After the close last night, semiconductor company Ambarella
(AMBA 43.09, +2.55, +6.29%) issued better-than-expected 4Q19 earnings of $0.14/share with revenue
essentially in-line at $51.1 mln, down 28% year/year. The maker of chips for
high definition applications also issued downside guidance for 1Q20, seeing
revenue of $47.0 mln vs. the $50.2 mln consensus.
However, despite those uninspiring headline numbers, the stock popped higher this morning, trading at its highest levels since last June. Primarily driving today's strength is a sense from investors that the worst is now behind for the company as impactful collapses in consumer-related products -- notably including that of GoPro (GPRO) cameras -- are believed to have mostly run their course. At the same time, the company's investments in computer vision technology made during the past couple of years looks poised to return the company back to growth.
In fact, during the earnings call last night, management stated that the gradual ramp of computer vision revenue from the professional security camera market and a declining impact from the consumer electronics business should result in AMBA's quarterly revenue stabilizing in 1H20 and returning to growth in 2H20. In our view, this statement is the confirmation that investors had been looking for and is what is mainly driving the stock higher this morning.
For the quarter, AMBA posted EPS of $0.14, comfortably beating the $0.04 consensus. The upside performance was driven by stronger than expected gross margin, which came in at 60.6% compared to the company’s guidance for 59.0-60.5%. This reflected a more favorable product mix than had been expected.
AMBA also kept a lid on operating expenses, which were up a
modest 2% year/year to $45.0 mln. Still, due to the steep drop in revenue,
operating income dove to ($14.4) mln compared to $1.4 mln in 4Q18.
Revenue fell by 28% year/year, marking the sixth straight quarter of year/year declines. All of the decline for this quarter resulted from ongoing declines in consumer-related revenue. The good news, though, is that wearable and sports cameras now only represent about 10% of revenue. As the category becomes smaller and smaller, negative impact from softness in the space will be lesser and lesser.
As wearables and sports cams have become less significant, security cameras and automotive products have become more prominent, with both businesses increasing revenues in the mid-single-digit percentage range to represent a stronger majority of the overall business in fiscal 2019.
What most investors are interested in, though, is AMBA's progress in the computer vision (CV) segment. CV technology includes methods for acquiring, processing, and analyzing digital images and, in combination, using data from real world surroundings in order to make decisions and/or automate functions that people do. It is prevalent in autonomous driving and driver assistance as well as in advanced security systems.
AMBA has commenced mass production of its CV22 chips and the company says it is seeing strong design activity, specifically for applications like electronic mirrors, aftermarket drive recorders, interior drive and cabin monitoring, and autonomous driving systems. In fact, in January, AMBA shipped its first mass quantity order to a camera supplier.
The company also introduced its latest System on Chip product for its CV family, the CV25. Cameras using CV25 tech will be able to utilize artificial intelligence, allowing features like facial recognition to happen in real time on a device. As an example, in smart video doorbells, CV25 can automatically recognize familiar faces approaching the door, flag unknown people, recognize license plates, and alert homeowners when a package is delivered.
Going forward, the company plans to focus on three core markets: surveillance, automotive, and robotics. The advanced driver assistance system market already has a total addressable market north of $1 bln, representing a substantial opportunity for AMBA by itself. In total, AMBA is confident that it made the correct decision to invest in these markets -- about $250 mln over several years -- and it plans to continue directing most of its investments toward technology in these areas.
AMBA is moving in the right direction, and the worst does seem to be in the rearview mirror, but it isn't out of the woods just yet. During the call last night, management commented that order volatility, a slowing economy in China, and global trade tensions are creating some uncertainty. On top of that, consumer electronics revenue will continue to slide over the next couple of years.