First, taking a closer look at its Q2 results, EPS came in at $0.25, comfortably beating the $0.13 consensus. The $0.12 beat was actually its widest in seven quarters. That's the good news. However, on a year/year basis, EPS fell sharply by 48%. The decline in earnings was driven by a combination of lower revenue, as well as some margin compression.
On the former issue, revenue was down 12.7% to $62.5 mln. During its conference call last night, management stated that revenue from consumer applications, such as sports, virtual reality, and drone cameras continue to decline. In regard to drones specifically, the market leader, DJI, is using its own semiconductor solutions, which is limiting AMBA's opportunities in that market. Also, demand for non-GoPro (GPRO) sports cameras continues to be weak. As a result of these dynamics, the company has made the strategic decision to focus on other markets with more attractive growth potential, including IP security, automotive, and robotics.
As has been the case in recent quarters, AMBA once again experienced growth in the IP security and Auto OEM markets. The only issue here, though, is that much of the strength is coming from lower margin China security revenues, which is having an impact on gross margin. Specifically, gross margin dipped to 61.4% from 61.8% in the preceding quarter.
Turing to its outlook, the company guided for Q3 revenue of $55.5-$58.5 mln, well below the $73.4 mln consensus. It also is forecasting that gross margin will slip a bit further to 59.0-60.5%. The cause for the downside guidance is the same reason why AMBA's top-line fell by 12.7% in Q2. Namely, the consumer-related markets are expected to take an even deeper turn for the worse.
As those markets continue to be pressured, AMBA plans to focus on computer vision (CV) products, based on its CVFlow architecture. It believes that security cameras with computer vision will continue to account for a larger portion of the overall market as they replace existing cameras. Furthermore, in the automotive market, the company says momentum is building for its CV products.
To conclude, AMBA has been mired in a nasty slump as revenue has now declined on a year/year basis for four straight quarters. Dwindling sports camera and drone revenue continues to be a major headwind for the company. It does have a couple potential growth catalysts, in the form of computer vision solutions and the auto OEM market in China. How long it takes for those growth drivers to fully offset the weakness in the consumer market is difficult to predict.