On the plus side, AMBA is still seeing solid growth from its core IPO security and automotive markets, but the dive in sports cameras, wearables, and drones is quite pronounced and it is having a significant negative impact on its financial results.
Taking a look at the numbers, AMBA reported EPS of $0.13, beating the $0.09 consensus, on revenue of $56.9 mln, also marginally ahead of the $56.1 mln expectation. So, the headline numbers look decent, at first glance. However, revenue was down 11% year/year, and this marked the third quarter in a row in which revenue was down.
Also, gross margin slipped to 61.8% from 64.3% in the year ago quarter due to a mix change as lower margin China security revenue increased, while higher margin drone revenue decreased. Unfortunately, as we discuss below, this trend is expected to continue throughout the remainder of the year.
The primary cause for the sell-off is AMBA's Q2 guidance. Specifically, it guided for revenue of $60-64 mln, below the $68.2 mln consensus. When AMBA was at the height of its growth curve, the company was consistently exceeding quarterly expectations and providing upside guidance. However, looking back over the past couple of years, AMBA has not issued upside guidance in at least eight quarters. A major culprit for the dramatic shift can be directly tied to GoPro (GPRO) and its decline, and now more recently, the downturn in drone sales.
During its conference call last night, management stated that it believes the decline in drones will negatively impact both the top line and gross margin this year, now expecting gross margin to come in at the low end of its 59-62% target. Furthermore, sales in virtual reality and non-GoPro sports cameras came in well below its expectations and AMBA now believes this softness will continue through what's typically a strong holiday selling season.
It's not all bad news for AMBA, though. Revenue in the IP security and automotive markets were up year/year and the company is especially enthusiastic about its opportunities in auto. In fact, in Q1, it achieved record sales for its SoC for automotive car recorders, driven by OEMs such as Honda, Toyota, and Nissan. Looking ahead, the company is optimistic for its camera systems that enable autonomous driving as its high-resolution cameras deliver 360-degree short and long distance viewing capability. If and when autonomous driving begins to ramp up, AMBA figures to be a major factor in the growth.
To conclude, AMBA is getting hit on multiple fronts including slowing sports cameras, drones, and wearable sales. which is dragging its margins lower. Once a high-flyer, the company is now struggling to reignite its growth. As noted above, it does have a potentially significant catalyst ahead in the autonomous driving area, but, it could take several quarters before that really becomes a driving factor for its financial results.