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Why Is Ambarella (AMBA) Down 8.9% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Ambarella, Inc. (AMBA - Free Report) . Shares have lost about 8.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Ambarella’s Q1 Earnings & Revenues Beat Estimates

Ambarella started fiscal 2018 on a strong note, reporting better-than-expected results for first-quarter fiscal 2018. Also, revenues and earnings marked a significant year–over-year improvement.

The company reported earnings of $0.07 per share, which came ahead of the Zacks Consensus Estimate of $0.03 and also registered a year-over-year jump of 40%. The year-over-year improvement was mainly driven by solid top-line growth which was partially offset by higher costs and expenses, as well as increase in number of outstanding shares.

Quarter in Detail

The fiscal first-quarter revenues increased 12.2% year over year to $64.1 million and came ahead of the Zacks Consensus Estimate of $63 million. Excluding sales to GoPro and OEMs, revenues increased 16.1%.

The solid year-over-year growth was primarily driven by strong performances at IP security, auto and non-GoPro wearable markets. The benefits at these markets were partially offset by decline in drone revenues.

Gross margin contracted 30 basis points (bps) to 63.9% in the reported quarter. On non-GAAP basis (excluding stock-based compensation), the company reported gross margin of 64.3%, which came 30 bps lower than the year-ago quarter. The contraction in gross margin was mainly due to increase in revenues from sales of lower margin China security and U.S. home monitoring products, as well as a decline in higher margin sports camera market revenues.

Operating expenses increased 8.4% year over year to $38.3 million. On non-GAAP basis, operating expenses came in at $25.7 million, up from $24.3 million incurred in first-quarter fiscal 2017. The year-over-year increase in non-GAAP operating expenses was mainly due to increase in headcount and chip development costs.

Operating income almost doubled to $2.6 million from $1.3 million reported in the year-ago quarter. Operating margin expanded 170 bps to 4.1% in the reported quarter.

Balance Sheet

Ambarella ended the fiscal first quarter with cash and cash equivalents & marketable securities of $420.2 million, up from $405.4 million in the previous quarter.

During the reported quarter, the company bought back 162,738 shares under its ongoing $75 million share repurchase program which started in Jun 2016, for a total consideration of $8.77 million. As of Apr 30, 2017, the company has approximately $46 million available under the current share repurchase authorization.

Guidance

For second-quarter fiscal 2018, revenues are expected to be between $69 million and $72 million, up 6–10.6% from the prior-year quarter. The company anticipates strong year-over-year revenue growth in IP security (both professional and consumer), as well as solid growth in automotive and non-sports wearable, partially offset by a decline in the drone revenues.

Non-GoPro revenues in the fiscal second quarter are expected to grow between 11.8% and 17%.

Non-GAAP gross margin is expected to be between 62.0% and 63.5% as compared with 67.1% in the year-ago quarter. The contraction will be due to increase in China security revenues and decline in drone revenues.

Operating expenses are expected to be between $26.0 million and $27.5 million, up sequentially due to higher head count expenses and increase in new chip development costs.

Management reiterated its forecasts for fiscal 2018. The company still expects revenues to be in the range of up 3% to down 3% as compared with fiscal year 2017. Strong growth in IP security, drones, non-sports wearable, and automotive market revenues will drive revenues. Excluding sales to GoPro and its ODMs, fiscal year 2018 revenues are estimated to grow between 20% and 32%.

Gross margins are expected to move into the high end of Ambarella’s target margin range of 59–62%, while operating expense is expected to increase 12–14% over fiscal year 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter. In the past month, the consensus estimate has shifted down by 14.3% due to these changes.

Ambarella, Inc. Price and Consensus

 

VGM Scores

At this time, the stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with an 'F'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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