It has been about a month since the last earnings report for Ambarella (AMBA Quick QuoteAMBA - Free Report) . Shares have added about 7.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Ambarella due for a pullback? 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 Q2 Earnings Beat, Soft Auto Hurts Top Line

Ambarella reported second-quarter fiscal 2021 non-GAAP earnings of 6 cents per share against the Zacks Consensus Estimate of a loss of 2 cents. However, earnings plunged 72.7% year over year.

Meanwhile, revenues of $50.1 million marginally beat the consensus mark but declined 11.1% year over year and 8% sequentially.

Softness in the automotive and other markets hurt Ambarella’s top-line growth in the reported quarter. However, the security-camera business increased low single digits sequentially. Home security also increased sequentially.

The momentum in AI business continued as CV revenues represented mid-to-high single-digit percent of total second-quarter revenues. Ambarella witnessed increase in blended average selling price (ASP) due to solid demand for CV SoC which carries higher ASP compared with non-CV solutions.

Customer & Market Details

Ambarella had two customers that contributed more than 10% in the reported quarter. WT Microelectronics, a fulfillment partner serving multiple customers, accounted for 56% of revenues. Chicony, a Taiwanese OEM which manufactures for multiple customers, contributed 20%.

Moreover, the company noted that it continues to gain SoC share in the professional security-camera market outside China. Momentum in Ambarella’s CVflow SoCs in professional IP cameras across all geographies continued in the reported quarter.

During the reported quarter, Japanese camera supplier PTZ continued to introduce more new models based on Ambarella’s CVflow SoCs.

Outside China, the company has a very strong pipeline of new-customer introductions planned over the next 12 months.

Within China, Ambarella is now seeing additional opportunities, particularly at the high and middle ends of the market. Markedly, Chinese IP camera makers have resurrected evaluation of Ambarella-based camera designs including CVflow AI SoCs.

Further, in the consumer IP camera market, Ambarella witnessed a rebound in orders from the major home monitor camera makers.

In July, Taiwanese baby-monitor and sleep-analytics company Cubo introduced its Cubo Ai Plus monitor base on Ambarella’s H.263 SoC.

Additionally, Ambarella held two online webinars to promote its Janus access control reference platform, which has been jointly developed with Lumentum and ON Semiconductor, and features CV25 SoC. Janus enables contact-free access control face recognition.

In the automotive space, Ambarella witnessed strong interest for its SoC solutions with various new OEM applications including ADAS, Level 2+ autonomous vehicles, electronic mirrors and car-recorder applications.

Since the beginning of 2020, the company has won a number of contracts from automotive OEMs.  These contracts are estimated to generate roughly $200 million in revenues over the lifetime of their production.

During the reported quarter, Ambarella also won two contracts from Japanese automaker Nissan.

Operating Details

Ambarella reported non-GAAP gross margin of 62.4%, up 430 basis points (bps) year over year in the quarter under review. The gross-margin figure was better than management’s guidance of 59-60.5% range. On a GAAP basis, gross margin expand 430 bps to 61.8%.

The healthy customer and product mix supported by strong operational execution benefited gross-margin expansion in second quarter.

Total operating expenses on a GAAP basis increased 7.9% year over year to $46.2 million. On a non-GAAP basis, operating expenses were $30.2 million, below management’s guided range of $31-$33 million due to reduced employee expenses, lower depreciation from deferred capital expenditures and a one-time foreign subsidy related to COVID-19.

Research & development expenses increased 7.8% year over year to $32.8 million. Moreover, selling, general and administrative expenses of $13.4 million were up 8.2% year over year.

Total headcount at the end of the second quarter was 758, with about 81% of the employees dedicated to engineering. Roughly 69% of Ambarella’s total headcount is located in Asia.

Balance Sheet & Cash Flow

As of Jul 31, 2020, Ambarella had cash and cash equivalents & marketable securities of $410.7 million compared with $411 million as of Apr 30.

The company reported operating cash outflow of $2.4 million primarily due to increases in operating assets, while current liabilities were flat sequentially.

Ambarella’s board approved an extension of the current $50 million repurchasing program for an additional 12 months ending Jun 30, 2021. Currently, $49 million is available under the program.

Key Q3 Developments

Markedly, in August, Ambarella selected the Lattice Semiconductor’s ECP5 FPGA to enable MIPI bridging capabilities in systems using former’s CVflowSoCs.

Moreover, Motorola Solutions announced the availability of Ambarella-based Avigilon H4 thermal elevated temperature-detection solution.

Further, U.K. and European dash-cam provider Nextbase launched its next-generation 622GW 4K dash cam based on Ambarella’s H22 SoC.

Guidance

For third-quarter fiscal 2021, revenues are expected between $52 million and $56 million. Non-GAAP gross margin is anticipated to be 60-62%. Non-GAAP operating expenses are projected at $31-$33 million.

Management anticipates security-camera revenues to be down sequentially. Automotive revenues are expected to remain unchanged. Other revenues are expected to increase sequentially.

Ambarella also stated that the rate of order push-out and cancellations has slowed down and design activity has started to recover.

Moreover, Ambarella expects CV products to contribute 10% of revenues in fiscal 2021. Additionally, higher gross profit dollars per CV unit (due to solid demand for CV Soc) is expected to drive the bottom line.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted 8.02% due to these changes.

VGM Scores

Currently, Ambarella has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ambarella has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.