Ambarella Inc. (AMBA Quick QuoteAMBA - Free Report) reported earnings (including stock-based compensation) of 54 cents per share in the fourth quarter of fiscal 2017, which beat the Zacks Consensus Estimate by 4 cents. Excluding stock-based compensation, earnings surged 43.8% from the year-ago quarter to 92 cents.

Revenues were up 28.8% year over year to $87.5 million, exceeding the Zacks Consensus Estimate of $86 million. The strong growth was primarily driven by higher sales to GoPro (GPRO Quick QuoteGPRO - Free Report) , which was 32% of the revenues in the quarter.

Excluding GoPro revenues, the other camera markets grew 7% year over year, offset by a 63% decline in the infrastructure revenues.
 

However, shares declined almost 5% in after-hour trading after management warned about a possible decline in fiscal 2018 revenues. The company noted that GoPro is using a chip from a competitor in its new camera, which will hurt shipment volumes, resulting in revenue decline in the second half of fiscal 2018. Moreover, higher operating expenses will also hurt bottom-line growth.

In fiscal 2017, earnings declined 11.8% over fiscal 2016 to $2.92 per share. Further, revenues decreased almost 2% to $310.3 million. GoPro total revenue declined from approximately 30% of revenues in fiscal 2016 to 24% in the reported year.

We note that Ambarella has underperformed the Zacks Electronics-Semiconductors industry in the last six months. While the stock lost 14.9%, the industry gained 20.9% in the period.

Quarter Details

Ambarella’s S2LM system-on-chip (SoC) has been gaining traction with companies like Netgear (NTGR Quick QuoteNTGR - Free Report) and Ring unveiling products that are developed using the SoC. Adoption of the company’s latest H.265 camera SoC has been higher in China.

The company stated that the world's largest security camera supplier Hikvision has started shipping its new value added series of H.265 cameras based on the company's S3LM IP camera SoC family product line.

Further, Ambarella’s camera SoC solutions for the automotive market continued to gain adoption with Japanese automaker Nissan introducing its full HD video recorder based on the company’s A12A Automotive Camera SoC. In automotive retail markets, U.S.-based startup Waylens introduced its Horizon 1080p60 automotive camera system based on H2 SoC.

Operating Details

Gross margin (including stock-based compensation) expanded 310 basis points (bps) to 66.9% in the quarter. The figure includes almost $850K benefit from the recovery and sale of inventory previously written down due to prior-period yield loss in the manufacturing process. The expansion in gross margin was driven by favorable product mix in the quarter.

Operating expenses as percentage of revenues fell 640 bps to 43.9%, primarily due to 350 bps and 290 bps decline research & development (R&D) and selling, general and administrative (SG&A) expenses, respectively.

Consequently, operating margin expanded a massive 960 bps to 22.9% in the reported quarter.

Balance Sheet

Amabarella ended the quarter with cash and cash equivalents & marketable securities of $405.4 million, up almost $33.3 million from the previous quarter.

Moreover, Ambarella didn’t bought back any shares during the reported quarter.  As of Feb 27, 2017, the company has repurchased a total of 405,089 shares under the program for total cash consideration of $20.2 million.

Guidance

For the first quarter of fiscal 2018, revenues are expected to be between $62.5 million and $64.5 million, up 9.3–12.8% from the year-ago 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 first quarter are expected to grow between 13.1% and 16.8%.

Gross margin basis is expected to be between 63.0% and 64.5% as compared with 64.6% in the year-ago quarter. The slight contraction will be due to unfavorable product mix.

Operating expenses are expected to be between $26.0 million and $27.5 million, up sequentially due to higher head count expenses.

For fiscal year 2018, management forecasts revenues to be 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.

Zacks Rank & Key Picks

Currently, Ambarella carries a Zacks Rank #4 (Sell). Applied Optoelectronics (AAOI Quick QuoteAAOI - Free Report) sporting a Zacks Rank #1 (Strong Buy) is a better-ranked stock in the sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Applied Optoelectronics is pegged at 18.33%.
 

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