Ambarella Inc (AMBA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Ambarella first-quarter fiscal year 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference may be recorded. Now my pleasure to turn the floor over to Deborah Stapleton. Please go ahead.

Good afternoon, everyone. And welcome to Ambarella's first fiscal quarter financial results conference call. Thank you for joining us today. Our speakers will be Dr. Fermi Wang, President and CEO, and George Laplante, CFO. The primary purpose of today's call is to provide you with the information regarding our fiscal first quarter.

The discussion today and the responses to your questions will contain forward-looking statements regarding our financial prospects, market growth, and demand for our solutions, among other things. These are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties and assumptions, as well as other information on potential risk factors that could affect our financial results, are more fully described in the documents that we file with the SEC, including the annual report on Form 10-K that we filed on April 4 for the 2013 fiscal year, and the Form 10-Q which will be filed shortly.

Access to our first-quarter results' press release, historical results, SEC filings and a replay of today's call can all be found on the Investor Relations portion of our website. I will now turn the call over to Dr. Fermi Wang. Fermi?

Thank you, Deborah, and good afternoon, everyone. Our Q1 revenue was $33.9 million, up 31% from the $25.9 million we reported in the first quarter a year ago. Our Q1 non-GAAP net income was $6.2 million, or $0.21 per diluted share. This compares with a non-GAAP net income of $3.5 million, or $0.11 per diluted ordinary share for the same period in fiscal 2013. I would like to discuss some of our products and the market highlights. Then I will turn it over to George for more in-depth discussion of our first-quarter financial performance and our guidance for Q2.

In IP video surveillance market, we are seeing significant increases in activity of security cameras continue to move from analog to digital IP. And standard definition to high definition, where we play. During the ISC West, International Security Conference, held in Las Vegas in April, we demonstrated a wide range of high definition video solutions, including our new S2 camera SoC with 4K or Ultra HD resolution. The 4K resolution capability enables S2-based IP camera to capture the finest details of people's face or objects, even when shot from a distance. Additionally, the S2 capability to de-warp images allow the design of IP cameras that use wide angle lenses to record images captured over a wide area.

Ambarella also demonstrated its Wi-Fi anti-camera platform using the A5s camera SoC. This solution is helping enable design wins, both in professional IP camera applications, as well as in the new home consumer applications that leverage home WiFi networks, cloud services, and smartphone applications.

During the ISC WEst show, Pelco, the leading US supplier of video surveillance equipment, introduced its new Sarix professional range of IP cameras based on Ambarella's A5s family of SoCs. The extensive new product range includes a 5 megapixel minidome, environmental (inaudible) camera, and a [box] IP cameras. Additionally, a leading Chinese supplier of video surveillance equipment introduced its new HF5100, and HF5200, 720P and (inaudible) IP camera based on Ambarella's A5s SoCs. Also during the ISC West show, Bosch of Germany demonstrated [full-Q] resolution IP cameras for the first time, highlighting the market requirements and the trend toward higher resolutions.

In summary, the IP video surveillance market is growing rapidly. And we believe Ambarella is in an excellent position to capitalize upon this growth based on its partnerships with the leading suppliers in China, Europe and in the US.

In the consumer camera market, we continue to see significant growth in wearable sports camera and a decline in sales of traditional camcorders. The growth in wearable sports camera is driven by market leader GoPro with its popular Hero3 cameras which are based on Ambarella's A5s and A7 SoCs. Consumers are increasingly demanding the highest resolution video, including (inaudible) TT60 and the 4K or Ultra HD video.

Televisions with full display capability have already reached $1,500 price points for 50-inch models. And should help continue to drive demand for 4K video resolution cameras. Additionally, the capability to wirelessly connect the sports camera to smartphones allows users to preview the video from a sports camera, as well as the ability to play it back and upload it to the Internet via the cellular network. This capability makes sports cameras far easier to use and should extend customer base beyond just camera enthusiasts. We expect the wearable sports camera category to continue to grow significantly as it becomes a major camera category, replacing traditional camera form factors.

In the automotive aftermarket, Ambarella provides SoC solutions for windshield-mounted camera recorders. Or, what's currently being referred to in the press as dashcams. During the first quarter, we continued revenue growth driven by strong sales in high-definition camera solutions in Russia and in Asia. At the China Sourcing Fair, a major Asian electronic show held in Hong Kong during April, we demonstrated a variety of new camera designs including field camera, Wi-Fi connected, 1080p60 resolution and a super wide angle solutions. Multiple ODNs also demonstrated new camera product based on Ambarella's new A family of SoCs that we introduced during the Consumer Electronics Show in January. In total, more than 150 companies both ODN and OEM visited with Ambarella at the Hong Kong show, demonstrating the growing interest level in this important market segment and Ambarella solutions.

In the video infrastructure business, Ambarella provides encoder solutions for television broadcast, transcoders and video contribution systems. As mentioned in the last earnings call, we continue to see lower demand from traditional broadcast [paid-in] markets, while we believe is primarily driven by micro market conditions in the US and Europe. We see continued growth in transcoder markets and new opportunities in video contribution systems.

During the April National Association of Broadcasters, or NAB, show in Las Vegas, Ambarella introduced the AmbaCast 8000 System on Chip. This SoC provides a flexible platform to increase the quality and the density of video transcoders and video contribution systems. Video contribution systems transmit video from remote sources such as satellite news gathering units to broadcast studios, or from broadcast studios to uplink centers or cable head ends. The AmbaCast 8000 is capable of essentially decoding and re-encoding four full HD channels, eight 720P HD channels, or 20 standard resolution HD channels. It can also encode video up to 4K or Ultra HD resolutions.

Also during the NAB show Harmonic, the leading supplier of broadcast and video infrastructure solutions, introduced its Ellipse 3000, the industry's first video contribution system based on the new AmbaCast 8000 SoC. Dolby Laboratories also announced its support for AmbaCast 8000 platform during the show, as it provides an ideal platform for Dolby Digital Plus surround sound. The introduction of AmbaCast 8000 SoC provides Ambarella the opportunity to extend our position in transcoding systems, while also entering the video contribution market for the first time.

With that, I will hand it over to George to discuss our financials.

Thank you, Fermi, and good afternoon, everyone. I'll start today's call with a summary of the financial results for the first quarter, our fiscal year 2014, that ended on April 30, 2013. And then move on to the outlook for Q2 of this fiscal year. During the call I'll discuss non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation expense, as adjusted for income taxes. As we discussed in the past, the Company has seasonality to both its revenue and gross margin. So I will include year-on-year comparisons for certain key operating metrics to assist in the understanding of changes in our business.

I will now discuss the financial results for the Company's key operating metrics, starting with revenue. For our first fiscal 2014 quarter that ended on April 30, 2013, the Company had net revenues of $33.9 million. The Q1 revenue of $33.9 million represented an increase of 31% over the $25.9 million in revenue for the same period in the prior year. Camera market revenue is estimated at 86% of Q1 revenue, as compared to 67% for the same period in the prior year. We continue to experience strong year-over-year growth in our professional and consumer IP security, wearable sports and automotive camera markets.

The sports camera market was especially strong in Q1, due to the successful ramp of several new camera models introduced at the end of last year by GoPro. As discussed in our year-end call, we believe infrastructure market revenues continue to be negatively impacted by macro market conditions in the US and Europe, recording lower revenues both sequentially and year over year. In addition, infrastructure revenue in Q1 of the prior year was unusually high, due to the release of approximately $1.6 million of deferred revenue as a result of renegotiation of a large customer contract. Ambarella uses WT Microelectronics as our logistic partner for distribution to the majority of our ODN and OEM customers. For the quarter ended April 30, 2013, sales to WT represented 40% of our revenue as compared to 75% of our revenue for the same period in the prior year.

Chicony Electronics Company, a manufacturer of camera products for multiple OEM customers, as well as for their own distribution, represented 42% of the revenue for the quarter, compared to 4% for the same period in the prior year. WT and Chicony were the Company's only 10% customers.

Non-GAAP gross margins for Q1 2014 was 64%, as compared to 63.3% in the immediate preceding quarter, and 71.1% in the first quarter of the prior year. In comparison to the preceding quarter, both camera market and infrastructure market demonstrated small increases in gross margins, which were partially offset by a decline in infrastructure revenue as a percent of total revenue for the quarter. In the camera market, a favorable mix change from Q4 to Q1 contributed to the sequential improvement in gross margin. As I previously mentioned, the gross margin in the prior year first quarter was positively impacted by the release of $1.6 million in deferred infrastructure revenue, which caused an unusually high mix of infrastructure revenue to total revenue, resulting in high gross margin for that period.

Non-GAAP operating expenses for Q1 2014 were $14.9 million, compared to $14.8 million for Q4 of 2013, and $14.6 million for Q1 of the prior year. Comparing Q1 year over year, operating expenses grew 2.3%, while revenue grew 31%. Total headcount at the end of Q1 2014 was 457, compared to 444 at the end of the previous quarter. With about 340 employees dedicated to engineering. Approximately 76% of our total headcount is located in Asia, primarily in Taiwan and China.

Non-GAAP net income for Q1 2014 was $6.2 million, or $0.21 per diluted ordinary share, compared with non-GAAP net income of $3.5 million, or $0.11 per diluted ordinary share, for the same period in the previous year. The non-GAAP effective tax rate in Q1 2014 was 9%. In Q1 2014, the non-GAAP earnings per ordinary share are based on 29.1 million diluted shares, as compared to 9 million diluted shares in Q1 of 2013. The Company is required to apply the two-class method to calculate earnings per ordinary share. In periods prior to the IPO, the two-class method allocates a portion of our earnings to preferred stocks, as well eliminates the preferred shares from the outstanding share count prior to computing basic and diluted earnings per ordinary share. This accounting treatment makes it difficult to compare our reported EPS in periods where preferred shares were outstanding for all or a portion of the periods, as in Q1 of the previous year. For fiscal 2014 and beyond, quarterly EPS will be computed on a basis consistent with that used in the fourth quarter of 2013.

We ended Q1 with cash of $104.3 million, adding $3.3 million of cash from operations in the quarter. Total accounts receivable at the end of Q1 2014 were $23.5 million, or about 62 days sales outstanding. This compares to accounts receivable of $20.2 million, or 59 days sales outstanding, in the prior quarter. Net inventory at the end of Q1 was $9.3 million, up from $8.9 million at the end of Q4. Accounts receivable and inventory remain in line with the Company targets.

I would now like to discuss the outlook for Q2 of fiscal year 2014. We expect revenues for second quarter ending July 31, 2013 to be between $34.5 million and $37.5 million. This represents an increase of between 23% and 34% over Q2 of last year. Q2 camera revenues are estimated to be between 88% and 92% of total revenue for the quarter, as compared to 77% in the same period in the prior year. Q2 revenues are being positively impacted by the growth of our primary camera markets, with especially strong growth expected in the consumer and professional IP security market. There are a number of projected new product launches by customers in the quarter. So, due to the uncertain timing of the launches, the revenue range presented is wider than my normal guidance.

Infrastructure revenues in Q2 of the prior year were unusually high due to the release of approximately $1.5 million in deferred revenue resulting from renegotiation of another customer contract. As I mentioned, the infrastructure business is experiencing lower demand that appears to be the result of macro market conditions, primarily in the US and Europe. Also, one large customer experienced uncertainty in its business as a result of a recent sale of the company.

As we have discussed, the change in mix between camera and infrastructure revenues may impact gross margins. Therefore, we estimate Q2 non-GAAP gross margins to be between 61% and 63%, compared to 64% in the preceding quarter and 69.2% in the same period in the prior year. The sequential decline in gross margin is primarily the result of decline in infrastructure revenues as a percent of total revenue. And to a lesser extent a decline in camera margins resulting from higher mix of consumer IP security cameras. Let me remind you that the release of the $1.5 million of deferred infrastructure revenue in Q2 of the previous year contributed to unusually high infrastructure revenues compared to camera revenues, which led to the high gross margins in that quarter.

We expect non-GAAP net income for the quarter to be between $5 million and $6.5 million. We forecast that operating expenses will increase by approximately $1 million in Q2 as compared to Q1, reflecting increased costs associated were amortization of NRE expense of our chip development programs and, to a lesser extent, our budgeted headcount increases. We are using an estimated non-GAAP annualized effective tax rate of 10% for net income amounts.

In summary, our Q1 revenues, gross margins and profitability remain strong as our business continues to benefit from expansion in our core camera markets, and what we believe is the strong competitive position of our product offerings. And, finally, Fermi and I would like to thank all our employees worldwide for their hard work and contribution to our continuing success.

Operator, we will now take questions.

(Operator Instructions)

Joe Moore with Morgan Stanley.

Great, thank you. The infrastructure business being weak, you talked about some of the reasons. What do you think? Do you think this is a temporary situation where it's weighed down by some of the issues that you mentioned, and there will be a rebound? Or do you think we stay at this lower level? And I have a follow-up.

This is George. I think the visibility is not great right now for our customers. So it's difficult to say where the market is heading and what opportunities they're looking at. But for now, the Company is taking a conservative approach to their numbers. And we're constantly discussing with them where they're going. But we feel that, because of the lack of visibility, we'll take a conservative position.

Okay. Great. And it looks like your gross margins have been pretty good considering that mix. Is the gross margins on the camera side, is this the level that you expect over the long haul? Or do you think that -- are you seeing some temporary mix benefits there that we should be cognizant of?

I think over the long haul, I've not at this point made any changes to what I consider my target model, which I've said 60% to 63%. So we're still comfortable with that target model, even with the current mix between camera and infrastructure revenues.

Thank you very much.

Quinn Bolton with Needham & Company.

Hi Fermi, hi, George. Congratulations on the strong results and guidance. Wanted to touch base first on the professional IP camera market. It sounds like you've not only had a number of design wins, a lot of those designs start to come into production in the July quarter. Can you give us some sense, are these more HD cameras based on the A5s [solican], or are these some of the new 4K by 2K cameras based on A2? And then to the extent that they are based on the 4K by 2K solution, does that give you better margins? Or are the margins between the HD and the 4K cameras relatively similar?

This is Fermi. I think all of the cameras, IP security cameras, are going with us in this quarter, even from later this year, are going to be A5s based camera. We don't expect any H2-based camera will go into production this year. The gross margin for the A5s camera vary based on the feature set. For the higher end professional camera, our gross margin is still maintained, (inaudible). We are also continuing to compete in the consumer level IP security camera where the gross margin is lower.

Okay, great. And then just switching gears to the sports camera market, it seems like you're seeing a little bit of atypical seasonality this year, where you're seeing strength in April and it sounds like sports cameras continue to be strong here in July. As you look into the second half of the year, since GoPro refreshed the product line at the end of calendar 2012, do you think that that potentially limits the normal seasonal pattern that you would typically see in the October quarter? Or do you expect another refresh of wearable cameras to drive typical seasonality in the October quarter? I know you're not guiding there yet but I just wonder whether seasonality is a little different this year than normal years.

This is George. I think because the seasonality's driven really by the holiday season, we did have a strong initial part of the year because of product launches. But we still see the holiday season as giving us our normal Q3 product build cycle.

Okay, great. Thank you.

Ross Seymore with Deutsche Bank.

Hi, guys. Congrats on a strong quarter. George, just a question on the guide going forward, specifically on the gross margin side of things. It looks like, even if I adjust for the mix, that the gross margin is being modeled to come down relatively decently in either your camera or your infrastructure side of things. Can you talk about what the gross margins are doing within each of those segments that is above and beyond the big segment mix?

Yes. If you look at the infrastructure business, those gross margins aren't really changing much. But in the camera space, as I mentioned in my script, the consumer IP security side of the business is growing, is expected to grow in Q2. Which is bringing down overall camera margins a bit.

There's nothing beyond that? You're not having to price more aggressively due to competitive pressures or anything along those lines?

It's the consumer side of the business so there is more price pressure. And we probably have a little bit of different ASP in there, giving us a little bit lower margin on the consumer side.

And then on the automotive side, you mentioned that is continuing, the dashcam is continuing to be strong. Is that already the A7LA that's starting to ramp that you launched back at CES? Or is that some of the prior generation still going?

For last quarter, Q2, I believe majority of our revenue still come from A5s and older generation. We believe A7LA will start ramping up later this year.

And as those new products launch, if I recall right, sometimes they carry at initial launch lower gross margins until you get the volumes up. Is that something within auto but across the board that we need to be concerned about as far as the gross margin implications, as we go into the back half of this year?

Probably no. In this case, because of the feature sets and the product offering we're giving there, we expect to maintain good gross margins in the initial periods.

And as my last question, if I'm doing the math right, it appears that you're guiding the infrastructure segment down almost 25% sequentially, but year over year it's about the same decline as you had in the first quarter. I know you talk about macro being weak, but it seems like there's something more than that going on when you're down as much as you are year over year. Can you give us any confidence or any additional color in when that might rebound, or if there's product cycles and refreshes that would come in to get that business back up to the $6 million, $7 million a quarter like it was last year?

There's a couple things. First of all, we mentioned that there is one of the customers, because the company got sold, so we lost the visibility there for a short period of time. And I think they're also trying to get back to the business as usual. But I think that's one of the reasons that you see 25% guidance down. But I think from a long term, although we don't have enough visibility for the traditional broadcasting encoder business, but we do believe that the transcoders that continue to be -- continue to grow. And in addition to that with AmbaCast 8000 we are going to get into the contribution system market. And that's a first time for us. And that's also a good gross margin business for us for long term. So, in the long run I think the transcoder and the contribution system will help us to get some revenue back.

Great. Thank you.

(Operator Instructions)

Kevin Cassidy with Stifel Nicolaus.

This is Dean Grumlose calling in for Kevin. Thank you very much for taking my call. I was hoping you could add some color on the growth in the IP security space. Is this going to market migrate towards Ultra HD or higher precision video, in your mind? And if so, over what time frame?

First of all, I think, like I said, today, for this year, majority growth will still come from the full HD or 1080p30. And we are seeing a lot of design activity around that resolution. And the new customer come in, like I said, the Pelco and Dahua, they're all going to contribute to our top line and bottom line. For the 4K resolution, we do see that in the market trend, and start picking up. And we have a design win there. But I don't expect any significant revenue this year for 4K resolution video.

Then as a follow-up, in this kind of product do you see that you have a value-add in image processing or some end-to-end capabilities? Or how would you describe your differentiation in both the consumer and professional security market?

I think for the professional security camera, the thing most important is really that the image quality and resolution. For example, we can support 4K. And now our competitors have assembled a chip to do that, which will really help us to win design. Because when people want to design in new products, they want to make sure that we have a road map to cover not only the low end but also across the board to the high end. So that we have a better image quality and a road map. But, more importantly, power consumption continues to play a very big role in the IP security camera because more and more people, all the professionals (inaudible) the form factor becomes small. And the power consumption becomes more and more important. And so that, on the professional side, even though alone they have the form factor is bigger, but that we have much lower power consumption than our competitors, still a huge advantage of ours. On the consumer side, because of limits by the Wi-Fi connectivity at home, the compression efficiency and of video quality and the power consumption, all those three things are the key differentiator for us versus our competitors. We are continuing to see that because that we are leading on the quality, compression efficiency and power consumption, help us to secure design wins.

Do you have the opportunity to do any additional analytics for these markets?

Absolutely. In fact, we believe that in the long run video capture device, typical encapture video is not good enough. That we need to start doing video analytics to offload those functions from the server side so that you can do a much faster and a better way to do a video analytics for real-time applications. And I think it's particularly important for the security camera, as well as for the automotive market.

That's very helpful. Thank you very much.

Quinn Bolton with Needham & Company.

Just a couple quick follow-ups. George, can you give us some sense where you think the share count falls out for the July quarter?

Yes, I can. 29.8 million for Q2.

Okay. Great. And then just for Fermi, the AmbiCast 8000 platform, is that a fiscal '15 introduction or product based on that really start to ship next year rather than this year?

For example, our customer, Harmonic, only demoed that platform at NAB. And we believe the significant revenue will come in early next year.

Okay, great. And then can you give us any update on how the design activity is going on the consumer side for the new A9 silicon that was introduced at CES?

Yes. That is targeting more on the sports camera side. And we do have design wins that we're working on. Again, I think that those products will not come out until early next year.

Okay, great. Thank you.

Ross Seymore with Deutsche Bank.

Quinn just beat me to the punch on it so I'm all set. Thank you.

(Operator Instructions)

And, presenters, at this time I'm showing no additional questioners in the phone queue. I'd like to turn the program back over to Fermi Wang for any additional or closing remarks.

Thank you. I would like, again, to thank our employees worldwide for their dedication to making this a world-class company. And thanks to all of you for joining us today. Thanks.

Thank you. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation. And have a wonderful day. Attendees, you may now disconnect.