Ambarella Inc (AMBA) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Ambarella's Q4 full year 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Deborah Stapleton. You may begin.

Thank you. Good afternoon, everyone, and welcome to Ambarella's fourth-fiscal-quarter and year-end fiscal 2014 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 information regarding our fiscal fourth 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 statements 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 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 Form 10-K for the 2014 fiscal year that will be filed shortly.

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

Thank you, Deborah, and good afternoon, everyone. We are very pleased with our Q4 and FY14 financial results. Q4 revenue was $40 million, up 26.8%, from the $31.5 million we reported in the fourth quarter a year ago. This brings our total revenue for fiscal 2014 to $157.6 million, a 30.2% increase over FY13 revenue of $121.1 million.

Q4 non-GAAP net income was $8.2 million, or $0.26 per diluted ordinary share. This compared to the non-GAAP net income of $5 million, or $0.18 per diluted ordinary share, for the same period in fiscal 2013. For the full fiscal year, we earned $33.2 million, or $1.10 per diluted ordinary share, compared to $22.7 million, or $0.79 per diluted ordinary share in FY13.

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 fourth-quarter financial performance and our guidance for Q1. Growth in our camera business was again led by strong sales in IP security cameras. This market segment continues to be driven by the migration of our analog CCTV cameras to high-definition IP security cameras.

During the fourth quarter, and for the third quarter in a row, Ambarella shipped more SoCs for use in IP cameras than for any other camera category. Also in FY14, Ambarella more than doubled its revenue for IP cameras compared with the previous year, reflecting both a significant gain in market share, as well as overall market growth.

Sales of professional IP cameras increased in all regions, but was particularly strong in China, led by Ambarella key customers Hikvision and Dahua. Ambarella's continued success in professional IP camera is based on fulfilling customers' requirements for high-quality, high-definition camera solutions. With excellent low-light capabilities, highly efficient encoding, and very low power consumption, Ambarella's A5s SoC family continues to meet the high-value market requirements, while Ambarella's S2 family enables ultra-HD [or] 4K video resolution, 360-degree de-warping for wide-angle designs, and the Dual Cortex ARM CPUs for advanced analytics.

In February, DynaColor, a leading supplier of professional IP cameras announced its new V-8 series of ultra-HD fish-eye cameras, based on Ambarella's H2 camera SoC. The cameras are available in 3 megapixel, 5 megapixel, and 6 megapixel resolutions, and in both 180-degree wall mount and 360-degree sill mount configurations. The H2 enables warping in the camera to provide multi-view Pan Tilt Zoom without mechanical parts.

Ambarella is also seeing increasing opportunities in consumer Wi-Fi IP cameras for home security systems. In addition to traditional home security companies, telecom and the cable network operators are now also introducing new cameras and video security services for consumers. It is expected that their offering will increasingly migrate from standard-definition to high-definition in the future, which would provide additional opportunities for Ambarella.

During the 2014 Consumer Electronics Show in January, Ambarella demonstrate its smart AVC video encoding technology of A5s SoC family. This technology significantly reduced the video stream [frame] rate, minimizing the required network bandwidth necessary to transmit HD video and lowering cloud storage costs, making it an ideal solution for home security cameras. In summary, we see continued growth in IP security cameras, driven by both professional IP camera and the consumer Wi-Fi IP camera applications.

During Q4, we continued to see strong sales of sports cameras, driven by market leader GoPro and its recently introduced HERO3+ silver and black camera editions. Ambarella [places] both cameras, including both GoPro and IR models, featured extensively in [march of the personal weekly shot] by athletes at 2014 Winter Olympics in Sochi.

In addition to wearable sports cameras, Ambarella is continuing to develop wearable camera solutions for social networking and the vertical market applications. At the 2014 Consumer Electronics Show, Ambarella and Google successfully demonstrated a wearable camera reference design to bring Google's Helpout application and service to a new class of wearable cameras.

Helpout is a new way to share knowledge and expertise over live video. It's easy to use and the [incomer] is scheduling [end] payments to allow instructors to monetize services. Ambarella's new reference design enables small form-factor wearable cameras that allow users complete mobility during a Helpout session. The camera can record full HD video while simultaneously streaming live video and audio wirelessly to a Google Helpout server via a Smartphone or WiFi access point.

In addition to wearable cameras, a new and exciting product category is quadcopters. Many of these quadcopters are equipped with video cameras to capture unique views of buildings, wildlife, or sporting events. During Q4, leading supplier, DJI Innovations of China, introduced its Phantom 2 Vision Quadcopters with integrated HD video camera. The camera is based on Ambarella's A5s camera SoC and provides 1080p video recording, 14 megapixels stills, and wide 140-degree field of view.

In the automotive aftermarket, Ambarella provides camera SoC solutions for video camera recorders, or dash cams. These cameras are sold primarily in Russia, China, Taiwan, and South Korea. Also during CES, Ambarella introduced its new MotorVu 360 automotive surround view and recording camera reference design. The reference design features four full 1080p30 HD camera modules that can be embedded in the front, rear and the side of the vehicle, providing 360-degree surround view for driving or parking assistance, as well as simultaneous four-channel black box recordings of road incidents.

MotorVu 360 is enabled by the new Ambarella B5 family of receiver/transmitter companion chips that supports transmission of video data across low-cost, flexible cable with no latency. The B5 chips can also be used into dual-channel configurations for front and rear view automotive applications. During fourth quarter, Korean market leader digital Fine Digital introduced its a FINEVu CR-2000 dual-channel dash cam solution. Based on Ambarella's A7L camera SoC, the CR-2000 is the first camera solution to provide full HD 1080p front and back recording.

Although market conditions in Russia have softened, Russian customers are now shipping over 20 new models based on Ambarella's A7L camera SoC, with many supporting Ambarella's advanced super-HD resolution and recording. The China [auto aftermarket] continued to expand, and the [whole March] of this market is still dominated by low-end and low-cost products. We expect a transition to higher-resolution products this year, creating new opportunities for Ambarella. Additionally, during CES 2014, several companies demonstrated new dash camera products, specifically designed to [be] target at US market for the first time.

In the broadcast infrastructure market, the majority of existing MPEG-2 and H.264 solutions continues to limit new infrastructure purchases, while new revenue opportunities exist in upgrades for cable network and emerging markets. This situation is unlikely to change significantly in this fiscal year and probably not until the upgrades to ultra-HD and HEVC, the next-generation video compression standard. With that, I will hand it over to George to discuss our financials.

Thanks, Fermi, and good afternoon everyone. Today I will discuss the financial highlights for both the fourth quarter and full year ending January 31, 2014. I will then review the financial outlook for Q1 of FY15, that ends on April 30, 2014. During the call, I will 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 start with a review of our Q4 results.

Our Q4 2014 revenues of $40 million represented an increase of 26.8% over the $31.5 million of revenue in the same period in the prior year. Camera market revenue is estimated at 90% of Q4 revenue, as compared to 83% for the same period in the prior year. Our professional and consumer IP security market was the largest driver of year-over-year revenue growth, followed by our wearable sports cameras.

Q4 automotive revenues increased sequentially, but were below the same period of last year. Infrastructure revenues declined both year-over-year and sequentially, in line with the guidance on our last earnings call. For the first time, we estimate that IP security and sports cameras ended Q4 pretty much even in terms of revenue dollars. Security camera revenues remain strong across China, North America, and Europe, while we saw continued progress with our relatively new security business in Korea.

The sports camera market demonstrated robust year-over-year growth, with Q4 remaining strong due to the impact of the early Q4 launch of two new GoPro models. As discussed on the last call, the Q4 automotive market revenues did improve from Q3, but remain below Q4 in the preceding year. The A7LA-based products launched successfully in the Asia markets and Russia, although we still faced competition from low-end solutions being offered, especially in China.

As expected, Q4 infrastructure revenues declined both sequentially and year-over-year, as system manufacturers continue to experience soft markets in most regions. We continue to be cautious on infrastructure revenues for the next year, as service providers delay investments in anticipation of the network upgrade to the new HEVC compression technology.

Non-GAAP gross margin for Q4 of FY14 was 64.1%, as compared to 63.8% in the immediately preceding quarter, and 63.3% in the fourth quarter of the prior year. In comparison to the preceding quarter, gross margin improved in the camera market due to a favorable product mix that was offset by a decline in higher-margin infrastructure revenues as a percent of total revenue.

Non-GAAP operating expenses for Q4 2014 were $17 million compared to $16.8 million for Q3 2014, and $14.8 million for Q4 of the prior year. The sequential increase in OpEx reflects higher cost associated with added headcount, primarily in our Asia software development team. Non-GAAP net income for Q4 2014 was $8.2 million, or $0.26 per diluted ordinary share, compared with non-GAAP net income of $5 million, or $0.18 per diluted ordinary share, for the same period in the previous year.

The non-GAAP effective tax rate in Q4 2014 was 5%. The tax rate was favorably impacted by the release of stock-based compensation expense previously deferred for tax reporting purposes, due to the exercise of employee stock options in the quarter. In Q4 2014, the non-GAAP earnings per ordinary share are based on 31.4 million diluted shares as compared to 28.5 million diluted shares for Q4 2013.

Turning to our full-year results for 2014, our revenues were $157.6 million, an increase of 30.2% over the $121.1 million for FY13. As discussed throughout the year, the IP security market was our fastest-growing market, driven by the launch of [several] new customers, as well as the steady growth of the overall digital security market.

The 2014 wearable sports cameras year-over-year revenue growth rate continued in line with FY13, while automotive year-over-year revenues were flat. Overall infrastructure revenue declined in FY14, as compared to the previous year.

Total headcount at the end of Q4 2014 was 495 compared to 489 at the end of the previous quarter, with about 358 employees dedicated to engineering. Approximately 77% of our total headcount is located in Asia, primarily in Taiwan and China.

We ended Q4 with cash of $143.4 million, adding $11.4 million of cash from operations in the quarter. Total accounts receivable at the end of Q4 2014 were $18.8 million, or about 43 days sales outstanding. This compares to accounts receivable of $25.4 million or 51 days sales outstanding in the prior quarter.

Net inventory at the end of Q4 was $10.5 million, or about 74 days, compared to $13 million, or 63 days, at the end of Q3. The decline in accounts receivable reflects lower sales in the quarter, as well as the increase in sales through our logistics supplier on more favorable credit terms. Inventory remains in line with our Company targets.

Ambarella uses WT Microelectronics as its logistic supplier for distribution to the majority of our ODM and OEM customers. For the quarter ended January 31, 2014, sales to WT represented 64% of our revenue, compared to 50% for the same period in the previous year. Chicony Electronics Company, a manufacturer of camera products for multiple OEMs, as well as for their own distribution, represented 21% of revenue for Q4 of fiscal 2014, as compared to 30% for the same periods in the prior year. WT and Chicony are our Company's only 10% customer.

I would now like to discuss the outlook for Q1 of FY15. We expect revenues for the first quarter of FY15, ending on April 30, 2014, to be between $39 million and $41 million. This represents an increase of between 15% and 21% over Q1 of last year. Q1 camera revenues are estimated to be between 89% and 91% of total revenue for the quarter, as compared to 86% in the same period in the prior year.

Q1 revenues in our wearable sports camera market are expected to decline from the same period in the prior year. As mentioned in our Q1 fiscal 2014 earnings call, Q1 of last year was positively impacted by the launch of three new camera models from GoPro. We anticipate a sequential increase in revenues from IP security in Q1 to offset the decline in wearable sports cameras. Automotive is expected to be flat as compared to Q4 and down compared to Q1 of last year. As discussed, we see softness in the infrastructure market, at least through the remainder of this fiscal year.

We estimate Q1 non-GAAP gross margins to be between 61% and 63% compared to 64.1% in Q4 of FY14 and 64% in Q1 of the prior year. Q1 camera market gross margins are expected to decline from the preceding quarter due to an increase in lower-margin professional and consumer security business in China, as a percent of total revenue in the quarter.

We expect non-GAAP net income for the quarter to be between $6 million and $7.5 million. As we discussed in our last earnings call in December, we expect new chip development expense to become a larger percentage of total OpEx throughout the year as we begin to develop in new 14 or 16 nanometer process nodes. We are using an estimated non-GAAP annualized effective tax rate of 11% for net income amounts.

If you are tracking GAAP net income, Q1 stock-based compensation expense is expected to be similar to that of Q4. We estimate our diluted share count for Q1 to be approximately 31 million shares. I would like to thank everybody for joining our call today and now I will turn it back to the operator to manage the Q&A session. Operator?

(Operator Instructions)

Ross Seymore of Deutsche Bank.

We can't hear you.

Can you hear me now? Sorry about that. What I was saying, when I was on mute, unfortunately, was can you just talk about some of the growth drivers you expect for the full year? You highlighted the full-year automotive was flat year-over-year. That end market color -- what you think is going to be the biggest drivers as we go to Fiscal 2015?

Ross, this is Fermi. Security camera are going to continue to be our biggest driver for our revenue, both from the professional and consumer side. We just announced that our -- last year's revenue -- IP security revenue doubled from the previous year, and we believe that the market growth rate is going to continue and we believe that we have strong momentum in that market right now.

On the consumer IP security side, we start seeing a lot of designs going on and also there are a lot of [demands pulling] from the market and we believe that's going to be a great opportunity for us to grow this year and in the near future. Security camera, as a whole, going to continue to be our biggest revenue driver.

As my one follow-up, George, on the margin side of things, the security camera side of the market growing, especially on the consumer side, and then you've talked about being keen on still investing in the OpEx side for future growth. When we put those together, do you see anything that really changes the margin model that you've had in the past of the low- to mid-60% as well as the 20% to 22% operating margin?

No, not right at the moment. I'd still think 60% to 63%, which is our target margin model -- it's still valid through the remainder of the year. There may be some quarters where the consumer side pushes that down to the low end of that, but we are still reasonably comfortable with that margin model.

And the operating margin side of it? Just trying to figure out the spending pattern for this year.

Yes. I'm sorry, no change in the operating margin model.

Great. Thank you.

Quinn Bolton of Needham & Company.

Congratulations on the nice results. Just wanted to ask first on the security market. If I remember, last quarter, you anticipated perhaps some slowdown in the security market in China ahead of Chinese New Year. It doesn't sound like that happened, or at least on this call you talked about strength. Can you give us some update as to what you're seeing in China, and if you didn't see that slowdown, what may account for that strength?

We actually had anticipated a slowdown and early in the -- late in last Q4 and early in this Q1 timeframe, we did experience that and then it accelerated quite a bit in China. You'll notice, my guidance on margins is slightly down and that's really due to the ramp we see happening now and through the end of the quarter and it's primarily in the lower end of the security production in China.

It's difficult for us to determine whether that's consumer-related or professional-related; we don't get that level of detail from the large Chinese manufacturers. So, it was a little bit of a change from what we had anticipated.

Just a clarification, George. The acceleration you saw in China, was that in the January quarter, or is that really post-Chinese New Year that you are seeing that strength?

It's post-Chinese New Year.

Post-Chinese New Year. Okay, great. Then just looking out for the auto market, it sounds like the A7LA designs are starting to ramp, but you continue to see competition and I assume pricing at the low end of the market, so it sounds like a flattish outlook for auto in fiscal 2015? Is that the right read of that market?

No, Quinn, now with A7LA family in production of 20-plus models in production and we believe there will be a lot more coming up in the next several months and we believe that this year we should see growth on that market.

Okay. Great. Thanks, Fermi, for the clarification.

Joe Moore of Morgan Stanley.

I wonder if you could talk about the competitive outlook. It sounds like TI has been embedded, group restructuring, that they said they were reducing spending in this area of cameras -- CSR end-of-life some products. I would say there's probably new competitors. But can you just talk about -- have you already seen the revenue benefits of those changes or could that be a revenue inflow for you guys over the course of the year?

Definitely, our competitive landscape changed a little bit in the last several months. Like you said, TI basically announced they are going to reduce their spending on IP security market and we [already] start seeing results. We believe the strength that we see in China really reflects the TI's weakness on this market right now and we are benefiting from that.

Also, that CSR canceled their camera line, this also helped us to stabilize our other markets in terms of sports and automotive. I also think that right now, today, if you look our -- the company competing with us, with most of them are the company in Asia, it's particularly in China, Taiwan, and some in Korea. Most of them are start-up companies and because they have some WebCam design win or other video-related product in the past, and then try to come in to competing with us. We see a lot of noise there and we definitely treat that seriously, but we think that from a capability point of view, we are in a stronger position than six months ago.

Okay. Thank you.

Jay Srivatsa, Chardan Capital Markets.

Just following up on the competition comment, Fermi. In China, increasingly looks like a lot of the local OEMs seem to be gravitating toward local chip solutions. Are you concerned as you look forward to the rest of the year, that a lot of these Asian companies that you alluded to could be very competitive in terms of either pricing or looking at ways to take market share from you?

They are already very competitive on the pricing already for the last couple of years. The way we are competing with [that], is that we always try to provide a complete road map to our customer from the high end to medium and low end and so that our customer can -- using one software platform for to address all their needs.

With that, although we need to really competing on the low-end price, but we can continue to get volume and better ASP and gross margin on our mainstream and high-end market. That's helping our model -- helping competing with the lower competitors for two, three years and you can see the results. So the competition is going to continue to be there, but I believe as long as we can continue to innovate and providing better road maps and better products on the high end and mainstream products, we should be okay.

All right. Then, in terms of the prospects in other countries related to IP camera -- outside of China and North Korea -- North America and Korea -- what are some of the areas you are looking at and where do see the opportunities as you look at the rest of the year?

Right. For example, in Europe, [Access and Bush] are still two of our big customers. So in fact, they are very steady, and we are we growing with them, with they grow their market shares. On the Europe side, although we didn't mention it this time, but we still continue to have a market share there. In China, we talked about it and in US, the telco and there is a company called [Avisual] in Canada so they are both really playing well in the North America market, but I do believe that this is really international market right now and we are trying to play out all the regions and we are being successful in there.

Okay and then last question for me. In terms of the variables related to your partnership with Google, when do expect material revenues from that opportunity -- is it later half of this year or more 2015?

More 2015. In fact, when we announced this partnership with Google in December, we made it clear that we don't expect much if any revenue this year and we think that wearable camera market is a brand new market, we are going to continue to invest on that and we also believe there is a long-term market that we want to play in and Google is going to provide us revenue growth in the future, but we just don't see that as a near-term effect.

Thank you.

Kevin Cassidy of Stifel.

On inventory, you had said you are comfortable with -- your in-line with your expectations for internal inventory, but can you -- do you have visibility into WT Microelectronics or Chicony's inventory and what are those levels like?

WT inventory, we obviously get daily reports from them. Anything that's in their inventory is already committed to end customers. Its deferred, so you will see that actually as included in our inventory balance, because it's a sales-out relationship. On Chicony, we do get good visibility. We have full-time operating people who work with Chicony in Taiwan, so we know based on each one of their customers, what their inventory levels are in any one-time and we are very comfortable with both WT and Chicony's inventory levels.

Okay. Great. Thanks. On the sports camera market, you say that's going to be flattish to down this quarter. Are there new models coming out later in the year that you know of or that you can talk about?

We don't talk about our customer product releases. They normally get angry when we pre-announce their products (laughter) So, we don't comment on that.

Okay. How about -- with some of the comments you did make about some competitors reducing their spending on their products? Are you winning any other sports camera designs outside of your current customers?

We continue gaining momentum in our market. Although we cannot really specifically mention the new design wins, but I feel very confident that we are the leaders in the sports camera market category.

Okay. Great. Thanks.

Charlie Anderson of Dougherty & Company.

Congrats on the strong results. I wanted to focus on home security. I wonder if you guys are seeing any revenue from that outside of Dropcam right now and -- especially with the operators, in terms of the AT&T and Comcasts of the world and when you might expect that to ramp for you guys, based on your design win pipeline?

First of all, I do believe some of the revenue in products shipped to China, to Hikvision and Dahua, some of them go to consumer IP camera category already. But none of them going through cable service provider or AT&T Comcast side yet. So while we continue to be optimistic about this market and we are going to continue to work with partners when we're ready to talk about design wins and revenues. We probably can talk about it second half this year.

Got you. Perfect. Then you guys attributed some strength in the margins in the quarter to mix. I wonder if you could maybe give us a little bit more color there on what products were driving that margin upside?

We had really two impacts. We had a strong quarter with our new A7LA product and A7LS product, both -- one is in the sports and one is automotive. That product is one of our strongest margin products and the timing of GoPro's product release, as well as the ramp in the automotive did strengthen our margins in the quarter. In addition, we did have lower volumes in the China low-end security market, so the revenue was offset with higher margin revenue.

Great. Thank you so much.

Stuart Rigby of Grandeur Peak Advisors.

Just one small question, just about Hikvision. I'd love to hear your perspective on them, in particular -- just where you are technologically versus them and a little bit more about maybe some strength that they may be having in the Chinese markets?

Hikvision is definitely number one IP security supplier in that market. In fact, not only do they supply IP-digital, IP-security camera, they are very [strong], have an [ML] camera, too. They basically either transition from an [ML] camera to IP-security camera internally. From the IP-security camera side, we have the product covered both from a low-end to a high-end for them. Our A5s product is really their low-end and the mainstream and also, we also already mentioned in the past, that they [already] designing our H2 product to cover the high-end product line.

I expect that we will continue to be a supplier -- big supplier to Hikvision on the IP-security side. From the technology point of view, I really think that although our main competitor in Hikvision is [High Silica] in China, and they are mainly competing with us on the low-end side. On the mainstream and the high end, I am comfortable with our position there. In terms of Hikvision, I also believe they have ambition to come into international so when they try to sell their product into international markets, our strength will also be highlighted.

Thanks.

I'm showing no further questions at this time. I would like to turn it back over to Fermi Wang for closing remarks.

Thank you. I would like to thank all of you for joining our conference call today and also would like to thank all my colleagues for continue delivering outstanding performance to make this possible. Thank you all.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.