CMFFrankDip kindly go us permission to repost his recounting of the AMBA shareholders meeting. It is definitely worth the read!
Saul
Recommendations: 77
This morning I had the pleasure of participating Ambarella’s third annual shareholder meeting which was held at AMBA headquarters located at 3101 Jay Street Santa Clara, California.
Let me warn you this is going to be a long post and I will try to add as much color to the festivities as I can - first a few pictures. I created a Google doc with three pictures of the building that houses approximately 25% of AMBA’s 543 employees. You can view those pictures at this link:
https://docs.google.com/document/d/1O0VhtPa6MwSlLyZX4vDE6U3S……
AMBA occupies both floors of the right side of the building (as you face it). This is a relatively standard building for engineering companies in Silicon Valley - furnishings inside were quite nice and the meeting was held in the 2nd floor Board Room.
Before I get into the details here is a summary.
This company is operating on all cylinders and is in the right place at the right time. They have a lot of tailwinds as the world goes to digital video everywhere.
The company develops semiconductor processing devices to enable HD video capture, sharing, and display. They are a fabless semiconductor company that has approximately 543 employees with 81% of those employees being engineers. They are headquartered in Santa Clara, California and 75% of the employees are located in Asia.
AMBA has a high IP/patent barrier to entry in SOCs for competitors in 3 areas:
- Video Quality - low light high resolution
- Compression Efficiency - 500:1
- Low Power SOC’s
The differentiators that AMBA has built into their products helps them win many design sockets and gives them the all important pricing power which is reflected in their margins.
Fermi Wang is a founder CEO who has dedicated his life to increasing high resolution video capability and has embodied his spirit and passion within AMBA.
Take a look at the Glassdoor rating:
http://www.glassdoor.com/Overview/Working-at-Ambarella-EI_IE……
The company operates in four primary areas of the camera market:
- Action
- IP Surveillance
- Drones
- Automotive
My key take aways from the meeting were:
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The CEO is completely engaged and worrying about who is buying or selling stock as insiders would not dissuade me from owning this company.
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The company has a competitive moat built around IP.
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The company has pricing power.
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WT Micro accounts for 62% of AMBA’s revenue as a logistics supplier. The key relationships with the customers are owned by AMBA not WT Micro.
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Drones are going to be the next big growth area for this company.
Now to the details.
The lobby has a 40 inch Ultra HD 4K television showing footage taken with a camera utilizing AMBA’s system on a chip (SOC).
I arrived at the lobby at about 8:30AM and sat with another shareholder for about twenty minutes until General Counsel Mike Morehead came out to take us up to the Board Room. We walked upstairs and were immediately introduced to CEO Fermi Wang as his two favorite shareholders. He was very personable, highly energetic, and sat down across the table from us and began telling us about his background which I will get into in a moment. I gave him a copy of David Meier’s original recommendation for AMBA and explained to him a little about the Motley Fool,that we were retail investors who had a long term buy and hold approach to owning fractional shares of great businesses and learning as much as we could about the companies we owned. He really warmed up to this - then the other shareholder sitting next to me said, and I am not making this up, I bought the stock because Jim Cramer talked about it. Talk about stockholders from opposite ends of the investing spectrum.
Fermi gave us a lot of information about his background. His father was an analog video engineer and he got involved with learning about video engineering as a child in Taiwan. His childhood gave him a great background for what would later become his career. After graduating from the University in Taiwan he went to Columbia University to work on his PhD. His advisor said he could choose between two areas to work on artificial intelligence and video compression. He chose video compression and graduated in 1991.
At about this point George Laplante, the CFO joined us and introduced himself - it was a couple of minutes before 9. I congratulated him on a great quarter and specifically getting days sales outstanding (DSO) down from 57 days to 50 days comparing sequential quarters. He said I was giving him too much credit as it was more a result of mix shift between WT Micro and Chicony.
I asked him how that works.
He said that WT Micro is simply a logistics partner that is paid on commission and the higher percentage of business from them in a quarter compared with Chicony causes DSO to go down. Fermi then explained that AMBA owns all AMBA’s inventory at WT Micro and AMBA has direct relationships with all the customers. WT Micro handles the logistics and takes the credit risk and handles the customer payments - for this they receive a commission from AMBA. Fermi explained that it can be hard to do business in China and WT Micro helps facilitate this for AMBA by handling the customer payments. AMBA is the one who negotiates the contracts and the product design with the customers.
When I think about this it makes sense in that WT Micro is selling a lot more than AMBA products to the same customers - so if a customer becomes a credit problem WT Micro has a lot of leverage because they sell that customer many different electronic components.
Somehow in the mix Fermi said he is very optimistic about drones being the next big revenue growth area for AMBA - he said we should see this in the current quarter’s results.
So lot’s of info and the formal meeting has not even started.
Now it’s 9AM and we are ready to begin. Two more shareholders join us for a total of four shareholders. The attendees from AMBA are:
Fermi Wang - CEO
George Laplante Jr. - CFO
Mike Morehead - General Counsel
Debra Stapleton - Investor Relations
Vicki Hsu - Stock Administration
also attending was Rob Ward of PricewatersCooper.
Mike Morehead ran the formal meeting which ran for two minutes - the first 3 proxy items were approved and the fourth around exec comp reviews was approved for a one year review on an advisory basis. You can read the proxy items here:
http://www.sec.gov/Archives/edgar/data/1280263/0001193125151……
Once the formal meeting ended Mike stated that since the company had just done it’s quarterly announcement two days ago the company would not have a formal presentation and he would now open the floor for stockholders to ask questions of Fermi and George … and so the fun began.
- I asked if they could tell us which foundries they used to make their chips.
Fermi said Samsung and TSMC - it sounded like Samsung got more of the business. (This is good for us as shareholders as these two companies have their facilities in different countries South Korea and Taiwan. Geographical diversity reduces risk of an exogenous event (typhoon, monsoon, earth quake, tsunami) shutting down the supply chain.))
- Dan , another shareholder, asked - how do you look at all the M&A that is taking place in the semiconductor space?
Fermi said the semiconductor business is a mature business with many companies growing between 3% and 5%. As a result larger slow growth companies are looking to buy innovation and add more growth to their product base. At the same time small semiconductor companies have difficulty affording the $8M it costs to create a mask set for a 40 nanometer chip and if they make a mistake and have to do a second mask set an additional $8M - as a result they are more willing to be acquired by a larger company with deep pockets.
- Dan asked about the police wearable camera market.
Fermi said that Taser was the leader in producing a product for that market, however it was relatively small with only 800,000 police people in the U.S. He said China had a much bigger market with 5M police people. He said Digital Ally was a smaller player in the market and that the Taser product was not hi resolution.
Fermi said that Garmin was a new customer that AMBA had announced.
He also said Comcast was a new customer for a home security camera application.
- I can’t remember exactly how this came up but Fermi told us about his background in Silicon Valley.
He started with C-Cube Microsystems where he was GM of a division that helped enable DirecTv to broadcast using compression - this company was bought by LSI.
Then he was CEO of a company called Afara Websystems that did server design. This company got sold to Sun Microsystems as the company had trouble raising additional capital after 9/11.
In 2003 he co-founded Ambarella.
- We were now getting near the end of the meeting and I decided to try to broach the topic of stock sales by the management team in a manner that would allow me to be welcome to attend next year’s annual meeting.
I asked with the stock price having run up as much as it has coupled with the fact that this was mainly an engineering company, how do you keep the employees who are getting richer by the minute motivated to continue to perform at a high level for the company?
Fermi said that was one of his biggest worries. He used the term “Vest In Peace.” He was of course referring to the fact that employee stock options were vesting on a monthly basis and many had strike prices at much lower values than today’s stock price. He said he and his management team spend a lot of time talking about this and he keeps his managers closely watching the performance of all employees and giving feedback to keep things on track.
My take on the stock sales are they are simply diversifying their holdings. If you look at the compensation section of the proxy which is in the earlier part of this post you can see that the key executives are getting stock options and restricted stock units each and every month. As a result they still have tremendous financial incentive to keep the company moving forward as the vesting period for the grants are four years.
At this point there were no other questions and we wrapped up.
Enjoyed the meeting and learned a lot about the company.
My big take away is this - Fermi Wang, CEO, is extremely passionate about this business and his company. He is from Taiwan and his dad was an early video engineer. He grew up as a kid learning about video engineering - this is the equivalent of Wayne Gretzky learning to skate when he was 2 years old. He is extremely enthusiastic about Ambarella’s future and this company is his life. He is not going anywhere and he is the classic founder CEO who embodies the principles we look for as long term investors.
Hope this helps.
Frank
I show a 1YPEG of 0.39 for AMBA. Now there are a lot of product launches in the first half of the year this time, so I can see how they might be skewing the YoY numbers up. On the conference call, Wang said “The unusual line number of new product launches we are experiencing in Q2 have historically occurred in our third fiscal quarter.” So we may see some YoY softening in the back half of the year. Is that what you’re thinking about, Saul, when you recommend only 20%-25% of a target position size? A 1YPEG of 0.39 seems to offer a bit of cushion for a slowdown. Or are you thinking that with a P/E so high we could see some serious compression once a slowdown manifests? (The company does seem to be getting a lot of hype right now.)