Ambarella, my thoughts (Say it isn't so!)

Investment Analysis Clubs Saul’s Investing Discussions
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I just got around to looking at AMBA’s call and I couldn’t believe what I’m seeing. It’s so terrible I wonder if I’ve made a mistake somewhere, but I don’t see it. If you do, please let me know.

Non-GAAP net income for Q4 2016 was $21.6 million, or 64 cents compared with $22.6 million or 68 cents for the same period in the previous year…The non-GAAP effective tax rate in Q4 2016 was a negative 3.6%, reflecting a lower annual non-GAAP tax rate of 5%. For non-GAAP reporting, we eliminated stock-based compensation expense and the impact of the one-time write-down of a deferred tax asset that may not be usable in the future.

Thus they got that 64 cents only by using a negative tax rate for the quarter. Most companies when they use adjusted earnings use a standard tax rate like 35% or 38%, and use fully taxed earnings if this is an odd one-time deal. Using a negative rate, they not only didn’t take ANY tax, but they added some imaginary cash back. Their actual fully taxed adjusted earnings would have been about 40 or 41 cents, down from 68 cents, at least the way I calculate it.

We expect non-GAAP net income for the first quarter to be between $8 million and $10 million. We are using an estimated non-GAAP annualized effective tax rate of 7.5% for the net income amounts.

Thus, at the high end, next quarter they only expect net income to be $10 million, which is less than half of what they had this quarter (46% actually). And they will have to use a positive tax rate, even if it’s not fully taxed. We’re talking about earnings of about 26 cents, down from 71 cents.

Granted they probably expect to beat the high end, but that’s a terrible forecast, not just a weak one.

Now this is just the way I figured it. If I have made a mistake here, please let me know.

Saul

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I’m confused. Never took an accounting class so I have no clue what is a negative tax rate?

How can you have a negative tax rate?

Also, for the next quarter, how can they project a 7.5% tax rate? The US tax rate on business is 35%. How do they go from 35% to 7.5%?

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How can you have a negative tax rate? Also, for the next quarter, how can they project a 7.5% tax rate? The US tax rate on business is 35%.

Hi Dovbgood,

My guess is that they have some tax-loss carry-overs from previous losses. But those are very temporary (just until you use them up), which is why most companies use fully-taxed earnings.

Saul

PS This doesn’t hold of course for GAAP tax rates, which can be anything. You’ll often see a quarter when a company takes all its remaining tax loss carryovers and reports huge, very huge, GAAP earnings, and goes back to normal the next quarter.

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Saul, thank you for pointing this out! This makes me question everything I thought I understood about the company.

The finances I read though for earnings reports and SEC filings (for all companies) frustrate me … I see so many games played with the numbers it seems just about anything could be hidden. I suppose it goes back to the question of it I feel I can trust management?

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I suppose it goes back to the question of if I feel I can trust management?

Hi othalan,
I remember about a year ago when some people on the AMBA board were upset that management had sold a HUGE amount of shares. I made excuses for management, but I guess I was wrong. They must have seen this GoPro crunch and increased competition coming. The price kept rising for another month or so and then fell off a cliff.
Saul

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Saul, interesting. Has me wondering if they also are not very optimistic about how the diversification of their products will turn out for future profits. I’ll have to look into that. I was already a bit ambivalent about AMBA, maybe its time to take my profits and look for better opportunities.

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I appreciate everyone’s responses and views concerning AMBA. All of this concerns me, too. I had a great profit going there for awhile, but it has been almost completely wiped out at this point. I’m seriously considering getting out entirely come Monday morning.

The subscription service upon whose recommendation I purchased AMBA shares (and which I do not believe I am permitted to identify on this board) is still recommending that shares be held for the long-term but, frankly, several of their recommendations have completely tanked over the last year or so.

Is there anyone on this board who still feels confident enough in the company that you are going to hang onto your AMBA shares for the foreseeable future?

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Is there anyone on this board who still feels confident enough in the company that you are going to hang onto your AMBA shares for the foreseeable future?

Leaving aside the fact that you should probably be giving more weight to the advice given by the service that you are paying for than opinions given on this board…

Amba’s current problems are almost exclusively down to the issues with GoPro. They are getting virtually no sales from GoPro at the moment, but this will change as the GoPro channel reduces inventory and GoPro launches its new products.

Amba’s sales from Security Cameras and drones are starting to take off - this will be a good market.

They are just getting started with automotive. This is very small now but could dwarf the business from Security/Drones/Wearables in a few years time.

They have other prospects - they mentioned a ‘doorbell’ app that allows you to see whoever is ringing your doorbell on your phone - wherever you are - and talk to them. This alone could be a huge market.

Despite attempts to challenge them from Qualcom - Amba is still well ahead in terms of quality, performance and power and they are seeing no real competition.

Beyond the next quarter we should see high growth returning.

Needless to say, none of this is guaranteed.

But I am very comfortable with holding a significant position in Amba and I will be continuing to hold at a minimum for the next 3 years while this thesis plays out.

Ian

…despite what I said about the service you are paying for, there are some very smart posters on this board and their opinion is always worth listening to.

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Ian,

I agree with you that AMBA is worth holding at this time, as I feel medium to long term they will continue to sell more product.

You mention the following:

They have other prospects - they mentioned a ‘doorbell’ app that allows you to see whoever is ringing your doorbell on your phone - wherever you are - and talk to them. This alone could be a huge market.

There is already on the market, the Ring video doorbell ($199) and the SkyBell ($149) that do all these things, so I’m not sure what more AMBA would provide with an offering here.

But I do feel they have a lot of other opportunities, for me, I think the automotive market is going to be large for them, although it may take a while to develop.

Like I said, I consider it a medium to long term hold at this point.

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I’m not sure what more AMBA would provide with an offering here.

From memory, they said on the conference call that their combination of low power, high compression and high resolution gave them an advantage.

I suppose those features might apply to almost any video application - which is why AMBA is in a good position to dominate this fast-growing space.

Ian

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Is there anyone on this board who still feels confident enough in the company that you are going to hang onto your AMBA shares for the foreseeable future?

Yes. I don’t have a position yet but plan to at some point in the second half of this year.

We are two quarters into the GPRO collapse. Two more quarters and we can normalize the GPRO component of sales to something like 5%. We will also get a new normalized TTM P/E reflecting the removal of GPRO from the equation.

Basically, you get AMBA ex-GPRO.

In spite of the utter collapse of GPRO sales (used to be 30% of AMBA revenue), AMBA had eked out a 5% revenue growth Y/Y. That means that the other parts of the business are growing nicely. While companies can play games with EPS, it is harder to muck with sales (although still possible to “stuff the channel”.)

Two quarters from now you get the decoupling of the AMBA stock from GPRO and we go from there.

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If you want to understand how fast the non GoPro market could be or should be growing to mitigate the GoPro collapse then take a look at
Avigilon’s results and earnings call transcripts:

http://ir.avigilon.com/Investor-Relations/Press-Releases/Pre…

http://seekingalpha.com/article/3946386-avigilons-aiocf-ceo-…

Apparently the industry growth rate is 8% but they grew revenues 21% at constant currency and 37% reported.

Forward guidance is 15-25%.

Ant

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In particular if you want to understand the security service body cam market demand Taser have just released results.

http://finance.yahoo.com/news/taser-reports-record-quarterly…

The police body cam and evidence.com service grew 47% to $9.4m. Growth came from the service whilst the camera sales declined in Q4 by $1.1m. This is a good thing for AMBA as they were delaying the shipment of Axom 2 to Q1 2016. AMBA was not in Axon 1 but is in Axon 2 cameras. They have obsoleted Axon 1 inventories too.

Axon product revenues for 2015 were $22m. COGS which I would assume AMBA to be a part of were $15m. Axon body product sales annually grew 40%.

Axon 2 should have a flying start and impact AMBA in Q1. Apparently the segment including evidence.com had billings of $44m in Q4 and has forward contracted bookings of $158m as at year end.

Taser shipped 2141 Axon cams in Q4 2015 vs 4568 in Q4 2014 and 17522 for 2015 vs 13219 for 2014.

There is also the Axon Flex which shipped 2902 and 18823 in Q4 and 2015. I don’t know about AMBA’s participation in Axon Flex but it is as big a market as Axon body. It would be fairly important to find out. Axon Flex is growing at 80% YoY, 2x the rate of Axon body - maybe there is some cannibalization there so again important to know AMBA’s involvement.

Here’s a spec sheet comparison between Axon body and Axon body 2.
http://www.axon.io/products/body2

Here’s the PR announcement indicating intentions to work on more products together…

TASER built Axon Body 2 on an Ambarella (NASDAQ: AMBA) HD camera System-On-Chip (SoC). Ambarella is a market leader in wearable, sports, flying, automotive and IP security camera SoCs.

“Ambarella is thrilled to partner with TASER to deliver this state-of-the-art on-officer video camera design,” said Fermi Wang, CEO of Ambarella. “We look forward to partnering with TASER on future products.”

http://www.prnewswire.com/news-releases/taser-introduces-nex…
Ant
PS yes I know AMBA supplied other body cam operators but this is a market leader’s numbers with good data transparency so a reasonable place to start.

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The subscription service upon whose recommendation I purchased AMBA shares (and which I do not believe I am permitted to identify on this board) is still recommending that shares be held for the long-term…

Hi az5speedy,
Another MF subscription service, also unnamed, as I remember just sold out of its position entirely a week or two ago. They had sold a portion at about $80-85, and now got out of the rest.

Saul

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Now this is just the way I figured it. If I have made a mistake here, please let me know.

In my initial post on this thread I asked if anyone could find a mistake in my reasoning. Lying in bed, I thought of a small one. I had concluded:

Thus, at the high end, next quarter they only expect net income to be $10 million, which is less than half of what they had this quarter (46% actually). And they will have to use a positive tax rate, even if it’s not fully taxed. We’re talking about earnings of about 26 cents, down from 71 cents. Granted they probably expect to beat the high end, but that’s a terrible forecast, not just a weak one.

What I realized last night is that they are talking about “net” income, so the effects of the positive tax rate are already figured in. Thus it’s a simple calculation. One can either take 46% of 64 cents, or $10 million divided by 34 million shares. Either way one gets 29.4 cents. What I should have written was:

Thus, even though they are only figuring 7.5% taxes instead of a more normal 35% taxes, at the high end, next quarter they only expect net income to be $10 million. This is less than half of what they had this quarter (46% actually). We’re talking about earnings of about 29.4 cents, down from 71 cents. Granted they probably expect to beat the high end, but that’s a terrible forecast, not just a weak one.

Also someone wrote that their revenue held up at least, showing that other markets are replacing GoPro:… AMBA had eked out a 5% revenue growth Y/Y. That means that the other parts of the business are growing nicely. While companies can play games with EPS, it is harder to muck with sales

Well, next quarter they are forecasting revenue down 20% to 24%. Granted they probably hope to do better, but revenue down 20% is a bunch.

I’m not saying this is toxic or that everyone should sell out, but don’t take this as a rosy picture either.

Saul

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I wrote this in my original post for this thread:

Thus they got that 64 cents only by using a negative tax rate for the quarter. Most companies when they use adjusted earnings use a standard tax rate like 35% or 38%, and use fully taxed earnings if this is an odd one-time deal. Using a negative rate, AMBA not only didn’t take ANY tax, but they added some imaginary cash back.

Here’s an example from LOGM’s recent report. They paid only $0.6 million in actual taxes (GAAP) which was less than a 10% rate, but in figuring non-GAAP earnings they allowed for $5.4 million (!) in taxes, approximately a 30% tax rate. That’s 5.4 million compared to 0.6 million. This is what companies normally do!

In other words, AMBA seems to have conned us by using a negative, non-sustainable, tax rate for their non-GAAP earnings.

Just saying…

Saul

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