With the advent of high-definition televisions and the potential for movies on demand, the death of the humble DVD player has been forecast for some time. Predictions about how this would impact companies that provide the technology that drives those players have been nothing short of a doomsday scenario.
For example, Motley Fool Stock Advisor recommendation Dolby Labs (NYSE: DLB ) provides the sound technology in virtually every DVD player on the market, which accounts for most of Dolby's revenue growth in the past. The decline of the DVD player was expected to weigh heavily on its results. As is apparent from this related Fool by Numbers article, if the demise is happening, it's nowhere near apparent today.
Dolby reported first-quarter results for 2007 and well exceeded analyst expectations for both revenues and profits on the strength of sales of standard DVD players, as well as portable ones. While analysts on the conference call were interested in looking to the future of HD televisions, next-generation DVDs, and gaming systems, it was the "old" tech that was powering the company. Additionally, notebook computers -- which often come with a DVD player as standard equipment -- helped drive licensing revenue higher by more than 19% from the year-ago period.
End-of-year bonuses that Dolby paid to executives last year had pushed SG&A expenses and R&D expenses higher in the fourth quarter, so on a sequential basis, those expenses were 4% and 2% lower, respectively. The company said investors should expect higher expenses for the rest of the year, since there will be a number of trade shows coming up in which Dolby will participate; plus, it will be hiring more sales and marketing personnel to push the brand further.
Dolby also benefited in the quarter from a lower tax rate -- 32%, versus 38% in the fourth quarter -- thanks to a change in tax laws for research and development, and the company expects taxes to return to normal levels. Even so, the difference would have amounted to about $0.03 per share, so it still would have beat expectations.
The company has a large cash hoard of more than $575 million, and while it would not divulge any specific plans, management says it is looking to break into video and imaging and is looking closely for opportunities to exploit. A number of its competitors, like DTS (Nasdaq: DTSI ) and SRS Labs (Nasdaq: SRSL ) , are also not standing still, and Q Sound (Nasdaq: QSND ) wants its microQ sound technology to be a part of tomorrow's mobile phones.
Dolby's results, though, were more than encouraging, particularly when viewed in light of the strong performance turned in last year, which surprised a lot of people. Dolby raised its earnings guidance 4% for 2007, to $0.88 to $0.96 per share on revenues of $420 million to $450 million. Next quarter, it expects to record a deferred royalty payment, so there may be a small bump in sales that won't repeat itself in the future. Dolby's sound-canceling technology, which it unveiled at the recent Consumer Electronics Show, should start showing up in TVs by year-end, and nothing has been settled between the Blu-ray and HD-DVD factions where Dolby is the standard technology in both formats. With LG Electronics unveiling a dual-technology DVD player, expect the war to continue over which of the competing systems will dominate.
Dolby Labs has proved that while the future may yet look bright and promising, it must maintain its old ways, too, as it turns up the volume on profits.
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Dolby is a recommendation of Motley Fool Stock Advisor. A 30-day guest pass gives you full access to the high-volume reason why it made the cut and is beating the market.
Fool contributor Rich Duprey owns shares of Dolby Labs but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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