Sounds Like Dolby's Making Waves

On Thursday, sound technology company Dolby Labs (NYSE: DLB  ) will report earnings, and if what happened to the stock price last Friday is any indication, it looks like the market may be expecting good things. That's because on a day when the market dropped by about 1.5%, Dolby's price rose more than 6%.

What might have accounted for the jump? Sure, Dolby has beaten analyst expectations by an average of 35% each quarter over the past four quarters. The 14 analysts covering the company anticipate an 18% increase in profits, or $0.32 a share, on revenue of $134.7 million. That alone shouldn't account for the price rising.

No, I'd surmise that it was the earnings report by Microsoft (Nasdaq: MSFT  ) : Sales of its Vista operating system helped boost revenue 30% and net income 79% from a year ago. Sales from the client division, which makes the Windows software, alone rose 67% to $4.34 billion. Key to this are sales of Vista Premium -- both the Home and Ultimate versions -- which include Dolby's technology-enhancing DVD playback function and DVD authoring.

Sales of the enterprise version of the Premium edition grew 35% for the quarter, and the number of licenses for the operating system has surpassed 100 million.

In recent earnings releases, Dolby, a Motley Fool Stock Advisor recommendation, reported that its fortunes improved because of Vista sales. Where analysts continuously expect Microsoft to fall short -- and Vista to fall even shorter -- the company continues to impress. Maybe it's Apple (Nasdaq: AAPL  ) envy or Microsoft hatred, but whatever the reason, they continue to underestimate the tech giant and its software.

Dolby has a slightly different problem. It's not its technology that analysts doubt, but rather where that technology is deployed. First, the much-anticipated demise of the DVD player was expected to slow Dolby's sales, except that the laptop computer, which includes DVD players, has helped drive those sales further. Falling computer sales were also supposed to eat into revenue, but that's turned out to be not much of a concern, either. Then it was Vista, which was generally panned as an inferior product -- yet both Microsoft and Dolby have seemed to prove otherwise.

Although Dolby does have competition, you don't hear too many people wanting to ensure their equipment has DTS (Nasdaq: DTSI  ) or SRS Labs (Nasdaq: SRSL  ) technology in it. Yet as much as the home theater is still a large part of Dolby's growth story, digital TV, next-generation DVDs and players (HD DVD or Blu-ray), and digital cinema will each take on greater importance. With its recent purchase of Coding Technologies, Dolby will also be an important player in audio compression technology for mobile phones.

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