3 Takeaways From Dolby's Earnings

Since reporting earnings that beat analysts' expectations last Thursday, shares of audio specialist Dolby Laboratories (NYSE: DLB  ) have traded relatively flat as the market "reacted" in an uncharacteristically muted fashion.

However, that doesn't mean you shouldn't care about what Dolby had to say in its report. Remember, we're still talking about a solidly profitable company whose audio technology has permeated the electronics world for the better part of the past several decades.

Last week I posed three questions for Dolby going into earnings, so let's take a look at Dolby's answers to get an idea of where this business is headed.

On stopping the bleeding
First, I wanted to know if this quarter would give us a better idea of when Dolby's revenue and earnings declines would finally stop. After all, Dolby has had to weather an unrelenting decline the past several quarters in its core PC and consumer electronics segments, which has undoubtedly held the otherwise healthy stock back from larger gains.

As expected, though, this quarter was no different, as PC revenue comprised 22% of licensing after dropping 31% sequentially, or 25% from the same year-ago period. Meanwhile, Dolby's consumer electronics revenue made up around 15% of licensing after falling by 17% from last quarter, or 12% year over year.

As a result, Dolby's total quarterly revenue fell around 1.5% year over year to $207.1 million, while third-quarter GAAP net income fell to $30.2 million, or $0.29 per diluted share, down from $51.5 million, or $0.48 per diluted share a year ago.

That said, however, remember last quarter PC revenue comprised around 26% of licensing, and the consumer electronics segment made up 15% of the total. So while the declines certainly aren't moderating, shareholders can take solace knowing they represent less of Dolby's business with each passing quarter.

On gaining traction where it counts
With this in mind, I also asked whether Dolby was continuing to make headway in promising segments like mobile and broadcast.

Sure enough, Broadcast revenue remained steady at 38% of licensing, which was down about 19% sequentially but up 10% over the last year. For those of you keeping track, that decline was largely thanks to a combination of seasonality and a modest decrease in the total addressable market for set-top boxes, while the increase was due to a higher attach rate in the market as a whole.

In addition, mobile made up 12% of licensing revenue, up from 10% of licensing last quarter. While that does represent a 9% sequential decrease -- in this case thanks to the "timing of royalty streams from a large licensee" -- remember that's also an increase of more than 80% over the third quarter of last year as the company continues to rack up new wins in the tablet and smartphone space.

On new revenue streams
Finally, I wondered whether investors would receive any updates on the progress of Dolby's newest products, which have yet to provide any meaningful boost in revenue to date.

Specifically, while Dolby's press release didn't offer anything new, CEO Kevin Yeaman didn't disappoint during the company's earnings conference call. He shed some light on how the Dolby Atmos, Dolby Voice, and Dolby 3D products are coming along.

Dolby Atmos, for one, has been used in 60 movies worldwide since its launch last year, including seven of the top 10 grossing titles so far this year. Just as impressive, Yeaman says, is that "all major Hollywood studios have released Dolby Atmos titles, and 35 postproduction facilities worldwide are now mixing in Dolby Atmos." The technology is now deployed in almost 200 screens around the world.

Additionally, Dolby Voice is now expected to be available in the fourth quarter thanks to Dolby's partnership with telecom giant BT Group (NYSE: BT  ) , through which both companies have created a new conference call solution aiming to make the experience more like an in-person meeting. Perhaps unsurprisingly, we shouldn't expect Dolby Voice to have an immediate material impact on either BT or Dolby's financial results, but Yeaman also elaborated to say feedback on the technology has been "very positive" so far.

Finally, Dolby 3D "continues to be well received," according to Yeaman, who also took the opportunity to highlight the fact Cameron Pace Group and The Foundry -- the minds behind Avatar -- both announced they would integrate the format into their 3-D video production workflows.

Remember, Dolby 3D represents the company's efforts to introduce a widely adopted glasses-free 3-D solution to the masses, and is the direct result of a partnership between Dolby and Philips which was announced in April. In addition, Yeaman says, Dolby has since "made progress further integrating the solution into the TV OEM supply chain," without providing further detail.

As it stands, however, Dolby management says we can now expect to see products on display showcasing Dolby 3D at the 2014 Consumer Electronics Show in Las Vegas next January.

Foolish takeaway
All in all, while this was a decidedly boring quarter with no significant surprises from Dolby, long-term shareholders definitely shouldn't be disappointed. To the contrary, they should remain encouraged by the fact the company not only continues to make progress where it counts in their pursuit of returning to sustainable growth, but has also remained solidly profitable all the while.

Eventually, the bleeding in PCs and consumer electronics will stop and, when that happens, Dolby's progress in broadcast, mobile, and other up-and-coming segments should be more than enough to allow the company to reward shareholders handsomely.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped by just a handful of companies like Dolby. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


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