Will Dolby Laboratories Report Sound Earnings?

Dolby Laboratories (DLB 0.53%) will release its first-quarter earnings results on Thursday. The company has been stuck in a rut of flat for the last five years or so, and that will likely continue as it faces pressure from its PC licensing segment. The trouble there has to do with decreased sales of PCs and a less favorable licensing agreement with Microsoft (MSFT 0.37%) for Windows 8.

It plans to offset its decline in PC revenue with mobile licenses from Amazon.com (AMZN -1.64%), and with new products like Dolby Voice, which it partnered with BT Group (BT) to improve the conference call experience.

Dolby is a leader in audio processing technology. It's also made advances in video processing, think 3D without glasses, and improving the dynamic range of digital video. Still, despite having practically no equals in intellectual property, the company will be hard-pressed to improve its revenue and profits in the short term. Let's see what we can expect for Dolby's first quarter.

Stats on Dolby

Source: Yahoo! Finance.

Sound earnings
Dolby's first-quarter guidance came in lower than analysts had initially hoped for, which caused earnings estimates to fall from $0.43 per share to $0.34 per share. Additionally, analysts deducted a couple pennies from the current quarter's outlook. Despite the decline in analyst estimates, the stock has climbed over 11.5% since its last earnings release while the S&P 500 is up less than 4%.

Dolby's fourth-quarter results were better than expected. The company reported earnings per share of $0.44 where analysts expected just $0.33. Still, earnings declined 10% year over year as the company failed to grow its lucrative licensing business. Dolby generated $191 million in licensing revenue for the fourth quarter of 2013 compared to $192 million in the year-ago period.

The effects of a declining PC market have taken its toll. PC revenues represented just 21% of the company's total in the fourth quarter, down 25% year over year. Although declines in the PC market played a big role in the drop in revenue, Dolby saw a bigger impact from its new revenue structure under its Windows 8 licensing agreement with Microsoft.

The company has two more comparable quarters under the new licensing agreement before it faces easier comps. Still, the persistent decline in the PC market throughout 2014 means Dolby will look to other areas to offset the diminishing portion of its revenue.

The fastest-growing segment for Dolby has been licensing its technology in mobile devices. The division grew 34% year over year in the fourth quarter. The company's technology is available in Amazon's Kindle Fire HDX tablets. Unfortunately, Amazon's high-end tablet might not be selling as well as the previous generation, and the company has reportedly reduced orders for the HDX in its supply chain. Nonetheless, Dolby sees long-term opportunity in getting its technology into all smartphones and tablets -- high-end and low-end.

Another opportunity for Dolby is in its recently unveiled Dolby Voice product. The company partnered with BT Group to vastly improve the conference call experience.Dolby CFO Lewis Chew estimates the conference call industry is a $3 billion to $5 billion market.

The British telecom giant gives Dolby a means to take, "something that already is sucky today and makes it a lot better" to use the technical jargon of CFO Lewis Chew. BT has already generated over 1 million conference minutes using Dolby Voice technology.

What to watch for
When Dolby reports its earnings, watch to see its revenue from PCs decline, which should be offset by increases in all of its other licensing segments. Mobile devices ought to show the strongest growth, but watch to see if lower than expected Kindle HDX sales had a negative effect on the segment.

Meanwhile, look for growth in its new Voice product, its first foray into enterprise solutions. Don't expect any miracles; Dolby will likely remain flat for a while, but there are several opportunities for long-term investors to be excited about.