Entertainment technologies developer Dolby Laboratories (NYSE:DLB) reported earnings on Wednesday evening, covering the results from the third quarter of fiscal year 2018. The company crushed Wall Street's earnings estimates and backed it up with bullish bottom-line guidance for the fourth quarter.

Dolby's third quarter by the numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$317.4 million

$305.7 million

3.8%

Non-GAAP net income

$98.9 million

$89.2 million

11%

Adjusted earnings per diluted share

$0.92

$0.86

7%

Data source: Dolby Labs.

Analysts' consensus estimates were pointed at adjusted earnings of roughly $0.69 per share on $317.7 million in sales. Dolby pretty much met the revenue target and stomped the earnings estimate.

The midpoints of Dolby's guidance for this period had outlined revenue of approximately $315 million and earnings in the neighborhood of $0.81 per share. 

Looking ahead, Dolby's management simply tightened up their full-year guidance ranges around the midpoint of each existing goal. To reach these targets, the company expects to collect roughly $270 million in fourth-quarter revenue and $0.43 of non-GAAP earnings per share.

What Dolby's management wants to talk about

In the earnings release, Dolby's management highlighted how customers are embracing the company's latest technologies in mass-market devices. The deal partners included consumer technology heavyweights Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).

"Apple adopted Dolby Atmos into Apple TV 4K while Microsoft announced Dolby Vision support for Xbox One," said Dolby CEO Kevin Yeaman. "We also now have partners that will be launching Dolby Cinema sites for the first time in England, Germany and Kuwait."

On the earnings call with financial analysts, Yeaman clarified that statement a bit further:

This quarter, Apple announced that Dolby Atmos will be supported on Apple TV 4K and in iTunes. Of course, Dolby Vision is already supported by Apple and iTunes already has over 300 Dolby Vision titles. The Apple TV 4K now becomes the first [digital media adapter] to support both Dolby Atmos and Dolby Vision.

Microsoft announced that it will be supporting Dolby Vision on the Xbox One. So this becomes the first gaming console to support both Dolby Vision and Dolby Atmos.

In other words, Apple adopted Dolby's next-generation audio standard first and added support for the company's best video platform later; Microsoft did it the other way around. Now, both Apple TV and the Xbox One can handle both Dolby Vision and Dolby Atmos.

Getting a few household names on board should help Dolby push the Vision and Atmos standards to other potential customers. It's a chicken-and-egg solution where the best way to gain more adoption is to demonstrate that the industry is embracing your solution.

Father and daughter enjoying a movie and a bucket of popcorn in a packed theater.

Image source: Getty Images.

What's next for Dolby Labs?

The wins extend beyond Atmos and Vision into the movie theater experience with Dolby Cinema and a range of high-quality voice solutions dubbed Dolby Voice. The company is enjoying solid momentum in all of these areas.

"All of this creates opportunities for increased revenue growth and broadens the number of people that will enjoy Dolby experiences," Yeaman said later in the call. "I really love to see the combined Dolby Atmos and Dolby Vision experience coming together and with so many services and so many devices. That bodes well for both of those initiatives."

Investors hope that Yeaman's constructive comments will translate into stronger stock returns. Dolby shares' performance has been sluggish in recent months, gaining just 4% year to date. The stock chart just isn't keeping up with Dolby's solid earnings growth. I'm not 100% sure that this makes Dolby a buy today, but I'm keeping an eye on the stock by adding it to my CAPS scorecard.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.