For 12 straight quarters -- three years in a row -- Dolby Labs (NYSE:DLB) has blasted past Wall Street earnings expectations, but tomorrow's Q4 report may pose Dolby's toughest test yet. Fellow high-tech electronics "guts" makers like Corning (NYSE:GLW) and NVIDIA (NASDAQ:NVDA) have floundered on the shoals of a consumer-led recession. Can Dolby avoid their fate?

What analysts say:

  • Buy, sell, or waffle? A baker's dozen of analysts listen in on Dolby's reports. Eight of them rate the stock a buy, and five more a hold.
  • Revenue. On average, they're looking for quarterly sales to grow 14% to $146.8 million.
  • Earnings. Conversely, profits are predicted to fall 13% to $0.34 per share.

What management says:
Dolby's earnings reports are famously laconic. But the last time we heard from the company, CEO Bill Jasper was predicting that fiscal 2008 revenue would come in around $615 million, with profits of about $1.61 per share. After punching a few calculator keys, it seems to me that Dolby can hit its numbers with as little as $0.29 per share reported tomorrow -- but Wall Street won't be happy unless Dolby adds another nickel to the pot. (Let's hope Jasper was being conservative.)

What management does:
One thing Dolby's not conservative about: squeezing simply obscene profit margins out of its revenue stream. Nearly one dollar out of every three that Dolby takes in as revenue drops to the bottom line as pure, delicious profit. Rivals like Kodak (NYSE:EK), Philips (NYSE:PHG), SRS Labs (NASDAQ:SRSL), and DTS (NASDAQ:DTSI) can only dream of margins like these.

Margins

3/07

6/07

9/07

12/07

3/08

6/08

Gross

82.0%

82.9%

84.6%

86.1%

87.8%

89.1%

Operating

35.9%

36.7%

38.3%

40.3%

42.4%

44.6%

Net

26.4%

27.2%

29.6%

30.4%

31.2%

32.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So what's not to like about Dolby? First and foremost, the company's record of near-incessant success has me terrified of how the Street might punish any misstep tomorrow. It's not as if the stock is pricing in much risk, you know. At 19 times earnings, and 18 times free cash flow, the stock sells for a pretty premium to the sub-15% long-term growth that analysts predict for it.

Assuming Dolby sticks to its usual habit of delivering stellar results, and promising more of the same, everything should work out just fine tomorrow. But if management gives even a hint that it's less than invulnerable to the economic slowdown, look out below.

What did we expect out of Dolby last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.