Dolby Laboratories (DLB +1.71%) just released mixed fiscal first-quarter 2015 results, but that doesn't mean they were bad.
Even so, Dolby stock waffled between positive and negative territory in Wednesday's after-hours trading, after it said quarterly revenue climbed 1% year over year to $234.2 million. That's just below the low end of Dolby's own expectations provided in October, which called for revenue of $235 million to $245 million, but it still translated to adjusted net income of $58.5 million, or $0.56 per diluted share. Gross margin also rose to 91.7%.
Analysts, on average, were expecting earnings of just $0.38 per share on higher sales of $239.5 million.
For the current quarter, Dolby estimates total revenue in the range of $260 million to $270 million, with gross margin in the range of 90% to 91%. That should result in adjusted earnings of $0.60 to $0.66 per diluted share. By contrast, analysts were modeling lower second-quarter earnings of $0.53 per share on higher revenue of $267.7 million.
Despite its top-line miss, Dolby also reiterated its previous guidance for full fiscal year 2015 revenue of $970 million to $1 billion, which is in line with Wall Street's expectations.
Breaking it down
Dolby's core licensing business continued to lead the way by growing around 5% year over year to $216.6 million, or above the high end of Dolby's expected range.
To blame for Dolby's shortfall, explained Dolby CFO Lewis Chew, was lower-than-expected combined revenue of $17.6 million from from its much smaller Products and Services segments. Specifically, Dolby completed its acquisition of Doremi labs in early November but saw lighter post-acquisition sales of Doremi products than projected for the first few months of its transition. Dolby also saw light demand for other mature Dolby products and services, though demand for Dolby's newer cinema-centric Atmos technology was in line with expectations.
Within licensing, Broadcast remained the clear leader, growing 21% year over year to $88.8 million to represent 41% of all licensing revenue. For that, investors can thank the continuing transition to digital broadcast signals in emerging markets such as China, India, and Africa.
Meanwhile, PC revenue decreased roughly 12% sequentially and around 18% from the same year-ago period to comprise 16% of the total. Consumer Electronics generated around 15% of total licensing, up about 11% sequentially but down around 21% year over year on lower DVD and Blu-ray device sales. Revenue from "Other" markets accounted for 12% of total licensing in Q1, up around 37% sequentially and over 40% year over year. This includes younger segments such as gaming and automotive, as well as promising non-audio services such as Dolby Vision and Dolby Voice.
One surprise was mobile device licensing, which climbed over 40% sequentially, and 11% year over year to comprise roughly 16% of the total. For perspective, three months ago Dolby management told investors that mobile licensing will probably be relatively flat on a sequential basis.
But before you get too excited, Chew explained the surprise by pointing to timing of a contract payment from an unnamed licensee. That payment won't repeat in the current quarter, however, so Dolby expects mobile licensing to drop back down to more normal levels of about 12% of total licensing in Q2.
Continued progress
Even so, Dolby CEO Kevin Yeaman later noted that Dolby continues to make headway in the mobile space, most recently with the inclusion of its audio tech in smartphones from HTC, tablets from Lenovo, and, of course, continued penetration of Dolby audio in Amazon.com's line of Kindle Fire devices. But he didn't provide an update regarding Dolby's ongoing license renewal negotiations with Samsung.
Next, Yeaman pointed out significant wins for Dolby Vision last quarter, including a pledge from Time Warner's Warner Bros. to release many popular 4K titles "mastered" for the new imaging format. Also, at the Consumer Electronics Show earlier this month, Netflix announced plans to begin streaming Dolby Vision content in 2015. "We are well on our way," Yeaman promised, "toward creating a strong pipeline of Dolby Vision content for the cinema and the home."
Finally, Dolby Voice remains in its early stages, but Yeaman said Dolby did begin shipping the new Dolby Conference Phone this quarter in an effort to maximize Dolby Voice's value proposition for its target market of business clients.
In the end, though Dolby's Products and Services revenue proved temporarily disappointing, there was plenty to like about this quarter. Dolby's margins remain healthy, its balance sheet is clean with no debt and over $620 million in cash and short-term investments, and its core licensing business appears to be making continued progress toward sustained long-term growth.
