Dolby Laboratories (NYSE:DLB) considers itself an integral part of what it refers to as "the entertainment experience," which it has pioneered and developed in 45 years of existence. This includes the lucrative licensing of technologies that help improve the audio quality of movies, music, television and related media. The adoption of the DVD was a huge top line driver, especially when the company went public back in 2005. Other traditional channels have included licensing its technology to the broadcast markets, such as through television and related set-top boxes. Personal computer licensing also serves as another major contributor to sales.
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Dolby is currently working to evolve into online and mobile distribution. The quick movement to smartphones, tablets and new devices, as well as the streaming and downloading, has caused Dolby to establish itself with new partners. The company has mentioned that it is on 120 handsets, more than a dozen tablets, and has established relationships with firms including Netflix (Nasdaq:NFLX), Best Buy (NYSE:BBY), Amazon (Nasdaq:AMZN) and Apple (Nasdaq:AAPL). It has also listed 3-D television and movies as another newer growth avenue.
Full Year Recap
Dolby recently released its 10-K filing with the SEC and detailed full financial details for its most recent fiscal year. Sales advanced 3.6% to $955.5 million on strong licensing revenue, though product sales fell and service-related revenues advanced only slightly. The lower product revenue resulted in a corresponding fall in product costs while the absence of an impairment charge last year helped push reported operating income up 9.1% to $429.7 million. Net income also advanced 9.1% to $309.3 million and share buybacks boosted earnings per diluted share by 11.8% to $2.75. Free cash flow came in at $356.3 million, or roughly $3.17 per diluted share for year-over-year growth of nearly 23%. (To know more about income statements, read Understanding The Income Statement.)
Analysts currently project a 1% decline in sales for the coming year and total sales of nearly $945 million. The consensus earnings projection is $2.57 for an annual decline of 6.5%.
The Bottom Line
Over the last decade, Dolby has grown by leaps and bounds. Specifically, annual sales growth has averaged more than 22% and earnings are up more than 44%. This growth has slowed over the past three and five year periods, but has still been impressively in the double digits. For investors, of course, the primary consideration is figuring out what Dolby's future growth prospects will be.
The near-term outlook is much murkier. PC growth has stagnated, especially in the consumer market that is most likely to use the media players on computers to listen to music and watch movies. DVD sales continue to plummet and media is quickly shifting to streaming and downloading. For the time being, it appears that consumers have been willing to shift audio and video quality for the convenience of watching on smaller devices with less dependable connectivity.
As evidenced by the new relationships Dolby has been able to forge in relatively short order, the company looks to be adapting successfully to the latest technology shift. At a forward P/E of 12, trailing free cash flow multiple of less than 10, the valuation looks to be discounting the current uncertainty. And with close to $1 billion in cash on the balance sheet and no debt, the firm looks very conservatively managed and able to withstand what currently looks like minimal risk. (For additional reading, check out An Introduction To Corporate Valuation Methods.)
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.