Dolby Still Playing Sounds Of Success

2/23/2009


  Recent Price
$32
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
17
  Shares (millions)
115
  Long-Term Debt as % of Capital
1%
  52-Week Price Range
$49.69 - $24.50

Founded in 1965, Dolby Laboratories ($32; DLB) enjoys the explosive growth of a start-up company. Dolby’s per-share profits rose at least 30% in 12 of the past 13 quarters, averaging 53% growth during that period.

Part of that success has come from entering a steady stream of new markets. In recent years, Dolby has moved beyond stereo and movie sound technology, producing equipment for high-definition (HD) television sets, DVD and Blu-ray players, video-game consoles, and 3D digital cinema. Dolby is rated Buy.

Sound business model
Licensing accounted for 84% of total revenue in fiscal 2008 ended September, and products for cinema operators and broadcasters represented 11%. Licensing sales jumped 39% in fiscal 2008. Consumer electronic devices — such as DVD and Blu-ray players, audio receivers, and home-theater systems — have long been Dolby’s largest market but now generate just 25% of licensing revenues. Computer and TV markets drive much of Dolby’s licensing growth.

Dolby technology powers DVD software players for personal computers (40% of licensing revenue) that run on Microsoft’s ($18; MSFT) Windows Vista operating system and will do the same in the forthcoming Windows 7. Televisions and digital set-top boxes represent roughly 20% of licensing sales. Dolby also makes equipment that controls soundtracks in many movie theaters.

In the December quarter, revenue advanced 20% to $180 million, with licensing sales up 26%, lifted by royalties on September-quarter shipments. Demand for sound equipment softened in the December quarter, and Dolby expects the economic slowdown to crimp licensing revenue starting in the March quarter.

Growth outlook clear
Rooted in the high-growth markets of digital television and computer and Internet video, Dolby enjoys a promising outlook beyond 2009. Countries settling into digital broadcasting have turned to Dolby as the audio format of choice. France requires HD televisions to use Dolby technology, and Italy could follow suit.

Admittedly, Dolby deals in discretionary products, an area pinched by the downturn. Management expects low-cost notebook computers — many lacking Dolby technology — to cut into sales growth in 2009. Consumer electronics face similar challenges. Still, mobile revenue could rise 30% this year, and gross profit margin should hold at about 97% for the licensing segment.

Founder Ray Dolby controls about 91% of the company’s voting power. That is a lot of control for one man, and it adds risk to the shares. But the firm appears to be on the right track.

Conclusion
On Dec. 31, Dolby had $584 million, or $5.08 per share, in cash and short-term investments, with almost no debt. The stock trades at 18 times projected year-ahead earnings of $1.79 per share, well below the five-year average forward P/E ratio of 22. Excluding the cash, Dolby trades at 15 times expected earnings, a reasonable valuation considering its strong operating momentum and growth history. An annual report for Dolby Laboratories Inc. is available at 100 Potrero Avenue, San Francisco, CA 94103; (415) 558-0200;
www.dolby.com.


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