Dolby Q3 Outperforms; Management Offers Updates on Atmos and Vision Adoption

Posted by Josh Stinehour
Aug 11 2016

Dolby announced revenue for its third fiscal quarter (ending July 1, 2016) of $277.6 million, up 19.8% versus the year earlier period, and an increase of 1.2% versus the preceding quarter, Q2 2016 .  Dolby_logo.svg

GAAP net income for the quarter was $63.6 million or $0.62 earnings per share (diluted).  This represents a 79% increase over the net income for the fiscal third quarter of 2015 of $35.5 million ($0.34 earnings per share), and a sequential decline of 5.6% against the preceding quarter.

GAAP Gross Margins were 91.1% for the quarter, an increase over the gross margins of 89.3% from the year earlier period and equivalent to the gross margins recorded during fiscal Q2 2016.  Operating margins were 29%, an increase over the 19% from fiscal Q3 2015 and a slight decline against the 29% operating margins during the preceding quarter.

Management guidance from the preceding quarter was for revenue in the range of $260 million to $275 million, gross margins between 89% and 90%, and earnings per share between $0.47 and $0.53. Dolby’s actual results exceed guidance in all areas.

The financial outperformance against guidance was attributed to increased adoption in the mobile and Digital Media Adapters (“DMAs”) and the timing of customer payments skewing toward the recently completed quarter.

Revenue by Type:

Dolby reports revenue across licensing, product, and service activities.  Product revenues consists primarily of sales of Digital Cinema Servers and Dolby Cinema Audio Products.

  • Licensing revenue for FQ3 2016 was $253.0 million, an increase of 23.5% versus FQ3 2015 and a 1.5% increase versus FQ2 2016.
  • Product revenue was $20.6 million, a decline of 8.7% compared to the year earlier period, and an increase of 2.8% versus FQ2 2016 results. Year-over-year declines are consistent with the broader cinema equipment market, which has been impacted by the recent completion of the conversion from film to digital.
  • Services revenue were $3.9 million during the fiscal third quarter, a decrease of 7.7% against FQ2 2015 and a decrease of 20.6% versus the fiscal second quarter’s results.

Product gross margins for FQ2 2016 were 31.7%, a substantial increase over the 11.4% gross margins from FQ3 2015 and a slight increase over the 30.3% gross margins in FQ2 2016.  According to Dolby’s SEC filing, the higher product gross margins stemmed from lower charges for excess and obsolete inventory along with reduced manufacturing variances.

Licensing Revenue by Customer Vertical:

Licensing revenue in the Broadcast vertical for televisions and set-top box sales was 39% of total licensing revenue or $98.7 million.  On an aggregate basis, Broadcast licensing grew 4.7% versus FQ3 2015, though declined 12.0% versus the preceding quarter, FQ2 2016.  As a percentage of total licensing revenue, Broadcast contributed 46% in FQ3 2015 and 45% during the FQ2 2016.

The remainder of Dolby’s licensing revenue is attributable to PC, Mobile, Consumer Electronics, and Other (Video game consoles, automobile entertainment, and audio conferencing).

Management attributed the sequential drop in Broadcast licensing to normal seasonality.  The year-over-year increase for Broadcast was due to emerging market transition to digital broadcast.  In particular in China where China Telecom and China Unicom specified Dolby Audio on their respective 4K IPTV set-top boxes.

Update on Dolby Atmos, Doly Cinema, and Dolby Vision:

As part of the earning release, Dolby disclosed several data points on the growing adoption of Dolby Atmos, the Company’s next-generation immersion audio technology.

There are now nearly 2,000 screens worldwide where Dolby Atmos is installed or committed.  Over 490 Dolby Atmos titles have been announced or released.  In the television sector during the quarter, the French Rugby League Final was delivered by Orange in Dolby Atmos and Comcast announced plans to deliver Dolby Atmos content later this year.

Management also provided an update on the progress of Dolby Cinema, a premium branded cinema. There are now more than 30 Dolby Cinema locations open and another 220 Dolby Cinema locations are scheduled for roll out around the world.  Dolby Cinema exhibitor partners include AMC (US), Wanda and Jackie Chan (China), Vue (Netherlands), and Cineplex (Austria).

In its call with analysts, Dolby’s management cited several developments with Dolby Vision, the Company’s high dynamic range imaging technology.

Since its launch in May, there have been 50 Dolby Vision theatrical titles announced or released.  Examples include the recent high-profile films Star Trek Beyond and The Legend of Tarzan.  

Lionsgate, Universal Pictures, Sony Pictures, and Warner Bros have all announced plans to create Dolby Vision content for the home.  Management is anticipating up to 100 Dolby Vision titles available for home entertainment by the end of 2016.

Dolby Vision has made further progress with television set manufacturers.  The second largest TV manufacturer in the world, LG now includes Dolby Vision in its full lineup of 2016 OLED and Super UHD LCD TVS.  Vizio (2nd largest in TV Manufacturer in US) now has Dolby Vision in its R-series, P-series, and M-series of televisions.  In addition, Dolby Vision TVs are now shipping from Skyworks, the third largest TV manufacturer in the world.

In the over-the-top (“OTT”) sector, Dolby Vision is now streaming from Amazon, Netflix, and Vudu.

Financial Guidance

Management guidance for the fiscal fourth quarter is revenue in the range of $220 million to $230 million, gross margins between 88% and 89%, and earnings per share between $0.16 and $0.22.  Broadcast licensing is anticipated to represent 45% of total revenue during FQ4 2016.

Commenting on the quarter’s results, Kevin Yeaman, President and CEO, Dolby Laboratories stated, “Q3 results were strong, and we continued to build momentum with our new initiatives. We opened our first Dolby Cinema locations in China, grew the number of Dolby Vision televisions in market, and added a new Dolby Voice partner.”


Related Content:

Press Release: Dolby Fiscal Q3 2016 Earnings Release



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