Dolby announced revenue for its second fiscal quarter (ending April 1, 2016) of $274.3 million, up 1% versus the year earlier period, and an increase of 14% versus the preceding quarter, Q1 2016.
GAAP net income for the quarter was $67.4 million or $0.66 earnings per share. This represents a 16% increase over the net income for Q2 2015 of $57.9 million ($0.56 earnings per share).
GAAP Gross Margins were 91.1% for the quarter, an increase over the gross margins of 90.8% from the year earlier period and the 87.6% gross margins recorded during Q1 2016. Operating margins were 30%, an increase over the 29% from Q2 2015 and the 16% operating margins during the preceding quarter.
Management’s guidance at the end of first quarter had been for revenue in the range of $255 million to $270 million for the second quarter with gross margins between 89% and 90%, and GAAP earnings per share of $0.42 and $0.48. On each measure, Dolby outperformed guidance. Dolby’s shares were trading approximately 13% higher after the earnings release.
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 Q2 2016 was $249.3 million, an increase of 2% versus Q2 2015 and an 18% increase versus Q1 2016.
- Product revenue was $20.0 million, a decline of 12.6% compared to the year earlier period, and a decrease of 19% versus Q1 2016 results. The Q1 2016 results had been especially strong given cinema updates related to holiday movie releases, including Star Wars episode seven. 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 $4.9 million during the second quarter, a decrease of 12.5% against Q2 2015, and a slight increase of 2% versus the first quarter’s results.
Product gross margins for Q2 2016 were 30.3%, a substantial increase over the 20.7% gross margins from Q2 2015 and 23.3% gross margins in Q1 2016.
As part of the earning release, Dolby disclosed several data points on developments in its growth initiatives within its cinema business.
There are now nearly 1,800 screens worldwide where Dolby Atmos is installed or committed. Over 450 Dolby Atmos titles have been announced or released.
There are also more than 20 Dolby Cinema locations open and another 200 Dolby Cinema locations are planned for roll out around the world. Dolby Cinema is a partnership with cinema exhibitors (including AMC in the US) to create a branded premium cinema featuring Dolby Vision laser projection and Dolby Atmos audio technology. Nearly 40 Dolby Vision theatrical titles have been announced or released since its launch in May 2015.
Licensing Revenue by Customer Vertical:
Licensing revenue in the Broadcast vertical (primarily televisions and set-top boxes) was 45% of total licensing revenue or $112.2 million. On an aggregate basis, Broadcast licensing grew 9.8% versus Q2 2015 and 10.7% versus the preceding quarter, Q1 2016. As a percentage of total licensing revenue, Broadcast contributed 42% in Q2 2015 and 48% during the first quarter of 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 growth in Broadcast licensing to higher back payments and higher volume in set-top boxes. During its earnings call, management noted Dolby is well-positioned to benefit from further growth in the Broadcast market as emerging markets transition to digital broadcast.
Also on the earnings call, Management highlighted several developments with Dolby Vision and Dolby’s growing technology presence in online content delivery.
LG, the 2nd largest TV manufacturer in the world, is set to begin shipping OLED and UHD LED TV’s featuring Dolby Vision. Dolby Vision is now included in three of the five television lines from Vizio, the 2nd largest TV manufacturer in the US.
Over 40 streaming services now deliver Dolby Audio including Google Play, Netflix, Microsoft, Amazon, and iTV. Management is anticipating up to 100 Dolby Vision titles available for home entertainment delivery by the end of 2016. Netflix and VUDU are now streaming content in Dolby Vision, and Amazon has announced a commitment to Dolby Vision.
Management guidance for the third fiscal quarter is 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.
Commenting on the quarter’s results, Kevin Yeaman, President and CEO, Dolby Laboratories stated, “It was a solid quarter and we gained momentum in mobile with the inclusion of Dolby Audio in iOS. We’ve also expanded the number of Dolby Vision TVs in market and the amount of Dolby Vision content, while continuing to roll out Dolby Cinema locations around the world.”
Press Release: Dolby Fiscal Q2 2016 Earnings Release
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