DLB - Dolby Laboratories, Inc.

[LC]

I couldn't find a topic on Dolby so I thought I would put it out there:

 

-Currently priced at 12-13x earnings ($35/sh on $2.75 eps)

 

-Have increased revenue annually since my data begins in 2002.

However revenue increased just 4% from '10 to '11 -  the lowest annual revenue increase so far. Does this indicate end of the growth phase?

 

-Excellent margins: ~85% gross margin and ~30% net margin

 

-Nice balance sheet: excellent current ratio, no long-term debt, very low debt-to-capital ratio.

 

-There is a small portion of controlling interest but it is small and doesn't seem concerning.

 

 

Looks to me like a great company with excellent intangibles (Dolby Surround Sound), no debt, great margins. My only concern is whether they can maintain revenue.

[beerbaron]

Isn't Dolby more a license company? They probably have 3-4 big patents that are cash cows, when do they expire? What's their NPV? What's in their pipeline in terms of tech and how successfull have they been at generating new cash cows in the last 4 years?

 

Just food for tough...

 

BeerBaron

[LC]

Isn't Dolby more a license company? They probably have 3-4 big patents that are cash cows, when do they expire? What's their NPV? What's in their pipeline in terms of tech and how successfull have they been at generating new cash cows in the last 4 years?

 

Just food for tough...

 

BeerBaron

Thanks for the response. You're right...they seem to just develop audio technology and then license that tech out to the manufacturers. Their 10-K states they are trying to develop audio technology for mobile devices, but most people use headphones and not speakers for their mobile phones, so I'm not sure how profitable that can be. I see that I have to do more research, so again thank you for the concise point in the right direction.

[rmitz]

Isn't Dolby more a license company? They probably have 3-4 big patents that are cash cows, when do they expire? What's their NPV? What's in their pipeline in terms of tech and how successfull have they been at generating new cash cows in the last 4 years?

 

Just food for tough...

 

BeerBaron

 

I actually think this is a plus.  It's also a brand, where the audio manufacturers must license the technology to say they're compatible--it's not just patents, if you want to, say, decode dolby 5.1 audio, I don't believe you can ever legally do that without paying the license fee--you have to be completely compatible.

[momentumgeek]

couple issues here. (i was actually looking at this as a short but missed the earnings drop). you're seeing a shift of viewing from television to ipads...etc (not as a whole but on the margin). ipads with headphones don't need dolby surround sound which means devices are sold that aren't paying a licensing revenue to dlb. also, their competitors are slightly gaining market share. and with the macro weakness and what we saw from gregg, sharp, lg...etc, tv sales are not good right now.

[mikazo]

I've actually been researching Dolby a little too. From what I can tell, their smartphone licenses include use of proprietary audio encoding and decoding algorithms that allow for higher quality sound that uses less bandwidth, so it probably doesn't matter whether end users are using headphones or speakers. Smartphones aren't Dolby's only source of licensing revenue anyway. About 20% is from DVD/Blu-ray players, about 30% is from television broadcast equipment, and about 30% is from PC OEM licensing. Dolby announced in Q2 this year that they've secured the inclusion of Dolby Digital Plus in Windows 8, which is a big plus to keep their PC licensing revenue stream going.

 

One thing I like is one of their three licensing models called the two-tier model. Integrated circuit manufacturers have to pay a one-time up-front license fee and pass quality testing to be able to include Dolby technology in their computer chips. Then, original equipment manufacturers (OEMs) have to pay royalties for each unit sold that includes these computer chips, so Dolby gets a piece of the pie twice, and on an on-going basis. Dolby is also in relationships with online content delivery companies such as Netflix and Amazon, so it would be great if they could break into that market as well.

 

I really like the extremely high margins, return on equity, return on assets, free cash flow growth, low R&D costs, and low debt. The only thing that sort of concerns me is this excerpt from their 2011 annual report:

 

For the foreseeable future, Ray Dolby or his affiliates will be able to control the selection of all members of our board of directors, as well as virtually every other matter that requires stockholder approval, which will severely limit the ability of other stockholders to influence corporate matters.

[boilermaker75]

Has anyone taken a look at DLB? DLB closed today at $34.80, has no debt, and has $9.48 of cash per share. The revenues have grown from $482 million in 2007 to a TTM revenue of $945 million. The enterprise value is $2.72 billion and the TTM FCF is  $0.355 Billion.  So  EV/(TTM FCF) = 7.7.

 

DLB has technology in the new Kindle tablets.

 

I have approached DLB conservatively having written Aug $30-strike puts, which expired, and today writing December $30-strike puts for $0.85 per share.

 

[boilermaker75]

Sorry, I should have done a search before posting. I see there is already a DLB thread.

[ShahKhezri]

I have been looking at it here and there for the past week.  Definitely on my watchlist, cash flows are strong.  I think this also feeds into some of the news keeping DELL down, that being the PC is dead.  But DLB is entrenched...if there is sound coming out of a device, it is likely that it is under a Dolby patent...at least my very brief readings.  I just have to do a lot more reading on it, not the metrics I'm worried about. 

 

[boilermaker75]

I have been looking at it here and there for the past week.  Definitely on my watchlist, cash flows are strong.  I think this also feeds into some of the news keeping DELL down, that being the PC is dead.  But DLB is entrenched...if there is sound coming out of a device, it is likely that it is under a Dolby patent...at least my very brief readings.  I just have to do a lot more reading on it, not the metrics I'm worried about. 

 

 

Thanks for you comments ShahKhezri. I agree the PC is not dead, so I have also been looking at DELL and INTC.

[ItsAValueTrap]

If we do not obtain new patents or proprietary technologies as our existing patents expire, our licensing revenue could decline.

We hold patents covering much of the technologies that we license to system licensees, and our licensing revenue is tied in large part to the life of those patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies in a particular country. Accordingly, to the extent that we do not replace licensing revenue from technologies covered by expiring patents with licensing revenue based on new patents and proprietary technologies, our revenue could decline.

As of September 30, 2011, we had nearly 2,300 individual issued patents and over 2,300 pending patent applications in nearly 90 jurisdictions throughout the world. Our issued patents are scheduled to expire at various times through May 2030. Of these, two patents are scheduled to expire in the remainder of calendar year 2011, 52 patents are scheduled to expire in calendar year 2012, 30 patents are scheduled to expire in calendar year 2013 and 91 patents are scheduled to expire in calendar year 2014. Patents relating to our Dolby Digital technologies, from which we principally derive our licensing revenue, have begun to expire and the remaining patents relating to this technology generally expire between now and 2017. Additional patents relating to our Dolby Digital Plus technologies, an extension of Dolby Digital, expire between 2018 and 2026. In addition, the remaining patents relating to Dolby Digital Live technologies, an extension of Dolby Digital, are scheduled to expire between now and 2021.

 

It looks like their main cash cow will come to an end in 2017?

 

I'm not sure if Dolby will come up with technologies that will be as crazy profitable as their Dolby Digital licensing business.  They have technology relating to audio compression and that used to be a big deal.  However:

A- Audio compression is less of an issue nowadays since technology is so much better.  We can simply throw bandwidth at the problem / it's ok to use bandwidth inefficiently.  If you look at the history of the Internet, you have the entrenchment of the JPEG format since it is good enough.  (Wavelet compression such as JPEG2000 would offer much higher compression efficiency than JPEG but has a very low adoption rate.)  I think audio compression is at the point where it's good enough.

B- For many applications, royalty-free standards will be extremely compelling.

 

Dolby patents relating to the HE AAC standard and I think this will be a nice business going forward.  They will get payments for digital radios, some audio players, etc.  But it's not the same as getting money for every DVD player, every Blu-Ray player, every digital TV decoding box, and every Windows computer with an optical drive sold.

 

2- Their other businesses are nowhere as good as the licensing business. 

 

Its digital cinema server is a commodity product.

Dolby 3-D competes against Real-D (RLD) and some other companies.  RLD has dominant market share because it is the better system.  RLD is also heavily shorted.

It has a Dolby reference monitor product that likely fares poorly against Sony Broadcast's OLED reference monitors.

 

It's ok that they don't have the best products (by definition most companies won't have the best products) and it's good that they try to innovate.  It's just that the licensing business has been unusually good for Dolby and they likely won't be able to duplicate it.  For a TV technology company, Dolby has a far larger market cap than Avid, Evertz, Imax, RLD, Ikegami, etc.

 

3- Ray Dolby, the founder of Dolby, has been consistently selling his stock.  Dolby is 79 years old so he has a legitimate reason to sell (you can't take that money to the grave).

 

Dolby was listed mainly so that Ray Dolby could sell his stock.  The company doesn't really need to raise capital.  It should probably return capital to shareholders since it is difficult to invest so much capital at decent rates of return.

[Parsad]

Ray Dolby passes. 

 

http://www.bbc.co.uk/news/world-us-canada-24075429