DLB - Dolby Laboratories Continues On Growth Path

2023-09-13 17:15:51 ET

Summary

• Dolby Laboratories, Inc. licenses audio and imaging technologies for media, entertainment, and communications applications.
• The market for consumer audio products is expected to exceed $234 billion by 2030, driving growth for Dolby.
• With the firm performing as expected, I reiterate my Buy rating at around $81.50.

A Quick Take On Dolby Laboratories

Dolby Laboratories, Inc. ( DLB ) reported its FQ3 2023 financial results on August 3, 2023, missing revenue but matching consensus earnings estimates.

The company licenses audio and imaging technologies for use in media, entertainment and communications applications.

I previously wrote about DLB with a Buy outlook due to improving financial metrics and a strong balance sheet.

With the latest quarter's performance in line with expectations and no material change to my thesis or the stock price, I reiterate my previous Buy rating at around $81.50.

Dolby Overview And Market

San Francisco, California-based Dolby Laboratories was founded to develop audio and imaging technologies primarily for media applications across various end-user devices.

The firm is headed by Chief Executive Officer Kevin Yeaman, who was previously CFO at Epiphany and VP of Worldwide Field Operations at Informix Software.

The company’s primary offerings are applicable to the industries of:

• Music

• Cinema

• Gaming

• Home Entertainment.

Dolby acquires clients by developing relationships with audio and visual equipment OEMs and with software developers.

According to a 2022 research report by Market Research Future, the worldwide market for consumer audio products of all types is expected to exceed $234 billion by 2030.

This represents an expected CAGR of 16.3% from 2022 to 2030.

The primary reasons for this high forecasted growth rate are growing demand for greater entertainment options, increasing use of advanced wireless solutions and a growing number of internet-connected homes.

Also, the North American region is forecasted to achieve the highest market share through 2030.

Major competitive or other industry participants include:

• Apple

• HARMAN International Industries

• Bose Corporation

• Sonos

• Sony Corporation

• DEI Holdings Inc.

• Sennheiser Electronic GmbH & Co. Kg

• VIZIO Inc.

• VOXX International Corporation

• Plantronics Inc.

• Ossic Corporation

• Phazon

• Trüsound Audio

• Jam

• Earin

• Human Inc.

Dolby’s Recent Financial Trends

• Total revenue by quarter has risen due to seasonal factors; Operating income by quarter has also fluctuated accordingly:

• Gross profit margin by quarter has fallen a bit; Selling and G&A expenses as a percentage of total revenue by quarter have risen slightly:

• Earnings per share (Diluted) have fallen due to reduced gross profit margin and higher SG&A costs, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, DLB’s stock price has risen 10.21% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 27.4%:

For balance sheet results, the firm ended the quarter with $889.3 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash flow was an impressive $300.5 million, during which capital expenditures were $32.9 million. The company paid $117.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Dolby Laboratories

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

DLB's most recent Rule of 40 calculation was 29.4% as of FQ3 2023's results, so the firm has been stable sequentially in this regard, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

I prepared a sentiment analysis for the firm’s most recent quarterly earnings call, tracking various negative and positive words as indicators:

The chart above indicates relatively few negative terms, with some emphasis on the macroeconomic environment’s effects on demand.

Analysts asked management about the macro environment, its gross margin pressures and restructuring efforts.

In response, management said that the macro environment was a cautious sign although there was a chance for an economic soft landing in the U.S.

Lower gross margins were due to higher excess and obsolete reserves, while its restructuring efforts were broad-based and aimed at improving efficiencies and nothing relating to changes in business focus areas.

Commentary On Dolby

In its last earnings call (Source - Seeking Alpha ), covering FQ3 2023’s results, management highlighted growth in the firm’s Atmos and Vision products in movies, TV and music.

The company already has nine car manufacturers using its systems, and "it’s still early days," according to CEO Yeaman.

Dolby is seeing ‘great momentum in China’ for its Vision capture system as it is embedded in iOS and Android phones with Xiaomi, OPPO and Vivo.

Leadership didn’t disclose any company, client or revenue retention rate data.

Total revenue for FQ3 2023 rose 3% year-over-year but gross margin fell 1.5%.

Selling and G&A expenses as a percentage of revenue grew by 2.1%, a negative signal and operating income dropped 28.2%.

The company's financial position is very strong, with substantial liquidity, no debt and impressive free cash flow generation.

Looking ahead, consensus fiscal year 2023 revenue estimates are approximately $1.3 billion, or a 5.1% growth rate over fiscal year 2022.

If achieved, this would represent a return to revenue growth rate versus 2022’s slight revenue decline rate of 0.47% versus fiscal 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple ended the period nearly where it began, as the chart from Seeking Alpha shows below:

So, from my last analysis, little has changed in terms of the company's valuation and its performance relative to its previous guidance, which management has reiterated.

Therefore, I reiterate my Buy outlook on DLB at around $81.50 per share.

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