Dolby (DLB) Q1 Earnings Beat Estimates, Revenues Grow Y/Y

Dolby Laboratories, Inc. (NYSE:DLB) reported first-quarter fiscal 2018 adjusted earnings of 79 cents per share, surpassing the Zacks Consensus Estimate of 44 cents by a whopping 79.5%.

However, the company’s first-quarter fiscal 2018 GAAP loss came in at 80 cents per share, compared with GAAP earnings of 51 cents per share in the year-ago quarter. The company’s GAAP numbers were adversely affected by the creation of a provision for estimated discrete tax expense of $154.6 million related to the latest tax reforms.

Inside the Headlines

Total revenues of $287.8 million steered past the company’s projected range of $260-$270 million. The top line also surpassed the Zacks Consensus Estimate of $265.4 million and grew 8.1% on a year-over-year basis. Healthy increase in revenues across the company’s licensing segment contributed to the decent rise in the top line.

The company’s Licensing revenues were $258 million, up 10.9% year over year. Solid year-over-year growth in Licensing in other markets and Mobile devices sales drove the segment’s growth. In the reported quarter, Licensing in “other markets” was up about 11% sequentially, driven by higher revenues in gaming consoles. This was partially offset by lower recoveries in automotive unit.

However, Product revenues came in at $24.9 million, down 11.6% on a year-over-year basis. The year-over-year decline resulted mainly on the account of ramping up of some of the company’s cinema products earlier than anticipated. The Services segment declined 9.5% year over year to $4.8 million.

Dolby Laboratories Price, Consensus and EPS Surprise

Dolby Laboratories Price, Consensus and EPS Surprise | Dolby Laboratories Quote

During the reported quarter, Dolby’s operating margin increased 380 basis points to 28.6%.

Liquidity

As of Dec 29, 2017, Dolby had cash and cash equivalents of approximately $596.4 million, up from $512.8 million as of Dec 30, 2016.

Net cash provided by operating activities came in at $17.1 million, compared with $67.8 million as of Dec 30, 2016.

Guidance

Concurrent with the market scenario, Dolby issued guidance for second-quarter fiscal 2018 earnings and revenues. The company estimates non-GAAP earnings in the range of 74-80 cents, while revenues for the fiscal second quarter are expected to lie within $295-$305 million.

Moreover, the company projects non-GAAP gross margin in the 89.5-90.5% band and non-GAAP operating expenses are likely to be between $166 million and $170 million.

Additionally, Dolby provided guidance for fiscal 2018. The company estimates total revenues to lie in the range of $1.15-$1.18 billion. Revenue streams, such as mobile revenues, Consumer Imaging, Consumer Electronics and Dolby Voice are likely to drive revenue growth. However, softer PCs and other licensing categories sales may affect growth momentum to some extent.

Further, non-GAAP operating expenses for fiscal 2018 are projected to lie between $655 million and $670 million.

Our Take

Dolby’s first-quarter 2018 results have been quite impressive, with substantial growth in both top and bottom-line performance. We believe the company’s three impressive projects, namely, Dolby Vision, Dolby Voice and Dolby Cinema, will accelerate growth going forward.

However, the company operates in a stringent competitive environment. The market for consumer entertainment products is highly competitive and price sensitive which exposes Dolby to the risks of reduced revenues due to lower prices. Going forward, the company also forecasts dismal sales of PCs, DVD, Blu-ray and home theater equipments.

Further, the company anticipates lower recoveries in broadcast business for fiscal 2018 to offset other growth drivers, consequently marring growth. Though the company’s relatively new offering Dolby Cinema is experiencing solid market traction, its success is hitched to the pipeline and the performance of motion pictures at Dolby Cinema locations. Further, given that the transition to digital cinema is almost complete, demand for new digital cinema screens is slowing down, which in turn is impeding cinema product sales.

Dolby currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks worth considering in the same space include Sony Corporation (NYSE:SNE) , Carter's, Inc. (NYSE:CRI) and Melco Crown Entertainment Limited (NASDAQ:MLCO) . While Sony sports a Zacks Rank #1 (Strong Buy), Carter's and Melco Crown Entertainment carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sony has a decent earnings surprise history, surpassing estimates thrice in the trailing four quarters with an average beat of 47.3%.

Carter's has an excellent earnings surprise history, exceeding estimates in the trailing four quarters with an average beat of 8.9%.

Melco Crown Entertainment has a decent earnings surprise history, surpassing estimates thrice in the trailing four quarters with an average beat of 61.2%.

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