Dolby Eyeing Apple

Dolby (NYSE:DLB) has transformed itself from an audio IP licensing company into an entertainment technology company. As we saw in the previous quarter, it is eyeing the 3D market and is now turning to the mobile market with its Dolby Mobile technology. Let’s take a closer look.

According to Digitimes, Dolby was aiming for orders from Apple and HTC, two of the most popular smartphone manufacturers. It already has a win with HTC’s Desire Black. Will it get lucky with Apple too?

Of course, with 2 million iPads shipped in the first 59 days of release, and the new iPhone 4 release, Apple has become one of the front runners in the media consumption device race. Dolby needs to get into bed with Apple to stay ahead.

Dolby does have an indirect relationship with Apple’s iPhone. Rhapsody, the on-demand streaming music service available on the iPhone, encoded its music library with Dolby Media Generator. But Dolby Mobile has not made any inroads yet;  it cannot be provided as a standalone application but would need to be packaged with the iPhone or iPad.

Dolby has design wins for its Dolby Mobile technology with LG, Lenovo, and Nokia. The recently launched smartphone from Nokia, N8, comes with Dolby Mobile. LG has been working with Dolby since 2008 on its audio and will be launching 20 handsets with Dolby Mobile including a luxury handset, Versace Unique. The Stream Android smartphone launched recently by Acer also includes Dolby Mobile.

As smartphones and tablets try to hook onto the trend of digital TV and streaming video, superior audio technology will become necessary to increase the quaility of the experience. The smartphone market registered 56.7% growth in the first quarter over last year. The tablet market is also in the hotspot with the launch of the iPad. According to a new forecast from International Data Corporation (IDC), worldwide media tablet shipments will grow from 7.6 million units in 2010 to more than 46 million units in 2014, representing a CAGR of 57.4%.

Dolby’s competitor, DivX, early this month announced that it has entered into a merger agreement with Sonic. DivX investors will receive 0.514 shares of Sonic common stock and $3.75 per share of DivX stock.

Dolby in its second quarter results reported revenue of $243.4 million, an increase of 19% over the year. Net income was $85.9 million or $0.74 per share compared to $69.5 million, or $0.60 per diluted share last year. The company has about $417 million in cash and debt of about $6 million. Q1 coverage is available here.

For fiscal 2010, Dolby with annual revenue of $719.5 million in 2009, has raised its guidance. It now expects revenue of $865 million to $895 million compared to the previous forecast of $780 million to $810 million. It expects EPS of $2.23 to $2.32 compared to previous forecast of $1.96 to $2.08. The stock is currently trading around $66.51 with market cap of about $3.53 billion. It hit a 52-week high of $69.72 on May 3.

With the global transition from analog to digital broadcasting as well as advances in high definition, online, and mobile content, Dolby’s target market is expanding. It has great growth prospects as countries such as China, India, and Russia make the transition to digital technology, and the company’s foray into the 3D market and the mobile market add to its growth potential.

Dolby continues to be one of my favorite companies.