Dolby, On A Roll, Courts Apple

Dolby (NYSE:DLB), the industry leader in audio technology, has expanded from cinema to home entertainment, PCs, Blu-ray DVDs, 3-D, and mobile markets. Airtel Digital TV, one of India’s leading commercial broadcast services, recently announced its selection of Dolby Digital Plus for its high-definition programming. With the global transition from analog to digital broadcasting, Dolby can expect continued strong growth. Let’s take a closer look.

At the National Cable & Telecommunications Association (NCTA) in Washington, DC, Dolby showcased its 3-D broadcasting technology with the broadcast of ESPN’s 3-D coverage of the 2010 FIFA World Cup. The 3D market is another growing market for Dolby. In its earnings call, the company reported that it has shipped approximately 4,400 Dolby 3-D systems to date and over 1,000 in the fiscal third quarter. It recently released Dolby Surround 7.1, which enables content creators to add even more audio dimensions to the 3-D experience.

Dolby in its third quarter results reported revenue of $230.3 million, an increase of 34% over the year. Net income was $71.1 million or $0.62 per share compared to $57.5 million, or $0.50 per share last year. Gross margin was 82.6%. The company ended the quarter with about $1.046 billion in cash, cash equivalents, and market securities after it repurchased shares for $94.5 million. Q2 coverage is available here.

Licensing revenue for the third quarter was $170.3 million, up 20%, driven by Dolvy’s PC and broadcast markets. Revenue from the PC market grew 40% on strong PC shipments and the ramp of Windows 7. Microsoft in its latest quarter reported that it sold 175 million licenses for its new Windows 7 operating system since the system’s launch last October. The broadcast market grew 43% due to strong TV unit growth and increased TV attach rates in both Europe and Japan. The consumer electronics market declined 9% owing to the recognition of back royalty payments in the third quarter of fiscal 2009. Third quarter product revenue was $52.7 million, up 142%, driven by Dolby’s digital cinema servers and 3D systems. Third quarter services revenue was $7.3 million, flat year-over-year.

For fiscal year 2010, Dolby, with annual revenue of $719.5 million in 2009, has raised its guidance. It now expects revenue of $890 million to $905 million compared to the previous forecast of $865 million to $895 million. It expects EPS of $2.31 to $2.36 compared to the previous forecast of $2.23 to $2.32. Non-GAAP EPS is expected to be $2.57 to $2.63. Analysts forecast earnings of $2.32 per share on revenue of $886.1 million. Gross margin is expected to be 85%. The stock is trading around $56 with market cap of about $6 billion. It hit a 52-week high of $70.14 on July 27.

Leigh Drogen of Seeking Alpha says that home improvement stocks such as Dolby will be hurt when the consumer is broke again. But Dolby is more than just a home improvement company because it has potential for strong growth from the broadcasting, PC, and 3-D markets. Its audio technology is set to become an essential part of consumer electronics. Its mobile audio technology has already design wins with LG, Lenovo, and Nokia as well as with HTC, a popular smartphone manufacturer. Dolby is reportedly aiming for Dolby Mobile orders from Apple, too, but hasn’t been lucky so far. A design win with Apple could add to Dolby’s winning streak.

Why is Apple so important for Dolby? Because, the iPad has become a fast growing, legitimate personal entertainment platform. Whether it is watching movies, listening to podcasts and music, or playing games, personal digital entertainment has taken a large leap forward this summer. This is one portion of the market with which Dolby has a natural synergy, but so far, Apple has eluded it.

I have to believe, though, that Apple is in Dolby’s future!