|a year old but some nuggets of information|
Will Dolby Remain Unrivaled in the Audio-Visual Market?
Dolby Laboratories’ world-class reputation within the media and entertainment industry has been under scrutiny in past, with the audio and video technology company undergoing several periods of low-revenue growth in 2010-2012, primarily due to excessive reliance on declining technologies such as those relating to optical media.
2016, however, saw an impressive financial performance driven by efforts to dominate the competitive landscape with innovative technologies that have attracted interest from a wide range of customers in different industries, which bodes well for investor sentiment in the year ahead. Currently, the stock is trading at $49.37 per share with a market capitalisation of $5.03bn.
Innovating Beyond SoundDolby’s emphasis has traditionally been on audio technologies, most notably surround-sound systems for movie theatres and TV. Ultimately, licensing its internally developed intellectual property technology lies at the heart of Dolby’s revenue generation model, accounting for 89% of total revenue, compared to 9% of revenue generated from its products and 2% from its services business segments respectively.
$49.37 is Dolby’s current share price
The introduction of Dolby Vision, “an imaging technology combining HDR and an expanded colour spectrum to deliver higher contrast, brighter highlights, and improved details for TV, cinema, and other consumer devices” according to a company press release, was arguably Dolby’s most successful initiative.
Several leading TV manufacturers, including LG, the world’s second largest, as well as Google, have announced support for the technologies in their product offerings this year. Furthermore, Dolby has been quick to pay attention to the rapidly growing online video streaming market, having secured licensing agreements with Netflix and Amazon to release titles incorporating Dolby Vision technology.
Similarly, the introduction of Dolby Voice, an audio conferencing solution launched together with telecoms giant BT, signals Dolby’s move into more esoteric technologies beyond spatial audio. Including Dolby Digital Plus audio codec technology within Lenovo and iOS tablets and phones, as well as making Dolby-enhanced content accessible on all operating systems including Android and Windows, has set the foundation for a new revenue source originating from customers in the rapidly evolving mobile market.
Strong Financials Driving R&D ActivityRevenue growth of 5.6% to $1.03 billion this year has led Dolby to resemble a younger, fast-growing company as it enters into exciting new fields, and justifiably so. Revenues have translated into higher earnings, with net income per share increasing to $1.85 from $1.77 the previous year, despite a dramatic share price increase in the last fiscal year.
21% of Dolby’s revenues were spent on R&D in 2016
Moreover, R&D Expenses have grown by 9.1% to $219 million – comprising a staggering 21% of total revenue for the 2016 fiscal year as Dolby carries out its plan of delving into developing more advanced imaging technologies.
An increasing price-to-cash flow ratio of 14.07 is not a cause for concern since operating cash flow was up 15% in 2016, and increased capital expenditures were the primary factor impacting free cash flow. Increased R&D expenditure has also been driven by a need to expand into new territory as patents covering its dated Dolby Digital audio codec technology are due to expire in 2017.
Competitors Struggling to Gain Market ShareSony Corporation is Dolby’s closest competitor, as it provides a comparable offering across licensing, products and services segments. With a price-to-earnings ratio of 80.04 and a price-to-forward earnings ratio of 20.24, an argument could be made for Sony’s earnings expectations being bullish (also given its relatively stable Enterprise Multiple of 6.57).
Dolby’s valuation ratios tell a rather different story, with its price-to-forward earnings ratio of 23.15 being only slightly lower than 27.08 at present. However, while Sony is a well-established player, Dolby’s foray into new segments makes its multiples artificially high, and thus likely to decrease once a clearer picture of the company’s future has been priced into its stock.
Samsung’s recent acquisition of speaker manufacturer Harman, both of which were disclosed by Dolby as competitors in licensing, could pose a threat, as some of Harman’s audio technologies could be integrated into Samsung’s mobile devices and televisions. Samsung’s influence as both a competitor and Dolby’s most important customer, contributing 12% of revenue in 2015, has nevertheless decreased as revenue contributions fell below 10% in 2016. This has not adversely affected its balance sheet, though, and will be just a minor setback going forward as Dolby continues to diversify its product range.
Dolby remains a unique player in the entertainment market. IMAX is a competitor, but maintaining its status as a leader in providing immersive cinema experiences remains its only focus, while Dolby is also a multi-faceted technology company. The success of the Dolby Cinema solution released in 2015, fusing Dolby Atmos and Dolby Vision technologies, has been such that Dolby has gained market share as strong partnerships with exhibitors like AMC have enabled 30 new cinemas to be opened around the world.
Strategic Clarity Counters RisksDolby’s position of strength could not be more clear than following its recent announcement of bringing Dolby Vision to China – deemed one of its least accessible markets due to difficulties enforcing IP rights – through adoption by Chinese online video platform company Tencent Video.
Despite Trump’s agenda to dissolve trade agreements with China and other economies, Dolby’s future investments are likely to be in Asia, where the growth of the media entertainment industry, in addition to original equipment manufacturers as potential customers, can make its footprint even more global.
69% of Dolby’s revenues come from outside the US
Dolby heavily relies on international sales that account for 69% of revenue, as opposed to 31% in the US, making its exposure to the foreign currency market relatively high for a company belonging to the consumer services sector. With the dollar strengthening significantly relative to other currencies, households in the UK, Europe, and foreign emerging markets may be reluctant to invest in US companies’ products at their domestic prices.
However, for a company whose brand has become synonymous with audio fidelity and which to a great extent tailors to the luxury end of the consumer market, it is likely that most media companies and semiconductor companies will continue to integrate Dolby technologies with their products irrespective of a marginal rise in relative price: Dolby’s IP-centred model is not as prone to tariffs and quotas as that of a company delivering physical goods.
The S&P 500 index’s dramatic increases have suggested that, due to expansionary fiscal policies such as corporate tax cuts, companies across many sectors will on average have more net income to invest in capital; and for technology companies, to invest into licensed technologies such as those offered by Dolby, providing protection in case its expansion into Asia and Africa stalls due to short-term political uncertainty.