Dolby Eyes Smartphones, Broadcasting As Hedges Against CE’s Declines
Declines in DVD and Blu-ray sales caused a 19 percent revenue drop in Dolby’s CE category during fiscal Q3, the company said on an earnings call late Thursday. Those trends are expected to continue, said Dolby CFO Lewis Chew, who projected overall CE declines for fiscal 2012 in the “high single to low double-digits range” on lower optical disc sales.
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CEO Kevin Yeaman distanced the company from disc-based media during the call, saying more than half of Dolby’s revenue derives from platforms “that do not support optical disk playback,” such as TVs, set-top boxes and smartphones. The remainder of Dolby’s licensing revenue comes from devices that include optical disc playback -- including Blu-ray, PCs and gaming consoles -- but “these are devices that now receive content from mobile and online networks as well,” he said. Dolby’s effort to extend its technology to the online and mobile categories “is creating reasons to include our technology in these devices beyond optical disc, as is the case of Dolby Digital Plus in Windows 8,” he said.
In response to a question on how Dolby can counteract the shift away from Blu-ray players toward “pass-through” streaming devices, Ramzi Haidamus, executive vice president-sales and marketing, said current R&D investment is focused on products that decode “in device” to deliver a “total experience.” Dolby decoding technology along with its Pulse process technology “is what really gets you the best entertainment experience,” he said. The company has been demonstrating the technology “for some time,” he said.
PC revenue fell 10 percent in fiscal Q3 versus Q3 2011 on lower revenue from ISV (independent software vendor) business, Chew said, saying the company expects to finish the fiscal year with $70-75 million in ISV sales compared with $80 million in fiscal 2011. Dolby projects PC unit growth of 2-3 percent for the year, he said. Haidamus noted that Dolby is currently licensing its PCEEv4 (PC Entertainment Experience 4) program into Ultrabooks and has a new technology combo comprising Dolby Digital Plus and Pulse processing. Although there are more SKUs in the marketplace, softness in high-end PCs is negatively impacting revenue, he said. The company expects the softness to continue “for the time being,” he said, but it predicts revenues will “pick up when consumer spending picks back up."
Dolby is looking for global trends in digital broadcast and cloud-based content delivery to grow its core audio business, Yeaman said. He reaffirmed a projected TV attach rate for the year of 4-5 percentage points, which will more than offset weakness in global TV shipments, he said. The company continues to expand its footprint with the digital broadcast industry, he said, noting that 26 of 46 HD channels in China broadcast using Dolby technology along with 12 HD channels in India. Africa has mandated Dolby technology for its final digital TV spec, Yeaman said, and Austria and Turkey include Dolby in the draft specs.
Digital broadcasting holds promise for further adoption of Dolby technology, he said, since “much of the world’s transition to digital broadcasting is still in front of us.” Further adoption could arise from a desire of “some global TV makers to standardize on Dolby formats for worldwide TV shipments,” he said, which is helping to grow TV attach rates in Asia Pacific, Eastern Europe and Latin American markets. Dolby will continue to target online video services, Yeaman said, adding to the roster that now includes Netflix, Vudu, HBO Go, Amazon, and Rovi, he said.
In Dolby’s “other markets” category -- which includes automotive, mobile devices, gaming and Dolby’s VIA licensing subsidiary -- revenue grew 14 percent over fiscal Q3, driven mostly by growth in mobile, Yeaman said. Dolby’s attach rate in smartphones is on the rise, Yeaman said, and the company is on track to finish the fiscal year with a smartphone attach rate in the low to mid-teens. Some 35 handsets from Samsung, six from Huawei and two from ZTE have given the company “confidence we can add value to other existing and new mobile ecosystems,” he said. He also touted the Atmos next-generation audio technology for cinema that debuted with Disney Pixar’s Brave.
Net income dropped in Dolby’s fiscal Q3 from $61.7 million, or $0.55 per diluted share, to $51.5 million, or $0.48 per diluted share, in 2012, Dolby said. Total revenue for fiscal Q3 was $208 million, down 5 percent from Q3 2011, it said. Dolby shares fell 14 percent Friday to close at $30.67.