Dolby Laboratories, Inc
Total Page：16
File Type：pdf, Size：1020Kb
The Henry Fund Henry B. Tippie School of Management Ajay Kaushik Rajagopalan [[email protected]] Dolby Laboratories, Inc. (DLB) March 8, 2016 Information Technology – Diversified Electronics Stock Rating Sell Investment Thesis Target Price $37-$44 DCF $40.65 Dolby Laboratories is a leader in audio technologies and since its inception in DDM $19.77 1965, it has established itself as the de-facto standard for lossless audio Relative Multiple $34.33 technologies. Dolby has supplemented its audio technology offerings with Price Data image technologies such as Dolby Vision. The current offerings of Dolby have Current Price $39.57 positioned it well to leverage the digital television boom in emerging markets. 52wk Range $29.87 – 41.84 The future growth prospects of Dolby are for good measure factored into the current stock price and hence this report recommends a sell rating. Consensus 1yr Target $39.00 Key Statistics Drivers of Thesis Market Cap (B) $3.97 The demand for Set Top Boxes (STBs) and Digital TVs is expected to grow Shares Outstanding (M) $101.35 at 7% CAGR through 2020 and this is expected to drive the broadcasting Institutional Ownership 94.6% licensing growth at 6.7% CAGR through 2020.(10) Five Year Beta 0.695 Wanda group is partnering with Dolby to open 200 new Dolby Cinema halls Dividend Yield 1.21% by 2024 and this is expected to drive the product segment growth at 16.6% Analyst Est. 5yr Growth 10.00% CAGR through 2020.(8,19) Price/Earnings (TTM) 24.42 Future Audio/Video conferencing products of British Telecom and Premier Price/Earnings (FY1) 18.8 Global Services Inc. (PGi) will incorporate the Dolby Voice technology. Price/Sales (TTM) 3.36 Dolby Voice witnessed a 30% growth in customer base in Q1 16. Debt/Equity 0.00 Risks to Thesis Profitability Dolby employs the pull marketing strategy by partnering with content Operating Margin 22.00% creators. The content creators have no obligation to use Dolby, and if they Profit Margin 18.69% stop partnering with Dolby, the entire strategy of Dolby to leverage the end Return on Assets (TTM) 8.81% market demand for content would fall apart. Return on Equity (TTM) 10.31% Increased clamor for open standards for broadcasting, if successful, will eliminate Dolby’s licensing revenue base. DLB Sector 20 Source:FactSet Greater than anticipated decline in PC sales, DVD players, and Blu-ray players will significantly lower the DCF stock price. Current 5-year CAGR 18.8 15 17.7 assumptions stand at -6.6% and -3.4% for these segments respectively. 13.3 10 10.3 Earnings Estimates 5 Year 2013 2014 2015 2016E 2017E 2018E 0 EPS $1.86 $2.02 $1.77 $1.82 $1.83 $1.84 P/E ROE (%) growth -24.7% 8.60% -12.38% 2.56.% 0.74% 0.52% 12 Month Performance Company Description S&P 500 DLB 30% Dolby Laboratories is a technology company that develops audio, imaging, and voice 20% Source: Yahoo Finance technologies used in the entertainment and 10% communications industry. Dolby 0% Laboratories, since its inception in 1965, has established itself as the de-facto standard for -10% lossless audio technologies. The company -20% offers technologies to audio, video, and gaming content creators such as artists, -30% M A M J J A S O N D J F directors, studios, and game developers. Important disclosures appear on the last page of this report. EXECUTIVE SUMMARY (perfect reconstruction from compressed files) audio technologies. With over 5100 issued patents and another Dolby Laboratories is a technology company that develops 3200 pending patents, Dolby has a strong portfolio of audio, imaging, and voice technologies used in the proprietary technologies. The patents that are current to entertainment and communications industry. the period of Dolby’s last 10k filing are expected to run until April 2040.(5) It is very important to keep track of the Dolby’s business model revolves around generating health of the intellectual property rights (IPRs) held by demand for their products by partnering with audio, video, Dolby as close to 90% of Dolby’s revenue is through and gaming content creators such as artists, directors, licensing of its proprietary technologies. During fiscal year studios, and game developers. The business model is 2015, Dolby completed the acquisition of Doremi and the unique because Dolby offers deep discounts on the Doremi-related assets for total purchase consideration of services and equipments that it provides to content $112.5 million. (21) Doremi boasts of a product line that creators. This strategic relationship with content creators includes Audio/Video equipments and also holds helps Dolby leverage the end market demand for the important patents in 4K resolution area. This acquisition content created and drive the demand for its technologies will help Dolby to provide an end-to-end system. A release to be incorporated in consumer electronic devices. The can now be filmed in Dolby, have its sound mixed in Dolby, Semiconductor companies and the Original Equipment be encoded in a Dolby format, be sent to the customer on Manufacturers (OEMs) must pay Dolby licensing fees to a Dolby-licensed disc format or through a Dolby-equipped use Dolby’s proprietary technologies and such is the set-top box, and be decoded with Dolby to be played back magnitude of these licensing revenues that it accounts for on Dolby-licensed speakers. (1) nearly 90% of the total revenue earned by Dolby in a fiscal year. The consumer electronics segments that will be Revenue Decomposition major drivers of revenue for Dolby are the demands for Set Top Boxes and Digital TVs. The number of digital TV households globally are expected to grow at 7% CAGR FY 15 Revenue Streams through 2020 and most of this growth is expected to be 8.6% 1.9% seen in the emerging markets of Asia, Latin America, and Sub-Saharan Africa. (9) Dolby Vision is an imaging technology that improves resolution, increases brightness, and enables the capture of High Dynamic Range (HDR) images. Dolby is working with 4K TV manufacturers to integrate its Dolby Vision into their products and with content creators who create content fit for 4K TVs. 89.4% Dolby Voice and Dolby Cinema are two other initiatives of Licensing Product Services Dolby that will aid in incremental revenue generation for the company. After weighing the individual end market Source: 10K (5) demand for each individual segment that Dolby caters to, the 5-year CAGR revenue growth was modelled to be 5.7%. As can be seen from the pie chart above, Dolby generates Dolby’s current share price when compared to the DCF its revenue from three segments, the largest being model price indicates that the future growth potential of licensing. Dolby charges its customers a licensing fee for Dolby is mostly factored into the current stock price. using its audio/video technologies. The technologies that Hence this report recommends a sell rating for Dolby. are licensed are either developed in house, acquired, or licensed from third parties. As licensing primarily deals COMPANY DESCRIPTION with licensing of IPRs, the majority of the cost incurred is through amortization of the acquired IPRs or royalty Dolby Laboratories, since its inception in 1965, has obligations on third party IPRs. Dolby enjoys a 99% gross established itself as the de-facto standard for lossless margin on its licensing revenue stream. Page 2 Most of the licensing business consists of a two-tier licensing model whereby the Dolby technology is licensed Forecasted demand for Set Top to a semiconductor manufacturer as well as Original Boxes (STB's) Equipment Manufacturers (OEMs). Dolby’s 10k refers to 200. these semiconductor manufacturers as implementation 126.7 licensees. These manufacturers then sell their ICs to OEMs 100. and these OEMs need to obtain what Dolby calls system 57.9 71.9 licenses to use the Dolby technology. While 0. implementation licensees pay a one-time licensing fee 2014 2015 2018* upfront, the system licensees are charged both a one-time fee and royalties. The royalties collected are dictated by North America Europe Asia/Pacific Latin America the number of Dolby technologies used and the volume of the product sold by the OEMs. Source: Statista (10) FY 15 Licensing Revenue Breakdown 12.0% 13.0% 44.0% 14.0% 17.0% Source: Statista (9) Broadcast PC Consumer Electronics Mobile Others Licensing Revenue from broadcasting has generally shown an increasing trend except for FY 2015 where it only grew Source: 10K (5) by 1.1%. FY 15 marked a year of tepid growth for licensing Licensing can be further broken down into 5 major in general. However going forward, the Broadcasting segments based on the product segment that the Dolby segment will witness tailwinds to end market demand technology serves. These segments are Broadcast (TVs, facilitated by the policy decisions in emerging markets STBs), PCs, Consumer Electronics (DVD, Blu-ray Players), such as India to move from analog to digital television Mobile, and other devices such as gaming consoles and services. This is reflected in the graphs shown above. The automobile entertainment systems. number of households worldwide with digital TVs is forecasted to grow at 7% CAGR through 2020. Page 3 PC segment. The demand for DVD and Blu-ray players will keep declining in the coming years as more and more media is consumed through streaming services as opposed to DVDs and Blu-ray discs. Dolby does not enjoy a stellar clientele in terms of its mobile business except for LG, Lenovo, and HTC. Losing its place in the flagship Samsung Galaxy models has significantly impaired the growth potential in the mobile licensing segment.