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.
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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.
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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. This is reflected in the drastic drop in mobile licensing revenue growth rate from 57.4% in 2013 to -1.2% in 2015. The end market demand for mobile devices is expected to grow at around 9-10% through 2018. Considering Dolby’s clientele in terms of its mobile segment, it is expected to witness 3.1% CAGR growth through 2020, much lesser than the near double digit growth expected for mobile devices on the whole. Source: IDC (2)
As shown in the graph above, PCs have and will be witnessing depressed demand and hence its contribution towards licensing revenue has and will be declining. The biggest revenue generator in PCs for Dolby is the optical disk drives that are built into these PCs. Slowing demand for PCs as well as the trend to move away from building PCs without optical disk drives will continue to impact the revenue generated from licensing the Dolby technology to PC manufacturers.
Source: IDC (13)
Dolby Voice has added 30 new A/V conferencing product manufactures as customers in Q1 16. This is a 30% rise in the customer base. FY 15 witnessed an 18.5% increase in “Other” licensing revenues from FY 14. With several large customers in the rollout stage and with BT Conferencing expected to maintain its momentum, “Other” licensing revenues should witness strong growth through 2020. In addition to contributing to licensing revenue growth, Dolby Voice will also spur the growth for “Other” Product revenues with increased sales of the conference phones that incorporate Dolby Voice.
Source: IC Insights (11) Dolby Cinema would be a premium offering for exhibitors and moviegoers and would include both Dolby Vision and The consumer electronics segments also suffers from Dolby Atmos technologies. Not only will this spur the depressed end market demand, not too dissimilar to the licensing revenue growth, but also will contribute to the
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product segment growth of Dolby in terms of increased hedge against currency risks. The licensing revenue demand for cinema servers, projectors, and audio devices. generated is based on the location of the licensees’ Wanda group, which also owns AMC, has decided to open headquarters. Product revenues are recognized based on 50 new Dolby Cinema screens in AMC Prime auditoriums the destination of the product shipment and services in 2016. This number will go up to 100 by 2024. In China, revenues are similar to products as they are recognized Wanda group plans to unveil 100 new Dolby Cinema based on the location of the service contract. Efforts on theatres by 2020. PVR Cinemas has announced its plan to Dolby’s part to hedge against currency risks have dictated open 50 screens fitted with Dolby Atmos technology by the model’s assumption to disregard loss or gain due to 2017. (8, 19, 16) These developments portend a healthy strengthening dollar on earnings. While this is a market for Cinema and Broadcast products. The increased reasonable assumption to make for the forecast horizon, adoption of BT MeetMe audioconferencing technology the strength of the US dollar needs to be continuously will help grow the “Other” products revenue from $4.2 monitored against the hedging contracts that Dolby has, as million in 2015 to $16.7 million in 2020. The “Other” any adverse developments in this regards will cause more product segment witnessed a 77.1% YoY growth between than a trivial change to the earnings of Dolby. 2014 and 2015 and this clearly signals that the BT MeetMe adoption is gaining traction. Doremi Acquisition
Services provide support for theatrical and television In 2014, Dolby agreed to purchase Doremi Labs for $92.5 production and hence growth in services segment revenue million in cash plus an additional $20 million in contingent is tied to the product segment growth. The services consideration that may be earned over a four year period. segment has been modelled to grow at 9.9% CAGR Doremi labs has a strong patent portfolio in 4K technology through 2020. The product segment is modelled to grow space and manufactures A/V equipment that can help at 16.6% CAGR through 2020. Dolby to position an end-to-end technology solution for its customers. With this diversified product portfolio, content Geographic Distribution of Revenue can be created, encoded, transferred, transmitted, and played using Dolby technologies. Since Doremi’s Dolby generates over 70% of its annual revenue outside of acquisition, the growth for Cinema products has gone from the US and hence has significant international exposure. -27.6% in 2014 to 46.6% in 2015. The benefits of this acquisition will play out in the coming years and the DCF FY 15 Percentage Sales by location model assumes positive synergies from this acquisition driving the 16.6% CAGR growth for the Cinema Product 7% Segment through 2020. (1) 7% 29% Pull Marketing Strategy 10% Dolby’s business model revolves around generating demand for their products by partnering with audio, video, and gaming content creators such as artists, directors, 13% studios, and game developers. Dolby offers deep discounts on the services and equipment that it provides to content 21% creators in an attempt to tie the content creators to 13% Dolby’s technologies.
US South Korea Japan Europe Taiwan China Other
Source: 10K (5)
With such a significant exposure to international markets, Dolby has various foreign currency forward contracts to
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RECENT DEVELOPMENTS FY 15 Revenue vs Costs by Segments Recent Earnings and Future Guidance 1000.0 FY 2015 Q1 16 FY 16 900.0 (A) (A) (Guidance) 800.0 Revenue (M) 967.4 240.8 1000-1030 700.0 Consensus 973.7 239.1 1017.2 600.0 Revenue (M) Surprise history -0.6 0.7 N/A 500.0 (%) 400.0 Actual EPS 1.73 0.30 N/A 300.0 Consensus EPS 1.61 0.28 1.72 200.0 Surprise history 7.7 5.88 N/A 100.0 (%) Source: FactSet 0.0 Licensing Products Services It can be seen that the consensus estimate for revenue is Revenue (millions) Costs (millions) very close to the actual sales reported by Dolby. For FY 16, Dolby has given a revenue guidance in the range of $1 billion to $1.03 billion. Even the consensus estimate Source: 10K (5) predicts that Dolby would become a billion dollar company The graph above reflects the impact of pull marketing in FY 16. In terms of EPS, Dolby has consistently performed strategy on Dolby’s gross margins across segments. By better than what the analysts predicted and it wouldn’t be leveraging the end market demand for the content surprising if that remains a theme in FY 16 as well. The created, Dolby charges licensing fees on its technologies to growth estimates for Dolby that have been assumed for be used by Semiconductor companies and the Original the DCF model place the sales for FY 16 at around $1.02 Equipment Manufacturers (OEMs) in the design and billion. This revenue estimate is not too far away from the manufacture of consumer electronic devices that aid in consensus revenue estimate and also falls within the content consumption. Such is the magnitude of these guidance band of Dolby. licensing revenues that it accounts for nearly 90% of the total revenue earned by Dolby in a fiscal year. This pull Wanda Cinema Line in China marketing strategy is driver of Dolby’s historically high Wanda Cinema Line Corporation Ltd and Dolby gross margin levels as 90% of the revenue generator has a Laboratories announced a collaboration to open 100 Dolby gross margin close to 99.5%. Despite the forecast horizon Cinema locations through 2020. The first location is indicating a greater thrust to Product Segment growth, expected to be opened during the second quarter of 2016. Licensing will still account for majority of the total revenue Dolby Cinema would be a premium offering for exhibitors and hence this strategy will be relevant going forward. and moviegoers and would include both Dolby Vision and Since content drives demand, it would be prudent to Dolby Atmos technologies. Not only will this spur the monitor the popularity that Dolby enjoys with the content licensing revenue growth, but also will contribute to the creators as any tectonic shift away from Dolby product segment growth of Dolby. (8) technologies for creating content would signify catastrophic falls in revenue for Dolby. AMC Prime
Wanda group that also owns AMC has decided to open 50 new Dolby Cinema screens in AMC Prime auditoriums in 2016. This number will go up to 100 by 2024 therefore bringing the total number of Dolby screens in the two largest markets (USA& China) to 200. These developments
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suggest that Cinema is best positioned in terms of product Increased adoption of digital TVs across the world and the segment growth for Dolby. (19). IMAX, the closest consumer demand for better looking content create a competitor to Dolby in the Cinema segment has 943 market opportunity that Dolby Vision can cash in on. New commercial multiplex theatres in operation as of content created that captures the extended brightness December 31, 2015. and details will need upgrades to the display technologies. Dolby Vision and HDR 10 are the two competing Dolby Voice Updates technologies vying for the market growth that the display technology upgrade will bring about. In terms of partners, British Telecom (BT) conferencing collaborated with Dolby Dolby has entered agreements with LG, TLC, and Vizio to to use the Dolby Voice technology in designing BT incorporate Dolby Vision in some of their new 4K TVs. MeetMe. Dolby Voice provides noise cancellation However, Samsung has moved away from using Dolby solutions that eliminate background noise while also Vision and has instead created a HDR 10 based TV line with helping in voice separation and project individual voices as LG also following suit. As more and more 4K content is coming from different virtual locations. BT conferencing is created and consumed, the direction that display the leading provider of conferencing technologies globally. technologies take will become clear. However in terms of pure technical standpoint, Dolby Vision is a superior Dolby Voice has added another significant audio technology to HDR 10 as Dolby Vision equipment encodes conferencing provider in the last year in Premier Global or decodes images differently rather than just adding a few Services (PGi). PGi is a multinational corporation that more levels of brightness. With OEMs looking to promote provides conferencing and collaboration solutions. Its their own offerings of HDR and trying to avoid licensing iMeet and GlobalMeet product lines are expected to fees that they would incur for Dolby Vision, it remains to incorporate Dolby Voice in future product rollouts. be seen if Dolby’s pull marketing strategy again leverages Dolby Vision Updates the content creators to make OEMs switch to Dolby Vision. Dolby Atmos for Virtual Reality
Dolby has announced a partnership with Virtual Reality (VR) content creator Jaunt to bring its Atmos surround sound technology to the world of VR. The market potential for VR is very uncertain as it is a very recent technology with most of the VR users comprised of early adopters. However, by partnering with VR content creators, Dolby has signaled a forward looking approach towards exploring new markets. The management has stated that Dolby is deeply committed to exploring prospects in augmented reality and VR. If VR takes off, then Dolby would be ideally positioned through its partnerships with content creators to push the Dolby Atmos licenses to mobile devices manufacturers. It would again be a case of Source: lowendmac.com (20) content driving licensing demand.
Current display technologies work with a very limited colour palette and do not have the requisite brightness to mimic reality. Dolby Vision is a technology that aims at increasing the brightness range and hence improving the details in the bright and dark regions of images. Unlike High dynamic range (HDR) imagery, Dolby Vision goes beyond the 24 bit range used for JPEGs and standard photography to accurately record more colours and brightness.
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INDUSTRY TRENDS content is consumed online, consumer electronics such as DVDs and Blu-ray players would lose relevance for Dolby. Streaming media The consumer electronics segment accounted for nearly 45% of the total revenue in 2007 and this has fallen to 14% in 2015.During the forecast horizon, the revenue Number of households contribution from DVDs and Blu-ray players is expected to subscribing to Netflix decline to 11.4%. worldwide from 2010 … Virtual Reality
150. 114.9 81.5 100. 70.4 54.5
MILLIONS 50. 19.1
0. 2010 2014 2015 2016* 2020* NUMBER OF HOUSEHOLDS IN IN HOUSEHOLDS OF NUMBER Source: Statista (12)
Streaming media sites such as Netflix, Hulu, and Vudu are fueling the industry trend of moving away from conventional media consumption avenues such as DVDs and Blu-ray discs to online content consumption. The graph above represents the growth that Netflix has witnessed and is expected to witness through 2020. The Source: Statista (22) number of household subscribers to Netflix alone is Virtual Reality (VR) is an industry trend that is exciting in expected to increase by 63% from 2015 to 2020 and this terms of growth prospects for Dolby. As VR headsets gain paradigm shift in content consumption has resulted in momentum and traction among users, Dolby can leverage declining revenue for Dolby from consumer electronics its Atmos technology to enable VR content with spatial segment. audio surround system. As represented by the graph above, VR is just starting out and is expected to reach $4 DVD Players Shipped in US (1000s) billion by 2017. There is however no certainty about the growth trajectory of VR, but any growth in VR would augur 18000 16418.2 well for Dolby. Not only can Dolby leverage its Atmos 16000 14754.9 technology, but it can also leverage its Dolby Vision 13841 technology to enable premium content creation. 14000
12000 MARKETS AND COMPETITION FY 14 FY 15 FY 16 E As described earlier in the report, Dolby works closely with content creators to spur demand for its products. Close to Source: Statista, AHAM (3) 90% of the revenue is generated from the licensing The chart above shows the declining shipments of DVD segment. The majority of the licensing revenue comes in players and this declining trend is expected to continue. In two forms; terms of emerging markets, the decline in demand for DVD i) One-time fee paid by semiconductor/software and Blu-ray players would not be as stark in the near future companies for using Dolby’s technology in designing their as slow broadband speeds are a bottleneck to enjoying hardware/software streaming services such as Netflix. However, the shift in customer preferences is real and as more and more
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ii) Royalty payments based on number of consumer ATSC refers to Advanced Televisions Systems Committee, electronic units sold. an international non-profit organization that develops standards for digital television. As shown in the map The remaining revenue comes from product sales (digital above, the whole of North America has adopted the ATSC cinema servers, projectors etc.) and services. Due to this standards and Dolby’s AC3 audio technology is the audio business model, Dolby competes in many different standard for ATSC. markets and in many different customer segments thereby making it hard to assign well defined competitors. All other broadcast television standards use an open standard audio format called MPEG ACC. It is in these The underlying factors dictating the licensing revenue other television standards that Dolby is trying to establish suggest a strong dependence on the patent portfolio held its AC3, AC4 audio technologies. DVB-T, ISDB-T, DTMB by the firms. This suggests that competition is along correspond to the broadcasting standards followed in the product differentiation and exclusivity rather than cost. On emerging markets making it imperative for Dolby to target the other hand, product segment demand is dependent on these broadcasting standards. how closely Dolby works with the content creators and the discounts it offers on its products. That would mean that Peer Comparisons price is one of the underlying factors determining the product competitive landscape. Sales Net ROA ROE P/E Debt/ (M) Profit (%) (%) (ntm Equity Emerging Markets Margi ) n (%) The number of digital TV households globally are expected Dolby 970.6 18.7 8.8 10.3 18.8 0.0 to grow at 7% CAGR through 2020 and most of this growth IMAX 373.8 14.7 7.1 10.9 34.8 4.8 is expected to be seen in the emerging markets of Asia, DTS 138.2 -8.9 -3.5 -5.8 19.3 77.1 Latin America, and Sub Saharan Africa. Policy decisions Inc. across the emerging markets have mandated the switch Source: FactSet (6) from analog to digital television. India is one such example of an emerging market where policy decision has Dolby operates in various spheres and hence it does not mandated the switch to digital television standards. The have very well defined publicly traded competitors. DTS market demand for STBs and digital TVs in various markets Inc.’s audio technologies compete directly with those of has already been explored previously in the Revenue Dolby’s in the consumer electronics audio market. Decomposition sub section of this report. However, most Blu-ray disc players as well as other audio codec and sound bar manufacturers include technologies Countries such as India and China have included Dolby from both companies in their products. This coexistence Digital Plus as part of their broadcast specification will continue as long as long content creators do not chose standards and these emerging markets are expected to one technology over the other. When the revenue streams contribute to the steady growth of broadcasting revenue of both companies are aligned and compared for similar for Dolby through the forecast horizon. product lines, it is seen that Dolby earns 6.3 times the revenue that DTS Inc. earns. FY 15 profit margin of DTS is Global Television Broadcast Standards negative while Dolby earned a healthy after tax profit of 18.7%. This suggests that Dolby is perched favorably in comparison to DTS Inc. Dolby is competing with IMAX in the cinema market with both companies having similar partnerships with movie theater chains such as Regal Entertainment Group, AMC Entertainment Inc. , or Cinemark Theatres. With most Dolby theatres opening in 2016 or beyond, accurate comparison in terms of revenue isn’t possible. When looking at the FY15 numbers, Dolby is seen to earn 2.6 times as much revenue as IMAX. These Source: Wikimedia Commons (23)
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comparisons suggest that Dolby’s financial health and Near 0% interest rates have kept the cost of debt low for growth prospects are better than its closest competitors. firms as well as individuals. Once the recent weakness in the economy passes, the fed fund rates are expected to ECONOMIC OUTLOOK move towards the 1.25% in the coming years. Even though this increase in the fed fund rates will not take the interest The demand for Dolby’s technologies is driven by rate to the levels that were existing before the economic consumer spending and hence all economic parameters recession of 2008-2009, it is still expected to make the cost that affect consumer spending will impact the growth of capital dearer. Premium electronic devices such as 4K potential of Dolby. The product portfolio that uses Dolby TVs would see greater demand if easy financing options technologies include Smartphones, set top boxes, PCs, Blu- were available. In a rising interest rate scenario, easy ray players , automobile entertainment systems, gaming financing options would be hard to come by. consoles , cinema technology , and other audio video entertainment devices/solutions. Discretionary consumer spending is positively correlated to GDP, negatively correlated to unemployment rate, and impacted adversely by rising interest rates.
Going forward, the GDP growth is expected to remain stable at around 2% (2016-2018) and this should translate to a steady demand in consumer discretionary electronic products such as smartphones, tablets, PCs, and other electronic devices. The forecasted decline in the Chinese GDP growth is a cause for concern. Any slowdown in the end market demand in China would be partially offset by the increasing demand from India. India’s GDP is expected to grow at 7-8% during the forecast period. Source: IBIS World (4)
The Per capita disposable income chart suggests that the Real GDP Growth disposable income available for discretionary spending will 10.00% remain steady through 2021. Per capita disposable income 8.00% is an important measure of customer’s willingness to pay 6.00% and the steady levels indicate a similar spending outlook 4.00% throughout the forecast horizon. 2.00% 0.00% CATALYSTS FOR GROWTH 2013 2014 2015E 2016F 2017F 2018F R&D spending as a percentage of sales currently stands at US China Global 20.7%. Increased R&D spending as a percentage of sales increases the probability of innovation, which would lead Source: Global Economic Prospects 2016, World Bank (15) to filing of new patents and potential increase in licensing revenue. With over 5100 issued patents and another 3200 Unemployment rates have a negative correlation with pending patents, Dolby has a strong portfolio of consumer discretionary sales. Increasing employment proprietary technologies. There are patents current to the increases the median disposable income and that last 10K filing that are expected to run till 2040. The OEMs correlates positively with spending on consumer that use the Dolby licenses are supposed to pay royalty for discretionary electronics such as smartphones, tablets, every unit sold and some royalty payments are expected PCs, TVs etc. The unemployment rate in the US has to run till the last patent of that particular technology continued to decline and the Henry Fund team believes expires. Increased R&D spending can help add quality that unemployment will settle between 4.95% over the patents to the portfolio. next 2 years.
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Another major catalyst for growth would be the healthy needs to be monitored closely as OEMs moving away relationships that Dolby creates and maintains with its from buying Dolby licenses will have significant content creators. The business model of Dolby is set up in earnings impact due to declining incremental such a way that if content creators move away from Dolby, revenues through royalties. OEMs and semiconductor manufacturers would no longer see the need to buy Dolby licenses. VALUATION INVESTMENT POSITIVES DCF, DDM, and relative P/E analysis have been used to value Dolby Laboratories. These three valuation The global shift towards digital television standards techniques computed stock prices of $40.7, $19.8, and will be the biggest driver of broadcasting licensing $34.3 respectively. We believe that the value of the Dolby growth. Dolby has successfully entered the Indian and stock is closest to the DCF model. the Chinese broadcasting market and these emerging economies will drive a significant portion of Dolby’s Dolby’s dividend payout policy is relatively recent as it future revenue. started only in the first quarter of 2015. The insufficient The relationship that Dolby maintains with its content history in terms of dividend payout has limited the scope creators is very strong as is evidenced by the for making reasonable assumptions in terms of future increasing number of titles created using Dolby Atmos dividend payout. In the DDM model, for the next five and Dolby Vision technologies. In the 4 years since years, we assumed a constant payout ratio of 26.4% and Dolby Atmos was released, more than 200 film titles since this assumption does not have sufficient historical have used it as their audio format. The Wanda Cinema backing, we have disregarded the DDM model. In FY 2015, Line has committed to install Dolby Atmos and Dolby the payout ratio for Dolby was 22.6%. Vision in over 200 theatres across US and China. The Among all available competitors, IMAX and DTSI are the online streaming services such as Vudu and Netflix two most aligned publicly traded competitors in terms of have announced support for Dolby Atmos content. As business activities. The relative P/E analysis with these two content created using Dolby Technologies continues publicly traded competitors reveals a share price that is to increase, revenues from both product and licensing lower than what the share trades at currently. Weighing would increase. the price reflected by the relative P/E analysis model Dolby Voice’s strategic partnerships with BT against the fact that there are only 2 publicly traded Conferencing and PGi will continue to drive growth. competitors suggests a limited scope of the relative P/E Dolby Voice witnessed a 30% growth in customer base model. Considering the abovementioned limitations of the in the last quarter alone and there is expected to be relative P/E valuation model, the share price suggested by increased product rollout activities in the years the model will be viewed subservient to the DCF model. coinciding with the forecast horizon. Short Term Revenue Growth Assumptions INVESTMENT NEGATIVES Dolby has multiple business segments and each segment Though Dolby provides technologies that are the de- faces differing end market demand. The revenue growth facto standards for audio broadcast, there is however rates for the DCF model have been projected by studying no binding contract on the content creators to use the individual end market demand for each of these Dolby. If the relationships that Dolby maintains with business segments. Each of these segments have been content creators start to sour, then the whole business described in detail in the Revenue Decomposition sub model of content driving licensing revenue would fall section under the Company Description section earlier in apart. this report. The end market demand drivers have also Headwinds for Dolby’s technology offerings can also been clearly delineated and discussed in detail in the come from OEMs who are trying to push for open Revenue Decomposition sub section. broadcasting standards. Samsung has moved away from Dolby in recent years and in CES 2016, it unveiled Dolby generates nearly 88-90% of its revenue by licensing its own line of SUHD televisions. This is a trend that its technologies. The entire licensing segment of Dolby is
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projected to grow at 4.3% CAGR through 2020. By 2020, Costs and Margins the contribution of licensing to the entire revenue of Dolby is expected to drop below the 85% range. The reasons for In FY 14, Dolby’s management indicated that that Dolby is this decrease is not because of headwinds for licensing, nearing the end of a significant investment cycle. The but because of the tailwinds in growth that will be seen for construction of new Dolby Headquarters and the Doremi the product segment of Dolby. The proposed Wanda acquisition were part of that significant investment cycle. Cinema line Dolby Cinema theatres in China and the AMC These developments have dictated the modelling of prime Dolby Cinema locations that in the US will drive the capital expenditure assumptions. Investments in Property, product segment of Dolby to grow at 15.7% CAGR through Plant, and Equipment are modelled to grow at 9.4%, a level 2020. Services segment, the last macro revenue segment that reflects the historical expenditure incurred by Dolby of Dolby mirrors the growth seen in the product segment to maintain its computer systems and software, as Services deals with product support, installation, equipments, furniture, and other activities needed to run product integration, and other engineering activities its daily operations. What this end to the significant related to Dolby products. Hence the CAGR growth rate of investment cycle also signifies is the smoothening of the Services segment is assumed to be 9.9% through 2020. depreciation expense across the years as significant portion of the depreciation expense would be the Dolby Voice has added 30 customers over the quarter that depreciation of the new headquarters building of Dolby. took its customer base from 90 to 120. With several large Selling, General, and administrative (SG&A) costs are customers in the rollout stage and with BT Voice expected modelled at 45.2% of revenue. Doremi acquisition resulted to maintain its momentum, “Other” licensing revenues in an increase in SG&A costs and with increased should witness strong growth through 2020. Given the assimilation of Doremi’s activities and the ensuing strong end market demand prediction for Dolby Voice, the economies of scale make the 45.2% assumption a 14.6% CAGR growth assumption through 2020 for “Other” reasonable one. A sensitivity analyses run on the SG&A licensing revenues seems justified. At this projected assumptions reveal that at 2015 levels of 47.5%, the DCF growth, “Other” will increase its contribution to the total stock price falls below $40. If SG&A costs do not stabilize licensing revenue from 12% in 2015 to 22.9% in 2020. In to pre-acquisition levels either through increased revenue addition to contributing to licensing revenue growth, or greater economies of scale, then current trading stock Dolby Voice will also spur the growth for “Other” Product price would indicate a premium value to the price revenues with increased sales of the conference phones mentioned above. This is one of the reasons for taking a that incorporate Dolby Voice. The revenue contribution of sell position on Dolby as current stock price levels are “Other” products to the product segment is expected to trading very close to the target price range arrived at using reach $16.7 million by 2020 from its current level of $4.2 the DCF model. Research and Development (R&D) million. The growth assumptions for individual segments expenses are expected to remain at 2015 levels of 20.7% of Dolby have been presented in the table below: to revenue. 20.7% indicates a healthy expenditure on R&D Segment Model assumption for and with the growth outlook that faces Dolby justifies this 5-year CAGR growth assumption. Other costs have been modelled at historical (through 2020 in %) average levels as there are no indications to suggest any Licensing-Broadcasting 6.7 adverse developments to skew the cost assumptions in Licensing-PC -6.6 either directions of historical assumptions. Licensing-Consumer -3.4 Electronics The revenue growth assumptions and cost assumptions Licensing-Mobiles 3.1 result in gross margins that are expected to stay above Licensing-Others 14.6 85% during the forecast horizon. This is a reasonable level for gross margin considering the growth outlook especially Products-Cinema 15.7 for the broadcast licensing segment and the product Products-Broadcasting 13.9 segment of Dolby. Dolby Vision, Dolby Atmos, Dolby Digital Products-Other 31.8 Plus, and Dolby Atmos are the key technologies that are Services 9.9 going to drive the gross profit margins of Dolby. These Source: HF Estimates assumptions have also driven the net profit margin of
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Dolby to settle at 15.1% through the forecast horizon. The The current market price of Dolby suggests that the net profit margin in 2015 for Dolby was 18.7% and this market has for good measure priced in Dolby’s growth suggests that the product growth outpacing the licensing prospects and hence the consensus estimate actually growth would eat into the profit margins of Dolby as lends support to the sell rating that this report products are often sold at discounts unlike licenses that recommends. enjoy a 99.5% margin on every agreement signed. KEYS TO MONITOR Perpetuity Growth Assumption One of the key trends that needs to be monitored is the growth of VR systems and the popularity that VR content Forecasted Global GDP gains. If Dolby is positioned appropriately through its (%) Dolby Atmos technology to ride the VR growth, then smartphone makers such as Apple, Samsung would be 4.2 forced to buy Dolby licenses. As VR is still in its infancy, this 4. report has not modelled the future growth that could 3.8 ensue due to VR. 3.6 3.4 The UHD alliance that was created in 2015 to determine 3.2 the specifications of Ultra HD has included Dolby Vision as 2016 2017 2018 2019 2020 a supporting technology. However, there is still a push Forecasted Global GDP (%) from TV manufacturers to move towards open broadcasting standards and this trend needs to be monitored closely. Source: Statista, IMF (14) A key assumption for growth in the DCF model is the The forecast for Global GDP suggests a 3.9% GDP growth growth that Dolby Cinema will witness due to the in 2020 and this has driven the long term growth proposed Dolby Cinema theatres to be opened by the assumption of 3.5% as the end market segments that Wanda Cinema Line Corporation. This trend needs to be Dolby targets are essentially dependent on the health of monitored as increased adoption of Dolby’s technologies the economy. Since the DCF model price is most sensitive by either retrofitting existing theatres or building new to the perpetuity growth assumption, a sensitivity analysis ones signify significant growth opportunities for Dolby. was done by varying the CV growth of NOPLAT. If Dolby Among the emerging markets, India’s adoption of Dolby’s were to maintain a status quo after 2020, i.e. a 0% growth cinema technologies needs to be monitored. PVR group of in perpetuity, then its DCF stock price should be around India announced in 2015 to retrofit 50 screens with Dolby $30. Even in the no growth scenario, Dolby’s intrinsic value Atmos technology by 2017. However, the other according to the DCF model returns a positive value component of Dolby Cinema, i.e. Dolby Vision is yet to be suggesting that Dolby can weather rough and uncertain widely adopted in the Indian market. Any change in this times in the future as long as it makes relevant products trend will indicate significant increases in revenue. that shields it from contraction. Valuation Summary REFERENCES 1. Seeking Alpha ‘s article on Doremi acquisition: The stock price according to the DCF model is $40.65 and this represents a 4.2% premium over the consensus http://seekingalpha.com/article/2190603-dolby-you- estimate of $39. The sensitivity analysis performed on the cant-argue-with-90-percent-margins DCF model’s stock price by varying the CV Growth rate, Beta, WACC, SG&A costs, Capex growth, and cost of products suggests the consensus estimate stock price to 2. Short term forecasts for PC demand: be a valid estimate of Dolby’s intrinsic worth if it doesn’t perform as well in the emerging market as the DCF model http://www.idc.com/getdoc.jsp?containerId=prUS258666 assumes or it fails to consolidate its post-acquisition costs. 15
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http://www.statista.com/statistics/273951/growth-of- 3. DVD shipments in the US: the-global-gross-domestic-product-gdp/ http://www.statista.com.proxy.lib.uiowa.edu/statistics/2 15. World Bank GDP forecasts: 20729/forecast-in-dvd-player-shipments-in-the-us/ http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/ 1/88501452035054522/Global-Economic-Prospects- 4. Per Capita disposable income: January-2016-Table1.pdf 16. PVR’s announcement to use Dolby Atmos: https://www.ibisworld.com/gosample.aspx?cid=1&rtid=4 http://www.dolby.com/in/en/technologies/dolby- atmos/pvr-announcement.html 5. Dolby Laboratory Inc., 2015 form 10-K 17. Earnings news, transcripts, and earnings calls: 6. Financial data for peer comparisons from FactSet http://investor.dolby.com/releases-financial.cfm 7. Dolby smartphone clientele: 18. P/E and ROE for sector: http://www.dolby.com/us/en/categories/smartphone.ht http://people.stern.nyu.edu/adamodar/New_Home_Pag ml e/dataarchived.html#returns 8. News on Wanda Line in China: 19. AMC Prime news: http://investor.dolby.com/releasedetail.cfm?ReleaseID=9 http://www.indiewire.com/article/why-dolby-cinema-at- 51961 amc-prime-is-a-great-place-to-see-the-fall-blockbusters- 20151208 9. Number of Digital TV households worldwide from 2010 to 2020 by region: 20. Dolby Vision commentary: http://www.statista.com/statistics/268538/number-of- digital-tv-households-by-world-region-since-2008/ http://lowendmac.com/2016/dolby-vision-the-future-of- television/ 10. Forecasted Demand for Set Top Boxes: 21. Doremi Acquisition: http://www.statista.com/statistics/461527/tv-stb- shipments-worldwide-by-region/ http://investor.dolby.com/releasedetail.cfm?releaseid=8 27738 11. Comparing market sizes and forecasted growth rates 22. Virtual Reality revenue forecasts: for systems, ICs: http://electroiq.com/blog/2015/03/comparing-market- http://www.statista.com/statistics/426496/virtual-realiy- sizes-and-forecasted-growth-rates-for-systems-ics hmds-sales-revenue-worldwide/ 23. Global broadcasting standards: 12. Number of households subscribing to Netflix worldwide from 2010 to 2020: https://en.wikipedia.org/wiki/Broadcast_television_syste http://www.statista.com/statistics/273885/quarterly- ms#/media/File:PAL-NTSC-SECAM.svg subscriber-numbers-of-netflix/ 13. Worldwide Smartphone Vendor Market Share: IMPORTANT DISCLAIMER http://www.idc.com/prodserv/smartphone-market- share.jsp Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at 14. Global GDP forecasts: the University of Iowa’s Tippie School of Management.
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These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.
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Dolby Laboratories Revenue Decomposition All figures in millions Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Licensing 807.08 878.84 868.11 899.15 936.63 979.47 1029.12 1072.18 Product 80.60 59.22 83.90 100.99 122.10 146.97 169.67 180.82 Services 21.99 22.11 18.62 19.55 22.49 25.86 28.45 29.87 Total revenue 909.67 960.18 970.64 1019.69 1081.21 1152.31 1227.23 1282.87
% Licensing 88.72% 91.53% 89.44% 88.18% 86.63% 85.00% 83.86% 83.58% % Product 8.86% 6.17% 8.64% 9.90% 11.29% 12.75% 13.83% 14.10% % Services 2.42% 2.30% 1.92% 1.92% 2.08% 2.24% 2.32% 2.33% % Total Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Licensing Growth Rate 1.58% 8.89% ‐1.22% 3.57% 4.17% 4.57% 5.07% 4.18% Product Growth Rate ‐22.04% ‐26.53% 41.68% 20.36% 20.90% 20.38% 15.44% 6.57% Services Growth Rate ‐22.33% 0.56% ‐15.78% 5.00% 15.00% 15.00% 10.00% 5.00% Total Revenue Growth Rate ‐1.79% 5.55% 1.09% 5.05% 6.03% 6.58% 6.50% 4.53%
Licensing Revenue Breakdown: Broadcast (TVs,STBs) 298.62 377.90 381.97 408.71 437.32 465.74 496.01 528.26 PC 193.70 166.98 147.58 135.77 124.91 117.42 110.37 104.85 Consumer Electronics (DVD,Blue Ray Players) 129.13 131.83 121.54 115.46 109.69 106.40 104.27 102.18 Mobile (Smartphones,tablet) 96.85 114.25 112.85 116.80 120.89 124.52 128.25 131.46 Others(Gaming,Automotive ) 88.78 87.88 104.17 122.40 143.82 165.40 190.21 205.42 Total Revenue from licensing 807.08 878.84 868.11 899.15 936.63 979.47 1029.12 1072.18
Broadcast Growth Rate 10.54% 26.55% 1.08% 7.00% 7.00% 6.50% 6.50% 6.50% PC Growth Rate ‐12.94% ‐13.79% ‐11.62% ‐8.00% ‐8.00% ‐6.00% ‐6.00% ‐5.00% Consumer Electronics Growth Rate ‐14.46% 2.09% ‐7.81% ‐5.00% ‐5.00% ‐3.00% ‐2.00% ‐2.00% Mobile Growth Rate 52.36% 17.97% ‐1.22% 3.50% 3.50% 3.00% 3.00% 2.50% Others Growth Rate 1.58% ‐1.01% 18.53% 17.50% 17.50% 15.00% 15.00% 8.00%
% Broadcast 37.00% 43.00% 44.00% 45.45% 48.64% 51.80% 55.17% 58.75% % PC 24.00% 19.00% 17.00% 15.10% 13.89% 13.06% 12.28% 11.66% % Consumer Electronics 16.00% 15.00% 14.00% 12.84% 12.20% 11.83% 11.60% 11.36% % Mobile 12.00% 13.00% 13.00% 12.99% 13.45% 13.85% 14.26% 14.62% % Others 11.00% 10.00% 12.00% 13.61% 16.00% 18.40% 21.15% 22.85% % Total licensing revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Products Revenue Breakdown: Cinema 70.12 50.93 74.67 88.86 106.64 127.96 147.16 154.51 Broadcast 7.25 5.92 5.03 6.04 7.25 8.34 9.17 9.63 Other 3.22 2.37 4.20 6.08 8.21 10.68 13.34 16.68 Total Products Revenue 80.60 59.22 83.90 100.99 122.10 146.97 169.67 180.82
Cinema Growth Rate ‐22.04% ‐27.37% 46.63% 19.00% 20.00% 20.00% 15.00% 5.00% Broadcast Growth Rate ‐29.83% ‐18.37% ‐14.99% 20.00% 20.00% 15.00% 10.00% 5.00% Other Growth Rate 3.95% ‐26.53% 77.11% 45.00% 35.00% 30.00% 25.00% 25.00%
% Cinema 87.00% 86.00% 89.00% 87.99% 87.34% 87.06% 86.73% 85.45% % Broadcast 9.00% 10.00% 6.00% 5.98% 5.94% 5.67% 5.40% 5.32% % Other 4.00% 4.00% 5.00% 6.02% 6.73% 7.26% 7.86% 9.22% % Total Products Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
International Revenue % 72.00% 67.00% 71.00% 71.00% 71.00% 72.00% 72.00% 74.00% Domestic Revenue % 28.00% 33.00% 29.00% 29.00% 29.00% 28.00% 28.00% 26.00% Dolby Laboratories Income Statement All figures in millions Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue: Revenue ‐ licensing 807.08 878.84 868.11 899.15 936.63 979.47 1029.12 1072.18 Revenue ‐ product 80.60 59.22 83.90 100.99 122.10 146.97 169.67 180.82 Revenue ‐ services 21.99 22.11 18.62 19.55 22.49 25.86 28.45 29.87 Total revenue 909.67 960.18 970.64 1019.69 1081.21 1152.31 1227.23 1282.87
Cost of licensing 16.86 10.81 10.88 13.70 14.27 14.93 15.68 16.34 Cost of products 64.27 45.13 70.49 80.78 97.66 117.56 135.72 144.64 Cost of services 15.59 14.23 13.45 13.52 15.55 17.88 19.67 20.66 Gain from amended patent licensing agreement 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Impairment of products provided under operating leases 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total cost of revenue 96.72 70.18 94.82 108.00 127.49 150.37 171.07 181.63
Gross margin 812.96 890.00 875.82 911.68 953.73 1001.93 1056.16 1101.24
Operating Expenses: Research & development expenses 168.75 183.13 201.32 211.50 224.26 239.00 254.55 266.09 Selling, general & administrative expenses 393.07 430.75 461.35 460.91 488.72 520.85 554.72 579.87 Restructuring charges, net 5.87 2.40 ‐0.08 0.00 0.00 0.00 0.00 0.00 Loss (gain) on settlements 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total operating expenses 567.69 616.28 662.59 672.40 712.98 759.86 809.27 845.95
Operating income 245.26 273.72 213.23 239.28 240.75 242.08 246.90 255.28
Interest income 3.85 3.34 4.54 3.96 4.04 4.12 4.21 4.30 Interest expense 0.58 ‐0.18 0.18 0.00 0.00 0.00 0.00 0.00 Other income (expenses), net 2.11 ‐1.15 28.19 6.52 6.91 7.37 7.85 8.20 Income (loss) before provision (benefit) for income taxes 250.65 276.10 245.78 249.76 251.70 253.57 258.95 267.78 Provision for income taxes 60.34 67.38 62.54 66.44 66.95 67.45 68.88 71.23
Net income (loss) including controlling interest 190.30 208.72 183.24 183.32 184.75 186.12 190.07 196.55 Less: net income (loss) attributable to controlling interest ‐1.03 ‐2.62 ‐1.85 ‐1.94 ‐2.04 ‐2.14 ‐2.25 ‐2.36 Net income (loss) attributable to Dolby Laboratories, Inc. 189.27 206.10 181.39 181.38 182.71 183.98 187.82 194.19
Year end shares outstanding 101.739 102.269 101.035 100.94 101.11 101.38 101.72 102.13 Net earnings per share ‐ basic 1.86 2.02 1.77 1.82 1.83 1.84 1.87 1.93 Payout Ratio 215.05% 0.00% 22.60% 26.44% 26.44% 26.44% 26.44% 26.44% Dividends per share 4.00 0.00 0.40 0.48 0.48 0.49 0.49 0.51 Dolby Laboratories Balance Sheet All figures in millions Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Assets: Cash & cash equivalents 454.40 568.47 531.93 628.51 779.00 919.88 1055.73 1187.60 Net Cash & cash equivalents 454.40 570.61 534.86 628.51 779.00 919.88 1055.73 1187.60
Short-term investments 140.27 231.21 138.90 139.85 140.80 141.75 142.72 143.69
Accounts receivable, gross 97.97 87.78 103.11 108.32 114.85 122.40 130.36 136.27 Less: allowance for doubtful accounts 0.51 1.62 1.54 1.52 1.61 1.72 1.83 1.91 Accounts receivable, net 97.46 86.17 101.56 106.80 113.24 120.69 128.53 134.36
Raw materials 2.05 1.01 3.25 4.64 4.92 5.24 5.58 5.83 Work in process 0.00 0.05 3.28 1.33 1.41 1.50 1.60 1.67 Finished goods 8.04 7.48 7.35 10.31 10.93 11.65 12.40 12.97 Inventories 10.09 8.54 13.87 16.27 17.25 18.38 19.58 20.47
Deferred taxes 78.38 86.45 97.10 98.56 99.33 100.06 102.19 105.67
Prepaid expenses 10.20 11.67 13.68 15.18 16.10 17.16 18.27 19.10 Other current assets 14.04 7.15 7.53 10.78 11.43 12.18 12.98 13.57 Income tax receivable 7.89 4.06 10.83 8.06 8.13 8.19 8.36 8.65 Assets held for sale 0.00 0.00 0.00 00000 Prepaid expenses & other current assets 32.12 22.88 32.03 34.03 35.66 37.53 39.61 41.31
Total current assets 812.72 1005.85 918.33 1024.01 1185.27 1338.29 1488.36 1633.10
Long-term investments 306.34 296.34 321.02 329.43 338.06 346.91 356.00 365.33
Property, plant & equipment, gross 376.05 461.19 604.77 661.57 723.71 791.68 866.04 947.39 Less: accumulated depreciation 133.14 171.44 201.68 274.23 343.95 412.31 480.60 549.98 Property, plant, & equipment, net 242.92 289.76 403.09 387.34 379.76 379.38 385.45 397.41
Intangible assets, net 41.32 63.70 127.51 109.98 95.30 85.51 75.86 66.08 Goodwill 279.72 277.57 307.71 307.71 307.71 307.71 307.71 307.71 Deferred taxes 43.29 41.75 46.18 45.96 46.32 46.66 47.65 49.28 Other non-current assets 11.64 9.05 9.46 10.87 11.53 12.29 13.09 13.68
Total assets 1737.95 1984.01 2133.29 2215.29 2363.94 2516.75 2674.11 2832.59
Liabilities and Stockholder's equity Current Liabilities: Accounts payable 10.70 15.90 20.71 15.71 16.66 17.76 18.91 19.77
Accrued royalties 6.08 2.53 1.95 3.25 3.45 3.67 3.91 4.09 Amounts payable to joint licensing program partners 40.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Amounts payable to patent administration program partners 0.00 43.44 40.47 44.32 46.99 50.08 53.34 55.76 Accrued compensation & benefits 54.42 71.68 70.32 61.41 65.11 69.39 73.91 77.26 Accrued amounts payable to patent pool partners 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Accrued professional fees 4.40 6.16 6.52 5.97 6.33 6.74 7.18 7.51 Accrued current portion of litigation settlement 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other accrued liabilities 32.80 34.57 50.05 36.42 38.62 41.15 43.83 45.82 Accrued liabilities 137.80 158.38 169.31 151.36 160.49 171.05 182.17 190.43
Income taxes payable 3.39 2.60 0.75 2.22 2.23 2.25 2.30 2.38 Current portion of long-term debt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Deferred revenue 20.93 12.50 18.91 22.19 23.53 25.08 26.71 27.92
Total current liabilities 172.82 189.37 209.68 191.48 202.92 216.13 230.09 240.49
Long-term debt, net of current portion 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Long-term deferred revenue 19.66 19.28 30.58 22.25 23.59 25.14 26.78 27.99
Long-term portion of litigation settlement 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Supplemental retirement plan obligations 2.14 2.41 2.40 2.33 2.47 2.64 2.81 2.93 Non-current tax liabilities 30.99 30.72 62.84 43.72 44.06 44.39 45.33 46.87 Other liabilities 12.31 10.59 11.78 13.04 13.83 14.74 15.70 16.41 Other non-current liabilities 45.44 43.72 77.02 59.09 60.36 61.76 63.83 66.22
Total liabilities 237.92 252.36 317.29 272.83 286.87 303.03 320.70 334.70
Stockholder's Equity: Common Stock (net of treasury and ESOP) 18.91 46.52 17.67 9.26 8.00 7.81 7.78 7.77 Retained earnings 1454.38 1660.49 1800.86 1933.79 2067.61 2202.31 2339.79 2481.90 Accumulated other comprehensive income 7.81 3.01 ‐11.46 ‐11.46 ‐11.46 ‐11.46 ‐11.46 ‐11.46
Total stockholders' equity - Doly Laboratories, Inc. 1481.11 1710.02 1807.07 1931.58 2064.14 2198.65 2336.10 2478.21 Controlling interest 18.92 21.63 8.94 10.88 12.92 15.06 17.31 19.67
Total stockholders' equity 1500.03 1731.65 1816.01 1942.47 2077.06 2213.72 2353.42 2497.89
Owner Equity + Liabilities 1737.95 1984.01 2133.29 2215.29 2363.94 2516.75 2674.11 2832.59 Dolby Laboratories Cash Flow Statement All figures in millions Fiscal Years Ending Sep 30 2013 2014 2015 Cash flow from operations: Net income (loss) including controlling interest 190.30 208.72 183.24 Depreciation & amortization 53.25 53.28 69.13 Stock-based compensation expense 64.33 65.68 67.07 Accretion of discounts on debt securities ‐‐‐ Accretion of discounts or amortization of premium on investments ‐‐‐ Amortization of premium on investments 10.23 9.40 9.16 Excess tax benefit from exercise of stock options ‐‐‐ Excess tax benefit from exercise of stock options & vesting of restricted stock ‐‐‐ Excess tax benefit from excercise of stock options ‐0.48 ‐2.43 ‐2.54 Provision for doubtful accounts ‐0.17 1.12 0.03 Litigation settlement ‐‐‐ Losses (gains) on put rights ‐‐‐ Losses (gains) on auction rate certificates ‐‐‐ Deferred income taxes ‐19.64 ‐6.70 ‐14.48 Gain from amended patent licensing agreement ‐‐‐ Loss (gain) on sale of ownership interest in subsidiary ‐‐‐26.22 Loss on impairment of long-lived assets ‐‐‐ Payment on litigation settlement ‐‐‐ Cash distributions to controlling interest ‐‐‐ Other non-cash items affecting net income ‐1.03 1.82 5.13 Restricted cash ‐‐‐ Accounts receivable ‐53.64 10.17 ‐7.01 Inventories 9.17 3.82 5.84 Prepaid expenses & other current assets ‐‐‐ Prepaid expenses & other assets 3.89 ‐0.35 ‐3.60 Accounts payable & accrued liabilities ‐‐‐ Accounts payable & other liabilities 21.89 24.12 ‐7.38 Income taxes, net 2.31 0.95 21.77 Deferred revenue ‐1.08 ‐8.73 8.98 Other non-current liabilities ‐4.68 0.69 0.27 Net cash flows from operating activities 274.66 361.55 309.38
Cash flow from investing: Purchases of investments ‐‐389.28 ‐392.94 Purchases of available-for-sale securities ‐482.37 ‐‐ Proceeds from sale of available-for-sale securities 548.74 ‐‐ Proceeds from maturities of available-for-sale securities 143.75 ‐‐ Proceeds from sales of investment securities ‐ 159.56 305.23 Proceeds from maturities of investment securities ‐ 137.06 146.15 Purchases of property, plant & equipment ‐26.71 ‐78.72 ‐157.55 Payments for business acquisitions, net of cash acquired ‐‐‐93.52 Acquisitions, net of cash acquired ‐‐‐ Other investments ‐3.00 ‐‐ Purchases of intangible assets ‐4.05 ‐37.95 ‐37.42 Proceeds from sale of property, plant & equipment & assets held for sale 0.50 3.36 0.03 Proceeds from sale of ownership interest in subsidiary, net ‐‐27.22 Change in restricted cash ‐ 1.03 ‐0.79 Other investing activities ‐‐‐ Net cash flows from investing activities 176.87 ‐204.94 ‐203.60
Cash flow from financing: Payments on debt ‐0.08 ‐‐ Proceeds from the exercise of stock options ‐‐‐ Proceeds from issuance of common stock 15.96 33.37 28.63 Issuance of class A common stock (Employee Stock Purchase Plan) ‐‐‐ Repurchase of common stock ‐82.25 ‐56.03 ‐107.35 Payment of cash dividend ‐408.21 ‐‐41.02 Distribution to controlling interest ‐5.04 ‐‐5.62 Excess tax benefit from the exercise of stock options 0.48 2.43 2.54 Shares repurchased for tax withholdings on vesting of restricted stock ‐8.83 ‐13.65 ‐15.71 Payment of deferred consideration for prior business combination ‐‐6.71 ‐ Net cash flows from financing activities ‐487.96 ‐40.58 ‐138.52
Effect of foreign exchange rate changes on cash & cash equivalents ‐1.77 ‐1.95 ‐3.81 Net increase (decrease) in cash & cash equivalents ‐38.20 114.08 ‐36.55
Cash & cash equivalents at beginning of year 492.60 454.40 568.47 Cash & cash equivalents at end of year 454.40 568.47 531.93 Dolby Laboratories Forecasted Cash Flow Statement All figures in millions Fiscal Years Ending Sep 30 2016E 2017E 2018E 2019E 2020E Cash flow from operations: Net Income (loss) 183.32 184.75 186.12 190.07 196.55 Add Depreciation 72.56 69.72 68.36 68.29 69.38 Add Amortization 17.53 14.68 9.78 9.66 9.78 Changes : Less Accounts Receivables -5.23 -6.44 -7.45 -7.85 -5.83 Less Inventory -2.40 -0.98 -1.13 -1.20 -0.89 Less Deferred Taxes -1.24 -1.12 -1.08 -3.11 -5.11 Less Prepaid Expenses & Other current assets -2.00 -1.63 -1.87 -2.08 -1.70 Add Accounts Payables -5.00 0.95 1.10 1.15 0.86 Add Accrued Liabililities -17.95 9.13 10.55 11.12 8.26 Add Deferred Revenue 3.28 1.34 1.55 1.63 1.21 Add Income Taxes Payable 1.46 0.02 0.02 0.05 0.08 Add Long Term Deferred Revenue -8.33 1.34 1.55 1.63 1.21 Net Cash flow from operating activities 236.01 271.75 267.49 269.37 273.80
Cash flow from investing: Changes: Less Short term investments -0.94 -0.95 -0.96 -0.96 -0.97 Less PP&E Gross -56.80 -62.14 -67.98 -74.36 -81.34 Less Long term investments -8.41 -8.63 -8.86 -9.09 -9.33 Less Goodwill 0.00 0.00 0.00 0.00 0.00 Less Other non current assets -1.41 -0.66 -0.76 -0.80 -0.59 Add Other non current liabilities -17.93 1.27 1.40 2.07 2.38 Net Cash flow from investing -85.50 -71.11 -77.15 -83.14 -89.85
Cash flow from financing: Less Current Portion of LT debt 0.00 0.00 0.00 0.00 0.00 Add Long Term debt , net of current portion 0.00 0.00 0.00 0.00 0.00 Less Dividends -48.45 -48.89 -49.28 -50.34 -52.08 Add Common Stock (net of repurchase and ESOP) -8.41 -1.26 -0.19 -0.03 0.00 Net cash flow from financing -56.87 -50.15 -49.47 -50.37 -52.08
Change in cash 93.65 150.49 140.88 135.86 131.87
Beginning Cash 534.86 628.51 779.00 919.88 1055.73 Ending Cash 628.51 779.00 919.88 1055.73 1187.60 Dolby Laboratories Common Size Balance Sheet
Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Assets: Cash & cash equivalents 49.95% 59.20% 54.80% 61.64% 72.05% 79.83% 86.03% 92.57% Net Cash & cash equivalents 49.95% 59.43% 55.10% 61.64% 72.05% 79.83% 86.03% 92.57%
Short-term investments 15.42% 24.08% 14.31% 13.71% 13.02% 12.30% 11.63% 11.20%
Accounts receivable, gross 10.77% 9.14% 10.62% 10.62% 10.62% 10.62% 10.62% 10.62% Less: allowance for doubtful accounts 0.06% 0.17% 0.16% 0.15% 0.15% 0.15% 0.15% 0.15% Accounts receivable, net 10.71% 8.97% 10.46% 10.47% 10.47% 10.47% 10.47% 10.47%
Raw materials 0.23% 0.11% 0.33% 0.45% 0.45% 0.45% 0.45% 0.45% Work in process 0.00% 0.00% 0.34% 0.13% 0.13% 0.13% 0.13% 0.13% Finished goods 0.88% 0.78% 0.76% 1.01% 1.01% 1.01% 1.01% 1.01% Inventories 1.11% 0.89% 1.43% 1.60% 1.60% 1.60% 1.60% 1.60%
Deferred taxes 8.62% 9.00% 10.00% 9.67% 9.19% 8.68% 8.33% 8.24%
Prepaid expenses 1.12% 1.21% 1.41% 1.49% 1.49% 1.49% 1.49% 1.49% Other current assets 1.54% 0.74% 0.78% 1.06% 1.06% 1.06% 1.06% 1.06% Income tax receivable 0.87% 0.42% 1.12% 0.79% 0.75% 0.71% 0.68% 0.67% Assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Prepaid expenses & other current assets 3.53% 2.38% 3.30% 3.34% 3.30% 3.26% 3.23% 3.22%
Total current assets 89.34% 104.76% 94.61% 100.42% 109.62% 116.14% 121.28% 127.30%
Long-term investments 33.68% 30.86% 33.07% 32.31% 31.27% 30.11% 29.01% 28.48%
Property, plant & equipment, gross 41.34% 48.03% 62.31% 64.88% 66.93% 68.70% 70.57% 73.85% Less: accumulated depreciation 14.64% 17.85% 20.78% 26.89% 31.81% 35.78% 39.16% 42.87% Property, plant, & equipment, net 26.70% 30.18% 41.53% 37.99% 35.12% 32.92% 31.41% 30.98%
Intangible assets, net 4.54% 6.63% 13.14% 10.79% 8.81% 7.42% 6.18% 5.15% Goodwill 30.75% 28.91% 31.70% 30.18% 28.46% 26.70% 25.07% 23.99% Deferred taxes 4.76% 4.35% 4.76% 4.51% 4.28% 4.05% 3.88% 3.84% Other non-current assets 1.28% 0.94% 0.98% 1.07% 1.07% 1.07% 1.07% 1.07%
Total assets 191.05% 206.63% 219.78% 217.25% 218.64% 218.41% 217.90% 220.80%
Liabilities and Stockholder's equity Current Liabilities: Accounts payable 1.18% 1.66% 2.13% 1.54% 1.54% 1.54% 1.54% 1.54%
Accrued royalties 0.67% 0.26% 0.20% 0.32% 0.32% 0.32% 0.32% 0.32% Amounts payable to joint licensing program partners 4.41% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Amounts payable to patent administration program partners 0.00% 4.52% 4.17% 4.35% 4.35% 4.35% 4.35% 4.35% Accrued compensation & benefits 5.98% 7.46% 7.24% 6.02% 6.02% 6.02% 6.02% 6.02% Accrued amounts payable to patent pool partners 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accrued professional fees 0.48% 0.64% 0.67% 0.59% 0.59% 0.59% 0.59% 0.59% Accrued current portion of litigation settlement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other accrued liabilities 3.61% 3.60% 5.16% 3.57% 3.57% 3.57% 3.57% 3.57% Accrued liabilities 15.15% 16.49% 17.44% 14.84% 14.84% 14.84% 14.84% 14.84%
Income taxes payable 0.37% 0.27% 0.08% 0.22% 0.21% 0.20% 0.19% 0.19% Current portion of long-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred revenue 2.30% 1.30% 1.95% 2.18% 2.18% 2.18% 2.18% 2.18% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total current liabilities 19.00% 19.72% 21.60% 18.78% 18.77% 18.76% 18.75% 18.75%
Long-term debt, net of current portion 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term deferred revenue 2.16% 2.01% 3.15% 2.18% 2.18% 2.18% 2.18% 2.18%
Deferred taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term portion of litigation settlement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Supplemental retirement plan obligations 0.24% 0.25% 0.25% 0.23% 0.23% 0.23% 0.23% 0.23% Non-current tax liabilities 3.41% 3.20% 6.47% 4.29% 4.07% 3.85% 3.69% 3.65% Other liabilities 1.35% 1.10% 1.21% 1.28% 1.28% 1.28% 1.28% 1.28% Other non-current liabilities 5.00% 4.55% 7.94% 5.80% 5.58% 5.36% 5.20% 5.16%
Total liabilities 26.15% 26.28% 32.69% 26.76% 26.53% 26.30% 26.13% 26.09%
Stockholder's Equity: Common Stock 2.08% 4.84% 1.82% 0.91% 0.74% 0.68% 0.63% 0.61% Retained earnings 159.88% 172.94% 185.53% 189.65% 191.23% 191.12% 190.66% 193.47% Accumulated other comprehensive income 0.86% 0.31% ‐1.18% ‐1.12% ‐1.06% ‐0.99% ‐0.93% ‐0.89%
Total stockholders' equity - Doly Laboratories, Inc. 162.82% 178.09% 186.17% 189.43% 190.91% 190.80% 190.36% 193.18% Controlling interest 2.08% 2.25% 0.92% 1.07% 1.20% 1.31% 1.41% 1.53%
Total stockholders' equity 164.90% 180.35% 187.09% 190.50% 192.10% 192.11% 191.77% 194.71% Dolby Laboratories Common Size Income Statement
Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue: Revenue ‐ licensing 88.72% 91.53% 89.44% 88.18% 86.63% 85.00% 83.86% 83.58% Revenue ‐ product 8.86% 6.17% 8.64% 9.90% 11.29% 12.75% 13.83% 14.10% Revenue ‐ services 2.42% 2.30% 1.92% 1.92% 2.08% 2.24% 2.32% 2.33% Total revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of licensing 1.85% 1.13% 1.12% 1.34% 1.32% 1.30% 1.28% 1.27% Cost of products 7.07% 4.70% 7.26% 7.92% 9.03% 10.20% 11.06% 11.27% Cost of services 1.71% 1.48% 1.39% 1.33% 1.44% 1.55% 1.60% 1.61% Gain from amended patent licensing agreement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Impairment of products provided under operating leases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total cost of revenue 10.63% 7.31% 9.77% 10.59% 11.79% 13.05% 13.94% 14.16%
Gross margin 89.37% 92.69% 90.23% 89.41% 88.21% 86.95% 86.06% 85.84%
Operating Expenses: Research & development expenses 18.55% 19.07% 20.74% 20.74% 20.74% 20.74% 20.74% 20.74% Selling, general & administrative expenses 43.21% 44.86% 47.53% 45.20% 45.20% 45.20% 45.20% 45.20% Restructuring charges, net 0.65% 0.25% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00% Loss (gain) on settlements 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total operating expenses 62.41% 64.18% 68.26% 65.94% 65.94% 65.94% 65.94% 65.94%
Operating income 26.96% 28.51% 21.97% 23.47% 22.27% 21.01% 20.12% 19.90%
Interest income 0.42% 0.35% 0.47% 0.39% 0.37% 0.36% 0.34% 0.33% Interest expense 0.06% ‐0.02% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% Other income (expenses), net 0.23% ‐0.12% 2.90% 0.64% 0.64% 0.64% 0.64% 0.64% Income (loss) before provision (benefit) for income taxes 27.55% 28.76% 25.32% 24.49% 23.28% 22.01% 21.10% 20.87% Provision for income taxes 6.63% 7.02% 6.44% 6.52% 6.19% 5.85% 5.61% 5.55%
Net income (loss) including controlling interest 20.92% 21.74% 18.88% 17.98% 17.09% 16.15% 15.49% 15.32% Less: net income (loss) attributable to controlling interest ‐0.11% ‐0.27% ‐0.19% ‐0.19% ‐0.19% ‐0.19% ‐0.18% ‐0.18% Net income (loss) attributable to Dolby Laboratories, Inc. 20.81% 21.47% 18.69% 17.79% 16.90% 15.97% 15.30% 15.14% Dolby Laboratories Value Driver Estimation
Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Marginal Tax Rate Calculation: Federal Statuatory rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% State income taxes, net of federal effect 0.60% 0.60% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% Foreign rate differential ‐4.50% ‐8.90% ‐9.10% ‐9.10% ‐9.10% ‐9.10% ‐9.10% ‐9.10% Marginal Tax Rate 31.10% 26.70% 26.60% 26.60% 26.60% 26.60% 26.60% 26.60%
EBITA Calculations: Net Sales 909.67 960.18 970.64 1019.69 1081.21 1152.31 1227.23 1282.87 Less COGS 96.72 70.18 94.82 108.00 127.49 150.37 171.07 181.63 Less SG&A 393.07 430.75 461.35 460.91 488.72 520.85 554.72 579.87 Less R&D Expsense 168.75 183.13 201.32 211.50 224.26 239.00 254.55 266.09 Add Implied Interest on operating leases 7.94 7.96 9.65 9.57 9.93 10.30 10.70 11.10 EBITA 259.08 284.08 222.80 248.84 250.68 252.38 257.59 266.38
Less Adjusted Income Taxes: Provision for income taxes 60.34 67.38 62.54 66.44 66.95 67.45 68.88 71.23 Less Tax on Gain from amended patent licensing agreement 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Add Tax Shield on Impairment of products provided under operating leases 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Add Tax Shield on Restructuring charges, net 1.83 0.64 ‐0.02 0.00 0.00 0.00 0.00 0.00 Add Loss (gain) on settlements 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Less Interest income 1.20 0.89 1.21 1.05 1.08 1.10 1.12 1.14 Add Interest expense 0.18 ‐0.05 0.05 0.00 0.00 0.00 0.00 0.00 Less Other income (expenses), net 0.66 ‐0.31 7.50 1.73 1.84 1.96 2.09 2.18 Add Tax Shield on Implied lease interest 2.47 2.13 2.57 2.54 2.64 2.74 2.84 2.95 Adjusted income Taxes 62.97 69.51 56.43 66.19 66.68 67.13 68.52 70.86
Add Change in Deferred Taxes: Change in DT ‐19.64 ‐6.70 ‐14.48 ‐1.24 ‐1.12 ‐1.08 ‐3.11 ‐5.11
NOPLAT : EBITA ‐ Adjusted Taxes + Change in DT NOPLAT 176.47 207.88 151.89 181.41 182.87 184.17 185.96 190.42
Operating Current Assets: Inventory Turnover (days) 50.56 48.45 43.13 50.93 47.98 43.25 40.50 40.24 Receivables Turnover (days) 31.87 38.13 39.47 42.29 42.87 43.59 44.20 44.75 Payables Turnover (days) 48.17 69.16 70.46 61.55 46.35 41.78 39.12 38.87 Working Capital Gap (INVT+ ART ‐APT) 34.26 17.42 12.13 31.67 44.51 45.06 45.57 46.12 Contingency operating period adjustment (days) 30 30 30 30 30 30 30 30 Operating Cash Assumption (%) : (Working capital gap + contingency adjustment) / 365 18% 13% 12% 16.90% 20.41% 20.56% 20.71% 20.85% Operating Cash (operating cash assumption * BS cash (t‐1) 86.73 59.04 65.62 89.88 128.30 160.19 190.46 220.17 Accounts receivable, net 97.46 86.17 101.56 106.80 113.24 120.69 128.53 134.36 Inventories 10.09 8.54 13.87 16.27 17.25 18.38 19.58 20.47 Prepaid expenses & other current assets 32.12 22.88 32.03 34.03 35.66 37.53 39.61 41.31 Operating Current Assets 226.41 176.62 213.09 246.97 294.44 336.79 378.19 416.30
Operating Current Liabilities: Accounts Payable 10.70 15.90 20.71 15.71 16.66 17.76 18.91 19.77 Accrued royalties 6.08 2.53 1.95 3.25 3.45 3.67 3.91 4.09 Amounts payable to joint licensing program partners 40.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Amounts payable to patent administration program partners 0.00 43.44 40.47 44.32 46.99 50.08 53.34 55.76 Accrued compensation & benefits 54.42 71.68 70.32 61.41 65.11 69.39 73.91 77.26 Accrued amounts payable to patent pool partners 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Accrued professional fees 4.40 6.16 6.52 5.97 6.33 6.74 7.18 7.51 Other Accrued Liabilities 32.80 34.57 50.05 36.42 38.62 41.15 43.83 45.82 Income taxes payable 3.39 2.60 0.75 2.22 2.23 2.25 2.30 2.38 Deferred revenue 20.93 12.50 18.91 22.19 23.53 25.08 26.71 27.92 Operating Current Liabilities 172.82 189.37 209.68 191.48 202.92 216.13 230.09 240.49
Other Operating Assets: Intangible assets, net 41.32 63.70 127.51 109.98 95.30 85.51 75.86 66.08 Other non-current assets 11.64 9.05 9.46 10.87 11.53 12.29 13.09 13.68 PV of Opearting Leases 140.69 170.48 169.00 175.40 182.06 188.96 196.12 203.56 Other Operating Assets 193.64 243.23 305.97 296.25 288.88 286.76 285.07 283.32
Other Operating Liabilities: Long-term deferred revenue 19.66 19.28 30.58 22.25 23.59 25.14 26.78 27.99 Non-current tax liabilities 30.99 30.72 62.84 43.72 44.06 44.39 45.33 46.87 Other liabilities 12.31 10.59 11.78 13.04 13.83 14.74 15.70 16.41 Other Operating Liabilities 62.96 60.59 105.21 79.01 81.48 84.27 87.80 91.27
PP&E (Net) 242.92 289.76 403.09 387.34 379.76 379.38 385.45 397.41
Invested Capital: Invested Capital 427.19 459.65 607.26 660.07 678.68 702.53 730.81 765.27
Return on Invested Capital: NOPLAT 176.47 207.88 151.89 181.41 182.87 184.17 185.96 190.42 Beginning Invested Capital 479.88 427.19 459.65 607.26 660.07 678.68 702.53 730.81 ROIC 36.77% 48.66% 33.04% 29.87% 27.71% 27.14% 26.47% 26.06%
Economic Profit: Begin IC * ( ROIC ‐WACC) Beginning Invested Capital 479.88 427.19 459.65 607.26 660.07 678.68 702.53 730.81 ROIC 36.77% 48.66% 33.04% 29.87% 27.71% 27.14% 26.47% 26.06% WACC 7.81% 7.81% 7.81% 7.81% 7.81% 7.81% 7.81% 7.81% Economic Profit 138.99 174.51 115.98 133.98 131.32 131.16 131.09 133.34
FCF: NOPLAT+Change in Invested Capital NOPLAT 176.47 207.88 151.89 181.41 182.87 184.17 185.96 190.42 Add: Beg Invested Capital 479.88 427.19 459.65 607.26 660.07 678.68 702.53 730.81 Less: Current Invested Capital 427.19 459.65 607.26 660.07 678.68 702.53 730.81 765.27 FCF 229.16 175.42 4.27 128.60 164.26 160.32 157.67 155.96 Dolby Laboratories Key Management Ratios
Fiscal Years Ending Sep 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Liquidity Ratios Current Ratio (Current Assets/ Current Liabilities) 4.70 5.31 4.38 5.35 5.84 6.19 6.47 6.79 Operating Cash Flow Ratio (Operating CF/ Current Liabilities) 1.59 1.91 1.48 1.23 1.34 1.24 1.17 1.14 Quick Ratio (Cash and other liquid assets) / current liabilities 4.00 4.69 3.70 4.57 5.09 5.47 5.77 6.09
Activity or Asset‐Management Ratios Asset Turnover Ratio (Sales/Total Assets) 0.52 0.48 0.45 0.46 0.46 0.46 0.46 0.45 Inventory Turnover Ratio (Sales/Total Inventory) 7.22 7.53 8.46 7.17 7.61 8.44 9.01 9.07 Receivables Turnover Ratio (Sales/Average Accounts Receivable) 11.45 9.57 9.25 8.63 8.51 8.37 8.26 8.16
Financial Leverage Ratios Debt‐to‐Equity Ratio (Total Debt/Total Equity) 9.38% 9.84% 9.31% 9.03% 8.77% 8.54% 8.33% 8.15% Equity Ratio (Total Equity/ Total Assets) 86.31% 87.28% 85.13% 87.68% 87.86% 87.96% 88.01% 88.18% Interest Coverage (Operating Income) / (Interest Expense) 426.5426 ‐1495.73 1165.18 NA NA NA NA NA
Profitability Ratios Return on Assets (Net Income/Total Assets) 10.95% 10.52% 8.59% 8.28% 7.82% 7.40% 7.11% 6.94% Return on Equity (Net Income/Shareholders Equity) 12.78% 12.05% 10.04% 9.39% 8.85% 8.37% 8.04% 7.84% Gross Margin (Revenue‐COGS)/Revenue 89.37% 92.69% 90.23% 89.41% 88.21% 86.95% 86.06% 85.84% EBIT Margin (EBIT/Sales) 26.96% 28.51% 21.97% 23.47% 22.27% 21.01% 20.12% 19.90% Profit Margin (Net Income/Sales) 20.81% 21.47% 18.69% 17.79% 16.90% 15.97% 15.30% 15.14%
Payout Policy Ratios Total Payout Ratio (Dividends paid + Repurchases)/NI 258.47% 27.18% 81.46% 55.64% 51.56% 50.83% 50.27% 49.50%
Payout Ratio (Dividend Payout Ratio) 215.05% 0.00% 22.60% 26.44% 26.44% 26.44% 26.44% 26.44% Dolby Laboratories Weighted Average Cost of Capital (WACC) Estimation Marginal Tax Rate 26.60% Cost of equity Calculation Risk Free Rate 2.62% (30 Yr Treasury Note) + Beta* 1.069 Market Risk Premium 5.00% = Cost of Equity 7.97%
WACC Calculation All figures in millions Shares outstanding* 101.035 MV of share 39.57 =Total MV of Equity [E] 3997.95
MV of debt [D] 169.00 Only Operating Leases as they don't have long term debt Cost of Debt 5.66%
MV of equity 3997.95 + MV of debt 169.00 = MV of the firm [V] 4166.95
Cost of Equity * 7.97% (E/V) 95.94% + Cost of Debt * 5.66% (1‐Marginal tax Rate) 73.40% (D/V) 4.06% = WACC 7.81% Dolby Laboratories Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth 3.50% CV ROIC 26.06% WACC 7.81% Cost of Equity 7.97%
Fiscal Years Ending Sep 30 2016E 2017E 2018E 2019E 2020E
DCF Model Discount period 1 2 345 NOPLAT 181 183 184 186 190 Continuing Value 3824 Free Cash Flow 129 164 160 158 156 Net FCF 129 164 160 3982 PV of free cash flows 119 141 128 2947 Value of Operations 3336
Non Operating Assets Excess Cash 469 ST Instruments 139 LT Instruments 321 Controlling Interest 9 Value of Non Operating Assets 938
Non Operating Liabilities PV of Operating Leases 169 Total Debt 0 PV of Pension Obligations 2 PV of employee stock options 114 Value of Non Operating Liabilities 286
Equity Value 3988 Shares outstanding 101 Intrinsic Share Price (FY 15 End) $39.47 Intrinsic Share Price (Today) $40.65 Current Share Price $39.57
EP Model Periods to discount 1 2 345 Economic Profit 134 131 131 131 133 Continuing Value 3093 Net EP 134 131 131 3224 PV of Economic Profit 124 113 105 2387 Initial Invested Capital 607 Value of Operations 3336
Non Operating Assets Excess Cash 469 ST Instruments 139 LT Instruments 321 Controlling Interest 9 Value of Non Operating Assets 938
PV of Operating Leases 169 Total Debt 0 PV of Pension Obligations 2 PV of employee stock options 114 Value of Non Operating Liabilities 286
Equity Value 3988 Shares outstanding 101 Intrinsic Share Price (FY 15 end) $39.47 Intrinsic Share Price (Today) $40.65 Current Share Price $39.57 Dolby Laboratories
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Sep 30 2016E 2017E 2018E 2019E 2020E Period of Discount 12344 EPS 1.82 1.83 1.84 1.87 1.93
Key Assumptions CV growth 3.50% CV ROE 7.84% Cost of Equity 7.97%
Future Cash Flows P/E Multiple (CV Year) 12.39 EPS (CV Year) 1.93 Future Stock Price 23.90 Dividends Per Share 0.48 0.48 0.49 0.49 Future Cash Flows 0.48 0.48 0.49 0.49 23.90
Discounted Cash Flows 0.44 0.41 0.39 0.36 17.59
Intrinsic Share Price (FY 15 End) $19.20 Intrinsic Share Price (Today) $19.77 Price Today $39.57 Dolby Laboratories Relative Valuation Models Peer Comparison EPS EPS Ticker Company Price 2016E 2017E P/E 16 P/E 17 DTSI DTS, Inc $21.42 $2.14 $2.42 10.0 8.9 IMAX IMAX Corporation $30.75 $1.19 $1.42 25.8 21.7 Average 17.9 15.3
DLB Dolby Laboratories $39.57 $1.82 $1.83 21.8 21.6
Implied Value: Relative P/E (EPS16) $ 32.54 Relative P/E (EPS17)$ 27.90
Industy Comparison EPS EPS Ticker Company Price 2016E 2017E P/E 16 P/E 17 DTSI DTS, Inc $21.42 $2.14 $2.42 10.0 8.9 IMAX IMAX Corporation $30.75 $1.19 $1.42 25.8 21.7 STRZA Starz Inc Class A $25.73 $2.41 $2.93 10.7 8.8 HRS Harris Corp $76.99 $5.73 $6.17 13.4 12.5 IPGP IPG Photonics Corp $95.01 $4.88 $5.50 19.5 17.3 LGF Lions Gate Entertainment $20.91 $0.58 $1.41 36.1 14.8 DIS The Walt Disney Corporation $98.68 $5.84 $6.24 16.9 15.8 Average 18.9 14.2
DLB Dolby Laboratories $39.57 $1.82 $1.83 21.8 21.6
Implied Value: Relative P/E (EPS16) $ 34.33 Relative P/E (EPS17)$ 26.04 Beta $40.65 0.5 0.6 0.7 0.8 0.9 1 1.069 1.1 1.2 1.3 1.4 1.5 4.00% 137.74 104.02 84.15 71.06 61.78 54.87 51.04 49.51 45.24 41.76 38.87 36.43 4.25% 124.92 95.47 77.82 66.06 57.66 51.37 47.87 46.48 42.57 39.37 36.71 34.46 4.50% 114.40 88.31 72.45 61.78 54.12 48.35 45.14 43.86 40.25 37.30 34.83 32.74 4.75% 105.61 82.23 67.84 58.09 51.05 45.73 42.75 41.56 38.22 35.47 33.18 31.23 5.00% 98.15 77.00 63.84 54.87 48.35 43.42 40.65 39.54 36.43 33.86 31.72 29.90 Risk Premium 5.25% 91.74 72.45 60.34 52.03 45.97 41.37 38.79 37.75 34.83 32.43 30.41 28.70 5.50% 86.18 68.46 57.24 49.51 43.86 39.54 37.12 36.15 33.40 31.14 29.24 27.63 5.75% 81.30 64.93 54.49 47.26 41.96 37.91 35.62 34.71 32.12 29.98 28.19 26.66 6.00% 77.00 61.78 52.03 45.24 40.25 36.43 34.27 33.40 30.95 28.93 27.23 25.78 6.25% 73.16 58.96 49.81 43.42 38.70 35.08 33.04 32.22 29.90 27.97 26.36 24.98 6.50% 69.73 56.42 47.80 41.76 37.30 33.86 31.92 31.14 28.93 27.10 25.56 24.25 6.75% 66.64 54.12 45.97 40.25 36.01 32.74 30.90 30.15 28.04 26.30 24.83 23.58
Beta $40.65 0.5 0.6 0.7 0.8 0.9 1 1.069 1.1 1.2 1.3 1.4 1.5 0.00% 42.96 39.80 37.15 34.88 32.94 31.24 30.19 29.75 28.44 27.26 26.21 25.26 0.50% 45.68 41.96 38.89 36.32 34.12 32.23 31.07 30.59 29.15 27.87 26.73 25.71 1.00% 49.07 44.60 40.99 38.01 35.51 33.38 32.09 31.54 29.95 28.55 27.32 26.21 1.50% 53.40 47.89 43.55 40.04 37.14 34.71 33.26 32.65 30.87 29.33 27.97 26.77 2.00% 59.14 52.10 46.74 42.51 39.10 36.29 34.63 33.94 31.94 30.22 28.72 27.41 CV NOPLAT 2.50% 67.11 57.69 50.83 45.61 41.50 38.19 36.26 35.47 33.18 31.24 29.57 28.12 Growth 3.00% 78.90 65.46 56.26 49.58 44.50 40.51 38.23 37.30 34.65 32.44 30.56 28.95 3.50% 98.15 77.00 63.84 54.87 48.35 43.42 40.65 39.54 36.43 33.86 31.72 29.90 4.00% 135.21 95.93 75.13 62.25 53.49 47.16 43.71 42.36 38.60 35.57 33.09 31.01 4.50% 236.07 132.72 93.75 73.29 60.69 52.15 47.70 45.98 41.32 37.67 34.74 32.33 5.00% 1584.61 235.12 130.26 91.60 71.48 59.16 53.11 50.83 44.83 40.30 36.76 33.92
CV NOPLAT Growth $40.65 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 6.50% $35.17 $36.62 $38.34 $40.40 $42.91 $46.06 $50.10 $55.49 $63.04 $74.37 $93.24 6.75% $34.07 $35.38 $36.92 $38.76 $40.98 $43.72 $47.20 $51.74 $57.93 $66.88 $80.94 7.00% $33.05 $34.24 $35.63 $37.27 $39.24 $41.64 $44.65 $48.52 $53.68 $60.90 $71.72 7.25% $32.10 $33.18 $34.44 $35.91 $37.66 $39.79 $42.41 $45.73 $50.07 $56.00 $64.55 7.50% $31.21 $32.20 $33.34 $34.66 $36.23 $38.11 $40.41 $43.29 $46.99 $51.91 $58.81 7.75% $30.39 $31.29 $32.32 $33.52 $34.93 $36.60 $38.63 $41.14 $44.31 $48.46 $54.12 7.81% $30.20 $31.08 $32.09 $33.26 $34.63 $36.26 $38.23 $40.66 $43.72 $47.71 $53.12 8.00% $29.61 $30.43 $31.38 $32.46 $33.73 $35.23 $37.02 $39.22 $41.97 $45.50 $50.21 8.25% $28.88 $29.64 $30.50 $31.48 $32.63 $33.97 $35.57 $37.51 $39.90 $42.93 $46.89 WACC 8.50% $28.20 $28.89 $29.68 $30.57 $31.61 $32.82 $34.25 $35.97 $38.06 $40.68 $44.05 8.75% $27.55 $28.19 $28.91 $29.73 $30.67 $31.76 $33.04 $34.57 $36.42 $38.70 $41.59 9.00% $26.94 $27.53 $28.19 $28.94 $29.80 $30.79 $31.94 $33.30 $34.94 $36.94 $39.44 9.25% $26.36 $26.91 $27.51 $28.20 $28.98 $29.88 $30.92 $32.15 $33.60 $35.36 $37.54 9.50% $25.82 $26.32 $26.88 $27.51 $28.22 $29.04 $29.98 $31.08 $32.38 $33.94 $35.85 9.75% $25.30 $25.76 $26.28 $26.86 $27.51 $28.26 $29.11 $30.11 $31.27 $32.66 $34.34 10.00% $24.81 $25.24 $25.71 $26.25 $26.85 $27.53 $28.31 $29.21 $30.25 $31.49 $32.98
$40.65 $40.65 8% $41.08 75% $41.86 9% $40.77 75.50% $41.74 9.39% $40.65 76% $41.62 10% $40.46 76.50% $41.50 11% $40.14 Cost of 77% $41.38 P&E (Capex) 12% $39.81 Products 77.50% $41.26 13% $39.46 78% $41.14 14% $39.11 78.50% $41.01 15% $38.75 79% $40.89 16% $38.37 79.50% $40.77 17% $37.99 80% $40.65 18% $37.59 80.50% $40.53 19% $37.18
$40.65 40% 49.90 41% 48.12 42% 46.34 43% 44.56 44% 42.79 SG&A 45.20% 40.65 45% 41.01 46% 39.23 47% 37.45 48% 35.68 49% 33.90 50% 32.12 Present Value of Operating Lease Obligations & other obligations (2015) Present Value of Operating Lease Obligations & other obligations (2014)
Operating Operating Fiscal Years Ending Sep 30 Leases Fiscal Years Ending Sep 30 Leases 2016 30.06 2015 31.26 2017 21.06 2016 20.50 2018 21.06 2017 20.50 2019 15.75 2018 14.45 2020 15.75 2019 14.45 Thereafter 134.40 Thereafter 145.73 Total Minimum Payments 238.096 Total Minimum Payments 246.876 Less: Interest 69 Less: Interest 76 PV of Minimum Payments 169 PV of Minimum Payments 170
Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.66% Pre‐Tax Cost of Debt 5.66% Number Years Implied by Year 6 Payment 8.5 Number Years Implied by Year 6 Payment 10.1
Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment 1 30.063 28.5 1 31.258 29.6 2 21.0625 18.9 2 20.4985 18.4 3 21.0625 17.9 3 20.4985 17.4 4 15.7535 12.6 4 14.447 11.6 5 15.7535 12.0 5 14.447 11.0 6 & beyond 15.7535 79.2 6 & beyond 14.447 82.6 PV of Minimum Payments 169.0 PV of Minimum Payments 170.5
Present Value of Operating Lease Obligations & other obligations (2013) Present Value of Operating Lease Obligations & other obligations (2012)
Operating Operating Fiscal Years Ending Leases #REF! Leases 2014 28.70 2013 17.58 2015 16.05 2014 17.09 2016 16.05 2015 17.09 2017 11.32 2016 12.58 2018 11.32 2017 12.58 Thereafter 121.73 Thereafter 132.40 Total Minimum Payments 205.168 Total Minimum Payments 209.315 Less: Interest 64 Less: Interest 69 PV of Minimum Payments 141 PV of Minimum Payments 140
Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.66% Pre‐Tax Cost of Debt 5.66% Number Years Implied by Year 6 Payment 10.7 Number Years Implied by Year 6 Payment 10.5
Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment 1 28.696 27.2 1 17.583 16.6 2 16.048 14.4 2 17.0925 15.3 3 16.048 13.6 3 17.0925 14.5 4 11.3245 9.1 4 12.576 10.1 5 11.3245 8.6 5 12.576 9.5 6 & beyond 11.3245 67.9 6 & beyond 12.576 74.2 PV of Minimum Payments 140.7 PV of Minimum Payments 140.3 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding All figures are in millions Number of Options Outstanding (shares): 8.84 Average Time to Maturity (years): 7.19 Expected Annual Number of Options Exercised: 1.23
Current Average Strike Price:$ 35.84 Cost of Equity: 7.97% Current Stock Price: $39.57
2016E 2017E 2018E 2019E 2020E Increase in Shares Outstanding: 1.23 1.23 1.23 1.23 1.23 Average Strike Price:$ 35.84 $ 35.84 $ 35.84 $ 35.84 $ 35.84 Increase in Common Stock Account: 44.05 44.05 44.05 44.05 44.05
Change in Treasury Stock 52.46 45.31 44.24 44.08 44.05 Expected Price of Repurchased Shares:$ 39.57 $ 42.72 $ 46.12 $ 49.80 $ 53.76 Number of Shares Repurchased: 1.33 1.06 0.96 0.89 0.82
Shares Outstanding (beginning of the year) 101.04 100.94 101.11 101.38 101.72 Plus: Shares Issued Through ESOP 1.23 1.23 1.23 1.23 1.23 Less: Shares Repurchased in Treasury 1.33 1.06 0.96 0.89 0.82 Shares Outstanding (end of the year) 100.94 101.11 101.38 101.72 102.13 VALUATION OF OPTIONS GRANTED IN ESOP All figures are in millions
Ticker Symbol DLB Current Stock Price $39.57 Risk Free Rate 1.51% Current Dividend Yield 1.26% Annualized St. Dev. of Stock Returns 29.60%
Average Average B‐S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted $13.90 ‐ $24.59 0.022 18.39 0.50 $ 21.07 $ 0 $24.60 ‐ $28.90 1.876 27.82 4.70 $ 14.83 $ 28 $28.91 ‐ $33.40 1.647 30.48 6.70 $ 14.53 $ 24 $33.41 ‐ $37.33 0.248 35.09 6.30 $ 12.40 $ 3 $37.34 ‐ $47.45 4.981 40.55 8.40 $ 11.78 $ 59 $47.46 ‐ $58.07 0.041 49.00 3.60 $ 5.61 $ 0 $58.08 ‐ $62.29 0.020 59.69 5.20 $ 5.08 $ 0 Total 9$ 35.84 7.19$ 15.06 $ 114