August 2, 2010 - Dolby Laboratories, Inc. (DLB-NYSE) develops and delivers products and technologies for the entertainment industry worldwide. The company offers products and services for content creators, which include encoding products and services for moviemakers, music studios, and video game designers; encoders, decoders, and processors for television producers and broadcasters; and mastering and packaging services for digital cinema business. It also provides encoders and digital audio coding technology for digital video disc producers.

It licenses its technologies to media software vendors, such as operating system vendors, independent software vendors, and integrated circuit manufacturers, as well as manufacturers of home audio and video products, set top boxes, video game consoles, mobile devices, in-car entertainment systems, and PC manufacturers.

Dolby Laboratories sells directly to customers, as well as through dealers and distributors. It has a collaboration agreement with Omnifone Limited to introduce the multi-platform digital file format Dolby Pulse into cloud-based music services for mobile, computer, in-home, and in-car streaming and downloading. The company was founded in 1965 and is based in San Francisco, California.

Sales have been ramping since 2007 when they were $482 million. Then they went to $640.2 million, followed by $719.5 million. This year should finish with $886.06 million, up 23.10%. Next year, 13 analysts have a consensus view of $990.26 million.

Earnings show the same pattern: 2007 at $1.26; 2008 at $1.74; 2009, $2.11. Consensus from 16 analysts is for $2.32 this year, then $2.71 next year (fiscal year ends September 30). Third quarter earnings were just released. They were better than expected. Analysts thought the company would earn 50 cents a share. It made 60 cents, a 20% upside surprise. And it wasn't the first one. Last quarter estimates were for 62 cents. The company delivered 74 cents, a 19.40% improvement. The quarter before that, analysts figured 49 cents. Results were 59 cents, a 20.40% upside surprise. The final quarter for 2010 is expected to show 49 cents, well above the 38 cents of last year's last period. But if history repeats, they'll be better than expectations. No wonder the stock has gone almost straight up since the beginning of 2009.

Third quarter numbers were just released on July 29. Here's the scoop: earnings per share were 55 cents compared to 44 cents last year. Revenues were up 34% to $230.3 million vs analysts' forecast of $209 million.

The upside surprises came from better than expected sales of the company's Dolby Digital Plus, its next generation audio format. It's being sold with Windows 7 which has been a big success for Microsoft. For Dolby, personal computers, including software, DVD players, and Microsoft Windows operating systems, have been a major growth area over the last few years. It earns royalties from the sale of Windows 7, which includes its technologies in 4 of the 6 available editions. The company earned 35% of its licensing revenues for fiscal 2009 from its personal computer segment.

Dolby management just revised earnings for the full year upward to between $2.57 and $2.63 a share on sales of $890 million to $905 million. Previously it gave guidance of $2.47 to $2.57 on sales of $865 million to $895 million. Analysts had forecast $2.32 on revenues of $886 million before the latest quarter's results were announced.

Other areas of growth: television broadcast, digital cinema, and 3D. All use Dolby products and are seeing strong increase in demand. The company also sells into the mobile market and recently signed a deal with Nokia which will adopt Dolby Digital Plus in some of its handsets.

The company is going even more global by establishing its first research and engineering center in Beijing, China, where it can better serve the ever growing market as well as hire the local engineering talent. Analysts see the same type of center in Russia and other emerging countries.

More numbers: Market cap is $7.24 billion. Trailing P/E is 29.34 while Forward P/E is 23.39. Price to sales is 9.34. Price to book is 5.15. Operating margin for the last 12 months was 47.06% and Profit margin was 31.31%. Return on equity was 18.92% and Return on assets was 15.06%. Total cash is $799.45 million for $7.05 per share. Total debt is $6.53 million or less than 1% of capital. Current ratio is 5.96. Book value per share is $12.78. Beta is 1.01. The stock is up 58.31% in the last 52 weeks. There are 113.44 million shares outstanding with a Float of 53.23 million. Institutions own 98.3% of the float. Founder Ray Dolby owns 99% of the class B shares and 63% of all shares with 99% of voting rights.

This stock has performed very well since going public in 2005. It's currently trading near its all-time high ($70.14 touched on July 27). There's a lot of good in this company. Investors have discovered that and bid the price to levels where valuations make one pause. But it's hard to find companies that deliver ever improving earnings, well above analysts' expectations, in a global economy that has done nothing but shrink for the last 2 years.

- Company Web site: www.dolby.com

- Ted Allrich