Dolby Licensing Revenue Up in Mobile, Gaming, Down in CE, PCs

A drop-off in deployment of 3D cinemas worldwide and a decrease in PC licensing revenue led to lower fiscal Q2 profit for Dolby Labs, the company said on its earnings call. For the second quarter, Dolby reported net income of $82.1 million, down from $85.9 million in Q2 2010. Revenue was $250 million, up from $243.4 million for second quarter 2010, Dolby said.

Product revenue in Q2 was $26.3 million, down 34 percent from Q2 2010 and 43 percent from the previous quarter, said Murray Demo, chief financial officer, who cited lower sales of 3D systems and digital cinema systems due to increased competition. Weak box office results also contributed to lower system demand, he said. CEO Kevin Yeaman said the company forecasts 50 percent of cinema screens worldwide will end up being 3D. “We're going to keep fighting for each piece of business,” he said, and the company will continue to think about “what’s next beyond 3D."

Overall Dolby licensing revenue in Q2 was $214.6 million, up 10 percent year over year and 14 percent from Q1 2011, said Demo. Licensing revenue growth was driven by broadcast, mobile and gaming categories, he said. PC revenue dropped 8 percent for the quarter from 2010 due to lower revenue from ISV software, but increased 11 percent sequentially on shipments of Windows 7, he said. Broadcast revenue jumped 36 percent year over year and 26 percent over Q1 2011 due to growth in TV and set-top boxes, he said.

CE revenue slipped 3 percent from Q2 2010 due to lower revenue from DVDs, Demo said. A Q2 sequential drop of 6 percent was also due to lower revenue from DVDs and higher DVD back-royalties in the first quarter of $4.5 million, he said. Demo said there’s been a migration among consumers to Blu-ray in home-theater-in-a-box purchases and away from standalone units. “We're seeing more revenue coming from home-theater-in-a-box because of Blu-ray,” he said. Revenue from Dolby’s other markets including mobile, gaming, automotive, the Via licensing program grew 27 percent year over year and 29 percent from Q1, driven primarily by mobile and gaming, he said. As for the impact from the Japan quake, the company hasn’t seen any to date but continues to monitor the situation closely, Demo said.

Yeaman said the company is building on a “strong foundation” and focusing efforts on delivering an immersive experience across all forms of delivery and playback. Dolby’s current position in CE products, game devices and PCs position it to benefit from “any increase in consumer spending across these areas,” Yeaman said, and to extend the company’s technology into “new geographies and new devices.”

Dolby sees continued opportunities in the international broadcast market as “the world transitions to digital television.” Just under 60 percent of TVs and 40 percent of set-top boxes incorporate Dolby technologies, leaving much of the available global market “to be captured in Asia, eastern Europe, and Latin America,” Yeaman said. Dolby was named an optional format in the draft national digital TV standard for China, which will help in the effort to extend Dolby technology to TVs produced in China, a 30 million-unit annual market, Yeaman said. A “high percentage” of country’s HD channels use Dolby technology, he said. Dolby is also making “great progress” in India, which is in an earlier stage of migration to digital TV, he said. Dolby has worked with individual satellite providers in India to grow the adoption of its surround-sound technologies, Yeaman said.

Yeaman said Dolby continues to focus on bringing “a more immersive audio experience” to content delivered online or over cellular networks for use in the living room, on the PC or the growing array of portable entertainment devices. Dolby sees an opportunity in the portable area where “consumers are too often forced to sacrifice on quality while also running into challenges with compatibility.” By the time content gets to a portable device, “content is significantly degraded from what the content creator intended originally,” he said. Dolby maintains consumers should expect to “play back all of their files in any environment with the immersive experience they've come to expect from home theater."

In the online space, Dolby plans to take a similar “ecosystem” approach similar to what it did in the home theater world and has made good progress with content providers and distributors, Yeaman said. He cited Netflix, Vudu, Apple, Amazon, and Roxio as online movie providers using Dolby 5.1 surround sound. On the audio side Rhapsody and Omniphone have adopted Dolby encoding to improve the quality of their services, he said. As consumers increasingly use mobile handsets to enjoy movies content, Dolby is seeing increased interest from IT manufacturers and mobile operators to support its formats. Some IT manufacturers want to make sure their mobile chipsets can play back a Dolby-encoded file, while some mobile operators see a chance to increase differentiation and charge a premium using Dolby technology, he said. Dolby Mobile has been incorporated into more than 100 handset models to date, he said, and Dolby Digital Plus is now in 14 models. Sixteen tablet models, half running Windows 7, incorporate Dolby Digital Plus, he said. The company is in talks with a number of tablet providers and expects its technology to be adopted in numerous models from multiple OEMs across a variety of platforms, he said.

Dolby still hopes it can work its way into the Apple iPad, Yeaman said. “Apple is the dominant provider in the space and we believe we can significantly enhance the audio quality,” he said. While Dolby continues to engage with Apple, “we need to convince them of that value,” he said, saying he “can’t comment on the likelihood or timetable.” The economic model for portable devices is much like other markets where Dolby provides tools and services to providers to get content on air in a Dolby format for delivery to devices that can play back that content, Yeaman said. Royalties come from the sale of those devices, he said. In cases where cloud-based content providers don’t want to distinguish “which devices have what,” Dolby is exploring the right economic model for those cloud-based service providers. “It’s an area where we'll be able to operate and create value,” he said.

Building on its experience in cinema, Dolby is working with the broadcast industry on efficient delivery of a “full resolution, 3D experience and believe we are making good progress,” Yeaman said. On the Dolby 7.1 front, the company is looking to introduce it to exhibitors around the world and bring it to other platforms such as Blu-ray, he said. In addition to the U.S. the first 7.1 releases have debuted in India, China, Spain and the U.K, he said.

Dolby expects the mobile business to be an earnings driver in the second half of 2011. According to Ramzi Haidamus, executive vice president of sales and marketing, “Mobile handset providers want to play in the movie playback environment” and content is coming from several channels, both operator-driven and Internet-based, whether online, streamed or ripped. Dolby provides “a common denominator,” a single codec that provides “low bit-rate, high-quality surround sound” without the need for a secondary technology, he said. By using Dolby decoders, manufacturers can play back all types of content irrespective of the growing number of sources, he said. Dolby shares closed $1.82 lower Friday to $48.95.