Dolby Eyes Mid-Tier Mobile, Dolby Vision to Offset PC Revenue Slide

Licensing revenue from PCs plummeted 27 percent in Dolby’s fiscal Q1 2014 ended Dec. 27, which contributed to a $5.3 million revenue drop from fiscal Q1 2013, the company said. PCs were 21 percent of total licensing for Q1, which was up slightly over the year-over quarter to $205.7 million, said Chief Financial Officer Lewis Chew. The trend is expected to continue for the current quarter due to the transition from the Windows 7 to the Windows 8 business model, Chew said.

Mobile device revenue, which was about 15 percent of licensing revenue in Dolby’s Q1, jumped 40 percent year over year driven by higher unit activity in smartphones and tablets, Chew said. CEO Kevin Yeaman said Dolby has concentrated on the high end of the smartphone market “where growth trends are slowing.” The company plans to expand its focus to mid-tier smartphones and tablets, Yeaman said. Attach rate on Android phones is about 20 percent, Yeaman said, and the company is working on new offerings for that segment to grow that share, he said. “We could see some of our new offerings coming to those kinds of devices and use cases very early in the release cycle,” he said.

Dolby is benefiting from consumers’ growing usage of mobile devices to access online content by enhancing the user experience through audio solutions, Yeaman said. A company goal is to grow both usage and the number of streaming services providing content using Dolby technology, Yeaman said. He said Hunger Games Adventures for the Kindle Fire HDX was released with Dolby audio.

Yeaman indicated that Dolby’s new Vision technology -- an end-to-end solution to improve picture quality from content creation to playback -- is likely to debut via over-the-top (OTT) content. While the company will look at providing Dolby Vision via Blu-ray, broadcast and OTT, “over-the-top appears to be the one where you could get out more quickly, given the infrastructure requirements of the other channels,” Yeaman said. He described Dolby Vision as providing “realistic, subtle distinctions in color and brighter highlights while also delivering improved shadow details.” Dolby Vision focuses on the quality of image from each pixel and is not dependent on the number of pixels, making it suitable for 1080p and 4K displays, he said. Sharp and TCL have integrated Dolby Vision in TVs due to ship later this year, he said.

Broadcast was about 36 percent of total licensing in Dolby’s fiscal Q1, up 8 percent year over year, Chew said. The company had higher revenue from TVs and set-top boxes on a higher total available market for set tops and higher amounts for back payments, he said. The CE category, which was 19 percent of licensing revenue in Q1, was up 10 percent year over year due to higher amounts for back payments, which offset lower Blu-ray revenue, Chew said.

Dolby continues to make progress in China and India, Yeaman said, with 52 of the 86 HD channels in China and 18 of the 32 HD channels in India adopting the Dolby audio format. India’s UCN network became the first cable operator in India to telecast with Dolby Digital Plus, following satellite provider Airtel and broadcaster Star TV network, he said. Additional wins for Dolby include MediaCorp, a broadcaster in Singapore, which is on-air with Dolby Digital Plus and U.K. cable provider Virgin UK, which upgraded its TiVo set-top boxes to Dolby Digital Plus, he said.

Revenue in the other markets category -- including gaming and automotive -- was 9 percent of licensing in the quarter, which was down 8 percent from a year ago on lower licensing revenue from gaming and relatively flat revenue from automotive. Chew said revenue from PS4 and Xbox One consoles won’t reflect until the fiscal Q2 earnings report. Licensing revenue was up sequentially 10 percent as gaming units “picked up from a very low level in Q4,” Chew said.

For the first quarter, Dolby reported total revenue of $231.3 million, compared to $236.6 million for the first quarter of fiscal year 2013, while net income dropped to $44.5 million from $51.3 million in Q1 fiscal 2013. Revenue outlook for fiscal Q2 is $240 million-$250 million with gross margin percentages ranging from 90-91 percent, it said. For the year, the company projects total revenue between $910 million and $940 million.