Dolby Cuts Mobile Revenue Projections by 10 Percent for Q3 After It’s Left Out of Galaxy S5

Dolby scaled back mobile licensing revenue projections by 10 percent for the current quarter, it said on an earnings call Tuesday, citing omission of Dolby technology from the Samsung Galaxy S5 smartphone, which began shipping in April. Chief Financial Officer Lewis Chew said Dolby is “working through our arrangements with Samsung” for mobile technologies and that Dolby Digital Plus is one of several third-party features in the Galaxy S4 that weren’t carried over to the Galaxy S5.

In response to a question on whether cost factored into Samsung’s decision, Dolby CEO Kevin Yeaman said, “It’s pretty clear that a lot of people in the smartphone industry are very much focused on cost.” The fact that Dolby Digital Plus isn’t shipping in the Galaxy S5 “shows that we have work to do,” Yeaman said, saying Dolby still has “a value proposition to bring.” The company is working with Samsung on contract details during the “natural renewal cycle,” and there are a “lot of moving parts right now,” Yeaman said. Dolby has an opportunity to grow the Samsung business and “everything is still on the table,” he said, while calling the Samsung decision S5 decision “disappointing.”

Neither Chew nor Yeaman provided more detail on mobile revenue projections. Chew said Dolby receives Samsung revenue from “a lot of different sources” and wouldn’t break out the revenue as a subset of total mobile revenue.

Yeaman said Dolby is expecting its Dolby Vision technology to be shipping in TVs by year-end. Dolby has demoed the technology to the press in its offices and at CES, promoting it as an “end-to-end” technology that offers a wider gamut of colors and improved shadow detail. The technology focuses on the quality of the image each pixel represents “and is not dependent on the number of pixels,” Yeaman said. Dolby Vision has received “great support” from the content community and is working to enable post-production and color-grading processes to create content in Dolby Vision, he said.

Internationally, Dolby is progressing Asia, China and India, Yeaman said, with 65 percent of HD channels in China telecasting in Dolby and roughly 60 percent of HD channels in India in Dolby. Russia has included Dolby Digital Plus in its HD standard, he said. Dolby technology has been tacked onto India’s terrestrial HD set-top box standard and it’s included in Indonesia’s terrestrial receiver standard, he said. In Thailand, the country’s largest pay-TV operator will air its 50 HD channels using Dolby Digital Plus, he said.

For fiscal Q2, mobile device licensing revenue jumped 36 percent over fiscal Q2 2013, to some 12 percent of licensing in the quarter, Chew said. Broadcasting led total licensing revenue for Dolby at 46 percent, which included a $24.7 million back payment settlement it reached with a “large licensee” early in the quarter, Chew said. Broadcasting revenue was up 37 percent year-over-year, including the back payment, and up 9 percent excluding it, Chew said. The increase was driven by higher attach rates on TVs, he said.

PC revenue was some 16 percent of total licensing in Q2, plummeting 29 percent year-over-year -- a “much larger” drop than the market decrease in PC revenue -- which Chew attributed to the transition from Windows 7 to Windows 8. Q2 “should be” the last quarter to reflect the transition, and going forward Dolby’s year-over-year PC revenue trends should more closely align with those of the market, Chew said. CE revenue in Q2, roughly 4 percent of total licensing, slipped by 4 percent year-over-year, he said. Gaming and automotive accounted for 12 percent of total licensing in Q2, up 28 percent from Q2 2013 on higher revenue from the PS4 and Xbox One gaming consoles that launched in late 2013, he said.

Dolby’s Q2 revenue was $278.6 million, compared to $249.3 million in the year-ago quarter, with net income growing to $76 million from $62 million, the company said. Revenue projections are $205 million-$215 million for Q3 and $930 million-$950 million for the fiscal year, it said. Shares closed 9.4 percent higher Wednesday at $39.85.