Samsung's TV Endorsement, Dolby.io Keys to Dolby's Growth, Says Analyst

Dolby needs to move beyond Foundational Audio for growth, said Rosenblatt Securities analyst Steven Frankel, citing risk factors in a Monday research note initiating coverage of Dolby at a “buy” rating after his departure from Colliers. “The company’s ability to consistently grow revenue is tied to its ability to convince device makers to adopt its newer technologies like Atmos and Vision, which allow the company to receive higher royalties per device,” Frankel said.

Frankel noted that as of the end of September, the Dolby family and their affiliates owned nearly 383,000 shares of the company’s Class A common and 36.01 million shares of Class B shares, giving the family 84.7% voting power. He also noted as a risk factor supply chain interruptions, which can affect revenue, which depends on the company's “ability to accurately predict device shipments from its customers.” Semiconductor shortages, in particular, “have the potential to inhibit Dolby’s ability to attach to new devices," he said.

Among catalysts for potential future growth, he said, is broader penetration of Dolby technologies in Samsung TVs. Mandates have forced Samsung to include tech such as Dolby Digital Plus in its TVs, but it has been “resistant to optional technologies,” including Atmos and Vision. Samsung has had “limited success” in convincing other OEMs to adopt its competing HDR10+ technology, Frankel said, saying Panasonic and Phillips have shifted from HDR10+ only to a strategy incorporating HDR10+ and Vision.

Other potential growth drivers for Dolby Atmos are car infotainment systems. Lucid and Nio have begun shipping Atmos-equipped systems, Frankel said, calling Lucid’s implementation “interesting in that it goes beyond music playback” to include driver warnings; seatbelt warning tones are presented in spatial audio, “allowing the driver to easily pinpoint which seat is generating the warning.”

Mercedes-Benz is adding Atmos in the Maybach sports utility vehicle and S-Class lines, Frankel said, but while adoption has begun at the high end, since most cars ship with multiple speakers, “barriers to adoption in more moderately priced vehicles is fairly low,” and Atmos could be a “competitive weapon.” With 70 million cars sold annually worldwide, “even a relatively low penetration rate can drive meaningful revenue,” he said.

Dolby.io has the greatest potential to accelerate revenue growth for the company, Frankel said. Dolby.io, with a multi-billion-dollar total available market, leverages the company’s audio experience and moves it "from reliance on device sales toward a recurring revenue model based on usage,” the analyst said. Over the next two years, the challenge will be to shift toward scaling the business, he said, “including attracting some marquee customers.”

Frankel noted that Dolby’s proprietary IP is embedded in chips in devices such as MediaTek’s SoCs that power much of the smart TV market, and the end device maker pays Dolby a per-unit royalty on each device. Dolby does business with virtually every CE, handset and PC maker, “giving the company a massive global footprint,” he said. It also earns revenue from managing patent pools such as high efficiency video coding, plus a management fee, he said.

Dolby’s core audio technologies are typically licensed on a per-channel basis, so that a two-channel device could have a royalty of 15-20 cents per unit, Frankel said, “while a multichannel implementation would be a couple of dollars.” Newer technologies, including Vision and Atmos “layer on top of the core audio functionality driving up royalty per device,” he said. Dolby didn’t comment.