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The$Henry$Fund$
$Henry&B.&Tippie&School&of&Management&Jon&Kerr&[[email protected]]&& & &Dolby$Laboratories,$Inc.$(DLB)$ April&20,&2015&
Information$Technology$–$Diversified$Electronics$ Stock$Rating$ Buy$
Investment$Thesis$ Target$Price$ $41$I$$45$&Dolby&Laboratories&is&a&leader&in&audio&and&imaging&technologies&used&by&the&entertainment& and& communications& industries.& & The& company& has& a& unique&business& plan& where& they& create& demand& for& their& technologies& on& the&consumer& end& by& giving& away& equipment& and& services& to& content& creators.&Dolby&had&a&significant&investment&cycle&the&last&few&years&with&new&products&and&technologies&being&released&that&will&produce&incremental&revenues&and&drive&growth&into&the&future.&&The&transition&to&digital&television&in&emerging&markets&will& sustain& growth& for& the& company.& &With& emerging&markets& and&new,&innovative&technologies&to&drive&growth,&we&recommend&a&buy&rating.&&Drivers$of$Thesis$• Dolby& has& successfully& integrated& their& audio& technology& into& television&
broadcasts& in& emerging& markets.& & The& global& transition& from& analog& to&digital& television& will& increase& broadcast& licensing& revenue& at& a& 6.35%&CAGR&over&the&next&five&years.&
• New&UHD&standards&for&digital&televisions&will&drive&a&consumer&upgrade&cycle& and& increase&Dolby& licensing& and&product& revenue,& contributing& to&the&5.13%&CAGR&of&overall&revenue&for&the&next&five&years.$
• Released&Dolby&Cinema&and&partnered&with&AMC&to&open&50&theaters&by&2018.& &We&expect&cinema&product& revenue& to& increase&at&a&19.4%&CAGR&into&2019.&&Dolby&Cinema&will&also&help&drive&content&creation&using&Dolby&Vision&and&Dolby&Atmos&technologies.$
Risks$to$Thesis$• Dolby& relies& on& content& creators& to& use& their& technologies.& & Content&
creators& do& not& have& contractual& obligations& to& use& Dolby& technologies&and&could&therefore&stop&using&them&whenever&they&want.&
• Consumer& Electronic& manufactures& are& pushing& for& open& standards& for&new& UHD& televisions.& & Open& standards& for& UHD& would& eliminate& Dolby&Vision&licensing&revenue.&
• The&shift&from&DVD&to&streaming&media&will&continue&to&decrease&licensing&revenue&of&the&consumer&electronics&segment&at&a&[1.64%&CAGR&into&2019&
Henry&Fund&DCF& $44.07&Henry&Fund&DDM& $35.39&Relative&Multiple& $44.53&Price$Data$ $Current&Price& $37.62&52wk&Range& $37.25&–&47.29&Consensus&1yr&Target& $39.00&Key$Statistics$ $Market&Cap&(B)& $3.94&Shares&Outstanding&(M)& 102.6&Institutional&Ownership& 45.4%&Five&Year&Beta& 0.966&Dividend&Yield& 1.04%&Analyst&Est.&5yr&Growth& 10.00%&Price/Earnings&(TTM)& 20.7&Price/Earnings&(FY1)& 22.7&Price/Sales&(TTM)& 4.06&Debt/Equity& 0.00&Profitability$ $Operating&Margin& 28.76%&Net&Profit&Margin& 21.47%&Return&on&Assets&(TTM)& 11.07%&Return&on&Equity&(TTM)& 12.76%&
&
Earnings$Estimates$Year$ 2012$ 2013$ 2014$ 2015E$ 2016E$ 2017E$EPS$ $2.47& $1.86& $2.02& $1.66& $1.73& $1.89&
Growth$ 611.2%$ 624.7%) 8.6%) 617.7%) 4.1%) 9.4%)12$Month$Performance$ Company$Description$
&
Dolby& Laboratories& develops& technologies& that&improve& the& entertainment& experience& in&cinemas,& at& home,& at& work,& and& on& mobile&devices.& & The& company& offers& technologies& to&creators& and& distributors& of& entertainment&content,& such& as& television,& movie,& and& music&recording& studios,& as& well& as& television&broadcasters,& satellite& and& cable& operators,&movie& theaters,& and& internet& streaming& service&providers.& & Since& being& founded& in& 1965,& the&company& has& been& a& leader& in& developing& state&of&the&art&audio&and&video&technologies.&
22.7$
12.9$
21.5$19.2$
10.1$7.5$
23.4$
16.5$
12.8$
0&
5&
10&
15&
20&
25&
P/E& ROE& Profit&Margin&
DLB& Industry& Sector&
[15%&
[10%&
[5%&
0%&
5%&
10%&
15%&
20%&
A& M& J& J& A& S& O& N& D& J& F& M&
DLB& S&P&500&
Source:&Yahoo&Finance&
Source:&Yahoo&Finance&
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EXECUTIVE$SUMMARY$
Dolby& Laboratories& is& a& leader& in& audio& and& imaging&technologies& used& by& the& entertainment& and&communications& industries.& & They& continue& to& be& at& the&forefront& of& innovative& technologies& by& investing& in&research& and& development& and& making& strategic&acquisitions.&
Dolby&has&a&unique&business&model&where&by& they&drive&demand&for&their&technologies&by&creating&and&sustaining&relationships& with& artists,& directors,& studios,& and& other&content&creators.&&Dolby&will&charge&a&minimal&fee&or&give&away& for& free& equipment& and& services& to& content&creators.& & These& relationship,& as&well& as& state& of& the& art&technologies,&ensures&content&will&be&created&with&Dolby&technologies.&&The&content&is&what&drives&demand&on&the&consumer& end& and& consumer& electronic& device&manufacturers&must&pay&Dolby& licensing& fees& in&order& to&incorporate&Dolby&technologies&in&their&products.&
Globally,& there& is& a& transition& from& analog& to& digital&television.&&At&the&end&of&2014,&67.7%&of&households&had&digital& TV& and& that& number& is& expected& to& increase& to&97.9%&by&2020.& (1)&Dolby&is&positioning&themselves&well& in&both& the& Indian& and& Chinese&markets,& as&well& as& certain&countries& in& Africa.& & Dolby& is& targeting& the& broadcast&companies& in& these& countries& to& ensure& Dolby& audio& is&included&in&the&distributed&content.&&By&making&sure&their&audio& codecs& reach& the& consumer,& manufacturers& of&consumer& electronics& must& support& Dolby& technologies,&thereby&generating&consistent&licensing&revenues&in&these&markets&into&2020.&
New& technologies& for& TV,& including& 4K& increased&resolution,& HDR,& and& increased& brightness,& create& a&significant&difference&in&the&viewing&experience.&&Dolby&is¤tly& working& with& TV& manufacturers& as& well& as&content& creators& to& integrate& Dolby& Vision& into& their&products& and& content.& & With& these& new& advances,& the&television& industry& as& a& whole& is& poised& for& another&upgrade&cycle,& similar& to& the&early&2000s& transition& from&standard& definition& televisions& to& 1080p& HD& digital&televisions.&&&
Dolby&Laboratories&has&other&key&initiatives&in&place&such&as& Dolby& Voice& and& Dolby& Cinema& that& will& generate&incremental& revenue& for& the& company.& & Dolby’s&management& has& stated& they& have& an& objective& of&double[digit& top& line&growth.& &We&have&modeled&Dolby’s&overall& revenues&to& increase&at&a&5.13%&CAGR& into&2019.&&
Overall,&we&believe&Dolby&is&poised&for&growth&in&the&near&future&and&therefore,&we&recommend&a&buy&rating.&&
COMPANY$DESCRIPTION$
Located& in& San& Francisco,& CA,& Dolby& Laboratories& was&founded& in&1965& for&developing&noise& reduction& systems&for&professional&recording&studios.&&Dolby&has&long&been&a&leader& in& audio& innovation& for& the& consumer& electronics&and&cinema& industries.& &The&company&has&been& listed&on&the&New&York& Stock&Exchange& since&2005.& & Today,&Dolby&develops& audio,& imaging,& and& communication&technologies& for& the&entertainment&and&communications&industries.& & Recently,& the& company& has& gone& through& a&cycle&of&large&investment&in&research&and&development&in&order& to& drive& innovation& and& open& up& new& areas& for&growth& in& the& audio,& video,& cinema,& and& communication&markets.&
Revenue$Types$
Source:&Dolby&2014&10[K&(2)&
Dolby& generates& revenue& through& three& different&segments.& & The& largest& segment& is& licensing.& & Dolby&charges& device& manufacturers& a& license& fee& for& using&Dolby& audio& and& video& technologies.& & & & Most& of& the&consumer&entertainment&licensing&revenue&comes&from&a&two[tier& licensing&model.& &Dolby&charges&a&one[time,&up[front&fee&and&will&provide&their&decoding&technologies&to&semiconductor& manufacturers& who& then& incorporate&those& technologies&on& to&an& integrated&circuit& (IC).& &That&IC& is& then& sold& to& OEMs& of& consumer& entertainment&products.& & These& OEMs& obtain& a& separate& license& from&Dolby& that& allows& them& to& sell& end[user& products& that&incorporate&the&Dolby&technologies&in&ICs&purchased&from&
91.53%$
6.17%$ 2.30%$
FY$2014$Revenue$Streams$
Licensing&
Products&
Services&
& &&
&!Page!3! !
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the& semiconductor& manufacturers.& & The& OEMs& are&required& to&pay&an& initial& license& fee&as&well&as& royalties.&&The& amount& of& royalties& collected& depends& on& which&Dolby&technologies&are&used&and&the&volume&of&products&that&are&sold&by&the&OEM.&
The&majority&of&licensing&revenue&comes&from&their&audio&technologies& but& they& have& also& been& developing&technologies& focused& on& enhancing& voice& conferencing&communications&and& imaging.& &We&expect& total& licensing&revenues&to&increase&at&a&3.76%&CAGR&from&2014&to&2019.&&&
In& 2014,& licensing& accounted& for& 91.5%& of& revenue.&&Licensing&can&be&broken&down&even&further&to&Broadcast,&PC,&Consumer&Electronics,&Mobile,&and&Other.& &Broadcast&licensing& is& the& largest& revenue& generator& at& 39.4%& of&company& revenue& in& 2014.& & Broadcast& licensing& revenue&includes& fees& received& from& the& sale& of& televisions& and&set[top&boxes.&&Broadcast&licensing&has&been&increasing&as&a& percentage& of& revenue& in& recent& years& and&we& expect&this& trend& to& continue& as& emerging& markets& begin& to&transition&from&analog&to&digital&television&services.&
Consumer& Electronics& licensing& revenue& includes& fees&received& from& the& sale& of& DVD& and& Blu[ray& players,& and&audio/video&receivers.&&The&PC&and&Consumer&Electronics&licensing& revenues& have& both& been& declining& since& 2011&as&demand&for&DVD&and&Blu[ray&players&has&declined.&&We&expect& this& trend& to& continue& with& consumers&transitioning&to&streaming&media.&
Mobile&licensing&revenue&includes&fees&received&from&the&sale&of&smartphones&and&tablets.&&Dolby&indicated&in&their&2014&earnings&call&that&Mobile&licensing&has&potential&for&tremendous& growth& as& HTC,& Lenovo,& and& Amazon& have&included& Dolby& technologies& on& their& tablets.& & However,&Mobile& licensing&will& take& a& hit& in& 2015,& as& Samsung&will&no& longer& include& Dolby& technologies& on& their& next&generation&of&Galaxy&smart&phones.&
Another&way&Dolby&generates&revenue&is&by&designing&and&manufacturing& audio& and& imaging& products& for& the& film&production,& cinema,& and& television& broadcast& industries.&&The&products&enhance&image&and&sound&quality,&as&well&as&improve& transmission& and& playback& and& are& used& in&content& creation,& distribution,& and& playback.& & Digital&cinema& is& based& on& open& standards& that& do& not& include&Dolby’s& proprietary& audio& technologies,& unlike& the&standards& for& film[based& cinema.& & With& the& recent&acquisition& of& Doremi,& we& expect& Dolby& Digital& Cinema&products&revenue&to&increase&at&a&19.4%&CAGR&from&2014&to& 2019.& & Product& revenue& has& been&more& than& 11%& of&
overall& revenue& since&2008&except& in& the& last& two& years.&&We& expect& product& revenue& to& increase& to& 11.6%& of&revenue&in&2019,&up&from&6.1%&of&revenue&in&2014.&
The& third& way& Dolby& generates& revenue& is& by& providing&services& to& support& theater& and& television& production.&&Dolby& assists& in& the& integration& and& support& of& their&technologies&and&products&to&create&and&reproduce&audio&and& imaging& content.& &We& expect& product& sales& to& drive&services&revenue.&&Therefore,&we&expect&services&revenue&to&increase&at&an&8.2%&CAGR&into&2019&but&still&only&make&up&2.7%&of&overall&revenue.&
Geographic$Diversification$
Source:&Dolby&2014&10[K&(2)$
Dolby& Laboratories& licenses& their& technologies& in& 47&countries.&&The&company&sells&their&products&and&services&in& 90& countries.& & Therefore,& a& significant& portion& of&revenue& comes& from& foreign& markets.& & Over& the& last& 7&years,& an& average& of& 67.3%& of& revenue& has& come& from&overseas.&&The&United&States&is&the&largest&market&at&33%&of& revenue,& followed& by& South& Korea& and& Japan,& at& 20%&and&13%&of&revenue,&respectfully.&&Europe&and&China&both&account&for&12%&of&revenue.&
Revenue& generated& from& licensing& is& based& on& the&location& of& the& licensees’& headquarters.& & Products&revenue&is&based&on&the&destination&to&which&the&product&is& shipped,& while& services& revenue& is& based& on& the&location&where& the& services& are&performed.& & In& an&effort&to& reduce& the& risk& of& foreign& currency& exchange& rate&fluctuations,& Dolby& has& foreign& currency& forward&contracts.& & As& well,& operating& expenses& of& foreign&subsidiaries& are& predominantly& denominated& in& local¤cies.&&Therefore,&the&companies&operating&expenses&
33%$
13%$12%$
20%$
12%$
10%$
Revenues$by$Region$
US&
Japan&
Europe&
South&Korea&
China&
Other&
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will& decrease& when& the& U.S.& dollar& strengthens& and&increase&when& the&U.S.& dollar&weakens.& & These&practices&help&the&company&diminish&the&risk&to&revenues&from&the&strengthening& of& the& U.S.& dollar& against& other& foreign¤cies.&
We& expect& foreign& sales& to& account& for& 67%& of& revenue&for&the&next&five&years.&However,&due&to&Dolby’s&efforts&to&mitigate&foreign¤cy&exchange&risks&we&don’t&believe&the& effects& of& a& strengthening& dollar& will& have& a&substantial& impact&on&2015&profits.& & In&our& total& revenue&growth&estimation,&we&accounted&for&a&net&effect&of&$3.0&million& due& to& foreign& currency& fluctuations.& & In& 2014,&Dolby& had& a& net& loss& of& $1.95& million& due& to& foreign¤cy&exchange& rates,&which&was&approximately&0.2%&of& revenue.& & We& have& not& modeled& foreign& currency&exchange&rate&changes&in&any&year&after&2015.&
Content$Drives$Demand$
Dolby& creates& demand& for& their& technologies& by&partnering&with& content& creators& and&distributors.& & Their&strategy& is& to& either& give& away& or& charge& small& fees& to&large& movie& studios& and& other& content& creators& for&equipment&and&services&required&to&produce&content&with&new& Dolby& technologies.& & Film& directors,& studios,& and&music& producers& have& incentives& to& use& the& newest& and&best& technologies& available& so& that& their& content& looks&and&sounds&as&they&intended.&&By&giving&away&equipment&and&services,&Dolby&helps&to&ensure&their&technologies&will&be& the& choice& of& content& creators.& & Once& content& is&available& with& Dolby& technologies,& demand& will& be&created&on&the&consumer&side.&
However,& because& of& this&model,& the& cost& of& sales& from&both& products& and& services& is& extremely& high.& & Gross&margins& for& the& products& segment& have& averaged& less&than&27%&since&2012.& &We&expect& this& trend& to& continue&with& margins& from& the& products& segment& shrinking& to&23%& by& 2019.& & Gross& margins& for& the& services& segment&have&averaged&less&than&40%&since&2012.&&We&also&expect&this& trend& to& continue& with& margins& from& the& services&segment&dropping&to&30%&by&2019.&&&
Dolby&sacrifices&low&margins&on&the&products&and&services&business& in& exchange& for& licensing& revenue.& & In& 2014,&more& than& 91%& of& Dolby’s& revenue&was& generated& from&licensing& to& manufacturers& of& end& consumer& products.&&The&margins&on& licensing& are&extreme&high.& & Since&2012,&Dolby& has& averaged& over& 98%& gross& margin& in& the&licensing& segment& of& the& business.& We& expect& this& to&
continue& with& licensing& margins& averaging& 98.2%& into&2019.&
The& overall& business& has& consistently& had& gross&margins&around& 90%.& & In& 2014,& Dolby’s& gross&margin&was& 92.7%,&which& is& consistent& with& industry& competitor& DTS,& Inc.&who& had& a& gross& margin& of& 92.3%& in& 2014.& & We& expect&gross&margins&for&the&company&to&average&88.5%&for&the&next&five&years.&
Source:&Dolby&2014&10[K&(2)&
RECENT$DEVELOPMENTS$
Dolby& Laboratories& recently& released& their& FY& 2014&earnings.& & The& company& experienced& growth& and& is&continuing& the& trend& of& large& investments& in& both&research& and& development& and& sales& and& marketing& to&expand&their&presence&in&existing&markets&as&well&as&enter&into&new&markets.&&They&made&a&significant&acquisition&in&2014& to& position& themselves& as& a& leader& in& professional&video& equipment.& & As& well,& they& made& a& strategic&partnership& to& help& enter& into& the& conferencing& services&market.&
FY$2014$and$Q1$2015$
Fiscal& Year& 2014& was& a& surprising& year& for& Dolby&Laboratories.& & At& a& Morgan& Stanley& Technology&Conference& in& March,& Dolby& CFO,& Lewis& Chew,& said& the&company&was&expecting&flat&revenues&in&2014&but&instead&saw&5.5%&growth& in& revenue&and&an&8.9%&growth& in&net&income&from&the&previous&year.& &The&unexpected&growth&was& due& to& better& than& expected& results& in& broadcast&
0&
100,000&
200,000&
300,000&
400,000&
500,000&
600,000&
700,000&
800,000&
900,000&
Licensing& Product& Services&
Dolby$2014$Revenue$and$Costs$by$Segment$
Revenue&
Costs&
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licensing& revenue.& &Mr.& Chew&also& stated& the& company’s&objective&is&to&achieve&double[digit&top&line&growth&in&the&next& few& years.& & However,& he& advised& that& revenue&growth&for&2015&would&be&around&1%&to&4%.&(3)&We&expect&2015& revenue& growth& to& be& 2.7%& and& are& modeling& a&5.13%&CAGR&of&revenue&for&the&next&5&years.&
Despite& small& growth& expectations& in& 2015,& on& October&23,&2014,&the&Board&of&Directors&announced&the&initiation&of& a& quarterly& dividend&payment& to& stockholders& as&well&as& increasing&the&size&of& its&stock&repurchase&program&by&an&additional&$200&million.& (2)&Because&of&a&cash÷nd&now&being&paid,&we&expect&share&repurchases&to&decrease&from&1.39&million&shares& in&FY2014&to&around&1.0&million&in&2015.&&However,&we&expect&the&companies&total&payout&ratio& to& be& greater& than& 47%& in& 2015,& up& from& 27%& in&2014.&
On&January&21,&2015,&Dolby&Laboratories&announced&their&Q1&2015&financial&results.&&Revenues&were&up&for&the&first&quarter&compared&to&the&first&quarter&of&2014,&but&only&by&$2.9&million,& less&than&1%&growth.& &Management&expects&revenues&for&Q2&2015&to&be&slightly&less&than&Q2&2014.& (4)&
They& still& expect& revenues& for& 2015& to& range& from& $970&million& to& $1& billion& with& GAAP& operating& expenses&between& $664& million& and& $674& million.& & We& are&forecasting& revenue& of& $986& million& with& operating&expenses&of&$670&million.&
Doremi$Acquisition$
On& October& 31,& 2014,& Dolby& acquired& Doremi& Labs& for&$92.5& million& in& cash,& in& order& to& expand& its& cinema&capabilities.& & Doremi& is& a& leading& manufacturer& in&professional& audio& and& visual& equipment.& & & With& the&acquisition,&Dolby&can&now&offer&their&existing&state&of&the&art& cinema& sound& along& with& Doremi’s& leading& digital&cinema& video& playback& platform.& In& the& digital& cinema&video&market,&Doremi&is&third&behind&only&GDC&and&Sony.&&Dolby’s& cinema& product& segment& revenue& was& only& $51&million& in& 2014.& & Doremi& is& positioned& well& in& emerging&markets& where& the& conversion& of& cinema& to& digital&projection& technology& is& underway.& Therefore,& with& the&acquisition,&we&expect&Dolby’s&cinema&product&revenue&to&increase& substantially&at&a&19.39%&CAGR&over& the&next&5&years.&As&well,&we&believe&this&acquisition&is&an&attempt&to&make&the&Dolby&Atmos&and&Dolby&Vision&technologies&the&film& industry& standard.& & This& will& eventually& lead& to& an&increase&in&licensing&sales,&as&content&and&distribution&will&drive&revenues&at&the&consumer&end&of&the&cycle.&
$
BT$Conferencing$Partnership$
Dolby&has&partnered&with&British&Telecom&Conferencing&to&create&BT&MeetMe&with&Dolby&Voice.& &BT&Conferencing&is&a& leading& provider& of& video& conferencing& services&worldwide.& & Dolby& Voice& is& a& software& solution& that&eliminates&background&noise&and&creates&voice&separation&functionality& so& each& person’s& voice& is& heard& from& a&distinct&virtual&location.&&By&partnering&with&BT,&Dolby&will&generate& licensing& revenues& from& a& completely& new&market.& & The& conferencing& service& global& market& is& a&growing& industry.& & Video& conferencing& alone& is& expected&to& grow& from& $594&million& in& 2010& to& $3,579&million& in&2015.&(5)&&
Source:&Statista&(IDC)&(5)&
Dolby&Laboratories&announced&in&their&2014&earnings&call&that&they&will&begin&shipping&the&Dolby&Conference&Phone&in& Q1& 2015.& & The& conference& phone& is& an& integral&component& of& Dolby& Voice.& Dolby’s& Mr.& Chew& stated& in&the&2014&earnings&call& that&Dolby&Voice& revenues&will&be&included& in& “other”& until& it& is& large& enough& for& its& own&category.&&“Other”&product&revenue&was&only&$2.4&million&in&2014.& &Due& to& the&conference&phone& sales,&we&expect&“other”&product&revenue&to&grow&to&$8.4&million&in&2019.&
Lost$Samsung$Mobile$
In&April& 2014,&Dolby& announced& that& Samsung&would& no&longer& include& the&Dolby&Digital& Plus& technology& in& their&Galaxy&line&of&smartphones&and&tablets.&&According&to&the&Dolby& CFO,& Samsung& is& still& using& a& Dolby& audio&technology&on&their&mobile&devices&but&it&is&no&longer&the&top&of&the&line&technology&and&therefore&mobile&licensing&revenue& from& Samsung& will& decline.& & The& effects& on&mobile& licensing& revenue& will& start& to& be& seen& in& Q2& of&2015& when& Samsung& releases& the& new& Galaxy& S6.&&Samsung& is& the& global& leader& in& smart& phone& market&
367.9& 549.4&
3,579.1&
0.&
500.&
1,000.&
1,500.&
2,000.&
2,500.&
3,000.&
3,500.&
4,000.&
2009& 2010*& 2015*&
Revenu
e$in$m
illions$US$$
Global$Market$Forecast$of$Video$Conferencing$Services$Revenue$
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&!Page!6! !
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share& so& this& could& be& a& significant& loss& to& mobile&revenue.&
Smartphone$Market$Share$
Period& Samsung& Apple& Lenovo& Huawei& Xiaomi& Others&
Q4&‘14& 19.9%& 19.7%& 6.5%& 6.3%& 4.4%& 45.7%&
Q4&‘13& 28.9%& 17.5%& 6.4%& 5.7%& 2.0%& 39.5%&
Q4&‘12& 29.1%& 20.9%& 5.5%& 4.6%& 0.9%& 39.0%&
Q4&‘11& 22.5%& 23.0%& 5.1%& 3.5%& 0.1%& 45.7%&Source:&IDC&(6)&
To& help& combat& the& decreasing& revenue& from& Samsung,&the& new& Lenovo& and& HTC& mobile& devices& will& include&Dolby&audio&technologies.& &As&well,& in& late&2014,&Amazon&announced&the&new&Amazon&Fire& tablets&would&be&using&Dolby& Atmos& technology.& & We& expect& mobile& licensing&revenue’s&to&decrease&by&[2%&in&2015&but&will&rebound&in&2016&with&a&3.5%&CAGR&into&2019.&
INDUSTRY$TRENDS$
Dolby&operates& in&many&different& industries.& &One&of& the&markets& they& compete& in& is& the& consumer& electronics&market.& & A&major& trend& occurring& in& that& industry& is& the&shift&from&DVD&and&Blu[ray&to&streaming&video.&&This&trend&has&the&potential&to&decrease&revenues&for&all&companies&involved& with& DVD& and& Blu[ray.& & Another& trend& in& the&consumer&electronics&market& is&a&new&wave&of&television&technologies.& & New& technologies& that& include& higher&resolution,& increased& brightness,& and& increased& dynamic&range& have& the& potential& to& create& a& massive& television&upgrade& cycle.& & As& well,& new& object[based& audio,&sometimes& referred& to& as& 3D& audio& or& immersive& audio,&could& drive&massive& upgrades& in& the& cinema& industry& as&well&as&in&electronic&home&theater&systems.&
Shift$from$DVD$to$Streaming$
Dolby& Digital& is& an& audio& compression& technology,& also&know& known& as& AC[3,& and& is& the& multi[channel& audio&format& standard& on& every& DVD& worldwide.& & Every& DVD&player& is& required& to& support& the& Dolby& Digital& sound&format.& &Therefore,&Dolby& receives& license& fees& for&every&DVD&and&Blu[ray&player&that&is&sold&worldwide.&
Since&2007,&DVD&and&Blu[ray&sales&have&been&declining.&&In&2014,& DVD& and& Blu[ray& sales& dropped& 10.9%& to& $6.93&billion.& &That&drop& is& following&a&decline&of&8.1%&in&2013.&&Sales& from&kiosk&rentals,&such&as&Redbox,& fell& in&2013&for&the& first& time& since& their& inception.& & Revenues& in& the&
kiosk[rental& category& were& $1.81& billion& in& 2014,& a&decrease&of&4.4%&from&2013.&(7)&
Source:&IBISWorld&(8)&
Consumers& have& shifted& their& buying& habits& and& are&embracing& the& convenience& and& accessibility& of&purchasing& digital& content.& & Digital& movie& purchases&increased&47%&in&2013&and&30.4%&in&2014&to&$1.55&billion.&&Subscription&streaming&increased&25.8%&to&$4.01&billion&in&2014.& (9)& Companies& such& as& Netflix,& Amazon,& and& Hulu&Plus& are& increasing& their& penetration& into& households&worldwide.& & According& to& the& Nielsen& Ratings& Company,&36%& of& households& in& the& United& States& subscribe& to&Netflix,&13%&to&Amazon&Prime,&and&6.5%&to&Hulu&Plus.& (10)&As& of& the& end& of& 2014,& Netflix& had& 57.39& million&subscribers,&up&29.4%&from&2013.&(11)&
Source:&Statista,&Netflix&(11)&
The&popularity&of&DVD&and&Blu[ray&will&continue&to&decline&as& streaming& content& becomes& the& preferred& way& to&watch&movies&and&television&shows,&as&well&as&play&video&
5.89&5.24&
4.25&3.79&
3.27&2.8&
0.&
1.&
2.&
3.&
4.&
5.&
6.&
7.&
2012& 2013& 2014& 2015& 2016& 2017&
Revenu
e$in$billions$US$$
Revenue$of$DVD,$Game,$and$Video$Rental$Industry$in$the$U.S.$
23.53&
33.27&
44.35&
57.39&
20.&
30.&
40.&
50.&
60.&
Q4&2011& Q4&2012& Q4&2013& Q4&2014&
Number$of$Global$Neblix$Streaming$Subscribers$(in$millions)$
& &&
&!Page!7! !
! !
games.&&Dolby&Laboratories&is&positioning&themselves&well&for& this& change& and& has& integrated& their& audio&compression&technology&into&Netflix&and&other&streaming&services.&&Televisions&are&now&adding&Internet&connection&capability,&which&removes&the&need&for&another&device&to&stream& content.& & Therefore,& Dolby’s& revenue& from&consumer& electronics& will& never& reach& 2008& and& 2009&levels& when& it& was& nearly& 21%& of& overall& revenue.& & By&2014,& the&consumer&electronics& revenue&had&declined& to&13.7%& of& overall& revenue.& & We& believe& this& trend& will&continue&with&consumer&electronics&revenue&declining&at&a&1.64%&CAGR&over&the&next&five&years&and&accounting&for&only&9.8%&of&revenue&in&2019.&&
UHD$Alliance$Formed$
The& UHD& alliance& was& formed& to& develop& standards& for&the& next& generation& of& televisions.& & The& companies& that&make& up& the& alliance& include& content& creators& and&distributors,& post[production& companies,& and& consumer&electronics&companies.&&The&companies&in&the&alliance&are&Samsung,& Sharp,& Sony,& LG,& Panasonic,&Disney,& Twentieth&Century&Fox,&Warner&Bros.,&Technicolor,&DirecTV,&Netflix,&and&Dolby&Laboratories.&
The& alliance& is& charged& with& defining& what& UHD&means,&with& the& goal& of& making& TV& viewing& look&more& like& real&life.& & Originally,& UHD& meant& 4K& TVs,& which& was& just&increased& resolution& and& was& not& a& significant& enough&increase& in& picture& quality& to& entice& consumers& to& buy&expensive& 4K& TVs.& & While& the& definition& of& UHD& will&include& higher& resolution& than& current& 1080p& HD,& it& will&also& include& an& increase& if& the& visible& color& spectrum&output& by& the& TV.& & Another& aspect& included& in& the& UHD&standard& will& be& high& dynamic& range& (HDR).& & This& will&expand& the& contrast& between& dark& and& light,& which& will&create&darker&blacks&and&brighter&whites.&&With&UHD&TV’s&demonstrated& at& the& 2015& CES& show,& it& is& believed& that&these& changes& will& be& a& significant& enough& increase& in&picture&quality& to& cause&a&massive& consumer&upgrade& to&new& UHD& TV’s,& similar& to& how& 1080p& HD& televisions&caused& consumers& to& upgrade& from& standard& definition&televisions&starting&in&1998.&&
Dolby& has& a& UHD& technology& called& Dolby& Vision.&&Currently&Dolby&is&providing&studios&with&post[production&tools& to& encode&movies& and& other& content& with& Dolby’s&version&of&the&UHD&standard.&&The&UHD&encoded&content&would& then&be&delivered& and&displayed&on&Dolby&Vision[certified& TVs.& &On&April& 14,& 2015,&Vizio& released& the& first&TV&incorporating&Dolby&Vision.& &As&well,&Warner&Brothers&Studios& has& announced& it& will& release& several& films&
mastered&in&Dolby&Vision&in&2015.&&Netflix&also&announced&its&commitment&to&stream&Dolby&Vision&content&in&2015.&&&
Consumer&electronics&manufacturers&do¬&like&having&to&pay& Dolby& license& fees& for& using& their& technologies.&&Therefore,& some& companies& are& lobbying& the& UHD&alliance&to&come&up&with&a&license[free&approach&that&has&open& standards.& & Samsung& is& one& company& hoping& for&open&standards&and&has&already&released&their&version&of&a&UHD&TV&called&S[UHD,&or&Super&Ultra&High&Definition.&
While&the&UHD&standards&are¬&set,&we&believe&Dolby&is&positioned&well&with& a& forward[thinking&approach& to& the&UHD& technology.& & Dolby& Vision& is& a& post[production& and&delivery& specification& that& allows& companies& to& master&content& for& current&TVs&but&also& for& future,&brighter&and&more&colorful&TVs.& &By&getting&content&creators& to&adopt&Dolby& Vision& technologies& early& on,& we& believe& Dolby&Vision&will&become&the&standard&for&UHD&since&it&involves&the&creation,&distribution,&and&consuming&of&the&content.&&This&will&add&incremental&revenues&to&broadcast&licensing&which&we&expect&to&increase&at&a&6.35%&CAGR&into&2019.&
ObjectIbased$Audio$
In& traditional& channel& based& audio& playback,& audio&instruments,& sound& effects,& or& dialog& in& a& movie& are&programmed& to& go& to& a& specific& speaker& in& a& listener’s&physical& speaker& configuration.& & The& speaker& could& be&headphones& or& a& large& movie& theater& with& multiple&speakers.& & Therefore,& the& sound&output& is&dependent&on&the& speaker& configuration& and&will& change& based& on& the&number&of&speakers&available&for&playback.& &The& industry&is&moving& towards&object[based&audio&where&sounds&are&no& longer& recorded& as& tracks,& but& as& objects.& & Sound& is&sent&to&a&place&in&3D&space&rather&than&a&specific&speaker.&&The& audio& system& then& chooses& how& and& where& to&playback& the&audio& in&any& speaker&arrangement.& &Object&based& audio& is& designed& to& reproduce& life[like,& three[dimensional& sound,& regardless& of& the& speaker&configuration.&
In& 2012,& Dolby& Laboratories& released& an& object& based&audio& technology&called&Dolby&Atmos.& &Major&electronics&manufacturers,& such& as& Pioneer,& Denon,& and& Yamaha,&already& have& products& supporting& the& Dolby& Atmos&technology.& &As&well,&numerous&Blu[ray&titles& include&the&audio& technology.& & DTS& Inc.& (DTSI),& Dolby’s& biggest&competitor& in& this& arena,& has& announced& their& object&based&audio&technology&called&DTS:X.&&DTS:X&was&officially&launched& in& March& 2015& with& many& of& the& major&
& &&
&!Page!8! !
! !
electronics& manufacturers& committed& to& launch&supporting&products&in&2015.&&
According& to& the& 2014& earnings& call,& the& Dolby& Atmos&sound& format&has&been& installed&or&has&been&committed&to&be&installed&in&more&than&900&cinema&screens&globally.&&DTS&is&targeting&cinemas&in&North&America&and&Asia&and&is&expecting& 350& installations& in& 2015.& & In& October& 2014,&Dolby&announced&16&new&Hollywood&titles&would&be&using&Dolby&Atmos&technology,&increasing&the&number&of&Dolby&Atmos& titles& to& more& than& 230.& & As& well,& 13& of& the& 15&highest& grossing& films& in& 2015& have& used& Dolby& Atmos&technology.&(12)&As&more&and&more&content&is&created&using&Dolby& Atmos& technology,& we& expect& cinema& product&revenue& to& increase& accordingly.& & We& are& forecasting&cinema&products& to& increase&at&a&19.39%&CAGR&over& the&next& five& years& because& of& the& increased& adoption& of&Dolby& Atmos,& the& new& Dolby& Cinema& initiative,& and& the&acquisition&of&Doremi.&
MARKETS$AND$COMPETITION$
Dolby&generates&over&90%&of&their&revenue&from&licensing&their& technologies& to& manufacturers& of& televisions,& set[top& boxes,& PCs,&mobile& devices,& home& theaters& systems,&and& automotive& audio& systems.& & Their& business&model& is&to& create& an& entire& “ecosystem”& around& their&technologies.& &They&are& involved& in&the&content&creation,&the&delivery,&and&the&playback.&&The&company&targets&the&artists& and& content& creators¬& the& consumers,& thereby&creating& demand& for& their& technologies& by& creating&content.&&
Due& to& this& model,& Dolby& is& involved& in& many& different&markets&and&competes& in&different&ways.& &A&market& that&generates& most& of& Dolby’s& revenues& is& the& television&broadcast& market.& & Dolby& competes& to& get& their&technologies&included&with&the&broadcast&standard.&&Once&their& technology& is& being& broadcast,& that& will& drive&consumers&to&demand&televisions&and&set[top&boxes&that&support&Dolby&technologies.&
Even&though&the&DVD&and&Blu[ray&industry&is&experiencing&declining& sales,& it& is& still& a& major& revenue& generator& for&companies& in& the& industry.& & Dolby,& along& with& rival& DTS&Inc.,& lobbied& to&make& their& technology& the&Blu[ray&audio&standard.&&Both&companies&won&and&therefore&both&audio&technologies&are&required&to&be&included&on&every&Blu[ray&player.& Dolby& and& DTS& still& compete& to& get& their& audio&technologies& included& on& other& consumer& electronic&devices,&although,&most&manufacturers&include&both.&
Recently,& Dolby& entered& the& premium& large& format&cinema& industry.& & They& will& compete& with& IMAX& by&partnering&with&movie&theater&chains,&which&will&use&their&new&and&innovative&technologies.&
Emerging$Markets$
Globally,& there& has& been& a& shift& from& analog& to& digital&television&in&recent&years.&&The&Indian&broadcast&market&is&no& different.& & In& 2011,& just& 20%& of& India’s& homes& had&digital&television.&&In&2013,&that&number&had&risen&to&56%&of& households.& (13)& A&mandate& for& TV& networks& to& switch&from&analog&to&digital&is&driving&that&number&higher.&&
Dolby& has& indicated& India& is& one& of& the& primary&markets&they& are& targeting.& & According& to& the&2014&earnings& call,&twelve& of& the& largest& operators& in& India& broadcast& using&Dolby& audio& technologies.& & In& the& first& quarter& of& 2015,&Den& Networks,& India’s& largest& cable& TV& provider,& began&shipping&HD& set& top& boxes&with&Dolby&Digital& Plus& audio&technology.& &As&well,&Dolby& indicates&that&the&number&of&HD&channels&broadcasting& in&Dolby&Digital&Plus&continues&to&grow&in&India.&&
Source:&Statista,&Ofcom&(13)&
China& is&another&market& targeted&by&Dolby&Laboratories.&China& Telecom& is& a& Chinese& state[owned&telecommunication&company&and& is& the& largest& fixed[line&service& provider& and& third& largest& mobile&telecommunications& provider& in& China.& & China& Telecom&has& included& Dolby& Digital& Plus& in& its& Internet& smart& TV&specification.&&&
Africa& is& another& market& that& is& transitioning& to& digital&broadcast.&&Dolby&has&been&active&in&South&Africa,&Ghana,&Kenya,&and&Nigeria&with&Dolby&Digital&Plus&being&included&in&the&digital&broadcast&standards.&
5%& 5%&25%&
32%&39%&
44%&
64%&
0%&
25%&
50%&
75%&
100%&
Proporeon$of$Analog$and$Digital$TV$Household$in$selected$countries$in$2013$$
Analog&
Digital&
& &&
&!Page!9! !
! !
With& these& emerging& markets,& we& expect& broadcast&licensing&to&continue&to&increase&at&a&moderate&pace&until&2020& when& digital& TV& penetration& is& expected& to& reach&97.9%&of&television&households&globally.&(1)&
Global$Television$Broadcast$Standards&
The& Advanced& Televisions& Systems& Committee& (ATSC)& is&an& international,& non[profit& organization& that& develops&standards& for&digital& television.& &Dolby&Digital&AC[3& is& the&audio& codec& standard& for& ATSC.& & It& is& the& only& audio&format& transmitted& in& the& ATSC& standard.& & All& of& North&America&has&adopted&the&ATSC&digital&television&standard.&
There& are& three& other& broadcast& standards& throughout&the& world,& which& include& DVB[T,& ISDB[T,& and& DTMB.&&Japan& and& much& of& South& America& use& the& Integrated&Services& Digital& Broadcasting& (ISDB)& standard.& & The& ISDB&standard& uses& an& open& standard& audio& format& called&MPEG&ACC&for&its&audio&broadcast&standard.&&&
China&adopted&a&digital& television&standard&called&DTMB,&while&the&rest&of&the&world&uses&the&DVB[T&standard.&&The&standard&audio&codec&for&DVB[T&and&DTMB&is&MPEG&ACC,&however& these& television& broadcasts& also& can& include&Dolby& Digital& AC[3& and& DTS& audio& codecs.& & In& these&markets,& the& television&provider&must& include& the&MPEG&ACC& audio& format& and& can& choose& whether& or& not& to&include& the& Dolby& AC[3& or& DTS& audio& formats& in& the&transmission.& & These& are& the& markets& that& Dolby&Laboratories& is& targeting& to& get& their& audio& technology&included&in&television&providers&broadcasts.&
Source:&Firebird[systems&(14)$
$
Consumer$Electronics$Digital$Audio&
Dolby& Laboratories& dominated& the& digital& audio& industry&for&many&years.& &Dolby&Digital&Plus& is& the&standard&audio&format&for&DVD&and& is& included& in&every&HD&broadcast& in&the& United& States.& & All& DVD& players& are& required& to&support& Dolby& Digital& audio.& & DTS& Inc.& offers& similar&technologies&to&Dolby.&&However,&DTS&audio&is&optional&on&DVD& players.& & Therefore& many& DVD& players& do& not&support&DTS.&&Conversely,&Blu[ray&players&are&required&to&support& both& Dolby& and& DTS& audio,& which& gives& the&content& creator& the& option& of& using& Dolby& or& DTS&technologies.& & As& well,& most& home& theater& systems& and&sound& bars& support& both& Dolby& and& DTS& technologies.&&The&driver&for&revenue&comes&down&which&technology&the&content&creator&uses.&
Cinema&
Dolby&is&challenging&IMAX&in&the&cinema&industry&with&its&new& Dolby& Cinema.& & On& December& 15,& 2014& Dolby&opened& the& doors& of& their& first& Dolby& Cinema& in&Amersfoort,& Netherlands.& Dolby& Cinema& combines& the&newest&audio&and&video&technologies&of&Dolby&Atmos&and&Dolby&Vision.&&On&April&9th,&AMC&Entertainment,&owner&of&the& nation’s& second[largest& movie& theater& chain,&partnered& with& Dolby& Laboratories& and& will& begin& to&convert& theaters& to& Dolby& Cinema& theaters.& & Four& AMC&locations& will& open& in& the& US& in& May& 2015,& with& that&number& expanding& to& 50&by& the& end&of& 2018,& and&up& to&100&by&2024.& (15)& In&comparison,& in&2014,& IMAX&added&97&new& theaters& around& the&world& and&as&of&December&31,&2014,&there&were&934&Imax&theaters&in&62&countries.&(16)&
Peer$Comparison&
&&Sales&(M)&
Net&Profit&Margin&%&
ROA&%&
ROE&%&
P/E&(ntm)&
Debt/Equity&
Dolby&Labs& 960.2& 21.47& 11.07& 12.76& 22.7& 0.00&
IMAX& 290.5& 13.41& 6.99& 10.99& 32.4& 1.23&
DTS&Inc.& 143.9& 18.86& 10.24& 13.5& 21.2& 11.42&Source:&FactSet&
Dolby& Laboratories& main& competitor& in& the& consumer&electronics& audio& market& is& DTS& Inc.& & Both& companies&have& competing& audio& technologies& that& are& required& in&the& Blu[ray& disc& standard.& & Therefore,& both& companies&receive& license& fees& for& every& Blu[ray& player& sold.& &Most&manufacturers& of& home& theater& equipment& and& sound&bars& include& both& audio& codecs.& & So& rather& than&competing&for&manufacturers&to&include&their&technology,&both& company’s& technologies& exist& together.& & Dolby’s&
& &&
&!Page!10! !
! !
2014& consumer& electronics,& PC,& mobile,& and& other&(includes& automotive)& revenue& was& $501& million&compared& to& DTS& Inc.’s& total& revenue& of& $144& million&which& includes& consumer& electronics,& PC,& mobile& and&automotive.&&In&the&markets&they&compete&in,&Dolby&is&3.5×& larger& than& DTS& Inc.& (17)& Both& companies& require&large& R&D& expenses& in& order& to& create& new& and&innovative& technologies.& & Dolby’s& R&D& expense& as& a&percent& of& revenue& has& increased& each& year& since& 2011&and& is& now&more& than& 19%& of& revenue.& & In& comparison,&DTS,& Inc.& had& R&D& expenses& as& a& percent& of& revenue& of&25.9%&in&2014.&&Those&percentages&equate&to&$183&million&spent&on&R&D&for&Dolby&and&$37&million&for&DTS,&Inc.&
Dolby& is& now& attempting& to& compete& in& the& Cinema&market& against& IMAX.& & Both& companies& partner& with&movie&theater&chains&such&as&Regal&Entertainment&Group,&AMC& Entertainment& Inc.,& or& Cinemark& Theatres.& & The&companies& compete& by& offering& a& high[tech& theater&experience& with& state& of& the& art& audio& and& video.&&Revenue& data& from& Dolby& Cinema& is& not& available& since&the&company&opened&the&first&theater&in&December&2014.&&IMAX&had& revenues& of& $290.5&million& in& 2014& compared&to& $960.2& million& by& Dolby.& (18)& Dolby& has& substantially&greater& capital& resources,& as& well& as& industry& leading&technologies& to& help& them& compete& with& IMAX& in& this&market.&Comparing&research&and&development&expenses,&in& 2014,& IMAX’s& R&D& expense& as& a& percent& of& revenue&was&5.5%,&or&$16.1&million&versus&Dolby’s&19%&of&revenue&and&$183&million.&
ECONOMIC$OUTLOOK$
The& main& economic& driver& for& Dolby& Laboratories& is&consumer& spending.& & Many& of& the& products& that&incorporate& Dolby& technologies& are& discretionary& goods,&such& as& televisions,& set[top& boxes,& PCs,& Blu[ray& players,&audio/video&receivers,&in[car&entertainment&systems,&and&smart& phones& and& tablets.& & In& 2014,& 91.5%& of& company&revenues& came& from& licensing& of& Dolby& technologies& to&products& such& as& these.& & When& consumer& spending& is&down,& sales& of& these& products& will& also& be& down.&&Consumer&spending&has&been&on&the&rise&since&2009&and&has&maintained&approximately&2%&growth&per&year.&(19)&
Source:&FRED&database&(19)&
One& factor& that& affects& consumer& spending& is& the&unemployment& rate.& & Unemployed& people& are& trying& to&stretch&their&financial&assets&for&a&longer&duration&due&to&the&uncertainty&of& the&end&of& their&unemployment.& &This&leads& to& a& reduction& in& consumer& spending& due& to&financial& limitations.& &We&expect&the&unemployment&rate&to& continue& to& decline& to& 5.47%& in& the& next& 6& months,&which&should&keep&consumer&spending&from&declining.&
Source:&FRED&database&(20)&
Consumer& spending& is& an& important& component& of& GDP&and& we& expect& GDP& to& grow& at& 2.66%& in& the& next& six&months,&and&2.85%&in&the&next&two&years.&&Therefore,&we&expect&consumer&spending&to&continue&to&increase&in&the&foreseeable&future.&
Dolby& Laboratories& has& a& large& percentage& of& revenue&from& foreign& sales.& & Almost& two[thirds& of& their& revenue&has&come&from&foreign&sales&every&year&since&2008.&&With&large& overseas& sales,& strengthening& of& the& U.S.& dollar&could&have&a&negative&impact&on&earnings.&&In&the&next&six&months,&we& expect& the& dollar& to& continue& to& strengthen&against& the& Euro& and& Yen.& & Long& term,& we& expect& the&dollar&to&weaken&slightly&against&the&Euro&and&Yen.&
[2&
[1&
0&
1&
2&
3&
4&
2006& 2007& 2008& 2009& 2010& 2011& 2012& 2013& 2014&
%$Cha
nge$
Real$Personal$Consumpeon$Expenditures$
5.6&
5.8&
6.0&
6.2&
6.4&
6.6&
6.8&
7.0&
7.2&
2013&Q4& 2014&Q1& 2014&Q2& 2014&Q3& 2014&Q4&
Percent&
$Unemployment$Rate:$All$Persons$Aged$15I64:$U.S.$
& &&
&!Page!11! !
! !
CATALYSTS$FOR$GROWTH$
Increase$in$R&D$and$Sales$and$Marketing&
Dolby& has& gone& through& a& significant& cycle& of& research&and&development& investment&since&2011& in&order&to& fuel&innovation& and& open& up& new& areas& for& growth& which& is&shown& with& the& release& of& Dolby& Voice,& Dolby& Cinema,&and&Dolby&Vision&in&late&2014&and&early&2015.&&Historically,&R&D& expenses&were& around& 11%& of& revenue.& & However,&R&D&expense&as&a&percent&of&revenue&has&increased&each&year&since&2011&and&is&now&more&than&19%&of&revenue&&
Dolby& has& also& had& a& significant& investment& in& sales& and&marketing& with& this& expense& increasing& from& 13.74%& of&revenue& in& 2009& to& 26.31%& in& 2014.& (2)& This& increase& in&sales& and& marketing& has& significantly& expanded& Dolby’s&presence&online,&and& in& the&mobile&and&digital&broadcast&markets,&offsetting&declines&in&PC&and&DVD/Blu[ray.&
Intellectual$Property$and$Patent$Royalties&
Dolby& is& dependent& upon& patents,& trademarks,& trade&secrets,©rights,&and&other&intellectual&property&rights.&&A& large&portion&of& licensing& revenue&depends&on& the& life&of&their&patents.&&Typically,&Dolby’s&licensees&are&required&to& pay& a& full& royalty& with& respect& to& a& particular&technology&until&the&last&patent&covering&that&technology&expires.& & As& of& September& 26,& 2014,& Dolby& had&approximately& 4,300& issued& patents& along& with&approximately& 2,900& pending& patent& applications&thought[out& the& world& with& current& patents& expiring& at&various×&through&April&of&2039.&(2)&
Relationships$with$Entertainment$Industry&
In&order&to&grow&revenues,&Dolby&must&maintain&and&build&relationships& with& a& broad& range& of& entertainment&industry&players.& &Most& importantly&are& the&relationships&with& content& creators,& such& as& film& directors,& studios,&music&producers,&and&online&content&producers,&because&the&content&is&what&drives&the&rest&of&the&industry.&&Dolby&must& also& keep& good& relationships& with& content&distributors,& such& as& broadcasters,& operators,& and& video&game& publishers,& as& well& as& maintaining& good&relationships& with& device& manufacturers.& & Licensing& of&their& technologies& is& dependent& upon& the& relationships&they& have& with& system& licensees& and& IC& manufacturers.&&Without& strong& relationships,& these& entertainment&industry&participants&may&be&less&likely&to&purchase&or&use&Dolby&technologies,&products,&and&services.&
INVESTMENT$POSITIVES$
•& The& global& shift& from& analog& to& digital& television&will&drive&growth& in&Dolby’s&broadcast& licensing& revenue.&&&At&the&end&of&2014,&67.7%&of&television&households&in&the&world&had&digital&TV.&&This&number&is&expected&to&increase&to&97.9%&by&2020.&(1)&Dolby&has&targeted&India,&China,&and&Africa& and& has& successfully& integrated& their& audio&technologies&into&these&markets&broadcast&standards&and&specifications.& &As&digital&television&penetration&increases&worldwide,&Dolby’s&broadcast&licensing&revenue’s&will&also&increase.&
•& Content& created& with& Dolby& Atmos& 3D& audio&technology&continues& to& increase.& &The&number&of&Dolby&Atmos& titles& is&more& than& 230.& & It& has& been& installed,& or&has& been& committed& to& be& installed,& in& more& than& 900&cinema& screens& globally.& (12)& VUDU& is& the& first& streaming&service& to& announce& support& for& Dolby& Atmos& content.&&Content& created& in& Dolby& Atmos& drives& demand& on& the&consumer& end.& & As& content& created& with& Dolby& Atmos&technology& continues& to& increase,& revenues& from& both&products&and&licensing&revenues&should&increase&as&well.!
•& Dolby&Voice&is&a&new&market&for&the&company&and&can& only& grow.& & Partnering& with& BT& Conferencing& gives&Dolby& immediate& access& to& an& existing& customer& base.&&With& an& existing& customer& base& and& a& superior&technology,&we&expect&revenues&from&both&products&and&licensing&to&increase.&
•& Similar& to& Dolby& Atmos,& content& created& with&Dolby& Vision& technologies& will& drive& demand& on& the&consumer& end.& &Warner& Bros.& will& be& releasing& the& first&Dolby& Vision& titles& in& 2015,& which& include& Edge& of&Tomorrow,& Into&the&Storm,&and&The&Lego&Movie.& &Netflix&has& announced& its& commitment& to& stream& Dolby& Vision&content& in& 2015.& & As& the& content& created& with& Dolby&Vision& technology& continues& to& increase,& revenues& from&both&products&and& licensing& revenues&should& increase&as&well.!
INVESTMENT$NEGATIVES$
•& Content&creators&can&choose&any&post[production&technology& they&desire&when&producing&audio&and&video&content.& & Dolby& must& maintain& and& build& relationships&with&a&broad& range&of&entertainment& industry&players& to&ensure&their&technologies&are&used.&&If&these&relationships&breakdown,&Dolby’s&technologies&could&be&replaced.&
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•& Dolby& generates& a& majority& of& their& revenue& by&licensing& their& technology& to& consumer& electronics&manufacturers.& & Each& time& a& manufacture& includes& a&Dolby& technology& in& a& device,& a& royalty& fee& is& paid& to&Dolby.& & Many& manufacturers& are& pushing& for& open&standards&for&object[based&audio&and&UHD&televisions&so&they& can& avoid& paying& licensing& fee’s& to& Dolby.& & If& open&standards&are&adopted&by& the& industry,&Dolby& could& lose&out&on&incremental&licensing&revenues.&
VALUATION$
We&used&a&DCF,&DDM,&and& relative&P/E&analysis& to&value&Dolby& Laboratories.& These& three& approaches& computed&stock& prices& of& $44.07,& $35.39,& and& $44.53& respectively.&We&believe&that&the&value&of&Dolby&stock&is&closest&to&the&DCF&model.&
Dolby&paid&out& their& first÷nd& in& the& first&quarter&of&2015.& & In& the& DDM& model,& for& the& next& five& years,& we&assumed& a& constant& payout& ratio& of& around& 24%,& which&was&the&ratio&of&the÷nd&paid&in&Q1&2015.&&We&do¬&have&any&historical&data&to&allow&us&to&make&assumptions&for& dividend& growth.& & Therefore,& we& chose& to& disregard&the&DDM&model.&
As& for& the& relative& P/E& analysis,& Dolby& has& two&competitors&that&are&publicly&traded&companies.&&As&well,&Dolby& does& not& always& compete& with& other& companies;&instead,& they& compete& with& industry& standards.& The&relative& P/E& analysis& computed& a& reasonable& price,& but&the& number& of& competing& companies& used& limits& the&model.&
The& DCF& model& was& built& assuming& many& different&revenue& growth& rates& for& each& area& of& business.&&&&Broadcast& licensing& is& the& largest& revenue& generator& for&the& company& and& we& forecasted& a& 6.35%& CAGR& for& the&next& five& years.& & We& assumed& this& growth& rate& due& to&Dolby& targeting& emerging& television& broadcast& markets.&&We& feel& this& growth& rate& is& reasonable& considering& that&broadcast&revenue&previously&had&a&5yr&CAGR&of&20.51%.&&Depending& on& industry& acceptance& and& consumer&popularity&of&Dolby&Vision,&this&growth&rate&could&be&even&higher& as& consumers& in& markets,& such& as& the& United&States& and& Europe,& that& have& nearly& 100%& digital&television&penetration&would&upgrade&their&existing&digital&television.&
Sales& in& the& PC& and& laptop& industry& are& expected& to&decrease& 5.3%& in& 2015.& (21)& Therefore,& we& forecasted& PC&licensing&revenues&to&decrease&5.3%&in&2015.&Overall,&we&
modeled&PC&licensing&decreasing&at&a&CAGR&of&[2.69%&into&2019& due& to& the& slowing& rate& of& decrease& of& PC& sales& in&recent&years.&
Due&to&the&decreasing&popularity&of&DVD&and&Blu[ray,&we&modeled& declining& revenues& for& consumer& electronics&licensing& at& a& [1.64%& CAGR& from& 2014& to& 2019.& & We&believe&sales&for&this&segment&will&pick&back&up&in&2018&as&more&streaming&services&begin&to&stream&Dolby&audio&and&video&technologies,&which&will&once&again&drive&consumer&electronics&devices&to&license&Dolby&technologies.&
For&mobile& licensing&revenues,&we&forecasted&a&decrease&in&revenues&of&[2%&in&2015&due&to&the&loss&of&the&Samsung&Galaxy& S6.& & However& we& believe& revenues& will& begin& to&grow&again&in&2016&due&to&the&new&agreements&with&HTC,&Lenovo,&and&Amazon.&&We&have&modeled&a&3.5%&CAGR&for&mobile&licensing&revenues&after&2015&into&2019.&
“Other”&licensing&is¤tly&9.15%&of&the&total&company&revenue.& & Starting& in& 2015,& “other”&will& include& licensing&of& Dolby& Voice.& & We& have& modeled& a& 10.89%& CAGR& for&“other”& licensing& into& 2019& which& will& increase& “other”&licensing& to& 11.6%& of& revenue.& & With& all& of& these&assumptions,& we& have& modeled& total& licensing& revenue&growth&at&a&4.5%&CAGR&over&the&next&five&years.&
In&2014,&product&revenue&accounted&for&only&6.17%&of&the&total& companies& revenue& and& has& been& declining& since&2010.& &With& the& acquisition& of& Doremi& in& late& 2014,& we&believe& cinema& revenue& will& reverse& its& recent& declining&revenue& trend.& &We&have&modeled&a&19.39%&CAGR& from&2014& to& 2019.& & This& growth& will& increase& sales& to& $123&million&by&2019,&which&is&near&2011&revenues&for&cinema&products.&&&
Broadcast&product&revenue&was&modeled&to&increase&at&a&14.13%& CAGR& due& to& increased& Dolby& Atmos& adoption.&&“Other”& product& revenue& will& include& the& Dolby&conference& phone& in& 2015.& & Therefore& we& modeled&“Other”& product& revenue& to& increase& at& a& 28.77%& CAGR&for&the&next&5&years&due&to&sales&of&the&Dolby&Conference&phone.& & Both& of& these& growth& rates& for& broadcast& and&“other”&product&revenue&will&equate&to&a&combined&1.5%&of& the& overall& revenue.& & With& these& assumptions,& total&product& revenue& will& grow& at& a& 19.35%& CAGR& over& the&next&5&years&and&become&11.63%&of&overall&revenue.&
In& the& FY& 2014& earnings& call,& Dolby& inferred& they& were&nearing&the&end&of&a&significant& investment&cycle.& & In&our&model,& we& forecasted& sales& and& marketing& to& grow& to&29%& of& revenues& in& 2015& with& that& expense& slowing& to&22%&of&revenue&in&2019,&which&is&between&2012&and&2013&
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levels.& & We& forecasted& research& and& development& to&increase&slightly& to&20%&of& revenue&and&continue&at& that&level& into&2019.& &As&well,& due& to& the&Doremi& acquisition,&we& forecasted& general& and& administrative& expenses& to&increase& to& 19%& of& revenue& and& remain& at& that& level&through&2019.&
We&also&modeled&our&cost&of&sales&to&increase&as&product&revenue& increases,& due& to& the& company& ramping& up&production& of& the& Dolby& conference& phone& as& well& as&taking& on& the& manufacturing& expenses& of& Doremi&products.& & With& these& increases,& Dolby’s& gross& margins&decrease& from&92.7%& in&2014&to&87.7%& in&2019.& &A&gross&margin& of& around& 88%& is& where& Dolby& historically&operated&before&the&decline&of&the&DVD.&
Dolby&is¤tly&investing&a&lot&in&sales&and&marketing&to&help& push& their& new& initiatives& of& Dolby& Voice,& Dolby&Vision,&and&Dolby&Cinema.&&We&expect&Dolby&to&decrease&their&Sales&and&Marketing&expenses&over&the&next&5&years&to& 22%& of& revenue& in& 2019.& & Dolby& has& historically&operated& with& Sales& and&Marketing& expenses& at& 15%& of&revenue.&&The&decrease&in&Sales&and&Marketing&expense&is&enough&to&offset&the&decreasing&gross&margins&and&create&and& increase& in& net& profit& margins.& & The& effect& of& these&assumptions&on&net&profit&margin&is&seen&below.&&
Source:&Dolby&10[K&(2)&
We&expect&share& repurchases& to&decrease& from&previous&years&due&to&Dolby&adopting&a÷nd&payout&policy.&&In&2014,& 1.39& million& shares& were& repurchased& for& $56&million.& & In& 2015,& we& expect& share& repurchases& to&decrease&to&1.0&million&shares,&which&will&cost&$40&million.&&We& expect& the& share& repurchase& to& remain& around& 1.1&million& per& year& into& 2019& with& the& companies& total&payout&ratio&remaining&around&45%&each&year.&
In& the&most& recent& earnings& announcement,& inventories&had& increased& to&$28.2&million,&up& from&$8.5&million& the&previous& quarter.& & This& was& due& to& the& acquisition& of&Doremi.&&With&the&acquisition&and&with&the&release&of&the&new&Dolby&Conference&Phone,&we&expect&inventory&levels&to&be&around&$32.5&million&in&2015.& & In&2014,& inventories&were& 14.4%& of& product& revenue.& & Historically,& inventory&has& been& around& 20%& of& product& revenue.& & With& new&initiatives&and&acquisitions,&we&expect&inventory&levels&to&be&around&30%&of&product&revenue&by&2019.&
We& expect& 2015& capital& expenditures& to& increase& 86%&from& 2014& expenditures& to& $158&million& because& of& the&Doremi&acquisition.& & In&2016&and&after,&we&expect&capital&expenditures& to& then& average& around& 5%& of& revenue,&which& is& historically& the& amount& of& capital& expenditures&Dolby&has&had&each&year.&
Another&assumption&that&significantly&affects&the&model&is&the& continuing& value& of& NOPLAT.& & After& 2019,& we& have&assumed& NOPLAT& will& grow& at& the& same& rate& as& global&GDP.& We& forecasted& this& number& based& on& projected&global& GDP& growth& rates.& & According& to& the& USDA&Economic&Research&Service,&the&global&GDP&will&be&3.48%&from&2020&to&2024.&(22)&We&feel&our&assumption&of&3.5%&is&a&reasonable&estimate.&
Source:&USDA&Economic&Research&(22)&
Our&DCF&valuation&price& is&higher&than&consensus&analyst&average& estimates& of& $39& and& our& price& range&of& $41& to&$45&is&a&9%&to&19%&premium&above&the¤t&price.&&We&based&our&price&range&on&sensitivity&analyses&around&the&DCF& price& by& varying& different& revenue& segment& growth&rates,&continuing&value&of&NOPLAT,&Beta,&and&WACC.&
We& feel& analysts& are& not& accurately& valuing& the&“ecosystem”& strategy& that& Dolby& has& in& place.& & They& are&involved&in&the&content&creation,&the&delivery&of&content,&
28.53%&
20.81%&
21.47%&
17.15%& 16.69%& 17.00%&18.26%&
20.56%&
0%&
5%&
10%&
15%&
20%&
25%&
30%&
2012& 2013& 2014& 2015E& 2016E& 2017E& 2018E& 2019E&
Net$Profit$Margin$%$
0.00&
1.00&
2.00&
3.00&
4.00&
Projected$Global$Real$GDP$Growth$%$
& &&
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and& the& playback& of& content& by& the& consumer.& & They&create& demand& for& their& technologies& by& working& with&content&creators.&&In&the&last&five&years,&the&company&has&had& a& significant& increase& in& R&D& and& sales& and&marketing.& &Many& new& initiatives& have& come& out& of& this&increased& investment.& & In& 2015,& these& new& initiatives& of&Dolby& Voice,& Dolby& Vision,& and& Dolby& Cinema& will& add&incremental& revenue& to& the& company.& & As& well,& the&transition& to& digital& television& in& emerging& markets& will&sustain&growth&for&the&company.&&We&feel&our&price&range&is& justified& based& on& growth& in& emerging& markets& and&incremental&growth&from&new&initiatives.&
KEYS$TO$MONITOR$
Dolby$Voice&
Dolby& has& many& new& initiatives& that& will& provide&incremental& revenue& to& the& company.& & One& of& those&initiatives&is&Dolby&Voice.&&Dolby&Voice&has&the&potential&to&be& a& technological& leader& in& the& conferencing& industry.&&How&well&Dolby&Voice& is& received&by& the& industry& should&be&watched.&
UHD$Alliance&
The& UHD& Alliance& is& in& charge& of& creating& standards& for&the&next&generation&of&televisions.&These&future&standards&could& have& a& large& impact& on& the& revenues& generated&from&the&Dolby&Vision&technology.& & If& the&alliance&choses&an& open& standard,& Dolby& could& lose& broadcast& licensing&revenue& from& television& and& set[top& box&manufacturers.&&However,&if&Dolby&Vision&is&chosen&as&the&standard,&Dolby&broadcast&licensing&revenues&could&increase&substantially.&
Dolby$Cinema&
The& number& of& Dolby& Cinema& theaters& being& built& or&retrofitted& is& a& good& indication& of& the& film& industry’s&adoption& of& both& the& Dolby& Atmos& and& Dolby& Vision&technologies.& & The&more& these& technologies& are& used& in&post[production&processes,&the&more&content&that&will&be&available.&&As&content&is&created,&demand&will&increase&on&the&consumer&side,&which&will&drive&Dolby&revenues.&
REFERENCES$
1. Digital&TV&Research,&May&2014,&“Digital&TV&World&Household&Forecasts”&https://www.digitaltvresearch.com/products/product?id=96&
2. Dolby&Laboratories,&Inc.&2014&Form&10[K&
3. Morgan&Stanley&Technology,&Media,&and&Telecom&Conference&http://cc.talkpoint.com/morg007/030215a_ae/?entity=135_OVCFWUY&
4. Dolby&Laboratories,&January&21,&2015,&“Dolby&Laboratories&Reports&First&Quarter&Fiscal&2015&Financial&Results”&http://files.shareholder.com/downloads/DLB/4120204983x0x804366/ec07c7b3[bc81[4bd6[a179[8de39c4236a9/DLB_News_2015_1_21_Financial_Releases.pdf&
5. IDC&2015,&“Global&market&forecast&of&video&conferencing&services&from&2009&to&2015”&http://www.statista.com.proxy.lib.uiowa.edu/statistics/203135/global[market[forecast[of[video[conferencing[services/&
6. IDC&2014,&“Smartphone&Vendor&Market&Share,&Q4&2014”&http://www.idc.com/prodserv/smartphone[market[share.jsp&
7. Wall&Street&Journal,&January&7,&2014,&“Sales&of&Digital&Movies&Surge”&http://www.wsj.com/articles/SB10001424052702304887104579306440621142958&
8. IBISWorld,&“Revenue&of&the&DVD,&game&and&video&rental&industry&in&the&United&States&from&2012&to&2017”&http://www.statista.com.proxy.lib.uiowa.edu/statistics/242671/revenue[of[the[us[recordable[media[manufacturing[industry/&
9. Deadline,&January&6,&2015,&“Home&Video&Sales&Fell&in&2014&as&Disc&Decline&Outpaced&Digital&Growth”&http://deadline.com/2015/01/home[entertainment[spending[fell[2014[deg[1201342148/&
10. GeekWire,&March&12,&2015,&“Netflix&still&king&of&streaming&video,&but&Amazon&gaining&market&share”&http://www.geekwire.com/2015/netflix[still[king[of[streaming[video[but[amazon[gaining[market[share/&
11. Netflix&2014,&“Number&of&Netflix&Streaming&Subscribers&Worldwide&from&3rd&Quarter&2011&to&4th&Quarter&2014&http://www.statista.com.proxy.lib.uiowa.edu/statistics/250934/quarterly[number[of[netflix[streaming[subscribers[worldwide/&
12. First&Quarter&Fiscal&Year&2015&Financial&Results&Conference&Call&http://edge.media[server.com/m/p/njiyxg99&
13. Statista,&“Proportion&of&analogue&and&digital&TV&households&in&selected&countries&in&2013”&http://www.statista.com.proxy.lib.uiowa.edu/statistics/198736/share[of[analogue[and[digital[tv[households[in[selected[countries/&
14. Firebird&Systems,&“International&Digital&Television&Systems”&http://www.firebird[systems.com/rev/international_digital_television_systems.shtml&
15. LA&Times,&April&9,&2015,&“AMC&and&Dolby&are&teaming&up&to&build&100&high[tech&theaters”&http://www.latimes.com/entertainment/envelope/cotown/la[et[ct[amc[dolby[20150408[story.html&
& &&
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16. IMAX&Corporate&Overview&https://www.imax.com/corporate/press[releases/&
17. DTS&Inc.&2014&Form&10[K&18. IMAX&Corporation&2014&Form&10[K&19. Federal&Reserve&Bank&of&St.&Louis&Economic&Data:&“Real&
Personal&Consumption&Expenditures”&https://research.stlouisfed.org/fred2/series/DPCERX1A020NBEA&
20. Federal&Reserve&Bank&of&St.&Louis&Economic&Data:&“Unemployment&Rate:&Aged&15[64,&All&Persons&for&the&United&States”&http://research.stlouisfed.org/fred2/series/LRUN64TTUSQ156S#&
21. ExtremeTech,&July&8,&2014,&“In&2015&tablet&sales&will&finally&surpass&PCs,&fulfilling&Steve&Jobs’&post[PC&prophecy”&http://www.extremetech.com/computing/185937[in[2015[tablet[sales[will[finally[surpass[pcs[fulfilling[steve[jobs[post[pc[prophecy&
22. USDA&Economic&Research&Service,&“Real&Projected&Gross&Domestic&Product&http://www.ers.usda.gov&
IMPORTANT$DISCLAIMER$
Henry&Fund&reports&are&created&by&student&enrolled&in&the&Applied&Securities&Management&(Henry&Fund)&program&at&the& University& of& Iowa’s& Tippie& School& of& Management.&These& reports& are& intended& to& provide& potential&employers&and&other&interested&parties&an&example&of&the&analytical& skills,& investment& knowledge,& and&communication& abilities& of& Henry& Fund& students.& Henry&Fund& analysts& are& not& registered& investment& advisors,&brokers& or& officially& licensed& financial& professionals.& The&investment& opinion& contained& in& this& report& does& not&represent&an&offer&or&solicitation&to&buy&or&sell&any&of&the&aforementioned&securities.&Unless&otherwise¬ed,&facts&and& figures& included& in& this& report& are& from& publicly&available& sources.& This& report& is& not& a& complete&compilation& of& data,& and& its& accuracy& is& not& guaranteed.&From& time& to& time,& the& University& of& Iowa,& its& faculty,&staff,& students,& or& the& Henry& Fund& may& hold& a& financial&interest&in&the&companies&mentioned&in&this&report.&
Dolby&LaboratoriesRevenue&Decomposition
Fiscal&Years&Ending&Sept.&30 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Licensing 537,363 594,697 710,474 790,340 794,563 807,081 878,844 889,509 914,688 958,612 1,004,807 1,057,035Products 72,284 95,967 180,402 131,611 103,388 80,603 59,219 73,728 102,443 122,244 135,273 143,378Services 30,584 28,839 31,837 33,554 28,313 21,990 22,113 23,016 27,498 30,156 31,763 32,714Total&Revenue 640,231 719,503 922,713 955,505 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127
%=Licensing 83.93% 82.65% 77.00% 82.71% 85.78% 88.72% 91.53% 90.19% 87.56% 86.28% 85.75% 85.72%%=Products 11.29% 13.34% 19.55% 13.77% 11.16% 8.86% 6.17% 7.48% 9.81% 11.00% 11.54% 11.63%%=Services 4.78% 4.01% 3.45% 3.51% 3.06% 2.42% 2.30% 2.33% 2.63% 2.71% 2.71% 2.65%%=Total=Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Licensing=Growth=Rate F 10.67% 19.47% 11.24% 0.53% 1.58% 8.89% 1.21% 2.83% 4.80% 4.82% 5.20%Product=Growth=Rate F 32.76% 87.98% F27.05% F21.44% F22.04% F26.53% 24.50% 38.95% 19.33% 10.66% 5.99%Service=Growth=Rate F F5.71% 10.40% 5.39% F15.62% F22.33% 0.56% 4.08% 19.47% 9.66% 5.33% 3.00%Total&Revenue&Growth&Rate A 12.38% 28.24% 3.55% A3.06% A1.79% 5.55% 2.72% 5.92% 6.35% 5.48% 5.23%
Licensing&Revenue&Breakdown:Broadcast 107,473 148,674 191,828 245,005 270,151 298,620 377,903 401,900 427,420 454,562 483,426 514,124PC 214,945 208,144 255,771 237,102 222,478 193,699 166,980 158,130 151,331 146,791 146,057 145,692Consumer=Electronics 134,341 148,674 156,304 165,971 150,967 129,133 131,827 125,235 120,226 117,821 119,000 121,380Mobile F F F F 63,565 96,850 114,250 111,965 114,204 117,630 122,335 128,452Other=(includes=mobile=from=2008=to=2011) 80,604 89,205 106,571 142,261 87,402 88,779 87,884 92,279 101,506 121,808 133,989 147,387Total&Revenue&from&Licensing 537,363 594,697 710,474 790,340 794,563 807,081 878,844 889,509 914,688 958,612 1,004,807 1,057,035
%=Broadcast 20.00% 25.00% 27.00% 31.00% 34.00% 37.00% 43.00% 45.18% 46.73% 47.42% 48.11% 48.64%%=PC 40.00% 35.00% 36.00% 30.00% 28.00% 24.00% 19.00% 17.78% 16.54% 15.31% 14.54% 13.78%%=Consumer=Electronics 25.00% 25.00% 22.00% 21.00% 19.00% 16.00% 15.00% 14.08% 13.14% 12.29% 11.84% 11.48%%=Mobile F F F F 8.00% 12.00% 13.00% 12.59% 12.49% 12.27% 12.18% 12.15%%=Other=(includes=mobile=from=2008=to=2011) 15.00% 15.00% 15.00% 18.00% 11.00% 11.00% 10.00% 10.37% 11.10% 12.71% 13.33% 13.94%%=of=total=Licensing=Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Products&Revenue&Breakdown:Cinema 49,153 78,693 162,362 114,502 89,948 70,125 50,928 63,660 89,125 106,950 117,644 123,527Broadcast 17,348 12,476 16,236 13,161 10,339 7,254 5,922 7,106 9,025 9,927 10,920 11,466Other 5,783 4,798 1,804 3,948 3,102 3,224 2,369 2,961 4,293 5,367 6,708 8,386Total&Revenue&from&Products 72,284 95,967 180,402 131,611 103,388 80,603 59,219 73,728 102,443 122,244 135,273 143,378
%Cinema 68.00% 82.00% 90.00% 87.00% 87.00% 87.00% 86.00% 86.35% 87.00% 87.49% 86.97% 86.15%%Broadcast 24.00% 13.00% 9.00% 10.00% 10.00% 9.00% 10.00% 9.64% 8.81% 8.12% 8.07% 8.00%%Other 8.00% 5.00% 1.00% 3.00% 3.00% 4.00% 4.00% 4.02% 4.19% 4.39% 4.96% 5.85%%=of=total=Products=Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
International=Revenue=% 66.0% 65.0% 66.0% 68.0% 67.0% 72.0% 67.0% 67.3% 67.3% 67.3% 67.3% 67.3%Domestic=Revenue=% 34.0% 35.0% 34.0% 32.0% 33.0% 28.0% 33.0% 32.7% 32.7% 32.7% 32.7% 32.7%
Dolby&LaboratoriesIncome'Statement
Fiscal'Years'Ending'Sept.'30 2012 2013 2014 2015E 2016E 2017E 2018E 2019ERevenue:Licensing 794,563 807,081 878,844 889,509 914,688 958,612 1,004,807 1,057,035Product 103,388 80,603 59,219 73,728 102,443 122,244 135,273 143,378Services 28,313 21,990 22,113 23,016 27,498 30,156 31,763 32,714Total revenue 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127
Cost of Sales:Cost of licensing 12,924 16,856 10,814 15,922 16,373 17,159 17,986 18,921Cost of products 66,325 64,270 45,132 62,669 81,954 94,128 104,160 110,401Cost of services 12,778 15,593 14,230 16,111 19,249 21,109 22,234 22,900Gain from amended patent licensing agreement 0 0 0 0 0 0 0 0Impairment of products provided under operating leases 0 0 0 0 0 0 0 0Total cost of revenue 92,027 96,719 70,176 94,702 117,576 132,396 144,380 152,222
Gross margin 834,237 812,955 890,000 891,550 927,053 978,615 1,027,462 1,080,905
Operating Expenses:Sales & marketing expenses 181,736 231,103 252,647 286,013 292,496 299,973 292,961 271,288General & administrative expenses 149,175 161,970 178,104 187,388 198,479 211,092 222,650 234,294Research & development expenses 140,143 168,746 183,128 197,250 208,926 222,202 234,368 246,625Restructuring charges, net 1,191 5,874 2,403 0 0 0 0 0Total operating expenses 472,245 567,693 616,282 670,652 699,901 733,267 749,979 752,208
Operating income 361,992 245,262 273,718 220,899 227,152 245,348 277,483 328,697
Interest income 6,411 3,848 3,344 4,393 4,929 5,910 6,953 8,062Interest expense -196 -575 183 0 0 0 0 0Other income (expenses), net 784 2,111 -1,146 1,556 1,591 1,631 1,593 1,475Income (loss) before provision (benefit) for income taxes 368,991 250,646 276,099 226,847 233,671 252,889 286,029 338,235Provision for income taxes 103,857 60,344 67,379 55,056 56,712 61,376 69,419 82,090
Net income (loss) including controlling interest 265,134 190,302 208,720 171,791 176,959 191,513 216,610 256,145Less: net income (loss) attributable to controlling interest -832 -1,031 -2,617 -2,617 -2,617 -2,617 -2,617 -2,617Net income (loss) attributable to Dolby Laboratories, Inc. 264,302 189,271 206,103 169,174 174,342 188,896 213,993 253,528
Weighted average shares outstanding - basic 106,926 101,879 102,151 101,816 100,876 99,908 98,941 97,919Year end shares outstanding 103,095 101,739 102,269 101,363 100,389 99,426 98,456 97,383Net earnings per share - basic 2.47 1.86 2.02 1.66 1.73 1.89 2.16 2.59
Dividend5per5share 0.00 4.00 0.00 0.40 0.42 0.46 0.52 0.62Payout5Ratio 0% 215% 0% 24.07% 24.07% 24.07% 24.07% 24.07%
Dolby&LaboratoriesBalance'Sheet
Fiscal'Years'Ending'Sept.'30 2012 2013 2014 2015E 2016E 2017E 2018E 2019EASSETSCash & cash equivalents 492,600 454,397 568,472 536,154 589,252 635,782 677,712 723,755Restricted cash 0 0 2,142 0 0 0 0 0Short-term investments 302,693 140,267 231,208 245,080 259,785 275,372 291,895 309,408
Accounts receivable, gross 44,451 97,974 87,783 83,831 83,570 83,326 82,029 80,153Less: allowance for doubtful accounts 956 514 1,615 1,968 2,085 2,217 2,338 2,461Accounts receivable, net 43,495 97,460 86,168 81,863 81,486 81,109 79,690 77,692
Raw materials 4,403 2,050 1,013 9,863 11,491 12,221 12,890 13,564Work in process 0 0 47 2,959 3,656 3,889 4,101 4,316Finished goods 12,297 8,043 7,476 19,725 21,937 23,331 24,609 25,896Inventories 16,700 10,093 8,536 32,546 37,084 39,441 41,600 43,776
Total Deferred Taxes (Assets - Liabilities) 100,904 121,672 128,191 99,100 96,410 104,340 118,013 139,552
Prepaid expenses 14,955 10,195 11,665 11,982 14,102 16,110 18,255 19,210Other current assets 13,165 14,038 7,152 3,576 0 0 0 0Income tax receivable 5,712 7,891 4,063 4,215 4,342 4,699 5,315 6,285Assets held for sale 0 0 0 0 0 0 0 0Prepaid expenses & other current assets 33,832 32,124 22,880 19,773 18,445 20,809 23,570 25,495
Total current assets 990,224 856,013 1,047,597 1,014,517 1,082,462 1,156,853 1,232,480 1,319,679
Long-term investments 361,614 306,338 296,335 314,115 332,962 352,940 374,116 396,563
Property, plant & equipment, gross 352,304 376,054 461,192 619,691 650,676 683,209 717,370 753,238Less: accumulated depreciation 97,628 133,137 171,437 241,679 253,763 266,452 279,774 293,763Property, plant, & equipment, net 254,676 242,917 289,755 378,012 396,912 416,758 437,596 459,475
Intangible assets, net 56,526 41,315 63,700 54,658 46,899 40,241 34,529 29,628Goodwill 281,375 279,724 277,574 315,791 315,791 315,791 315,791 315,791Other non-current assets 13,687 11,638 9,051 6,585 3,974 1,196 0 0
Total assets 1,958,102 1,737,945 1,984,012 2,083,678 2,179,000 2,283,779 2,394,512 2,521,136
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable 14,831 10,695 15,898 16,664 17,650 18,771 19,799 20,835
Accrued royalties 2,391 6,075 2,526 4,714 4,820 4,944 4,828 4,471Amounts payable to program partners 35,492 40,091 43,438 50,052 51,187 52,495 51,268 47,475Accrued compensation & benefits 47,331 54,423 71,677 74,329 76,013 77,956 76,134 70,502Accrued professional fees 4,893 4,402 6,162 6,708 6,860 7,035 6,871 6,363Accrued current portion of litigation settlement 0 0 0 0 0 0 0 0Other accrued liabilities 25,985 32,804 34,573 39,139 40,026 41,049 40,090 37,124Accrued liabilities 116,092 137,795 158,376 174,942 178,907 183,480 179,191 165,935
Income taxes payable 2,424 3,394 2,600 2,239 2,306 2,496 2,823 3,339Current portion of long-term debt 0 0 0 0 0 0 0 0Deferred revenue 23,493 20,931 12,496 12,821 13,580 14,443 15,234 16,031
Total current liabilities 156,840 172,815 189,370 206,665 212,443 219,191 217,047 206,139
Long-term debt, net of current portion 0 0 0 0 0 0 0 0
Long-term deferred revenue 18,192 19,663 19,279 19,725 20,893 22,220 23,437 24,663
Long-term portion of litigation settlement 0 0 0 0 0 0 0 0Supplemental retirement plan obligations 2,042 2,144 2,409 2,651 2,917 3,210 3,532 3,886Non-current tax liabilities 20,862 30,986 30,715 23,123 22,118 21,482 20,826 20,522Other liabilities 16,933 12,311 10,591 8,824 6,953 4,963 2,864 655Other non-current liabilities 39,837 45,441 43,715 34,598 31,988 29,654 27,221 25,063
Total Long-term Liabilities 58,029 65,104 62,994 54,324 52,880 51,874 50,658 49,726
Stockholders' Equity:Common Stock and Additional paid-in capital 268,306 101,159 102,546 105,139 108,754 112,370 115,986 116,956Repurchase of Common Stock -268,203 -82,245 -56,028 096,028 0141,028 0189,028 0241,028 0296,028Retained earnings 1,709,479 1,454,382 1,660,485 1,788,933 1,921,305 2,064,727 2,227,204 2,419,699Accumulated other comprehensive income 10,687 7,814 3,014 3,014 3,014 3,014 3,014 3,014
Total stockholders' equity - Doly Laboratories, Inc. 1,720,269 1,481,110 1,710,017 1,801,058 1,892,045 1,991,083 2,105,176 2,243,641Controlling interest 22,964 18,916 21,631 21,631 21,631 21,631 21,631 21,631Total stockholders' equity 1,743,233 1,500,026 1,731,648 1,822,689 1,913,676 2,012,714 2,126,807 2,265,272
Total&Liabilites&and&Stockholders'&Equity 1,958,102 1,737,945 1,984,012 2,083,678 2,179,000 2,283,779 2,394,512 2,521,136
Dolby&LaboratoriesCash%Flow%Statement
Fiscal%Years%Ending%Sept.%30 2008 2009 2010 2011 2012 2013 2014
Cash&flows&from&operating&activities:Net income (loss) including controlling interest 199,458 242,991 282,827 310,582 265,134 190,302 208,720Depreciation & amortization 24,814 28,732 34,937 43,994 43,876 53,245 53,278Stock-based compensation expense 22,332 21,758 27,694 43,665 47,581 64,328 65,680Amortization of premium on investments 1,904 5,589 9,118 17,088 17,140 10,234 9,398Excess tax benefit from exercise of stock options & vesting of restricted stock -21,746 -5,827 -24,639 -6,593 -852 -475 -2,434Provision for doubtful accounts 935 1,392 365 772 -379 -174 1,119Losses (gains) on put rights - -9,508 7,601 - - - -Losses (gains) on auction rate certificates - 10,869 -7,601 - - - -Deferred income taxes -21,750 5,237 -16,031 6,784 1,208 -19,642 -6,696Gain from amended patent licensing agreement - -20,041 - - - - -Loss on impairment of long-lived assets - - 12,986 226 275 - -Payment on litigation settlement -3,000 -3,000 -3,000 -3,000 - - -Cash distributions to controlling interest - - -263 - - - -Other non-cash items affecting net income 2,273 3,506 610 532 95 -1,026 1,821Accounts receivable 987 1,797 -31,329 -8,514 18,831 -53,639 10,165Inventories -7,567 -3,638 -15,696 2,105 3,051 9,166 3,818Prepaid expenses & other assets -18,640 -147 15,009 -10,305 -4,108 3,891 -354Accounts payable & accrued liabilities 33,874 -21,362 32,677 -16,952 -6,641 21,890 24,124Income taxes, net 29,825 8,602 27,995 708 3,866 2,314 951Deferred revenue 25,962 7,488 -25,725 19,800 -498 -1,076 -8,734Other non-current liabilities -5,187 -1,213 -237 2,796 1,218 -4,677 691Net cash flows from operating activities 264,474 273,225 327,298 403,688 389,797 274,661 361,547
Cash flows from investing activities:Purchases of available-for-sale securities -304,097 -373,223 -646,052 -619,238 -611,211 -482,370 -389,282Proceeds from sale of available-for-sale securities 299,376 176,908 - - 358,142 548,739 159,559Proceeds from maturities of available-for-sale securities - - 643,443 429,681 236,535 143,754 137,059Purchases of property, plant & equipment -13,610 -13,994 -37,482 -47,362 -167,349 -26,711 -78,718Acquisitions, net of cash acquired -253,047 -16,621 -5,601 -3,350 -12,521 - -Other investments 40 - - - - -3,000 -Purchases of intangible assets - -9,571 -825 - -350 -4,050 -37,950Proceeds from sale of property, plant & equipment & assets held for sale - - 2,160 3,567 2,075 503 3,355Change in restricted cash - - - - - - 1,033Net cash flows from investing activities -271,338 -236,501 -44,357 -236,702 -194,679 176,865 -204,944
Cash flows from financing activities:Payments on debt -1,536 -1,522 -7,680 - -518 -79 -Proceeds from the exercise of stock options 13,553 13,716 35,569 17,877 - - -Proceeds from issuance of common stock 1,133 3,502 4,060 5,442 17,386 15,958 33,373Repurchase of common stock 0 0 -241,362 -192,410 -268,203 -82,245 -56,028Payment of cash dividend - - - - - -408,206 -Distribution to controlling interest - - - - - -5,039 -Excess tax benefit from the exercise of stock options 21,746 5,827 24,639 6,593 852 475 2,434Shares repurchased for tax withholdings on vesting of restricted stock - - - - -3,835 -8,828 -13,651Payment of deferred consideration for prior business combination - - - - - - -6,708Net cash flows from financing activities 34,896 21,523 -184,774 -162,498 -254,318 -487,964 -40,580
Cash flows from all activities:Effect of foreign exchange rate changes on cash & cash equivalents -1,738 -1,330 -3,984 1,163 288 -1,765 -1,948Net increase (decrease) in cash & cash equivalents 26,294 56,917 94,183 5,651 -58,912 -38,203 114,075
Cash & cash equivalents at beginning of year 368,467 394,761 451,678 545,861 551,512 492,600 454,397Cash & cash equivalents at end of year 394,761 451,678 545,861 551,512 492,600 454,397 568,472
Dolby&LaboratoriesForecasted*Cash*Flow*Statement
Fiscal'Years'Ending'Sept.'30 2015E 2016E 2017E 2018E 2019E
Cash&flows&from&operating&activities:Net income (loss) 169,174 174,342 188,896 213,993 253,528Add: Depreciation 70,242 12,084 12,688 13,323 13,989Add: Amortization 9,042 7,759 6,657 5,712 4,901Changes in:Restricted cash 2,142 0 0 0 0Accounts Receivable Net 4,305 378 377 1,418 1,998Inventories >24,010 >4,538 >2,357 >2,160 >2,176Total Deferred Taxes (Assets - Liabilities) 29,091 2,690 >7,929 >13,673 >21,540Prepaid Expenses & other current assets 3,107 1,328 >2,364 >2,761 >1,925Accounts payable 766 986 1,122 1,028 1,035Accrued liablilities 16,566 3,965 4,573 >4,289 >13,256Income taxes payable >361 67 190 327 515Deferred revenue 325 759 863 791 797Long-term deferred revenue 446 1,168 1,328 1,217 1,226
Net cash flows from operating activities 280,834 200,988 204,044 214,925 239,093
Cash flows from investing activities:Short-term investments >13,872 >14,705 >15,587 >16,522 >17,514Property & equipment, gross >158,499 >30,985 >32,534 >34,160 >35,868Long-term investments >17,780 >18,847 >19,978 >21,176 >22,447Goodwill >38,217 0 0 0 0Other non-current assets 2,466 2,612 2,778 1,196 0Other non-current liabilities >9,117 >2,611 >2,333 >2,433 >2,158Controlling interest 0 0 0 0 0
Net cash flows from investing activities B235,019 B64,536 B67,655 B73,096 B77,987
Cash flows from financing activities:Current portion of long-term debt 0 0 0 0 0Long-term debt, less current portion 0 0 0 0 0Payment of cash dividend >40,726 >41,970 >45,474 >51,516 >61,033Repurchase of Common Stock >40,000 >45,000 >48,000 >52,000 >55,000Common Stock and Additional paid-in capital 2,593 3,616 3,616 3,616 970Accumulated other comprehensive income 0 0 0 0 0
Net cash flows from financing activities B78,133 B83,355 B89,858 B99,900 B115,064
Cash flows from all activities:Net increase (decrease) in cash & cash equivalents B32,318 53,098 46,531 41,929 46,043
Cash & cash equivalents, beginning of year 568,472 536,154 589,252 635,782 677,712Cash & cash equivalents, end of year 536,154 589,252 635,782 677,712 723,755
Dolby&LaboratoriesCommon%Size%Income%Statement
Fiscal%Years%Ending%Sept.%30 2012 2013 2014 2015E 2016E 2017E 2018E 2019ERevenue:Licensing 85.78% 88.72% 91.53% 90.19% 87.56% 86.28% 85.75% 85.72%Product 11.16% 8.86% 6.17% 7.48% 9.81% 11.00% 11.54% 11.63%Services 3.06% 2.42% 2.30% 2.33% 2.63% 2.71% 2.71% 2.65%Total revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales:Cost of licensing 1.40% 1.85% 1.13% 1.61% 1.57% 1.54% 1.53% 1.53%Cost of products 7.16% 7.07% 4.70% 6.35% 7.85% 8.47% 8.89% 8.95%Cost of services 1.38% 1.71% 1.48% 1.63% 1.84% 1.90% 1.90% 1.86%Gain from amended patent licensing agreement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment of products provided under operating leases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total cost of revenue 9.94% 10.63% 7.31% 9.60% 11.26% 11.92% 12.32% 12.34%
Gross margin 90.06% 89.37% 92.69% 90.40% 88.74% 88.08% 87.68% 87.66%
Operating Expenses:Sales & marketing expenses 19.62% 25.41% 26.31% 29.00% 28.00% 27.00% 25.00% 22.00%General & administrative expenses 16.11% 17.81% 18.55% 19.00% 19.00% 19.00% 19.00% 19.00%Research & development expenses 15.13% 18.55% 19.07% 20.00% 20.00% 20.00% 20.00% 20.00%Restructuring charges, net 0.13% 0.65% 0.25% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 50.98% 62.41% 64.18% 68.00% 67.00% 66.00% 64.00% 61.00%
Operating income 39.08% 26.96% 28.51% 22.40% 21.74% 22.08% 23.68% 26.66%
Interest income 0.69% 0.42% 0.35% 0.45% 0.47% 0.53% 0.59% 0.65%Interest expense .0.02% .0.06% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00%Other income (expenses), net 0.08% 0.23% .0.12% 0.16% 0.15% 0.15% 0.14% 0.12%Income (loss) before provision (benefit) for income taxes 39.84% 27.55% 28.76% 23.00% 22.37% 22.76% 24.41% 27.43%Provision for income taxes 11.21% 6.63% 7.02% 5.58% 5.43% 5.52% 5.92% 6.66%
Net income (loss) including controlling interest 28.62% 20.92% 21.74% 17.42% 16.94% 17.24% 18.48% 20.77%Less: net income (loss) attributable to controlling interest .0.09% .0.11% .0.27% .0.27% .0.25% .0.24% .0.22% .0.21%Net income (loss) attributable to Dolby Laboratories, Inc. 28.53% 20.81% 21.47% 17.15% 16.69% 17.00% 18.26% 20.56%
Dolby&LaboratoriesCommon%Size%Balance%Sheet
Fiscal%Years%Ending%Sept.%30 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
ASSETSCash & cash equivalents 53.18% 49.95% 59.20% 54.36% 56.41% 57.23% 57.83% 58.69%Restricted cash 0.00% 0.00% 0.22% 0.00% 0.00% 0.00% 0.00% 0.00%Short-term investments 32.68% 15.42% 24.08% 24.85% 24.87% 24.79% 24.91% 25.09%
Accounts receivable, gross 4.80% 10.77% 9.14% 8.50% 8.00% 7.50% 7.00% 6.50%Less: allowance for doubtful accounts 0.10% 0.06% 0.17% 0.20% 0.20% 0.20% 0.20% 0.20%Accounts receivable, net 4.70% 10.71% 8.97% 8.30% 7.80% 7.30% 6.80% 6.30%
Raw materials 0.48% 0.23% 0.11% 1.00% 1.10% 1.10% 1.10% 1.10%Work in process 0.00% 0.00% 0.00% 0.30% 0.35% 0.35% 0.35% 0.35%Finished goods 1.33% 0.88% 0.78% 2.00% 2.10% 2.10% 2.10% 2.10%Inventories 1.80% 1.11% 0.89% 3.30% 3.55% 3.55% 3.55% 3.55%
Total Deferred Taxes (Assets - Liabilities) 10.89% 13.38% 13.35% 10.05% 9.23% 9.39% 10.07% 11.32%
Prepaid expenses 1.61% 1.12% 1.21% 1.21% 1.35% 1.45% 1.56% 1.56%Other current assets 1.42% 1.54% 0.74% 0.36% 0.00% 0.00% 0.00% 0.00%Income tax receivable 0.62% 0.87% 0.42% 0.43% 0.42% 0.42% 0.45% 0.51%Assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses & other current assets 3.65% 3.53% 2.38% 2.00% 1.77% 1.87% 2.01% 2.07%
Total current assets 106.91% 94.10% 109.10% 102.87% 103.62% 104.13% 105.17% 107.02%
Long-term investments 39.04% 33.68% 30.86% 31.85% 31.87% 31.77% 31.93% 32.16%
Property, plant & equipment, gross 38.03% 41.34% 48.03% 62.83% 62.29% 61.49% 61.22% 61.08%Less: accumulated depreciation 10.54% 14.64% 17.85% 24.50% 24.29% 23.98% 23.87% 23.82%Property, plant, & equipment, net 27.49% 26.70% 30.18% 38.33% 38.00% 37.51% 37.34% 37.26%
Intangible assets, net 6.10% 4.54% 6.63% 5.54% 4.49% 3.62% 2.95% 2.40%Goodwill 30.38% 30.75% 28.91% 32.02% 30.23% 28.42% 26.95% 25.61%Other non-current assets 1.48% 1.28% 0.94% 0.67% 0.38% 0.11% 0.00% 0.00%
Total assets 211.40% 191.05% 206.63% 211.27% 208.59% 205.56% 204.34% 204.45%
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable 1.60% 1.18% 1.66% 1.69% 1.69% 1.69% 1.69% 1.69%
Accrued royalties 0.26% 0.67% 0.26% 0.48% 0.46% 0.44% 0.41% 0.36%Amounts payable to program partners 3.83% 4.41% 4.52% 5.08% 4.90% 4.73% 4.38% 3.85%Accrued compensation & benefits 5.11% 5.98% 7.46% 7.54% 7.28% 7.02% 6.50% 5.72%Accrued professional fees 0.53% 0.48% 0.64% 0.68% 0.66% 0.63% 0.59% 0.52%Accrued current portion of litigation settlement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other accrued liabilities 2.81% 3.61% 3.60% 3.97% 3.83% 3.69% 3.42% 3.01%Accrued liabilities 12.53% 15.15% 16.49% 17.74% 17.13% 16.51% 15.29% 13.46%
Income taxes payable 0.26% 0.37% 0.27% 0.23% 0.22% 0.22% 0.24% 0.27%Current portion of long-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred revenue 2.54% 2.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%
Total current liabilities 16.93% 19.00% 19.72% 20.95% 20.34% 19.73% 18.52% 16.72%
Total debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Less: current portion of debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Long-term debt, net of current portion 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Long-term deferred revenue 1.96% 2.16% 2.01% 2.00% 2.00% 2.00% 2.00% 2.00%
Long-term portion of litigation settlement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Supplemental retirement plan obligations 0.22% 0.24% 0.25% 0.27% 0.28% 0.29% 0.30% 0.32%Non-current tax liabilities 2.25% 3.41% 3.20% 2.34% 2.12% 1.93% 1.78% 1.66%Other liabilities 1.83% 1.35% 1.10% 0.89% 0.67% 0.45% 0.24% 0.05%Other non-current liabilities 4.30% 5.00% 4.55% 3.51% 3.06% 2.67% 2.32% 2.03%
Total Long-term Liabilities 6.26% 7.16% 6.56% 5.51% 5.06% 4.67% 4.32% 4.03%
Stockholders' Equity:Common Stock and Additional paid-in capital 28.97% 11.12% 10.68% 10.66% 10.41% 10.11% 9.90% 9.48%Repurchase of Common Stock 128.96% 19.04% 15.84% 19.74% 113.50% 117.01% 120.57% 124.01%Retained earnings 184.56% 159.88% 172.94% 181.39% 183.92% 185.84% 190.06% 196.22%Accumulated other comprehensive income 1.15% 0.86% 0.31% 0.31% 0.29% 0.27% 0.26% 0.24%
Total stockholders' equity - Doly Laboratories, Inc. 185.72% 162.82% 178.09% 182.62% 181.12% 179.21% 179.65% 181.95%Controlling interest 2.48% 2.08% 2.25% 2.19% 2.07% 1.95% 1.85% 1.75%Total stockholders' equity 188.20% 164.90% 180.35% 184.81% 183.19% 181.16% 181.49% 183.70%
Total&Liabilites&and&Stockholders'&Equity 211.40% 191.05% 206.63% 211.27% 208.59% 205.56% 204.34% 204.45%
Dolby&LaboratoriesValue&Driver&Estimation
Fiscal&Years&Ending&Sept.&30 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Marginal3Tax3RateFederal3statutory3tax3rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%State3income3taxes,3net3of3federal3benefit 1.10% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60%Foreign3rate3differential G5.30% G4.50% G8.90% G8.90% G8.90% G8.90% G8.90% G8.90%Marginal&Tax&Rate 30.80% 31.10% 26.70% 26.70% 26.70% 26.70% 26.70% 26.70%
EBITA:Operating3Revenues 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127- Cost of licensing G12,924 G16,856 G10,814 G15,922 G16,373 G17,159 G17,986 G18,921- Cost of products G66,325 G64,270 G45,132 G62,669 G81,954 G94,128 G104,160 G110,401- Cost of services G12,778 G15,593 G14,230 G16,111 G19,249 G21,109 G22,234 G22,900- Research & development expenses G140,143 G168,746 G183,128 G197,250 G208,926 G222,202 G234,368 G246,625- Sales & marketing expenses G181,736 G231,103 G252,647 G286,013 G292,496 G299,973 G292,961 G271,288- General & administrative expenses G149,175 G161,970 G178,104 G187,388 G198,479 G211,092 G222,650 G234,294+3Implied3Interest3on3Operating3Leases 2,276 2,514 2,286 3,704 4,833 5,074 5,328 5,594EBITA 365,459 253,650 278,407 224,603 231,984 250,422 282,811 334,292
Less:3Adjusted3Taxes:Income tax provision (benefit) 103,857 60,344 67,379 55,056 56,712 61,376 69,419 82,090+ Tax Benefit on restructuring charges 460 2,267 928 0 0 0 0 0- Gain from amended patent licensing agreement 0 0 0 0 0 0 0 0+ Impairment of products provided under operating leases 0 0 0 0 0 0 0 0- Tax Shield on Interest income G1,975 G1,197 G893 G1,173 G1,316 G1,578 G1,856 G2,153+ Tax Benefit on Interest expense 60 179 G49 0 0 0 0 0+ Tax Shield Other income (expense), net G241 G657 306 G415 G425 G436 G425 G394+3Tax3Shield3on3Implied3Lease3Interest 701 782 610 989 1,290 1,355 1,423 1,494Adjusted&Taxes 102,862 61,719 68,281 54,457 56,262 60,718 68,560 81,037
Plus:3Change3in3Deferred3Tax3Liabilities:Deferred income tax provision (benefit) 1,208 -19,642 -6,696 29,091 2,690 -7,929 -13,673 -21,540Net&Change&in&DT&Liabilities 1,208 K19,642 K6,696 29,091 2,690 K7,929 K13,673 K21,540
NOPLATNOPLAT:&EBITA&K&Adjusted&Taxes&+&Change&in&DT 263,805 172,289 203,430 199,237 178,412 181,775 200,578 231,715
Operating3Current3Assets:Average3of3cash3on3B/S3since32008 57% 57% 57% 57% 57% 57% 57% 57%x3Revenue 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127"Normal"3Cash3(Revenue3x3Avg3%) 527,958 518,502 547,288 562,151 595,424 633,262 667,935 702,866Cash3and3cash3equivalents 492,600 454,397 568,472 536,154 589,252 635,782 677,712 723,755
Lower3of3"Normal"3Cash3or3Actual3Cash 492,600 454,397 547,288 536,154 589,252 633,262 667,935 702,866Accounts receivable, net 43,495 97,460 86,168 81,863 81,486 81,109 79,690 77,692Inventories 16,700 10,093 8,536 32,546 37,084 39,441 41,600 43,776Other Current Assets less assets held for sale 33,832 32,124 22,880 19,773 18,445 20,809 23,570 25,495Operating&Current&Assets 586,627 594,074 664,872 670,336 726,266 774,620 812,796 849,830
Operating3Current3Liabilities:Accounts payable 14,831 10,695 15,898 16,664 17,650 18,771 19,799 20,835Accrued royalties 2,391 6,075 2,526 4,714 4,820 4,944 4,828 4,471Amounts payable to program partners 35,492 40,091 43,438 50,052 51,187 52,495 51,268 47,475Accrued compensation & benefits 47,331 54,423 71,677 74,329 76,013 77,956 76,134 70,502Accrued professional fees 4,893 4,402 6,162 6,708 6,860 7,035 6,871 6,363Other accrued liabilities 25,985 32,804 34,573 39,139 40,026 41,049 40,090 37,124Income taxes payable 2,424 3,394 2,600 2,239 2,306 2,496 2,823 3,339Deferred revenue 23,493 20,931 12,496 12,821 13,580 14,443 15,234 16,031Operating&Current&Liabilities 156,840 172,815 189,370 206,665 212,443 219,191 217,047 206,139
Net3PPE:Property & equipment, net 254,676 242,917 289,755 378,012 396,912 416,758 437,596 459,475
PV3of3Operating3Leases:PV&of&Operating&Leases 40,880 37,168 60,231 78,577 82,506 86,631 90,963 95,511
Other3Operating3Assets:Intangible assets, net 56,526 41,315 63,700 54,658 46,899 40,241 34,529 29,628Other non-current assets 13,687 11,638 9,051 6,585 3,974 1,196 0 0Total&Other&LongKTerm&Operating&Assets 70,213 52,953 72,751 61,243 50,873 41,438 34,529 29,628
Other3Operating3Liabilities:Long-term deferred revenue 18,192 19,663 19,279 19,725 20,893 22,220 23,437 24,663Non-current tax liabilities 20,862 30,986 30,715 23,123 22,118 21,482 20,826 20,522Other liabilities 16,933 12,311 10,591 8,824 6,953 4,963 2,864 655Total&Other&LongKTerm&Operating&Liabilities 55,987 62,960 60,585 51,673 49,963 48,665 47,126 45,840
Invested3Capital:Invested&Capital 739,569 691,337 837,654 929,830 994,151 1,051,591 1,111,710 1,182,466
Value&Drivers:NOPLAT 263,805 172,289 203,430 199,237 178,412 181,775 200,578 231,715
/33Beginning3IC 683,504 739,569 691,337 837,654 929,830 994,151 1,051,591 1,111,710ROIC: 38.60% 23.30% 29.43% 23.79% 19.19% 18.28% 19.07% 20.84%
Beginning3IC 683,504 739,569 691,337 837,654 929,830 994,151 1,051,591 1,111,710x3(ROIC3G3WACC) 31.01% 15.71% 21.84% 16.20% 11.60% 10.70% 11.49% 13.26%
EP 211,943 116,173 150,973 135,678 107,859 106,342 120,786 147,361
NOPLAT 263,805 172,289 203,430 199,237 178,412 181,775 200,578 231,715G3CapEx 56,066 G48,232 146,317 92,176 64,321 57,441 60,118 70,756
FCF 207,739 220,521 57,113 107,061 114,092 124,335 140,459 160,959
Dolby&LaboratoriesKey$Management$Ratios
Fiscal$Years$Ending$Sept.$30 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Liquidity(RatiosCurrent2Assets 990,224 856,013 1,047,597 1,014,517 1,082,462 1,156,853 1,232,480 1,319,679/2Current2Liabilities 156,840 172,815 189,370 206,665 212,443 219,191 217,047 206,139=&Current&Ratio 6.314 4.953 5.532 4.909 5.095 5.278 5.678 6.402
(Current2Assets 990,224 856,013 1,047,597 1,014,517 1,082,462 1,156,853 1,232,480 1,319,679=2Inventory2) 16,700 10,093 8,536 32,546 37,084 39,441 41,600 43,776/2Current2Liabilities 156,840 172,815 189,370 206,665 212,443 219,191 217,047 206,139=&Quick&Ratio 6.207 4.895 5.487 4.751 4.921 5.098 5.487 6.190
(Cash 492,600 454,397 568,472 536,154 589,252 635,782 677,712 723,755+2Marketable2Securities) 302,693 140,267 231,208 245,080 259,785 275,372 291,895 309,408/2Current2Liabilities 156,840 172,815 189,370 206,665 212,443 219,191 217,047 206,139=&Cash&Ratio 5.071 3.441 4.223 3.780 3.997 4.157 4.467 5.012
Activity(or(Asset2Management(RatiosAnnual2Sales 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127/2Average2Accounts2Receivable 52,655 70,478 91,814 84,016 81,674 81,297 80,400 78,691Receivables&Turnover 17.59 12.91 10.46 11.74 12.79 13.67 14.58 15.67
365 365 365 365 365 365 365 365 365/2Receivables2Turnover 17.59 12.91 10.46 11.74 12.79 13.67 14.58 15.67Average&Collection&Period 20.75 28.28 34.90 31.09 28.54 26.71 25.04 23.29
Cost2of2Goods2Sold 92,027 96,719 70,176 94,702 117,576 132,396 144,380 152,222/2Average2Inventory 21,472 13,397 9,315 20,541 34,815 38,263 40,521 42,688Inventory&Turnover 4.286 7.220 7.534 4.610 3.377 3.460 3.563 3.566
365 365 365 365 365 365 365 365 365/2Inventory2Turnover 4.286 7.220 7.534 4.610 3.377 3.460 3.563 3.566Inventory&Period 85.163 50.556 48.447 79.170 108.080 105.486 102.438 102.358
Financial(Leverage(RatiosTotal2Debt2(includes2operating2leases) 40,880 37,168 60,231 78,577 82,506 86,631 90,963 95,511/2Total2Assets 1,958,102 1,737,945 1,984,012 2,083,678 2,179,000 2,283,779 2,394,512 2,521,136Debt&Ratio 2.09% 2.14% 3.04% 3.77% 3.79% 3.79% 3.80% 3.79%
Total2Debt 40,880 37,168 60,231 78,577 82,506 86,631 90,963 95,511/2Total2Equity 1,743,233 1,500,026 1,731,648 1,822,689 1,913,676 2,012,714 2,126,807 2,265,272DebtJtoJEquity&Ratio 2.35% 2.48% 3.48% 4.31% 4.31% 4.30% 4.28% 4.22%
EBIT 365,459 253,650 278,407 224,603 231,984 250,422 282,811 334,292/2(Interest2Charges2x2(=1)2) =196 =575 183 0 0 0 0 0Interest&Coverage J1864.588 J441.131 1521.349 N/A N/A N/A N/A N/A
Profitability(Ratios(Sales2=2COGS) 834,237 812,955 890,000 891,550 927,053 978,615 1,027,462 1,080,905/2Sales 926,264 909,674 960,176 986,252 1,044,629 1,111,011 1,171,842 1,233,127Gross&Profit&Margin 90.06% 89.37% 92.69% 90.40% 88.74% 88.08% 87.68% 87.66%
Net2Income 264302 189271 206103 169174 174342 188896 213993 253528/2Sales 926264 909674 960176 986252 1044629 1111011 1171842 1233127Net&Profit&Margin 28.53% 20.81% 21.47% 17.15% 16.69% 17.00% 18.26% 20.56%
Net2Income 264,302 189,271 206,103 169,174 174,342 188,896 213,993 253,528/2Average2Total2Assets 1,920,909 1,848,024 1,860,979 2,033,845 2,131,339 2,231,389 2,339,146 2,457,824Return&on&Assets 13.76% 10.24% 11.07% 8.32% 8.18% 8.47% 9.15% 10.32%
Net2Income 264,302 189,271 206,103 169,174 174,342 188,896 213,993 253,528/2Average2Shareholder2Equity 1,714,292 1,621,630 1,615,837 1,777,168 1,868,183 1,963,195 2,069,760 2,196,039Return&on&Equity 15.42% 11.67% 12.76% 9.52% 9.33% 9.62% 10.34% 11.54%
Payout(Policy(RatiosDividends2per2Share $0.00 $4.00 $0.00 $0.40 $0.42 $0.46 $0.52 $0.62/2Earnings2per2Share 2.47 1.86 2.02 1.66 1.73 1.89 2.16 2.59Payout&Ratio 0.0% 215.1% 0.0% 24.07% 24.07% 24.07% 24.07% 24.07%
Dividends2per2Share 0.00 4.00 0.00 0.40 0.42 0.46 0.52 0.62x2Shares2Outstanding 103,095 101,739 102,269 101,363 100,389 99,426 98,456 97,383(2Total2Dividend 0 406,958 0 40,545 41,768 45,255 51,263 60,699+2Stock2Repurchases2) 268,203 82,245 56,028 40,000 45,000 48,000 52,000 55,000/2Net2Income 264,302 189,271 206,103 169,174 174,342 188,896 213,993 253,528Total&Payout&Ratio 101.48% 258.47% 27.18% 47.61% 49.77% 49.37% 48.26% 45.64%
Dolby&LaboratoriesWeighted(Average(Cost(of(Capital((WACC)(Estimation
WACC$=$Re$*$(E/V)$+$Rd$*$(1$1$t)$*$(D/V)$+$Rpfd$*$(PFD/V)
Cost&of&EquityRe$=$Rf$+$B$*$(E[Rm]$1$Rf)Rf 2.560%E[Rm]$1$Rf 4.85%Beta 1.0466Re 7.64%
Cost&of&debtRd 6.15%
Cost&of&Preferred&StockRpfd 0.00% *Note:$No$preferred$stock$outstanding
Market&Value&of&EquityShares$outstanding 102151Shares$Price 37.62E $3,842,921
Market&Value&of&DebtD $60,231 *Note:$Only$debt$is$Operating$Leases
Market&Value&of&PreferredShares$outstanding 0Shares$Price 37.62PFD 0
Market&Value&of&FirmV $3,903,152
weight$of$equity 98.46%weight$of$debt 1.54%weight$of$preferred $0Marginal$Tax$Rate 26.70%
WACC 7.59%
Dolby&LaboratoriesDiscounted+Cash+Flow+(DCF)+and+Economic+Profit+(EP)+Valuation+Models
Key$Inputs:
$$$$$CV$Growth 3.50%
$$$$$CV$ROIC 20.84%
$$$$$WACC 7.59%
$$$$$Cost$of$Equity 7.64%
Fiscal+Years+Ending+Sept.+30 2015E 2016E 2017E 2018E 2019E
DCF&ModelPeriod 1 2 3 4 5
FCF 107,061 114,092 124,335 140,459 160,959
Continuing$Value 4,716,672
PV 99,511 98,566 99,840 104,833 3,520,339
V(operating) 3,923,089
NonOoperating$Assets:
Excess$Cash 21,184
Restricted$Cash 2,142
ShortOterm$Investments 231,208
LongOterm$Investments 296,335
V(non>operating) 550,869
NonOoperating$Liabilities:
PV$of$Operating$Leases 60,231
Employee$Stock$Options 87,976
Retirement$Plan$Obligations 2,409
V(other) 150,616
V(e) 4,323,343Shares$Outstanding 102,151
Intrinsic&Value&of&Stock&(FY&End&'14) 42.32
EP&ModelPeriod 1 2 3 4 5
Economic$Profit 135,678 107,859 106,342 120,786 147,361
Continuing$Value 3,604,962
PV 126,109 93,182 85,392 90,150 2,690,603
NPV 3,085,435
Beginning$Invested$Capital$(end$2014) 837,654
V(operating) 3,923,089
NonOoperating$Assets:
Excess$Cash 21,184
Restricted$Cash 2,142
ShortOterm$Investments 231,208
LongOterm$Investments 296,335
V(non>operating) 550,869
NonOoperating$Liabilities:
PV$of$Operating$Leases 60,231
Employee$Stock$Options 87,976
Retirement$Plan$Obligations 2,409
V(other) 150,616
V(e) 4,323,343Shares$Outstanding 102,151
Intrinsic&Value&of&Stock&(FY&End&'14) 42.32
Intrinsic&Value&of&Stock&(Today) $44.07
Dolby&LaboratoriesDividend'Discount'Model'(DDM)'or'Fundamental'P/E'Valuation'Model
Fiscal'Years'Ending'Sept.'30 2015E 2016E 2017E 2018E 2019E
EPS 1.66$........ 1.73$........ 1.89$........ 2.16$........ 2.59$........
Key$Assumptions...CV.growth 3.50%...CV.ROE 11.54%...Cost.of.Equity 7.64%
Future$Cash$Flows.....P/E.Multiple.(CV.Year) 16.85.....EPS.(CV.Year) 2.59$.............Future.Stock.Price 43.62$...........Dividends.Per.Share 0.40 0.42 0.46 0.52 1.80.....Future.Cash.Flows 43.62
.....Period 1 2 3 4 5
.....Discounted.Cash.Flows 0.37 0.36 0.36 0.39 32.50
Intrinsic&Value&(FY&End&'14) 33.98$&&&&&
Intrinsic&Value&of&Stock&(Today) $35.39
Dolby&LaboratoriesRelative(Valuation(ModelsPeer(Comparison
EPS EPSTicker Company Price 2015E 2016E P/E715 P/E716
DTSI DTS,7Inc $36.40 $1.727 $2.107 21.27777777777 17.37777777777IMAX IMAX7Corporation $36.65 $1.137 $1.397 32.47777777777 26.47777777777
Average 26.8&&&&&&&&&& 21.9&&&&&&&&&&
DLB Dolby7Laboratories $37.62 $1.667 $1.737 22.67777777777 21.87777777777
Implied&Value:&&&Relative&P/E&(EPS15) &$&&&&&44.53&&&&Relative&P/E&(EPS16) 37.76$&&&&&
Industry(Comparison
EPS EPSTicker Company Price 2015E 2016E P/E715 P/E716
DTSI DTS,7Inc $36.40 $1.727 $2.107 21.27777777777 17.37777777777IMAX IMAX7Corporation $36.65 $1.137 $1.397 32.47777777777 26.47777777777STRZA Starz7Inc7Class7A $37.81 $2.547 $2.747 14.97777777777 13.87777777777HRS Harris7Corp $79.30 $5.047 $5.127 15.77777777777 15.57777777777IPGP IPG7Photonics7Corp $96.61 $4.347 $4.937 22.37777777777 19.67777777777JDSU JDS7Uniphase7Corp $13.31 $0.547 $0.737 24.67777777777 18.27777777777LGF Lions7Gate7Entertainment $31.39 $1.487 $1.727 21.27777777777 18.37777777777
Average 21.8&&&&&&&&&& 18.4&&&&&&&&&&
DLB Dolby7Laboratories $37.62 $1.667 $1.737 22.67777777777 21.87777777777
Implied&Value:&&&Relative&P/E&(EPS15) &$&&&&&36.16&&&&Relative&P/E&(EPS16) 31.87$&&&&&
VALUATION)OF)OPTIONS)GRANTED)IN)ESOP
Ticker'Symbol DLBCurrent'Stock'Price $37.62Risk'Free'Rate 2.56%Current'Dividend'Yield 1.06%Annualized'St.'Dev.'of'Stock'Returns 20.88%
Average Average BLS ValueRange'of Number Exercise Remaining Option of'OptionsOutstanding'Options of'Shares Price Life'(yrs) Price GrantedRange'1 2 5.65 0.10 31.94$'''''''''' 64$''''''''''''''''''''''''Range'2 155 17.32 0.80 20.33$'''''''''' 3,152$''''''''''''''''''Range'3 17 48.15 3.40 2.98$'''''''''''' 51$''''''''''''''''''''''''Range'4 397 25.26 3.60 13.88$'''''''''' 5,512$''''''''''''''''''Range'5 33 58.78 5.20 2.52$'''''''''''' 83$''''''''''''''''''''''''Range'6 6,240 32.54 7.80 11.69$'''''''''' 72,937$''''''''''''''''Range'7 767 42.12 7.90 8.05$'''''''''''' 6,177$''''''''''''''''''
Total 7,611 32.96$'''''''''' 7.43 13.48$'''''''''' 87,976$))))))))))))))))
Effects'of'ESOP'Exercise'and'Share'Repurchases'on'Common'Stock'Balance'Sheet'Account'and'Number'of'Shares'Outstanding
Number'of'Options'Outstanding'(shares):' 7,611Average'Time'to'Maturity'(years): 7.43Expected'Annual'Number'of'Options'Exercised: 1,025
Current'Average'Strike'Price: 32.96$''''''''''''Cost'of'Equity: 7.64%Current'Stock'Price: $37.62
1 2 3 4 52015E 2016E 2017E 2018E 2019E
Increase'in'Shares'Outstanding: 157 138 138 138 17Average'Strike'Price: 17.17$'''''''''''' 26.20$'''''''''''' 26.20$'''''''''''' 26.20$'''''''''''' 58.78$''''''''''''Increase'in'Common'Stock'Account: 2,696'''''''''''''' 3,616'''''''''''''' 3,616'''''''''''''' 3,616'''''''''''''' 970'''''''''''''''''
Change'in'Treasury'Stock 40,000 45,000 48,000 52,000 55,000Expected'Price'of'Repurchased'Shares: 37.62$'''''''''''' 40.49$'''''''''''' 43.58$'''''''''''' 46.91$'''''''''''' 50.50$''''''''''''Number'of'Shares'Repurchased: 1,063'''''''''''''' 1,111'''''''''''''' 1,101'''''''''''''' 1,108'''''''''''''' 1,089''''''''''''''
Shares'Outstanding'(beginning'of'the'year) 102,269 101,363 100,389 99,426 98,456Plus:'Shares'Issued'Through'ESOP 157 138 138 138 17Less:'Shares'Repurchased'in'Treasury 1,063'''''''''''''' 1,111'''''''''''''' 1,101'''''''''''''' 1,108'''''''''''''' 1,089''''''''''''''Shares'Outstanding'(end'of'the'year) 101,363 100,389 99,426 98,456 97,383
Present'Value'of'Operating'Lease'Obligations'(2014) Present'Value'of'Operating'Lease'Obligations'(2013)
Operating OperatingFiscal.Years.Ending.Sept..30 Leases Fiscal.Years.Ending.Sept..30 Leases2015 14384 2014 170942016 8968 2015 77652017 8968 2016 77652018 6617 2017 36382019 6617 2018 3638Thereafter 34034 Thereafter 3028Total.Minimum.Payments 79588 Total.Minimum.Payments 42928Less:.Interest 19357 Less:.Interest 5760PV.of.Minimum.Payments 60231 PV.of.Minimum.Payments 37168
Capitalization'of'Operating'Leases Capitalization'of'Operating'Leases
PreKTax.Cost.of.Debt 6.15% PreKTax.Cost.of.Debt 6.15%Number.Years.Implied.by.Year.6.Payment 5.1 Number.Years.Implied.by.Year.6.Payment 1.0
Lease PV.Lease Lease PV.LeaseYear Commitment Payment Year Commitment Payment1 14384 13550.6 1 17094 16103.62 8968 7958.9 2 7765 6891.33 8968 7497.8 3 7765 6492.04 6617 5211.7 4 3638 2865.45 6617 4909.8 5 3638 2699.46.&.beyond 6617 21102.5 6.&.beyond 3028 2116.6PV.of.Minimum.Payments 60231.4 PV.of.Minimum.Payments 37168.3
Present'Value'of'Operating'Lease'Obligations'(2012) Present'Value'of'Operating'Lease'Obligations'(2011)
Operating OperatingFiscal.Years.Ending.Sept..30 Leases Fiscal.Years.Ending.Sept..30 Leases2013 13751 2012 102942014 9350 2013 8938.52015 9350 2014 8938.52016 5004 2015 5477.52017 5004 2016 5477.5Thereafter 5981 Thereafter 5048Total.Minimum.Payments 48440 Total.Minimum.Payments 44174Less:.Interest 7560 Less:.Interest 7163PV.of.Minimum.Payments 40880 PV.of.Minimum.Payments 37011
Capitalization'of'Operating'Leases Capitalization'of'Operating'Leases
PreKTax.Cost.of.Debt 6.15% PreKTax.Cost.of.Debt 6.15%Number.Years.Implied.by.Year.6.Payment 1.2 Number.Years.Implied.by.Year.6.Payment 1.0
Lease PV.Lease Lease PV.LeaseYear Commitment Payment Year Commitment Payment1 13751 12954.3 1 10294 9697.62 9350 8298.0 2 8938.5 7932.83 9350 7817.2 3 8938.5 7473.24 5004 3941.3 4 5477.5 4314.25 5004 3712.9 5 5477.5 4064.36.&.beyond 5004 4156.7 6.&.beyond 5048 3528.6PV.of.Minimum.Payments 40880.4 PV.of.Minimum.Payments 37010.6
Sensitivity)Analysis201512019)Broadcast)Licensing)Revenue)Growth
$44.07 3.00% 4.00% 5.00% 6.00% 6.35% 7.00% 8.00% 9.00% 10.00%16.00% $41.36 $42.08 $42.81 $43.55 $43.82 $44.32 $45.10 $45.92 $46.8015.00% $41.43 $42.14 $42.87 $43.62 $43.88 $44.38 $45.17 $45.98 $46.8514.00% $41.49 $42.20 $42.93 $43.68 $43.94 $44.44 $45.23 $46.04 $46.9113.00% $41.55 $42.27 $42.99 $43.74 $44.01 $44.51 $45.29 $46.10 $46.97
2015)Mobile 12.00% $41.62 $42.33 $43.06 $43.81 $44.07 $44.57 $45.36 $46.16 $47.03Licensing)Revenue)Growth 11.00% $41.68 $42.39 $43.12 $43.87 $44.13 $44.63 $45.42 $46.22 $47.08
0.00% $41.74 $42.46 $43.18 $43.93 $44.20 $44.70 $45.48 $46.29 $47.141.00% $41.81 $42.52 $43.25 $43.99 $44.26 $44.76 $45.55 $46.35 $47.202.00% $41.87 $42.58 $43.31 $44.06 $44.32 $44.82 $45.61 $46.41 $47.25
201612019)Broadcast)Licensing)Revenue)Growth$44.07 3.00% 4.00% 5.00% 6.00% 6.35% 7.00% 8.00% 9.00% 10.00%1.00% $42.86 $43.59 $44.34 $45.10 $45.38 $45.89 $46.69 $47.51 $48.361.25% $42.47 $43.19 $43.93 $44.69 $44.96 $45.47 $46.27 $47.09 $47.921.50% $42.07 $42.79 $43.53 $44.28 $44.55 $45.05 $45.85 $46.66 $47.491.79% $41.62 $42.33 $43.06 $43.81 $44.07 $44.57 $45.36 $46.16 $47.03
Licensing)Cost)of)Sales 2.00% $41.29 $41.99 $42.72 $43.46 $43.73 $44.22 $45.02 $45.87 $46.742.25% $40.89 $41.59 $42.31 $43.06 $43.34 $43.87 $44.69 $45.53 $46.402.50% $40.50 $41.20 $41.96 $42.74 $43.02 $43.54 $44.36 $45.20 $46.062.75% $40.16 $40.90 $41.65 $42.43 $42.70 $43.22 $44.03 $44.86 $45.723.00% $39.86 $40.59 $41.34 $42.11 $42.38 $42.89 $43.70 $44.53 $45.37
Beta$44.07 1.000 1.010 1.020 1.030 1.047 1.050 1.060 1.070 1.0804.00% $58.36 $57.66 $56.97 $56.29 $55.21 $54.99 $54.37 $53.76 $53.164.25% $54.22 $53.57 $52.94 $52.33 $51.35 $51.15 $50.58 $50.03 $49.484.50% $50.65 $50.06 $49.48 $48.92 $48.02 $47.84 $47.32 $46.81 $46.314.75% $47.55 $47.01 $46.48 $45.96 $45.13 $44.96 $44.48 $44.01 $43.55
Risk)Premium 4.85% $46.42 $45.89 $45.38 $44.88 $44.07 $43.91 $43.44 $42.99 $42.545.00% $44.83 $44.33 $43.84 $43.36 $42.58 $42.43 $41.98 $41.55 $41.125.25% $42.43 $41.96 $41.50 $41.06 $40.34 $40.19 $39.77 $39.37 $38.975.50% $40.29 $39.85 $39.42 $39.00 $38.33 $38.20 $37.81 $37.42 $37.055.75% $38.38 $37.96 $37.56 $37.17 $36.53 $36.41 $36.04 $35.68 $35.33
Beta$44.07 1.000 1.010 1.020 1.030 1.047 1.050 1.060 1.070 1.0802.50% $40.32 $39.95 $39.60 $39.25 $38.68 $38.57 $38.24 $37.91 $37.592.75% $41.59 $41.20 $40.81 $40.43 $39.82 $39.70 $39.34 $38.99 $38.643.00% $43.02 $42.59 $42.16 $41.75 $41.08 $40.95 $40.56 $40.18 $39.813.25% $44.62 $44.14 $43.68 $43.22 $42.49 $42.34 $41.92 $41.50 $41.10
CV)Growth 3.50% $46.42 $45.89 $45.38 $44.88 $44.07 $43.91 $43.44 $42.99 $42.54of)NOPLAT 3.75% $48.48 $47.89 $47.31 $46.75 $45.86 $45.68 $45.16 $44.66 $44.16
4.00% $50.83 $50.17 $49.53 $48.90 $47.89 $47.69 $47.11 $46.55 $46.004.25% $53.57 $52.82 $52.08 $51.37 $50.23 $50.01 $49.36 $48.72 $48.104.50% $56.79 $55.92 $55.07 $54.25 $52.95 $52.70 $51.95 $51.23 $50.53
CV)growth)of)NOPLAT$44.07 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%6.50% $48.42 $50.51 $52.90 $55.66 $58.89 $62.69 $67.26 $72.85 $79.836.75% $45.73 $47.54 $49.58 $51.91 $54.60 $57.74 $61.45 $65.90 $71.357.00% $43.35 $44.91 $46.67 $48.66 $50.93 $53.55 $56.61 $60.23 $64.567.25% $41.22 $42.58 $44.10 $45.81 $47.75 $49.96 $52.52 $55.50 $59.02
WACC 7.59% $38.68 $39.82 $41.08 $42.49 $44.07 $45.86 $47.89 $50.23 $52.957.75% $37.58 $38.63 $39.78 $41.07 $42.51 $44.13 $45.97 $48.07 $50.498.00% $36.00 $36.93 $37.95 $39.08 $40.33 $41.74 $43.31 $45.10 $47.148.25% $34.57 $35.39 $36.30 $37.29 $38.39 $39.61 $40.97 $42.50 $44.248.50% $33.25 $33.99 $34.79 $35.67 $36.63 $37.70 $38.89 $40.21 $41.70
