Dolby Company Analysis - .support&Dolby&technologies.& & & & & &!

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  • Important)disclosures)appear)on)the)last)page)of)this)report.)

    The$Henry$Fund$

    $ Henry&B.&Tippie&School&of&Management& Jon&Kerr&[jonathan6kerr@uiowa.edu]& & & & 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.&

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    21.5$ 19.2$

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    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& currently& 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.&