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Dolby Laboratories Reports Third Quarter Fiscal 2010 Results

Jul 29, 2010

SAN FRANCISCO, Jul 29, 2010 (BUSINESS WIRE) -- Dolby Laboratories, Inc. (NYSE:DLB) today announced the company's financial results for its third quarter of fiscal 2010.

For the third quarter, Dolby reported total revenue of $230.3 million, compared to $171.2 million for the third quarter of fiscal 2009, an increase of 34 percent.

Third quarter GAAP net income was $63.5 million, or $0.55 per diluted share, compared to $51.1 million, or $0.44 per diluted share, for the third quarter of fiscal 2009. On a non-GAAP basis, third quarter net income was $71.1 million, or $0.62 per diluted share, compared to $57.5 million, or $0.50 per diluted share, for the third quarter of fiscal 2009. Dolby's non-GAAP measures exclude expenses related to stock-based compensation, the amortization of intangibles from business combinations, restructuring charges, a gain from an amended patent licensing agreement, and the related tax impact of these items.

"We had a solid third quarter," said Kevin Yeaman, President and Chief Executive Officer, Dolby Laboratories. "In addition to our strong financial results, we continued to make progress in important growth markets, including in broadcast, where one of India's leading commercial broadcast services, Airtel Digital TV, announced its selection of Dolby Digital Plus for its high definition programming, and in cinema, where we continued to experience strong demand for our 3D systems."

In the third quarter, Dolby recorded a non-cash impairment charge of $9.6 million in cost of revenue related to digital cinema systems provided under operating leases to exhibitors. These operating leases were initiated to encourage the motion picture industry to transition to digital cinema. We ceased entering into these operating leases during the fourth quarter of fiscal 2009. The remaining net book value at the end of the third quarter for these digital cinema systems is $7.1 million.

Financial Targets

For fiscal 2010, Dolby is now targeting revenue of $890 million to $905 million, total gross margin of approximately 85 percent on a GAAP basis, and 86 percent on a non-GAAP basis. In addition, Dolby is now targeting fiscal 2010 operating expenses of $356 million to $362 million on a GAAP basis and $317 million to $321 million on a non-GAAP basis, and a tax rate of approximately 35 percent on a GAAP basis and non-GAAP basis. Dolby's non-GAAP targets exclude expenses related to stock-based compensation, the amortization of intangibles from business combinations, restructuring charges, and the related tax impact of these items.

These targets lead to a fiscal 2010 diluted earnings per share target range of $2.31 to $2.36 on a GAAP basis and $2.57 to $2.63 on a non-GAAP basis.

The Company's Conference Call Information

Members of Dolby management will lead a conference call open to all interested parties to discuss Dolby Laboratories' Q3 2010 fiscal year financial results at 2:00 p.m. PT (5:00 p.m. ET) on Thursday, July 29, 2010.

Access to the teleconference will be available over the Internet from http://investor.dolby.com/medialist.cfm or by dialing 888-811-5436. International callers can access the conference call at 913-312-9306.

A replay of the call will be available from 5:00 p.m. PT on Thursday, July 29, 2010, until 9:00 p.m. PT on August 5, 2010 by dialing 877-870-5176 (international callers can access the replay by dialing 858-384-5517) and entering the confirmation code 7705478. An archived version of the teleconference will also be available on Dolby Laboratories' website, www.dolby.com.

Non-GAAP Financial Information

To supplement Dolby's financial statements presented on a GAAP basis, Dolby provides non-GAAP financial measures of gross margin, operating expense, tax rate, and diluted earnings per share. These measures are adjusted to exclude the charges and expenses discussed above. Dolby presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Dolby's operating results in a manner that focuses on what Dolby's management believes to be its ongoing business operations. Dolby's management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes the impact of stock-based compensation expense, amortization of acquired intangible assets through business combinations, restructuring charges, a gain from an amended patent licensing agreement, and the related tax impact of all of these items on the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Dolby's business for planning and forecasting in subsequent periods. Dolby's management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Whenever Dolby uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. Investors are also encouraged to review Dolby's GAAP financial statements as reported in its SEC filings. A reconciliation between GAAP and non-GAAP financial measures is provided at the end of this press release and on our investor relations website at http://investor.dolby.com/medialist.cfm.

Forward-Looking Statements

Certain statements in this press release, including statements relating to Dolby's expectations regarding revenue, gross margin, operating expense, tax rate, and diluted earnings per share for fiscal 2010, the progress Dolby is making in important growth markets, Dolby's prospects in the broadcast market in India, demand for Dolby's 3D systems, and the benefits that may be derived from them are "forward-looking statements" that are subject to risks and uncertainties. These forward-looking statements are based on management's current expectations, and as a result of certain risks and uncertainties actual results may differ materially from those projected. The following important factors, without limitation, could cause actual results to differ materially from those in the forward-looking statements: risks associated with the effects of macroeconomic conditions; risks associated with trends in the markets in which Dolby operates, including the DVD and Blu-ray Disc(TM), broadcast, personal computer, consumer electronics, gaming, mobile, and automobile markets; pricing pressures; the timing of Dolby's receipt of royalty reports and/or payments from its licensees; Dolby's accuracy of calculation of royalties due to its licensors; Dolby's ability to develop, maintain, and strengthen relationships with industry participants; Dolby's ability to develop and deliver innovative technologies in response to new and growing markets in the entertainment industry; competitive risks; risks associated with conducting business in China and other countries that have historically limited recognition and enforcement of intellectual property and contractual rights; risks associated with the health of the motion picture industry generally; the development and growth of the market for digital cinema and digital 3D and Dolby's ability to successfully penetrate this market; Dolby's ability to expand its business generally, and to expand its business beyond sound technologies to other technologies related to digital entertainment delivery, by acquiring and successfully integrating businesses or technologies; and other risks detailed in Dolby's Securities and Exchange Commission filings and reports, including the risks identified under the section captioned "Risk Factors" in its most recent Quarterly Report on Form 10-Q. Dolby disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise.

About Dolby Laboratories

Dolby Laboratories (NYSE:DLB) is the global leader in technologies that are essential elements in the best entertainment experiences. Founded in 1965 and best known for high-quality audio and surround sound, Dolby creates innovations that enrich entertainment at the movies, at home, or on the go. For more information about Dolby Laboratories or Dolby(R) technologies, please visit www.dolby.com.

Dolby and the double-D symbol are registered trademarks of Dolby Laboratories. Blu-ray Disc is a trademark of Blu-ray Disc Association. S10/23160 DLB-F

DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Quarter Ended Fiscal Year-to-Date Ended
June 26, 2009 June 25, 2010 June 26, 2009 June 25, 2010
(unaudited)
(in thousands, except per share amounts)
Revenue:
Licensing $ 142,141 $ 170,326 $ 456,076 $ 532,045
Products 21,790 52,651 75,744 140,147
Services 7,313 7,292 23,806 22,714
Total revenue 171,244 230,269 555,626 694,906
Cost of revenue:
Cost of licensing 3,362 3,719 11,223 13,282
Cost of products (1) 13,142 23,336 46,776 72,042
Cost of services (1) 3,246 3,407 9,546 10,554
Gain from amended patent licensing agreement - - (20,041 ) -
Impairment of products provided under operating leases - 9,594 - 9,594
Total cost of revenue 19,750 40,056 47,504 105,472
Gross margin 151,494 190,213 508,122 589,434
Operating expenses:
Research and development (1) 20,871 27,513 59,831 75,561
Sales and marketing (1) 24,403 36,527 68,963 93,635
General and administrative (1) 26,523 29,165 76,912 86,677
Restructuring charges, net 1,278 1,068 4,012 1,371
Total operating expenses 73,075 94,273 209,718 257,244
Operating income 78,419 95,940 298,404 332,190
Other income, net 600 2,142 5,794 6,200
Income before provision for income taxes 79,019 98,082 304,198 338,390
Provision for income taxes (27,502 ) (34,394 ) (104,555 ) (118,890 )
Net income including controlling interest 51,517 63,688 199,643 219,500
Less: net income attributable to controlling interest (371 ) (236 ) (951 ) (1,064 )
Net income attributable to Dolby Laboratories, Inc. $ 51,146 $ 63,452 $ 198,692 $ 218,436
Earnings per share attributable to Dolby Laboratories, Inc. (basic) $ 0.45 $ 0.56 $ 1.76 $ 1.92
Earnings per share attributable to Dolby Laboratories, Inc. (diluted) $ 0.44 $ 0.55 $ 1.73 $ 1.89
Weighted-average shares outstanding (basic) 113,261 113,254 112,907 113,775
Weighted-average shares outstanding (diluted) 115,528 115,282 115,153 115,780
(1) Stock-based compensation included above was classified as follows:
Cost of products $ 93 $ 126 $ 471 $ 305
Cost of services 29 36 85 99
Research and development 1,447 1,869 3,788 4,613
Sales and marketing 2,006 2,573 4,746 6,522
General and administrative 2,980 3,540 6,885 9,476
DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 25, 2009 June 25, 2010
(unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 451,678 $ 519,098
Short-term investments 283,808 303,771
Accounts receivable, net 22,981 47,650
Inventories 12,975 16,989
Deferred taxes 83,438 101,723
Prepaid expenses and other current assets 45,958 23,007
Total current assets 900,838 1,012,238
Long-term investments 205,938 222,664
Property, plant, and equipment, net 92,178 95,486
Intangible assets, net 82,035 69,322
Goodwill 261,121 258,853
Deferred taxes 23,755 29,272
Other non-current assets 15,450 15,351
Total assets $ 1,581,315 $ 1,703,186
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 113,822 $ 140,059
Income taxes payable 3,934 17,841
Current portion of long-term debt 1,624 1,675
Deferred revenue 37,204 12,041
Total current liabilities 156,584 171,616
Long-term debt, net of current portion 5,825 4,470
Long-term deferred revenue 10,759 11,758
Deferred taxes 13,573 12,919
Other non-current liabilities 31,469 29,316
Total liabilities 218,210 230,079
Stockholders' equity:
Class A common stock 53 53
Class B common stock 60 60
Additional paid-in capital 478,979 375,241
Retained earnings 852,475 1,070,911
Accumulated other comprehensive income 9,541 4,558
Total stockholders' equity - Dolby Laboratories, Inc. 1,341,108 1,450,823
Controlling interest 21,997 22,284
Total stockholders' equity 1,363,105 1,473,107
Total liabilities and stockholders' equity $ 1,581,315 $ 1,703,186
DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Quarter Ended Fiscal Year-to-Date Ended
June 26, 2009 June 25, 2010 June 26, 2009 June 25, 2010
(unaudited)
(in thousands)
Operating activities:
Net income including controlling interest $ 51,517 $ 63,688 $ 199,643 $ 219,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,916 8,151 21,501 25,545
Stock-based compensation expense 6,371 8,063 15,551 20,501
Amortization of premium on investments 1,677 2,406 3,942 6,384
Excess tax benefit from exercise of stock options (2,065) (6,606) (3,548) (16,890)
Provision for doubtful accounts (234) 27 1,148 (181)
Deferred taxes 2,875 (11,352) 19,832 (21,782)
Unrealized losses/(gains) on Put Rights (232) 3,755 (9,452) 6,506
Unrealized losses/(gains) on auction rate certificates 232 (4,687) 10,854 (7,601)
Gain from amended patent licensing agreement - - (20,041) -
Impairment of products provided under operating leases - 9,594 - 9,594
Other non-cash items affecting net income 2,984 1,241 1,795 2,007
Changes in operating assets and liabilities:
Accounts receivable (3,477) (3,148) (24,694) (24,595)
Inventories 3,855 (6,504) 145 (4,087)
Prepaid expenses and other assets (4,530) 2,467 3,163 15,730
Accounts payable and accrued liabilities (8,669) 17,542 (24,244) 24,273
Income taxes, net (1,020) (1,609) 248 31,903
Deferred revenue 11,760 (4,744) 4,788 (24,282)
Other liabilities 237 (315) (2,367) (74)
Payment on litigation settlement (3,000) (3,000) (3,000) (3,000)
Net cash provided by operating activities 65,197 74,969 195,264 259,451
Investing activities:
Purchases of available-for-sale securities (109,470) (179,439) (304,723) (556,172)
Proceeds from sale of available-for-sale securities 43,999 287,159 97,985 519,857
Purchases of property, plant, and equipment (5,684) (6,989) (9,236) (24,882)
Purchases of intangible assets - (700) (8,321) (825)
Acquisitions, net of cash acquired (16,621) - (16,621) -
Net cash provided by/(used in) investing activities (87,776) 100,031 (240,916) (62,022)
Financing activities:
Payments on debt (387) (402) (1,121) (1,192)
Proceeds from exercise of stock options 6,249 13,790 9,410 32,948
Issuance of Class A common stock (ESPP) 1,830 2,139 3,465 4,060
Repurchase of common stock - (94,524) - (177,648)
Excess tax benefit from exercise of stock options 2,065 6,606 3,548 16,890
Net cash provided by/(used in) financing activities 9,757 (72,391) 15,302 (124,942)
Effect of foreign exchange rate changes on cash and cash equivalents 3,670 (860) (1,035) (5,067)
Net increase/(decrease) in cash and cash equivalents (9,152) 101,749 (31,385) 67,420
Cash and cash equivalents at beginning of period 372,528 417,349 394,761 451,678
Cash and cash equivalents at end of period $ 363,376 $ 519,098 $ 363,376 $ 519,098
GAAP to Non-GAAP Reconciliations
(In millions, except per share data)

The following tables show the Company's third quarter of fiscal years 2009 and 2010 GAAP financial measures reconciled to non-GAAP financial measures included in this release:

Net income: Fiscal Quarter Ended
June 26,

2009

June 25,

2010

GAAP net income $ 51 $ 63
Stock-based compensation 7 8
Amortization of acquired intangibles 2 3
Restructuring charges, net 1 1
Income tax adjustments (3 ) (4 )
Non-GAAP net income $ 58 $ 71
Diluted earnings per share: Fiscal Quarter Ended
June 26,

2009

June 25,

2010

GAAP diluted earnings per share $ 0.44 $ 0.55
Stock-based compensation 0.06 0.07
Amortization of acquired intangibles 0.02 0.02
Restructuring charges, net 0.01 0.01
Income tax adjustments (0.03 ) (0.03 )
Non-GAAP diluted earnings per share $ 0.50 $ 0.62
Shares used in computing diluted earnings per share 116 115

The following tables show the Company's fiscal year 2010 GAAP financial targets reconciled to non-GAAP financial targets included in this release:

Gross margin: Fiscal Year
2010
GAAP gross margin 85 %
Stock-based compensation 0 %
Amortization of acquired intangibles 1 %
Non-GAAP gross margin 86 %
Operating expenses: Fiscal Year 2010
Low High
GAAP operating expenses $ 356 $ 362
Stock-based compensation (31 ) (32 )
Amortization of acquired intangibles (4 ) (5 )
Restructuring charges, net (4 ) (4 )
Non-GAAP operating expenses $ 317 $ 321
Diluted earnings per share: Fiscal Year 2010
Low High
GAAP diluted earnings per share $ 2.31 $ 2.36
Stock-based compensation 0.27 0.28
Amortization of acquired intangibles 0.10 0.11
Restructuring charges, net 0.03 0.03
Income tax adjustments (0.14 ) (0.15 )
Non-GAAP diluted earnings per share $ 2.57 $ 2.63
Shares used in computing diluted earnings per share 116 116

SOURCE: Dolby Laboratories

Dolby Laboratories
Alex Hughes, 415-645-4572 (Investors)
investor@dolby.com
Sean Durkin, 415-645-5176 (Media)
news@dolby.com

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