Dolby Laboratories Reports Second Quarter Fiscal 2014 Financial Results

SAN FRANCISCO--(BUSINESS WIRE)--

Dolby Laboratories, Inc. DLB today announced the Company's financial results for the second quarter (Q2) of fiscal year 2014. For the second quarter, Dolby reported total revenue of $278.6 million, compared to $249.3 million for the second quarter of fiscal year 2013.

Second quarter GAAP net income was $75.9 million, or $0.73 per diluted share, compared to $61.9 million, or $0.60 per diluted share, for the second quarter of fiscal 2013. On a non-GAAP basis, second quarter net income was $91.7 million, or $0.88 per diluted share, compared to $76.4 million, or $0.74 per diluted share, for the second quarter of fiscal 2013. Dolby's non-GAAP measures are described and reconciled to the corresponding GAAP measures at the end of this release.

“We're pleased to report our second quarter results with revenues higher than forecast,” said Kevin Yeaman, President and CEO, Dolby Laboratories. “Our broadcast business continues to outperform, and we are excited to work with great partners creating amazing consumer products such as the Sony PlayStation 4, Microsoft Xbox One, and the recently unveiled Amazon Fire TV.”

Financial Outlook

Q3 2014

Dolby estimates that total revenue will range from $205 million to $215 million. Gross margin percentages are projected to range between approximately 91% to 92% on a GAAP basis and 92% to 93% on a non-GAAP basis.

Dolby anticipates that operating expenses will be between approximately $153 million and $158 million on a GAAP basis and between $135 million and $140 million on a non-GAAP basis.

Dolby expects diluted earnings per share to be between $0.24 and $0.29 on a GAAP basis and between $0.38 and $0.43 on a non-GAAP basis.

The Company estimates that its fiscal Q3 2014 effective tax rate will be between approximately 27% and 28% on both a GAAP and non-GAAP basis.

FISCAL YEAR 2014

Dolby anticipates that total revenue will range from $930 million to $950 million.

Dolby anticipates that operating expenses will be between approximately $611 million and $616 million on a GAAP basis and between $535 million and $540 million 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 Q2 fiscal 2014 financial results for Dolby Laboratories at 2:00 p.m. PT (5:00 p.m. ET) on Tuesday, April 29, 2014. Access to the teleconference will be available over the Internet from http://investor.dolby.com/medialist.cfm or by dialing 1-888-599-4876. International callers can access the conference call at 1-913-312-1485.

A replay of the call will be available from 5:00 p.m. PT on Tuesday, April 29, 2014, until 9:00 p.m. PT on Tuesday, May 6, 2014, by dialing 1-877-870-5176 (international callers can access the replay by dialing 1-858-384-5517) and entering the confirmation code 1121212. An archived version of the teleconference will also be available on the Dolby Laboratories website, www.dolby.com.

Non-GAAP Financial Information

To supplement Dolby's financial statements presented on a GAAP basis, Dolby provides certain non-GAAP financial measures. These measures are adjusted to exclude amounts related to stock-based compensation, expense associated with dividend equivalents paid on restricted stock units, the amortization of intangibles from business combinations, restructuring charges, and the related tax impact of these items. Dolby presents 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 both GAAP and non-GAAP measures 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 non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Whenever Dolby uses non-GAAP financial measures, it provides a reconciliation of the non-GAAP financial measures to the most closely applicable GAAP financial measures. 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 measures as detailed above. Investors are also encouraged to review Dolby's GAAP financial statements as reported in its US Securities and Exchange Commission (SEC) filings. A reconciliation between GAAP and non-GAAP financial measures is provided at the end of this press release and on Dolby's investor relations website at http://investor.dolby.com/medialist.cfm.

Forward-Looking Statements

Certain statements in this press release, including, but not limited to, statements relating to Dolby's expected financial results for Q3 2014 and fiscal 2014 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 trends in the markets in which Dolby operates, including the personal computer, DVD, and Blu-ray Disc™, broadcast, consumer electronics, gaming, mobile, and automobile markets; the loss of, or reduction in sales by, a key customer or licensee; pricing pressures; risks associated with the rate at which OEMs include optical disc playback in Windows® 8 devices and the rate of consumer adoption of Windows operating systems; risks that a shift from disc-based media to online media content could result in fewer devices with Dolby® technologies; risks associated with the effects of macroeconomic conditions, including trends in consumer spending; risks relating to the expiration of patents; the timing of Dolby's receipt of royalty reports and 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; risks associated with acquiring and successfully integrating businesses or technologies; and other risks detailed in Dolby's US 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 DLB creates audio, video, and voice technologies that transform entertainment and communications in mobile devices, at the cinema, at home, and at work. For nearly 50 years, sight and sound experiences have become more vibrant, clear, and powerful in Dolby. For more information, please visit www.dolby.com.

Dolby and the double-D symbol are registered trademarks of Dolby Laboratories. All other trademarks remain the property of their respective owners. S14/27979 DLB-F

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
		Fiscal Quarter Ended								Fiscal Year-To-Date Ended
		March 28, 2014				March 29, 2013				March 28, 2014				March 29, 2013
Revenue:
Licensing		$	258,616			$	226,455			$	464,276			$	431,331
Products		14,563				17,726				32,667				43,224
Services		5,413				5,165				12,926				11,393
Total revenue		278,592				249,346				509,869				485,948
Cost of revenue:
Cost of licensing		3,742				6,409				7,743				9,489
Cost of products		10,293				13,206				24,081				31,695
Cost of services		3,470				3,668				7,063				7,704
Total cost of revenue		17,505				23,283				38,887				48,888
Gross margin		261,087				226,063				470,982				437,060
Operating expenses:
Research and development		44,798				41,948				89,261				84,384
Sales and marketing		64,828				58,130				125,207				116,551
General and administrative		46,457				41,803				88,365				84,911
Restructuring charges		86				—				3,301				—
Total operating expenses		156,169				141,881				306,134				285,846
Operating income		104,918				84,182				164,848				151,214
Other income/expense:
Interest income		920				904				1,574				2,243
Interest expense		(93		)		(402		)		(205		)		(427		)
Other income/(expense), net		(2,823		)		188				(2,594		)		901
Total other income/expense		(1,996		)		690				(1,225		)		2,717
Income before income taxes		102,922				84,872				163,623				153,931
Provision for income taxes		(26,373		)		(22,633		)		(41,828		)		(40,215		)
Net income including controlling interest		76,549				62,239				121,795				113,716
Less: net (income) attributable to controlling interest		(681		)		(328		)		(1,412		)		(456		)
Net income attributable to Dolby Laboratories, Inc.		$	75,868			$	61,911			$	120,383			$	113,260
Net Income Per Share:
Basic		$	0.74			$	0.61			$	1.18			$	1.11
Diluted		$	0.73			$	0.60			$	1.16			$	1.10
Weighted-Average Shares Outstanding:
Basic		102,291				101,638				102,021				102,000
Diluted		103,934				102,680				103,460				102,980

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
		March 28, 2014				September 27, 2013
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents		$	568,899			$	454,397
Restricted cash		3,344				3,175
Short-term investments		169,082				140,267
Accounts receivable, net		109,143				97,460
Inventories		9,569				10,093
Deferred taxes		82,980				84,238
Prepaid expenses and other current assets		24,377				28,949
Total current assets		967,394				818,579
Long-term investments		304,376				306,338
Property, plant and equipment, net		242,970				242,917
Intangible assets, net		46,772				41,315
Goodwill		279,871				279,724
Deferred taxes		44,877				37,434
Other non-current assets		10,295				11,638
Total assets		$	1,896,555			$	1,737,945
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	10,312			$	10,695
Accrued liabilities		144,382				137,795
Income taxes payable		9,148				3,394
Deferred revenue		12,640				20,931
Total current liabilities		176,482				172,815
Long-term deferred revenue		20,178				19,663
Other non-current liabilities		46,713				45,441
Total liabilities		243,373				237,919
Stockholders' equity:
Class A common stock		50				47
Class B common stock		53				55
Additional paid-in capital		49,074				18,812
Retained earnings		1,574,765				1,454,382
Accumulated other comprehensive income		8,694				7,814
Total stockholders' equity – Dolby Laboratories, Inc.		1,632,636				1,481,110
Controlling interest		20,546				18,916
Total stockholders' equity		1,653,182				1,500,026
Total liabilities and stockholders' equity		$	1,896,555			$	1,737,945

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
		Fiscal Quarter Ended								Fiscal Year-To-Date Ended
		March 28, 2014				March 29, 2013				March 28, 2014				March 29, 2013
Operating activities:
Net income including controlling interest		$	76,549			$	62,239			$	121,795			$	113,716
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,705				13,291				25,114				26,420
Stock-based compensation		17,753				14,945				32,807				32,649
Amortization of premium on investments		2,328				2,159				4,594				5,953
Excess tax benefit from exercise of stock options		(552		)		(180		)		(1,562		)		(649		)
Provision for doubtful accounts		133				449				507				270
Deferred income taxes		(4,980		)		(7,950		)		(6,302		)		(10,577		)
Other non-cash items affecting net income		2,838				(181		)		2,943				(872		)
Changes in operating assets and liabilities:
Accounts receivable		(33,334		)		(39,884		)		(12,186		)		(47,948		)
Inventories		(585		)		5,419				1,640				(754		)
Prepaid expenses and other assets		492				(4,787		)		(1,139		)		4,129
Accounts payable and other liabilities		22,033				17,756				5,337				(2,142		)
Income taxes, net		8,591				(5,090		)		13,386				4,422
Deferred revenue		(1,879		)		(1,846		)		(7,776		)		(1,989		)
Other non-current liabilities		46				416				262				1,428
Net cash provided by operating activities		102,138				56,756				179,420				124,056
Investing activities:
Purchase of investments		(76,113		)		(118,862		)		(178,830		)		(325,997		)
Proceeds from sales of investment securities		35,998				78,037				63,424				467,105
Proceeds from maturities of investment securities		34,663				13,625				81,402				64,950
Purchases of property, plant and equipment		(8,905		)		(5,447		)		(17,872		)		(12,164		)
Purchases of intangible assets		(12,400		)		(2		)		(12,400		)		(4,050		)
Proceeds from sale of property, plant and equipment and assets held for sale		—				357				42				376
Change in restricted cash		5				(937		)		(169		)		(1,228		)
Net cash provided by/(used in) investing activities		(26,752		)		(33,229		)		(64,403		)		188,992
Financing activities:
Proceeds from issuance of common stock		9,337				2,700				17,464				7,202
Repurchase of common stock		—				(11,477		)		(11,660		)		(65,433		)
Payment of cash dividend		—				—				—				(408,206		)
Distribution to controlling interest		—				—				—				(5,039		)
Excess tax benefit from the exercise of stock options		552				180				1,562				649
Shares repurchased for tax withholdings on vesting of restricted stock		(1,631		)		(1,496		)		(8,358		)		(5,132		)
Net cash provided by/(used) in financing activities		8,258				(10,093		)		(992		)		(475,959		)
Effect of foreign exchange rate changes on cash and cash equivalents		615				(1,119		)		477				(1,181		)
Net increase/(decrease) in cash and cash equivalents		84,259				12,315				114,502				(164,092		)
Cash and cash equivalents at beginning of period		484,640				316,193				454,397				492,600
Cash and cash equivalents at end of period		$	568,899			$	328,508			$	568,899			$	328,508

GAAP to Non-GAAP Reconciliations
(In millions, except per share data)
The following tables present the Company's GAAP financial measures reconciled to the non-GAAP financial measures included in this release for the second quarter of fiscal 2014 and 2013:
Net income:		Fiscal Quarter Ended
		March 28, 2014				March 29, 2013
GAAP net income		$	75.9			$	61.9
Stock-based compensation		17.7				14.9
RSU dividend equivalent		0.9				2.2
Amortization of acquired intangibles		2.8				3.4
Restructuring charges, net		0.1				—
Income tax adjustments		(5.7		)		(6.0		)
Non-GAAP net income		$	91.7			$	76.4
Diluted earnings per share:		Fiscal Quarter Ended
		March 28, 2014				March 29, 2013
GAAP diluted earnings per share		$	0.73			$	0.60
Stock-based compensation		0.17				0.15
RSU dividend equivalent		0.01				0.02
Amortization of acquired intangibles		0.03				0.03
Restructuring charges, net		—				—
Income tax adjustments		(0.06		)		(0.06		)
Non-GAAP diluted earnings per share		$	0.88			$	0.74
Shares used in computing diluted earnings per share (in millions)		104				103
The following tables present a reconciliation between GAAP and non-GAAP versions of the estimated financial amounts for the third quarter of fiscal 2014 and fiscal year 2014 included in this release:
Gross margin:		Q3 2014
GAAP gross margin (low - high end of range)		91% - 92		%
Stock-based compensation		0.2		%
Amortization of acquired intangibles		0.8		%
Non-GAAP gross margin (low - high end of range)		92% - 93		%
Operating expenses:		Q3 2014				Fiscal 2014
GAAP operating expenses (low - high end of range)		$153 - $158				$611 - $616
Stock-based compensation		(16		)		(66		)
RSU dividend equivalent		(1		)		(3		)
Amortization of acquired intangibles		(1		)		(4		)
Restructuring charges, net		—				(3		)
Non-GAAP operating expenses (low - high end of range)		$135 - $140				$535 - $540
Diluted earnings per share:		Q3 2014
		Low				High
GAAP diluted earnings per share		$	0.24			$	0.29
Stock-based compensation		0.16				0.16
RSU dividend equivalent		0.01				0.01
Amortization of acquired intangibles		0.03				0.03
Income tax adjustments		(0.06		)		(0.06		)
Non-GAAP diluted earnings per share		$	0.38			$	0.43
Shares used in computing diluted earnings per share (in millions)		103				103