3 Risks Dolby Investors Should Worry About
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dolby (NYSE: DLB), an audio technology company, faces jeopardy from multiple corners. Dolby’s revenue declined 3% for fiscal year 2012. The blame rests solely on softening demand for devices carrying Dolby’s technology. Bright spots such as increasing sales of Dolby compatible televisions in emerging markets and increasing adoption of Dolby technology in the mobile and gaming arena do exist. However, I found three risks in Dolby’s form 10K that investors should be deeply concerned about.
1.) PC decline
The decline of the PC threatens a huge chunk of Dolby’s revenue, “To the extent that sales of PCs with Dolby technologies decline our licensing revenue will be adversely affected.”
The portion of licensing revenue coming from PCs has been steadily declining for the past three years. Tablets and mobile devices, most of which don’t incorporate Dolby technology, replace the spot once occupied by the PC in people’s personal lives.
While some tablets with Dolby technology such as the Amazon Kindle Fire gain traction, the general consensus remains that the Apple (NASDAQ: AAPL) iPhone and iPad (which don’t incorporate Dolby technology) will rule the marketplace. Some analysts predict the iPad will comprise 63% of all tablets shipped for 2012.
2.) Windows 8 disappointment
The second risk definitely slaps Dolby investors in the face, “In May 2012, we entered into an agreement with Microsoft relating to the inclusion of Dolby Digital Plus decoding and Dolby Digital Consumer Encoder in the Windows 8 operating system. There are no assurances that we will derive as much licensing revenue under this model as we did under our prior licensing arrangements with Microsoft. The ultimate financial impact of these licensing arrangements for Windows 8 on our licensing revenue is subject to various risks, including: The extent and rate at which Windows 8 is adopted in the marketplace.”
The disappointing sales of Microsoft’s (NASDAQ: MSFT) Windows 8 and its new tablets don’t bode well for Dolby investors. According to a report issued by market research firm NPD Group, Windows based laptop sales are down 24% since the launch of Windows 8. Windows based desktop sales slumped 9% since the same period last year.
The PC market represented 28% of Dolby’s licensing revenue in 2012 down from 30% in 2011. These figures from the NPD group indicate this trend will continue.
On a bright note a Windows executive stated that 40 million Windows 8 licenses were sold which exceeds Windows 7 at this stage.
3.) Conversion to digital cinema
The third risk comes from the cinema industry, “The demand for our cinema products and services could decline as the cinema industry adopts digital cinema.”
Dolby hasn’t made inroads into the open standards digital cinema market. Adopters of digital cinema can choose from a variety of playback technologies which don’t include Dolby technology.
Cinema products only comprised 11% of 2012 revenue down from 14% in 2011 and 20% in 2010.
Conclusion
Dolby needs to make better inroads into the tablet market. It would be optimal if Dolby could strike some sort of deal with Apple to incorporate some of Dolby’s technology into the popular Apple devices. Most likely revenue from the Microsoft licensing deal will disappoint. As digital technology becomes the standard in the cinema industry Dolby will lose out there as well. Bright spots for this company do exist such as growth in the mobile, television and set top box market however, until these issues are resolved Dolby’s future remains questionable.
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