Dolby Reports Q3 2013 Financial Results

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Dolby Laboratories announced its third quarter 2013 financial results.

Dolby trades on the NYSE under the symbol DLB.

For more information visit: www.dolby.com

Unedited press release follows:

Dolby Laboratories Reports Third Quarter Fiscal 2013 Financial Results

SAN FRANCISCO — Dolby Laboratories, Inc. (NYSE:DLB) today announced the Company’s financial results for the third quarter of fiscal year 2013. For the third quarter, Dolby reported total revenue of $207.1 million, compared to $210.3 million for the third quarter of fiscal year 2012.

Third quarter GAAP net income was $30.2 million, or $0.29 per diluted share, compared to $51.5 million, or $0.48 per diluted share, for the third quarter of fiscal 2012. On a non-GAAP basis, third quarter net income was $48.5 million, or $0.47 per diluted share, compared to $60.8 million, or $0.57 per diluted share, for the third quarter of fiscal 2012. Dolby’s non-GAAP measures are described and reconciled to the corresponding GAAP measures at the end of this release.

“Licensing revenue increased year over year, with growth in our mobile and broadcast businesses offsetting weaker demand for PCs and consumer electronics this quarter,” said Kevin Yeaman, President and CEO, Dolby Laboratories. “While the current consumer-spending environment is weak, we continue to make solid progress on our long-term growth initiatives.”

Financial Outlook

Q4 2013
Dolby anticipates total revenue for the fourth quarter (Q4) of fiscal year 2013 to range from $205 million to $215 million. Gross margin percentages are projected to be approximately 90% on a GAAP basis and 91% on a non-GAAP basis.

Dolby anticipates that operating expenses will be approximately $142 million on a GAAP basis and $124 million on a non-GAAP basis.

Dolby expects diluted earnings per share to be between $0.30 and $0.36 on a GAAP basis and between $0.45 and $0.51 on a non-GAAP basis.

The Company estimates that its fiscal Q4 2013 effective tax rate will range from 27% to 28% on both a GAAP and non-GAAP basis.

FISCAL YEAR 2013
Dolby now anticipates that total revenue for fiscal year 2013 will range from $900 million to $910 million.

Dolby now anticipates that operating expenses will be approximately $574 million on a GAAP basis and $496 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 Dolby Laboratories’ third quarter fiscal 2013 financial results at 2:00 p.m. PT (5:00 p.m. ET) on Thursday, July 25, 2013. Access to the teleconference will be available over the Internet from http://investor.dolby.com/medialist.cfm or by dialing 1-888-329-8903. International callers can access the conference call at 1-719-457-2601.

A replay of the call will be available from 5:00 p.m. PT on Thursday, July 25, 2013, until 9:00 p.m. PT on Thursday, August 1, 2013, by dialing 1-877-870-5176 (international callers can access the replay by dialing 1-858-384-5517) and entering the confirmation code 3172721. 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 non-GAAP financial measures of gross margin, operating expense, net income, and diluted earnings per share. 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 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 Q4 2013 and fiscal 2013 and Dolby’s long-term growth initiatives 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; pricing pressures; risks associated with the rate at which original equipment manufacturers (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, 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 in environments from the cinema to the living room to mobile devices, Dolby creates innovations that enrich entertainment at the movies, at home, or on the go. For more information about Dolby Laboratories or Dolby 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 the Blu-ray Disc Association. Windows is a registered trademark of Microsoft Corporation. S13 /27158DLB-F

DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Fiscal Quarter Ended Fiscal Year-to-Date Ended
June 28,
2013		 June 29,
2012		 June 28,
2013		 June 29,
2012
Revenue:
Licensing $ 184,707 $ 180,886 $ 616,038 $ 609,159
Products 17,381 22,132 60,605 75,760
Services 4,986 7,304 16,379 22,340
Total revenue 207,074 210,322 693,022 707,259
Cost of revenue:
Cost of licensing 4,053 2,892 13,542 9,523
Cost of products 16,269 14,529 47,964 46,052
Cost of services 4,018 3,610 11,722 9,458
Total cost of revenue 24,340 21,031 73,228 65,033
Gross margin 182,734 189,291 619,794 642,226
Operating expenses:
Research and development 42,915 35,123 127,299 102,185
Sales and marketing 58,528 49,269 175,079 138,779
General and administrative 38,413 36,859 123,324 109,605
Restructuring charges / (credits) 5,930 (85 ) 5,930 1,193
Total operating expenses 145,786 121,166 431,632 351,762
Operating income 36,948 68,125 188,162 290,464
Interest income 820 1,513 3,063 4,664
Interest expense (77 ) (26 ) (504 ) (57 )
Other income, net 156 709 1,057 969
Income before income taxes 37,847 70,321 191,778 296,040
Provision for income taxes (7,345 ) (18,915 ) (47,560 ) (82,951 )
Net income including controlling interest 30,502 51,406 144,218 213,089
Less: net (income) / loss attributable to controlling interest (286 ) 123 (742 ) (281 )
Net income attributable to Dolby Laboratories, Inc. $ 30,216 $ 51,529 $ 143,476 $ 212,808
Net income per share:
Basic $ 0.30 $ 0.48 $ 1.41 $ 1.97
Diluted $ 0.29 $ 0.48 $ 1.39 $ 1.96
Weighted-average shares outstanding:
Basic 101,751 106,328 101,917 107,876
Diluted 103,031 107,202 102,999 108,493

DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 28,
2013		 September 28,
2012
ASSETS
Current assets:
Cash and cash equivalents $ 408,561 $ 492,600
Short-term investments 109,342 302,693
Accounts receivable, net 74,528 43,495
Inventories 12,795 16,700
Deferred taxes 79,114 80,966
Prepaid expenses and other current assets 30,200 33,832
Total current assets 714,540 970,286
Long-term investments 335,371 361,614
Property, plant and equipment, net 245,667 254,676
Intangible assets, net 44,736 56,526
Goodwill 278,718 281,375
Deferred taxes 36,591 22,634
Other non-current assets 11,827 13,687
Total assets $ 1,667,450 $ 1,960,798
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 8,845 $ 14,831
Accrued liabilities 119,154 116,092
Income taxes payable 1,012 2,424
Deferred revenue 23,233 23,493
Total current liabilities 152,244 156,840
Long-term deferred revenue 19,073 18,192
Deferred taxes — 2,696
Other non-current liabilities 46,271 39,837
Total liabilities 217,588 217,565
Stockholders’ equity:
Class A common stock 47 46
Class B common stock 55 57
Additional paid-in capital 17,111 —
Retained earnings 1,408,587 1,709,479
Accumulated other comprehensive income 5,812 10,687
Total stockholders’ equity – Dolby Laboratories, Inc. 1,431,612 1,720,269
Controlling interest 18,250 22,964
Total stockholders’ equity 1,449,862 1,743,233
Total liabilities and stockholders’ equity $ 1,667,450 $ 1,960,798

DOLBY LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Fiscal Quarter Ended Fiscal Year-to-Date Ended
June 28,
2013		 June 29,
2012		 June 28,
2013		 June 29,
2012
Operating activities:
Net income including controlling interest $ 30,502 $ 51,406 $ 144,218 $ 213,089
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,195 11,086 39,615 31,189
Stock-based compensation 17,283 10,741 49,932 34,243
Amortization of premium on investments 2,148 3,974 8,101 13,280
Excess tax benefit from exercise of stock options (17 ) (516 ) (621 ) (941 )
Provision for doubtful accounts (359 ) 317 (89 ) 449
Deferred income taxes (2,396 ) 2,955 (12,973 ) (7,075 )
Other non-cash items affecting net income 72 (2,199 ) (800 ) 38
Changes in operating assets and liabilities:
Accounts receivable 17,119 11,256 (30,829 ) 15,359
Inventories 6,390 4,399 5,636 5,275
Prepaid expenses and other assets 4,023 1,710 6,924 582
Accounts payable and other liabilities 1,302 11,154 (840 ) (1,567 )
Income taxes, net (7,586 ) (7,251 ) (3,164 ) 6,857
Deferred revenue 2,644 (1,057 ) 655 (221 )
Other non-current liabilities 295 354 1,723 2,441
Net cash provided by operating activities 84,615 98,329 207,488 312,998
Investing activities:
Purchases of available-for-sale securities (90,691 ) (309,645 ) (413,688 ) (431,894 )
Proceeds from sales of available-for-sale securities 67,004 156,066 534,109 261,520
Proceeds from maturities of available-for-sale securities 27,900 91,400 92,850 202,915
Purchases of property, plant and equipment (5,637 ) (19,775 ) (17,801 ) (50,225 )
Acquisitions, net of cash acquired — — — (575 )
Other investments — — (3,000 ) —
Purchases of intangible assets — (350 ) (4,050 ) (350 )
Proceeds from sales of property, plant and equipment and assets held for sale — 273 376 988
Net cash provided by / (used in) investing activities (1,424 ) (82,031 ) 188,796 (17,621 )
Financing activities:
Proceeds from issuance of common stock 6,414 9,565 13,616 16,196
Repurchase of common stock (8,709 ) (103,810 ) (74,142 ) (189,959 )
Payment of cash dividend — — (408,206 ) —
Distribution to controlling interest — — (5,039 ) —
Excess tax benefit from the exercise of stock options 17 516 621 941
Shares repurchased for tax withholdings on vesting of restricted stock (577 ) (273 ) (5,709 ) (3,380 )
Net cash used in financing activities (2,855 ) (94,002 ) (478,859 ) (176,202 )
Effect of foreign exchange rate changes on cash and cash equivalents (283 ) 124 (1,464 ) (279 )
Net increase / (decrease) in cash and cash equivalents 80,053 (77,580 ) (84,039 ) 118,896
Cash and cash equivalents at beginning of period 328,508 747,988 492,600 551,512
Cash and cash equivalents at end of period $ 408,561 $ 670,408 $ 408,561 $ 670,408

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 third fiscal quarter of 2013 and 2012:
Net income: Fiscal Quarter Ended
June 28,
2013		 June 29,
2012
GAAP net income $ 30.2 $ 51.5
Stock-based compensation1 15.4 10.7
RSU dividend equivalent 1.1 —
Amortization of acquired intangibles 3.3 2.5
Restructuring charges, net 5.9 —
Income tax adjustments (7.4 ) (3.9 )
Non-GAAP net income $ 48.5 $ 60.8
Diluted earnings per share: Fiscal Quarter Ended
June 28,
2013		 June 29,
2012
GAAP diluted earnings per share $ 0.29 $ 0.48
Stock-based compensation 0.15 0.10
RSU dividend equivalent 0.01 —
Amortization of acquired intangibles 0.03 0.02
Restructuring charges, net 0.06 —
Income tax adjustments (0.07 ) (0.03 )
Non-GAAP diluted earnings per share $ 0.47 $ 0.57
Shares used in computing diluted earnings per share (in millions) 103 107
The following tables present a reconciliation between GAAP and non-GAAP versions of the estimated financial amounts for the fourth fiscal quarter of 2013 and fiscal year 2013 included in this release:
Gross margin: Q4 2013
GAAP gross margin 90 %
Stock-based compensation — %
RSU dividend equivalent — %
Amortization of acquired intangibles 1 %
Non-GAAP gross margin 91 %
Operating expenses: Q4 2013 Fiscal Year 2013
GAAP operating expenses $ 142 $ 574
Stock-based compensation (16 ) (64 )
RSU dividend equivalent (1 ) (4 )
Amortization of acquired intangibles (1 ) (4 )
Restructuring charges, net — (6 )
Non-GAAP operating expenses $ 124 $ 496
Diluted earnings per share: Q4 2013
Low High
GAAP diluted earnings per share $ 0.30 $ 0.36
Stock-based compensation 0.16 0.17
RSU dividend equivalent 0.01 0.01
Amortization of acquired intangibles 0.03 0.03
Restructuring charges, net — —
Income tax adjustments (0.05 ) (0.06 )
Non-GAAP diluted earnings per share $ 0.45 $ 0.51
Shares used in computing diluted earnings per share (in millions) 103 103
1 Excludes $1.9 million stock-based compensation expense for previously awarded grants that would have otherwise been recognized over their remaining vesting terms through the second quarter of fiscal 2014. These amounts were associated with an employee terminated under the current restructuring plan and are included in restructuring charges.