Dolby Reports Q3 2014 Financial Results

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Dolby Laboratories announced its third quarter 2014 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 2014 Financial Results

SAN FRANCISCO — Dolby Laboratories, Inc. (NYSE:DLB) today announced the Company’s financial results for the third quarter (Q3) of fiscal year 2014. For the third quarter, Dolby reported total revenue of $223.4 million, compared to $207.1 million for the third quarter of fiscal year 2013.

Third-quarter GAAP net income was $39.8 million, or $0.38 per diluted share, compared to $30.2 million, or $0.29 per diluted share, for the third quarter of fiscal 2013. On a non-GAAP basis, third-quarter net income was $54.3 million, or $0.52 per diluted share, compared to $48.5 million, or $0.47 per diluted share, for the third 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 another strong quarter with better than expected revenues,” said Kevin Yeaman, President and CEO, Dolby Laboratories. “In addition, we are excited to be featured as part of the recently announced Amazon Fire Phone which extends our presence in the full line of Kindle Fire tablets and Fire TV.”

Financial Outlook

Q4 2014
Dolby estimates that total revenue will range from $210 million to $220 million. Gross margin percentages are projected to range between approximately 92 percent and 93 percent on a GAAP basis and between 93 percent and 94 percent on a non-GAAP basis.

Dolby anticipates that operating expenses will be between approximately $155 million and $158 million on a GAAP basis and between $137 million and $140 million on a non-GAAP basis.

Dolby expects diluted earnings per share to be between $0.28 and $0.33 on a GAAP basis and between $0.43 and $0.48 on a non-GAAP basis.

The Company estimates that its fiscal Q4 2014 effective tax rate will be between approximately 25 percent and 26 percent on both a GAAP and non-GAAP basis.

FISCAL YEAR 2014
Dolby anticipates that total revenue will range from $945 million to $955 million.

Dolby anticipates that operating expenses will be between approximately $618 million and $621 million on a GAAP basis and between $542 million and $545 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 Q3 fiscal 2014 financial results for Dolby Laboratories at 2:00 p.m. PT (5:00 p.m. ET) on Thursday, July 24, 2014. Access to the teleconference will be available over the Internet from http://investor.dolby.com/events.cfm or by dialing 1-888-213-3710. International callers can access the conference call at 1-913-312-0677.

A replay of the call will be available from 5:00 p.m. PT on Thursday, July 24, 2014, until 9:00 p.m. PT on Thursday, July 31, 2014, by dialing 1-877-870-5176 (international callers can access the replay by dialing 1-858-384-5517) and entering the confirmation code 6522119. An archived version of the teleconference will also be available on the Dolby Laboratories website, http://investor.dolby.com/events.cfm.

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/events.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 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, including back payments; timing of revenue recognition under licensing agreements and other contractual arrangements; 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 SEC 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) 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. S14/28196 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
June 27, June 28, June 27, June 28,
2014 2013 2014 2013
Revenue:
Licensing $ 205,625 $ 184,707 $ 669,901 $ 616,038
Products 12,971 17,381 45,638 60,605
Services 4,754 4,986 17,680 16,379
Total revenue 223,350 207,074 733,219 693,022
Cost of revenue:
Cost of licensing 4,389 4,053 12,132 13,542
Cost of products 10,860 16,269 34,941 47,964
Cost of services 3,620 4,018 10,683 11,722
Total cost of revenue 18,869 24,340 57,756 73,228
Gross margin 204,481 182,734 675,463 619,794
Operating expenses:
Research and development 46,786 42,915 136,047 127,299
Sales and marketing 63,602 58,528 188,809 175,079
General and administrative 44,205 38,413 132,570 123,324
Restructuring charges/(credits) (688 ) 5,930 2,613 5,930
Total operating expenses 153,905 145,786 460,039 431,632
Operating income 50,576 36,948 215,424 188,162
Other income/expense:
Interest income 959 820 2,533 3,063
Interest expense (251 ) (77 ) (456 ) (504 )
Other income/(expense), net 530 156 (2,064 ) 1,057
Total other income/expense 1,238 899 13 3,616
Income before income taxes 51,814 37,847 215,437 191,778
Provision for income taxes (11,251 ) (7,345 ) (53,079 ) (47,560 )
Net income including controlling interest 40,563 30,502 162,358 144,218
Less: net (income) attributable to controlling interest (784 ) (286 ) (2,196 ) (742 )
Net income attributable to Dolby Laboratories, Inc. $ 39,779 $ 30,216 $ 160,162 $ 143,476
Net Income Per Share:
Basic $ 0.39 $ 0.30 $ 1.57 $ 1.41
Diluted $ 0.38 $ 0.29 $ 1.55 $ 1.39
Weighted-Average Shares Outstanding:
Basic 102,350 101,751 102,131 101,917
Diluted 103,942 103,031 103,605 102,999

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 27, September 27,
2014 2013
ASSETS   (unaudited)  
Current assets:
Cash and cash equivalents $ 590,097 $ 454,397
Restricted cash 3,334 3,175
Short-term investments 181,446 140,267
Accounts receivable 95,259 97,460
Inventories 9,185 10,093
Deferred taxes 85,183 84,238
Prepaid expenses and other current assets 22,446 28,949
Total current assets 986,950 818,579
Long-term investments 313,505 306,338
Property, plant and equipment, net 252,389 242,917
Intangible assets, net 50,225 41,315
Goodwill 279,966 279,724
Deferred taxes 46,200 37,434
Other non-current assets 9,541 11,638
Total assets $ 1,938,776 $ 1,737,945
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 11,626 $ 10,695
Accrued liabilities 153,070 137,795
Income taxes payable 7,310 3,394
Deferred revenue 13,167 20,931
Total current liabilities 185,173 172,815
Long-term deferred revenue 19,471 19,663
Other non-current liabilities 47,968 45,441
Total liabilities 252,612 237,919
Stockholders’ equity:
Class A common stock 50 47
Class B common stock 53 55
Additional paid-in capital 41,289 18,812
Retained earnings 1,614,544 1,454,382
Accumulated other comprehensive income 8,678 7,814
Total stockholders’ equity – Dolby Laboratories, Inc. 1,664,614 1,481,110
Controlling interest 21,550 18,916
Total stockholders’ equity 1,686,164 1,500,026
Total liabilities and stockholders’ equity $ 1,938,776 $ 1,737,945

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  Fiscal Quarter Ended   Fiscal Year-To-Date Ended
June 27, June 28, June 27, June 28,
2014 2013 2014 2013
Operating activities:
Net income including controlling interest $ 40,563 $ 30,502 $ 162,358 $ 144,218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,877 13,195 38,991 39,615
Stock-based compensation 15,966 17,283 48,773 49,932
Amortization of premium on investments 2,462 2,148 7,056 8,101
Excess tax benefit from exercise of stock options (295 ) (17 ) (1,857 ) (621 )
Provision for doubtful accounts 118 (359 ) 625 (89 )
Deferred income taxes (3,634 ) (2,396 ) (9,936 ) (12,973 )
Other non-cash items affecting net income (488 ) 72 2,455 (800 )
Changes in operating assets and liabilities:
Accounts receivable 13,767 17,119 1,581 (30,829 )
Inventories 1,014 6,390 2,654 5,636
Prepaid expenses and other assets (662) 4,752 (1,801) 8,881
Accounts payable and other liabilities 11,696 1,302 17,033 (840 )
Income taxes, net (1,556 ) (7,586 ) 11,830 (3,164 )
Deferred revenue (180 ) 2,644 (7,956 ) 655
Other non-current liabilities (100 ) 295 162 1,723
Net cash provided by operating activities 92,548 85,344 271,968 209,445
Investing activities:
Purchase of investments (124,520 ) (90,691 ) (303,350 ) (416,688 )
Proceeds from sales of investment securities 76,873 67,004 140,297 534,109
Proceeds from maturities of investment securities 24,200 27,900 105,602 92,850
Purchases of property, plant and equipment (19,250 ) (5,637 ) (37,122 ) (17,801 )
Purchases of intangible assets (7,550 ) — (19,950 ) (4,050 )
Proceeds from sale of property, plant and equipment and assets held for sale 3,313 — 3,355 376
Change in restricted cash 10 (729 ) (159 ) (1,957 )
Net cash provided by/(used in) investing activities (46,924 ) (2,153 ) (111,327 ) 186,839
Financing activities:
Proceeds from issuance of common stock 6,683 6,414 24,147 13,616
Repurchase of common stock (29,298 ) (8,709 ) (40,958 ) (74,142 )
Payment of cash dividend — — — (408,206 )
Distribution to controlling interest — — — (5,039 )
Excess tax benefit from the exercise of stock options 295 17 1,857 621
Shares repurchased for tax withholdings on vesting of restricted stock (863 ) (577 ) (9,221 ) (5,709 )
Net cash provided used in financing activities (23,183 ) (2,855 ) (24,175 ) (478,859 )
Effect of foreign exchange rate changes on cash and cash equivalents (1,243 ) (283 ) (766 ) (1,464 )
Net increase/(decrease) in cash and cash equivalents 21,198 80,053 135,700 (84,039 )
Cash and cash equivalents at beginning of period 568,899 328,508 454,397 492,600
Cash and cash equivalents at end of period $ 590,097 $ 408,561 $ 590,097 $ 408,561

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 quarter of fiscal 2014 and 2013:
Net income: Fiscal Quarter Ended
June 27, June 28,
2014 2013
GAAP net income $ 39.8 $ 30.2
Stock-based compensation 16.0 15.4
RSU dividend equivalent 0.7 1.1
Amortization of acquired intangibles 2.9 3.3
Restructuring charges, net (0.7 ) 5.9
Income tax adjustments (4.4 ) (7.4 )
Non-GAAP net income $ 54.3 $ 48.5
Diluted earnings per share: Fiscal Quarter Ended
June 27, June 28,
2014 2013
GAAP diluted earnings per share $ 0.38 $ 0.29
Stock-based compensation 0.15 0.15
RSU dividend equivalent 0.01 0.01
Amortization of acquired intangibles 0.03 0.03
Restructuring charges, net (0.01 ) 0.06
Income tax adjustments (0.04 ) (0.07 )
Non-GAAP diluted earnings per share $ 0.52 $ 0.47
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 fourth quarter of fiscal 2014 and fiscal year 2014 included in this release:
Gross margin: Q4 2014
GAAP gross margin (low – high end of range) 92% – 93 %
Stock-based compensation 0.2 %
Amortization of acquired intangibles 0.8 %
Non-GAAP gross margin (low – high end of range) 93% – 94 %
Operating expenses: Q4 2014 Fiscal 2014
GAAP operating expenses (low – high end of range) $155 – $158 $618 – $621
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) $137 – $140 $542 – $545
Diluted earnings per share: Q4 2014
Low High
GAAP diluted earnings per share $ 0.28 $ 0.33
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 (0.05 ) (0.05 )
Non-GAAP diluted earnings per share $ 0.43 $ 0.48
Shares used in computing diluted earnings per share (in millions)