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With China committed to digital broadcasting for its 2008 Olympics, I expect this is a good reason for Chinese citizens to replace their old TV with a flat panel high definition version. Japan already has 80% of prime time programs delivered in HD; the figure for the US is 67% (based on 2006 data). Are you ready to switch?

Dolby Laboratories Inc. (NYSE:DLB) delivered another impressive report card yesterday: quarterly net income increased by 53% YoY. With 74% of revenue from licensing, it’s a low risk business model - the company doesn’t need to worry about inventory and fluctuation in component costs as faced by manufacturing companies. DLB is also a very profitable company with 28% net margins.

DLB is the most direct proxy for digital home as its technologies cover a very wide spectrum of consumer electronic devices. In case you don’t know, you are paying DLB when you buy a new digital TV, as all new TVs shipped into the US must be digital and DLB is a mandatory feature under the ATSC standard (the US version of the digital TV standard).

Americans must replace existing analogue TVs with a digital version (or buy a digital set top box which DLB will also collect royalty) soon, because analogue TV broadcasting in US is planned to stop in 2008 (though this may be delayed).

Also, when you buy a new high definition DVD player, no matter if it’s Blu-ray or HD-DVD, you are paying DLB.

If you have bought a Playstation 3 or Microsoft Xbox for your kids, you have also paid DLB for the Dolby-driven sound.

Have you upgraded your PC to Windows Vista yet? DLB also get a cut of the price you paid for each license of Vista Home Premium and Ultimate editions, which according to Microsoft's most recent earnings call, accounted for the majority of Vista shipments. In fact, DLB expects PC (35%) and digital TV (15%) will be 2 major sources of revenue for 2007.

Still not sexy enough? Earlier this year DLB acquired BrightSide Technologies, a display technology that enables high dynamic range on LCD monitors. I talked to a friend of mine, a researcher in LED/LCD technology, who said BrightSide is the real market leader in terms of the number of fundamental patents it owns (fundamental patent means the technology is so important that almost all other display technologies would likely infringe it and hence need to license it from the patent owner).

DLB said that it is extending its imaging initiative to the consumer market with focus on enhancing LED backlit LCD displays using high dynamic range technology. The technology makes the whites whiter and darks darker, which dramatically enhances image quality. Dolby expects to begin seeing some initial revenue from this technology in fiscal 2008.

I like checking the company’s recruitment advertisements to see what is going on inside. Recently, I saw the following HK-based openings from DLB:

Compliance Officers

• Work closely with HQ in the USA and Sales Offices worldwide to monitor licensee’s usage reports to ensure compliance to licensing agreement
• Research, investigate, and analyze market data to verify usage reports from licensees
• Assist in enforcement of Company’s intellectual property rights
• Manage international trade shows pre-planning and on-site coordination
• Experience/knowledge in IP Industry or handling of legal documents is an advantage
• Strong communication, negotiation, interpersonal, and analytical skills
• Good command of written and spoken English and Mandarin
• Native Korean speaker with good command of written and spoken English

The biggest issue for licensing model is how to get the licensee to report and pay royalty. Seems like DLB is very aware of this, and it is a good sign that it has a plan to deal with it.

Currently traded at ~27x forward earnings, DLB is a reasonably priced, high growth stock.

Disclosure: Author is long DLB

DLB 1-yr chart:

DLB 1-yr chart

Source: Dolby: A Reasonably Priced, High-Growth Stock

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