Nadeem Moulvi's  Instablog

It was another great quarter for Dolby Laboratories (DLB). Dolby announced the financial results for the third quarter, handily beating analyst expectations. The company reported an EPS of $0.44 compared to an EPS of $0.40 a year ago.  Analysts were expecting an income of $0.31 a share on revenues of $147.2 million.  It should be noted that revenues in the quarter included approximately $22 million from prior period shipments. 

More importantly, Dolby revised its guidance for the current financial year.  The company now expects to report revenue in the range of $700 million to $715 million compared to its previous outlook of $650 million to $700 million.  It expects an EPS of $2.01 to $2.06, up from its previous guidance of $1.76 to $1.91 a share.

The increased quarterly revenue and earnings were primarily due to better than expected licensing revenue which is its highest margin source.  As I noted in my previous article, Dolby boasts an industry leading gross margin of 88.5%.

Based on the last few quarterly results, I am projecting revenues of $704 million and income of $2.02 share for the current financial year.  For the financial year 2010, I am initiating a revenue estimate of $770 million and an EPS estimate of $2.17.  I am also revising my price 12-month target from $44 a share to $50 a share by applying a P/E of 23 to my 2010 EPS estimate.  At these levels Dolby would be trading towards the low end of its historic multiples.

Disclosure: Long DLB