- Dolby Laboratories’ revenue barely moved in the most recent quarter.
- Dolby Laboratories’ balance sheet serves as a bright spot.
- Dolby started paying a regular dividend to entice investors to wait for better times.
On Jan. 21, audio, video, and voice technologies company Dolby Laboratories (NYSE: NYSE:DLB) came out with its Q1 FY 2015 earnings announcement. In my opinion, the company didn't do so well in its most recent quarter on a fundamental basis. Let's take a look to see what's going on with the company.
In the most recent quarter, Dolby Laboratories saw its revenue increase 1.3% year-over-year. Its licensing segment contributed to all of Dolby Laboratories' overall revenue increase. The company is also fighting to keep up with changing times as people move away from DVDs and PCs and onto online platforms and mobile.
Net income declined
On that note, Dolby Laboratories saw its net income decline 7.1% year-over-year as operating expenses such as research and development and sales and marketing outpaced the increase in revenue. Dolby Laboratories' operating income declined 11% year-over-year in the most recent quarter. Hopefully, the company can come up with some new technologies to help it gain market share.
Free cash flow negative
Dolby Laboratories was free cash flow negative in the most recent quarter. It swung to a negative $18.2 million vs. a positive $68.3 million during the same time last year. An unfavorable change in operating assets and liabilities due to the timing of payments from customers and to vendors accounted largely for this swing. Company management expects this to be a one-time deal that will normalize throughout the year.
Balance sheet excellent
Dolby Laboratories sports an excellent balance sheet. Its $939 million in cash and short term investments represents a whopping 53.6% of stockholder's equity giving it plenty of cash to fund operations, acquisitions and product innovation. Moreover, the company sports no long-term debt which is a good thing because long-term creates interest which chokes out profitability and cash flow. I like to see companies with long-term debt amounting to 50% or less of stockholder's equity.
Dolby Laboratories recently started paying a regular dividend. The best way to gauge dividend sustainability is to compare how much a company pays relative to its free cash flow in a year. Since the company lacks a history of paying a regular dividend and it was free cash flow negative in the most recent quarter it remains to be seen if free cash flow can support the dividend on an ongoing basis. Currently, the company pays its shareholders $0.40 per share per year and yields 1% annually.
Dolby Laboratories' future is murky at best in the face of serious competitors. The company needs to keep up with changing consumer patterns as more people go mobile. Analysts predict that earnings per share will come in at $1.57 in 2015 and $1.70 in 2016. If the current P/E ratio of 20 holds, this will translate into share prices of $31.40 and $34.00 respectively over the next two years, translating into downturns of 21% and 14% respectively for the two years based on the current price of $39.62. Investors may want to take their investing dollars elsewhere.
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