Dolby reports strong earnings but decreases predictions for 2011 profits

Dolby reported strong numbers in the Q1 earnings call, but shares fell after it revised its 2011 earning predictions. (Photo courtesy of Dolby Laboratories)

Shares of Dolby Laboratories, Inc. (NYSE: DLB) dropped by 12 percent on Feb. 4 after the San Francisco maker of audio surround sound reported robust earnings for the first fiscal quarter ending Dec. 31, 2010 that exceeded analysts’ expectations,  but also announced reduced guidance for  2011 revenue.

The San Francisco-based company reported net income of $86.4 million, or 76 cents per diluted share, for the first fiscal quarter , up 25 percent from the $69.1 million, or 59 cents per diluted share, reported in the same period a year ago.

Excluding special charges taken this quarter related to company restructuring and tax-related items, the company reported a non-GAPP first fiscal quarter net income of $85 million, or 75 cents per share, compared to the $74.3 million, or 64 cents per share, reported in the year-ago period.

This quarter’s figure outstripped Wall Street’s expectations which foresaw that Dolby would report j 62 cents per diluted share.

Despite looming competition from other audio-entertainment companies like Sony Corp. and an imminent slowdown in PC sales, Dolby’s revenue for the first quarter increased 10 percent to $242.7 million from $221.2 million in the year-ago quarter, largely due to licensing growth. Analysts had a revenue estimate of $234.7 million for the first quarter.

Looking ahead, the company now expects revenues of $930 million to $970 million for the fiscal year 2011, where it previously expected revenues of $950 million to $990 million for the year.

President and Chief Executive Officer Kevin Yeaman said in a statement, “During the first quarter, we generated double-digit revenue growth in many of our licensing  markets and we remain well-positioned for growth in our number of entertainment devices. In the near term, we have revised our fiscal 2011 outlook to reflect a slowdown in our PC market.”

A major component  of the company’s success in the last fiscal year has been the inclusion of Dolby audio technology in the new Microsoft Windows Vista and 7 operating systems and the growth of the digital television market. However, along with the expectation for a considerable drop in PC sales, a concern among investors has been that Dolby stock will drop as more consumers begin to stream their media over the Internet and lose the necessity for industry-level outfitted sound.  The company’s recently announced  partnership with Netflix, Inc.  may help alleviate this problem.  On Oct. 14, Netflix announced it would use Dolby Digital Plus surround sound for the movies and television shows streamed in the  popular ‘Watch Instantly’ section of the site.

This high-profile partnership, along with Dolby’s strong showing at this year’s Consumer Electronics Showcase trade show has analysts expecting the company to earn  revenue of $986.6 million for the fiscal year 2011, exceeding Dolby’s own  forecast for the year.

While a few analysts continue to maintain a buy ranking for Dolby stock,  some have shifted  to an overweight ranking. S&P Equity Research has cut Dolby stock down from a buy rating to a hold rating. At Piper Jaffray, analysts maintain that the stock is overpriced and investors should refrain from buying. In an interview, Michael Olson, an analyst from the firm,said, “Dolby’s dependence on the PC market will not bode well because of severe decreased visibility in that particular market.”

After the earnings announcement, Dolby  shares dropped  $1.44, or 2.55 percent, at the 4 p.m  close  to $55.12 per share in afternoon trading on the New York Stock Exchange. Current trading has fallen by 19 percent from a 52- week high of $70.14, according to Yahoo Finance.

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