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Dolby Reports Q3 2016 Financial Results

Dolby Laboratories announced its third quarter 2016 financial results.

For more information visit: www.dolby.com


Unedited press release follows:

Dolby Laboratories Reports Third Quarter Fiscal 2016 Financial Results

SAN FRANCISCO — Dolby Laboratories, Inc. (NYSE:DLB) today announced the Company’s financial results for the third quarter (Q3) of fiscal year 2016. For the third quarter, Dolby reported total revenue of $277.6 million, compared to $231.7 million for the third quarter of fiscal year 2015.

Third quarter GAAP net income was $63.6 million, or $0.62 per diluted share, compared to $35.5 million, or $0.34 per diluted share, for the third quarter of fiscal 2015. On a non-GAAP basis, third quarter net income was $78.3 million, or $0.76 per diluted share, compared to $51.4 million, or $0.49 per diluted share, for the third quarter of fiscal 2015. Dolby’s non-GAAP measures are described and reconciled to the corresponding GAAP measures at the end of this release.

“Q3 results were strong, and we continued to build momentum with our new initiatives,” said Kevin Yeaman, President and CEO, Dolby Laboratories. “We opened our first Dolby Cinema locations in China, grew the number of Dolby Vision televisions in market, and added a new Dolby Voice partner.”

Dividend
Today, Dolby announced a cash dividend of $0.12 per share of Class A and Class B common stock, payable on August 17, 2016, to stockholders of record as of the close of business on August 8, 2016.

Financial Outlook

Q4 2016
Dolby estimates that total revenue for the fourth quarter (Q4) of fiscal 2016 will range from $220 million to $230 million. Gross margin percentages are projected to range between approximately 88 percent and 89 percent on a GAAP basis and between 89 percent and 90 percent on a non-GAAP basis.

Dolby anticipates that operating expenses will be between $172 million and $175 million on a GAAP basis and between $154 million and $157 million on a non-GAAP basis.

Dolby estimates that diluted earnings per share will be between $0.16 and $0.22 on a GAAP basis and between $0.31 and $0.37 on a non-GAAP basis.

Dolby estimates that its fiscal Q4 2016 effective tax rate will be approximately 26 percent on both a GAAP and non-GAAP basis.

Fiscal Year 2016
Dolby anticipates that total revenue will range from $1.015 billion to $1.025 billion.

Dolby anticipates that operating expenses will be approximately $685 million on a GAAP basis and approximately $610 million on a non-GAAP basis.

Conference Call Information
Members of Dolby management will lead a conference call open to all interested parties to discuss Q3 fiscal 2016 financial results for Dolby Laboratories at 2:00 p.m. PT (5:00 p.m. ET) on Wednesday, July 27, 2016. Access to the teleconference will be available over the Internet from http://investor.dolby.com/events.cfm or by dialing 1-888-211-0226. International callers can access the conference call at 1-913-312-6667.

A replay of the call will be available from 5:00 p.m. PT on Wednesday, July 27, 2016, until 9:00 p.m. PT on Wednesday, August 3, 2016, by dialing 1-877-870-5176 (international callers can access the replay by dialing 1-858-384-5517) and entering the confirmation code 4803921. 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.

Forward-Looking Statements
Certain statements in this press release, including, but not limited to, statements relating to Dolby’s expected financial results for Q4 2016 and fiscal 2016, our ability to advance our long-term objectives, and future quarterly dividend payments 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, Blu-ray Disc™, broadcast, consumer electronics, cinema, gaming, mobile, communications, 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 and Windows 10 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; 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 more than 50 years, sight and sound experiences have become more vibrant, clear, and powerful in Dolby. For more information, please visit www.dolby.com.

Dolby, Dolby Voice, and the double-D symbol are registered trademarks of Dolby Laboratories. Dolby Cinema and Dolby Vision are trademarks of Dolby Laboratories. Blu-ray Disc is a trademark of Blu-ray Disc Association. Windows is a registered trademark of Microsoft Corporation. DLB-F

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Quarter Ended Fiscal Year-To-Date Ended
July 1, June 26, July 1, June 26,
2016 2015 2016 2015
Revenue: (unaudited) (unaudited) (unaudited) (unaudited)
Licensing $ 253,026 $ 204,855 $ 713,491 $ 664,786
Products 20,638 22,596 65,510 58,844
Services 3,923 4,251 13,740 14,260
Total revenue 277,587 231,702 792,741 737,890
Cost of revenue:
Cost of licensing 6,620 1,347 19,851 8,615
Cost of products 14,098 20,027 47,114 50,848
Cost of services 3,903 3,506 11,795 9,976
Total cost of revenue 24,621 24,880 78,760 69,439
Gross margin 252,966 206,822 713,981 668,451
Operating expenses:
Research and development 54,977 45,508 160,393 150,703
Sales and marketing 74,234 70,782 220,503 204,740
General and administrative 42,570 45,587 129,130 135,956
Restructuring charges/(credits) (10 ) 1,245 (39 )
Total operating expenses 171,771 161,877 511,271 491,360
Operating income 81,195 44,945 202,710 177,091
Other income/expense:
Interest income 1,464 1,453 4,011 3,444
Interest expense (26 ) (69 ) (88 ) (115 )
Other income/(expense), net (849 ) 1,049 (1,542 ) 1,159
Total other income 589 2,433 2,381 4,488
Income before income taxes 81,784 47,378 205,091 181,579
Provision for income taxes (18,017 ) (11,522 ) (42,768 ) (45,254 )
Net income including controlling interest 63,767 35,856 162,323 136,325
Less: net (income) attributable to controlling interest (139 ) (350 ) (396 ) (1,488 )
Net income attributable to Dolby Laboratories, Inc. $ 63,628 $ 35,506 $ 161,927 $ 134,837
Net Income Per Share:
Basic $ 0.63 $ 0.35 $ 1.61 $ 1.32
Diluted $ 0.62 $ 0.34 $ 1.59 $ 1.29
Weighted-Average Shares Outstanding:
Basic 100,533 102,670 100,578 102,494
Diluted 102,677 104,105 101,979 104,127

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
July 1, September 25,
2016 2015
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 599,991 $ 531,926
Restricted cash 5,673 2,936
Short-term investments 118,778 138,901
Accounts receivable, net 91,637 101,563
Inventories 18,544 13,872
Prepaid expenses and other current assets 37,306 32,031
Total current assets 871,929 821,229
Long-term investments 266,431 321,015
Property, plant and equipment, net 428,225 403,091
Intangible assets, net 222,868 127,507
Goodwill 309,020 307,708
Deferred taxes 149,633 143,279
Other non-current assets 15,247 9,464
Total assets $ 2,263,353 $ 2,133,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 14,762 $ 20,710
Accrued liabilities 174,573 169,307
Income taxes payable 212 754
Deferred revenue 22,530 18,910
Total current liabilities 212,077 209,681
Long-term deferred revenue 34,903 30,581
Other non-current liabilities 76,053 77,024
Total liabilities 323,033 317,286
Stockholders’ equity:
Class A common stock 56 51
Class B common stock 46 51
Additional paid-in capital 15,380 17,571
Retained earnings 1,926,528 1,800,857
Accumulated other comprehensive (loss) (10,205 ) (11,462 )
Total stockholders’ equity – Dolby Laboratories, Inc. 1,931,805 1,807,068
Controlling interest 8,515 8,939
Total stockholders’ equity 1,940,320 1,816,007
Total liabilities and stockholders’ equity $ 2,263,353 $ 2,133,293

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year-To-Date Ended
July 1, June 26,
2016 2015
Operating activities: (unaudited) (unaudited)
Net income including controlling interest $ 162,323 $ 136,325
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 63,829 50,767
Stock-based compensation 51,473 50,822
Amortization of premium on investments 3,288 7,224
Excess tax benefit from exercise of stock options (1,313 ) (2,532 )
Provision for doubtful accounts 1,133 (30 )
Deferred income taxes (5,838 ) (15,088 )
Other non-cash items affecting net income 306 1,928
Changes in operating assets and liabilities:
Accounts receivable 8,798 (9,317 )
Inventories (6,024 ) 5,238
Prepaid expenses and other assets (11,075 ) (6,179 )
Accounts payable and other liabilities 10,808 (18,909 )
Income taxes, net (1,612 ) 18,290
Deferred revenue 8,052 7,158
Other non-current liabilities (193 ) 420
Net cash provided by operating activities 283,955 226,117
Investing activities:
Purchase of investments (247,680 ) (357,096 )
Proceeds from sales of investment securities 242,141 220,636
Proceeds from maturities of investment securities 77,668 117,545
Purchases of PP&E (77,079 ) (119,769 )
Payments for business acquisitions, net of cash acquired (93,516 )
Purchase of intangible assets (118,770 ) (22,716 )
Change in restricted cash (2,737 ) 223
Net cash used in investing activities (126,457 ) (254,693 )
Financing activities:
Proceeds from issuance of common stock 44,067 28,057
Repurchase of common stock (84,854 ) (47,956 )
Payment of cash dividend (36,256 ) (30,744 )
Distribution to controlling interest (214 ) (5,628 )
Excess tax benefit from exercise of stock options 1,313 2,532
Shares repurchased for tax withholdings on vesting of restricted stock (12,153 ) (12,918 )
Net cash used in financing activities (88,097 ) (66,657 )
Effect of foreign exchange rate changes on cash and cash equivalents (1,336 ) (2,371 )
Net increase/(decrease) in cash and cash equivalents 68,065 (97,604 )
Cash and cash equivalents at beginning of period 531,926 568,472
Cash and cash equivalents at end of period $ 599,991 $ 470,868

GAAP to Non-GAAP Reconciliations
(in millions, except per share data)
The following tables present Dolby’s GAAP financial measures reconciled to the non-GAAP financial measures included in this release for the third quarter of fiscal 2016 and third quarter of fiscal 2015:
Net income: Fiscal Quarter Ended
July 1, June 26,
2016 2015
GAAP net income $ 63.6 $ 35.5
Stock-based compensation 16.0 16.3
RSU dividend equivalent 0.2 0.6
Amortization of acquired intangibles 3.8 4.1
Income tax adjustments (5.3 ) (5.1 )
Non-GAAP net income $ 78.3 $ 51.4
Diluted earnings per share: Fiscal Quarter Ended
July 1, June 26,
2016 2015
GAAP diluted earnings per share $ 0.62 $ 0.34
Stock-based compensation 0.16 0.16
RSU dividend equivalent 0.01
Amortization of acquired intangibles 0.04 0.04
Income tax adjustments (0.06 ) (0.06 )
Non-GAAP diluted earnings per share $ 0.76 $ 0.49
Shares used in computing diluted earnings per share (in millions) 103 104
The following tables present a reconciliation between GAAP and non-GAAP versions of the estimated financial amounts for the fourth quarter of fiscal 2016 and fiscal year 2016 included in this release:
Gross margin: Q4 2016
GAAP gross margin (low – high end of range) 88% – 89%
Stock-based compensation 0.1 %
Amortization of acquired intangibles 0.9 %
Non-GAAP gross margin (low – high end of range) 89% – 90%
Operating expenses: Q4 2016 Fiscal 2016
GAAP operating expenses (low – high end of range) $172.0 – $175.0 $ 685.0
Stock-based compensation (16.0 ) (68.0 )
RSU dividend equivalent (1.0 )
Amortization of acquired intangibles (2.0 ) (6.0 )
Non-GAAP operating expenses (low – high end of range) $154.0 – $157.0 $ 610.0
Diluted earnings per share: Q4 2016
Low High
GAAP diluted earnings per share $ 0.16 $ 0.22
Stock-based compensation 0.16 0.16
Amortization of acquired intangibles 0.04 0.04
Income tax adjustments (0.05 ) (0.05 )
Non-GAAP diluted earnings per share $ 0.31 $ 0.37
Shares used in computing diluted earnings per share (in millions) 103 103
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