The Future of This Company Lies With Netflix and Streaming 4K Video

By Markets Fool.com

Following the release of mixed first-quarter earnings, shares of Dolby Labs fell as much as 11% on Thursday. The stock set a fresh 52-week low during the session and has overall underperformed the broad market by a wide margin over the last five years.

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What would it take for Dolby to start building new 52-week highs rather than lows? The earnings report gives us some clues.

In the first quarter, Dolby sales rose a modest 1.3% year-over-year to land at $234.2 million, while analysts were looking for about 3.4% sales growth. On the other hand, adjusted earnings of $0.56 per share destroyed the analyst expectations of $0.38.

All things considered, Dolby CEO Kevin Yeaman called it "A solid start to the year driven by the strength of our broadcast business."

Looking ahead, Dolby expects to deliver roughly $0.63 of non-GAAP earnings per share in the second quarter, culled from sales of about $265 million. If the company delivers on these projections, it would be a rerun of the first quarter with softer revenues but strong earnings.

Evidently, Dolby investors were hoping for more.

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Taking a look behind the curtain, the business model is changing quickly.


Image source: Dolby Labs

The inveterate media technology developer is now licensing its audio and video platforms to set-top boxes and connected TV sets. That business segment increased sales by 21% year-over-yearand now makes up 41% of total revenue.

Mobile licensing also increased, up 11% from the year-ago period and representing 16% of overall sales. The "other markets" division saw sales rise 40% as gaming devices and connected car systems reached out to Dolby for its audio and video expertise -- 12% of all sales currently stem from these customers. That just about sums up the good news.

On the other hand, PC system licenses declined 18% year-over-year, and non-networked consumer electronics dropped by 21%. These aging platforms, including Blu-ray players and home theater systems, just aren't what they used to be.

Industry watchers can draw some interesting conclusions from these trends, as entertainment options head for cyberspace in a game-changing market shift. It's been a big week for digital media investors, since Netflix outlined the same trends in slightly different words on Tuesday.

On that note, Netflix also recently announcedthat it is embracing Dolby's latest video encoding platform in a big way. Dolby Vision will help Netflix and others push the envelope with high-quality 4K video content, helping that picture-quality upgrade hit the mainstream in 2015. More than just a higher pixel count, Dolby Vision redefines the color space and video compression pipeline.

Any wins in this category will count toward Dolby's biggest winner, which is the set-top box and connected TV division. So the trends you saw playing out in the first quarter should continue unabated through 2015. Dolby is leaning heavily on the emerging 4K video standard, while older media technologies are going out of fashion like last year's spring collection.

The article The Future of This Company Lies With Netflix and Streaming 4K Video originally appeared on Fool.com.

Anders Bylund owns shares of Netflix. The Motley Fool recommends Dolby Laboratories and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.