Why Is Dolby Laboratories (DLB) Down 11.9% Since Its Last Earnings Report?

It has been about a month since the last earnings report for Dolby Laboratories (NYSE:DLB) . Shares have lost about 11.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is DLB due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Dolby Q1 Earnings Beat Estimates, Revenues Grow Y/Y

Dolby reported first-quarter fiscal 2018 adjusted earnings of 79 cents per share, surpassing the Zacks Consensus Estimate of 44 cents by a whopping 79.5%.

However, the company’s first-quarter fiscal 2018 GAAP loss came in at 80 cents per share, compared with GAAP earnings of 51 cents per share in the year-ago quarter. The company’s GAAP numbers were adversely affected by the creation of a provision for estimated discrete tax expense of $154.6 million related to the latest tax reforms.

Inside the Headlines

Total revenues of $287.8 million steered past the company’s projected range of $260-$270 million. The top line also surpassed the Zacks Consensus Estimate of $265.4 million and grew 8.1% on a year-over-year basis. Healthy increase in revenues across the company’s licensing segment contributed to the decent rise in the top line.

The company’s Licensing revenues were $258 million, up 10.9% year over year. Solid year-over-year growth in Licensing in other markets and Mobile devices sales drove the segment’s growth. In the reported quarter, Licensing in “other markets” was up about 11% sequentially, driven by higher revenues in gaming consoles. This was partially offset by lower recoveries in automotive unit.

However, Product revenues came in at $24.9 million, down 11.6% on a year-over-year basis. The year-over-year decline resulted mainly on the account of ramping up of some of the company’s cinema products earlier than anticipated. The Services segment declined 9.5% year over year to $4.8 million.

During the reported quarter, Dolby’s operating margin increased 380 basis points to 28.6%.

Liquidity

As of Dec 29, 2017, Dolby had cash and cash equivalents of approximately $596.4 million, up from $512.8 million as of Dec 30, 2016.

Net cash provided by operating activities came in at $17.1 million, compared with $67.8 million as of Dec 30, 2016.

Guidance

Concurrent with the market scenario, Dolby issued guidance for second-quarter fiscal 2018 earnings and revenues. The company estimates non-GAAP earnings in the range of 74-80 cents, while revenues for the fiscal second quarter are expected to lie within $295-$305 million.

Moreover, the company projects non-GAAP gross margin in the 89.5-90.5% band and non-GAAP operating expenses are likely to be between $166 million and $170 million.

Additionally, Dolby provided guidance for fiscal 2018. The company estimates total revenues to lie in the range of $1.15-$1.18 billion. Revenue streams, such as mobile revenues, Consumer Imaging, Consumer Electronics and Dolby Voice are likely to drive revenue growth. However, softer PCs and other licensing categories sales may affect growth momentum to some extent.

Further, non-GAAP operating expenses for fiscal 2018 are projected to lie between $655 million and $670 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 11.2% due to these changes.

VGM Scores

At this time, DLB has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our style scores.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions also looks promising. Notably, DLB has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.