Dolby Laboratories, Inc. (DLB Quick QuoteDLB - Free Report) reported fourth-quarter fiscal 2016 adjusted earnings of 23 cents per share, comfortably beating the Zacks Consensus Estimate of 20 cents by 15.0%.

However, the company’s non-GAAP earnings came in at 37 cents, down 14.0% on a year-over-year basis. Encouragingly, the non-GAAP earnings came at the upper end of the guidance provided by the company. Lackluster top-line performance restricted earnings growth. Also, a rise in the cost of revenues and higher operating expenses weighed down on the bottom-line performance.

For fiscal 2016, non-GAAP income was $2.43 per share, indicating a rise of 10% from fiscal 2015 levels.

Inside the Headlines

Total revenue of $233.0 million steered past the company’s projected range of $220–$230 million. Though relatively flat compared to the year-ago tally, the top line managed to surpass the Zacks Consensus Estimate of $226 million. All the three segments recorded flat top-line performance.

For fiscal 2016, the company’s top line grew 5.7% to $1025.7 million compared with the tally in fiscal 2015. Revenues also exceeded the upper end of the company’s full-year guidance provided earlier.

The company’s licensing revenues were $203.5 million, flat year over year Unfavorable timing of payments and seasonality offset improvements in licensing revenues.

Unfavorable timing of payments adversely affected both PC licensing revenues and Mobile revenues, down 18% and 27% on a year-over-year basis respectively. However, a 12% increase in Broadcast revenues and 10% improvement in “other markets” offset the decline of licensing revenue to some extent. The “other markets” mainly benefited from the impressive performance of Dolby Cinema and gaming business.

Consumer electronics licensing revenues were flat on a year-over-year basis. While higher revenues from DMAs and sound bars acted as tailwinds; lower volume in DVD, Blu-ray and home-theater-in-a-box played spoilsports.

Also, sales for the Product segment remained nearly unchanged from the year-ago quarter, at $25 million. The decline came on the back of dismal industry trends as almost the entire cinema equipment industry underwent the conversion cycle from film to digital, leaving limited scope for profitability.

Liquidity

As of Sep 30, 2016, Dolby had cash and cash equivalents of approximately $516.1 million, down from $531.9 million as of Sep 25, 2015.

Also, net cash provided by operating activities came in at $356.8 million, compared with $309.4 million as of Sep 25, 2015.

Guidance

Concurrent with the market scenario, Dolby issued the guidance for first-quarter fiscal 2017 earnings and revenues. The company expects non-GAAP earnings in the range of 49–55 cents, while revenues for fiscal first quarter are expected to lie within $250–$260 million.

Moreover, the company projects non-GAAP gross margin in the 89–90% band. Similarly, operating expenses are likely to be between $154 million and $158 million, on a non-GAAP basis.

In addition, Dolby provided guidance for fiscal 2017. The company estimates total revenue to lie in the range of $1.06–$1.09 billion. It believes that new revenue streams, such as Dolby Cinema, Consumer Imaging and Dolby Voice and a rebound in the mobile licensing revenues, will prove boost revenues However, softer PCs, DVD, Blu-ray and home theater equipment sales may affect the company’s growth momentum to some extent.

Also, non-GAAP operating expenses for fiscal 2017 are projected to lie between $625 million and $635 million.

Our Take

Dolby reported decent quarterly results with most of the key metrics topping the company’s conservative guidance range. Going forward, we believe that efforts to strengthen its leadership position in audio solutions will be support Dolby’s growth going ahead. Impressive market traction of offerings under three of its new businesses, namely – Dolby Voice, Dolby Vision and Dolby Cinema – are likely to act as major profit churners. Gain of big clients, like Amazon.com, Inc., (AMZN Quick QuoteAMZN - Free Report) and Netflix, Inc. (NFLX Quick QuoteNFLX - Free Report) , by Dolby Vision and increasing market share of Dolby Voice in China look promising.

Also, rising adoption of Dolby Cinema technology catches our eye. Presently, there are just over 30 Dolby Cinema locations; however Dolby’s partners have been planning to roll out a total of over 220 locations worldwide, reflecting tremendous growth prospects. However, unfavorable timing of payments and maturity of the digital cinema market pose as threats for the company’s profitability.

Dolby currently holds a Zacks Rank #3 (Hold). A better-ranked stock in the sector is Activision Blizzard, Inc. which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Based in Santa Monica, CA, Activision Blizzard is a leading developer and publisher of console and online games. The company has a decent earnings surprise history, beating estimates thrice over the trailing four quarters.

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