A month has gone by since the last earnings report for Dolby Laboratories (DLB Quick QuoteDLB - Free Report) . Shares have lost about 1.4% in that time frame, underperforming the S&P 500.

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

Dolby Q3 Earnings Beat Estimates, Revenues Fall Y/Y

Dolby reported impressive third-quarter fiscal 2020 (ended Jun 26, 2020) results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Despite higher adoption of Dolby Atmos and Dolby Vision technology, lower licensing coupled with lower product and services revenues stemming from COVID-19 adversities marred quarterly performance.

Net Income

On a GAAP basis, net income was $67.3 million or 66 cents per share compared with $39.6 million or 38 cents per share in the year-ago quarter. Despite top-line contractions, the year-over-year increase was primarily driven by lower operating expenses.

Non-GAAP net income came in at $87.5 million or 86 cents per share compared with $79.3 million or 76 cents per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 59 cents.

Revenues

Total GAAP revenues were $246.9 million, down 18.3% from $302.2 million in the year-ago quarter. The decline was caused by the COVID-19 pandemic, which led to temporary business shutdowns and lower consumer activity globally. Nevertheless, the top line surpassed the Zacks Consensus Estimate of $232 million.

Segmental Performance

Revenues from Licensing were $235.1 million, down 13.5% year over year, due to lower revenues in Broadcast business. Despite higher adoption of Dolby Vision and Dolby Atmos, Broadcast business witnessed nearly 34% year-over-year decline in revenues owing to lower volume and recoveries stemming from COVID-19 pandemic. Sales from Consumer Electronics fell nearly 29% due to lower volume and recoveries. Revenues from Mobile Devices were up nearly 65% from prior-year quarter’s figure, driven by robust growth in patent programs. Sales from PC was down by about 4% year over year owing to lower recoveries. Meanwhile, revenues from Other Markets fell nearly 34% owing to a decline in revenues from Dolby Cinema coupled with lower gaming revenues.

Products and services revenues came in at $11.8 million, down 61.1% year over year. The downside was primarily caused by the impact of COVID-19 pandemic on the Cinema business as social distancing norms led to movie theatre closures.

Other Details

Gross profit in the fiscal third quarter was $217 million compared with $262.5 million in the year-earlier quarter. Total operating expenses fell 19.9% to $182.9 million, primarily due to lower restructuring charges. Operating income was $34.1 million compared with $34.3 million in the year-ago quarter.

Cash Flow & Liquidity

During the first nine months of fiscal 2020, Dolby generated $231.2 million of net cash from operating activities compared with $197.2 million in the year-ago quarter. As of Jun 26, the company had $855.1 million in cash and equivalents with $120 million of non-current liabilities.

Q4 & Full Year 2020 Guidance Issued

Despite uncertainties pertaining to the ongoing virus outbreak, Dolby provided guidance for fourth-quarter fiscal 2020 and full year 2020.

For fourth-quarter fiscal 2020, the company expects GAAP earnings in the range of 5-20 cents per share and non-GAAP earnings in the range of 22-37 cents per share on revenues of $225-$255 million. Unit volume shipments across various end markets and devices are likely to be lower due to COVID-19 adversities. On a GAAP basis, operating expenses are expected in the $187-$197 million band, whereas on a non-GAAP basis, operating expenses are anticipated in the range of $167-$177 million.

For 2020, Dolby expects GAAP earnings per share (EPS) in the range of $2.04-$2.19 and non-GAAP EPS in the range of $2.76-$2.91. Revenues are anticipated in the range of $1.12-$1.15 billion. On a GAAP basis, operating expenses are expected in the $785-$795 million band, whereas on a non-GAAP basis, operating expenses are anticipated in the range of $697-$707 million.

Due to certain macroeconomic factors like unemployment and supply chain disruptions, Dolby’s near-term performance is more prone to get affected by the ongoing turmoil of the deadly pandemic across various end markets. Although its licensing as well as products and services revenues are likely to be affected by the coronavirus, Dolby is committed to support its business operations in this hour of crisis.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -19.86% due to these changes.

VGM Scores

At this time, Dolby Laboratories has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dolby Laboratories has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.