Maintaining its earnings streak for the fourth consecutive quarter, Dolby Laboratories, Inc. (DLB Quick QuoteDLB - Free Report) reported first-quarter fiscal 2017 adjusted earnings of 51 cents per share, beating the Zacks Consensus Estimate of 37 cents by a whopping 37.8%.

Despite stellar results, the stock declined 2.1%, probably due to the lukewarm guidance, which hints relatively slow growth.

In addition, the company’s non-GAAP earnings were up 37.5%, to 66 cents, on a year-over-year basis. Encouragingly, the non-GAAP earnings surpassed the guidance issued by the company. Robust top-line growth boosted the company’s bottom-line performance.

Inside the Headlines

Total revenue of $266.3 million steered past the company’s projected range of $250–$260 million. The top line managed to surpass the Zacks Consensus Estimate of $255 million and grew 10.6% on a year-over-year basis.

Improvement in the top line came on the back of fresh initiatives, impressive broadcast and cinema product sales. Higher volume in set-top boxes primarily drove growth in broadcast revenues.

The company’s Licensing revenues were up 10.2% to $232.7 million, year over year. Both PC licensing revenues and Mobile revenues were up 5% and 16%, on a year-over-year basis, respectively. While higher recoveries and higher volume drove PC licensing revenues, higher revenue from the patent licensing programs proved conducive to the growth of Mobile revenues.

Consumer electronics, also part of licensing revenues, were down 5% year over year. Higher revenues from DMAs and sound bars, which acted as tailwinds, were more than offset by poor sales of DVD, Blu-ray and home-theater-in-a-box played spoilsports. Licensing in “other markets” jumped a whopping 45%, chiefly supplemented by higher recoveries in automotive and growing revenue from Dolby Voice and Dolby Cinema.

After few quarters of dull performance, the Product revenues rebounded, climbing 13.7% to $28.2 million on a year-over-year basis. Substantial number of clients turned to Dolby to help them revamp the theaters in anticipation of big releases announced during the holiday sales. This ramped up sales in this segment. Further, the Services segment witnessed a year-over-year growth of 10.4% to $5.4 million.

Liquidity

As of Dec 30, 2016, Dolby had cash and cash equivalents of approximately $512.8 million, down from $516.1 million as of Sep 30, 2016.

In addition, net cash provided by operating activities came in at $67.8 million, relatively flat compared with the year-ago tally of $67.4 million.

Guidance

Concurrent with the market scenario, Dolby issued the guidance for second-quarter fiscal 2017 earnings and revenues. The company estimates non-GAAP earnings in the range of 58–64 cents, while revenues for the fiscal second quarter are expected to lie within $265–$280 million.

Moreover, the company projects non-GAAP gross margin in the 89–90% band. Similarly, operating expenses are likely to be between $158 million and $162 million, on a non-GAAP basis.

Dolby tweaked its guidance for fiscal 2017. Currently, the company foresees total revenue to lie in the range of $1.06–$1.09 billion from the earlier guided range of $1.06–$1.10. The hike at the upper-end of the guidance expectation is based on projections of growth from new revenue initiatives, such as Dolby Cinema, Dolby Voice and consumer imaging programs.

Additionally, the company believes that Mobile licensing revenues will turn out to be a key profit churner for the year. However, some of these growth are likely to be offset by declines in PCs, DVD/Blu-ray and home theater equipments.

The company reiterated its non-GAAP operating expenses for fiscal 2017, which is likely to lie between $625 million and $635 million.

Our Take

Dolby’s first-quarter 2017 results have been quite impressive with substantial growth in both top- and bottom-line performance. Dolby’s long-term growth strategy stands on three pillars, namely advancing the science of sight and sound, providing creative solutions and delivering superior experiences. Presently, the company is focusing on fortifying its dominating position in audio solutions and introducing fresh audiovisual experiences to grab a greater market share.

The company’s guidance increase at the upper end also highlights its confidence from the new ventures. Solid market traction of offerings under three of its new businesses – Dolby Voice, Dolby Vision and Dolby Cinema – are likely to act as major profit churners. Strategic deals with industry frontrunners, rapid expansion in fast growing economies and a sturdy financial health, are anticipated to accelerate the growth momentum of this Zacks Rank #1 (Strong Buy) company.

Key Picks

Other favorably placed stocks in the space include Central Garden & Pet Company (CENT Quick QuoteCENT - Free Report) , Hyatt Hotels Corporation (H Quick QuoteH - Free Report) and Belmond Ltd. . While Central Garden & Pet sport the same Zacks Rank as Dolby, both Hyatt Hotels and Belmond hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Central Garden & Pet Company has a whopping average earnings surprise estimate of 72.5%, beating estimates each time for the trailing four quarters.

Belmond has an stellar average earnings surprise of 108.6%, having beaten estimates thrice over the trailing four quarters.

Hyatt Hotels Corporation has an average positive surprise of 24.7%, having beaten estimates thrice over the trailing four quarters.

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