It has been about a month since the last earnings report for Dolby Laboratories (DLB Quick QuoteDLB - Free Report) . Shares have added about 12.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dolby Laboratories due for a pullback? 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 Misses Q2 Earnings Estimates, Withdraws View

Dolby reported unimpressive second-quarter fiscal 2020 (ended Mar 27, 2020) results, with the top and the bottom line missing the Zacks Consensus Estimate. However, higher Licensing revenues along with increased adoption of Dolby Atmos and Dolby Vision technology contributed to its quarterly performance.

Net Income

On a GAAP basis, net income was $88.5 million or 86 cents per share compared with $73.4 million or 70 cents per share in the year-ago quarter. The year-over-year increase in earnings was primarily driven by top-line growth and lower income tax provision. However, the bottom line missed the Zacks Consensus Estimate by 6 cents.

Non-GAAP net income came in at $106.6 million or $1.04 per share compared with $109 million or $1.04 per share in the prior-year quarter.

Revenues

Total GAAP revenues were $351.8 million, up 4% from $338.3 million in the year-ago quarter. The upside can be attributed to increase in the Licensing segment revenues. However, total revenues were $30 million below the midpoint of the guidance provided at the beginning of the quarter. The decline was primarily caused by the COVID-19 pandemic, which led to temporary business shutdowns and lower consumer activity globally. Moreover, the top line lagged the Zacks Consensus Estimate of $355 million.

Segmental Performance

Revenues from Licensing were $328.9 million, up 6% year over year, driven by higher revenues in Broadcast business. Markedly, Broadcast business witnessed a 5% year-over-year increase in revenues, driven by higher adoption of Dolby Vision and Dolby Atmos coupled with higher recoveries. Sales from Consumer Electronics increased 10%, driven by higher volume of Dolby Vision and Dolby Atmos technology. Revenues from Mobile Devices were up nearly 13% from prior-year quarter’s figure, driven by robust growth in patent programs. Sales from PC surged 11% year over year, mainly driven by higher recoveries. However, it was partially offset by lower volumes stemming from the coronavirus pandemic. Meanwhile, revenues from Other Markets fell nearly 16% owing to a decline in revenues from Dolby Cinema coupled with lower recoveries in automotive.

Products and services revenues came in at $23 million, down 17.9% year over year. The downside was primarily caused by the impact of COVID-19 pandemic on the Cinema business.

Other Details

Gross profit in the fiscal second quarter was $315 million compared with $301.7 million in the year-earlier quarter. Total operating expenses increased 5.2% to $209 million, primarily due to higher general and administrative charges. Operating income was $105.9 million compared with $102.9 million in the year-ago quarter.

Cash Flow & Liquidity

Dolby generated $96.9 million of net cash from operating activities in the quarter compared with $105.8 million in the year-ago quarter. As of Mar 27, the company had $724.9 million in cash and equivalents with $178.8 million of non-current liabilities.

Q3 Guidance Issued & 2020 Guidance Withdrawn

Despite uncertainties pertaining to the ongoing virus outbreak, Dolby has provided guidance for third-quarter fiscal 2020. The company expects GAAP earnings per share in the range of 1-18 cents and non-GAAP earnings per share in the range of 18-35 cents, while revenues are anticipated to be $225-$250 million. Moreover, unit volume shipments across various end markets and devices are likely to be lower by 15-25%. On a GAAP basis, operating expenses are expected in the $191-$201 million band, whereas on a non-GAAP basis, operating expenses are anticipated in the range of $170-$180 million.

However, due to certain macroeconomic factors like unemployment and supply chain disruptions coupled with the current turmoil of the deadly pandemic on global financial markets, Dolby is unable to provide a definitive financial outlook for fiscal 2020. Consequently, the company has withdrawn its previous guidance for 2020. Although its licensing as well as products and services revenues are likely to be affected by the catastrophic impact of coronavirus, Dolby is committed to support business operations in this 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 -86.79% due to these changes.

VGM Scores

At this time, Dolby Laboratories has a nice Growth Score of B, though it is lagging a lot on the Momentum Score 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 C. 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. It's no surprise Dolby Laboratories has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.