Thursday, August 2, 2007

I like Dolby (DLB)

China has committed digital broadcasting for its 2008 Olympic, I expect that is a good reason for Chinese to replace their old TV with a flat panel high definition version. Japan already has 80% of prime time programs delivered in HD, that for US is 67% (based on 2006 data). Are you ready to switch?

Dolby Laboratories Inc. (DLB) delivered another impressive report card yesterday, quarterly net income increased by 53% YoY. With 74% of revenue from licensing it’s a low risk business model as it doesn’t need to worry about inventory and fluctuation in component costs as faced by manufacturing companies. DLB is also a very profitable company with 28% net margin.
Click here for the detail numbers

DLB is the most direct proxy for digital home as its technologies covered a very wide spectrum of consumer electronic devices. Just in case you don’t know, you are paying DLB when you buy a new digital TV as all new TV shipped into US must be digital and DLB is a mandatory feature under the ATSC standard (the US version of digital TV standard).

For all Americans you must replace your existing analogue TV with a digital version (or buy a digital set top box which DLB will also collect royalty) very soon because analogue TV broadcasting in US is planned to stop in 2008. (though it may be delayed).

When you buy a new high definition DVD player, no matter it’s Blu-ray or HD-DVD you are paying DLB.

If you have bought a Playstation 3 or Microsoft Xbox for your kids, you have also paid DLB for the Dolby sounds.

Have you upgraded your PC to Windows Vista yet? DLB also get a cut of the price you paid for each license of Vista Home Premium and Ultimate editions, which according to Microsoft's most recent earnings call that accounted for the majority of Vista shipments. In fact DLB expects PC (35%) and digital TV (15%) will be 2 major sources of revenue for 2007.

Still not sexy enough? Earlier this year DLB acquired BrightSide Technologies which is a company in display technology that enables high dynamic range on LCD monitors.. I talked to a friend of mine who is a researcher in LED/LCD technology, he said BrightSide is the real market leader in terms of the number of fundamental patents it owned. (fundamental patent means the technology is so important that almost all other display technologies would likely infringe it and hence need to license it from the patent owner) DLB said that it is extending its imaging initiative to the consumer market with focus on enhancing LED backlit LCD displays using high dynamic range technology. The technology makes the whites whiter and darks darker, which dramatically enhances image quality and expect to begin seeing some initial revenue from this technology in fiscal 2008.

I like checking company’s recruitment advertisement to see what is going on inside the company. Recently I saw the following HK based openings from DLB:

Compliance Officers
* Work closely with HQ in the USA and Sales Offices worldwide to monitor licensee’s usage reports to ensure compliance to licensing agreement
* Research, investigate, and analyze market data to verify usage reports from licensees
* Assist in enforcement of Company’s intellectual property rights
* Manage international trade shows pre-planning and on-site coordination
* Experience/knowledge in IP Industry or handling of legal documents is an advantage
* Strong communication, negotiation, interpersonal, and analytical skills
* Good command of written and spoken English and Mandarin
* Native Korean speaker with good command of written and spoken English

The biggest issue for licensing model is how to get licensee to report and pay royalty. Seems like DLB is very aware of it and it is a good sign that it has a plan to deal with it.

Currently traded at ~27x forward earning DLB is a reasonably priced high growth stock.

Disclosure of interest: I’m LONG DLB