Value Investing Forum

@nell:

Thanks for the comments!  I've found that I tend to downplay or ignore the negatives when I find a company that looks attractive, so I like having my positive points challenged and I agree with some of the risks you pointed out.  That said, here are a few thoughts:

- PC licensing revenues represent 36% of total revenues ~ Quite a chunk of future sales and cashflow at risk

Just to clarify, PC is 36% of licensing revenues, 28% of total revenues, and Microsoft is only 12% of the 28% (FY10).  So while it's a completely valid point, the revenue immediately at risk is only about a third of the figure you gave.

- Licensing multiple smaller entities will be less profitable (in contrast to pre Win8 times -> just Microsoft)

I would argue that while volume may drop, going back to contracts with individual OEMs and software vendors will actually be more profitable per unit than native inclusion in Windows.  Microsoft was able to throw around its buyer power and pay Dolby significantly lower royalties than the 3rd parties with Windows Vista and 7.  Here's an excerpt from the latest 10-K (p.42):

As a sidenote.. I would not argue with historical data points. Our world is changing, dolbys world is changing and we should value "future" cash flows! ;-) 

An excellent point!  Dolby has grown impressively since its IPO, but it's dangerous to project similar rates of growth into the future.  It's stunning how quickly Dolby's sales mix has changed and continues to change based on consumer trends.  This is a company and an industry where being nimble and responding quickly to market changes is absolutely crucial to stay competitive.

 - brand reputation: would i pay more for dolby sound if i could get the same sound from a chinese supplier? im not sure if there is pricing power

Dolby wouldn't have become either the official or de facto coding standard in the majority of the markets it serves if it hadn't been able to differentiate itself and convince the leading players of the added value of its sound technologies.  Chinese electronics manufacturers might be able to produce sound good enough to get by on low-end products (cheap DVD players, netbooks, etc.), but to my knowledge no competitor (domestic or foreign) has really been able to challenge Dolby's position simply by offering comparable sound at a lower price.

@Jae:

Thanks for the input!  I'm thinking along the same lines, although I wasn't aware of the PC virtualization trend.  Here's where I see future growth and future declines changing DLB's sales mix:

Growth:

1. Online/streamed content and set-top boxes - As of the 2010 10-K, Apple, Amazon, Netflix, Omnifone, Rhapsody, Sonic, and Vudu all used Dolby technologies.  That list has probably grown in the last three quarters.
2. Mobile – on the Q3 call, management mentioned that mobile devices are the fastest growing market for Dolby and are approaching 10% of revenues, which, presumably, is when it would be disaggregated from "Other licensing" for reporting.
3. Emerging markets penetration – Dolby has mostly saturated the U.S. market for its technologies in existing products (although new products will still provide growth opportunities), but BRIC and other countries have far lower attach rates and have been growing as a % of revenue

Decline:

1. 3D and digital cinema – These markets still have some juice in them, but increasing competition and price pressures are squeezing out Dolby, which has about a 20% share of each market.  Management estimated on the Q3 call that theaters are over halfway through the investment cycle for both technologies, so revenues will begin to taper off over the next year or two.
2. PC – already discussed, but most likely a long-term net negative for sales
3. DVD players – sales of standard-def players have been dropping for years and will continue to do so.  Blu-ray growth is offsetting part of the decline, but I think online delivery to connected TVs will ultimately make DVDs nearly obsolete.

I'd love to hear any other thoughts you guys have!