Dolby Laboratories Crushed Expectations in Q4, Sending Shares to All-Time Highs

Audio and video technology developer Dolby Laboratories (DLB -0.14%) crushed Wall Street's consensus estimates in Thursday evening's fourth-quarter earnings report. It wasn't even close, and management also indicated that Dolby should get back to positive year-over-year growth in the first quarter.

Dolby's investors embraced the strong report in a hurry, driving share prices as much as 6% higher in Friday's trading session.

Dolby Laboratories' fourth-quarter results by the numbers

Data source: Dolby Laboratories. GAAP = generally accepted accounting principles.

The COVID-19 pandemic continued to weigh on Dolby's results in the fourth quarter. Revenue from Dolby Cinema was next to nonexistent due to limited theater runs and a weak slate of available movies on the silver screen. Gaming sales bottomed out at the end of a multiyear life cycle for that industry, which was looking forward to this holiday season's launches of new video game consoles.

Mobile devices, such as smartphones and tablets, ship with high-end Dolby media technologies more often than ever, but mobile sales still fell due to the timing of so-called recoveries in that market. That's the term Dolby uses in discussions about legal settlements and back payments of overdue royalties.

Recoveries are a large part of Dolby's current business model, adding a significant amount of unpredictability to the company's quarter-by-quarter results. PC systems also saw a surge in Dolby-powered media solutions, driving sales 26% higher year over year, with minimal contributions from recoveries.

Where will Dolby go from here?

Looking ahead to the first quarter of fiscal year 2021, Dolby set the midpoints of its guidance ranges at $345 million for sales and $0.78 per share for adjusted earnings. Hitting these targets would amount to 18% year-over-year revenue growth and 21% stronger earnings. Analyst projections currently point to earnings near $0.56 per share on sales in the neighborhood of $278 million, and even the low end of Dolby's guidance exceeds the most optimistic analyst projections across the board.

As a result, Dolby's stock reached fresh all-time highs on Friday with a 52-week gain of 24%. If the fourth quarter turns out to have been the lowest point of Dolby's coronavirus concerns on top of the swinging game console life cycle, the company could be due for some mighty impressive results in 2021. In particular, CEO Kevin Yeaman has high hopes for torrential sales of the Apple iPhone 12 smartphone line, which comes equipped with the ability to record videos with support for Dolby Vision's image-enhancing technology. iPhones have supported Dolby Vision playback since 2017, but the ability to record videos in this format is brand new in 2020.

Image source: Getty Images.

"We are excited about the opportunity to support this ecosystem so the Dolby Vision content can be enjoyed on social media, video sharing sites, and more," Yeaman said on the earnings call. "This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology and creating new opportunities for Dolby."

In other words, consumers should see more reason to invest in home-theater systems with Dolby Vision now that there will be more content available in that format. Consumer-electronics giants Sony and Panasonic are already including Dolby Vision and Dolby Atmos support in many midrange TV sets, moving Dolby's technology down from a smaller high-end market and into the mass-market midstream.

Dolby's advanced media technologies are expanding their target markets in lockstep with the accelerating cord-cutting trend. That opens up booming long-term growth opportunities, even in the face of forgettable contributions from movie theaters.

Yes, Dolby is trading at all-time highs today, but I don't think that the market-beating story stops here.