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Bill Smith
Bill Smith
Articles (43) 

Dolby Labs: The Kings of Immersive Audio Selling at a Discount

March 14, 2011 | About:

About the author:

Bill Smith
I'm an IT professional and a private individual value investor with degrees in electronic engineering and business economics. My major investment influence is Warren Buffett--finding "wonderful companies trading at wonderful prices".

Rating: 4.2/5 (25 votes)

Comments

hschacht
Hschacht - 5 years ago
Before you buy, read the company's proxy letter. Read about Ray Dolbe's perks like free movies in the company theater. It seems that every company facility is owned by this billionaire and he collects the rent. Including $1200 a month for an apartment that he leases to the company.

This is a group that looks out for one guy... not the shareholders.

Buyer beware!

I was initially interested because of the obvious FCF generation, but the proxy letter tells you a lot about who the company works for.
Adib Motiwala
Adib Motiwala - 5 years ago
Henry,

Good point. But, would you overlook everything else that is positive for this bit. I mean, he also has serious skin in the game and has obviously done well for all shareholders.

Adib
hschacht
Hschacht - 5 years ago
Yes, when I realize that management will nickel and dime shareholders on idiotic things... then it makes you wonder what else they will do. The man has billions of dollars in DLB stock, but he finds it necessary to have his son on the payroll as a "consultant" for around $100,000 a year? Free movies and popcorn? He is a billionaire and he's milking this company for every cent he can.

With all the companies out there why mess with a company that is such a governance nightmare?

If something goes wrong, these are the things that will come to light and you'll scratch your head and say "why didn't I heed the warning?"

Just go read the proxy... it is the funniest and saddest thing I've ever read. And as someone who has read 1000 proxies in my life, I can tell you that this one is a standout for all the wrong reasons.

And DLB isn't that cheap... it's been riding a recent wave of business that is unlikely to be sustained.
DocMoney
DocMoney - 5 years ago
Expiration of patents: as the patents for their older technologies expire it could reduce revenue from these sources. Consequently, Dolby must continually innovate.

I say that's the most important part of your very good analysis. This is a high burden for any company and also a reason I think Apple does not have that wide a moat. A company can be on a tear for a while, then get hit with a corporate equivalent of "writer's block."

Bill Smith
Bill Smith premium member - 5 years ago
Hschact: caveat emptor, thanks for the input. Yep, he's a rich guy--wish I had his net worth...between $2.5B-$3.0B, and like Adib said he has some very serious skin in the game since he owns so much of DLB stock. Not only is his personal wealth at stake, but his namesake and reputation are on the line too. He's also philanthropic, donating $16M to regenerative research.

You're correct, those are in the proxy. To provide some coloration for future readers, here's a summary:



  • Ray Dolby retired from the Board and will be in the position of "Founder and Director Emeritus" (an honorary title). He'll be entitled to attend meetings of the Board and its committees as an observer and to receive copies of the related meeting materials, but won't have Board voting rights. This is also an uncompensated position.
  • His son, Dave Dolby, was an employee of the company and will be resigning to assume the vacated Board seat from Ray. His annual compensation will be less than his compensation as an employee--the $100K you mentioned versus $120K.
  • DLB does rent properties owned by Ray for their executive offices, warehouses, and parking facilities at 100 Potrero Ave. These leases were negotiated at fair market values
  • DLB also jointly owns real estate with Ray, who owns the majority financial interest
  • Ray is allowed to use two offices in one of DLB's facilities for non-company related activities
  • Members of Ray's family are allowed to use DLB's conference and screening rooms for personal purposes up to 10 times per year; incremental cost to the company is $15K
  • DLB leases a condo in Alpine Meadows at $1200/month from Ray

    Dolby employee benefits include (other than health, finance, education, etc.):
  • secured parking lot (at 100 Potrero Ave)
  • company movies (in the same screening room he can use at the facility he leases to DLB)
  • company ski cabin at discounted rates (in Alpine Meadows, that he leases to DLB)
  • Dolby equipment discounts
  • http://www.dolby.com/about/careers/benefits.html
So if Ray is independent, not paid by DLB, and happens to own the facilities DLB is currently occupying, and there's no conflict of interest, why shouldn't he be a capitalist and get paid for it? After all, that's how he got to have his net worth. Hey, at least there's nothing in there about paying for a mansion, or outfitting offices with gold toilet seats :-)

If they're not to be trusted, I'd expect to see shenanigans in the EPS since that can be easily manipulated, which is why I look to owner earnings to see what's going on with cash flow. EPS growth and owner earnings growth track each other. If something was funny, I'd expect those two to diverge. They also don't book their revenue until they have confirmation of the licensing.

I'm curious what's your estimate of fair value?

Bill Smith
Bill Smith premium member - 5 years ago


Doc: thanks. Personally, I think they have the mojo to keep innovating, it's part of their culture and not dependent on Ray Dolby--they've done so since 1965 with each advancement in audio technology. However, the rate of change is happening quicker nowadays which could be an issue. This was a driver for using a lower-end initial growth rate in the DCF, even though they've shown a strong track record of CROIC averaging 20%. Hopefully, I set the bar low and they perform better than my expectation.
jeffmart
Jeffmart - 5 years ago


Bill and others,

Thanks for the excellent research and feedback. I too have been taking a closer look at DLB. One question that I have is the quality of the management team. It seems that most of the senior managers are new to the company since the IPO and have Wall Street backgrounds. Do you have a sense for the reputations of these senior execs, the current chemistry of the company, and the quality of leadership in the areas of vision, goals, research, sales & marketing going forward? In other words, is the new team going to take the baton from Ray and go farther or have they shown up at the party to feast for themselves?

Thanks!
Bill Smith
Bill Smith premium member - 5 years ago


Jeffmart: excellent question, thanks for the input. I'll get back to you on this later tonight/tomorrow morning. I have my initial research done, just need to let my brain process it.

v/r

Bill
Bill Smith
Bill Smith premium member - 5 years ago
Jeffmart: after your question, I re-visited my initial thoughts when I read through the management bios. I can't really speak to reputations, but I can tell you what I think about the quality of the team based on my experience in some of these areas.

For Dolby to be engaged in future markets, they need a team which understands the gamut: analog, digital, software, media, internet technologies, cinematic, analog & digital transmission systems, sound reinforcement & reproduction, licensing & patents, and standards setting agencies.




Even though some of their leadership is recent, they also have some grey-beards. As far as their backgrounds I see a company that’s put together a team of people that have a wide range of experience in the technology industry in the right areas. To read in detail, bios are here http://www.dolby.com/about/who-we-are/leadership/index.html



A quick snapshot:



CEO: since 2005; former Dolby CFO; experience in technology startups and enterprise software

CFO: since 2009; 20 yrs financial experience in software companies

VP Sales & Marketing: since 2007; Via licensing startup; former Dolby Director of Business Development, Technology & Business Strategist; and Licensing Manager

VP Products & Technology: 20 yrs experience technology and engineering; former CTO of Avid; Chief Architect of Software Engineering at Digidesign (creators of the widely used ProTools in the music industry); recording engineer

VP Corp. Development: 30 yrs investment banking experience, the last 10 years was technology investment banking; experience with digital media, internet, and new media businesses



Management Team (where the rubber meets the road)

Sr VP: since 1969; spearheaded plenty of the breakthrough formats

Sr VP Research: since 1982; audio entertainment, automotive and communications systems development

Sr VP Sales: 25 yrs experience building global technology sales teams

Sr VP & CTO: since 1977; 25 yrs experience; behind Dolby Surround Sound, muti-channel, Dolby Digital and Dolby Digital Cinema

Sr VP Marketing: since 2009; 20 yrs strategic marketing experience in digital media, internet, software, and PC technology



The Board:

Chairman: since 2003, digital media and technology background; founder of Digidesign (the makers of ProTools); worked for Dolby in the past.

Bill Jasper: former Dolby CEO, joined in 1979; led them through many transitions—analog to digital, music to film, cassettes to DVDs, and audio-only to audio & video

Avadis Tevanian: former Apple CTO

The remainder of the board also has experience in technology.

I think their management effectiveness numbers (see above) are consistent and speak to their abilities. Management's base salaries appear to be less than industry peers and not egregious. To answer your last question: yes, I believe they'll take the baton and move forward from here. Ray retired in 2009. Their performance post-Ray is similar to their performance with Ray. They appear to have the mix of experience they'll need to navigate the future.

v/r

Bill


Bill Smith
Bill Smith premium member - 5 years ago
Updated disclosure section.

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