Dolby Laboratories (DLB)

Audio and video technology company Dolby Laboratories (NYSE:DLB) reported Q3 CY2025 results exceeding the market’s revenue expectations, but sales were flat year on year at $307 million. On the other hand, next quarter’s revenue guidance of $330 million was less impressive, coming in 9.9% below analysts’ estimates. Its non-GAAP profit of $0.99 per share was 40.4% above analysts’ consensus estimates.

Company Overview

Known for its iconic "D" logo that appears before countless movies and TV shows, Dolby Laboratories (NYSE:DLB) designs and licenses audio and video technologies that enhance entertainment experiences in movies, TV shows, music, and other media.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Dolby's competitors include DTS (a subsidiary of Xperi Holding Corporation), THX (owned by Razer Inc.), IMAX Corporation (NYSE:IMAX) in the premium cinema space, and various codec technologies from companies like Fraunhofer (developers of MP3) and organizations developing open-source alternatives.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Dolby Laboratories grew its sales at a weak 3% compounded annual growth rate. This was below our standard for the software sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Dolby Laboratories’s recent performance shows its demand has slowed as its annualized revenue growth of 1.9% over the last two years was below its five-year trend.

This quarter, Dolby Laboratories’s $307 million of revenue was flat year on year but beat Wall Street’s estimates by 0.7%. Company management is currently guiding for a 7.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Dolby Laboratories’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Dolby Laboratories’s products and its peers.

For software companies like Dolby Laboratories, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Dolby Laboratories’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 88.1% gross margin over the last year. That means Dolby Laboratories only paid its providers $11.87 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Dolby Laboratories has seen gross margins decline by 0.1 percentage points over the last 2 year, which is slightly worse than average for software.

In Q3, Dolby Laboratories produced a 87.1% gross profit margin, down 1.7 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Dolby Laboratories has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 19.6%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Dolby Laboratories’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Dolby Laboratories generated an operating margin profit margin of 9.7%, down 5.5 percentage points year on year. Since Dolby Laboratories’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Dolby Laboratories has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 32.3% over the last year.

Dolby Laboratories’s free cash flow clocked in at $106.6 million in Q3, equivalent to a 34.7% margin. This cash profitability was in line with the comparable period last year and above its one-year average.

Over the next year, analysts’ consensus estimates show they’re expecting Dolby Laboratories’s free cash flow margin of 32.3% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

Dolby Laboratories is a profitable, well-capitalized company with $793.4 million of cash and $38.88 million of debt on its balance sheet. This $754.5 million net cash position is 12.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results. Its revenue guidance for next quarter missed and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 1.1% to $64.67 immediately after reporting.

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Dolby Laboratories.

We cheer for all companies solving complex business issues, but in the case of Dolby Laboratories, we’ll be cheering from the sidelines. To kick things off, its revenue growth was weak over the last five years, and analysts don’t see anything changing over the next 12 months. And while its admirable gross margin indicates excellent unit economics, the downside is its operating margin hasn't moved over the last year. On top of that, its customer acquisition is less efficient than many comparable companies.

Dolby Laboratories’s price-to-sales ratio based on the next 12 months is 4.5x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $90.50 on the company (compared to the current share price of $64.67).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.