Thursday, February 12, 2009

Dolby Laboratories Shareholder Meeting (2009)

Dolby's S.F. brick building

CEO Jasper, me, and Mr. Dolby

I attended Dolby Laboratories Inc.'s (DLB) annual shareholder meeting in San Francisco on February 10, 2009. Shareholders were invited to the third floor, where Dolby had coffee and tea available prior to the meeting. Full size bars of Ghirardelli chocolate were also available to shareholders. I split some white chocolate with two other shareholders, who were initially reluctant to break the bars until I decided to dive in.

The meeting itself took place in a small auditorium and lasted around fifty minutes. President and CEO N. William Jasper, Jr. aka Bill Jasper, ran most of the meeting. Mr. Jasper efficiently completed the formal portion of the meeting, which included an election of directors. The informal portion of the meeting consisted of two presentations. The first one was Dolby's Las Vegas CES presentation, and the second one consisted of charts and financial numbers. It was a good combination--serious, dry numbers alongside highly entertaining visuals. I would have switched the order and done the numbers presentation first and ended with the CES presentation, but that's just a stylistic preference.

The CES presentation was a lot of fun--not surprising for a company whose motto is "every bit amazing." Dolby strutted its product lines clearly and powerfully, showing clips from major films that had used Dolby products. Shareholders saw clips from Iron Man and Spiderman to illustrate how Dolby boosts sound quality. The narrator of Dolby's CES presentation showed what a scene in Spiderman sounded like without "Dolby mobile"--basically, flat and lifeless--and with "Dolby mobile," which produced superior sound. At this point, I should probably point out that I'm hearing-impaired--and even I could tell the difference. Now that's darn good technology.

The next part showed how "Dolby volume" allows users to get consistent levels of sound across all media players. In short, "Dolby volume" minimizes sound distortions. To demonstrate, Dolby showed shareholders other movie clips without Dolby, then with Dolby--and again, the difference was highly noticeable.

The next product was Dolby Axon. Gamers can use Dolby Axon to create a more realistic gaming experience. Rather than have one constant sound level for gaming characters, Dolby Axon modulates a character's voice based on his/her/its surroundings. The video narrator demonstrated the technology by playing a video game where Dolby Axon modulated a character's voice in real-time. For example, if the character went behind a wall, his voice was muffled. If the character moved closer to the screen, his voice increased in volume and sharpness. Gamers can also adjust their character's voice, making it deeper or higher. Of all the Dolby products shown, this one seemed most poised for growth.

The CES video ended with a rousing rendition of the song "Human," by The Killers.

In the next presentation, Mr. Jasper continued to explain Dolby's different customers and product lines. Dolby sells its products to content creators (movie studios); broadcasters (BBC, PBS); gaming companies (Electronic Arts); cinemas; and PC-related companies. It receives most of its revenue--around 85%--from licensing and royalties. Mr. Jasper proudly talked about the fact that Dolby had been around for 44 years, and 3 billion products had been sold using Dolby technology. (A side note: Dolby has only been public since 2005, and apparently went public to assist the founder, Ray Dolby, with estate planning purposes; in other words, Dolby had a healthy balance sheet and didn't go public because it needed a cash infusion.)

Mr. Jasper then said something that endeared himself to any investor who appreciates honesty. He said that although Dolby's recent results had met expectations, Dolby's licensees report results/sales on a lagging basis. As a result, the recently released numbers compiled sales information up to September 2008--before the worldwide financial meltdown. Mr. Jasper said that Dolby's March results would be "more revealing." How refreshing is that? Mr. Jasper didn't have to downplay his company's numbers, but chose to do so to be more transparent. (Bank CEOs could learn a thing or two from Mr. Jasper.)

The most interesting slide related to Dolby's shift in product sales. In 2004, personal computers were only 25% of Dolby's business, while consumer electronics were 60%. In 2008, PCs were 40% of Dolby's business, while consumer electronics were 25%.

In the ensuing Q&A session, I asked the CEO to specify Dolby's top five sources of licensing revenue. The CEO listed the top three: PCs (software), DVDs, and TVs. What this tells me is that if more consumers adopt the Blu-ray DVD format and buy new DVD players, Dolby will benefit.

I didn't hear the next question properly, but I believe another shareholder asked about the locations of Dolby employees and Dolby R&D facilities. Mr. Jasper listed several locations, both domestic and worldwide. Later, in response to another question, he added that in terms of numbers, Dolby was not downsizing employees and planned to add 100 jobs net.

I asked how Dolby was dealing with IP issues in China. ( Given the size of China's consumer market, if Dolby fails to protect its IP, its growth may stall.) Mr. Jasper said that Dolby was "attacking" the IP problem in several ways. He said Dolby performed license audits; had persons monitoring trade shows to discover unauthorized sellers; and had agents in the field monitoring sales of consumer electronics. I liked the specifics, and to be quite frank, there's no magic bullet that will solve the international IP theft problem. It seems like Dolby is taking the problem seriously and is being pro-active.

I asked about the top three countries in terms of revenue sources. The CEO listed 1) United States; 2) Japan; and 3) China and Greater China (including Taiwan and Hong Kong). This was interesting, because Dolby's 10K indicates it receives the majority of its revenue from abroad. I realize the numbers could be 40% U.S., 30% Japan, 20% China, and 10% EU, but investors may want more disclosure in terms of sales per specific country. Such a breakdown, if released every year, would show more transparently how Dolby is doing in terms of international expansion.

Another shareholder asked how Dolby was dealing with the economic downturn. Mr. Jasper confidently answered the question by saying that Dolby's shareholders focused on a long term strategy and were long-term shareholders. Basically, Mr. Jasper was saying that Dolby had been around 44 years and its diversified product line and balance sheet placed the company in a favorable long term position. For a minute, it felt like Mr. Jasper was channeling Warren Buffett and Mr. Buffett's preference for the long term view.

I asked the final question. I asked what Mr. Jasper would do to fix the economy if he were President for a day. Mr. Jasper first joked that he would first sign an executive order mandating use of Dolby Sound in all consumer electronic products. He then became more serious and said that R&D tax credits, especially for small businesses and consumer electronics manufacturers, would be helpful.

Overall, Mr. Jasper presented his company with confidence and clarity. After the meeting, he was open enough to allow me a picture with himself and Mr. Ray Dolby, the founder. To give you an idea of Mr. Jasper's kindness, he patiently waited outside until Mr. Dolby came down so we could all take a picture. (Readers may go to the very top of this post to see two pictures, one of Dolby's S.F. building, and another of the CEO and founder.)

I have only two remaining remarks, both of which are tangential to the company's overall outlook: one, I couldn't find Mr. Jasper's full name anywhere, and I'm still curious what the "N" in his name stands for; and two, all the directors, except for one person, appeared to be Caucasian men. A company doesn't necessarily need diversity to do well; however, with Dolby expanding in China, it makes sense to add at least one director who has experience with Chinese laws and Chinese culture.

In any case, investors who want to open new positions in Dolby stock may want to wait until after its next earnings report, when numbers may not be as sanguine. Long term, however, assuming that it aggressively protects its IP, Dolby seems well-positioned for future growth. After all, even in a recession, most consumers won't stop going to movies, replacing computers, or listening to music.

: I own an insignificant number of Dolby (DLB) shares.

Update: an astute friend tells me that Mr. Jasper's first name is "Norval." See

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