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A fading breed

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Company: Dolby Laboratories (DLB)
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  A fading breed

Some of the weakness on the product and service side stems from the company’s digital cinema business. Currently there is $20 million worth of deferred revenue that was originally expected to be realized in the second half. (Deferred revenue usually occurs when a company receives payment up front for a service or a product that has not yet been delivered. Once the product is completed - or gradually as it is in the process of being completed - the company is able to book the revenue on the books as it has now been “earned.”) It now appears that the revenue will not be able to be booked until the first half of fiscal 2009 as the equipment has yet to be completed and then must be certified by a third party in order to be deemed complete. Management appears to be explaining the change as an issue with the timing regarding the third party. While it should be any investors nature to be skeptical, management appears to be very conservative on other metrics which helps them hold credibility in this metric that is difficult to verify.

One such example of a conservative approach involves the company’s handling of a cash alternative held on the books. A position of roughly $80 million in auction rate securities came to the forefront during the conference call. The auction rate debt market has essentially “locked up” in recent months as liquidity has dried up and trading has come to a virtual halt. While very little has changed as to the creditworthiness of underlying issuers, there is basically no way to get out of some of these securities. Management took the prudent step of 1) disclosing the issue, 2) writing down the value by $3.5 million, and 3) reclassifying the position as a long-term investment from a short-term security. While this particular instance should not be a major concern to investors, it is important to understand how connected different markets are, and how disconnects in one are of the financial world can bleed over into seemingly unrelated securities.

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