The motion picture industry jump started their week with the surprising news that Dolby Laboratories, Inc. had reached an agreement to acquire Doremi Labs, a leading manufacturer of professional audio visual equipment, for USD $92.5 million in cash. The deal also includes a four-year earn out of USD $20 million which is contingent upon performance and other factors. As is customary, regulatory bodies both in the United States and internationally will need to approve the deal, though the acquisition should be complete by the end of 2014.
Dolby hardly needs an introduction. They’ve been providing audio and imaging technologies to the motion picture, broadcast and music industries for just shy of 50 years. The San Francisco based company is best known their proprietary noise-reduction systems, though they have also been at the forefront of multichannel audio, compression and broadcast transmission technologies. Dolby has annual revenue that has climbed from USD $327.9 million in 2005 to USD $909.6 million last year and net income that has grown from USD $52.2M to USD $189.2 million during the same time period. Its best year for both revenue and net income was 2011 when it rang up USD $961 million and USD $309.2 million respectively. The company’s current market cap is USD $4.2 billion.
Doremi Labs, founded in 1985, may not be as much of a household name as Dolby, though over the past 14 years it has steadily built a solid reputation within the industry as the manufacturer of digital cinema servers. Its servers and integrated media block (IMB) is installed in over
47,000 58,000 movie auditoriums around the world and has been purchased by exhibitors of all sizes. The company, which has offices in Burbank, CA and France, also markets broadcast and post-production equipment as well as closed caption devices. As a private company Doremi doesn’t report its revenue and earnings.
If one needed another sign that the global digital cinema conversion was coming to an end, beyond Hollywood studios ceasing the distribution of film prints, there is none better than this deal. Here is why we believe this acquisition is a smart move and makes perfect sense for both Dolby and Doremi:
As mentioned, after more than a decade the rollout of digital cinema technology around the world has reached a saturation point. According to a February 8th presentation delivered by Media Salles in Berlin on February 8th, upwards of 87% of the world’s movie screens have converted to digital projection as of January 1st of this year. Doremi has grown quite steadily due to the brisk sales of its digital cinema technology over the past decade. While the company brought in revenue from the sale of pro-A/V equipment and technologies, the lion’s share of its earnings is likely derived from d-cinema related products.
Doremi would have seen sales volumes of existing digital cinema product lines plateau (if it hadn’t already) and potentially decrease during the next three to five years. Demand for d-cinema equipment (servers, IMBs and projectors) will decline and new sales will be dependent on the construction of new theatres (new builds) and technology refresh cycles. This in turn leads to the risk of a loss in market share should exhibitors select equipment from other manufacturers.
From all appearances Doremi was in good shape to weather a cyclical sales plateau or decline. The company, headed by Camille Rizko its founder and President, was right-sized with only 130 employees. In addition, Doremi’s strong engineering team is working on a slate of new products that include new hardware and software. An example of their handiwork is CaptiView, a closed caption system which was introduced a few years ago but the market for which is growing. Add to this the extensive and multinational dealership network Doremi has built up to sell such products.