Dolby Laboratories

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal first quarter results. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, you will need to press star 1 on your telephone. As a reminder, this call is being recorded Monday, May 4, 2020. I would now like to turn the conference call over to Jason Deed, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

Good afternoon. Welcome to Dolby Laboratories' second quarter 2020 earnings conference call. Joining me today are Kevin Gannon, Dolby Laboratories President and CEO, and Louis Chiu, Executive Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements, including our third quarter fiscal 2020 outlook and our assumptions underlying the outlook. These statements are subject to risk and uncertainty that may cause actual results to differ materially from the statements made today. In particular, we are currently in the midst of the COVID-19 pandemic. The extent of its continued impact on our business will depend on several factors. including the severity, duration, and extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements, as well as in the Risk Factors section of our most recent quarterly report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss GAAP and non-GAAP financial measures. The reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations Data Sheet on the investor relations section of our website. As for the content of today's call, Louis will begin with a recap of Dolby's financial results and provide our third quarter fiscal 2020 outlook. And Kevin will finish with the discussion of the business. So with those introductions behind us, I will now turn the call over to Louis. Louis?

Okay, thank you, Jason. Pretty fun doing this from a remote, huh? Okay, good afternoon, everyone, and And thank you all for joining this call. And of course, may the fourth be with you. We are reporting today that revenues and operating income are up over last year and the adoption of Dolby technologies continues to expand. We have a strong business model and our financial position is solid. And having said that, the COVID-19 pandemic has caused a lot of stress and uncertainty in the economy. This affected the level of growth we were able to achieve in Q2 and has also limited the visibility into the near term. So as I go through the numbers today, my commentary will include some perspectives on how the economic environment has impacted the numbers and give you a sense for how that might continue until things recover. Later on, Kevin will talk more broadly about our people and the business and how we're managing through the COVID-19 situation so that we can emerge from this downturn as strong as ever. So let's go through the numbers. Second quarter revenue was $352 million compared to $292 million in Q1 and $338 million in Q2 of last year. Total revenue of $352 million was about $30 million below the midpoint of the guidance that we gave at the beginning of the quarter. And all of this was due to lower volume and consumer activity related to the pandemic. In other words, the temporary shutdowns around the globe, and the lower consumer purchases of electronic devices. Based on our analysis, we estimated that licensing revenue was negatively impacted by the pandemic by about $25 million for the quarter, and that was heavily concentrated in China. And in our products and services category, which mainly serves the cinema industry, those revenues were about $7 million below the midpoint, And we believe most of that delta was also tied to the pandemic. Let me now talk about the composition of our revenue by end market. And as part of that, I'll also describe the types of devices that we include in these end market categories so you can better understand how consumer spending for different devices can affect us and our revenue patterns, not just for Q2, but also going forward. So let's start with broadcast. which is the market category we use for licensing revenue that we get from TVs and set-top boxes. Broadcast represented about 39% of total licensing in the second quarter. Broadcast revenues were up by about 5% year-over-year, driven by higher recoveries and also higher adoption of Dolby Vision and Dolby Atmos. And this was then partially offset by lower volume because of the pandemic. which was broadly affecting TVs and set-top boxes. On a sequential basis, broadcast was up by about 26% due to higher recoveries and timing of activity in our patent programs. Our mobile devices category consists of mobile phones and tablets, but not laptops. In Q2, Mobile represented approximately 23% of total licensing. Mobile was up about 13% over last year, driven primarily by growth in our patent programs. And on a sequential basis, mobile was up by more than 100% due to timing of revenue under contracts as well as growth in our patent programs. Consumer electronics is our next market category, and this captures a broad range of home entertainment gear. such as sound bars and smart speakers, DMAs, which are your Apple TV and Fire TV type devices, audio video receivers, and Blu-ray players. And yes, there are other consumer devices that have Dolby technology in them, but the ones that I just mentioned make up the bulk of the volume in this category. About 15% of total licensing in the second quarter was in our consumer electronics category. On a year-over-year basis, CE licensing increased by about 10%, driven by higher volume from more adoption. And on a sequential basis, CE was up slightly as higher recoveries were offset by seasonality and lower volume because of the pandemic. Now it's in the latter part of the quarter. PC, which consists of desktop and laptop computers, represented about 14% of total licensing in the second quarter. PC was up by about 11% year-over-year, mainly due to higher recoveries, then offset partially by lower volumes due to the pandemic. Sequentially, PC was up by about 44% due to higher revenue from timing under contracts and higher recoveries. Our last category, other markets licensing, includes revenue from automotive, Dolby Cinema box office revenue sharing, gaming consoles, and Dolby Voice licensing. Just as a side note, Dolby Voice hardware in our room is a service offering revenue.

Hello?

Hello?

Can you hear me now? Yes, sir. Okay, thank you. Like I said, it's fun doing this from remote. Let me start that last sentence over. You'll test my photographic memory here. Okay, so our last category, other markets licensing, includes revenue from automotive, Dolby Cinema box office revenue sharing, gaming consoles, and Dolby Voice licensing. And I was just making a note that Dolby Voice hardware and room-as-a-service revenues Those are included in products and services, not in licensing. So in Q2, other markets represented about 9% of total licensing. They were down by about 16% year-over-year as we saw lower volume and lower recoveries in automotive, lower revenues from Dolby Cinema, all of which was due to the pandemic, despite the fact that we do have more Dolby Cinema screens now than we did a year ago, and lower revenues from gaming due to the lifecycle in the consoles. On a sequential basis, other markets was down by about 27% due to lower revenue and gaining because of seasonality, lower Dolby Cinema because of the pandemic, and lower automotive volume and recoveries. So let's move on now to products and services revenue, which was 23 million in Q2 compared to 34 million in Q1 and 28 million in last year's Q2. As you can see, it's a relatively small part of the overall Dolby revenue picture. And most of this revenue comes from equipment that we sell to cinema exhibitors. And the cinema industry is being particularly hard hit by the pandemic. So it should be no surprise that our declining trends as well as the Q2 shortfall against our guidance were all driven primarily by the pandemic. And I'll cover this further in the outlook section. But first, let me go over margins and operating expenses for Q2. Total gross margin in the second quarter was 89.5% on a GAAP basis and 90.2% on a non-GAAP basis. Products and services gross margin on a GAAP basis was minus 2.8% in the second quarter compared to 27% in Q1. The unusually low gross margin in products and services in Q2 reflects a large drop in demand because of the pandemic and that rippled into higher excess and obsolescence charges and lower production volumes, which meant lower recovery of fixed costs. So then products and services gross margin on a non-GAAP basis was 3% in the second quarter compared to 29.7% in Q1, and the reasons for the decrease are the same as what I talked about in GAAP gross margins. I'll give guidance on this later on. Operating expenses in the second quarter on a GAAP basis were $209 million compared to $206 million in Q1. And operating expenses in Q2 were about $4 million, give or take, less than the low end of the range that we had guided. As you might expect, we had lower travel and trade show related expenses because of the pandemic. We also had some marketing activities that were pushed out and some activities that utilized consulting and outside services that were impacted by shutdowns, et cetera. On the other hand, we had other expenses that were incrementally higher because of the pandemic, such as bad debt expense and some costs that we incurred to enable our Adobe employees to work from home. So operating expenses in the second quarter on a non-GAAP basis were $188.4 million compared to $182 million in the first quarter. And the comments I just made about GAAP expenses apply similarly here to non-GAAP. Operating income in the second quarter was $105.9 million on a GAAP basis or 30.1% of revenue compared to $102.9 million or 30.4% of revenue in Q2 of last year. Operating income in the second quarter on a non-GAAP basis was $129 million or 36.7% of revenue compared to $124.6 million or 36.8% of revenue in Q2 of last year. The effective income tax rate in Q2 was 20% on both a GAAP and non-GAAP basis. Net income on a GAAP basis in the second quarter was $88.5 million or 86 cents per diluted share compared to $73.4 million or 70 cents per diluted share in last year's Q2. And net income on a non-GAAP basis in the second quarter was $106.6 million, or $1.04 per diluted share, compared to $109 million, or also $1.04 per diluted share in Q2 of last year. For both GAAP and non-GAAP, net income in Q2 was below our original guidance, and this is due to the shortfall in revenue, but then partially offset by the lower operating expenses. During the second quarter, we generated about $66 million in cash from operations, which compares to about $49 million generated in last year's second quarter. We ended the second quarter with a little over $1 billion in cash and investments. During Q2, we bought back about a million shares of our common stock and ended the quarter with about $260 million of stock for purchase authorization still available. We also announced today a cash dividend of $0.22 per diluted share, which will be payable – I'm sorry. I got dilution on the brain. We also announced today a cash dividend of $0.22 per share, which will be payable on May 27, 2020 to shareholders of record on May 18, 2020. So now let's discuss the outlooks. Normally, this is where I give you all a simple update on the full year guidance, then provide guidance in detail for the upcoming quarter. However, there's not much that's normal about the environment these days. When we go through our normal process for developing a revenue projection, we look at a variety of market data and projections that come from external industry sources. We also look at information that relates to our specific customers and partners, including getting input from the field. We also look at historical data to factor in things like seasonality. We consider all the various inputs that we gather and identify a range that we would reasonably expect to happen, and then we use that to provide guidance. Right now, it is way more difficult to do all that with the same degree of certainty or accuracy that we are accustomed to. Industry data and market reports are not being updated frequently enough to keep up with the pace of change. estimating what our customers will ship to their customers is unpredictable. And when things start to recover, we don't know what the shape of that recovery will be. So, as I provide the Q3 guidance today, I'll divide my discussion between products and services revenue and licensing revenue and talk about how the current economic environment could impact those areas respectively and how that could translate into our Q3 revenues. So, Let's start with products and services revenue, which we estimate could range from $5 million to $10 million in Q3. That range is roughly 70% to 80% less than what we were previously thinking for Q3. Most of our products and services are sold into the cinema industry. And right now, the vast majority of cinema screens are closed and probably won't reopen until at least June. or later in some cases. Our cinema customers are conserving cash and many don't have physical access to their sites. These factors are embedded in the outlook for products and services. Now let's talk about licensing, which really is the bulk of our business. We estimate that Q3 licensing revenue could range from $220 million to $240 million. And that's down by roughly 20% to 25%, roughly, from what we were previously expecting for Q3. And here's why. The cinema closures I just mentioned means that there won't be much Dolby Cinema licensing, in other words, the share of box office in Q3. We don't break that out separately, but I have mentioned in the past that Dolby Cinema revenues were less than 5% of revenues. And so it's fair to assume that we would get very little revenue from Dolby Cinema in Q3. The vast majority of our licensing is generated from electronic devices containing our technology where we all earn royalty revenue based on units shipped. Broad-based consumer demand for electronic stuff in general is probably the most difficult thing to predict with accuracy or confidence right now. And yet, it's the most significant factor in projecting our q3 licensing revenue we looked at industry data for a number of specific devices like tvs and pcs and mobile phones we also looked at broad economic data and projections and where we landed was there wasn't a lot of uniformity in the data and many of our customers are also not providing a lot of specifics or quantified guidance in their outlook so with all that in mind we modeled a scenario where If you assume that shipments in Q3 blended across all devices were down, say, 15% to 25% versus what we were previously modeling, that would translate to roughly a $40 million to $60 million reduction in licensing revenue in Q3 versus our previous expectation. And within that, we've also allowed for any shifts in timing for revenue under contract or new wins. And with regards to a Q4 projection, it's just too early to say, especially when you consider all the moving parts that impact the economy and consumer purchasing behavior. So let me pause and give a quick recap of what I just said about the Q3 revenue outlook. First, the cinema industry is experiencing widespread closures, so we anticipate that our products and services revenue could be 70% to 80% lower than what we were anticipating before the pandemic hit. And we don't expect any significant licensing revenue from Dolby Cinema box office share. Second, because of the broad-based slowdown in the consumer economy, we are modeling a 15% to 25% decline in unit shipments broadly blended across all categories. Based on these factors and assumptions, total revenue for Q3 could range from $225 million to $250 million. of which licensing could range from $220 million to $240 million, while products and services could range from $5 million to $10 million. At this time, we are only providing an outlook for Q3. We're not providing guidance for Q4, and therefore no full year, obviously one quarter left, because of the degree of uncertainty and lack of visibility into Q4. So let me finish with the rest of the Q3 outlook so I can turn it over to Kevin. Gross margin for Q3 on a GAAP basis is estimated to range from 86% to 87%, and non-GAAP gross margin is estimated to be about one point higher than the GAAP number. With respect to product and services gross margin, because of the anticipated sharp decline in revenue in that area, products and services margins will fall into negative territory in Q3 mainly because of fixed costs that are not fully covered at the lower revenue levels. It's probably easier to talk about this in dollars. So at the revenue range in the outlook that I gave, products and services gross margin on a gap basis could range from minus $6 million to minus $9 million in Q3. And on a non-gap basis, products and services gross margin could range from minus $5 million to minus $8 million in Q3. Operating expenses in Q3 are estimated to range from $191 million to $201 million on a gap basis, and from $170 million to $180 million on a non-gap basis. Other income is projected to range from $1 to $2 million for the quarter, and that's $1 million, not $1. And our effective tax rate for the third quarter is projected to range from 19% to 21%, on both a GAAP and non-GAAP basis. Based on a combination of the factors I just reviewed, we estimate that Q3 diluted earnings per share could range from about one cent to 18 cents on a GAAP basis and from about 18 cents to 35 cents on a non-GAAP basis. And so with that, I would now like to hand it over to Kevin.

Thank you, Louis, and good afternoon, everyone. Louis just went through a lot of information, clearly much as uncertain as we look out over the next few months. At the same time, we are well positioned to navigate these challenging times. We have a strong value proposition, a strong business model, and a strong balance sheet, and we are confident in our long-term opportunities. I will talk more about our business in a moment, including the implications of the current environment. Let me start with where it all begins, which is our people. Our top priority each step of the way has been and will continue to be the safety and well-being of our people. As of today, approximately 95% of our workforce is working from home. We have in place a business continuity plan, and while nobody ever wants to have to use it, it is served as well. In terms of how it has affected our work, we are able to continue to conduct our business from product releases to integrations and certifications and building technologies. We, of course, can't fully replicate the ability to wow our customers with live demos or engage in certain aspects of our research and development that rely on our labs. One of our responses has been to increase our focus on our ability to conduct online demos and training for our customers and partners. The support and infrastructure team has not missed a beat, continuing to stay on schedule while working even harder to meet the needs of our work from home employees. I want to take a moment to thank our people Our people are the magic behind the Dolby experience and our future innovations. And I speak for everyone on our team when I say that our hearts go out to those who are most impacted by this pandemic. Let me turn to the business. While the environment is uncertain, what remains unchanged is our conviction of the Dolby purpose and mission. We continue to believe that consumers want to be immersed in their content and that quality matters. If anything, we are reminded of the importance of shared stories and experiences. We see so many examples of people engaging with each other through audio-visual tools, and we remain focused on bringing more Dolby experiences to more types of content to more people around the world. Our strong financial position allows us to maintain a focus on long-term success. We have a strong balance sheet with over $1 billion in cash and investments with no outstanding debt. our business continues to generate high margin licensing revenues, which account for about 90% of our total revenues. Across the company, we are actively recalibrating priorities in recognition of the fact that there are many changes to the work that can and should be done in the near term to best achieve our long-term goals. This includes regular review of our spending and our capital investments. As we look across our businesses, there have been some areas that have been more directly impacted than others. In cinema, the vast majority of screens around the world are closed, including all of our Dolby Cinema screens. In addition, both the ability and the capacity for capital investment by exhibitors has negatively impacted demand for cinema products. We are confident that when it is safe to do so, consumers will return to the theaters, and Dolby Cinema is the best way to see a movie. During the quarter, we entered into agreements with two new exhibitor partners that will bring the first Dolby Cinemas to South Korea and Saudi Arabia. We currently have 250 Dolby Cinema locations and eagerly await an exciting slate of titles. As it relates to our licensing business, the combination of retail closures and economic conditions have significantly impacted sales of most home entertainment and mobile products. Disruptions related to the pandemic have had an impact on the near-term priorities of some of our partners, and in some cases, this may affect the timing of new products and partnerships. In addition, we've seen the delay of major events, such as the Summer Olympics, that were expected to be key moments for the industry. At the same time, as we continue to engage with our partners in this environment, what remains consistent is the value that they see Dolby bring to the experiences we are enabling, or planning to enable, on their devices and services. Dolby is uniquely positioned as we enjoy a broad adoption of our technologies across a large range of content, services, and devices. In addition, many of our growth opportunities are still in the early stages. We are confident that as consumer spending does return, we will continue our momentum of broadening the reach of Dolby experiences and return to our path of driving revenue and earnings growth. Even within this environment, we continue to see several examples of progress in the adoption of Dolby Vision and Dolby Atmos. One area that has seen growth during the current environment has been the increased consumption of streaming content from our partners like Netflix, Apple, Amazon, and Disney, all of whom are streaming content in Dolby Vision and Dolby Atmos. We continue to see broader adoption across an increasing number of partners. The latest examples include Showtime and CBS, and they have both started to support Dolby Vision on their streaming services. At CES, which admittedly seems like a very long time ago, many of our OEM partners announced new TVs and PCs supporting Dolby Vision and Dolby Atmos, and we have seen a number of those products launch this quarter, and most remain on track to come to market later this year. We continue to enable Dolby Vision and Dolby Atmos experiences further within TV lineups. Over the past few months, we have seen our partners like Changhong, Konka, Skyworth, and two of our partners in India, Vue and SuperPostronics, launch additional TVs within their lineups that support Dolby Vision and Dolby Atmos. We remain on track towards significantly increasing the adoption of Dolby Vision and Dolby Atmos across a larger percentage of 4K TVs this year. In mobile, Samsung, Oppo, and Sony all launched their latest models for 2020 with support for Dolby Atmos. Additionally, Apple included support for Dolby Vision within their recently launched iPhone SE, the most affordable model within the iPhone lineup. We continue to see opportunities for more adoption of Dolby Vision and Dolby Atmos within PCs, with gaming content becoming a growing use case. This quarter, Activision launched Call of Duty Warzone in Dolby Atmos, reaching over 50 million gamers within its first month. Also, Lenovo has just launched its latest lineup of gaming PCs that fully supports the Dolby experience. We continue to generate excitement within the artist community for the music in Dolby experience as we add support across genres and regions. ARama, became the first music artist from India to support Dolby Atmos for music. Pearl Jam released their new album Gigaton in Dolby Atmos and we have enabled a special visual album experience in Dolby Vision and Dolby Atmos on Apple TV. We look forward to continuing to make progress in bringing these experiences to more devices, services, and people around the world. Looking forward, we have begun making Dolby technologies available to developers to improve the quality of the media and communications within their applications. The initial APIs we have made available can analyze and enhance the quality of media content or enable multi-party audio-video communication to be embedded within an app. While early, we've seen increased usage by our initial customers, especially in a time where people are engaging even more through online experiences. We are optimistic about our opportunity for enabling developers to bring improved experiences to a wide array of applications and services. To wrap up, while it is difficult to predict what may happen in the short term, our confidence in our mission and opportunity remains unchanged. Zoldy is well positioned to navigate these challenging times, and we remain excited about the momentum of our new opportunities. Consumers want to be immersed in their content, and the quality of these experiences matter. We have a strong value proposition, our partners remain deeply engaged, and we are focused on bringing more Dolby experiences to more types of content and to more people around the world. When conditions do improve and consumer spending returns, we are confident Dolby will return to our path of long-term growth. I look forward to updating you next quarter, and with that, I will turn it over to Q&A.

Thank you, sir. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you may do so by pressing star 1. If you would like to withdraw your question, please press star 2. If you are on a speakerphone, please pick up your handset before entering your request. Please be sure to identify yourself and your firm at the outset. To be fair to all participants, we ask that you limit yourself to one question and a follow-up question until all participants have had a chance in the first round. If time allows, we will then come back to answer any remaining questions. And the first question today will come from Steven Frankel, Doherty.

Good afternoon. So, Kevin, given this environment doesn't look like it's going to get any better in the short run, and it may take a few quarters to come out of this, can you give us a little more insight insight into your thought process on reducing the run rate of expenses and maybe, you know, kind of how much of the Q1, or sorry, this current quarter's expenses were kind of the temporary work-from-home bump, and so what's the right run rate going forward?

Sure. I'll turn it over to Lewis to talk a little bit more about the composition of the Q2 spend. But as we look forward, Steve, I guess, first of all, our first guiding principle is making sure that we're focused for strength as we come out of this and as it relates to our long-term opportunities. And so that does have an effect on the things we can do in the near term. It really varies on a business-by-business and customer-by-customer basis. Some things you would expect are naturally lower, such as travel expenses and trade shows, but we are reviewing each of our projects and programs as it relates to what we can do in the near term to come out the other side of this in a very strong position as the world returns back to whatever that new normal is. I would say that, of course, as we sit here today, we don't have We have less visibility than we would normally have as to how the rest of this year plays out. And so we're going to continue to be watching for indicators in each of our businesses, whether that's how consumer spending is coming back, how people are coming back to the movies and what social distancing restrictions they might be under. And as we watch those indicators, we will also continue to recalibrate how we're thinking about operating expenses.

Okay. And, Lewis, if you could maybe give us just a little more detail on is the guidance you gave for the current quarter, is that kind of the normal run rate or is there still some more work-from-home kind of one-time expenses in that number as well?

Sure. I would say that the Guidance that we gave does reflect the spirit of your question, which is temporarily we see some lower spending, primarily for obvious things like lower travel, significantly lower travel, a lower rate of hiring than what we were originally modeling. There's probably some use of outside services, consulting, et cetera, that are lower. These things that are maybe what you might think of as discretionary as long as it doesn't impede our progress on key projects. Yeah, I wouldn't say that we've baked in a lot of unusual one-timers per se in the guidance that we gave for OpEx. And this past quarter, we had some expenses for that first ramp up of work from home, but I don't think that repeats every quarter. And in this, as I also mentioned, in Q2 that we just reported, we did have a higher bad debt expense in the quarter, and I would not expect going forward to run at that level every quarter, although over history from time to time we have a low bump for things like this, although we've never had a pandemic, but there might be some customers who run into some issues, and then we have to reserve for that.

Okay, and assuming life does start to recover, how much of an insight do you think you'll get into your customer's production volumes as they ramp up or do you feel like it's going to be more based on your feeling of the overall economy versus specific feedback and you might have to play catch up to the extent that things start to ramp?

Sorry, Steve, can you explain? I understood your question except for the catching up.

So, in other words, you know, are you going to be able to anticipate this ramp by talking to your customers and understanding how they recover, or is it more likely to be, in essence, you're seeing it in the rearview mirror when you get the actual production reports, and so we're almost back to the old method of revenue rack that you're seeing it. in the statements as opposed to in your estimates of their production volume?

Yeah, so in terms of, you know, in the course of any given quarter, you know, what are the signs? It really is a wide range of factors. I'm sure many of the ones you look at, including industry analyst reports, economic reports, of course, we do get some anecdotal information from some of our customers throughout the quarter. Sometimes we reach out to see what we can learn from them. At the end of the day, of course, we don't know for certain across the entirety of our business until we have those reports and we can record that information. But I think in terms of how that affects the work we do, we are still engaged with all of our partners who are interested in adapting Dolby Vision and Dolby Atmos. Of course, you would expect there are going to be cases where because of the circumstances of an individual partner or environment, they might change their plans as it relates to launches or product plans. But importantly, it's not that we're not losing deals or business Many of our products are still shipping. I went through a lot of lens here. And we feel confident in that long-term opportunity. So the work we have to do certainly will be informed to some degree by what's happening in the market, but more specifically by how our partners are reacting to that environment.

Okay. Thank you.

Our next question comes from Eric Wold, B. Riley.

Thank you. Good afternoon, guys. So just to follow up on kind of the last set of questions, I guess I know there's a lot of uncertainty out there because of baked into your 15% to 25% assumed unit volume decline in the June quarter guidance. I think the thing that framing that, is that mainly based on what you think demand will be from the consumer standpoint? I mean, how much of that is supply chain driven? Is your supply chain back ramping? they can meet the demand if it's there, or is there some portion of both supply and demand baked into that decline?

Right. Well, first of all, it's really a – it's a scenario that we modeled based on a wide range of data points to give you context on how we could see this quarter play out. But for more detail on that, why don't I turn it over to Louis, who he and his team have been – You're doing a great job consolidating all these data points. Louis?

Hey, Eric. This is Louis. How are you?

Hey, Eric.

How are you doing? I'd say that we try to leverage the approach we always take, which is we typically take a two-pronged approach at minimum. We go at the ground up looking at customer data and individual market segments. And then from the top down, looking at industry-wide reports and our economic data. So in constructing the scenario, the one thing we did notice that I kind of alluded to in my prepared comments was that the data in this environment was fairly scattered. Normally, when you think about this process, you would be getting data from these parallel tracks sort of at the same time, and they sort of corroborate each other, and you can sort of interpolate. But in this environment, there was different timing. I mean, you're talking about some industries where in a normal year, they might only issue an industry update once every six months, not every six days or every six weeks. And so we basically looked at as many different inputs as we reasonably could in the different markets we serve and ultimately tried to come up with a range of scenarios that would at least sound like that could happen. I think it's very difficult for us to sit here today and pretend like we know more than anyone else and not saying that's our projection and it's better than anyone else. But it does utilize a lot of these sources. But as Kevin said, we recognize and have to accept the reality that they're more scattered this time. And even those data points could have a little bit less of a degree of certainty. But nevertheless, the fundamental approach is similar. We try to look at data by markets, data from customers, and data at an overall economic level. and say, what does this foresee for what's happening out there? To the point of supply chain versus consumer demand, I think it's really hard to parse that apart. We try to boil it down to one straightforward scenario we can give you, which is units volume be shipped less. And then trying to parse between how much of that supply chain versus demand would probably be difficult. At this stage, I think what Kevin and I were talking about in getting ready for this call was, there are signs that the supply chain is getting better. And I think companies much larger than ourselves made comment from their earnings calls about the supply chain now, like today, being better than it was a month and a half ago. So I'd say as a general comment then, we would not be attributing as much of this to supply chain as we are to what will be happening with units shipped because it feels like the economic data suggests that there's this broad base reduction in consumer demand broadly across devices. I guess this is one moment where I can say Dolby is pretty widely adopted through a lot of things that people buy, and we love that fact, and that's actually the strength of our business model. But when consumer demand drops off, the kind of numbers that you've seen out there that are being written about, we have to acknowledge that that flows through to us because, as you know, we earn our royalties based on a volume unit-based model, so.

Okay, very helpful. I guess my follow-up question would be, I guess you always talk about, you know, the strong balance sheet is kind of allowing the company to take advantage of opportunities as they arise, I guess, which, you know, disruption could be viewed as one, depending on how long-term someone thinks it goes. I know you bought back, you know, about twice as much on buybacks in the March quarter as you did in the December quarter. Was that all kind of done before things really started to get bad around COVID, and would you anticipate still being active buying back shares in this environment, or are you likely to rein that in so you get a little more visibility?

Thanks. Yeah, there's a lot embedded in that question. So maybe I'll start off with a quick commercial reminder that we really truly do have a very, very solid financial position we come from. I think Kevin mentioned in his prepared comments, we have ended the quarter, ended this quarter with a little over a billion in cash and investments and no debt. So that helps us prepare for the long term. You're right. We did buy back a good chunk of stock this last quarter. I would say that it was probably time more towards the earlier part of the quarter. It's not uncommon for us to conduct that activity once we've gotten our numbers out. We try to, you know, do that as straightforward a way as we can. And then the second thing I would say is we have not suspended our buyback program. And as you can see, we also declared a dividend today as well. I don't want to imply that we're being namby-pamby and pretending like there's not issues out there in the environment, but we are in a good position. And you know from the past, too, that we don't project how much we buy back into a quarter. So I think it's just fair to leave it at that, that we have not suspended our buyback program. We did declare a dividend, and as Kevin said in his prepared comments, we are continuing to invest in programs that drive the growth of the company. So I think this is all These are all things that I'm happy that we can sit here to be saying today about Dolby.

Thank you.

Our next question will come from Ralph Shockert, William Blair.

Good afternoon. Two questions if I could. First for Kevin. Actually, I think both for Kevin. What's up? As you think about the COVID environment right now with what's going on and if there's any parallels, you could think about or draw the 08 and 09 during, you know, the Great Recession that we saw there. Just in terms of the declines that you're seeing today versus historically. And then how do you think Dolby is positioned, you know, assuming recovery begins at some point going forward, coming out of COVID versus 08 and 09? I think you have much more exposure to PC than versus perhaps more diversification on this go-around. And maybe a follow-up to that. On the call, you talked about, you know, growing international partnerships for Atmos and Vision. But you said you remain on track for a significant increase in 4K TVs this year. And then I think also, Kevin, you may have said that COVID may affect, during the licensing comments, certain timing of partnerships. Just kind of wanted some more clarification on that latter point.

Thank you. Sure. Thanks, Ralph. On the first part of your question, we haven't spent a lot of time comparing it to 2008, 2009. We think it is – it's a different – it's a very different kind of environment than what we were seeing then. And our business has also changed a lot. I mean, that was a time when we were still transitioning from – DDD revenue and also in the middle of the adoption of Digital Plus and digital broadcasts, our company is in a different place. And I think that there are a lot of things that are hard to draw parallels from as it relates to this environment that we're in. So if you have more specific questions, I can take those. But let me get to the second part of your question. We are still, you know, as I said, we're still very, we feel very good about our ability to significantly increase our adoption rate of Doty Vision and Doty Atmos this year. That was a big deal, of course, coming into the year. You know, obviously, how much revenue you get from that increased adoption depends on unit shipping. But, you know, when you set your sights on the point in time when consumer spending returns, every win we can get now is an increase in revenue then. and we continue to have engagements across the board. As it relates to your question about timing, you know, I did think of one partner specifically. I'm not going to talk to the names and specifics, but we do have a partner who's going to launch a Dolby Vision, Dolby Atmos TV a few weeks ago, and they've decided to delay their launch. They're still going to include Dolby. It's still a win for us. There's a whole lot of reasons why someone might want to do that in this environment. And so, you know, sort of the observation is that depending on how long this goes on, it's certainly possible we see more people wanting to adjust a launch window to a stronger environment or that they have other priorities they're focused on. But that doesn't change the fact that we value that win significantly because when we do come out the other side, then we're in that much better of a position. And we're also looking to focus on areas like gaming as an area. I mentioned that Activision launched Call of Duty Warzone with Dolby Atmos this quarter. Gaming is an area that is clearly, if I judge based on just our household, is an area of increased engagement. That's an area where we think we have a big difference to make, and we think that benefits us not just in consoles, but also with opportunities in PC on the horizon. So we're just looking for – we're going to continue to engage where partners want to adopt, because even if the unit volume isn't there in the immediate term, it's going to be there, and that's what's going to lead to our long-term growth.

Okay, that's helpful. Thanks, Kevin.

Up next, we'll hear from Paul Chung, J.P. Morgan.

Hi, guys.

Thanks for taking my questions. Let's first start. how do you think your kind of cinema strategy will change kind of given the corona impact?

Do you expect maybe to proceed with additional cinema investments maybe when COVID dies down or, you know, will we see kind of future investments on hold for a while?

And then what would that kind of impact be on CapEx for the rest of this year and next year?

Yeah, so let me take the first part and then maybe you can comment on the CapEx part. So as it relates to our cinema strategy, I would say that we're going to be taking a lot of our cues from the cues of our partners. And I'm confident that people are going to want to come back to the movies, and when they do, It's the higher quality PLF screens that are going to fill up first, and Dolby Cinema is the best way to see a movie. I think that, and for that matter, Dolby Atmos in cinemas is another way to upgrade that experience, and I think that this is going to be a time where I think exhibitors, many of the exhibitors we speak to, while they clearly aren't able, many of them are not able to act in this environment, they are still engaged with us in discussions for some later point in time. But that later point in time is highly uncertain right now. So what we're going to be watching is do the cinemas open up? When do they open up? And right now we're seeing anywhere from June to some of our larger partners, it's early July. And that's you know, in large part due to the fact that the big titles are now scheduled to start rolling out again in mid-July. What social distancing guidelines are they going to be under? Because most people will be under restrictions. And then within that, how many of those seats that are available are filling up? Those are all the things we're going to be watching to be able to think about the pace of our long-term strategy and how that plays out going forward. Liz, do you want to talk about how we're seeing CapEx right now?

Sure. If I think back, Paul, for a second to what I said in the guidance outlook that we gave, I believe I said that we're really not expecting much Dolby Cinema revenue share this quarter just because of the fact that when they're shut down, they're not generating revenue. We get a percent. So I'd say as a... add on to that and sort of the natural outcome. Right now, the activity in terms of new Dolby Cinema builds is significantly reduced from where it was even just a couple months ago. And so we have adjusted our CapEx expectations accordingly to not have super optimistic expectations for new builds for the rest of this year. Beyond that, we'll monitor it going forward. You know, the Dolby Cinema investments that we've made over the years, we could easily and reasonably handle that within our normal business model and the amount of cash we generate. And it is obviously a great vehicle for us to show people what the best movie experience is out there. But for the near term and looking into Q3 and possibly into Q4, we do expect that there will be a significantly lower level of Dolby Cinema build-outs. than we would have originally anticipated. And that really is driven by our partners. We don't do that on our own scores because they're all with someone else's screen.

Gotcha. And then my follow-up on the revenue front, any color you can kind of provide on the specific regions.

You know, for example, are you seeing any trends, you know, consumer demand kind of emerging in Asia where, you know, retail outlets are kind of opening up more? Just curious to hear what you're hearing from your OEM customers as of late.

Yeah, so well, first of all, we're seeing that our partners are having a big increase in minutes volume. And much of our revenue, as you know, is about getting our hardware and our experience installed in huddle rooms and other spaces. And, of course, many offices or most offices around the world are closed. But we are, to your point, hearing particularly in Asia early signs of companies wanting to make sure that they're recognizing that parts of their employee population might be working from home for quite some time or alternating people in and out. And as a result, they're going to want ways to effectively collaborate for the people who are in the office with the people who are from home. So we could see some of that as we go forward.

And we'll go to Jim Goss, Barrington Research.

Thanks. A couple of questions. First one on the mobile side. You mentioned the iPhone SE was a new opportunity for you. There's also been a notion that the iPhone 12 might be pushed back for a couple of months. I'm wondering, is this a similar analogous to the television area where, as you get into lower price point units, that they have a similar value to the higher price point units, so you'll have a greater value out of the SE than any delay you get out of the 12th? And are there other lower value units that you think you'll provide an opportunity with as well?

Hey, Jim. This is Lewis. How are you doing?

Good. How about you, Lewis?

Yeah. Well, first of all, it's great to see us getting adopted into new models. That fundamentally is the crux of our business strategy. We think that the Dolby technology makes things look better, sound better, just improves the whole experience. So we do enjoy it when our technology makes it into the lower end units. We stop, but we don't specifically comment at a customer level, and it doesn't matter whether that customer starts with the letter A or the letter Z. But in general, yes, I think we look to find a way to get our technology adopted broadly across different models. I think we hesitate to infer that there's some sort of a linear up-and-to-the-right correlation because depending on who the customer is and what the model is you're talking about, there's natural curves between pricing and volume, and that's true for any customer, large and small. But at the very core of our strategy is, in fact, to get adopted not just in the hiring models. And, in fact, if you think about what Kevin was saying about Dolby Vision, which is going into TVs, Specifically, one of the things we aim to do is to have Dolby Vision adopted broadly throughout all the TVs. Just to be clear here, I'm sorry. Okay. That's it.

Okay. Can I ask one other thing related to Dolby Music? You mentioned the new Pearl Jam Dolby Atmos release. Do you have an opportunity to create remasters and re-releases of classic albums, and how would you monetize that with Toby Music?

Well, we have increasing engagement across the artistic community. That includes everything from new album launches and quite a lot of remastered library content. And our focus right now is on, you know, encouraging artists to adopt the technology and to create these experiences in Dolby and on looking to bring that experience, connect that experience to more ways to enjoy it, whether it be smart speakers, sound bars, and beyond.

Okay, so the content will just be the fuel for the show. product sales and lesson sales as is historically the case.

That is the most direct path for us to revenue. I certainly think over time it could create other interesting opportunities for us, but our focus right now is on supporting those artists who have gotten very excited about offering their music this way and trying to increase the adoption on playback devices.

Okay. Thank you very much.

And everyone, at this time, there are no further questions. I'll hand back to Kevin Yeaman for any additional or closing remarks.

Great. Well, thank you, everybody, for joining us today, and we look forward to keeping you updated as we progress. Thank you.

And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.