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.