Dolby Laboratories

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal fourth quarter and fiscal 2020 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 the star 1 on your telephone. As a reminder, this call is being recorded Thursday, November 12, 2020. I would now like to turn the conference call over to Jason Dee, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

Good afternoon.

Welcome to Dolby Laboratories' fourth quarter 2020 earnings conference call. Joining me today are Kevin Yamen, Dolby Laboratories President and CEO, and Louis Chu, Executive Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements, including our first quarter and second quarter fiscal 2021 outlook and our assumptions underlying that outlook. These statements are subject to risk and uncertainties that may cause actual results to differ materially from the statements made today. In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time. The 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 factor section of our most recent quarterly report on Form 10Q. 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. A 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 or website. As for the content of today's call, we will begin with a recap of Dolby's financial results and provide our first and second quarter 2021 outlook. And Kevin will finish with a discussion of the business. So with that introduction behind us, I will now turn the call over to Lewis.

All right. Thank you, Jason, and congratulations in advance for the impending arrival of your second child. So good afternoon, everyone. I hope everyone's doing well. Our Q4 revenue was above our guidance, but we're still down on a year-over-year basis, and that reflects the ongoing impact of the pandemic. So let's go through the numbers. Fourth quarter revenue was $271 million, compared to $247 million in Q3, and $299 million in Q4 of last year. Our revenue guidance coming into the fourth quarter was a range of $225 million to $255 million. So compared to guidance, revenues were better than what we projected as we had a true-up of about $25 million in the quarter related to Q3 shipments, which was about $15 million higher than the true-up that we had last quarter, and with most of that improvement coming from TVs and set-top boxes and PCs. Total company revenue in Q4 increased sequentially by $24 million compared to Q3, as we benefited from higher unit volumes in TVs, set-top boxes, DMAs, and PCs, along with the higher true-up that I just discussed. And all this was partially offset by lower revenue from mobile due to timing under contracts, and I'll discuss that in a second. Now, looking at Q4 on a year-over-year basis, Total company revenue is down by $28 million from last year's Q4, and we can attribute that mainly to COVID-19, especially in products and services, which were down by about $20 million or nearly 60% below last year. The composition of Q4 revenue was $257 million in licensing and $14 million in products and services. So let's break down licensing revenue by end market, starting with broadcasts. Broadcast represented about 47% of total licensing in the fourth quarter. Broadcast revenues increased by about 2% year-over-year, helped by the higher true-up related to the Q3 shipments, and also driven by higher adoption in TVs and set-top boxes. And then this was then offset partially by lower recoveries in the quarter. On a sequential basis, broadcast was up by about 35% due to higher volume in TVs and set-top boxes, along with higher recoveries and the higher true-up. Mobile. Mobile represented approximately 15% of total licensing in Q4. Mobile was down by about 13% over last year due to lower recoveries, but partially offset by higher adoption of Dolby technologies. For the sequential comparison, I should point out that last quarter, Q3, mobile was about 33% of licensing, which was higher than normal, and that was due to timing of revenue under customer contracts. we came into Q4 expecting mobile revenue to decline this quarter and return to a more normalized percentage of revenue, which is what it did. So accordingly, mobile revenue was down sequentially by about 50%. That was primarily due to timing of revenue under customer contracts. Consumer electronics represented about 13% of total licensing in the fourth quarter. On a year-to-year basis, CE licensing was down by about 8%, mainly due to lower recoveries. On a sequential basis, CE was about 68% higher than Q3. And as a reminder, Q3 was lower than usual at only 9% of licensing because of timing under contract. And so the sequential increase from Q3 to Q4 was mostly a return to a more normal level. PC represented about 12% of total licensing in Q4. PC was higher than last year by about 26%, helped by the higher true-up and also because of increased adoption of Dolby technologies. And sequentially, PC was up by about 32%. That's for similar reasons. Other markets represented about 13% of total licensing in the fourth quarter. And they were down by about 19% year-over-year due to significantly lower Dolby Cinema box office share. And that's because of the COVID restrictions and lack of big titles. And also because of lower revenues from gaming due to console life cycles and lower recoveries in automotives. On a sequential basis, other markets was up by about 32%, driven by higher revenue from gaming and from via admin fees, and that's the patent pool that we administer. Excuse me. Beyond licensing, our products and services revenue was $14.3 million in Q4, compared to $11.8 million in Q3 and $34 million in last year's Q4. Our guidance had anticipated the large year-over-year decrease because most of this revenue comes from equipment that we sell to cinema exhibitors, and these customers continue to be negatively affected by the pandemic. And speaking of products and services revenue, going forward into Q1, we are winding down and exiting conferencing hardware sales, as we will now be fully focused on expanding the availability of the Dolby Voice experience through software solutions, such as interactivity APIs on our developer platform. So later on, when I cover the outlook for FY21, my comments on products and services revenue and gross margin will reflect the fact that we're exiting the conferencing hardware arena. Now I'd like to discuss Q4 margins and operating expenses. Total gross margin in the fourth quarter was 84.3% on a GAAP basis, and 85.1% on a non-GAAP basis. Products and services gross margin on a GAAP basis was minus $15.5 million in the fourth quarter. And a large portion of that consisted of charges for excess and obsolete inventory associated with conferencing hardware. And that relates back to what I just said a minute ago about our plans in that space. Going forward into Q1, we anticipate that products and services margin will still be negative but more along the lines of around minus $3 million or minus $4 million. I'll cover this again in the outlook section in a few minutes. Products and services gross margin on a non-GAAP basis was minus $14.1 million in the fourth quarter, and my comments here are similar to what I just said for GAAP gross margins. Operating expenses in the fourth quarter on a GAAP basis were slightly above the high end of the range that we had guided. coming in at $198.7 million compared to $182.9 million in Q3. And remember that Q3 was particularly low for us as that was the first full quarter of reacting to COVID-19, and lots of our activities had been temporarily halted or pushed out. Operating expenses in the fourth quarter on a non-GAAP basis were $176.5 million, which is within our range, and that was compared to $159.2 million in the third quarter, And basically the same comments that I made in GAAP apply here as well. Operating income in the fourth quarter was $30.1 million on a GAAP basis or 11.1% of revenue compared to $51.2 million or 17.1% of revenue in Q4 of last year. Operating income in the fourth quarter on a non-GAAP basis was $54.3 million or 20% of revenue compared to $77.6 million or 26% of revenue in Q4 of last year. Income tax in Q4 was 21.8% on both a GAAP and non-GAAP basis. The effective tax rate was slightly higher than guidance and that was due mainly to the mix of our income between different tax jurisdictions. Net income on a GAAP basis in the fourth quarter was $26.8 million or 26 cents per diluted share compared to $43.9 million or 43 cents per diluted share in last year's Q4. Net income on a non-GAAP basis in the fourth quarter was $45.8 million or 45 cents per diluted share compared to $67.6 million or 66 cents per diluted share in Q4 of last year. For both GAAP and non-GAAP, net income in Q4 was above the guidance that we gave at the beginning of the quarter And that was primarily due to revenue being above the high end of our range, offset partially by the lower product and services gross margin that I mentioned a minute ago. During the fourth quarter, we generated about $113 million in cash from operations, which compares to about $130 million generated in last year's fourth quarter. We ended the fourth quarter with nearly $1.2 billion in cash and investments. During Q4, we bought back about 640,000 shares of our common stock and ended the quarter with about $187 million of stock for purchase authorization still available to us. We also announced today a cash dividend of 22 cents per share. The dividend will be payable on December 4th, 2020 to shareholders of record on November 24th, 2020. So before I go into the outlook for FY21, Let's summarize the results for the full year FY20. Total revenue in FY20 was $1,162,000,000. That compares to $1,241,000,000 in the prior year, with the year-over-year decline due to the impact from COVID-19. Within total revenue, licensing was $1,079,000,000, which was down about $28 million from last year due to lower consumer activity because of the pandemic. while product and services revenue was $83 million for the year, down about $51 million from last year due mainly to lower demand from the cinema industry because of restrictions brought on also by the pandemic. Operating income for the full year, FY20, was $219 million on a GAAP basis, or about 19% of revenue, and operating income on a non-GAAP basis was $318 million, or about 27% of revenue. Net income on a GAAP basis was $231 million or $2.25 per diluted share. And net income on a non-GAAP basis was $305 million or $2.97 per diluted share. And cash flow from operations for the full year was $344 million and that's slightly up from the previous year where cash flow from operations was $328 million. So now, Let's discuss the full year outlook. First, let me say that we'll be facing some interesting dynamics in FY21 with our year-over-year comparisons. Because we have a September year end, the first two quarters of FY20 were mostly unaffected by COVID-19, while the last two quarters of FY20 were fully affected by COVID. And as we head into FY21, COVID continues to persist and visibility is very limited. even more so the further out you tried to look. So today, I'm going to provide an outlook scenario for the first half of the year, including our perspective on what Q1 and Q2 revenue could be. And for the second half of the year, because visibility is limited, we're not providing guidance at this time, but I will provide some color on some of the factors that could affect the second half. So let's discuss the first half. In the first half of FY21, We currently anticipate year-over-year growth in licensing revenue, and that could be offset by year-over-year decline in products and services revenue. The anticipated growth that we could get in licensing would come mainly from higher adoption of our technologies, as industry analysts currently are projecting market TAMs to be flat to slightly down in the first half. And also, we anticipate Dolby Cinema licensing revenue to be significantly down year over year in our first half because of that COVID versus pre-COVID factor of comparison in the cinema industry. And then for that same reason, we are anticipating cinema product sales to be down year over year. Now within the first half of the year, based on what we currently see, here's the scenario we're assuming for Q1 and then Q2. In the first quarter of FY21, we anticipate that total revenue could range from $330 million to $360 million. Within that, we estimate that licensing could range from $320 million to $345 million, while products and services is projected to range from $10 million to $15 million. At the midpoint of the range, we anticipate growth in licensing to be driven by higher adoption of our technologies across a range of devices. In addition, the Q1 licensing outlook is benefiting from timing of revenue under customer contracts, as well as potentially higher recoveries. Now, we're not anticipating as much revenue from these items, namely the timing or the recoveries, in our second quarter. And by the way, last year it was Q2, not Q1, that benefited more from timing and recoveries. So with that in mind, and based on what we currently see, and having just gone over the Q1 revenue outlook, We currently see our Q2 revenue scenario looking like a range of about $270 million to $300 million. And doing the math for you on the first half of FY21 by combining the Q1 and Q2 figures that I just went over, our current outlook scenario assumes a first half FY21 revenue range of $600 million to $660 million. We will plan to update you on how this picture has evolved after Q1 is completed. As for the second half, like I said, we're not giving guidance for the second half, but here are some points to consider. On a sequential basis in our licensing revenue, we typically see second half revenues lower than the first half because of lower seasonality in consumer device shipments and also because of timing of revenue under customer contracts. On a year-over-year basis, while we do expect to see continuing benefits from increased adoption of Dolby technologies, It's worth noting that with respect to market TAMs, current industry analyst reports are projecting markets like PC and TV TAMs to be down on a year-over-year basis in the second half. And that's because of an uptick in unit shipments that happened in the latter part of FY20 that might not repeat in that same timeframe next year. So, of course, it's much too early to know if that will be true, but that's what the current reports currently suggest. And as for Dolby Cinema and Cinema products, The year-over-year comparison should be favorable in the second half, but we don't know to what extent or at what pace. So those are a few things to think about for the second half, and we thought it was worth providing you that color. So let me now finish up by providing the outlook on the rest of the P&L for Q1. I already highlighted the revenue range scenario of $330 million to $360 million. So Q1 gross margin on a gap basis is estimated to range from 90% to 91%. and the non-GAAP gross margin is estimated to range from 91 to 92 percent. Within that, products and services gross margin is estimated to range from minus three million dollars to minus four million dollars on a GAAP basis and from minus two million dollars to minus three million dollars on a non-GAAP basis. As I mentioned earlier, we are winding down and exiting the conferencing hardware space and The demand for cinema products continues to be weak because of industry conditions. And as a result, we are reducing certain resources in manufacturing, as well as other areas that were connected with conferencing hardware and cinema products. We anticipate that it will take several months to complete various activities to smoothly transition our conferencing hardware partners and end customers. With respect to the impact on our products and services gross margin, we estimate that we could start to see savings in our cost of goods sold by around the end of fiscal Q2, and that's because of these transitioning activities that we have to undertake. Operating expenses in Q1 on a GAAP basis are estimated to range from $207 million to $219 million. Included in this range is approximately $7 million to $9 million of restructuring charges for severances and related benefits that are being provided to employees that are impacted by the actions that I just mentioned a minute ago. Operating expenses in Q1 on a non-GAAP basis are estimated to range from $175 million to $185 million, and this range excludes the estimated restructuring charge. Other income is projected to range from $1 to $2 million for the quarter, and our effective tax rate for Q1 is projected to range from 20% to 21%, on both a GAAP and non-GAAP basis. So based on a combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.70 to $0.85 on a GAAP basis and from $0.97 to $1.12 on a non-GAAP basis. So that's it for me. Over to you, Kevin.

Thank you, Lewis, and thank you, everybody, for joining us today. I want to focus my comments on three main areas today. I will start by highlighting our continued progress, increasing the number of Dolby Vision and Dolby Atmos experiences around the world. I'll then spend a few minutes on the changes we've made in our cinema and conferencing hardware business to adjust to the evolving conditions in certain markets. And then I will share some thoughts on the exciting opportunity for Dolby to address a new world of content through our developer platform and related initiatives. Before we move on, I do want to take a moment to thank our employees for their dedication and creativity. In a year where we all face challenges and disruptions, they have continued to bring more Dolby experiences to more people around the world, and they are the driving force behind the Dolby magic. So let me start with the Dolby Vision and Dolby Atmos ecosystem that continues to grow. With the launch of the iPhone 12, consumers are now able to see the benefits of Dolby Vision when they record video and share it. We are excited about the opportunity to support this ecosystem so that Dolby Vision content can be enjoyed on social media, video sharing sites, and more. This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology and creating new opportunities for Dolby. During 2020, we continued to grow the presence of Dolby Vision and Dolby Atmos across the many ways that people enjoy movie and TV content. At the beginning of the year, we saw the launches of Disney Plus and Apple TV Plus with the combined Dolby experience. Google Play, Showtime, and CBS all began streaming in Dolby Vision this year. And this quarter, Watcha, a streaming service in Korea, began supporting content in Dolby Vision and Dolby Atmos. The momentum of Dolby Vision and Dolby Atmos within movie and TV content continues to drive an expanding lineup of devices within the home. The adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew significantly year over year. Our partners, like TCL, Sony, Panasonic, and Skyworth, added support for the Dolby Vision and Dolby Atmos experience deeper within their TV lineups, and have also broadened the global reach of their offerings, including this year into India. Xiaomi launched their first TV that supports Dolby Vision and Dolby Atmos just this year. And we continue to bring new innovations to market, like Dolby Vision IQ, which optimizes the picture on your TV by adjusting to the surrounding light and to the type of content being viewed. Our continued innovation brings new value to our partners and consumers and adds to the reasons for deeper adoption. Dolby Vision and Dolby Atmos continue to grow across a broader range of devices. Apple recently began enabling support for Dolby Atmos to the HomePod. Earlier this year, Sonos launched its first Dolby Atmos product with the Sonos Arc, and Roku began supporting Dolby Vision and Dolby Atmos with the Roku Ultra. We are also beginning to see increasing adoption of the combined experience within set-top boxes, including the latest offerings from Free in France and Deutsche Telekom in Germany. Within mobile and PC, Apple highlights the adoption of the Dolby Vision and Dolby Atmos playback with support throughout their iPad, MacBook, and iPhone lineups. We also have strong initial adoption of Dolby Atmos within the latest flagship mobile phones from Samsung, Oppo, and Sony. Lenovo launched several new PCs that support the combined experience, and Dell began shipping Dolby Vision-enabled PCs earlier this year. We see significant growth opportunities within both mobile and PC as we gain new wins, drive deeper adoption within our partner's device lineups, and expand the types of content that can be enjoyed with Dolby Vision and Dolby Atmos. In the same way that Dolby Vision and Dolby Atmos enable great movie and TV content, we see a significant opportunity to create immersive experiences within music and gaming. These are important forms of entertainment that expand our current value proposition and grow the number of devices that can benefit from the Dolby experience. Let me start with music. A year ago, we launched Dolby Atmos for Music with Amazon Music HD and the Amazon Echo Studio. The music and Dolby experience has been met with deep and passionate engagement from artists. For example, those that we highlighted in the stories from Lizzo, Post Malone, Coldplay, and Jay Baldwin. Tidal became the second streaming service to support Dolby Atmos music, enabling millions of Dolby Atmos devices within mobile and in the home. Our increasing presence in music will create opportunities to grow adoption in mobile, automotive, smart speakers, and headphones. In gaming, Microsoft announced their new Xbox will be the first gaming console to support the combined Dolby Vision and Dolby Atmos experience for gaming. We are also seeing a growing number of gaming PCs adopt the Dolby experience, including new products from Lenovo and Asus this year. As we grow the presence of Dolby Vision and Dolby Atmos within gaming content, we add to the value proposition for broader adoption within PCs, gaming consoles, and mobile phones. Our momentum for Dolby Vision and Dolby Atmos across content, services, and devices is strong, and at the same time, we still see much of the opportunity ahead of us. We continue to grow our presence throughout devices within the home and remain at even earlier stages of adoption within mobile and PCs. We are focused on accelerating that adoption by increasing the amount of content and by broadening our presence in categories like music and gaming. Let me shift now to talk about the areas where we have made some changes to adjust to the evolving conditions in certain markets. The cinema environment remains challenging as the time of recovery is uncertain and the landscape is evolving. As Lewis discussed, we have made some adjustments to operations and manufacturing here to reflect a lower outlook for demand. At the same time, we remain confident that studios will continue to create great content, that audiences will continue to want to experience these movies in the cinema, and that they will seek out the best experiences. Let me spend just a few moments on Dolby Voice. We entered the communication space with the goal of enabling higher quality and more natural meeting experiences. Our value proposition of enabling higher quality interactions remains as strong and relevant as ever. and we see significant opportunities to broaden the reach of our technologies. As we move forward, we are winding down the sales of our conferencing hardware to focus all of our efforts on the larger opportunity to enable the Dolby Voice experience through our enterprise partners and our developer platform. And that brings me to the opportunity to bring the Dolby experience to the vast and growing amount of content that are a part of our everyday lives, from user-generated content to social media and casual entertainment, to everyday virtual interactions. Today, developers can access our technology through Dolby.io to improve media and interactivity within their applications. We have seen growing engagement from developers across a variety of industries and use cases, from improving audio quality in podcasts, media production, and online marketplace videos, to enabling interactivity in online education, social media, and live streaming applications. This quarter, we began partnering with SoundCloud to enable artists to improve the quality of their tracks using our mastering APIs and have seen nearly 200,000 tracks mastered with our APIs in the few months since launch. We are also working to integrate our media APIs onto the Box platform this quarter to enable their customers to enhance content with our media APIs right within the Box experience. Additionally, we recently enabled our interactivity API to include the benefits of Dolby Voice and has drawn strong engagement from developers since its release. As we look ahead, we will continue to expand our offering to address more audio and video features. For example, now that consumers can create in Dolby Vision with the iPhone 12, we see opportunities to support content platforms seeking to make the most of this expanding world of Dolby Vision content. While we are just at the beginning of these new opportunities, we are learning quickly from our early engagement with developers and evolving our offering to bring the Dolby experience to everyday applications and services. So to wrap up, the momentum of Dolby Vision and Dolby Atmos in movies and TV content is strong as our partners continue to bring new devices and services to market. Our opportunity remains ahead of us and we are enabling more content experiences in music and gaming that can accelerate the adoption across device categories. Consumers can now capture and edit in Dolby Vision for the first time, expanding the Dolby experiences into the growing world of user-generated content. And we are excited by the opportunity to bring the Dolby experience to new use cases and industries through our developer platform. All of this gives us confidence in our ability to drive revenue and earnings growth into the future. I look forward to updating you next quarter, and with that, I will turn it over to Q&A.

Thank you, 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, 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. One moment, please, for the first question. Your first question comes from Steven Frankel with Colliers.

Good afternoon. Thanks for the opportunity. Kevin, I'd like to talk a little bit about the Dolby I.O. opportunity. Tell us a little bit about the go-to-market approach and specifically around voice. How do you take voice, which has so much promise, and get it into some higher volume applications where it can really make a difference to the consumer? Thanks, Steve. We're really excited about the opportunity to improve so many different types of experiences, including with building voice. And in terms of how we're bringing it to market, we are, you know, first focused on our engagement with developers. We've, you know, brought a lot of people on board who have a lot of experience doing that. We're marrying them with the teams that we have that understand how to apply our technology and expertise to improve media and interaction experiences. So it really is about reaching out to developers, growing that community, bringing them to our platform, make it easy for them to understand how they can employ these technologies, and then also learning from them to then evolve our offerings and bring to bear more of our expertise and more of our IP portfolio to solve new challenges. And of course, you know, over the last six months, our product teams have had the opportunity to engage with a lot of potential developers and customers as it relates to deploying these technologies. As it relates to building voice, it's about the interactivity that we experience in our apps and services every day. And so this runs across telehealth, online education, We see opportunities where entertainment meets communications to work in areas like in the future. We're talking to people about areas like social media or live streaming platforms where people want to introduce interactivity. These are all areas that we see opportunities to bring Dolby Voice to life through the developer platform. And your existing partners like BlueJeans, Should we expect them to adopt the software approach as well so even without your hardware you can get that same experience? They do that today, Steve. So BlueJeans has the Dolby Voice service integrated into their full platform. So you do not require the Dolby hardware to get that experience. And we continue to work with BlueJeans and BlueJeans customers will continue to enjoy the Dolby voice experience when they're participating over their mobile devices and their PCs, like so many of us are doing for so many hours a day. Great. And you didn't mention anything about gaming, given there are too many platforms just hitting the market, both of which are sold out. Have we seen that in the numbers in the September quarter? Is that coming in the December quarter? coming. We are about to go through a refresh cycle. I did touch on it briefly, Steve, but I'm sure you're aware Xbox is supporting Dolby Vision and Dolby Atmos for gaming, and we're really excited about that. And so, yeah, of course, the refresh cycle is something that is likely to benefit us in the coming couple of quarters. And gaming is a big area of focus for us across the board. Certainly we're focused on making that Xbox experience as successful and as big of an ecosystem of content as possible. But beyond that, we believe that we can add value in mobile gaming and other areas. And then just one last one. Where do you think your market share is today in gaming? delvey vision and 4k tvs given uh that what you're talking about the phenomenon and new geographies and and more models yeah the so first of all steve i'll say the data is still coming in on that because of course you know we will get our q4 reports in the coming uh weeks and the industry analysts are not um quite uh uh not quite uh well maybe it's not possible they're not fully adapted to this uncertain environment so the numbers are still coming in um but we're We're confident that we are going to end up somewhere between 15% and 20% delivery vision to 4K TVs, and that 4K TVs are probably coming in this last fiscal year for us at somewhere just over 50% of the market.

All right. Thank you, Kevin.

We'll take our next question from We'll take our next question from Ralph at Shack Art with William Blair.

Good evening. First question, the true-up that you called out in the quarter was a 25-9. It's a little bit larger than normal.

I think you talked about maybe 15 higher than expected. Any more color on that? Is 606 sort of affecting the true-up this quarter?

Sure. And, you know, we've been very transparent about this even before we launched 606 that we were going to have this. First of all, I'll reassure you that our process is very solid, applied very consistently, and the biggest piece of that bump and true-up was new data that we got in on some of the key TAMs in the markets we work on were higher than what had been published as the TAMs at the time we did the estimate, and that was across several different categories. So, of course, we flowed that right through, and that affects a number of units that our customers report, because I think I've talked about this in the past, but our technique uses interpolation where we use multiple data points customer inputs market share data points and also tam data and so that the biggest thing driving that uptick in the true up was an uptick in the tam data versus what we had when we did the estimate for qs okay and then um

know we get a lot of questions and the opportunity for io there's obviously a lot of excitement around it sounds like you're making great progress in the quarter any way to sort of give us a sense of how to frame this opportunity and put some numbers around it you know range it's very wide and if not just sort of like maybe the building blocks how to think of um you know potential size on it yeah obviously um ralph well um let me back up but we're we do think this is a big opportunity and and um You know, for a very long time I've said that we believe we can improve any audiovisual experience. And this is what gives us the opportunity to expand that building experience far beyond our traditional realms. We're about six months in. And so right now what we're focused on is, you know, engagement with developers. As I think you know, we have a number, a growing number of initial customers that are out there using the platform. And we definitely look forward to providing more data as we go forward here. But we're excited about the customers that we're engaged with and that are coming online now.

Great. One more question. Just if you kind of take a step back and envision a post-COVID world that hopefully we get to sooner rather than later, maybe just some updated thoughts on your kind of long-term goal to march back to double-digit growth, your sort of confidence around that prior statement that you've talked about before.

Yeah, well, I feel I'm really pleased with our portfolio of growth opportunities And I think that, you know, on the Dolby Vision and Dolby Atmos portfolios we talked about, you know, we probably have the strongest progress in the living room for movies and TV. And as we just talked about, that puts us at about 15% to 20% attached to 4K TVs. We are in an even earlier stage with PCs and mobile devices. And we do believe that this focus on additional forms of content, gaming, music, are the key to really opening up those opportunities for us. And I think that with Apple embracing the ability to capture, share, edit content in Dolby Vision, I think that just is the best testament to how the Dolby experience can apply far beyond even those more traditional forms of content. So that's a big growth area. And then as we talked about, we were just talking about Dolby.io. So we're really excited about the ability to serve those new markets and new industries, unlocking the creativity of developers with the decades of experience and technology we have in making for the best high-quality media and interactions. And so we do see that as another significant growth opportunity.

Great. Thanks, Kevin. Thanks, Liz.

Yep. Our next question comes from Paul Chung with JP Morgan.

Hi, guys. Thanks for taking my question. So just on your guidance, is your timing of contracts with one of your largest customers just, shifting into F1Q from F2Q. So are we going to see better relative performance in PCs and mobile in 1Q?

Well, I stopped short of giving a breakdown by market because those tend to move around. But yes, this year we do see more of that timing of contracts issue affecting us in Q1 versus last year's in Q2. But for the first half of the whole, it tends to be relatively similar. I should remind you, too, that as we roll on, as each year goes along, we do get additional customers and get more penetration. So it's not necessarily the same items every year. It's just something we have to live with now under six mistakes. But, yes, to your question, Paul, clearly this year we see a little bit more of that benefit from the timing of contracts issue falling into Q1 versus Q2 than it did last year, where it fell more into Q2 versus Q1.

Okay. And then secondly, can you talk about the Dolby Vision recording capability on the iPhone? You know, you got a lot of good airtime during the event, which is, you know, great exposure there. So is there, you know, incremental revenue associated with this feature? And are you getting interest from, you know, other prominent OEMs kind of looking at this? Yeah, so again, we couldn't be more thrilled to have Apple embrace Dolby Vision for capture and sharing of content. And obviously, we're not going to get into the specific economics of our relationship with Apple, but I think it does a couple of things for us. One, it, again, is an amazing example of how Dolby can apply far beyond movies, TV, and even gaming and music. Secondly, yes, we do think it opens up over time the opportunity to bring that experience to a broader audience. And then third, we think in a world of a large and growing ecosystem of building vision content in these new areas, that there could be some interesting opportunities in some of our newer initiatives to help people get the most out of that content.

Great. Thanks, guys. Great job. All right, Paul. Thanks.

We'll take our next question from Eric Wold with B. Reilly Securities.

Thank you. Good afternoon, guys. A couple questions to follow up on the conversation around Dolby I.O. I know it's early, six months in. You're not talking about guidance. Is there a way to maybe frame what the average deal size or user size could look like? You're trying to think about what the best way to think about the revenue ramp as you gain penetration, or is it going to be just so many smaller users and revenue flows, and that's just not the right way to think about it?

Well, as you said, it's early. But I think we can already see that there will be a pretty broad distribution. There will be customers that are – You know, it's certainly in in, you know, historical Dolby standards are might be lower per customer. But I think there's also some opportunities to have some some reasonably large customers. So it's all going to be about their scale and their use case. So, you know, right now, where we're seeing early adoption are in areas like improving recorded audio in a number of these cases like SoundCloud, podcasts. An interesting example is an online platform for the automobile industry for those looking to digitize so people do videos of the car they're selling and we clean up that audio for them. So for those customers, the value proposition is a better quality experience, in some cases saving them time and money on what they were doing to clean it up. And so the revenue potential is very much a function of the scale of those services. And the same is true on the interactivity side. And many of our customers are just kind of, they're getting ramped up and have the potential to grow quite a lot more from where they're at today.

Okay. And then last question, you know, obviously this question you get all the time with a billion two in cash and no debt and seemingly very strong. know uh you know free cash flow trends to continue you know at what point does the uh i guess there's never a need to put that to use a burning hole in your pocket but what's the problem point is that kind of need to be put to use in some manner because obviously you are buying back stock but there's you know clearly a limit there to agree you know your acquisitions come more into play or is there just nothing really of size that can really uh make a dent in that

Well, first of all, we, um, we regularly review our capital allocation. And as you point out, we have also returned cash via buybacks and, um, and a recurring dividend. Um, I would say that, um, we're always, um, uh, looking for potential acquisitions that could accelerate our business. Historically that's tended to be, uh, what you might think of as technology tuck-ins, um, and, um, I think if we go into new areas, that will also open up new opportunities for us to consider. But we'll make those decisions based on where we see opportunities to accelerate and expand the opportunities that we're in pursuit of.

Got it. Thank you, guys. Okay, Eric. Thanks.

Our next question comes from Jim Goss with Barrington Research.

Thanks. A couple more things on the iPhone 12 capability with the vision capture and edit. Are you thinking that capability is sufficient for the device to be used more for professional content in that maybe it might be overkill to some extent for regular consumers? And also to the extent that you're You are pretty important to potentially the iPhone 12 sales. Do you think Apple is going to use Dolby Vision as one of the marketing capabilities that's going to be pushed on it, given what they did do on their own show?

They could run an ad, Kevin.

Yeah. Thanks, Jim. So, yeah, one of the ads Apple has been running, at least I've seen it on sports, does, in fact, highlight the ability to take professional quality video in Dolby Vision. And so to answer your question, it's both. I mean, there are, you know, many of the, many scenes that you've seen in movies actually have been, many of them have been shot with an iPhone. So the iPhone is both a professional device and a consumer device, and the Dolby Vision, brings out the best for both. So it's also a great way to capture your own content. I mean, we've been trying it, and it's amazing, and it looks more real and like what you experienced. And so today you can, I know at Amirum, you can use it in the Photos app, you can use it in iMovies, you can use it in Clips. So we just look forward to supporting, building out the ecosystem of apps and services that can support it both for professional use and for consumers. Okay, and I think Atmos is included on the phones also. Can headphones be hooked up to them and take advantage of the Atmos capabilities, or do they have to be specially produced headphones? Well, for Atmos playback, the iPhone supports iPhone playback, so does the AirPod Pro. The If you're asking about capture, we don't yet have capture, but there's always more to do.

All right.

Well, one other thing on the Dolby Cinema installations, China has actually recovered a lot more quickly because of the lockdown capabilities they had. Are you seeing any pickup in the potential for...

installations to go on there versus other areas which are behind in this regard?

Yeah, well, we certainly had more discussion, engagement in China recently than in many other parts of the world. Because as you say, they are open and they've actually had some really good weeks with big local titles. Um, um, so, um, um, I would say of the parts of the world where, um, we would still see some, uh, near return activity in that regard. Yeah. China would be among that list, but, um, you know, overall, certainly we expect a lower pace of deployment for, there'll be similar screens and equipment, uh, to the, you know, until we get to the other side of this recovery. But, yeah, China is definitely one of the markets that stands out as being better than the others. Did the vaccine news finally create any higher degree of conversation with the parties you're dealing with for either the U.S. or Europe or elsewhere? Did it create that light in the end of the tunnel where you can start talking again? Well, I talk to partners in all of the markets, and I think none of us know when the industry is going to recover. I mean, obviously, most of our screens are actually open, but, of course, attendance is affected by the attendance restrictions and the time of the title. So, yeah, I think that... Any news that can help with seeing that light at the end of the tunnel obviously is great. But I think, you know, most of all, we do believe that studios will keep creating great movies and that there are audiences that are going to want to see them in the seminars. And when they do, they're going to want to see the best experiences. We just can't right now predict any better than anybody else when that day is going to come.

Okay, thank you. Thanks, Jim.

And we'll take our next question from Ivan Feinseth with Tigris Financial Partners.

Ivan, you're on. Are you on mute?

Sorry. Thank you for taking my call, and congratulations on the great results in a difficult time. Did you start to work with Apple early on for the design of the iPhone 12 to incorporate Dolby Vision, and is there some things that are unique to the iPhone 12 that allow it to be in, or will you be able to work with other phone manufacturers as well, and we'll see this in some other brands?

Well, we have a long, and as you know, we have a longstanding relationship with Apple and They support Dolby Vision and Dolby Atmos playback throughout their ecosystem. And so, yeah, we've been working with them for some time to bring this experience to life. And our first focus is on making it a successful ecosystem. I mean, one thing, of course, that is true of Apple is that they have all of the apps and the services and the devices and the entire ecosystem to bring an experience like this to life at scale. So job number one for us is to help them make that as successful as it could possibly be and to open up that ecosystem to other apps and services. And then from there, yes, over time we'll certainly see an opportunity for this to be something that opens up new opportunities for us.

With other film manufacturers as well. Right. Also, in your decision to get out of conferencing, you mean just the conferencing hardware, you're still going to focus on implementing Dolby Voice into other conferencing products?

That's right. We're still supporting our enterprise communications partners. We're winding down at the sale of the physical hardware for conferences.

And, you know, with the cash that you have, when you think about acquisitions, is there any specific direction you envision, like, that you could extend your brand and continue?

Well, you know, I think what we've been, you know, the theme for the day has been, in addition to extending the presence of Dolby Vision, Dolby Atmos across our existing categories, we see opportunities in new forms of content, in gaming and music, but with Dolby.io really extending into all the ways in which we enjoy media and interactivity experiences. So when we think about acquisitions, it's through that lens. Are there opportunities that could accelerate or expand our opportunity? We don't look at it like we have this capital, so we need to go do an acquisition. And that's something that we're always, we're obviously like any company, we're always looking at the opportunities that come our way.

Thank you very much and good luck going forward.

Thank you.

It appears we have no further questions. I'd like to turn the conference back to Kevin Yeaman for any additional or closing remarks.

Great. Well, thank you, everybody, for joining us today. Thanks for the questions, and we look forward to updating you on our progress. Have a great day.

That does conclude today's conference. We thank you for your participation. You may now disconnect.