Dolby Laboratories

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratory's conference call discussing fiscal fourth 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 has been recorded Tuesday, November 16, 2021. I would now like to turn the conference call over to your host, Ashley Shonola, with SEER Manager and Vestor Relations for Dolby Laboratory. Please go ahead, Ashley.

Good afternoon. Welcome to Dolby Laboratory's fourth quarter 2021 earnings conference call. Joining me today are Kevin Gaiman, Dolby Laboratory CEO, and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our first quarter and fiscal 2022 outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the extent of the continuing impact of COVID-19 on our business. 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 annual report on Form 10-K. SOLDI 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 of our website. As for the content of today's call, Kevin will start with the discussion of the business, and Robert will follow with a recap of Dolby's financial results and provide our first quarter and fiscal 2022 outlook. So with that introduction behind us, I will now turn the call over to Kevin.

Thank you, Ashley, and good afternoon, everyone. Our Q4 EPS came in above our midpoint, while revenue came in toward the low end of our guidance range. Looking at the full year, we had a strong fiscal 2021 with 10% revenue growth and our highest operating margin since fiscal 2014. And we created considerable momentum across many of our growth initiatives that will allow more people to be entertained by premium Dolby experiences. Consumers can now easily record, edit, and share their videos in Dolby Vision with their Apple iPhone. Music in Dolby is being enjoyed by a significantly larger audience with the launch of Dolby Atmos on Apple Music. And we have the first partners who will enable the Dolby Atmos music experience in the car with Mercedes-Benz and Lucid Motors. And gamers can now play some of their favorite titles in Dolby Vision for the first time on the latest Xbox. During FY21, our revenues benefited from robust increases in consumer device shipments combined with increased adoption of Dolby Atmos and Dolby Vision, partially offset by a decrease in cinema-related revenues. As we enter FY22, we are expecting revenue growth in the mid to high single digits as we anticipate a shift in those factors. With accelerating growth of Dolby Atmos and Dolby Vision and a partial recovery in cinema-related revenues, offset by a macro slowdown in consumer device shipments. It has been a dynamic environment. Before Robert takes you through the numbers in more detail, including a discussion on our licensing end markets, I want to walk you through some of the most important factors as we think about long-term revenue growth. Our foundational audio technologies, increased adoption of Dolby Atmos and Dolby Vision, and our opportunity to expand our addressable market with initiatives like Dolby.io. Let's start with our foundational audio technologies, which include Dolby Digital Plus, AC4, and our audio patent licensing. These foundational technologies made up roughly three-quarters of our licensing business in FY21 and have high attach rates across a diverse set of devices and end markets. In FY21, our foundational audio technologies grew about 11% year over year, due largely to robust global shipments of PCs and higher TV volumes, particularly in North America and Europe. We also benefited from higher than normal true-ups coming into the year. As we look ahead to FY22, industry analyst reports indicate that we will not see the level of market growth we saw in the previous year, noting uncertainties around global supply constraints, and consumer spending. Of course, we partner with OEMs across multiple device categories across all geographies, and each of them is impacted differently. When we take all of this into account, we expect a decrease in the low single digits for our foundational audio revenues. Over the long term, we expect our foundational licensing revenue to generally reflect market trends in device shipments, driven by our strong presence across a wide set of consumer devices and markets, with opportunities to increase adoption in certain areas like mobile and automotive. The remainder of our licensing revenue includes Dolby Atmos, Dolby Vision, and our imaging patent technologies, where growth is being driven primarily by new adoption and new licensees. This portion of our licensing revenue also includes Dolby Cinema, where we expect strong year-over-year growth as box office recovers from low attendance throughout FY21, driven by the pandemic. In total, this portion is approaching one quarter of our licensing revenue and grew nearly 20% in FY21. We see this growth accelerating to over 35% in FY22. Our continued momentum with Dolby Vision and Dolby Atmos is a key driver here, and I'd like to take a few minutes to highlight our progress in these areas. Let me start with Dolby Atmos Music. The response from artists and consumers is clear. Dolby Atmos creates a whole new way to enjoy music. The engagement continues to build with some of the world's most popular music artists like Justin Bieber and The Weeknd describing the Dolby Atmos music experience as game-changing and an immersive world where you can feel every detail. We also recently launched a new venue, Dolby Live at Park MGM, where concert attendees will be able to enjoy their favorite artists with the ultimate Dolby Atmos music experience. and then seek the experience in all the ways they enjoy music. Amazon Music recently announced that they are making Dolby Atmos music experiences more broadly available to their subscribers. The music and Dolby experience significantly increases the value that Dolby brings across a wide range of devices, including mobile, PC, and speaker products. Our growing presence in music has created a new value proposition for Dolby in the automotive space. Mercedes-Benz announced last month that they are adopting the Dolby Atmos music experience in two of their top luxury cars, the Mercedes-Maybach and the Mercedes-Benz S-Class. And just yesterday, Chinese electric car maker NIO announced they are including Dolby Atmos in their ET7 model. We are excited that these new partnerships add to our early momentum within automotive that started with Lucid Air earlier this year, which is now on the road in the U.S., We're just at the beginning of the significant opportunity we see ahead in this space. This quarter, the launch of the iPhone 13 lineup again highlighted the capability to enable consumers to record and share their videos in Dolby Vision. With a significant increase to the amount of Dolby Vision content being created through the iPhone, we are seeing a range of content platforms now enabling support for Dolby Vision for the first time. This quarter, Bilibili, one of China's largest social video sites, began to support the upload and sharing of user-generated Dolby Vision content. More recently, Vimeo began the first all-in-one platform to support playback of Dolby Vision content for the Apple ecosystem. With more content platforms supporting Dolby Vision content to broader audiences and use cases, we look to drive increased adoption of Dolby Vision playback and capture across more devices, particularly in mobile and PC. We are also building momentum to enable more live broadcast events in Dolby. Comcast delivered the 2021 MLB World Series and playoff games in Dolby Vision on Fox Sports. Thursday night football games will be available in Dolby Vision through Fox, and NBC will be delivering select college football games in Dolby Vision. Growing the number of Dolby content experiences, especially live content with dedicated followings, provides more impetus for greater adoption of Dolby Vision and Dolby Atmos. Gaming in Dolby Vision is now available on the Xbox Series X and S, marking the first time gamers can enjoy playing in the combined Dolby experience. Microsoft also expanded their support of the combined experience by adding Dolby Vision to their Surface devices. In the living room, we see our partners like Amazon, Xiaomi, TCL, and Sky highlight the combined Dolby Vision and Dolby Atmos experience in their latest TV launches. And we continue to garner support from streaming services, with Hulu adding Dolby Vision this quarter. The newest soundbar products from LG and Sonos showcase support for Dolby Atmos, and in mobile, we saw new Android phones and tablets this quarter from Samsung, Xiaomi, and Realme with Dolby technologies. With a solid foundation and increasing adoption of Dolby Atmos and Dolby Vision, we are able to broadly address the world of premium content experiences like movies, TV, and music, and are confident in our ability to drive continued growth. With Dolby I.O., our developer-first API platform, we see an opportunity to greatly expand our addressable market by focusing on use cases that benefit from Dolby's unique experience in media and communications. While our platform has broad applicability across a range of use cases, we are focusing where we think we can offer the most differentiation. Virtual live performances, online and hybrid events, social audio, premium education, gaming, and content production. Each of these verticals represents an opportunity of hundreds of billions of minutes annually. And collectively, we estimate the addressable market to be about $5 billion and growing. With the breadth and depth of our expertise, we are enabling higher quality capture, processing, and playback capabilities compared to what is currently available in the market. Last quarter, we released a major platform update, which puts us in a position to address more of our potential customers' needs by making our APIs more competitive on the number of concurrent users we can support. As we focus on our target use cases and learn from our engagement with developers, we continue to introduce new APIs and features that address the needs of developers and improve the overall developer experience. With these recent improvements, We are beginning to see increased self-service activity, and with our new leadership in place, we are focused on increasing awareness and building the pipeline. This quarter, we saw a number of new music distribution services, including United Masters, integrating our music mastering API and enabling their users to create high-quality music tracks. Also, Cloudinary recently launched an integration of Dolby IOs audio enhanced APIs with their MediaFlows product, allowing their customers to easily improve the audio quality of their videos. While we are still in the early days of Dolby IO, we are excited about the significant opportunity ahead. Before I wrap up, let me spend a minute on our operating model. We significantly increased operating margins in FY21 due to a combination of gross margin improvements and reduced spending levels due to COVID. We anticipate a partial return of some of these operating expenses in FY22, like travel and events, as well as a few specific items like our 53rd week of payroll. At the same time, on the strength of our operating model, including our improved gross margins, we will continue to generate higher operating margins as compared to our pre-pandemic levels while investing in our growth areas. So in summary, we have a strong foundation, and fiscal 2021 was highlighted by significant wins like Dolby Atmos on Apple Music, the first cars that will support Dolby Atmos, and enabling Dolby Vision across a wider range of content from live events to gaming to user-generated content. We see much of the opportunity ahead as we drive broader adoption across more content and more devices, even as we seek to significantly expand our addressable market with Dolby I.O. All of this gives us confidence in our ability to drive long-term revenue and earnings growth as we look to FY22 and beyond. So before the financials, I would like to welcome our new Chief Financial Officer, Robert Park. Robert is an experienced leader with a track record of guiding companies through growth while delivering operational excellence and accountability. Robert's been on board for about four weeks now. We are excited to have his expertise as we work towards Dolby's next phase of growth. And with that, I'll hand it over to Robert to take us through the financials in more detail.