Dolby Laboratories

Good afternoon. Welcome to Dolby Laboratory's second quarter 2022 earnings conference call. Joining me today are Kevin Gaiman, Dolby Laboratory's CEO, and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our third quarter and fiscal 2022 outlook, and 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 stability 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 quarterly report on Form 10-Q. Dolby assumes no need 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 a discussion of the business and Robert will follow with a recap of Dolby's financial results and provide our third 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. The quarter came in above the midpoint of our guidance on both revenue and non-GAAP EPS, and we continue to gain wins with Dolby Vision and Dolby Atmos and build momentum with Dolby IO. At the same time, we are operating in an increasingly uncertain environment, and we are reducing our full-year outlook to reflect the impact of lower estimated TV, gaming, and automotive shipments for the year. Robert will take you through the details in a few minutes. While the environment is dynamic, we have a durable business model, a healthy balance sheet, strong cash flow, and confidence in our long-term growth prospects. We have established a prominent position in the entertainment ecosystem and remain steadfast in our belief that people want to have the best quality experiences. We continue to see Dolby Vision, Dolby Atmos, and our imaging patents growing at a rate of over 35% on the strength of strong adoption across a broad range of use cases. and there is much opportunity ahead with Dolby I.O. as we empower developers to create immersive experiences and raise the bar on quality. So let me start with foundational audio, which represented about 75% of our licensing revenue last year. With its deep adoption across devices, our foundational audio revenues are more heavily impacted by macro trends. We came into the year expecting foundational audio to be down low single digits and are now expecting year-over-year declines in the high single digits. This is due to lower TV shipments, which we are now estimating to decline mid-single digits globally and even larger declines in North America and Europe, coming off strength in those regions last year. Additionally, supply chain issues have continued to weigh on gaming and automotive, which has resulted in lower unit estimates in those markets. In the near term, There continue to be many uncertainties that are limiting our visibility, including COVID-related shutdowns in China, the war in Ukraine, and ongoing concerns around supply chain and inflation. At the same time, we are well positioned for the long term. Dolby has an enduring licensing business with a high margin profile, strong profitability, and consistent cash generation. This business is diversified across a broad range of consumer devices. with our foundational audio technologies included in so many of the devices that people use to consume audio and video content. The expansive and growing amount of content available in Dolby, combined with broad adoption across content distributors and devices, puts us at a position to provide longstanding value, making for a durable business. Over the long term, we expect foundational audio to track roughly in line with market demand for the consumer devices we serve. Dolby Vision, Dolby Atmos, and our imaging patents, which represented almost 25% of our licensing revenue last year, benefit from these same valuable characteristics, but with greater opportunity for growth ahead as they are earlier in their adoption cycles. We continue to increase the number of ways people can enjoy Dolby experiences through music, gaming, and live content. With over 400 studios in over 40 countries designed for recording music in Dolby Atmos, and another 200 slated open in the near future. It is now easier than ever for artists and producers to create immersive tracks. With an increase of music available in Dolby Atmos from new recordings and re-releases, Apple Music has stated publicly that plays of spatial audio tracks with Dolby Atmos have quadrupled since September. As music in Dolby becomes even more prevalent, we strengthen our core proposition in areas like mobile, PC, and automotive. In gaming, PlayerUnknown's Battleground Mobile, commonly known as PUBG, one of the most popular mobile games today, now supports Dolby Atmos. And in live content, Disney Star will now broadcast Indian Premier League cricket with Dolby Atmos. Naver has launched Naver Shopping Live with Dolby Vision, the world's first Dolby Vision-capable live commerce content. Dolby Vision's ability to capture and reproduce ultra vivid colors and detailed textures gives consumers a more realistic shopping experience online. With new content experiences, we are creating additional value to our partners and consumers and add to the reasons for deeper adoption within devices. The growth of Dolby Vision and Dolby Atmos is evident with adoption from new customers and deeper adoption from existing partners. The combined Dolby experience is making its way into TVs of all sizes, with LG debuting the world's smallest OLED TV at 42 inches and Xiaomi launching a 100-inch model, both highlighting Dolby Vision and Dolby Atmos. And we see new models of TVs and soundbars from a number of partners. In mobile, Vivo has launched their first tablet with Dolby Vision and Dolby Atmos, the first Vivo product to include the combined experience. We are also seeing an increase in gaming-specific devices adopting Dolby experiences, including Lenovo's Legion gaming line with Dolby Atmos and Dolby Vision, and Xiaomi's gaming edition smartphone with Dolby Atmos. New phones and tablets from Oppo, Samsung, and Realme launched this quarter as well, all highlighting Dolby Atmos. We are excited by the momentum of adoption and the opportunities still ahead of us. Now I'd like to turn to our developer platform. Our goal for Build.io is to be the destination for developers that want to build the most immersive online experiences. We offer the capabilities to help them create those immersive experiences with tools like high-quality audio and video capture, sound spatialization that feels more lifelike, and delivery of live streamed content at scale in ultra-low latency to massive audiences. Ultimately, we believe that quality matters everywhere and Dolby I.O. has applicability across all verticals. In the near term, we are focused on those in which quality of experience is top of mind, such as virtual live performances, online and hybrid events, gaming, premium education, and content creation and production. For example, We are talking to a lot of customers who are building virtual worlds, from gaming platforms for music concerts and live performances, to creating new ways for people to collaborate for business and brand engagement. These customers are excited because we have the tools to infuse those virtual worlds with high fidelity, audience interaction and participation, and amazing content. A great illustration of this is Oz, a virtual event platform built with Unreal Engine, that is integrated with Snapchat to bring a user's Bitmoji into an immersive environment. Oz uses Dolby I.O. to stream concerts to viewers on Snapchat, allowing them to interact with their avatars in real time. We are working with other companies who are building immersive work environments, allowing business people to create their own avatars in stage meetings, events, showrooms, and training sessions in a virtual space, all of which can be enhanced by Dolby I.O. Cone Interactive, for example, designs interactive experiences for brands, and with our spatial audio, their customers can network and share insights with a more natural and realistic feel, similar to being in a live conference room. The possibilities of these types of interactions are endless, and we believe that Dolby I.O. has a key role in making them the most high-quality, immersive experiences possible. We are encouraged by the discussions we are having with existing and potential customers. With an estimated TAM of $5 billion in growing, we are excited about the opportunity ahead and its potential to significantly contribute to long-term growth. To wrap up, we continue to operate in an uncertain environment, impacting primarily our foundational audio revenues in the current year. And at the same time, we are well positioned for the long term. We are still seeing strong growth of Dolby Atmos and Dolby Vision as they are adopted deeper into new devices and content, giving consumers the most immersive entertainment experiences. And we are excited about the opportunity ahead with Dolby IO and our ability to help developers create high quality experiences through apps and services. All of this gives us confidence in our ability to navigate near-term headwinds and drive revenue and earnings growth into the future.

And with that, I'd like to hand it over to Robert to take us through the financials. Great. Thank you, Kevin. Good afternoon, everybody.