Dolby Laboratories

question, press star 1 again. As a reminder, this call is being recorded Wednesday, August 7, 2024. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Dolby Laboratory's third quarter 2024 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratory's CEO, and Robert Park, our CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2024 fourth quarter -of-year 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 impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending, and geopolitical instability on our business. A discussion of these risks 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 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 non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the interactive analyst center on the investor relations section of our website. With that, I'd like to turn the call over to Kevin. Thank you,

Peter, and thanks to everyone joining us on the call today. Revenue for the quarter came in just above the midpoint of the range that we provided you on the call. For the whole year, we now expect revenue to be down approximately 1 to 2%, which is at the lower end of what we've been expecting throughout the year. We are not making any changes to our non-GAAP EPS guidance for the year. Our foundational audio revenue is coming in lower than we expected as global device sales in aggregate have been soft all year, and we're seeing lower than expected units in set-top boxes and gaming consoles for the second half of the year. In products and services, cinema products are coming in lower than we expected as the box office remains sluggish and exhibitors continue to push out CapEx. Dolby Atmos and Dolby Vision are performing slightly ahead of our expectations as strong content growth continues to drive device attach rates. Dynamics remain stable and ongoing engagement from the broader ecosystem of creators, distributors, and device manufacturers are driving a steady stream of product launches across all device families. We continue to be confident in our growth opportunity with Dolby Atmos and Dolby Vision, and we have a strong position with our foundational audio technologies, which are well positioned as our end markets return to more normal cycles. Moving on to the highlights for the quarter, we continue to enjoy momentum in content for Dolby Atmos and Dolby Vision, which is driving growth in autos, TVs, and mobile, our three biggest areas of opportunity. Starting with content, I'm happy to share that as of this spring, over 25,000 TV shows and movies have been made available in Dolby Vision, a significant milestone considering that we launched Dolby Vision in October of 2015 with just 13 movies from one studio and one TV OEM. Since that initial launch, Dolby has worked across the ecosystem on a global basis to add studios, production companies, product partners, content service providers, and device partners to the Dolby Vision story. And we are taking that Dolby Vision momentum in TV and movies into live sports. Comcast Xfinity in the US and a variety of global partners are making the Olympics available in Dolby Atmos and Dolby Vision, which builds on the momentum we've seen throughout this year. In Q3 alone, the Cricket World Cup, European Championship Soccer, Wimbledon, the NHL and NBA post seasons were all available in Dolby Atmos and Dolby Vision. And of course, we aren't stopping there. In May, Tencent Music cited Dolby Atmos music on their earnings call, mentioning that we helped them to drive 20% -over-year growth by making their music offerings more attractive and stickier, which is something we love to hear. And Audible recently announced that they will continue to expand their library of Dolby Atmos content with full-cast audio productions of all seven Harry Potter books scheduled to premiere in late 2025. Moving on to automotive, GM announced this quarter that the 2025 Cadillac Optic will feature Dolby Atmos, our first car with GM. And also this quarter, Rivian announced that the second generation of its flagship vehicle, the R1, will support Dolby Atmos. And Hyundai announced that its luxury brand Genesis will make Dolby Atmos standard across five models starting in Korea. We now have 20 OEM partners for Dolby Atmos and the momentum continues to build. In TVs, we are seeing a slight uptick in attach rates. Hisense and CCL, which are both strong adopters of Dolby Atmos and Dolby Vision, continue to gain market share. And we continue to get incremental wins as other TV OEMs look to bring Dolby Atmos and Dolby Vision deeper into their lineups in order to compete more aggressively in certain markets. Also contributing to the momentum are additional drivers like the growth in sports content that we just covered. Lastly, in mobile, in addition to the steady rollout of new models from most of our mobile OEM partners, Transient added a Dolby-enabled low-cost phone to consumers in Malaysia as the company continues to sell affordably priced higher-end phones aggressively into Africa, the Middle East, India, and Southeast Asia. Moving on to M&A, I'd like to briefly discuss our pending acquisition of GE licensing, which complements, strengthens, and expands Dolby's patent offerings, particularly in imaging, and represents a compelling financial profile of durable, reoccurring, high-margin revenue. This transaction adds a significant portfolio of video codec technologies that provide -in-class video compression while also enabling better overall picture quality and higher resolution, which is particularly important in applications like streaming and video conferencing. In addition to strengthening our current video patent licensing programs, this acquisition continues to position us well for new licensing opportunities. These patents are primarily monetized through patent tools, which are collaborative licensing structures that enable industry efficiency and promote long-term growth by facilitating the adoption of next-generation standardized technologies. We expect the transaction to close by the end of the fiscal year and expect it to be accretive on a non-GAAP basis to operating margins and EPS in fiscal 2025. Also on M&A, we recently enhanced our Dolby I.O. offering with the acquisition of Theo Technologies for $55 million. As we've talked about, we are seeing demand from companies in sports and entertainment who are looking to create real-time and personalized experiences. Theo addresses a similar customer base with complementary technologies. This acquisition gives us more momentum from both a product and customer perspective and a stronger foundation to build on. Neither of these deals will have a material impact on FY24. In summary, we continue to operate in an uncertain and dynamic market environment with lower unit shipments and cinema box office weighing on revenues this year, particularly in foundational. At the same time, we continue to grow our Dolby Atmos and Dolby Vision content ecosystems across movie, TV, sports, and music, and to grow device adoption, particularly in automotive, TV, and mobile. We remain committed to growing earnings faster than revenue while investing in a healthy portfolio of innovation, and we are strengthening our imaging offerings with a financially attractive acquisition. I continue to be very excited about the opportunities in front of us and the opportunity to deliver revenue and earnings growth. And with that, I'll turn the call over to Robert.

Thanks, Kevin, and thanks to everyone joining us on this call today. Before we review the quarter in some detail, I'd like to hit the highlights. First, revenues for Q3 were above the midpoint of the range we laid out on the Q2 earnings call, and profitability came in above the high end of the range. Second, the environment remains uncertain and dynamic. Our revenue guidance for the full year is skewing towards the lower end of what we've been describing as roughly flat all year, and our non-GAAP EPS range is unchanged. And third, as I had said before, we feel good about our long-term growth prospects and our value profits remain strong, and our financials are solid. Q3 revenue was $289 million, down 3% compared to the year-ago quarter, but above the midpoint of guidance we shared with you on the last earnings call. Licensing revenue of $267 million was down 2% -over-year. Products and services revenue was $22 million, down 14% -over-year. Detailed licensing performance by AndMarket is on our IR website, but I'd like to point out some worthy details. As a reminder, timing of recoveries, minimum volume commitments, and true-ups can drive volatility between quarters. For example, mobile, which benefited from minimum volume commitments this quarter, was up 25% -over-year, but will still be down slightly for the full year. Similarly, consumer electronics revenue was down 18% -over-year in the quarter, but we expect revenue to be down slightly for the full year. We expect broadcast revenue to be down -over-year for the full year, driven by tough comps in terms of timing and size of deals and lower set top box revenue. On the flip side, we continue to expect solid growth in other markets driven by imaging patent admin fees and increased adoption of Dolby Atmos and Auto. PC is benefiting from minimum volume commitments and slightly higher unit volumes. Moving to the bottom line, we earned 71 cents per diluted share on a non-GAP basis, above the high end of our guidance, primarily due to stronger revenue, lower operating expenses, and higher non-operating income. And we generated 21 million in operating cash flow. As a reminder, cash flow will fluctuate quarter to quarter due to timing of deals, but over time, operating cash flow will correlate to non-GAP net income. GAP operating expenses included a restructuring charge of approximately 4 million for severance and related benefits as we continue to align resources with our strategic priorities. Moving on, we repurchased 35 million of common stock and we have 72 million remaining on our repurchase plan authorization. We recently received board approval to increase the existing share repurchase authorization by 350 million, bringing our total authorization to about $420 million. We declared a 30-cent dividend, up 11% from our dividend a year ago, and ended the quarter with cash and investments of just under $1 billion. Turning to guidance, it continues to be an uncertain and dynamic market. Device shipments remain soft and the box office remains sluggish, which has negative implications for both our licensing and product and services revenue. At the same time, we continue to see steady growth of content created and distributed in Dolby technology, strong engagement from our partners, and revenue from Dolby Atmos and Dolby Vision and imaging patents is performing a bit better than expected. For Q4 fiscal 24, we expect revenue to be between $300 million and $320 million. Within that, licensing revenue is estimated to range from $275 million to $295 million. Gross margins should be approximately 88% on a non-GAAP basis. We expect non-GAAP operating expenses to be between $190 million and $200 million. Our effective tax rate for Q2 is to be around 23% on a non-GAAP basis. So, as a result, we estimate that non-GAAP EPS should be between $0.61 and 76% per diluted share. This Q4 guidance implies full year revenue between $1 billion, $270 million, and $1 billion, $290 million at the lower end of what we've been describing as roughly flat revenue all year, as we are seeing lower than expected unit shipments and lower revenue from cinema. However, we still expect non-GAAP earnings to be within the range we've been discussing all year of $3.60 and $3.75. To wrap things up, the creation and distribution of Dolby enabled content continues to grow nicely and our partners are still very engaged. Our financials remain solid and we are well positioned for growth when economic conditions improve. With that, I'd like to turn it back to the operator to open the line for your questions. Operator.

Thank you. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Ralph Schackart with William Blair. Please go ahead.

Good afternoon. Thanks for taking the question. Kevin, just on the macro, just to kick it off, just curious what you observed in this quarter in relation to what you observed last quarter. Was it sort of within bounds maybe at the lower end given sort of the slight tweaked guidance? Anything you could add in the macro and then I have a follow-up?

Yeah, of course. Thanks, Ralph. Yeah, I would say that as far as the macro goes, we're seeing much the same we've been seeing all year. I think that it's been a, you know, I think it's fair to say it's been a tough environment for our OEM customers over the last several years, but we see them, you know, I think cautiously optimistic that things are stabilizing, looking for opportunities for growth. And we continue to have really strong engagement on content distribution devices for Dolby Atmos and Dolby Vision. What we did see this quarter, Ralph, that was a little more specific is we, as I mentioned, some softness in set-top boxes and gaming consoles. So it's really set-top boxes. The industry analysts and our customers and partners were expecting set-top boxes to begin to tick up through the year. They had worked through a pretty big inventory level last year, and we're not seeing that. We're seeing it stay kind of flattish. And so we had a negative true up in Q3 of $8 million, which was, you know, set-top box with the biggest part, also continued weakness in gaming consoles. And we see that continuing through the year. At the same time, you know, there's always puts and takes in the quarter. So we had a few things come in early in Q3, which is why you didn't see it show up relative to our guidance for Q3. So, and then I would say on top of that, the box office continued to be pretty soft through the end of Q3. So we continued to see the pushing out of cinema product purchases. So I would say those two specific things were what contributed to the slight adjustment, but I wouldn't characterize it as a big macro change.

Okay, great. It's really helpful. Thanks, Kevin. And just one more. Just on the new patents that you acquired from GE, curious if you could leverage these patents either into existing products or potentially for future products. I noticed in part that they applied a video compression. So overall curious, perhaps could this help your DOLDI IO efforts as well?

This is really, so first of all, we're always looking for opportunities that can expand or accelerate our existing business initiatives. And this is very much focused on our imaging patent business, where we license our through patent pools, which are collaborative licensing structures. And this is a really, for us, this is a pretty unique opportunity in terms of the ability to bring on a very attractive portfolio, patent portfolio, in the video codec technology space. So it expands our presencing and imaging patents. It's a very attractive and durable set of revenue streams. And we expect it to be accretive to both non-opening, sorry, non-GAAP operating income and GPS in the first year. We also did, as it relates to IO, we did also this quarter, acquire a startup by the name of Theo Technologies, which does enhance the DOLDI IO offering. As you know, we're very much focused on sports and entertainment companies that are looking to offer real time, more interactive digital experiences. We really refocused our efforts around that coming into the beginning of this fiscal year. Theo has a video player and features and functions that increase interactivity. They serve a very similar customer base. And so it's on the one hand, it's a buy versus build because it's a very complimentary set of technologies allows us to provide a more complete solution. And we also think it can increase sales momentum because of the ability to cross sell. In fact, we have a number of customer prospects in common. We're getting very positive feedback. And so we're excited about that one as well.

Okay, great. Thanks, Kev.

Our next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

Thanks. First, I'd like to ask about Atmos and Cars. You gave a number of usage points, including Cadillac, Optique, Rivian, Genesis. In the Genesis, with five different models being used, that's pretty rare, I think, to this point. But I wonder if you're seeing that in a number of the other applications. And how do you feel you are picking up momentum in broadening the usage within Cars?

Yeah, thanks, Jim. I'm very excited to have Cadillac on board with the first model. And also, you would have seen that we had Rivian. Hyundai is now offering five models in Korea. And we continue to see, we now have 20 OEM partners. And we continue to see many of them expanding into additional models and get deeper into lineups. And so, yeah, this is an area where in Dolby Atmos and Dolby Vision for, sorry, Dolby Atmos for Automotive, we're doing better than we expected coming into the year. And it's a function of going deeper into lineups, continuing to bring on new models, and some of those doing, you know, just exceeding their unit projections.

Okay, and the way you're monetizing this is payment for, it's not a royalty base, but it's more of an installation base in the products area. Is that correct?

It's a, it's a, it's our typical model. We get an amount for each car.

Okay. And the movie business is at a low point, obviously, but it's been starting to recover and expectations are pretty high for 25 and 26. I'm wondering if that's prodding you to increase the number of theater installations, either domestically or internationally or both. And, you know, just, you know, any comments you might have on that, but also the real monetization has been via TV applications, other consumer products. And I wonder if you might also elaborate on just how that penetration continues to go, and whether you're getting similar royalties as you move to expanded lower priced SKUs.

Yeah, thanks, Jim. So, of course, as you know, we came into the year expecting that Box Office this year would be affected by the lingering effects of the strikes and the scheduling and release schedule. And if anything, through, you know, through the end of June, there's probably a little softer than most expected. But at the same time, we in the industry are optimistic about 25 and 26, because a lot of those titles are, you know, there's a lot of great titles that will be ready to come out. And it's nice to see the this quarter, the September quarter off to a really strong start. So to answer your question, even as we've seen people pushing product sales later into the year or into next year, we're seeing increased engagement as it relates to Dolby Cinema and also the ability that we announced at CinemaCon to incorporate Dolby Vision and Dolby Atmos into existing exhibitor branded PLFs. And that's because, you know, even throughout this period of time, beginning with the pandemic, and it's and it's continued to be strong, the percentage of the box office that is going to premium large format experiences, including Dolby Cinema, is significantly increased as a percentage of the box office. So exhibitors see that. And we have increased engagement as they look to increase their premium experience footprint as they and with optimism as they look at the potential for box office in 25 and 26.

And within the United States, though, it's your contract is still an exclusive with AMC, I believe, with the full vision Atmos package. So are you and I don't think that's changing. Are you are you finding a number of other areas around the world where you are increasing that penetration and hoping to do the same in terms of spuring device shipments in those other markets as well?

Yeah. You said device shipments. Are we still on Dolby? Did you mean Dolby Cinema? Well, I can't tell. Yeah, Dolby Cinema. Yeah. OK. So so, yes, today AMC is our partner in the US and they're, you know, well over 150 screens. So it's a great great partner with us. We also have a number of partners in Japan, in Europe, in Korea, where Make A Box recently announced that they would expand with us. So we have a pretty good footprint across the globe and demand around the globe. So I think as we as we go into next year, you know, and it's like I said, it's a positive sign that Q4 is off to a good start. We're optimistic that we can we can begin to increase the number of Dolby Cinema and Dolby Atmos, Dolby Vision installations.

All right. Thank you.

We have no further questions at this time. With that, we will conclude today's conference call. Thank you all for your participation. You may now disconnect.