Dolby Laboratories, Inc. (NYSE:DLB) Q4 2023 Earnings Call Transcript
Dolby Laboratories, Inc. (NYSE:DLB) Q4 2023 Earnings Call Transcript November 16, 2023
Dolby Laboratories, Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.52.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Dolby Laboratories 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. [Operator Instructions] As a reminder, this call is being recorded, Thursday, November 16, 2023. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead.
Peter Goldmacher: Good afternoon, welcome to Dolby Laboratories' fourth quarter 2023 earnings call. Joining me today are Kevin Yeaman, Dolby Labs' CEO, and Robert Park, Dolby Labs' CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2024 first quarter and full-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 current macroeconomic events, ongoing supply chain issues, inflation rates, changes in consumer spending, and geopolitical instability 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.
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 certain non-GAAP financial measures, a reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and on the Interactive Analyst Center on the Investor Relations section of our website. With that, I'd like to turn the call over to Kevin.
Kevin Yeaman: Thank you, Peter, and thanks to everyone for joining us today. Today, I'd like to cover three topics. First, I'm going to make some brief comments on the macro. Second, I will revisit the fundamental premise underlying our business model to help you understand why we remain so bullish on our opportunity. And third, I'll make a few comments about our fourth quarter and share our outlook and priorities for fiscal year '24 before turning the call over to Robert. I know the macro is top-of-mind for many of you. The demand environment hasn't changed noticeably since the last time we spoke in August. Our partners and customers still want to bring the best audio and video experiences to their consumers and we continue to have strong engagement.
At the same time, many of our partners and customers continue to rebalance their priorities to reflect the current economic realities. The impact on Dolby from a top line perspective is that some new partnerships and design wins are taking more time. And when you layer-in the amount of time it takes to go from an agreement to a Dolby-enabled device reaching the market, things are just taking longer. I'll talk more about our outlook and the progress we're making on our long-term growth opportunities in a few minutes. But before I do that, I'd like to spend a few minutes revisiting our business model to help you all understand why we remain confident in our long-term growth opportunities. We generate over 90% of our revenues from licensing. Today, roughly two-thirds of our licensing revenue comes from our foundational audio technologies, which includes our branded audio codecs and our audio patent licensing.
These technologies have broad penetration across a diverse set of devices and end markets and we continue to strengthen our position through ongoing innovation. Our revenue from these technologies is primarily driven by device shipments from licensees, and is largely correlated with consumer spending over the long term. The remainder of our licensing revenue primarily comes from Dolby Atmos, Dolby Vision, and our imaging patents. Dolby Atmos and Dolby Vision are earlier in the adoption and licensing cycle than our foundational audio technologies. So, our opportunity for growth is more driven by increased adoption from current partners and the addition of new licensees. Topline growth for Dolby Atmos and Dolby Vision is more about getting on more devices that are shipping than about how many devices are shipping.
I'd like to spend the next few minutes discussing our ecosystem and the growth opportunity for Dolby Atmos and Dolby Vision, since that is the most dynamic part of our business. The Dolby ecosystem is built on three pillars, creators, distributors, and device manufacturers. Creators are the people like a movie director, a musician, or a social media influencer that use Dolby technology to make content. Distributors are companies that deliver Dolby-enabled content to consumers like Netflix, Apple Music, or Comcast. Device manufacturers are the companies that make consumer hardware and pay us royalties when they sell devices that include Dolby technology. Some examples would include a Sony or LG TV, an Apple iPhone, a Sonos speaker or soundbar, or a Mercedes.
Creators and distributors are a critical part of the ecosystem because they create and distribute the content that is ultimately enjoyed by consumers on their devices. Dolby generates substantially all of its licensing revenue from device manufacturers. The amount and availability of great content created in Dolby continues to grow. And this is the first step in a virtuous cycle. As more creators create high-quality content in Dolby, that content attracts more distribution and device partners. The virtuous cycle for Dolby is as more devices support the Dolby experience the more content creators want to create in Dolby and more distributors want to deliver that content. We remain excited about our business, because we see the momentum from our creators and strong engagement from our distributors and device manufacturers, which we expect to drive long-term growth.
These days there’s just more content, more types of content, and more ways to enjoy that content. The top 10 global movie and TV, streaming providers all offer an ongoing flow of Dolby-enabled content with several of them carrying thousands of movies and TV episodes sourced from a large range of major and independent studios who create in Dolby. The top 20 grossing movies in the United States for the last two years were created in Dolby Atmos and Dolby Vision, including two of the biggest movies this summer Barbie and Oppenheimer, as well as this fall's Taylor Swift: The Eras Tour. Over 85% of the global Billboard top 100 artists of 2023 have one or more tracks available in Dolby Atmos. All three major record labels and hundreds of Indies are delivering Dolby Atmos tracks to 16 music services in over 160 countries.
We have growing support for Dolby Vision capture so that anyone can create and share high-quality videos. And in sports, the US Open, Bundesliga, Men's World Cup soccer, Major League Baseball, the Super Bowl, and the Premier Cricket League, all delivered content in Dolby technologies. These content stories highlight that Dolby Atmos and Dolby Vision are becoming a de-facto standard across a wide variety of content. And we believe this sets us up very well to continue to drive partnerships with device manufacturers to drive long-term growth. Our top areas of focus are TVs and living room devices driven by movie, TV, and sports content, automotive driven by Dolby Atmos Music, and mobile devices, driven by user-generated content. With that context, I'd like to transition to some of our Q4 highlights.
We had some great wins this quarter, we signed up BYD, the Chinese car manufacturer who has already launched its first car with Dolby Atmos. BYD is our fifth automotive OEM win this year and our tenth OEM win to date. These manufacturers are in various stages of rolling out their first models and in some cases like Mercedes rolling out multiple follow-on models. Bringing Dolby Atmos music to automotive represents one of our most compelling growth opportunities and momentum continues to build. Sports came to the fore this summer as events all over the world leveraged Dolby Technology to broadcast high-quality content to Dolby-enabled devices. Comcast is broadcasting ESPN's College Football game of the week in Dolby Vision and Dolby Atmos. Sky TV in the UK showed the US Open Tennis Tournament in Dolby Atmos, and in India, the French Open was available in Dolby Atmos and Dolby Vision.
And Disney Star delivered the Indian International Cricket Council World Test Championships in Dolby Atmos. This fall, MAX streamed its Baseball playoff games in Dolby. We've enjoyed strong adoption for movie and TV enthusiasts for a long time and now sports enthusiasts are able to enjoy the Dolby experience. And this represents a new opportunity for us to drive more adoption on more TVs over time. We also had a very active quarter for speakers and headphones, including wins with a variety of household names including TCL, Jabra, Yamaha, and LG. These partnerships are driven both by our strength in movie and TV content, as well as our fast-growing presence in music. And in mobile, Honor, a Chinese smartphone manufacturer adopted Dolby Vision playback.
Four of the top-five mobile phone OEMs and the leading social media platforms in China are leveraging Dolby technology, an indication of our strong and growing presence enabling user-generated content. We also had continued momentum in the quarter from longtime partners shipping new products with Dolby Atmos and Dolby Vision, including Apple and the iPhone 15, Microsoft's latest version of the Surface, and Amazon's new Fire TV 4K. Some other highlights for the quarter include Zebronics, an Indian PC OEM now shipping products with Dolby Atmos indicating momentum down market and Polytron the largest TV OEM in Indonesia, introducing Dolby technology in all of its TVs over 32 inches. Turning to innovation. This quarter, we introduced Dolby Atmos FlexConnect a new solution that enables consumers to place wireless speakers paired with a TV anywhere in a room and automatically get an immersive Dolby Atmos experience.
TCL is our first partner to announce this product. And speaking of innovation, I'd like to touch on Dolby IO. Since its introduction, we've released several technologies with the aim of enabling higher quality experiences across a broader range of audio and video use cases. We now have enough market feedback to consolidate our efforts around the biggest opportunities like the ability to stream high-quality audio/video in hundreds of milliseconds, an area where we're seeing demand in sports and entertainment for more real-time interactive experiences. The net result is a streamlined organization and a clear path to drive growth and margin over time. In addition, we've sharpened our focus across the organization to find efficiencies, to prioritize processes and projects that deliver meaningful benefit, and to scale back or eliminate activities where the benefits aren't as compelling.
So moving onto FY '24. Our guidance for FY '24 is for revenue to be roughly flat. As I said at the start of the call, our pipeline remains strong, but given the persistence of the current economic conditions, some of our new partnerships and design wins are taking longer. We expect a slight decline in foundational and while we continue to expect a multi-year CAGR of 15% to 25% in Dolby Atmos, Dolby Vision and imaging patents over the medium-term, we do not expect to achieve our targeted growth of 15% to 25% this year. In light of these conditions, we are sharpening our priorities to drive margin growth faster than sales growth this year. Robert will take you through the outlook in more detail in a few moments. We have three priorities for FY '24.
The first priority is to drive long-term growth by continuing to work within the three pillars of our ecosystem to drive the virtuous cycle we discussed earlier. The second priority is continuous innovation to bring more Dolby experiences to more people around the world. And the third priority is growing earnings faster than revenue while we continue to navigate economic headwinds. I am enormously proud of all the people that work at Dolby to bring great experiences to market. We will continue to drive the creation of Dolby-enabled content in the market, engage with distributors to keep the channels that deliver that content vibrant and innovate with our device partners and customers to bring Dolby experiences to more people around the world.
There's never been a stronger demand in the market for entertainment content and for that content to be more and more immersive. All of this gives me confidence in our long-term growth opportunity and our ability to execute on it. With that, I'd like to turn the call over to Robert to discuss our financials before we open the line for questions.
Robert Park: Thanks, Kevin. Before I dig into the numbers, I'd like to share three thoughts. First, results for Q4 and the full year came in as expected from both the top line and bottom line perspective. Second, we're streamlining the business to best support our top line priorities, which will deliver margin expansion. And third, despite the economy, we feel good about our long-term prospects as our value proposition remains strong and our financials are solid. Q4 revenue was $291 million, up 4% compared to the year-ago quarter and just above the midpoint of guidance we shared with you on the last earnings call. Licensing revenue of $265 million was up 6% year-over-year. Products and services revenue was $25 million, down 13% year-over-year driven by lower cinema product sales.
For the full-year 2023, we grew the business 4% to $1.3 billion. Our foundational technologies revenue was down approximately 5% year-over-year. Revenue from our Dolby Atmos, Dolby Vision, and imaging patents category was up 20% year-over-year and represented just over one-third of our licensing revenue. We break our licensing revenue into five markets. Broadcast, which includes TVs and set-top boxes, mobile, consumer electronics, PC, and other. Detailed performance by category is on our IR website. But I'd like to point out some noteworthy details. Broadcast, our largest end-market, was down 6% year-over-year in the quarter, but was up 4% for the full year with Dolby Atmos, Dolby Vision and imaging patents, more than offsetting declines in foundational revenue due to lower shipments.
Consumer electronics was up 15% year-over-year in the quarter, but was down 9% for the full year, primarily due to lower device shipments. PC sales remained sluggish. And our other category grew 52% year-over-year in the quarter and was up 35% for the full-year, driven primarily by growth in imaging patent admin fees and Dolby Atmos in auto. Moving to the bottom-line, in Q4, we earned $0.65 per diluted share on a non-GAAP basis, above the high end of our guidance, primarily due to a lower tax rate. We generated $85 million in operating cash flow, repurchased $25 million of stock, and have $212 million, remaining on our repurchase plan authorization. We declared a $0.30 dividend, up 11% from our dividend a year ago and ended the year with cash and investments of just under $1 billion.
During the fourth quarter, in order to realign resources with our strategic priorities, we adopted a restructuring plan that we completed in November. In the fourth quarter, we recorded a non-GAAP restructuring charge of about $30 million, comprised of $13 million for severance and related benefits for impacted employees and an impairment loss of approximately $17 million associated primarily with internally developed software that is no longer aligned with our priorities. In Q1, we expect to record an additional non-GAAP charge of approximately $5 million for severance and related benefits for actions taken in November. For the things we can control, we are focusing internally on activities that will have the greatest near-term impact and are delaying or eliminating projects that don't offer compelling payback.
Speaking about R&D specifically, we continue to invest in technologies that we believe will shape the future of content and entertainment. Turning to guidance. As Kevin discussed at the outset of this call, there’s still uncertainty in the market and our guidance assumes no material change in the macroeconomic environment. As Kevin mentioned in his comments, while we continue to see steady growth of content created and distributed in Dolby Technology and strong engagement from our partners, device shipments remain soft, and some design wins are taking longer to get to market. For Q1 '24, we expect revenue to be between $300 million and $330 million. Within that, licensing revenue is estimated to range from $275 million to $305 million. Q1 is down year-over-year largely due to true-ups last year and timing of revenue associated with minimum volume commitments and recoveries.
Gross margins should be between 89% and 90% on a non-GAAP basis. We expect non-GAAP operating expenses to be between $180 million and $190 million. Our effective tax rate for Q1 is projected to be around 20% on a non-GAAP basis. So, based on a combination of factors, I just covered, we estimate that non-GAAP EPS should be between $0.80 and $0.95. Turning to the full-year guidance for fiscal year '24, we are expecting roughly flat revenue. Embedded in this guidance is an assumption of a mid-single-digit decline in foundational audio licensing revenue offset by high-single-digit growth in Dolby Atmos, Dolby Vision, and imaging patent licensing revenue and flat products and services revenue. We expect the timing of licensing revenue to be more evenly distributed than the last two years, with a slight weighting towards the first half of the year.
Looking at our licensing by end-market, we see solid growth in other markets and PC should benefit from slightly higher units, higher revenue for imaging patents and recoveries. This increase will be offset by declines in broadcast, consumer electronics, and mobile. While we see growth in Dolby Atmos and Dolby Vision in these markets, this year, the overall revenue declines are primarily due to tough comps in terms of the timing and size of deals including minimum volume commitments and recoveries and true-ups in foundational engineering patents last year. We continue to expect a multi-year CAGR of 15% to 25% in Dolby Atmos, Dolby Vision and imaging patents over the medium term. Non-GAAP gross margin should be roughly 89%. Non-GAAP operating expenses for the full year should be in the $740 million to $750 million range, which will result in about a 1 to 2 percentage point improvement in operating margins on a full-year basis.
On the bottom line, we are expecting non-GAAP EPS of between $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 are solid and we are well-positioned for growth when economic conditions improve. Lastly, for those of you coming to Vegas in early January for CES, we're going to show some demos for the investment community on January 10th at 8:00 AM. Please follow up with Peter for an invitation. This concludes our prepared remarks. Operator, can you please open the line for Q&A?
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