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Edited Transcript of DLB earnings conference call or presentation 14-Nov-19 10:00pm GMT

Q4 2019 Dolby Laboratories Inc Earnings Call

SAN FRANCISCO Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Dolby Laboratories Inc earnings conference call or presentation Thursday, November 14, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Dea

Dolby Laboratories, Inc. - Director of Corporate Finance & IR

* Kevin J. Yeaman

Dolby Laboratories, Inc. - President, CEO & Director

* Lewis Chew

Dolby Laboratories, Inc. - Executive VP & CFO

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Conference Call Participants

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* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* Paul Chung

JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst

* Ralph Edward Schackart

William Blair & Company L.L.C., Research Division - Partner & Technology Analyst

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal fourth quarter and fiscal 2019 results. (Operator Instructions) As a reminder, this call is being recorded, Thursday, November 14, 2019.

I would now like to turn the conference over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

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Jason Dea, Dolby Laboratories, Inc. - Director of Corporate Finance & IR [2]

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Good afternoon. Welcome to Dolby Laboratories Fourth Quarter 2019 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories President and CEO; and Lewis Chew, Executive Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. A discussion of some of these risks and uncertainties can be found in the earnings press release that we issued today under the section captioned risk factors as well as in our most recent report on Form 10-Q. 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 2 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, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2020 outlook, and Kevin will finish with a discussion of the business.

So with that introduction behind us, I will now turn the call to Lewis.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [3]

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Okay. Thank you, Jason, and good afternoon, everyone. As a reminder, we adopted ASC 606, the new revenue accounting standard at the beginning of this year, and we use the full retrospective method, and that required us to recast the previous year's revenue.

So within our earnings release is a table that shows the FY '18 quarterly revenue figures as adjusted under 606, and that's the same table that we posted last quarter.

So any prior year revenue numbers that I refer to in my commentary are those recasted number under 606.

So let's go through the Q4 results. In the fourth quarter of fiscal '19, total revenue was $299 million compared to $302 million in Q3 and $241 million in last year's Q4.

Licensing revenue for the quarter was $265 million, while products and services revenue was $34 million. And both of those were in line with the guidance that we gave at the beginning of the quarter.

Here's my commentary by end market. Broadcast represented about 44% of total licensing in the fourth quarter. Broadcast revenues were up about 14% year-over-year, and that was driven by higher recoveries.

And on a sequential basis, however, Broadcast revenues were down about 12% as recoveries were lower than they were in Q3.

Mobile devices represented approximately 17% of all the licensing in the fourth quarter. And Q4 is a difficult quarter to make meaningful year-over-year comparisons in the Mobile space because the 606 recast caused last year's Q4 Mobile to be about 1% of licensing, which is obviously not reflective of the organic business we have in that space. But I can say that Dolby Technologies are more widely adopted into mobile devices now than they were a year ago, and that's a key contributor to our growth in this space.

On a sequential basis, Mobile was down by about 4%, and that was due mainly to timing of revenue under contract.

Consumer Electronics represented about 14% of total licensing in the fourth quarter. CE licensing was down about 8% year-over-year due mostly to lower recoveries. And on a sequential basis, CE increased by about 30% driven by higher adoption across several of the consumer device categories, including sound bars and DMAs.

PC represented about 9% of total licensing in the fourth quarter. On a year-over-year basis, PC was down by about 5%, due mainly to lower mix of ASPs, but on a sequential basis, PC revenue was roughly flat.

Other Markets represented about 16% of total licensing in the fourth quarter. They were down by about 8% year-over-year due to lower recoveries, but that was offset partially by higher revenues from Dolby Cinema and from gaming.

On a sequential basis, other licensing was up about 8% compared to Q3 driven by higher revenues in gaming. Product and services revenue was $34 million in Q4 compared to $30.3 million in Q3 and $25.9 million in last year's Q4.

Growth in this area was driven by higher sales of our newer offerings in the Cinema products group. Let me now review margins and operating expenses. Total gross margin in the fourth quarter was 84.6% on a GAAP basis and 85.4% on a non-GAAP basis.

Gross margin percentage was a bit lower than I had guided, as we had some higher cost of sales and licensing in Q4 that we don't anticipate to recur in Q1 and going forward.

Products and services gross margin on a GAAP basis was 14.2% in the fourth quarter compared to 12.8% in Q3.

Q4 product gross margin was also a little below what we had projected, and that was due to some inventory write-downs for items that we decided to discontinue.

Looking forward into Q1, we do anticipate that product gross margins should bounce back up to more typical levels. Product and services gross margin on a non-GAAP basis was 18.9% in the fourth quarter compared to 16.3% in Q3, and the same comments apply here as what I said about GAAP product gross margins.

Operating expenses in the fourth quarter on a GAAP basis were $201.6 million, which includes $6 million of restructuring expenses and that compares to total operating expenses in the third quarter of $228.2 million, which included $30 million of restructuring expenses, and the vast majority of these were related to leased facilities in San Francisco which we decided to exit.

Operating expenses in the fourth quarter on a non-GAAP basis were $177.5 million compared to $178.2 million in the third quarter. Operating income in the fourth quarter was $51.2 million on a GAAP basis or 17.1% of revenue, compared to $12.6 million or 5.2% of revenue in Q4 of last year.

And I'd like to note that last year's Q4 revenue was recast under 606, in other words, lower than what it had been under 605, and that rippled through to a lower operating income number, and this applied to both GAAP and non-GAAP results.

And so operating income in the fourth quarter on a non-GAAP basis was $77.6 million or 26% of revenue compared to $32.3 million or 13.4% of revenue in Q4 of last year.

The effective income tax rate in Q4 was 21.9% on a GAAP basis and 18.2% on a non-GAAP basis. The GAAP tax rate was a little higher than I had guided because of discrete charges during the quarter.

Net income on a GAAP basis in the fourth quarter was $43.9 million or $0.43 per diluted share compared to $26.7 million or $0.25 per diluted share in last year's Q4.

GAAP EPS was a little below our guidance due to the restructuring charge and the higher tax rate that I just mentioned a second ago.

Net income on a non-GAAP basis in the fourth quarter was $67.6 million or $0.66 per diluted share compared to $23.5 million or $0.22 per diluted share in Q4 of last year, and non-GAAP EPS was in line with what we had projected.

During the fourth quarter, we generated about $130 million in cash from operations and ended the quarter with a little over $1 billion in cash and investments.

We bought back about 900,000 shares of our common stock in Q4 and ended the quarter with about $360 million of stock repurchase authorization still available. We also announced today that we are raising our quarterly cash dividend by $0.03 per share from our previous layout of $0.19 per share to a new payout of $0.22 per share, which will be payable on December 4, 2019, to shareholders of record on November 26, 2019.

And since this is Q4, let me give a quick summary of the results for the full year. Total revenue in FY '19 was $1.241 billion compared to $1.055 billion in FY '18 as recasted under 606.

Within that FY '19 number, licensing revenue was $1.107 billion, consistent with what we had guided, while products and services revenue came in for the year at $134 million.

Operating income for the year was $257 million on a GAAP basis or about 21% of revenue, and operating income was $380 million on a non-GAAP basis or about 31% of revenue.

Net income for the year on a GAAP basis was $255 million or $2.44 per share or per diluted share, and net income on a non-GAAP basis for the full year was $335 million or $3.20 per diluted share, and cash flow from operations for the full year was around $328 million.

So let me now go over the outlook for fiscal 2020, starting first with the full year. For FY '20, in total, we anticipate that total revenue will range from $1.3 billion to $1.35 billion. Within that total, we estimate that licensing will range from $1.16 billion to $1.2 billion, while products and services are estimated to range from $130 million to $160 million.

Here are some considerations that we have incorporated into the full year outlook. In Broadcast first. We anticipate that Broadcast revenues should benefit from more adoption of Dolby Atmos and Dolby Vision in TVs and set-top boxes, but we are projecting lower recoveries, which would largely offset this for the year.

In Mobile, we expect revenues to grow noticeably above the company average, with contributions from our branded technologies and from our innovative patent licensing programs.

Consumer electronics is projected to grow primarily from DMAs, sound bars and smart speakers. And in PC licensing, we expect some continued downward pressure from ASPs due to mix, but some of that, we expect, would be offset by adoption of our newer technologies in PCs.

In other licensing, we expect growth from Dolby Cinema as we currently plan to add a similar number of new screens in FY '20 as we did in FY '19. But also in the Other category, we are projecting, right now, lower recoveries in automotive and lower gaming revenues because of the life cycle of the gaming consoles.

And finally, in products and services, we are projecting Cinema products to be relatively flat for the full year, while Dolby Voice is expected to grow.

Gross margin percentage for the year on a GAAP basis, is projected to range from 87% to 88%. And for non GAAP, we expect gross margin to range from 88% to 89%. Operating expenses are projected to range from $829 million to $849 million on a GAAP basis and from $740 million to $760 million on a non-GAAP basis.

Other income is estimated to range from $15 million to $20 million for the year for both GAAP and non-GAAP. The effective income tax rate for the year is expected to range from 18% to 21% on both a GAAP and non-GAAP basis. Based on the factors above, we estimate that full year diluted earnings per share will range from $2.64 to $2.74 on a GAAP basis and from $3.40 to $3.50 and on a non-GAAP basis. So that's the full year.

Let me move on to the first quarter of fiscal '20. For the first quarter, we anticipate that total revenue will range from $275 million to $295 million.

Within that, we estimate that licensing will range from $250 million to $260 million, while products and services are projected to range from $25 million to $35 million.

Q1 gross margin percentage on a GAAP basis is estimated to be around 88%, plus or minus, and the non-GAAP gross margin is estimated to be around 89%, plus or minus. Operating expenses in Q1 are estimated to range from $214 million to $220 million on a GAAP basis and from $192 million to $198 million on a non-GAAP basis. And now, so we see this increase in Q1 over Q4, and that increase is being driven by the timing of certain marketing programs, where the activities that drive our spending are concentrated more in the first half of the year than the back half of the year.

So you can look at that relative to the full year guidance to get a sense of that. Other income is projected to range from $4 million to $5 million for the quarter and our effective tax rate for Q1 is projected to range from 18% 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 will range from $0.27 to $0.33 on a GAAP basis and from $0.45 to $0.51 on a non-GAAP basis.

So now I'd like to hand it over to Kevin. Kevin?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [4]

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Thank you, Lewis, and good afternoon, everyone. Our financial results in 2019 cap off another solid year of financial performance for Dolby. Over the last 3 years, revenue has grown on average about 7% annually, and our earnings per share has grown at an even higher rate.

This is primarily driven by the progress we have made with Dolby Vision, Dolby Atmos and Dolby Cinema. Today, I'd like to reflect on that progress and how it positions to continue to grow as we head into 2020.

I'll also highlight how we are working to broaden the reach of our technologies to drive even higher growth in the future. Three years ago, the first Dolby Vision TVs and Dolby Atmos sound bars were just coming to market, and the first Dolby Cinema sites were coming online.

Today, Dolby Vision and Dolby Atmos experiences are accessible to hundreds of millions of consumers globally across a broad range of content, services, devices and cinema locations. One of the highlights of the momentum this year is Apple's adoption of the combined Dolby Vision and Dolby Atmos experience. With the release of IOS 13 and MAC OS Catalina, iPhone, iPad and MacBook products now support both Dolby Vision and Dolby Atmos for the first time.

Apple TV Plus launched this month, and all Apple original content is in Dolby Vision, with most titles also in Dolby Atmos. The world of streaming services continues to expand and the availability of the Dolby experience is expanding along with it.

Disney launched Disney Plus this week, supporting Dolby Vision and Dolby Atmos across their library of content, including the first 7 Star Wars films, which are now available in the combined format.

Also, most of their original content, including the Mandalorian, is available in Dolby.

In India, Eros Now recently became the first OTT service in India to launch with Dolby Atmos and will soon be delivering their upcoming originals in the combined Dolby Vision and Dolby Atmos experience.

I am particularly excited about the launch of Dolby Atmos Music this quarter. The Amazon Echo Studio is the first Dolby Atmos-enabled smart speaker, with Amazon Music HD streaming a growing library of content from Universal Music Group and Warner Music.

It is still early days, but the experience is resonating with both artists and fans as a completely new way to enjoy music. We are seeing Dolby Atmos Music create a level of passion and engagement from artists that is similar to what we have seen with directors and the Dolby Cinema experience.

I'll have more on the opportunities that Dolby Atmos Music opens up for us in a few minutes.

We've also continued to expand the range of Dolby content in live events as Rock in Rio, one of the largest music festivals in the world, was broadcast in Dolby Atmos in Brazil. Also, last month, ESPN began broadcasting their college football prime time games in Dolby Atmos with DIRECTV and Comcast.

For Dolby Cinema, the theme in 2019 has been global expansion. The first Dolby Cinemas in the U.K., Japan, Germany and Kuwait opened during the year. And last month, we announced a partnership with Kino OKKO to open the first Dolby Cinema in Russia.

Including Russia, Dolby Cinema will have a presence in 7 of the top 10 global box office markets. And overall, we now have about 240 Dolby Cinema sites open globally. With a growing amount of content and devices, Dolby Vision and Dolby Atmos are setting a new standard in how people enjoy their entertainment content. Our progress gives us confidence in our ability to drive sustained revenue and earnings growth as reflected in our fiscal 2020 guidance. We also see opportunities ahead to increase our growth rate and to achieve our goal of double-digit growth.

Now let me take a few minutes to highlight some of these opportunities. We are still in an early stage in the adoption cycle for Dolby Vision and Dolby Atmos. For example, we have made great progress with Dolby Vision on 4K TVs, doubling volume each year over the last 3 years.

We now estimate that Dolby Vision is present on about 10% of 4K TV shipments in 2019. We see opportunity ahead as adoption of both Dolby Vision and Dolby Atmos expands beyond the high end and as the 4K TV market continues to grow as a percentage of total TVs.

And beyond TVs, we are at even earlier stages of adoption in categories like mobile and PCs. In previous technology adoption cycles, we have hit inflection points that resulted in higher revenue growth for the company, and we do know the formula for this. Increase the amount of compelling content available in Dolby and continue to make it easier and more valuable for partners to adopt, ultimately increasing passion for the Dolby experience among consumers around the world.

Signs to watch for, as we go forward, include new partner wins, deeper penetration throughout our partners' device lineups and adoption in new categories of devices.

Bringing the Dolby experience to additional types of content is an important path to accelerating growth. We will continue to invest in making more Dolby experiences available in sports, gaming and even user-generated content. The launch of Dolby Atmos Music is an example of increasing our value proposition by enabling new Dolby experiences.

A healthy Dolby music ecosystem will create opportunities for further adoption in smart speakers and other home audio products. In mobile, we have built a strong position and enjoy growth at the high end of the market, largely based on our presence in theatrical and episodic content.

Dolby music not only brings more value to these partners, it also increases the attractiveness of the Dolby experience to a broader population of devices. Music can also bring new value to automotive where today, our revenue primarily comes from rear-seat entertainment. Our continued innovations can also create opportunities for additional growth. For example, we are engaging in opportunities where our Dolby Voice technology can create additional value in areas like PC and smart speakers. With the breadth of our technologies, we have established a unique position throughout the premium entertainment ecosystem. We enjoy broad adoption of our audio codecs and have enabled exciting new experiences with Dolby Vision and Dolby Atmos.

As we bring more value to our existing partners and continue to add new partners and devices, it enables us to continue our momentum with many opportunities to accelerate growth.

Beyond these areas, we continue to look for ways to extend the Dolby experience beyond the realm of premium entertainment. We enable many of the world's most famous studios, directors and artists to tell their stories through movies, TV and now music. These activities are powered by our decades of innovation and experience.

Today, we live in a world where audio visual media enhances almost every aspect of our lives. And we see opportunities all around us to improve the quality of these media experiences, from learning how to perform a new skill to collaborating with colleagues or sharing our stories with friends. We see compelling opportunities to enable more Dolby experiences in ways that both reinforce our existing propositions as well as create new revenue streams. And I will keep you posted as we continue to progress in these areas.

So to wrap up, 2019 was highlighted by the momentum in enabling Dolby Vision and Dolby Atmos experiences across an increasing amount of content, services, devices and cinema locations around the world. As we head into 2020, we are focused on the road ahead to advance the adoption of Dolby technologies within consumer entertainment and the cinema ecosystem. This gives us confidence that we'll be able to sustain revenue and earnings growth. In addition, we believe we are well positioned to accelerate growth as we broaden the reach of our innovations.

I look forward to updating you. And with that, I will turn it over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question will come from Ralph Schackart with William Blair.

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Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [2]

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Kevin, a couple of questions just on some of the longer-term commentary on accelerating growth.

I understand that you have the Dolby Atmos and Dolby Vision coming together. But can you just give us a sense of, when you talk about accelerating growth, what's the time line on that? Would that be something that potentially could occur as you exit this fiscal year? And then maybe a follow-up is, I know you switched to 606 in, I guess, previous fiscal year, but how comparable is 2020 to 2019 given the switch? Just trying to get a sense of how -- is this the true growth rate here? Or if there's any accounting treatment there? And I have a follow-up.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [3]

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Sure. so I'll take the first one. I might have Lewis give some color on the -- our first true comparison here. So Ralph, yes -- so thank you for acknowledging that we have -- we are really proud of the momentum we've built up with Dolby Vision and Dolby Atmos, and that's what's gotten -- has allowed us to get to this mid- to high single-digit growth rate.

And we see a lot of opportunities ahead and what I laid out in the script today are some of the areas where we see opportunity to accelerate that growth rate further.

And I guess, the short answer to your question is we -- I do believe that those could be -- I think you asked whether we could hit that exiting the year. I believe it could. It's difficult for us to predict these inflection points. It has been difficult in the past, but we know where the opportunities are, and we know what it takes to go after them, and that is to continue to increase the amount of available content. That increases the proposition for why people would want to include us on more devices. You look at the progress we've made just recently, where you now can enjoy Apple TV plus, Disney+, College Football on Saturday night. All of these are more reasons to want the Dolby Vision, Dolby Atmos experience. Those are the things that are going to drive us towards that inflection point, and we are just heads down, working to get there as fast as we possibly can.

And as I said, I'm very excited about new contexts for Dolby Vision and Dolby Atmos. And with music this quarter, we think that's the beginnings of something, which can open up devices for us that we haven't had the opportunity to play in recently. Lewis, do you want to talk about the 606, 605?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [4]

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Yes, we really haven't spent much time in the company on 606, so it's nice to touch on a topic that didn't take any effort. Yes, I think, Ralph, just to clarify on your question, fiscal '19 was -- the year we just completed was the first year that we truly operated and reported under 606. We recasted '18 and '17 so that it could be a comparison point. So that means that I believe fiscal '20, the guidance we're giving, versus fiscal '19 is a fair comparison, both not only accounted for under 606 but sort of think of it as the company operating under 606 as opposed to backwards applying new rules.

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Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [5]

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Okay. I know you can't go back in time and kind of readjust to get a different prior year comparison. But let me ask just a different question. In Q1, just the guide, I think it was lower than expected, at least relative to The Street. I know timing can be a factor. And sometimes it's tough to line up your quarters. But anything you'd call out in Q1 on the top line specifically?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [6]

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Yes, those things are not lost on us. We did look at sort of the pattern of the year by quarter that was out there, let's say, on -- published on consensus versus ours. And the first thing I'd point out is our Q1 '19 to Q1 '20 pattern isn't actually that different than the '18 to '19 pattern.

I think the FY '20 consensus number were -- was probably a set of numbers that had to make a lot of broad assumptions. So it's really speak -- hard to speak to a number we weren't responsible for. I don't think there's anything particularly quirky other than the shape of our revenues will show probably a bigger spike in Q2 that maybe some of that was expected in Q1.

So there's nothing, in particular, about the way we run our business that's driving anything differently. Also, last year, in FY '19 under 606, in Q1, we did have some extra revenue that came from hybrid deals in the Dolby Cinema space, which was sort of lumpy because those are not the larger part of our business there, and we actually didn't have any more of those as the year progressed.

And so that also creates a little bit of a hitch in terms of the comparison. So if you isolate for that, that's also causing some of the noise. But other than that, I think when we look at the whole year, I think, right now, our whole year guidance is a range of 1,300 to 1,350 (sic) [$1.30 billion to $1.35 billion] with a midpoint of 1,325 or 1 3 2 5 (sic) [1.325 billion] that's not that far off from where The Street was, and a lot of that difference is in the landing in Q1.

And for the rest of the year, in totality, that sort of lines up. And in terms of our new seasonality, I think even last year, we were signaling that Q2 is not an uncommon quarter for us to see a little bit of a surge in revenue just from the pattern of our activities and the way our customer activity works.

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Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [7]

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Great. And then sometimes, I know, from time to time, you'll talk about the growth in new products. Can you give us a sense of that for 2020? And I'll turn it over to another question.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [8]

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Sure. Sure. So you remember that we came into the year having done about $100 million between our consumer imaging initiatives, Dolby Cinema and Dolby Voice, saying that we felt we could grow that at, at least 65% again in '19.

We had a couple of benefits of a few one-off items. But excluding those, we came in just above that, right around [$170 million]. Going forward, I think we've come to the conclusion that Dolby Vision and Dolby Cinema really aren't that new anymore. And so we're going to begin talking about those growth opportunities in the context of each of our markets, and then as I further laid out today.

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Operator [9]

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And next will be Steven Frankel with Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [10]

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Just to follow up on Ralph's question. Let me just understand the guidance. So the fact that, at the midpoint, Q1 revenue is down about 6% is more a reflection of how we should think about seasonality and not some headwinds that you're seeing earlier in the year that you expect to work through and to hit the full year number.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [11]

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Yes. That's probably the shortest answer you'll ever get from me.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [12]

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And how big were those hybrid deals? So let's kind of zone in on that. And how much was that last year?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [13]

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Sure. Let me try to surround that. Last year, in Q1, we actually exceeded our revenue projection in that quarter probably in the neighborhood of -- I want -- off the top of my head, $7 million to $10 million. And we indicated at that time that a lot of that was driven by some of these hybrid deals. You may remember, at that time, Kevin and I clarified that our core business really is a revenue-sharing business. But in some instances, where, for financial reasons or currency reasons or whatever, they're -- the hybrid deals can be more applicable approach.

We had that in Q1, and we didn't really have that much volume in that for the remainder of the year. So that gives you a sense of the scale of the last year, and we're not projecting that scale to happen again this year in Q1.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [14]

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Okay. So we're going to stick with your belief that this is a kind of mid- to high single-digit growth business with the potential to layer on some new initiatives to try to drive that harder.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [15]

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Yes.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [16]

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Yes. And I mean, we -- it's -- I would say it's easier for us to form our guidance on an annual basis than a quarterly basis. It's important to do it on a quarterly basis, and this is our...

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [17]

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Yes. It's important.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [18]

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But Steve, when we look at our current position within each of our major areas of technology and the wins we have in-house, that's what's giving us confidence in that continued growth.

And beyond that, as I said, we look for opportunities where we can hit an inflection point. We've got a seasoned executive here who's been through many of these cycles, who likes to point out to me that we know when we've hit an inflection point 6 months after we've hit it, and there's some truth in that in that we just have to -- if we keep our head down and we keep expanding content, and we kept getting more devices, and we keep creating desire for these Dolby experiences, we have opportunities to hit even higher rates of growth than the ones that we are -- that we can see in front of us.

And beyond that, we continue to be very excited about the pipeline of innovation we have in the future.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [19]

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Thank you for calling out the Dolby Vision number at this year's holiday. What was that a year ago?

The TV penetration, sorry.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [20]

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So the number I cited today is 10% of 4K TVs. And according to our data, 4K TVs are -- and that was 4K TV shipments during the year. And according to our data, 4K TV shipments were about 50% of the total TV market. I don't know if I have the percent number for you, but I did mention in the call, Steve, that we've been doubling our shipments about every year. The denominator has been harder for us to get a handle on, but now that we're at a certain size, we can -- we're comfortable saying -- seeing that we're at 10% of 4K TVs. If you remember, I had once gone down a path of a percentage of premium 4K TVs. And I didn't set myself up for a repeatable statistic because the bar on premium, it turns out...

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [21]

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Premium, went down.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [22]

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is not a uniform one. So we're on 10% of 4K TVs, and we've been doubling unit shipments every year since we launched it in 2016.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [23]

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Okay. And just a quick update. Two questions. One on Dolby Cinema and one on the wider cinema products business in terms of Dolby Cinema, where is the backlog today?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [24]

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So we said on the call, we have 240 installed, and we're at about 200 in backlog. And as Lewis said, we feel like we're in a good position to increase the screen count at about the same pace we did last year. I would say that, if you look at our wins over 2019, we entered quite a few new markets. And we feel like each of those could represent the beginnings of some -- of a place to grow further, but we have some good wins in the U.K., Germany, Japan.

And recently, we signed Russia are all new markets for us. I'm sorry, what was the second part of the question?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [25]

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So not part of the question -- Steve, I know this is probably going to be a question that comes out anyway, but people have been asking about, oh, what's the size of Dolby Cinema. I think my overarching comment would be that, typically, when we look in the past at chunks of revenue that we started talking about separately, they usually have to get to either like 10% or $100 million in revenue. And right now, our Dolby Cinema revenues are still below 5%. And but at least if you use some -- and it's growing. And as Kevin just said a second ago, the number of screens we're adding per year has now stabilized at a pace of -- so it looks fairly similar. But that would give you some sense for the size of Dolby Cinema revenues as it is today. And as we go forward, we will look for more opportunities to try to break that out. But right now, it's still sub-5%.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [26]

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Right. And you're still satisfied with the unit economics. And would you say that they are improving as it matures? Kind of what's the same-store sales look like in Dolby Cinema? If that's something you can talk about.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [27]

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Well, in our most -- our largest market, of course, is the U.S. market where we have about between 130 and 140 of those screens. And we are -- according to all of our data, we are the highest performing format as judged by box office per screen.

So all the unit economics have been positive, and we really feel really good about that. I think for a lot of these other markets, it might be early for me to draw any broad generalizations as we build the screen count.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [28]

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Yes. Critical mass on those.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [29]

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Yes. Okay.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [30]

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And then just to circle back to the traditional cinema products business and the issues you brought up, I think it was last quarter about softer demand. What's happened in the last quarter?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [31]

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I think it's stabilized. This quarter, we hit our targeting guidance on cinema products. The guidance we give, we always try to make sure we are realistic about that. And you can see in my prepared comments, Steve, I indicated that we're currently modeling roughly flat sales year-on-year we do have backlog. We do track what's going on. So I think the hit that we took in Q3 and then I adjusted the guidance for Q4, we tried to reset to what the current environment is as opposed to death by 1,000 cuts.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [32]

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Okay. And then the last one. Any update on velocity of Dolby Voice? Now that you've really focused in on that huddle room market, has that been successful?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [33]

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We -- Dolby Voice grew this year. Didn't grow as much as we had...

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [34]

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Liked -- would have liked

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [35]

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Liked -- would have liked. The -- coming into year, you rightly remember, we were focused on -- we had just added BlueJeans as a major huddle room partner. About partway through the year -- actually, most of the way into the year. We also introduced with them a room-as-a-service model.

This is -- so we're going from a CapEx purchase model, which is still an option, to their customers are able to avail themselves of the complete Dolby experience through a subscription. That's much more natural with the purchase cycle.

That was really -- we saw increased volume in the fourth quarter of the year, and that was the first full quarter with that model. We added LogMeIn during the fourth quarter, and they also have that model. Now of course, that would be less revenue up front but a nice recurring revenue stream over time. So we're still focused on the huddle room model and, in particular, with this ability to offer a way of purchasing the experience that I think is much more natural in this market.

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Operator [36]

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And our next question will come from Eric Wold with B. Riley.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [37]

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Thank you. Couple questions. I guess, one just following up on the last one around the cinema market. I guess, it sounds like you're anticipating that the competitive environment you saw that drove the hit in Q3 and the lower guide in Q4 continues into 2020. I guess, first, is that fair? And then, two, in your guidance for products and services for the year, is Dolby Cinema growing offset by traditional cinema products? Or are both growing?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [38]

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Eric, this is Lewis. Just to be clear, the guidance I gave about cinema products being flat is specifically just the product revenue for our cinema products. We do anticipate that Dolby Cinema, the initiative we refer to as Dolby Cinema will grow in FY '20, full stop.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [39]

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Okay. And then going back to the question around the Q1 timing, not to beat that. I guess, you called out that marketing spend being more front weighted. I guess, one, what is that spending going towards? Is it something new that you haven't spent on before? And just the -- is the timing of the spend, has that shifted at all versus prior year?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [40]

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It's the timing that is shifting, yes. Look, our marketing is driven toward a combination of industry events, being where our partners and prospective partners are and also engaging in creating an understanding and awareness, when you have a Dolby of experience, you know you're having it, you know how great it is. And leveraging partner marketing to tell that story makes sure that consumers are appreciating the partnership we have that result in these great experiences. And this year, we are going to concentrate more of those dollars in the front half of the year, and that's because that's when you've got the holiday season. You've got the awards season. We believe that's where the moments are that we want to be a part of it.

And yes, so within the same overall budget as a percentage of revenue, we're going to weight it more into the first half of the year. And yes, you'll see us try some new things with those dollars to make sure that the message is coming through and that people are aware of where they can get Dolby experiences and create desire for them.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [41]

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Perfect. And then, Lewis, the higher cost of goods and licensing in Q4, was that due to the write-downs of the products you're discontinuing? Or what was causing it that would not recur going forward? And how much was kind of that incremental?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [42]

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Yes. No. So the write-down of the products that we discontinued, that shows up in product gross margin. The extra cost of sales and licensing were just some additional costs we incurred relative to some of our IP, and it was a little bit of a spiky piece in Q4 that we don't anticipate to recur in future quarters at that level or anywhere near that level.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [43]

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Great. And then just a final one for me. You called out in the guidance that you expect lower recoveries this year for Broadcast and Other. Can you give us a sense maybe of what -- I guess, what's causing expectations for a lower recovery? And then kind of what's the delta between total recoveries in '19 and what's assumed total recoveries in 2020?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [44]

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Yes. As you can imagine, we try not to break our forecast down to that level, so maybe I can answer the question directionally. In fiscal '19, in total for the whole company, we did see recoveries rise. As we construct our forecast for FY '20, we use models to try to anticipate what those might look like. And currently, our model anticipates that it will be lower, partially because, FY '19, they were a little bit higher.

Beyond that, we try to do the best we can to see what markets those land in. And so I recognize, if I give guidance in Q1, as we progress through the year, I will give you guys updates on how that actually lands. But that at least gives you some sense of this back and forth. Some years, it's higher, some years, it's lower. And it just so happened, in FY '19, in total for the whole company, we did see higher recoveries.

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Operator [45]

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And our next question will come from Paul Chung with JPMorgan.

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Paul Chung, JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst [46]

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So first up, can you just talk on kind of the puts and takes on your free cash flow? Which kind of looks like it's down about 20% for fiscal year '19. It looks like you had a drag on some working cap and CapEx was a bit higher. So if you could expand on what's going on with your cash cycle days? How 606 kind of impacted? And then as we look out to fiscal year '20, should we expect a more kind of normalized conversion of your net income for free cash flow? Can you kind of hit north of $300 million, which looks like your pro forma net income will hit that amount? I have a follow-up.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [47]

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Sure. The first thing I'll maybe clarify for the rest of -- whoever is listening in on the call is I don't think that our cash flow from operations was down 20%. It may have been down $20 million. But if I look at it -- I mean, I don't have it right in front of me, but the cash flow statement is in the press release. So yes, you alluded to it in your question. But for the most part, our business is continuing to function as the business you've always known and loved, which is it's a high cash flow producing business, a high profit margin business. And for the most part, these fluctuations that you see, whether it be quarter-to-quarter or year-to-year are, to some extent, affected by things going on in our balance sheet.

And as I've talked about during the course of FY '19, some of these are related to 606. Because remember, under 606, we are now required under those new accounting rules to effectively recognize some revenue a quarter sooner than we were, and that has affected my balance sheet. But I think as we move into FY '20, those comparisons will now become a little bit more pure, if you will. Because FY '19 was our first transition year where we started booking these estimated revenues each quarter, but understand that, that does not necessarily mean we can bill the customer a quarter sooner. So as we work our way through that, I think our cash flows will start to normalize. For example, if I look narrowly at Q4 cash flow, Q4 cash flow that we just reported was $130 million from operations, above net income. So it's a good example of how we got a little bit of a positive boomerang from what was a lower number in Q3.

So I think, as we move forward in FY '20, we would expect to have our cash flow from operations and our free cash flows start to mimic what you were seeing before, even under 605. No substantial change in terms or anything like that.

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Paul Chung, JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst [48]

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Got you. And then if I look at your guidance at the midpoint, it looks like your revenue and kind of your pro forma OpEx are on pace for kind of a similar growth of 6% to 7%.

But I guess, your gross margin lift from kind of higher licensing mix gives you some -- a little bit more flexibility to increase your spending, but it looks like your operating margins might be up modestly. Are you kind of comfortable with this pace of spending? And in order for us to really see more operating leverage in the model, is it more about when your revenues kind of hit that double-digit mark?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [49]

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Sure. I'll start off with sort of the geeky numbers coming, and I'll let Kevin finish off any qualitative [add-ons]. But we are, once again, for probably the fifth consecutive year, providing guidance where we're growing revenue faster than OpEx. At the midpoint of our guidance, we're expecting revenue to grow in the neighborhood of 7% and OpEx to grow in the neighborhood of 5.5%.

So within that context, Kevin and I have committed that we would at least maintain operating margins, non-GAAP, in the neighborhood of 31%. And I think all that is hanging together as a very sustainable and continuing business model going forward. In terms of leverage for more operating margin, to some degree, that is going to be helped or affected by the rate of revenue growth.

As Kevin said a second ago, we do think there are opportunities for the revenue growth to be higher than that. But currently, our guidance for the year is what we think will happen. That's our best guess for what happens. So I think the business model is very, very strong. We're talking about revenue growth, mid- to high single digits, OpEx growth below that, operating margins of 31% or better and EPS growth higher than revenue growth. That is kind of the model that we're trying to run.

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Operator [50]

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And moving on to James Goss with Barrington Research.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [51]

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A couple of questions. First, with Dolby Cinema, is the economic model across all of these markets a joint-venture-type model or a revenue sharing model as I think it is in the United States?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [52]

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The vast majority are pure revenue sharing. And as Lewis talked about a moment ago, we did have a few last year that fell under a larger upfront payment with a smaller revenue share. And we expect we'll have those from time to time. It's mostly driven by the characteristics of the individual market, and in particular, if it's a -- depending on the -- whether there's financial risks or things where we want to move to that model. But the vast majority of the screens are and will continue to be in the full revenue share model.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [53]

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And are those dollars usually in the licensing revenues? Or I think some of the theaters where you might sell some product that might be in the product area. So I'm just wondering where you position them in your income statement.

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [54]

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The revenue share -- so revenue sharing revenues will be in licensing. And where we do sell product, we'll include that in products and services.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [55]

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So if you looked across your income statement in terms of Dolby Atmos and Vision and Cinema since they do get into various categories, what share of your total revenues do you think are affected by those services and technologies?

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Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [56]

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Yes, I don't think we -- yes, I shouldn't say I don't think, we don't break out Dolby Vision and Dolby Atmos revenue as a separate item. I think Kevin mentioned in his prepared comments that Dolby Vision and Dolby Atmos or the combined are a significant contributor to our growth rate. But we don't anticipate breaking out what you just asked, Jim, which is a separate summation of revenue solely from just Vision and Atmos. They -- it goes into a lot of different devices. And as you already said a second ago, Dolby Cinema is effectively a Dolby experience that combines Dolby Vision and Dolby Atmos. And as I indicated, our total Dolby Cinema revenues today are less than 5% of company's revenue but growing.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [57]

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Okay. Another category. I'm encouraged to see that music is being affected by your technologies. It seemed for a while that iTunes had recreated some momentum in music, but it dumbed down the audio quality. I'm wondering -- so this is a good trend. Are there limiting factors to be able to take advantage of the qualities you're bringing to the table in your various music initiatives? Because there always seems to be a limiting factor. The least qualified part of the system will cause the system to -- or the technology then to not come through as you had intended to. And are there a number of things you have to do to really get it to where it will be fully appreciated and then fully embraced.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [58]

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Yes, thanks, Jim. The -- I mean, it looks a lot like the adoption cycle of any Dolby experience, Dolby Vision, Dolby Atmos, Dolby Cinema, and that starts with having the artistic community excited about the experience they can create. And I would say that, on that score, we feel really good about the early days of Dolby Atmos Music. The artists are very excited about it. And today, you can -- there is music from Lady Gaga, The Weeknd, Ariana Grande, Post Malone, the list goes -- the list goes on. It's growing fast. And we consistently hear from artists that this is -- they think of this as a -- it's a new way to experience their music. So that's step one, and we feel really good about that step. And we've been engaged in that part of the process for quite some time. So we've made a lot of headway in terms of making the tools and plug-ins available to fit naturally within their workflow and their process. Then the second thing, of course, is getting distribution and getting -- and having the device playback capability.

Fortunately, we do have an installed base of Dolby Atmos devices in the world. We are really excited that we're able to launch with Amazon Music and streaming to their Echo Studio. So that's where you can experience it today. We know that Amazon has said they intend to expand the availability -- the device footprint, which can -- which Amazon Music can stream to. And of course, we're focused on broadening it as far as we can through both in terms of distribution and device. So it looks a lot like the cycles that we're used to, but we think we're off to a really strong start.

And as I said in the prepared remarks, one of the reasons we're excited about it is that it increases the value proposition for partners that we're working with today and consumers who have our devices today, ultimately. It also opens up the ability to sell into devices that are really music-first devices. I mean, you take the success we've had in the mobile space, for instance, and that is primarily at the high end. This is primarily based on our proposition in movie and TV content. Music is a use case that we believe could have much broader appeal in the mobile space. It can have -- we think that it will be something that gives us a lot of opportunities in the smart speaker and home product space and in cars as well.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [59]

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Okay. Great. And last thing. You are a long lead time type business in terms of creating a technology and get it into market the way Dolby Atmos and Vision have developed over this past 3 years. Are there any new technologies now at the sort of stage that they were at 3 years ago that we'll be talking about in 3 years in the same way?

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [60]

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Yes. We're -- we feel great about our pipeline of innovation. And some things you see coming to life today, some things -- I did mention in the call that Dolby Voice, which, of course, I talked a moment ago about the progress and how we're doing in the huddle room space. But we're also beginning to see opportunities for that fundamental technology in other areas of our business. And so we're excited about potential opportunities in, for instance, our PC market. Early days, but I think that that's something that's sort of far along in the cycle. I think, on another end of the scale, we are also looking -- I mentioned in the script, we're looking at ways that we can bring our decades of experience and innovation -- our current innovation as well as our future innovation, to all of the increasing ways in which we experience our audio/visual content. And one of the initiatives we have, which is at early stages but is in market, is the -- we've made our technologies available in a way that developers can access them directly, in particular, for the communications space.

So we have a number of companies that are integrating the ability to have a communication directly into their inflow of their application or service. And so that's early days, but we think the very -- the notion -- this is an interesting way for us to be able to make our technology and our experience, in the form of documentation and how-to videos, to the -- all of the ways in which media is increasingly being employed today.

So early days, but it's something that we're excited about.

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Operator [61]

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Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

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Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [62]

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Great. Well, thank you, everybody, for joining us today, and we look forward to keeping you posted as we move into 2020. Thank you.

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Operator [63]

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Thank you. That does conclude today's conference. We do thank you for your participation. Have a wonderful day.