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Edited Transcript of DLB.N earnings conference call or presentation 12-Nov-20 10:00pm GMT

·45 min read

Q4 2020 Dolby Laboratories Inc Earnings Call SAN FRANCISCO Nov 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Dolby Laboratories Inc earnings conference call or presentation Thursday, November 12, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Eric Christian Wold B. Riley Securities, Inc., Research Division - Senior Equity Analyst * Ivan Philip Feinseth Tigress Financial Partners LLC, Research Division - Director of Research * James Charles Goss Barrington Research Associates, Inc., Research Division - MD * Paul Chung JPMorgan 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 Colliers Securities LLC, Research Division - Senior VP & Director of Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Fourth Quarter and Fiscal 2020 results. (Operator Instructions) As a reminder, this call is being recorded, Thursday, November 12, 2020. I would now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason. -------------------------------------------------------------------------------- Jason Dea, Dolby Laboratories, Inc. - Director of Corporate Finance & IR [2] -------------------------------------------------------------------------------- Good afternoon. Welcome to Dolby Laboratories Fourth Quarter 2020 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, including our first quarter and second quarter fiscal 2021 outlook and our assumptions underlying the outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time. The discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-looking Statements as well as in the Risk Factors section of our most recent quarterly report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website. As for the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our first and second quarter 2021 outlook, and Kevin will finish with a discussion of the business. So with that introduction behind us, I will now turn the call over to Lewis. -------------------------------------------------------------------------------- Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- All right. Thank you, Jason, and congratulations in advance for the impending arrival of your second child. So good afternoon everyone. I hope everyone is doing well. Our Q4 was above our guidance, but was still down on a year-over-year basis, and that reflects the ongoing impact of the pandemic. So let's go through the numbers. Fourth quarter revenue was $271 million compared to $247 million in Q3 and $299 million in Q4 of last year. Our revenue guidance coming into the fourth quarter was a range of $225 million to $255 million. So compared to guidance, revenues were better than what we projected as we had a true-up of about $25 million in the quarter related to Q3 shipments, which was about $15 million higher than the true-up that we had last quarter, and with most of that improvement coming from TVs and set-top boxes and PCs. Total company revenue in Q4 increased sequentially by $24 million compared to Q3 as we benefited from higher unit volumes in TVs set-top boxes, DMAs and PCs, along with the higher true-up that I just discussed. And all of this was partially offset by lower revenue from Mobile due to timing under contracts, and I'll discuss that in a second. Now looking at Q4 on a year-over-year basis, total company revenue was down by $28 million from last year's Q4, and we can attribute that mainly to COVID-19, especially in products and services, which were down by about $20 million or nearly 60% below last year. The composition of Q4 revenue was $257 million in licensing and $14 million in products and services. So let's break down licensing revenue by end market, starting with broadcast. Broadcast represented about 47% of total licensing in the fourth quarter. Broadcast revenues increased by about 2% year-over-year helped by the higher true-up related to the Q3 shipments and also driven by higher adoption in TVs and set-top boxes, and then this was then offset partially by lower recoveries in the quarter. On a sequential basis, broadcast was up by about 35% due to higher volume in TVs and set-top boxes, along with higher recoveries and a higher true-up. Mobile. Mobile represented approximately 15% of total licensing in Q4. Mobile was down by about 13% over last year due to lower recoveries, but partially offset by higher adoption of Dolby Technologies. For the sequential comparison, I should point out that last quarter, Q3, Mobile was about 33% licensing, which was higher than normal. And that was due to timing of revenue under customer contracts. So we came into Q4 expecting Mobile revenue to decline this quarter and return to a more normalized percentage of revenue, which is what it did. Accordingly, Mobile revenue was down sequentially by about 50%. That was primarily due to timing of revenue under customer contracts. Consumer electronics represented about 13% of total licensing in the fourth quarter. On a year-over-year basis, CE licensing was down by about 8%, mainly due to lower recoveries. On a sequential basis, CE was about 68% higher than Q3. And as a reminder, Q3 was lower than usual at only 9% of licensing because of timing under contract. And so the sequential increase from Q3 to Q4 was mostly a return to a more normal level. PC represented about 12% of total licensing in Q4. PC was higher than last year by about 26%, helped by the higher true-up and also because of the increased adoption of Dolby Technologies. And sequentially, PC was up by about 32%, that's for similar reasons. Other markets represented about 13% of total licensing in the fourth quarter, and they were down by about 19% year-over-year due to significantly lower Dolby Cinema box office share, and that's because of the COVID restrictions and lack of big titles, and also because of lower revenues from gaming due to console life cycles and lower recoveries in automotive. On a sequential basis, other markets was up by about 32%, driven by higher revenue from gaming and from via admin fees, and that's the patent pool that we administer. Beyond licensing, our products and services revenue was $14.3 million in Q4 compared to $11.8 million in Q3 and $34 million in last year's Q4. Our guidance had anticipated a large year-over-year decrease because most of this revenue comes from equipment that we sell to cinema exhibitors, and these customers continue to be negatively affected by the pandemic. And speaking of products and services revenue. Going forward into Q1, we are winding down and exiting conferencing hardware sales as we will now be fully focused on expanding the availability of the Dolby Voice experience through software solutions, such as interactivity APIs on our developer platform. So later on, when I cover the outlook for FY '21, my comments on products and services revenue and gross margin will reflect the fact that we are exiting the conferencing hardware arena. Now I'd like to discuss Q4 margins and operating expenses. Total gross margin in the fourth quarter was 84.3% on a GAAP basis and 85.1% on a non-GAAP basis. Products and services gross margin on a GAAP basis was minus $15.5 million in the fourth quarter, and a large portion of that consisted of charges for excess and obsolete inventory associated with conferencing hardware, and that relates back to what I just said a minute ago about our plans in that space. Going forward into Q1, we anticipate that products and services margin will still be negative, but more along the lines of around minus $3 million or minus $4 million. I'll cover this again in the outlook section in a few minutes. Products and services gross margin on a non-GAAP basis was minus $14.1 million in the fourth quarter, and my comments here are similar to what I just said for GAAP gross margins. Operating expenses in the fourth quarter on a GAAP basis were slightly above the high end of the range that we had guided, coming in at $198.7 million compared to $182.9 million in Q3. And remember that Q3 was particularly low for us as that was the first full quarter of reacting to COVID-19, and lots of our activities have been temporarily halted or pushed out. Operating expenses in the fourth quarter on a non-GAAP basis were $176.5 million, which is within our range, and that was compared to $159.2 million in the third quarter and basically the same comments that I made in GAAP apply here as well. Operating income in the fourth quarter was $30.1 million on a GAAP basis or 11.1% of revenue compared to $51.2 million or 17.1% of revenue in Q4 of last year. Operating income in the fourth quarter on a non-GAAP basis was $54.3 million or 20% of revenue compared to $77.6 million or 26% of revenue in Q4 of last year. Income tax in Q4 was 21.8% on both a GAAP and non-GAAP basis. The effective tax rate was slightly higher than guidance, and that was due mainly to the mix of our income between different tax jurisdictions. Net income on a GAAP basis in the fourth quarter was $26.8 million or $0.26 per diluted share compared to $43.9 million or $0.43 per diluted share in last year's Q4. Net income on a non-GAAP basis in the fourth quarter was $45.8 million or $0.45 per diluted share compared to $67.6 million or $0.66 per diluted share in Q4 of last year. For both GAAP and non-GAAP, net income in Q4 was above the guidance that we gave at the beginning of the quarter, and that was primarily due to revenue being above the high end of our range, offset partially by the lower product and services gross margin that I mentioned a minute ago. During the fourth quarter, we generated about $113 million in cash from operations, which compares to about $130 million generated in last year's fourth quarter. We ended the fourth quarter with nearly $1.2 billion in cash and investments. During Q4, we bought back about 640,000 shares of our common stock and ended the quarter with about $187 million of stock repurchase authorization still available to us. We also announced today a cash dividend of $0.22 per share. The dividend will be payable on December 4, 2020, to shareholders of record on November 24, 2020. So before I go into the outlook for FY '21, let's summarize the results for the full year FY '20. Total revenue in FY '20 was $1.162 billion, that compares to $1.241 billion in the prior year, with the year-over-year decline due to the impact from COVID-19. Within total revenue, licensing was $1.079 billion, which was down about $28 million from last year due to lower consumer activity because of the pandemic. While products and services revenue was $83 million for the year, down about $51 million from last year, due mainly to lower demand from the cinema industry because of restrictions brought on also by the pandemic. Operating income for the full year FY '20 was $219 million on a GAAP basis or about 19% of revenue, and operating income on a non-GAAP basis was $318 million or about 27% of revenue. Net income on a GAAP basis was $231 million or $2.25 per diluted share, and net income on a non-GAAP basis was $305 million or $2.97 per diluted share. And cash flow from operations for the full year was $344 million, and that's slightly up from the previous year where cash flow from operations was $328 million. So now let's discuss the full year outlook. First, let me say that we'll be facing some interesting dynamics in FY '21 with our year-over-year comparisons. Because we have a September year-end, the first 2 quarters of FY '20 were mostly unaffected by COVID-19, while the last 2 quarters of FY '20 were fully affected by COVID. And as we head into FY '21, COVID continues to persist and visibility is very limited. Even more so the further out you try to look. So today, I'm going to provide an outlook scenario for the first half of the year, including our perspective on what Q1 and Q2 revenue could be. And for the second half of the year, because visibility is limited, we're not providing guidance at this time, but I will provide some color on some of the factors that could affect the second half. So let's discuss the first half. In the first half of FY '21, we currently anticipate year-over-year growth in licensing revenue, and that could be offset by year-over-year decline in products and services revenue. The anticipated growth that we could get in licensing would come mainly from higher adoption of our technologies as industry analysts currently are projecting market TAM to be flat to slightly down in the first half. And also, we anticipate Dolby Cinema licensing revenue to be significantly down year-over-year in our first half because of that COVID versus pre COVID factor of comparison in the cinema industry. And then for that same reason, we are anticipating Cinema product sales to be down year-over-year. Now within the first half of the year, based on what we currently see, here's the scenario we're assuming for Q1 and then Q2. In the first quarter of FY '21, we anticipate that total revenue could range from $330 million to $360 million. Within that, we estimate that licensing could range from $320 million to $345 million, while products and services is projected to range from $10 million to $15 million. At the midpoint of the range, we anticipate growth in licensing to be driven by higher adoption of our technologies across a range of devices. In addition, the Q1 licensing outlook is benefiting from timing of revenue under customer contracts as well as potentially higher recoveries. Now we're not anticipating as much revenue from these items, namely the timing of the recoveries in our second quarter. And by the way, last year, it was Q2, not Q1 that benefited more from timing of recoveries. So with that in mind and based on what we currently see and having just gone over the Q1 revenue outlook, we currently see our Q2 revenue scenario looking like a range of about $270 million to $300 million. And doing the math for you on the first half of FY '21 by combining the Q1 and Q2 figures that I just went over, our current outlook scenario assumes a first half FY '21 revenue range of $600 million to $660 million. We will plan to update you on how this picture has evolved after Q1 is completed. As for the second half, like I said, we're not giving guidance for the second half, but here are some points to consider. On a sequential basis in our licensing revenue, we typically see second half revenues lower than the first half because of lower seasonality in consumer device shipments and also because of timing of revenue under customer contracts. On a year-over-year basis, while we do expect to see continuing benefit from increased adoption of Dolby Technologies, it's worth noting that with respect to market TAMs, current industry analyst reports are projecting markets like PC and TV TAMs to be down on a year-over-year basis in the second half. And that's because of an uptick in unit shipments that happen in the latter part of FY '20 that might not repeat in that same time frame next year. So of course, it's much too early to know if that will be true, but that's what the current reports currently suggest. And as for Dolby Cinema and Cinema products, the year-over-year comparison should be favorable in the second half, but we don't know to what extent or at what pace. So those are a few things to think about for the second half, and we thought it was worth providing you that color. So let me now finish up by providing the outlook on the rest of the P&L for Q1. I already highlighted the revenue range scenario of $330 million to $360 million. So Q1 gross margin on a GAAP basis is estimated to range from 90% to 91%, and the non-GAAP gross margin is estimated to range from 91% to 92%. Within that, products and services gross margin is estimated to range from minus $3 million to minus $4 million on a GAAP basis and for minus $2 million to minus $3 million on a non-GAAP basis. As I mentioned earlier, we are winding down and exiting the conferencing hardware space, and the demand for Cinema products continue to be weak because of industry conditions. And as a result, we are reducing certain resources in manufacturing as well as other areas that were connected with conferencing hardware and cinema products. We anticipate that it will take several months to complete various activities to smoothly transition our conferencing hardware partners and end customers. With respect to the impact on our products and services gross margin, we estimate that we could start to see savings in our cost of goods sold by around the end of fiscal Q2, and that's because of these transitioning activities that we have to undertake. Operating expenses in Q1 on a GAAP basis are estimated to range from $207 million to $219 million. Included in this range is approximately $7 million to $9 million of restructuring charges for severances and related benefits that are being provided to employees that are impacted by the actions that I just mentioned a minute ago. Operating expenses in Q1 on a non-GAAP basis are estimated to range from $175 million to $185 million and this range excludes the estimated restructuring charge. Other income is projected to range from $1 million to $2 million for the quarter, and our effective tax rate for Q1 is projected to range from 20% to 21% on both the GAAP and non-GAAP basis. So based on a combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.70 to $0.85 on a GAAP basis and from $0.97 to $1.12 on a non-GAAP basis. So that's it for me. Over to you, Kevin. -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [4] -------------------------------------------------------------------------------- Thank you, Lewis, and thank you, everybody, for joining us today. I want to focus my comments on 3 main areas today. I will start by highlighting our continued progress, increasing the number of Dolby Vision and Dolby Atmos experiences around the world. I'll then spend a few minutes on the changes we have made in our cinema and conferencing hardware business to adjust to the evolving conditions in certain markets. And then I will share some thoughts on the exciting opportunity for Dolby to address a new world of content through our developer platform and related initiatives. Before we move on, I do want to take a moment to thank our employees for their dedication and creativity. In a year where we all face challenges and disruptions, they have continued to bring more Dolby experiences to more people around the world, and they are the driving force behind the Dolby Magic. So let me start with the Dolby Vision and Dolby Atmos ecosystem that continues to grow. With the launch of the iPhone 12, consumers are now able to see the benefits of Dolby Vision when they record video and share it. We are excited about the opportunity to support this ecosystem so that Dolby Vision content can be enjoyed on social media, video sharing sites and more. This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology, and creating new opportunities for Dolby. During 2020, we continued to grow the presence of Dolby Vision and Dolby Atmos across the many ways that people enjoy movie and TV content. At the beginning of the year, we saw the launches of Disney+ and Apple TV+ with the combined Dolby experience. Google Play, SHOWTIME and CBS all began streaming in Dolby Vision this year. And this quarter, WATCHA, a streaming service in Korea began supporting content in Dolby Vision and Dolby Atmos. And the momentum of Dolby Vision and Dolby Atmos within movie and TV content continues to drive an expanding lineup of devices within the home. The adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew significantly year-over-year. Our partners, like TCL, Sony, Panasonic and Skyworth, added support for the Dolby Vision and Dolby Atmos experience deeper within their TV lineups and have also broadened the global reach of their offerings, including this year into India. Xiaomi launched their first TV that support Dolby Vision and Dolby Atmos just this year. And we continue to bring new innovations to market like Dolby Vision IQ, which optimizes the picture on your TV by adjusting to the surrounding light and to the type of content being viewed. Our continued innovation brings new value to our partners and consumers and adds to the reasons for deeper adoption. Dolby Vision and Dolby Atmos continue to grow across a broader range of devices. Apple recently began enabling support for Dolby Atmos to the HomePod. Earlier this year, Sonos launched its first Dolby Atmos product with the Sonos Arc and Roku began supporting Dolby Vision and Dolby Atmos with Roku Ultra. We are also beginning to see increasing adoption of the combined experience within set-top boxes, including the latest offerings from Free in France and Deutsche Telekom in Germany. Within mobile and PC, Apple highlights the adoption of the Dolby Vision and Dolby Atmos playback with support throughout their iPad, MacBook and iPhone lineups. We also have strong initial adoption of Dolby Atmos within the latest flagship mobile phones from Samsung, OPPO and Sony. Lenovo launched several new PCs that support the combined experience and Dell began shipping Dolby Vision enabled PCs earlier this year. We see significant growth opportunities within both mobile and PC as we gain new wins, drive deeper adoption within our partners' device lineups, and expand the types of content that can be enjoyed with Dolby Vision and Dolby Atmos. In the same way that Dolby Vision and Dolby Atmos enable great movie and TV content, we see a significant opportunity to create immersive experiences within music and gaming. These are important forms of entertainment that expand our current value proposition and grow the number of devices that can benefit from the Dolby experience. Let me start with music. A year ago, we launched Dolby Atmos for music with Amazon Music HD and the Amazon Echo Studio. The music and Dolby experience has been met with deep and passionate engagement from artists. For example, those that we highlighted in the stories from Lizzo, Post Malone, Coldplay and J Balvin. TIDAL became the second streaming service to support Dolby Atmos music, enabling millions of Dolby Atmos devices within mobile and in the home. Our increasing presence in music will create opportunities to grow adoption in mobile, automotive, smart speakers and headphones. In gaming, Microsoft announced that new Xbox will be the first gaming console to support the combined Dolby Vision and Dolby Atmos experience for gaming. We are also seeing a growing number of gaming PCs adopt Dolby experience, including new products from Lenovo and Asus this year. As we grow the presence of Dolby Vision and Dolby Atmos within gaming content, we add to the value proposition for broader adoption within PCs, gaming consoles and mobile phones. Our momentum for Dolby Vision and Dolby Atmos across content, services and devices is strong, and at the same time, we still see much of the opportunity ahead of us. We continue to grow our presence throughout devices within the home and remain at even earlier stages of adoption within mobile and PC. We are focused on accelerating that adoption by increasing the amount of content and by broadening our presence in categories like music and gaming. Let me shift now to talk about the areas where we have made some changes to adjust to the evolving conditions in certain markets. The cinema environment remains challenging as the time of recovery is uncertain and the landscape is evolving. As Lewis discussed, we have made some adjustments to operations and manufacturing here to reflect a lower outlook for demand. At the same time, we remain confident that studios will continue to create great content that audiences will continue to want to experience these movies in the cinema and that they will seek out the best experiences. Let me spend a few -- just a few moments on Dolby Voice. We entered the communications space with the goal of enabling higher quality and more natural meeting experiences. Our value proposition of enabling higher quality interactions remains as strong and relevant as ever, and we see significant opportunities to broaden the reach of our technologies. As we move forward, we are winding down the sales of our conferencing hardware to focus all of our efforts on the larger opportunity to enable the Dolby Voice experience through our enterprise partners and our developer platform. And that brings me to the opportunity to bring the Dolby experience to the vast and growing amount of content that are part of our everyday lives, from user-generated content to social media and casual entertainment to everyday virtual interactions. Today, developers can access our technology through Dolby.io to improve media and interactivity within their applications. We have seen growing engagement from developers across a variety of industries and use cases, from improving audio quality and podcast, media production and online marketplace videos to enabling interactivity in online education, social media and live streaming applications. This quarter, we began partnering with SoundCloud to enable artists to improve the quality of their tracks using our mastering APIs and have seen nearly 200,000 tracks mastered with our APIs in the few months since launch. We are also working to integrate our media APIs onto the box platform this quarter to enable their customers to enhance content with our media APIs right within the box experience. Additionally, we recently enabled our interactivity API to include the benefits of Dolby Voice and has drawn strong engagement from developers since its release. As we look ahead, we will continue to expand our offering to address more audio and video features. For example, now that consumers can create in Dolby Vision with the iPhone 12, we see opportunities to support content platforms seeking to make the most of this expanding world with Dolby Vision content. While we are just at the beginning of these new opportunities, we are learning quickly from our early engagement with developers, and evolving our offering to bring the Dolby experience to everyday applications and services. So to wrap up. The momentum of Dolby Vision and Dolby Atmos in movies and TV content is strong as our partners continue to bring new devices and services to market. Our opportunity remains ahead of us, and we are enabling more content experiences in music and gaming that can accelerate the adoption across device categories. Consumers can now capture and edit in Dolby Vision for the first time, expanding the Dolby experiences into the growing world of user-generated content. And we are excited by the opportunity to bring the Dolby experience to new use cases and industries through our developer platform. All of this gives us confidence in our ability to drive revenue and earnings growth into the future. I look forward to updating you next quarter. And with that, I will turn it over to Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Steven Frankel with Colliers. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [2] -------------------------------------------------------------------------------- Kevin, I would like to talk a little bit about the Dolby.io opportunity. Maybe tell us a little bit about the go-to-market approach and specifically around Voice, how do you take Voice, which has so much promise, and get it into some higher volume applications where it can really make a difference to the consumer. -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Sure. Thanks, Steve. Yes, we're really excited about the opportunity to improve so many different types of experiences, including with Dolby Voice. And in terms of how we're bringing it to market, we are first focused on our engagement with developers. We've brought a lot of people on board who have a lot of experience doing that. We're marrying them with the teams that we have that understand how to apply our technology and expertise to improve media and interaction experiences. So it really is about reaching out to developers, growing that community, bringing them to our platform, make it easy for them to understand how they can employ these technologies. And then also learning from them to then evolve our offerings and bring to bear more of our expertise and more of our IP portfolio to solve new challenges. And of course, over the last 6 months, our product teams have had the opportunity to engage with a lot of potential developers and customers as it relates to deploying these technologies. As it relates to Dolby Voice, it's about the interactivity that we experience on our apps and services every day. And so this runs across telehealth, online education. We see opportunities in -- where entertainment needs communications to work in areas like in the future. We're talking to people about areas like social media or live streaming platforms where people want to introduce interactivity. These are all areas that we see opportunities to bring Dolby Voice to life through the developer platform. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [4] -------------------------------------------------------------------------------- And your existing partners like BlueJeans should we expect them to adopt the software approach as well. So even without your hardware, you can get that same experience? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- They do that today, Steve. So BlueJeans has the Dolby Voice service integrated into their full platform. So they do not require the Dolby hardware to get that experience. And we continue to work with BlueJeans and consumers -- BlueJeans customers will continue to enjoy the Dolby Voice experience when they're participating over their mobile devices and their PCs like so many others are doing for so many hours a day. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [6] -------------------------------------------------------------------------------- Great. And you didn't mention anything about gaming, given the two new platforms, just sitting in the market, both of which are sold out, have we seen that in the numbers in the September quarter? Was that coming in the December quarter? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Coming, we are about to go through a refresh cycle. I did touch on it briefly, Steve, but I'm sure you're aware, Xbox is supporting Dolby Vision and Dolby Atmos for gaming, and we're really excited about that. And so yes, of course, we're -- the refresh cycle is something that is likely to benefit us in the coming couple of quarters. And gaming is a big area of focus for us across the board. Certainly, we're focused on making that Xbox experience as successful and as big of an ecosystem content as possible. But beyond that, we believe that we got value in mobile gaming and other areas. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [8] -------------------------------------------------------------------------------- And then just one last one. Where do you think your market share is today in Dolby Vision and 4K TVs, given what you're talking about the phenomenon in new geographies and more models? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes. The -- so first of all, Steve, I'll say the data is still coming in on that because, of course, we will get our Q4 reports in the coming weeks and the industry analysts are not quite -- well, maybe it's not possible. They're not fully adopted to this uncertain environment. So the numbers are still coming in, but we're confident that we are going to end up somewhere between 15% and 20% Dolby Vision to 4K TVs. And that 4K TVs are probably coming in this last fiscal year for us at somewhere just over 50% of the market. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- We'll take our next question from Ralph Schackart with William Blair. -------------------------------------------------------------------------------- Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [11] -------------------------------------------------------------------------------- First question on the true-up that you called out in the quarter to $25 million, a little bit larger than normal. You talked about maybe 15 higher than expected. Any more color on that as 606 are affecting the true-up this quarter? -------------------------------------------------------------------------------- Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [12] -------------------------------------------------------------------------------- Sure. And we've been very transparent about this even before we launched 606 that we were going to have this. First of all, I'll reassure you that our processes is very solid, applied very consistently. And the biggest piece of that bump in true-up was new data that we got in on some of the key TAMs in new markets we work on were higher than what had been published as the TAMs at the time we did the estimate, and that was across several different categories. So of course, we flow that right through and that affects a number of units that our customers report. Because I think I've talked about this in the past, but our technique uses interpolation, where we use multiple data customer inputs, market share data points and also TAM data. And so the biggest thing driving that uptick in the true-up was an uptick in the TAM data versus what we had when we did the estimate for Q3. -------------------------------------------------------------------------------- Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [13] -------------------------------------------------------------------------------- And then we get a lot of questions on the opportunity for IO. There's obviously a lot of excitement around it. It sounds like you're making great progress in the quarter. Any way to sort of give us a sense on how to frame this opportunity and put some numbers around it, range it. It's very wide. And if not, just sort of like maybe the building blocks, how to think -- for potential size on it? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. Obviously, Ralph -- well, let me back up. But we do think this is a big opportunity. And for a very long time, I've said that we believe we can improve any audiovisual experience. And this is what gives us the opportunity to expand that Dolby experience far beyond our traditional realms. We're about 6 months in. And so right now, what we're focused on is engagement with developers. As I think you know, we have a number of -- a growing number of initial customers that are out there using the platform. And we definitely look forward to providing more data as we go forward here. But we're excited about the customers that we're engaged with and that are coming online now. -------------------------------------------------------------------------------- Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [15] -------------------------------------------------------------------------------- Great. One more comment. Just if you kind of take a step back and envision a post COVID world that hopefully we get to sooner rather than later. Maybe just some updated thoughts on your kind of long-term goal to -- on the march back to double-digit growth. Your sort of confidence around that prior statement that you've talked about before? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes. Well, I feel -- I'm really pleased with our portfolio of growth opportunities. And I think that on the Dolby Vision and Dolby Atmos portfolio, as we talked about, we probably have the strongest progress in the living room for movies and TV. And I just talked about that it's at about 15% to 20% attached to 4K TVs. We are even earlier stage with PCs and mobile devices. And we do believe that this focus on additional forms of content, gaming, music are the key to really opening up those opportunities for us. And I think that with Apple embracing the ability to capture, share, edit content in Dolby Vision, I think that just is the best testament to how the Dolby experience can apply far beyond even those more traditional forms of content. So that's a big growth area. And then as we've talked about, we were just talking about Dolby.io. So we're really excited about the ability to serve those new markets and new industries, unlocking the creativity of developers with the decades of experience and technology we have in making for the best high-quality media and interactions. And so we do see that as another significant growth opportunity. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from Paul Chung with JPMorgan. -------------------------------------------------------------------------------- Paul Chung, JPMorgan Chase & Co, Research Division - VP & IT Hardware Analyst [18] -------------------------------------------------------------------------------- So just on your guidance, is your timing of contracts with 1 of your largest customers just shifting to F1Q from F2Q. So are we going to see better relative performance in PCs and Mobile in 1Q? -------------------------------------------------------------------------------- Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [19] -------------------------------------------------------------------------------- Well, I stop short of giving the breakdown by market because those tend to move around. But yes, this year, we do see more of that timing of contracts issue affecting us in Q1 versus last year's in Q2, but for the first half as a whole, it tends to be relatively similar. I should remind you, too, that as we rolling on as each year goes along, we do get additional customers to get more penetration. So it's not necessarily the same items every year. It's just something we have to live with now under 606. But yes, to your question, Paul, clearly, this year, we see a little bit more of that benefit from the timing of contract issue falling into Q1 versus Q2 than it did last year, where it fell more into Q2 versus Q1. -------------------------------------------------------------------------------- Paul Chung, JPMorgan Chase & Co, Research Division - VP & IT Hardware Analyst [20] -------------------------------------------------------------------------------- Okay. And then secondly, can you talk about the Dolby Vision recording capability on the iPhone. You got a lot of good airtime during the event, which is great exposure there. So is there incremental revenue associated with this feature? And are you getting interest from other prominent OEMs kind of looking at this? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Yes. So again, we couldn't be more thrilled to have Apple embrace Dolby Vision for capture and sharing of content. And obviously, we're not going to get into the specific economics of our relationship with Apple, but I think there's a couple of things for us. One, it, again, is an amazing example of how Dolby can apply far beyond movies, TV and even gaming and music. Secondly, yes, we do think it opens up over time the opportunity to bring that experience to a broader audience. And then third, we think in a world of a large and growing ecosystem of Dolby Vision content in these new areas, that there could be some interesting opportunities in some of our newer initiatives to help people get the most out of that content. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- We'll take our next question from Eric Wold with B. Riley Securities. -------------------------------------------------------------------------------- Eric Christian Wold, B. Riley Securities, Inc., Research Division - Senior Equity Analyst [23] -------------------------------------------------------------------------------- A couple of questions. A follow-up on kind of all the conversation around Dolby.io. I know it's early 6 months in. You're not kind of talking about guidance. Is there a way to maybe frame kind of what the average deal size or user size could look like? Trying to think about what the best way to think about the revenue ramp as you gain penetration, or is it going to be just so many smaller -- from the users revenue flow, or is that's just not the right way to think about it? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Well, it's as you said, it's early. But I think we can already see that there'll be a pretty broad distribution, right? There will be customers that are certainly in historical Dolby standards are -- might be lower per customer. But I think there's also some opportunities to have some reasonably large customers. So it's all going to be about their scale and their use case. So right now, where we're seeing early adoption are in areas like improving recorded audio in a number of use cases like SoundCloud, podcasts, an example is an online platform for the automobile industry, for those looking to digitize, so people do videos of the car they're selling. And we clean up that audio for them. So for those customers, the value proposition is a better quality experience, in some cases, saving them time and money on what they were doing to clean it up. And so the revenue potential is very much a function of the scale of these services. And the same is true on the interactivity side. And many of our customers are just kind of -- they're getting ramped up and have the potential to grow quite a lot more from where they're at today. -------------------------------------------------------------------------------- Eric Christian Wold, B. Riley Securities, Inc., Research Division - Senior Equity Analyst [25] -------------------------------------------------------------------------------- Perfect. And then last question. Obviously, Kevin, you get all the time with $1.2 billion in cash and no debt and seemingly very strong free cash flow trends to continue. At what point -- I guess there's never a need to put that to use to bring on or pocket. But at what point is that kind of need to be fit to use in some manner? Because obviously, you are buying back stock, but there's clearly a limit there to agree. The acquisitions come more into play? Or is there just nothing really a side that can really make a dent in that? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Well, first of all, we regularly review our capital allocation. And as you pointed out, we have also returned cash by buybacks and a recurring dividend. I would say that we're always looking for potential acquisitions that could accelerate our business. Historically, that's tended to be what you might think of as technology tuck-ins and -- I think as we go into new areas, there might -- that will also open up new opportunities for us to consider. But we'll make those decisions based on where we see opportunities to accelerate and expand the opportunities that we're going to pursue it. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our next question comes from Jim Goss with Barrington Research. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [28] -------------------------------------------------------------------------------- A couple of more things on the iPhone 12 capability with the Vision capture and edit. Are you thinking the -- that capability is sufficient for the device to be used more for professional content, in that maybe it might be over tilt to some extent for regular consumers? And also, to the extent that you are pretty important to potentially to iPhone 12 sales. Do you think Apple is going to use Dolby Vision as one of the marketing capabilities that's going to be pushed on it, given what they did on their own show. -------------------------------------------------------------------------------- Lewis Chew, Dolby Laboratories, Inc. - Executive VP & CFO [29] -------------------------------------------------------------------------------- Think they're running an ad, Kevin? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Yes. Thanks, Jim. So yes, one of the ads Apple has been running, I've seen it on sports, does in fact, highlight the ability to take professional quality video in Dolby Vision. And so to answer your question, it's both. I mean there are -- many themes that you've seen in movies actually have been -- many of them have been shot with an iPhone. So the iPhone is a -- both a professional device and a consumer device and the Dolby Vision brings out the best for both. So it's also a great way to capture on content. I mean, we've been trying it, and it's amazing. And it looks more real and like what you experienced. And so today, you can -- I know at a minimum you can use it in the photos app, you can use it in iMovies, you can use it in Eclipse. So we just look forward to supporting building out the ecosystem of apps and services that can support it both for professional use and for consumers. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [31] -------------------------------------------------------------------------------- Okay. And I think Atmos is included on the phones also. Can headphones be hooked up to them and take advantage of the Atmos capabilities? Or do they have to be specially produced headphones? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- Well, for Atmos playback, you -- the iPhone sports iPhone playback, so does the, AirPods Pro, we -- if you're asking about capture, we don't yet have capture, but there's always more to do. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [33] -------------------------------------------------------------------------------- All right. Well, one other thing. On the Dolby Cinema installations. China has actually recovered a lot more quickly because of the lockdown capabilities they had. Are you seeing any pickup in the potential for installations to go on there versus other areas which are behind in this regard? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- Yes. Well, we certainly had more discussion -- engagement in China recently and in many other parts of the world. Because as you say, they are open, and they've actually had some really good weeks with big local titles. So I would say of the parts of the world where we would still see some near-term activity in that regard, yes, China would be a main on list. But overall, certainly, we expect a lower pace of deployment for Dolby Cinema screenings and equipment through the -- until we get to the other side of this recovery. But yes, China is definitely one of the markets that stands out as being better than the others. -------------------------------------------------------------------------------- James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [35] -------------------------------------------------------------------------------- Did vaccine news finally create a higher degree of conversation with the parties you're dealing with for either the U.S. or Europe or elsewhere? Did it create that light in the end of the tunnel where you can start talking again? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [36] -------------------------------------------------------------------------------- Well, look, we -- I talk to partners in all of the markets. And I think none of us know when the industry is going to recover. I mean, obviously, most of our screens are actually open. But of course, attendance is affected by the attendance restrictions and the time of the title. So yes, I think that any news that could help with seeing that light at the end of the tunnel, obviously, is great. But I think most of all, we do believe that studios will keep creating great movies and that there are audiences that are going to want to see it in the And when they do, they're going to want to see the best experiences. We just can't right now predict any better than anybody else when we're going to -- when that day is going to come. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- We'll take our next question from Ivan Feinseth with Tigress Financial Partners. -------------------------------------------------------------------------------- Ivan Philip Feinseth, Tigress Financial Partners LLC, Research Division - Director of Research [38] -------------------------------------------------------------------------------- Congratulations on the great results in a difficult time. We -- when did you start to work with Apple early on for the design of the iPhone 12 to incorporate Dolby Vision? And is there some things that are unique to the iPhone 12 that allow it to be in? Or will you be able to work with other phone manufacturers as well, and you'll see this in some other brands? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Well, we have a long -- and as you know, we have a long-standing relationship with Apple and they support Dolby Vision and Dolby Atmos playback throughout their own ecosystem. And so yes, we've been working with them for some time to bring this experience to life. And our first focus is on making it a successful ecosystem. I mean one thing, of course, that is true of Apple is that they have all of the apps and the services and the devices and the entire ecosystem to bring an experience like this to live at scale. So job number one for us is to help them make that as successful as it could possibly be and to open up that ecosystem to other apps and services. And then from there, yes, over time, we certainly see an opportunity for this to be something that opens up the opportunities for us. -------------------------------------------------------------------------------- Ivan Philip Feinseth, Tigress Financial Partners LLC, Research Division - Director of Research [40] -------------------------------------------------------------------------------- With other phone manufacturers as well? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Ivan Philip Feinseth, Tigress Financial Partners LLC, Research Division - Director of Research [42] -------------------------------------------------------------------------------- Well, so in your decision to get out of conferencing, you mean just the conferencing hardware, you're still going to focus on implementing Dolby Voice into other conferencing products? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [43] -------------------------------------------------------------------------------- That's right. We're still supporting our enterprise communications partner, winding down at the sale of the physical hardware for conference rooms. -------------------------------------------------------------------------------- Ivan Philip Feinseth, Tigress Financial Partners LLC, Research Division - Director of Research [44] -------------------------------------------------------------------------------- And with the cash that you have when you think about acquisitions, is there any specific direction you envision like that you could extend your brand and can do? -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [45] -------------------------------------------------------------------------------- Well, I think what we've been -- the theme for the day has been, in addition to expanding the presence of Dolby Vision, Dolby Atmos across our existing categories, we see opportunities in new forms of content in gaming and music, but with Dolby.io, really extending into all the ways in which we enjoy media and in their activity experiences. So when we think about acquisitions, it's the are there opportunities that could accelerate or expand our opportunity. We don't look at it like we have this capital, so we need to go do an acquisition. And that's something that we're obviously, like any company, we're always looking at the opportunities that come our away. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- It appears we have no further questions. I'd like to turn the conference back to Kevin Yeaman for any additional or closing remarks. -------------------------------------------------------------------------------- Kevin J. Yeaman, Dolby Laboratories, Inc. - President, CEO & Director [47] -------------------------------------------------------------------------------- Great. Well, thank you, everybody, for joining us today. Thanks for the questions, and we look forward to updating you on our progress. Have a great day. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- That does conclude today's conference. We thank you for your participation. You may now disconnect.