Q4 2019 Earnings Call
Please standby.
Ladies and gentlemen, thank you for standing by welcome to the Dolby Laboratories conference call discussing fiscal fourth quarter and fiscal 2019 results. During the presentation, all participants will be in listen only mode.
The words, you will be invited to participate in a question answer session.
If you have a question you'll need to press star one day telephone.
Reminders. This call is being recorded Thursday November 14 2019.
Now I turn the conference over to Jason D Director of Investor Relations for Dolby Laboratories. Please go ahead Jason.
Good afternoon, welcome to Dolby Laboratories' fourth quarter, 20, Nike Inc. earnings Conference call.
Joining me today, our Kevin Yanni, 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 could differ materially in the statements made today.
A discussion of some of these risks and uncertainties can be sound <unk> earnings press release that we issued today.
Under the section caption risk factors as well as you know 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.
Your commission or future events.
During today's call will discuss GAAP and non-GAAP financial measures.
A reconciliation between the two is available in our earnings press release, and Dolby Laboratories, Investor Relations data sheet on the Investor Relations section of our website.
Actually the cost at today's call Lewis will begin with the recap Adobes financial results and provide our fiscal 2020 outlook.
It will finish with a discussion of business.
So with the introduction behind US I will now turn the call. Okay. Thank you, Jason and good afternoon, everyone.
As a reminder, we adopted you see six so six the new revenue accounting standard at the beginning of this year, we use the full retrospective method not required us to recap previous years revenue. So within our earnings release the table that shows the airplane 18 quarterly revenue figures as adjusted under six all six business.
Same table that we published last quarter. So any prior year revenue numbers I refer to my commentary are those recasted number under six thing so let's go through the Q4 results.
[noise] in the fourth quarter of fiscal 19 total revenue was $299 million compared to 302 million in Q3 and $241 million in last years Q4.
Licensing revenue for the quarter was 265 million wall products and services revenue was 34 million both those.
Were in line with the guidance that we gave at the beginning in the quarter.
Here's my commentary by end markets broadcast represented about 44% to 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. Oliver broadcast revenues were down about 12% recoveries were lower than they were in Q3.
Mobile devices represented approximately 17% of total like thing in the fourth quarter. You know Q4 is a difficult quarter to make meaningful year over year comparisons in the mobile space because sixtyl six recast card last year's Q4 mobile to be about 1% of licensing which is obviously not reflective of the again.
Any business, we have not space, but I can't 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% they'll due mainly to timing of revenue under contracts.
[noise] consumer electronics represented about 14% told the licensing in the fourth quarter.
You like they were down about 8% year over year, due mostly to lower recoveries and on a sequential basis see increased by about 30% driven by higher adoption across several of the consumer device categories, including sound bars and the amazed.
[laughter].
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 ASP.
But on a sequential basis PC revenue was roughly flat.
Other markets represented about 16% of total licensing in the fourth quarter [noise].
They were down by about 8% year over year due to lower recoveries.
Offset partially by higher revenues from Dolby cinema from game.
On a sequential basis other licensing was up about 8% compared to Q3, driven by higher revenues again.
Products and services revenue was $34 million in Q4 compared to 30.3 million in Q3, and 25.9 million in last years Q4 growth in this area was driven by higher sales of our newer offerings in this animal 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 in licensing in Q4 that we don't anticipate to recur in Q1 and going forward.
[noise] products and services gross margin on a GAAP basis was 14.2% to fourth quarter compared to 12.8% in Q3.
Q4 product gross margin was also a little below what we have projected that was due to some inventory write downs items that we decided to discontinue.
Looking forward into Q1, we do anticipate the product gross margin should bounce back up to more typical levels.
Product and services gross margin on a non-GAAP basis was 18.9% fourth quarter compared to 16.3% in Q3 in the same common supply here, what I said about yeah product gross margins.
Operating expenses in the fourth quarter under GAAP basis for $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 bad.
The 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 into fourth quarter was $51.2 million on the GAAP basis or 17.1% to revenue.
Compared to $12.6 million or 5.2% of revenue in Q4 last year and like to note that last year's Q4 revenue was recap under six to six another was lower than what it had been over six supply and that ripples through to a lower operating income number 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 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 guided because of discrete charges during the quarter.
Net income on a GAAP basis in the fourth quarter was $43.9 million or 43 cents per diluted share.
Compared to $26.7 million or 25 cents per diluted share in last year's Q4.
Yes, well be able our guidance due to the restructuring charge and the higher tax rate I just mentioned the second go.
Net income on a non-GAAP basis in the fourth quarter.
Was $67.6 million or 66 cents per diluted share compared to $23.5 million or 22 cents per diluted share in Q4 last year and non-GAAP EPS was inline with what we had projected.
During the fourth quarter, we generated about $130 million in cash from operations and ended the quarter with little over $1 billion in cash and investments we bought back about 900000 shares of our common stock in Q4 and ended the quarter with about $360 million stock repurchase authorization still available.
We also announced today that we're raising our quarterly cash dividend by three cents per share from a previous payout of 19 cents per share to a new payout of 22 cents per share, which will be payable on December four 2019 to shareholders of record on November 26 2019.
Essences Q4, let me give a quick summary, the results for the full year.
Total revenue in F. Why 19 was 1.241 billion compared to 1.055 billion in Fyeighteen as Recasted under six so six.
Within that if why 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% revenue.
Operating income was $380 million on a non-GAAP basis or about 31%.
Net income for the year on a GAAP basis was $255 million or $2, a 44 cents per share or per diluted share.
And yet 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 full year.
Why 20 in total we anticipate that total revenue will range from 1.300 billion to $1.350 billion.
Within that total we estimate that licensing will range from $1.160 billion to $1.200 billion.
Our products and services, our estimated 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 TV set top boxes, but we are projecting lower recoveries, which was largely offset this for the year.
In mobile we expect revenues to grow noticeably above the company average with contributions from our brand new technologies and from our innovative patent licensing programs.
Consumer electronics is projected to grow primarily from dnase sound bars and smart speakers.
And in PC licensing, we expect some continued downward pressure from a ASP due to mix, but some of that we expect will be offset by adoption of our newer technologies mpcs.
In other licensing we expect growth from Dolby cinema, and we currently plan to add a similar number of new screens in 40, Twond as we Didnt F. why 19.
But also on the other category, we are projecting right now lower recoveries in automotive and lower gaming revenues because of the lifecycle of the gain councils.
And finally in products and services, we're 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, the $20 million for the year for both GAAP and non-GAAP .
The effective income tax rate for the year as expected range from 18% to 21% on both the GAAP and non-GAAP basis.
Based on the factors above we estimate the full year diluted earnings per share will range from $2.64 to $2.74 on the GAAP basis.
And from $3.40 to $3.50 on a non-GAAP basis.
Well, that's the full year, let me move onto the first quarter 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 at $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 range from 214 million to 220 million on a GAAP basis.
From 192 million to 198 million on a non-GAAP basis.
And now so we see this increase in Q1 over Q4 and that increases being driven by the timing of certain marketing programs, where the activities that drive our spending or concentrating more of the first half of the year then the back half of the year. So you can look at that relative to the full year guidance to get a sense.
Other income was 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 the GAAP and non-GAAP basis. So based on a combination of factors I just covered we estimate that Q1 diluted earnings per share.
Range from 27 cents to 33 cents on the GAAP basis, and some 45 cents to 51 cents on a non-GAAP basis, So now I'd like to handed over to Kevin Kevin.
Thank you Lewis and good afternoon, everyone.
Financial results in 2019 cap off another solid year financial performance for Dolby.
Over the last three years revenue has grown on average about 7% annually at our earnings per share has grown at an even higher rate was primarily driven by the progress we have made with Dolby vision Dolby Atmos Dolby cinema.
Today I'd like to reflect on that progress and now positions to continue to grow as we head into 2020.
I'll also highlight how we're 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, we're 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 apples adoption of the combined Dolby vision and Dolby Atmos experience.
With the release of Iowa, 13 America, less Catalina iPhone, iPad and Mac both products now support both Dolby vision as Dolby Atmos for the first time.
Apple TV plus launch this month at all Apple original content isn't Dolby vision with those 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 at Disney plus this week supporting Dolby vision, and Dolby Atmos across their library of content, including the first seven Star Wars felt which are now available in the combined format.
Also most of their original content, including demand Lorien is available in Dolby.
In India Eros now recently became the first OTG service in India to launch with Dolby Atmos and will soon be delivering their upcoming originals in the combined Dolby vision in Dolby Atmos experience.
Hi, particularly excited about the launch of Dolby Atmos music this quarter.
Amazon Echo studio is the first Dolby Atmos enabled smart speaker with Amazon music HD streaming a growth growing library of content from Universal Music group and Warner music.
It's 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've 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 what are the largest music festivals in the world was broadcast and Dolby Atmos in Brazil.
Also last month SDN began broadcasting their college football Primetime games in Dolby Atmos, let's Directv and Comcast.
For Dolby cinema at the theme in 2019 has been global expansion.
The first Dolby cinemas in the UK, Japan, Germany, and Kuwait opened during the year.
And last month, we announced a partnership with Keno OCO to open the first Dolby cinema in Russia.
Including Russia, Dolby cinema will have a presence in seven of the top 10 global box office markets.
Overall, we now have about 240, Dolby cinema sites open globally.
Well the growing amount of content of devices Dolby vision, and Dolby Atmos are setting a new standard and now 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. Let me take a few minutes to highlight some of these opportunities.
We're still at an early stage in the adoption cycle for Dolby vision in Dolby Atmos.
For example, we've made great progress with Dolby vision on Fourk Tvs doubling volume each year over the last three years.
We now estimate the Dolby vision is present on about 10% of Fourk TV shipments in 2018.
We see opportunity ahead as adoption of both Dolby vision and Dolby Atmos expands beyond the high end and as the 14 TV market continues to grow as a percentage of total TV.
And beyond Tvs, we are it even earlier stages of adoption in categories like mobile and PC.
In previous technology adoption cycles, we have inflection points that resulted in higher revenue go for the company and we do know the formula for this increase the amount of compelling content available Adobe and continue to make it easier and more valuable for partners to adopt ultimately increasing passion for the Dolby experience amongst.
Tumors around the world.
Sites to watch for as we go forward include new partner wins deeper penetration throughout our partners device lineups and adoption of new categories of devices.
[noise], 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 to 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 and unique position throughout the premium entertainment ecosystem.
We enjoy broad adoption of our audio codec 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 that 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.
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're focused on the road ahead to advance the adoption of Dolby technologies within consumer entertainment emphasis.
Ecosystem.
This gives us confidence that we'd be able to sustained 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 cure that.
Thank you, ladies and gentlemen, if you wish to register a question for today's question answer session. You may do so I pressing star one.
She would like to withdraw your question. Please press star too.
Hey, Speakerphone, please pick up your handset before entering your request.
Please be sure to identify yourself and your from at the outset to be fair to all participants we ask the limit yourself to one question and a follow up question until all participants have had a chance in the first route if time allows it will then come back to answer any remaining questions. One moment. Please for the first.
Question.
Your first question will come from Ralph Schackart with William Blair.
Hi, Good afternoon, Kevin a couple of questions just on some of longer term commentary out accelerated growth I understand that you have.
Dolby Atmos and Dolby vision to come together, but can you give us a sense of when you talk about accelerating growth what's the timeline 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 switch the six so six and I guess previous fiscal year, but how comparable as 2020.
Now to 2019, given the switch just trying to get a sense.
So true growth rate here or if there's any accounting treatment there and I have follow up thanks.
Sure so.
So I'll take the first of all that might have Louis give some color on on the our first true comparison.
Here.
So Ralph.
Yes, so thinking for technology. We have we are really proud of the momentum we built up with Dolby vision, and Dolby Atmos and that's what gotten as as allowed us to.
Get to this mid to high single digit growth rate and.
And we see a lot of opportunities ahead and what.
What I.
Laid out in the script today are some of the areas, where we see opportunity to accelerate that growth rate any further and.
I guess the short answer to your question is are we you know I do believe that that those could.
B. I think you asked whether we get 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 available content that increases the.
The the proposition for why people would want to include us on more devices.
You look at the progress you've made just recently.
Where are you now can enjoy Apple TV plus Disney plus.
College football on Saturday Night, and all of these are more reasons to want to Dolby vision Dolby Atmos experience. Those are the things that are going to drive us toward that inflection point and we're just heads down working to get there as fast as we possibly can.
And as I said I'm very excited about new context for Dolby vision, and Dolby Atmos and with music. This quarter. We think that's the beginnings of something which can which can open up devices for us that we haven't had the opportunity to play a recently.
Louis do you want to talk about the six so six six of US Yeah. We really haven't spent much time in company on six I think so it's nice to touch on the topic it didn't taking effort.
Yeah, I think route 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 six so six we recasted 18, and 17, so that it could be a comparison point. So that means that I believe Cisco 20, the guidance, we're giving versus fiscal 19 is a fair comparison both no.
Well, we accounted for under six so six but sort of think of it as a company operating under six opex as opposed to backwards applying rules.
Okay. I know you can't go back in time to kind of readjust to get a different.
Prior year comparison, but let me ask it's different question a Q1 just.
The guide I think 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 topline and specifically.
Yeah. 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 in the first thing I'd point out is our our Q1 19 to Q1 to one pattern isn't actually that different than the 18 to 19 pattern I think.
No.
The F. Whitewave consensus number were pool was probably set of numbers that had to make a lot of broad assumptions as we speak hard to speak for a number we were responsible for I don't think there was anything particularly quirky other than the shape of our revenues will show probably a bigger spike in Q2 that maybe some of that was expecting Q1, but there's nothing.
In particular about the way we run our business. That's that's driving differently also last year in F. Why 19 under six so six in Q1, we did have some extra revenue the came from hybrid deals in the Dolby cinema space, which well sort of lumpy because those are those are not the larger.
Part of our business, there and we actually Didnt have any more of those the year progressed and so that also creates alluded to that of a hit in terms of the comparison. So you isolate for that that that's also causing some of the noise, but other than that I think we looked at the whole year I think right now our whole year guidance is a range of 1300, the 13 50 with the midpoint of 13.
25, or one three to five and that's not that far off from where it's the laws and a lot of that differences that we landed in Q1 and for the rest of the year in totality that certain lines up in terms of our new seasonality I think even last year. We are signaling that Q2 is not uncommon quarter for us to see.
A little bit or surgeon revenue just from the pattern of our activities and the way our customer activities work.
Great and then sometimes on up from time to time, you'll talk about the growth and new products can you give a sense of that for 2020 and I'll turn it over to the other question. Thank you.
Sure.
Sure so.
You'll remember that we came in to the year, having done about a $100 million between our consumer imaging initiatives Dolby cinema in Dolby voice as saying that we felt we could grow that at least 65% again in night team we.
We had couple of benefit of our Q1 off items, but excluding those we came in just above that right around 170.
Going forward.
I think we've.
We've come to 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've further laid out today.
Okay. Thanks, Kevin Thanks.
And next will be Steven Frankel with Doherty.
Hi, just a follow up on Ralph's question, let me just understand the guidance so.
The fact that at the midpoint Q1 revenues down about 6%.
He 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.
Yes.
Okay, and how they do over here.
How big were those hybrid deal so, let's let's kind of zone in on that.
How much was that last year.
Let me try to surround that last year in Q1, we actually exceeded our revenue projecting that quarter, probably in the neighborhood of our off top of my he had $7 million to $10 million and we indicated that time that a lot of that was driven by some of these hybrid deal do you may remember these are the time, Kevin I clarified that our core business.
Really the revenue sharing business, but in some instances where for financial reasons is a currency reasons is or whatever there.
Hybrid deals can be a more.
Applicable approach, we had that in Q1, and we didn't really have that much volumes out for the remainder of the year. So that gives you a sense of the scale of last year and we're not projecting at scale to happen again this year in Q1.
Okay. So so we're going to stick with your belief that this is a and a mid to high single digit growth business with the potential to layer on some new initiatives to try to drive that harder.
Yes, and I mean.
We are.
It's it's I would say, it's easier for us to form our guidance on annual basis that a quarterly basis, it's important to do a quarterly basis or.
But I, but but Steve when we look at.
Our current position within each of our major areas of technology and the the the wins we have in house.
That's what's giving us confidence in that in that continued growth and beyond that as I said, we look for opportunities, where we can hit an inflection point.
Got a seasoned executive here has been through many of these cycles, who likes to point out to me that.
We know when we hit an inflection 0.6 months after we've had and there's some truth in that and that we just have to we if we when we keep our head down and we keep expanding content, we kept getting more devices.
And we keep creating.
Desire for for these Dolby experiences.
We have opportunities to even higher.
Higher rates of growth than the ones that we are.
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.
Thank you for calling out the Dolby vision number.
This year's holiday what was that a year ago.
The TV penetration Terry.
So the number I cited today is 10% of Fourk Tvs at according to our data Fourk Tvs are it and that was fourk TV shipments during the year and according to our data Fourk TV shipments were about 50% of.
Total TV market I don't really have the percent number for you, but I did mentioned in the call Steve that we've been doubling our shipments about every year that 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 were 10% of Fourk Tvs.
If you remember right whats gone down a path of a percentage of premium Fourk Tvs and I didn't set myself up for a repeatable statistic because the bar on on on premium it turns out or is not a uniform ones. So we're on 10% of Fourk Tvs and we've been doubling unit shipments every year since we.
Launched it in 2016.
Okay, and just a quick update to two questions one on Dolby cinema and one on the wider cinema products business in terms of Dolby cinema Where's the.
Where's the backlog today.
So we said on the call we have 240 installed and we're at about 200 and backlog and as Lewis said we.
We feel like we're at a good position to increase the screen count or about the same.
Pace, we did last year I would say that if you look at our.
Our wins over 2019.
We entered quite a few new markets and we feel like each of those could represent.
The beginnings of some place to grow further, but we have some good wins in the UK, Germany.
Japan.
And recently, we signed Russia are all are all new markets for us.
So what I'm sorry.
No not part of brick tasty.
No that's probably going to be question. It comes out anyway, but people have been asking about all what's the size of Dolby cinema or the my overarching comment would be that typically when we look in the past that chunks of revenue that we start talking about separately, they usually have to get to either like 10% or higher millions in revenue and right now our Dolby cinema Rep.
These are still below 5%, but at least they use some say and it's growing as Kevin just had a second ago. The number of screens were adding per year has now stabilized at a piece of so look fairly similar but I'll give you some sense for the size of Dolby cinema revenues as it is today as we go forward, we will look for more opportunities to try to break that out right now it's still sub 5%.
And you're still set aside satisfied with the unit economics and.
Would you say that they are improving as it matures kind of whats the same store sales look like in Dolby cinema.
Thanks.
Well in our most.
Our our our largest market of course is us market, where we have about.
Between 130 840 hours of those screens.
And.
We are encouraged of all of our all of our data we are the highest.
Hi, it's performing format as.
As judged by box office for screen.
So all the unit economics have been.
Positive and and we really feel really good about that I think for a lot of these other markets might the early for me to draw any broad generalizations, yeah, as we incurred as we grow the screen count yeah.
Okay, and then just to circle back to the traditional cinema products business in the issues you brought up I think with last quarter about yes softer demand what what's happened in the last quarter.
I think it's a stabilized this quarter, we hit our target and guidance on similar products to the guidance. We give we always try to make sure. We are realistic about that 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 try.
Back what's going on so I think to hit that we took in Q3 and then I adjusted the guidance for Q4, we try to reset to what the current environment is as opposed to 5000 cuts.
Okay, and then the last one.
Any update on the velocity of Dolby voice now that Youve really focused in on that hotel room market is that.
Been successful.
We Dolby voice grew this year didnt grow as much as we head.
I would have liked.
The coming into the year you rightly remember we're focused on we just added a blue jeans is a major how to were partner.
About partway through the year actually most of the we ended the year, we also introduced with them.
Aruba The service model. This is so we're going from a capex purchase model, which is still an option to.
There are customers are able to.
Avail themselves with 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 the year and that was the first full quarter without model.
We added logging in during.
The fourth quarter and they also have that model of course that would be less revenue fraud, but nice recurring revenue stream over time. So we're still focused on the hurdle remodel and in particular with this this ability to offer.
A wave of purchasing the experience that I think as much for natural in this market.
Okay, great. Thank you Kevin.
And our next question will come from Eric Wold with B. Riley.
Thank you.
Couple questions I just wanted just following on the last one around.
The the cinnamon market I guess, it sounds like you're anticipating the competitive environment you saw that drove the hit in Q3 and a lower guiding Q4.
Continues into 2020, I guess first is that fair and then two in your guidance for Tarkan services for the year.
You know is Dolby cinema growing offset by traditional similar products were both growing.
Hi, Eric This is Louis just to be clear the guidance I gave about cinema products being flat is specifically just the product revenue for cinema products. We do anticipate that Dolby cinema. The initiative, we've heard of Dolby cinema will grow in my 20 forestall.
Okay.
And then.
Going back to the question on the Q1 timing not not to beat that.
Yes, you called out the marketing spend.
The more front weighted.
I guess, one what does that spending going towards something new they haven't spent on before it is just the is the timing of the spend as that shifted at all versus versus prior years.
It's the timing that is shifting yes, yes.
Look our marketing is driven toward.
So a combination of of industry events, the being where our partners and prospective partners are and also engaging in creating.
And understanding and awareness when you have Adobe experience you know you're having a great. It is and leveraging partner marketing to tell that story and make sure that.
That that consumers are appreciating the partnership we have that results in these great experiences and this year.
We're 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 award seasons, we think Thats, where the moments are that we want to.
Part of it and you have so within the same overall budget as a percentage of revenue we're going to wait at more into the first half of the year and yeah, you'll see us try some new things with those dollars to to make sure that messages coming through and that.
That that people are aware of.
Where they can get Dolby experiences and create desire for them.
Perfect and then Lewis the higher cost of goods and I think in Q4 was that.
Due to the write downs the products you discontinuing or what was causing you said that would not recur going forward, how much was kind of that incremental.
Yes, no. So the write down of the products that we just continue that shows up in product gross margin.
Extra causes sales and licensing with just some additional cost we incur relative to some are 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.
Great and then 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 sensitivity of what I guess, what's what's causing an expectation for lower recovery and then kind of whats the delta between.
Total recoveries and 19 and whats assumed total recoveries in 2020.
Yeah.
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 at 0.1, we use models to try to anticipate what those might look like and currently our model anticipates that it'll be lower.
Partially because that by 19 year in little bit higher beyond that we tried to do the best we can to see what markets of land in and so I recognized when I give guidance in Q1 as we progressed through the year I will give you guys updates on how that actually lands, but at least give you. Some sense of this those back and forth some years as higher some years as low.
And it just all happening and that's why 19 in total for the whole company, we did see higher recoveries.
Perfect. Thank you guys.
Yes.
And our next question comes from Paul Chunks with JP Morgan.
Hey, guys. Thanks for taking my questions. So.
First off can you just talk on the puts and takes.
On.
On your free cash flow, which kind of looks like it's down about 20% for fiscal year 19.
Looks like you had a drag on on some working cap and Capex was a bit higher. So if you could you expand on what's going on with your cash cycle days.
How six to six kind of impacted and then as we look out to fiscal year 20 issues. You know 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 you're performing when it come we'll have got him out. Thanks.
Following.
Sure are the first thing I'll I'll, maybe clarify for the rest of whoever is listening in on the calls I don't think that our cash flow from operations was down 20% and they've been down 12 million, but if I look at it I mean, I don't have right from the cash flow statement is in the press release. So yes, you alluded to it and your question, but for the most part are busy.
This is continuing to function as a business, you've always known and love, which is at the high cash flow producing business a high profit margin business and that for the most part these fluctuations that you see whether the quarter to quarter year to year are to some extent affected by things going on our balance sheet and as I've talked about during the course of roughly 19.
Some of these are related to six so six because remember under six so six we're now required under those new accounting rules to effectively recognize some revenue quarter sooner than we were and that has affected my balance sheet I think as we move into halfway 20, those comparisons will now become more pure you will find night.
He was our first transition year, where we started booking these estimated revenues each quarter, but understand that does not necessarily mean, we can build the customer a quarter sooner. So as we work our way through that's I think our cash flows will start normally for example, if I look narrowly at Q4 cash flow Q4 cash flow that we just.
Ordered was 130 million from from operation above net income. So it's a good example of how we got a little bit of a positive boomerang, but what was the lower number in Q3. So I think as we move forward in the F. why 20, we would expect to have our cash flow from operations and our free cash flows start to meet what you were seeing before even nursing.
No no substantial change in terms or anything like that.
Gotcha.
And then if I if I look at your guidance at the midpoint looks like your revenue and kind of your your pro forma opex are on pace for kind of similar growth since 6% to 7% but.
I guess your you know 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. Thank you.
Sure I'll I'll start off with sort of the numbers comment I'll, let Kevin finish off within qualitative pattern, 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 and neighborhood of 7% and opex to grow in the neighborhood of five and half percent. So within that context, Kevin I have committed that we would at least maintained operating margins non gap in the neighborhood of 31 for.
And I think all of 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 we helped or affected by the rate of revenue growth as Kevin said the second to go.
We do think there are opportunities for the revenue growth to be higher than that we're 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 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 that is kind of the model that we're trying to run.
Thank you.
Well.
And moving on to Jim Goss with Barrington Research.
Thanks couple quick questions first with Dolby cinema is the economic model across all of these markets a joint venture type model revenue sharing model.
As I think it is in the United States.
The the vast majority are.
Pure revenue sharing and as we've talked about a moment ago, we did have.
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.
Bye.
The the characteristics of the individual market in particular, if its a.
Pending on the.
But it wasn't Theres financial risks are things, where we want to 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.
And how are those dollars usually in the licensing revenues or I think some of the theaters, where you might sell some product of makena product.
Area.
So just what revenue share your income statement.
So revenue sharing revenues will be in licensing and where we do sell product will include that in products and services.
If you looked across your income statement.
And in terms of Dolby Atmos, and vision and cinema, some say do get into various categories.
What share of your.
Total revenues to think are affected by those services.
And technologies.
Yeah.
Obviously, we yeah I Shouldnt I don't see we don't breakout 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 significant contributor to our growth rate.
We don't anticipate breaking out what you just asked Jim which as a separate.
Commission revenue solely from just vision that most of the goes into a lot of different devices and as you already set a second ago. Dolby cinema is effectively a dolby experience that combined Dolby vision, Dolby Atmos and as I indicated our total Dolby cinema revenues today are less than 5% of companies right, but growing.
Okay. Another category I'm encouraged to see that music as being affected by your technologies same for a while that.
I tunes said.
Recreated the some momentum in music, but dumbed down the audio quality.
I am wondering so this is a good trend.
Are there limiting factors to be able to take advantage of the.
The qualities your bring to the table in your various and music initiatives.
As there always seems to be a limiting factor the.
Are you know so.
Leased a qualified part of the system will.
Caused the a system.
To answer the technology it into a.
Not come through as should intended to and are are there.
Number of things you have to do to really get it to where it will be fully appreciated and fully embraced.
Yeah. 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 real.
The good about the early days of Dolby Atmos music.
The artists are very excited about it and today you can you know there's music from.
Lady Gaga the weekend air to ground a post below the list goes those goes on is 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 step one and we feel really good about that staff and we've been.
Gauge 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 in 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 ACO studios. So that's that's where you can experience it today.
We know that Amazon is that they intend to expand the availability the device for print which.
Can which Amazon music can stream to.
And of course, we're focused on broadening it as as far as we can both in terms of distribution and device. So.
It looks a lot like.
You know the cycles that were used to but we think we're off to a really strong start and I and it.
As I said in the prepared remarks, one of the reasons. We're excited about it is that increases the value proposition for partners that are working with us today consumers, who have our devices today ultimately, but also opens up the ability to sell into devices.
That are that are really music first devices you take the success we've had in the mobile space for instance, and that is primarily at the high end 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.
The smart speaker and home product space and in cars as well.
Okay, Great and last thing you are a long lead time tape business in terms of creating a technology and get it in the market the way.
Dolby Atmos envision have a developed over this past three years are there any new technologies now at the sort of stage that they were at three years ago.
And we'll talk to their there are three years in the same way.
Yeah, we're we feel great about our pipeline of innovation and and some things you see coming to life today, some things I.
I did mentioned in the call that Dolby voice, which of course.
I talked a moment ago about the progress.
And how we're doing in the how to 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 thats something that sort of.
Far along in the cycle I think on another ended at scale.
We are also looking I mentioned in the script, we're looking at ways that we can bring our decades of experience at innovation, our current innovation as well as our future innovation.
To all of the increasing ways in which we experience our audio visual content.
<unk>.
One of the initiatives, we have which is at early stages, but is.
That is in market is the we've made.
Our technologies available I'm in a way that developers can access them directly in particular for the communication 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 a that's early days, but we think the very the notion that this. This this is an interesting way for us to be able to make our technology.
In the and our experience in the pharma 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.
Okay. Thanks very much.
Thank you and that does conclude the question answer session I'll now turn the conference back over to you for any additional for closing remarks.
Right well. Thank you everybody for joining us today, and we look forward to keeping it posted as we move into 2020. Thank you.
Well. Thank you that does conclude today's conference where do you think you for your participation have a wonderful day.