Q3 2021 Dolby Laboratories Inc Earnings Call
Ladies and gentlemen, please remain holding the conference will begin momentarily again, please remain holding.
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The Kaufmann.
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Ladies and gentlemen, thank you for standing by welcome to the Dolby Laboratories conference call discussing fiscal third quarter results during the presentation all participants.
Since we'll be in a listen only mode. Afterwards, you will be invited to participate and a question and answer session at that time. If you have a question you will need to press star 1 on your telephone as a reminder, this call is being recorded Thursday July 29, 2020, what I would now like to turn the conference call over.
Jason D Senior director of Finance and Investor Relations for Dolby Laboratories. Please go ahead Jason.
Good afternoon.
Welcome to Dolby Laboratories third quarter 2021 earnings conference call joining.
Joining me today are Kevin Yeaman Dolby.
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 fourth quarter second half and fiscal 2020, 1 outlook and our assumptions underlying that outlook.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today.
In particular, the extent of the continued impact of COVID-19.
And our business remains uncertain at this time.
A discussion of these and additional risks and uncertainties.
Sound and the earnings press release that we issued today under the section caption 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 does not intend to update any forward looking statements made during this.
Can be as a result of new information or future events.
During today's call, we will discuss GAAP and non-GAAP financial measures a.
A reconciliation between the 2 is available and our earnings press release, and and the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website.
As for the content of today's call, Kevin will start with a discussion of the business and.
And Louis will follow with a recap of Dolby financial results and provide our fourth quarter second half and fiscal 2021outlook.
So with that introduction behind Us I will now turn the call over to Kevin Kevin.
Thank you Jason.
And good afternoon, everyone.
Q3 was another strong quarter for Dolby or.
Our revenue and earnings for the quarter were solid and we are on track to deliver annual revenue growth of over 10% and year over year earnings growth and an even higher rate.
At the same time Dolby experiences are accessible to a growing number of people.
And the world highlighted by the launch of Dolby Atmos on Apple music and the Tokyo Olympics Broadcasting in Dolby vision and Dolby Atmos.
Before Louis takes you through the numbers I wanted to highlight the recent progress we've made and enabling Dolby experiences across a much broader range of content, which creates opportunities.
People are renewed revenue and earnings growth.
The inclusion of Dolby Atmos, and Apple music marks a significant step forward and bringing Dolby Atmos music to a much larger audience and establishing it as the best way to create and listen to music.
The Dolby Atmos music experience has been prominently featured by Apple and.
And it's been met with positive and enthusiastic reactions from artists and industry partners and consumers.
Apple music subscribers around the world can easily access albums, and playlists of Dolby Atmos songs and can enjoy their music across apples wide range of products that support the combined Dolby experience.
And recently Dolby Atmos enabled Android devices can also enjoy Dolby Atmos on Apple music.
Beyond Apple music, Naver Vibe, and music streaming service and South Korea launch support for Dolby Atmos this quarter and.
And Additionally, our partners like title Amazon music, whom Gama.
Number and on Gommie continue to grow the number of songs available in Dolby Atmos on their streaming services.
As the ways in which consumers can enjoy Dolby Atmos music expands we are also focused on growing the library of music through our engagement with artists and music distributors.
Distro Kid, a leading distributor.
There are independent music announced that day will be delivering songs and Dolby Atmos on both Apple music and title.
We see enthusiastic engagement from popular artists, including Ariana Grande P. T S. Billy Eyelash and glass animals, who are among the many artists highlighting.
And the availability of their music in Dolby.
As we expand the availability of Dolby Atmos music to consumers, we add to the reasons to adopt Dolby Atmos and mobile P C and automotive.
We also had some exciting wins and live broadcast and this quarter.
Comcast is currently.
Bring N B C's live Tokyo Olympics coverage in both Dolby vision, and Dolby Atmos to their X 1 customers.
This marks the first time that the Olympics can now be enjoyed and the combined experience.
Also this quarter Euro 2020 broadcasting in Dolby Atmos across multiple broadcasters.
In Poland, Malaysia across the Middle East and North Africa.
And the Euro vision song contest was broadcast in Dolby Atmos live to viewers in the Netherlands.
By enabling a growing number of live broadcast events, we build upon our strong presence and movie and TV content and add to the value proposition for.
For deeper adoption of Dolby and Tvs set top boxes D amaze and mobile applications.
The momentum of Dolby vision, and Dolby Atmos content across streaming services continues to be strong as our partners bring new titles in Dolby vision and Dolby Atmos.
Paramount plus added support for.
And most when they recently released a quiet place 2 and the combined Dolby experience.
We have also seen our partners expand the amount of original local content that is enabled and Dolby.
And I G recently announced they will be making Dolby vision and Dolby Atmos content available on their international App that is available and over 100.
Dolby and countries and will be enabling Dolby experiences and new original local content on their platform.
Apple TV plus is enabling new local episodic content in Dolby vision, and Dolby Atmos and Korea.
Netflix released their first original film for Thailand, and Dolby vision, and this quarter and Disney plus.
And 90 star is enabling new local content for India and Dolby.
Stan a leading OTT service in Australia now supports the combined Dolby experience on their platform and.
Enabling relevant local content in Dolby is another important factor and driving more adoption across the global markets that our OEM.
Oh and partner served.
This quarter Xiaomi and Sky worth released new TV models, highlighting both Dolby vision and Dolby Atmos and.
And Japan Regs that launched their first TV with Dolby vision IQ, adding to a growing list of partners that includes LG Panasonic T C. L. Xiaomi.
And <unk> and high sense.
Say, Jim Com recently launched their all in 1 video soundbox, which combined and set top box and sound bar functionality with support for Dolby Atmos.
And LG announced the rollout of updates coming to their OLED Tvs that optimized for the best gaming experience and Dolby.
Yeah.
Gaming is another area, we are focused on growing the number of experiences and Dolby and if we and we began to see momentum with mobile game is becoming available in Dolby Atmos.
With gaming and music, we are enabling more of the relevant content for mobile phones and Pcs to now be Dolby.
<unk>, adding to the reasons for adoption on these devices.
This quarter, we saw Dolby Atmos highlighted across several mobile phone launches and India, including auto and they're real me branded phones and Jeremy's read me gaming smartphone.
Within P C. Samsung recently launched a new galaxy.
Obi vision lineup featuring Dolby Atmos.
We continue to build on our momentum of Dolby vision, and Dolby Atmos across content services and devices and at the same time, we still see significant opportunity to increase adoption as we grow the amount of content experiences available in Dolby.
But let me shift to cinema.
We now have about 95% of our Dolby cinemas opened globally and our partners remain deeply engaged.
In recent months more content and has returned and has returned to the big screen and we have seen positive signs and box office performance.
This was highlighted in the U S with strong opening.
Turning weekends from titles like Black widow, and F..9 fast saga that we're both available and Dolby cinema.
We continue to see movie goers seeking to enjoy these movies and the best way possible with box office skewing more towards Dolby cinema, and premium experiences compared to pre pandemic levels.
And we are now, bringing Dolby expertise and innovations that create the best way to enjoy content to a much broader range of experiences and real time interactions through Dolby Dot I O.
We are very excited to have welcomed Marie who V to the Dolby team this quarter to lead our Dolby Dot Io efforts.
Marie brings strong leadership experience and a track record of leading engagement with developer communities, including most recently at dock you sign where she established the company's first class developer experience.
During our first year with Dolby Io and market.
Our focus has been on building our engagement with the developer.
E learning from these interactions and continually evolving our offerings to best meet the needs of developers.
Since launch we have seen strong demand for higher quality real time experiences.
We have now begun to rollout a significant uptake that will enable larger scale interactions with more.
Community Anticipant.
We have positive feedback from current customers, who are now live with this release and we are actively engaging a significant pipeline and potential customers that these increased capabilities can directly address.
We see engagement across a variety of use cases, including podcasting remote.
Collaboration tools virtual meetings and online education.
We are excited by the many ways developers are engaging with our Apis and we are just at the beginning of what Dolby Dot Io can enable and creating higher quality every day audiovisual experiences.
So to wrap up.
More per Dolby is available to a much larger audience across a wider range of content today than ever before.
As we build upon our presence and movie and television content with more Dolby experiences and music gaming and live events, we increase the reasons for deeper adoption of Dolby across devices.
And.
We don't I O. We are building the momentum to bring the Dolby magic to a wide range of use cases and experiences.
All of this gives us confidence and our ability to drive revenue and earnings growth into the future.
And with that I'd like to hand, it over to Louis to take us through the financials.
Okay, Thanks, Kevin and thank.
Oh good afternoon everybody.
Kevin said when he kicked off his comments.
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And with Dolby net ladies and gentlemen, and please remain holding low my speaker reconnect.
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And I'm going to dial back in.
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Lewis you May proceed.
Okay.
Thank you Kevin I guess, 1 of the fundings and are working with the pandemic is that we're all doing this on a row with phones and stuff like that and I think I went on mute and for some reason the line froze. So I'm back on now so hopefully hey, Jason can you hear me, Okay give me a thumbs up.
And.
Alright, good okay, let's start all over already.
Good afternoon, and as Kevin said in his opening comments, we did have another solid quarter. So let me go through the Q3 numbers and and I'll walk you through the outlook for Q4 so.
Turning off with revenue revenue and the third quarter was $287 million.
And at the higher end of our guidance range and included a true up of about $14 million for Q2 shipments reported that were above the original estimates and that that item is not uncommon.
On a year over year basis third quarter revenue was about $40 million above last year's Q3, as we benefited from.
Which was higher market towns along with greater adoption of our Dolby technologies and then on a sequential basis revenue was down from Q2, mainly due to timing of revenues from contracts and from patent licensing programs and both of these topics were anticipated when we gave guidance.
So Q3 revenue was comprised of 270.
He and dollars and licensing and $15 million and products and services. So let's discuss the trends and licensing revenue by end market starting with broadcast.
Broadcast represented about 46% of total licensing in the third quarter broadcast revenues increased by about 40% year over year and that was driven.
2 million market volume higher recoveries and higher adoption of our Dolby technologies.
And then on a sequential basis broadcast increased by about 18% and that was due mostly to higher recoveries.
In the mobile space mobile represented about 18% of total licensing in Q3.
And by high mobile declined by about 36% year over year, mainly due to lower recoveries and that was offset partially by higher market volume.
And then on a sequential basis mobile was down by about 24% due mostly to timing of revenue under contracts and we did anticipate that.
[noise] consumer electronics.
<unk> represented about 14% of total licensing Q3 and on a year over year basis, CE licensing increased by about 86% driven by higher market volume higher adoption of Dolby and higher recoveries.
On a sequential basis CE went down by about 22% and that was due mainly.
The timing of revenue under contracts.
P. C. P. C represented about 9% of total licensing and the third quarter PC was higher than last year by about 6% due to higher market volume along with increased adoption of Dolby vision, Dolby Atmos offset partially by lower recoveries.
And sequentially P. C was down by about 51% due mostly to timing of revenue and net lines up with some of the comments I made last quarter about its increase that quarter because of timing.
Other markets represented about 13% of total licensing and the third quarter, they were up about 42% year over year.
And that was driven by higher revenue from Dolby cinema via admin fees and gaming.
And on a sequential basis other markets increased by about 4% due mostly to Dolby cinema and to gaming.
So if I go beyond licensing our products and services revenue was about $15.2 million and Q.
3 compared to $16 million, and Q2 and $11.8 million and last year's Q3, the year over year increase reflects just modestly higher demand and the cinema industry.
So now I'd like to discuss Q3 margins and our operating expenses.
Total gross margin and.
Quarter was 89% on a GAAP basis, and 89, 7% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $3.9 million and Q3 compared to minus $345000 and the second quarter.
And products and services gross margin on a non.
And third basis was minus $2.6 million and Q3 compared to a positive $1.1 million in the second quarter.
Both GAAP and non-GAAP product gross margins were lower than what I had guided and that was due to write downs. We took during the third quarter for conferencing hardware.
Non-GAAP answers into third quarter, and a GAAP basis were $199.1 million compared to 204 million and Q2.
And our operating expenses in the third quarter on a non-GAAP basis were $173.6 million compared to $178.4 million in the second quarter.
Now operating expenses.
<unk> spread below guidance and Q3 and that was mainly due to some of our marketing programs that shifted and timing from Q3 into Q4, and you will see that sort of a mirrored back and reflected in our Q4 expense guidance, where the delta from Q3 to Q4 will be driven mostly.
And this is what marketing programs.
And then our operating income and the third quarter was $56.1 million on a GAAP basis, or 19, 6% of revenue compared to $34.1 million or 13, 8% of revenue in Q3 of last year.
Operating income into third quarter on a non.
Non-GAAP basis was $83.6 million or $29, 1 per cent of revenue compared to $65 million or 24.5 per cent of revenue in Q3 of last year.
Income tax and Q3 was 7.7% on a GAAP basis and 13, 7%.
On a non-GAAP basis.
So net income net income on a GAAP basis, and the third quarter was $54.6 million or 52 cents per diluted share compared to $67.3 million or 66 cents per diluted share in last year's Q3 and I'd like.
<unk> now and as a reminder, last year's Q3 net income and that's both GAAP and non-GAAP included $36 million of discreet tax benefits, which does affect the year over year comparisons.
So our net income on a non-GAAP basis, and the third quarter was $74.8 million or 71.
The point of diluted share compared to $87.5 million or 86 cents per diluted share in Q3 of last year, and and again that that benefits the last year and number of benefits from that onetime tax credits.
For both GAAP and non-GAAP net income in the third quarter was above guidance.
And due to revenue landing at the higher end of our range and expenses coming in below the range.
During the third quarter, we generated $172 million and cash from operations compared to $134 million generated in last year's third quarter. We ended the third quarter with about 1.3 billion.
And cash and investments.
During the third quarter, we bought back about 400000 shares of our common stock and ended the quarter with about $37 million of stock repurchase authorization available.
Today, we announced that the board of directors has approved an additional 350 million.
Hours of stock repurchase authorization.
And if I combine that new approval with the remaining balance that was at the end of June it means that as of today, we have $387 million of stock repurchase authorization available going forward.
We also announced today, a cash dividend of 22 per share.
The dividend will be payable on August 19th 2021 to shareholders of record on August 11, and 'twenty 'twenty 1.
So now let's discuss the forward outlook lap.
Last quarter, when I discuss guidance for Q3, I laid out a scenario that said our second half revenue could range from 560.
Share the 600 million.
And now with Q3 under our belt and having landed and the range. We are updating the seventh second half revenue range to $570 million to 600 million and other words bumping up the lower and by $10 million.
Which means we're anticipating Q4 revenue to range from 2.
<unk> hundred and 80 million to $310 million.
Within that licensing could range from $265 million to $290 million, while products and services could range from 15 million to $20 million.
With respect to mark and conditions and industry analyst reports and I look out over the horizon.
And there's still a fair amount of uncertainty out there and so we are maintaining similar assumptions as what we talked about last quarter, namely that PC Tam and the second half could be higher on a year over year basis, while Tammy for Tvs and other consumer devices could be down and the second half.
We also continue to anticipate that we'll see organic growth on a year over year basis from broader adoption of Dolby technologies across various markets.
And we also anticipate some higher revenue from Dolby cinema as that industry looks to improve which we have seen some signs of in recent times and Kevin.
Couple of comments about that with some of the titles that came out.
So let me move on to the rest of the P&L outlook for Q4 Q4 gross margin on a GAAP basis is estimated to range from 88% to 89% and the non-GAAP gross margin.
And ladies and gentlemen, please remain holding while our speaker reconnect, ladies and gentlemen, please remain holding while our speaker reconnect.
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And went off.
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Can you hear me okay.
Yes.
Operating here okay.
Yes, Mr. Chew. Your line is open you May proceed.
Okay. Good all right, let's move on to the rest of the P&L outlook for Q4, I wasn't quite sure where I dropped off Q4 gross margin on a GAAP basis is estimated to range from 88 per cent to 89% and the non-GAAP gross margin is estimated to range from 89% to 90.
Per cent within that products and services gross margin is estimated to range from about breakeven to $1 million on a GAAP basis and from about $1 million or $2 million on a non-GAAP basis.
Operating expenses in Q4, and a GAAP basis, our estimated range from $216 million to $226 million.
And operating.
Fences and Q4 on a non-GAAP basis are estimated to range from $190 million to $200 million.
As I mentioned earlier the increase from Q3 to Q4 would be driven primarily by specific marketing programs, some of which shifted and timing from Q3 into Q4, but in total Q.
Q3, plus Q4 marketing is expected to land at a similar amount as we were thinking last quarter.
And to repeat a comment I made last quarter marketing expenses for the full year FY 'twenty, 1 would be similar to what they were last year, maybe a bit lower depending on how Q4 turns out.
So let's finish up the Q4 guidance.
Other income is projected to range from 1 million to $2 million for the fourth quarter and our effective tax rate for Q4 is projected to range from 19% to 20% on both a GAAP and non-GAAP basis.
Based on and combination of factors I just covered we estimate that Q4 diluted earnings per share could range.
25 cents to <unk> 40 on a GAAP basis and from 47 to 62 on a non-GAAP basis.
And now that we've provided guidance for Q4, here's our full year outlook that would correspond to that.
FY 'twenty.
Hugh is anticipated to range from 1 billion 280.
And then to 1 billion and $310 million with gross margin ranging from 89% to 90% on a GAAP basis, and 90% and 91% on a non-GAAP basis.
Total operating expenses for the year are estimated to range from $810 million to $820 million on a GAAP basis and.
Millions and $710 million to $720 million on a non-GAAP basis.
And full year diluted earnings per share are estimated to range from $2.79 to $2.94 on a GAAP basis and from $3.57 to $3.72 on a non.
For Mrs.
So with that let me move onto Q&A and turn it over to the operator, so operator hopefully my phone is working okay. Now can you queue up the first question. Thank you.
Thank you, ladies and gentlemen, if you wish to register a question for todays question and answer session. You may do so by pressing.
<unk> Star 1 if you would like to withdraw your question Press Star 2 if you are and if you are on a speakerphone. Please pick up your handset before entering your request please be sure to identify yourself and your farm at the outset to be fair to all participants we ask that you limit yourself to 1 question and.
GAAP question until all quest participants have had a chance in the first round. If time allows we will then come back to answer any remaining questions..1 moment. Please for the first question.
Yeah.
Your first question.
Volume from Ravi Shanker with William Blair. Please proceed.
Good afternoon, and thanks for taking the question first question's on I O, Kevin and the prepared remarks, you talked about a significant update.
Said more specifically it allows larger interactions with more participants.
Just curious was this sort of a limitation.
And kind of the Io offering and there's a sort of widen the aperture for new customers just trying to gauge how significant and such.
And how significant this update is.
Well, it's significantly increases the number of participants we can support in and audio video events and.
And so.
<unk>, we launched with a.
We launched with the.
Our API is about a year ago.
We started out with a number of features that improve capture qualities.
Of course, Dolby voice embedded in the in the service.
And.
So we we began.
And engaging with customers, who had a greater needs for more participants and so the significance of this release.
Is that it's going to enable us to engage with more developers for larger events and and more usage. So we're excited we're excited to bring this to life.
Great I guess now that you have the news release, and then you've had I guess another quarter or 2 and with partnerships such as box can you, maybe just sort of help us understand the monetization opportunities and I know, it's tough to put a number on the market opportunity, but any sort of methods or methodologies are you sort of help us think about how to gauge this opportunity I think would be helpful.
And yes.
Well starting at the very highest level Ralph there's hundreds of billions of audio video interactions going on every month and there's hundreds of billions of minutes of media content in the cloud and we strongly believe that Dolby that people want to have the best quality experiences.
And that's what we're seeing from the developers that are engaging with us today. So we're confident that there's a very large addressable market and so today. What we're focused on is continuing to evolve the platform based on on what we're hearing.
And bringing on more developers and and getting more usage and.
And seeing some really great.
Use cases developing.
And and so you know the monetization models. You know is is a usage basis, and that's where we're seeing that now so it's all about getting getting more adoption and more usage.
Great last 1 and I'll turn.
Turn it over just curious if theres any updates on the CFO search.
Yeah.
Well, we are in the process I'm confident that there's you know there's a lot of great candidates out there. We also have a great team here at Dolby So were progressing and we'll we'll keep you updated.
Okay, great. Thanks.
Thanks, Kevin.
Thank you Mr. Shattered. The next question is from Stephen ranks with Colliers Securities. Please proceed.
Okay.
So.
Last question.
Oh.
And maybe give us that.
Yeah.
No changes.
And with it.
Ship and that group.
Yeah. So thanks, Steve you were cutting out quite a bit not quite as a silent as Louis went on me, but I think I got that.
The gist of your question.
Just to confirm Youre asking.
It came about new <unk>.
Murray, joining and kind of what the focus is for the.
And so the question what do you think.
And if you want to make to the business.
Yeah, So well look I think.
You know first and foremost cheese.
Diving right into.
Ah the roadmap we have you know like I said this was a big release for US, which obviously was in the in the works even as Marie joined them in.
And she is working with the team to.
Look at the roadmap for our platform to look at areas that we can accelerate those that we think will will.
Create the most engagement with with developers and increased usage and she also has spent.
Decades involved in.
Businesses that are centered around developer communities. So you.
You can expect to see us engaging in stepping.
Stepping up our efforts to.
Market this to develop.
And we'll engage with developers and and build that community.
Yeah.
Okay.
Congratulations on the progress and lives.
And then.
And.
Are there.
And our production.
Okay.
E E.
Developer.
It's really scale.
And rather than 1 off peak Olympics.
And those become.
And play.
And I'm, sorry, Steve you're really cutting in and out but I gather that the question is centered around the live broadcasting.
Of the Olympics and I think your question was about kind of what work has to be done and the future to accelerate that as that kind of keep that moving it was at the.
Yeah, right I was getting more towards but not all of them.
Uh huh.
Yeah.
Now you've cut out altogether.
Together.
And how can we make this much more commonplace.
And how do we make it more commonplace and because we just said right.
Right.
Right Okay. Good.
Well first of all of course, we're thrilled that Comcast as is.
And is making the Olympics available in and both vision and Atmos and Yeah. You know as you know we've been working with Comcast for for some time look each event like this is a step toward making it more commonplace, it's a matter of.
Making sure that the you know the supporting cast that.
And that that is supporting these live events. Some of them are are obviously doing it for the first time, they're getting the right equipment and software and place. So each time that we go through and event like this that's another step toward.
You know getting more events.
We're excited about that we're excited about the other events, we talked about in Dolby Atmos.
And it's a big focus for our organization. So so yeah. There's there's definitely a certain amount of work that goes along with for people doing it for the first time, but high profile events like this are a really big step forward.
And of course.
So people, who will move from this event to other events and so you'll get people who are familiar who aren't doing it for the first time.
Okay. Thank you.
Thank you Mr ranks. The next question is from James Goss with Barrington Research.
Please proceed.
Thank you and I'd.
And I'd like to start with the Dolby music.
You've talked about a lot of devices and services, where there's availability and people can sample list and I'm wondering if you could sense the size of them too.
First like what is required.
And then for individuals to be able to.
To take advantage of the service and what what do you think would be a currently enabled Tam if you will and.
And and taking advantage of of music.
And are there unit sales beyond the existing sales of.
Have you.
Choir ever sound bars P sees that.
And that would and it would.
B and benefit from.
Amusing development.
Sure Yeah. Thanks for the question well.
Body, who is a subscriber of 1 of our service partners.
There's that has a Dolby atmos most device that supports that service is is able to to to to get the benefit of the Dolby Atmos experience and Oh and.
And of course I've been through the names, but since you brought it up you know we're very excited to have Apple music we've.
And ever see nave or buy which is south Korea. So you've noticed we've had a regional focus as well with companies like whom Gama.
And Oh and Gommie.
So the number of people that can support the service is growing.
They can receive the service is growing significantly the significance Jim is that in the mobile phone and P. C space.
Base, I mean, you've seen us continue to garner.
Wins at the high and that.
With the movies and T D V value proposition and it's being bolstered by our progress and mobile gaming music has very broad appeal and we think it really expands the addressable market of mobile devices, and Pcs that are going to see value and supporting Dolby.
Atmos in terms of new categories, which is where you are I think you ended your question I would point to the automotive space because automotive is.
And experience where.
Artists are service providers, everybody is really focused on that as a really important.
Our experience and the realm of music and so we think that this really gives us an opportunity to make it make some headway in the automotive space.
And then in that regard or you and developed.
Developing relationships are at the OEM level.
And.
Sirius XM would too.
To try to get and are the new systems and cars and is there.
Part of it that yeah. That's right. So you saw that we are last quarter announced that lucid air would be bringing the Dolby Atmos music experience to life and we are engaged across the industry looking to bring the Dolby.
Atmos to more cars.
Okay, and then 1 other thing and cinema.
<unk>.
Obviously, you're in the middle of.
Although the windows issues and that sort of thing with the <unk>.
Dolby cinema and.
And today, there was a lawsuit with Scarlett Johansson and trying to look at Disney.
And to maybe.
Pull back a little bit and the day and date and maybe help a business like yours and IMAX with.
With.
You know the theatrical window and honor for me to comment on.
And the reaction and you have it's a relatively it's brand new event.
Perhaps you have some thoughts.
I don't think so I mean, I honestly I Havent I had not seen that news.
But you know our our belief is that for these blockbuster movies that are the ones that are the ones that show and Dolby cinema that that people are going to want us to eat.
And.
And the big screen experience.
And that what we've seen is that are you know as we begin to see box office.
Return, we have seen the percentage of box office trending toward premium experiences and Dolby cinema specifically.
Commanding more of the box office.
And then it was at pre pandemic and I.
And I I believe that stands to reason I think as people I think as people come back to the cinema and they want to have the best experience possible.
Yeah.
Okay, and I'll come back otherwise thank you.
Yeah.
Thank you Mr. Golf. The next question is from Paul Chung with J P. Morgan. Please proceed.
Yeah.
Hi, Thanks for taking my questions. So.
And your free cash flow has been very strong this year.
<unk> driven mostly by strong net income so you know I don't really see.
Real you know kind of working cap benefits this year so.
You know your free cash flow margins kind of hitting levels last seen in 2011 is this the new normal and moving forward is this the baseline of free cash flow and 400 million plus kind of moving forward.
You want me to take that 1 Kevin.
Yeah.
I guess, the first wonder with weather and my phone is working ha, Hey, Paul How's it going.
Good how are you.
I guess are you you're always very focus on the free cash flow. So a couple of comments I would make is 1.
And you see now that our cash flow generation.
And he is now running fairly consistent with the business operations, obviously, there's a ebb and flow to working capital quarter to quarter, but you'll also notice that this year. Our operating margins are very strong and part of that is because our gross margins have ticked up a little bit and the gross margin improvement is because the mix of our revenue has.
<unk> stronger than maybe what we would have anticipated at the beginning of the year. So I think that all ties together and a sense that we do believe that as a business. We will continue to generate a high degree of cash flow relative to <unk>.
Okay.
Ladies and gentlemen.
Ben Please remain holding while our speaker reconnect again, please remain holding while our speaker reconnect.
Well I, Okay and can you guys still hear me, yes, now okay. Yes, we can hear you live and alright.
Okay. Good.
Funny thing about this pause believe and I'm on a landline.
And so I'm not sure why it's cutting in and out.
Because I'm looking at my phone and it's it says as connected so what I don't know that I'll ever be able to figure that out.
To wrap up by saying that.
The strong cash flow that you see is very heavily linked to our operating performance, obviously, the timing from quarter to quarter. It does depend on when we collect those receivables and also the fact that this year you see.
See that our gross margins have ticked up and our operating margins are stronger than day, they've been historically, so I think that all ties together and I think it's a very good story right now.
And then your Opex levels are kind of and this you know 55 per cent range of sales is that the right level to kind.
About and I mean, it's.
It's ranged anywhere between the mid fifties to 60, so yeah.
Yeah couple of comments on that 1 is that we like so many companies. We are seeing some expenses that are lower because of pandemic. The most obvious thing being travel and I don't think you should expect.
And so.
Super.
And other companies progress forward.
Yes, okay.
Not sure if it's I'm not sure. If the are you hearing me okay on this phone call right now.
Yes, Paul Okay. Good.
The second thing the second thing I'd like to point out too is just as a side note that FY 'twenty 2.
And to every 6 years or so we have a 53 week year like like many companies do and we will have a 50 <unk> week next year, so that'll be a little onetime blip next year and expenses and so I think the opex to revenue range that you see right now is probably at the lower point and what we would normally run, but Kevin and I have talked quite a bit about the fact.
And we've always committed to keeping operating margins at or above that sort of 31% level and now this year with the improvement in gross margin, we see that ticking up a little bit so probably some of that will come back a little bit Paul in terms of the opex ratio not all of it and think about it and it's just be this little bit of a bounce back from Covid, but also next year, we will have that extra.
Extra week, which also then and the following year that will go away. So a lot of things to think about it and no. We're not ready to give FY 'twenty 2 guidance yet, but your question kind of almost goes beyond Q4, so I thought it'd be worth getting you're thinking about that.
Great. Thanks, and then Kevin and on vision, where are you on adoption rates and Tvs today.
Update there would be nice and.
Kind of what's your penetration rate kind of trending and Pcs and smartphones.
See opportunities and auto and then separately Atmos and auto give them and kind of the longer sales cycle would adoption really take time for EMS too to take off and car speakers.
Yeah, so well.
Well I guess at the highest level I would start by saying that with the wins we have garnered throughout this year around music around gaming around services like Billy Billy more recently live sport.
And we feel really good about the sales proposition we have to continue to bring.
The Dolby experience to more devices across all of the areas that that you just went through.
We and have continued to increase the penetration on Tvs with Dolby vision and with Dolby Atmos.
You've heard me today and throughout the quarters talk about a number of wins and PC.
And mobile.
And automotive is an area, where we expect to make progress and and of course, there's a lead time to implementation that that lead time has come down from what it might have been 3 to 5 years ago, and you know, especially in the in the and the the pure play.
Electric vehicle players.
Or is that can be much faster and even with the traditional car manufacturers. You know you can get time frames that are.
Within a year or so I think from her and when I mean, obviously your mileage, obviously mileage varies but a lot of what we're gonna be doing is is is through the software so it'll vary but.
But we're out there engaged we think it's a really compelling experience and we.
We'll keep you updated as we as we go.
And then last kind of housekeeping question on the segment and whats the back payment came in from Q2 would be helpful. Thank you.
The.
Back payment that came in Q2.
Shipment and you give me a little more color on that question.
Although he recognized the back payment in Q3 from Q2 shipments is that not the case.
Oh I'm sorry, Yeah, you talked about the true up we we don't break out we don't break out the true up by category.
Corey are generally although I would say that are our strongest.
Segment market segment and for you with broadcast and broadcast did benefit from that.
And Rob Yeah, so sort of T V. The Tvs and set top boxes would've benefited significantly from natural.
Great. Thank you.
Yep.
Thank you Mr. Chang again, ladies and gentlemen to ask a question press Star 1 again to ask a question press Star 1.
There are no additional questions waiting at this time I went and I'll pass the conference back to Kevin Yeaman for closing remarks.
Well. Thank you everybody for joining and we look forward to keeping you up to date on our progress.
Thank you.
That concludes the conference call and enjoy the rest of your day.
Sure.
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Uh huh.