Q4 2022 Dolby Laboratories Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the double Dolby Laboratories conference call discussing fiscal fourth quarter results. During the presentation. All participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session at that time, if you have a quest.
<unk> you will need to press star one on your telephone.
A reminder, this call is being recorded Thursday November 17, 2022, I would now like to turn the conference over to Ashley.
Our senior manager Investor Relations for Dolby Laboratories. Please go ahead Ashley.
Good afternoon, welcome to Dolby Laboratories' fourth quarter 2022 earnings Conference call. Joining me today are cabin gaming Dolby Laboratories, CEO , Robert Park, CFO , and Maggie O'donnell head of Investor Relations.
As a reminder, today's discussion will include forward looking statements, including our first quarter and fiscal 'twenty 'twenty three outlook and our assumptions underlying that outlook. These.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including among other things the impact of current macroeconomic events COVID-19 supply chain issues inflation changes in consumer spending and geopolitical instability on our business.
A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned forward looking statements as well as in the risk factors section of our most recent annual report on Form 10-K Dolby.
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 non-GAAP financial measures a reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the New Interactive Analyst Center on the Investor Relations section of our website.
So with that introduction behind Us I will now turn the call over to Maggie.
Thank you Ashley and thanks, everybody for joining us today, so last quarter, we tried something different with the format and it seemed to be really well received so we're going to try to do the same thing today I'm gonna be leading our conversation with both Kevin and Robert and then we're going to turn it over to our analysts for Q&A.
So let's get started.
Kevin.
Obviously this is a really dynamic environment can you talk about that and how it's impacting our business.
Yeah.
The past year and for that matter. The last few years I've been a challenging environment I don't think that's.
News to anybody.
Combination of the pandemic geopolitical issues supply chain inflation. All of this has come together to create an environment of uncertainty uncertainty and change and most of the industries. We serve have been significantly impacted by some combination of these factors.
As it relates to this quarter it continues to be a tough environment and our results did come in lower than what we expected since we last talked.
The estimates for a consumer device shipments have continued to come down across the number of categories, particularly in PC and TV and transaction cycles are taking longer right now we're in an environment with a lot of challenges that affect not just us, but our partners and our customers.
So our customers both current and potential continue being engaged but we're seeing some of those engagements taking longer.
At the same time, we've accomplished a lot over this quarter and over this last year, we're making progress in our key focus areas. We continue to strengthen our movies and TV ecosystem, we had significant growth with Dolby vision and Dolby Atmos.
In terms of increased content across services and stream content and we've expanded across all device categories that people used to enjoy their favorite movie and TV content.
We've had we have fantastic momentum across the Dolby Atmos music ecosystem, we've more artists more studios onboard the amount of music in Dolby Atmos continues to expand and we have more ways for people to enjoy that music across streaming services and devices and increasingly their car.
And we're building out our ecosystem for user generated content, which is what enables a growing number of consumers to capture and share their memories and Dolby vision across their favorite platforms. So our strategy has not changed and we're confident in the opportunity ahead, our consumers have a seemingly insatiable demand for entertainment content.
We're hard at work to bring the Dolby experience to all the ways consumers experience that content, whether it's movies TV gaming sports music user generated content and all the devices that those experiences are enjoyed on.
But we also see audio video content and they've been able to do the ability to interact digitally and audio video increasingly become a part of everything we do online and with Dolby Io. We can improve these experiences and bring Dolby to a far wider range of use cases, so while there are near term headwinds we're staying focused.
On what we can control and we're confident in the opportunity ahead.
Great that's great context.
Let's talk a little bit about the revenue drivers so over the last year, you've been talking about revenue drivers in the context of both foundational and Dolby Atmos Dolby vision Dolby imaging, sorry imaging patents start with foundational.
And maybe as a reminder, for people who might be new or newer to the story of our foundational audio revenues are made up of our audio codecs and audio patents and these technologies are deeply embedded in the ecosystem for entertainment audio and they're delivered across a.
Broad diversity of consumer devices and were included on such a significant number of those devices that this part of the business is sensitive to the macro economic environment, especially especially as it relates to consumer device shipments.
So for this year foundational was down nearly 15% and ended up at roughly 70% of our licensing revenues.
And while macro challenges continue to make it difficult to predict the near term.
Based on current data points, we're expecting foundational to be down again in FY 'twenty three.
But it is important to note that these technologies are fundamental to the playback of content. They have been for decades, and they will continue to be for years to come and this is a strong position to be in we're going to continue to strengthen it and once the end markets stabilize we expect that foundational revenue will contribute continue.
Continue to be a contributor to our growth.
It makes sense.
What about Dolby Atmos, Dolby vision and imaging patents.
Revenue from those.
Areas grew roughly 30% versus last year that is a little bit slower than we expected as of last call. It is that these areas are not as sensitive to the macro environment as a foundational it's more about getting on more of the devices with these relatively newer technologies.
The rest of our shipping, but they're not immune to the macro.
The largest growth driver what drove the 30% what is the largest growth drivers as movie and TV content. We built this incredible ecosystem of content around Dolby vision, and Dolby Atmos and that's led to broad adoption by content services and so we're seeing growth in living room devices like Tvs set top box is sound bars.
And beyond we also saw a strong growth in Dolby cinema as the box office began to improve from the pandemic lows.
We also had a lot of progress beyond that we're we've laid the foundation for new ways to experience Dolby and laying the foundation for new growth in areas like music and automotive user generated content with Dolby vision capture we're always looking for ways to bring Dolby to new experiences. So the opportunity ahead of US is significant we are confident that.
We have the opportunity to double the size of these revenues in the midterm and we are targeting 15% to 25% annual growth over the next three to five years.
Got it so we're gonna, let Robert talk a little bit more about revenue in a few minutes, but first let's let's dive into the three main focus areas that you mentioned at the beginning the.
First the movies and TV ecosystem in the living room Theres music in auto and Theres also the user generated content with Dolby vision capture.
So can we start with the living room.
Yeah, well with movies and television like I said earlier, we have very strong adoption across the creative community and great distribution across content services and all of that means that it's easier than ever to access your favorite content in Dolby.
We firmly established Dolby vision, Dolby Atmos as the best way to enjoy movies and television and and we have broad adoption across premium Forte models and of course, we began to move this deeper into lineups.
And that's why we focused on expanding our deeply into lineups like we've done with partners such as Sony and Vizio. It also means pursuing remaining partners and that includes.
The house brands at Big box retailers that makes up a.
Part of the market. So we are also focused on we're always looking for ways to become a part of more of the content that people care most about and a great. Great example of that is live sports that there's there's few examples with content that bring out more emotion the live sport.
And and big events can actually drive television purchases so.
The way to bring Dolby into more living rooms, and so we're we're particularly excited that Comcast announced this morning that X one customers are going to be able to enjoy the world Cup and Dolby vision.
That's great that's huge news.
What is also let's move on to the music and audio initiative what are you seeing there.
Well as is the case with all of our ecosystem. It starts with content and enthusiasm from artists to the increasing availability of mastering tools and studios means an increasing amount of music available in Dolby.
Universal Music Group recently said on its earnings call that 80% of its top streaming artists have tracks available in Dolby Atmos and that makes up nearly half of streamed content music consumption there.
They also said that 90% of consumers surveyed reported that they listen longer when they're listening in Dolby Atmos.
Once you have the content that it's about the availability of the content to the consumer and we made a lot of progress. This year, we added Tencent QQ to a roster of streaming partners with Apple and Amazon that means that we now have three of the top five global streaming services in the world.
We also added a number of top regional services in markets like South Korea, the Middle East, China, and this quarter, we added Ghana Dot Com, which is a top music streaming service in India. So it's that combination of content and availability, what we at Dolby referred to in our ecosystem, that's what creates the value.
Proposition to our device partners and we continue to see demand signals across all the ways consumers enjoy their music, but especially.
We're especially focused on automotive and we've added more than half a dozen auto partners in just over a year in just the past couple of weeks, we've added Pollstar Lotus.
At the Paris Auto show a few weeks ago, Mercedes we're showcasing the Dolby Atmos music experience.
And it got rave reviews, and just last week Volvo announced the E X 90, which is the soon to be released electric SUV will feature Dolby Atmos. So we're really excited about all of that we're going to stay focused on bringing more streaming services to life, bringing on more auto partners going deeper into lineups with the partners who brought.
On board and that's what drives growth in this ecosystem.
Our goal is to make Dolby Atmos music the way everyone experiences music all the time.
Alright, that's awesome.
So on the third focus area Dolby vision capture can you talk about that.
Yeah.
Citing about this is enabling consumers to engage with Dolby vision content on a daily basis and that that.
<unk> significantly enhances our value across the mobile device ecosystem.
A couple of years ago, when Apple introduced Dolby vision capture and this year, we expanded into Android, we last quarter Xiaomi launched the first Android smartphone with Dolby vision capture in China. They.
They launched another model with Dolby vision capture this quarter and.
It's often striking when we look back at our videos that we've taken over the years, how sometimes that older content can be a little unfulfilling. It can be washed out colors arent right.
But with Dolby vision, you get a giant leap in quality and you can tell things like you know from the light what time of day it was or what season was it what was the weather everything looks more vivid and just like you remember it. So this is important to smartphone makers because.
We all use our phones as these memory capture devices every day and the camera is a major reason that people upgrade their phones. So we expect to see more adoption of this.
And capturing the memories as one thing well, it's even more important are sharing them. So that's why we're so excited to see the ecosystem coming together with services in China. We have started like Wechat and QQ, Billy Billy enabling the sharing of Dolby vision content. So that hundreds of millions of users on these platforms can experienced those same.
Good memories.
This year look for us to continue to be focused on expanding the Dolby vision capture ecosystem with more services and more devices.
Got it.
So of course in addition to those three main focus areas. There are lot of other things. We're working on one of those Adobe Io can you talk about that a little bit.
Yeah with Dolby Io, we've created a platform that enables developers to create experiences that are highly immersive.
Audio visual content and interactivity are increasingly a part of everything we do online Dolby Io makes it easy to integrate the Dolby experience into a wide range of use cases that have become a part of our everyday lives.
It's been a little over two years since we launched we're continuing to see strong increases in developer engagement with that takes the form of developers signing up for the platform and engaging with and working with our Apis.
One area, we're seeing a lot of demand is in real time streaming. So this is a use case that developers are looking for so it's easy for them to understand it's also easy for them to integrate and our offering is differentiated because of course it brings very high quality. It can scale to a very high number of users and we have exceptionally low delay times and that's what brings.
The action and the viewer closer together so it makes the experience as close to real time as possible and that's critical for a number of use cases.
We're also seeing a lot of customers that are starting with her it started with real time streaming and then expanding to enable our real time interaction so that the audience can.
It can interact with one another the presenter can air you can interact with the participants.
And have a conversation that flows very naturally.
That is made possible by things like our audio space utilization, which makes it easier to know where the sales are coming from and with combined with extremely low latency. You don't have those delays that caused when people are talking over one another.
But beyond that we're adding a lot of conversations with companies and developers who are focused on inventing the next generation of online immersive experiences. The audio experience is top of mind, they are creating rich and complex environments that require high quality audio and specialization to be realistic to keep people in those in those <unk>.
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A lot of interest in areas like virtual performance social events sports Big company events.
Music is also top of mind and we just talked about the momentum we have in Dolby Atmos music and of course that can come into play and these worlds, but combined with specialization.
It creates the opportunity for if it's a virtual concert for instance, then the audience can be having a realistic experience interacting with one another if it's some kind of a social event or a company tradeshow. If your background music. The music can be high quality, but you also have the realistic ambient environment. So.
Early days, but we're we're really excited about the opportunities.
Hello.
So lastly, the macro environment is obviously going to continue to be challenging.
How are you planning to manage the business throughout this period.
Although he has managed through many economic downturns and many technology transitions and we're coming at this from a position of strength given our strong business model balance sheet proven ability to generate cash.
And we're planning for it to continue to be a tough environment in the near term.
And so we're going to be wise with our resources.
Our head count is roughly flat year over year, we've paused hiring except for the most critical hires and we've taken a number of cost savings measures.
And on top of all that the management team is regular Lee reviewing our resource envelope and our resource allocation to make sure that we continue to be aligned to where the opportunities are and Robert can elaborate on this further.
But we understand what it takes to go through an environment like this and come out the other side is strong.
For us the Formula starts with first and foremost staying true to who we are.
Consumers have the seemingly insatiable demand for entertainment content and audiovisual experiences are becoming a pervasive part of everything we do so our purpose has never been more relevant and there's incredible opportunity to bring more dolby experiences to more people around the world.
And we're always hard at work reinventing what that means what it means to have a dolby experience and bringing those experiences to the the content that's most important to them.
We know that to do all this and this kind of environment requires extraordinary focus and that's why you hear us talking about our key focus areas and we've just talked about the momentum that we have across movies and television music user generated content, bringing more developers to Io. So we're clear on what our most present opportunities are.
Going to focus on what we can control and we're going to act with urgency to bring more Dolby experiences to more people and that's what drives the business.
Great.
Just kind of sense.
Thanks, Kevin and let's now turn to some of the numbers Robert can you walk us through the financials for both the fourth quarter and fiscal year 'twenty two.
Thanks, Maggie course, let's start with Q4.
Total revenue in the fourth quarter was $278 million, which fell short of the total revenue guidance. We provided on our last call. This was driven by a couple of factors based on what we're seeing including data points from industry analysts. There were further declines in consumer device shipments, especially for Tvs and Pcs compared to when we provided guidance in August .
This negatively impacted our current quarter revenue estimate.
Last quarter, we mentioned that we're seeing transaction cycles take longer in the environment, particularly in Asia and within mobile and this had a greater impact than we expected on Q4.
Now as a reminder, our licensing business is based on unit shipments in general we estimate revenues from unit shipments each quarter and true up the following quarter based on actual reported shipments from our partners. We also have transactions that reflect revenue from unit shipped in prior periods, which we call recoveries and transactions, where the customer will commit to minimum volumes.
For a given period, where all or a portion of the revenue is recognized upfront.
These transactions are all related to unit shipments. The only difference is the timing and amount of revenue in any given quarter. Our partners remain actively engaged and we expect these transactions to close but the process is taking longer now.
Now, let's get into the Q4 details Q4 revenue was down 2% year over year, driven primarily by lower unit shipments and PC broadcast CE and gaming.
This was partially offset by growth in Dolby Atmos, Dolby vision and imaging patents as well as an increase in products and services revenue driven by improvements in the cinema industry.
Q4 revenue comprised of $249 million in licensing revenue and $29 million in products and services revenue.
Now to our full year results.
Fiscal year 'twenty, two revenues were $1, two 5 billion compared to $1. Two 8 billion in fiscal year, 'twenty, one, resulting in a year over year decline of 2%.
Within that licensing revenue was $1 6 billion, while products and services revenue was $89 million fiscal year 'twenty two licensing revenue was $1 6 billion down 4% year over year.
Foundational audio made up roughly 70% of our licensing revenue in fiscal year 'twenty two revenue for foundational audio declined about 15% year over year, primarily as a result of lower device shipments, especially in areas like broadcast gaming and auto and lower recoveries in broadcast and mobile.
We also had a tough comp against the higher than normal true up in fiscal year 'twenty one.
Dolby Atmos Dolby vision and imaging patents were about 30% of total licensing revenue. This portion of our licensing revenue grew roughly 30% in fiscal year 'twenty, two compared to nearly 20% growth in fiscal 'twenty one.
Driven by higher adoption and new licensees as well as increased box office, which positively impacted Dolby cinema.
Now, let's get into the end markets.
Broadcast represented about 37% of total licensing in fiscal year 'twenty two full year broadcast revenues declined by $42 million or negative 9% on a year over year basis, driven by lower TV unit shipments and lower recoveries.
Both impacting primarily foundational audio.
This was partially offset by growth in Dolby vision, and Dolby Atmos in Tvs and set top boxes and.
In Q4 broadcast revenues declined year over year, driven by lower unit shipments, partially offset by increases in Dolby vision and Dolby Atmos.
Mobile represented about 21% of total licensing in fiscal year 'twenty two.
Full year mobile revenues declined by $22 million or negative 9% on a year over year basis as the prior year benefited from timing of deals, including recoveries, partially offset by increases in Dolby Atmos, Dolby vision and imaging patents.
Q4, mobile revenues were down year over year, driven by lower unit shipments.
Consumer electronics represented about 16% of total licensing in fiscal year 'twenty to full year, <unk> revenues increased by $4 million or 2% on a year over year basis, driven by growth in Dolby Atmos, Dolby vision, partially offset by lower units.
Q4, <unk> revenues were down year over year, driven by lower recoveries and lower unit shipments, partially offset by growth from Dolby vision, Dolby Atmos and imaging patents.
PC represented about 13% of total licensing in the fiscal year 'twenty two full year PC revenues increased by $9 million or 6% driven by Dolby Atmos, Dolby vision, and imaging patents and higher recoveries compared to fiscal year 'twenty one.
This was partially offset by lower PC shipments.
Primarily in the back half of the year.
Q4, PC revenues are down year over year, driven by lower unit shipments, partially offset by growth in Dolby vision, Dolby Atmos and imaging patents.
Other markets represented about 13% of total licensing in fiscal year 'twenty two other markets were flat year over year, driven by improvements in Dolby cinema offset by unit declines in gaming and auto.
Q4, other markets declined driven by lower gaming units and true ups.
Beyond licensing our products and service revenue were $89 million in fiscal year, 'twenty, two compared to $67 million in fiscal year 'twenty one.
The year over year increase was primarily driven by higher product sales as a result of improved semi industry and we also saw revenue growth from Dolby Io.
Total non-GAAP gross margin in the fourth quarter was 87% compared to 90% in the fourth quarter of fiscal year 'twenty. One gross margins came in lower driven by a higher mix of products revenue.
non-GAAP operating expenses in the fourth quarter were $182 million compared to $190 million in the fourth quarter of fiscal year 'twenty one.
Operating expenses were below the low end of our guidance for Q4, driven by lower variable incentive compensation expenses.
non-GAAP operating income for Q4 was $60 million or 22% of revenue compared to 23% of revenue for Q4 of last year.
non-GAAP income tax in Q4 was within our range of guidance at 18% compared to 12, 7% in last year's Q4.
The year over year increase was primarily driven by the mix of our income between different tax jurisdictions and lower discrete benefits.
Net income on a non-GAAP basis in the fourth quarter was $53 million or <unk> 54 per share per diluted share compared to $60 million or <unk> 58 per diluted share in Q4 of 'twenty one.
On a full year basis, non-GAAP operating income was $376 million or 30% of revenue compared to $451 million or 35% in fiscal 'twenty one.
Full year net income on a non-GAAP basis was $320 million or $3 14 per diluted share compared to $383 million or $3 66 per diluted share in fiscal 'twenty one.
During the fourth quarter, we generated $51 million in cash from operations compared to $110 million generated in last year's fourth quarter. We ended the fourth quarter with just over $900 million in cash and investments.
During the fourth quarter, we bought back about $2 9 million shares of our common stock and ended the quarter with about $361 million stock repurchase authorization available going forward.
We announced also announced today a cash dividend of <unk> 27 per share an increase of <unk>, <unk> or 8% compared to the prior quarter.
The dividend will be payable on December eight 2022 to shareholders of record on November 32022.
Alright, so before you get into the numbers for fiscal year 'twenty three how are you thinking about guidance going forward.
Well I'd start by saying, we are continuing to operate in a challenging and uncertain environment.
No one in the World is.
Not only is the world's still dealing with repercussions from the pandemic, but there has also been supply chain imbalances geopolitical instability high inflation and monetary tightening to address it and the list goes on our.
Our customers and partners are similarly impacted by the uncertainty in the environment and as a result, we are seeing this impact not only our unit shipments, but the timing of some of the transactions as discussed earlier.
Companies, who stopped giving guidance during the pandemic are still not providing guidance. All of this is to say that our visibility is limited and predicting what will happen in the next year is difficult.
With that with this as the backdrop I'll be providing a high level scenario for fiscal year 'twenty three.
Based on what we're seeing right now including data points from industry analysts were expecting declines in consumer device shipments, particularly for Tvs in North America, and Europe and globally for PC in CE.
This mostly impacts our foundational audio revenue, which we project will decline mid single digits during the year.
As Kevin said earlier, we are targeting 15% to 25% growth in Dolby vision, Dolby Atmos and Mg patents and we expect this to be driven by growth in the broadcast mobile and other markets.
We assume this will more than offset the declines in foundational audio that we're expecting.
With these assumptions we are projecting total revenue for fiscal year 'twenty three to grow low single digits year over year.
Within this we anticipate licensing revenue to be up low single digits with products and services revenue expected to grow high single digits.
Now, let's talk about Opex.
For the full year, we are currently anticipating non-GAAP operating expenses to increase increase roughly 2% compared to the prior year.
We will see growth in our annual merit increases and normalization of the incentive compensation for employees compared to fiscal year, 'twenty, two which came in significantly below 100%.
We are also seeing inflationary pressures in some areas and increased travel expenses.
This was mostly offset by cost saving measures, we've taken such as organizational adjustments and reductions in infrastructure costs.
We will continue to limit hiring to the most critical roles, while focusing our investments on the areas that have the largest impact towards our long term opportunities.
This would result in operating margins of roughly 30% on a non-GAAP basis for the year.
We will continue to be disciplined with our spend review, our resource envelope and allocations on a regular basis and make adjustments as the year progresses.
We anticipate that non-GAAP earnings per share will grow at a slightly higher rate than revenue.
Great.
Thanks for the full year context and perspective.
Q1.
Well, let me reiterate that volatility from this economic environment has made forecasting more challenging in the near term and that includes visibility into Q1 and.
In addition revenue Lumpiness from timing of deals is more acute in the quarters and on a full year.
That said based on what we're seeing right now, we see Q1 revenue ranging from $300 million to $333 million.
Within that licensing revenue is estimated to range from $280 million to 305 billion, while products and services is projected to range from $20 million to $25 million.
Compared to Q1 last year, we expect lower unit declines.
Lower your declines in TV, and PC and lower recoveries.
At the same time, we continue to see growth from Dolby vision and Dolby Atmos.
non-GAAP gross margin estimated to be 90% plus or minus.
Operating expenses in Q1 on a non-GAAP basis are estimated to range from $180 million to $190 million.
Our effective tax rate for Q1 is projected to range from 19% to 21% on a non-GAAP basis.
This is higher than fiscal year 'twenty two as we are forecasting lower benefit foreign tax credits. We also benefited from discrete items in fiscal year 'twenty. Two that are not included in fiscal 'twenty three.
We anticipate the full year tax rate will be in a similar range.
So based on a combination of the factors I just covered we estimate that non-GAAP Q1 diluted.
Earnings per share could range from 76 to 91.
Let me, let me restate Q1 revenue range is $300 million to $330 million.
Alright.
Robert.
Do you have any closing remarks.
Yes, yes, it remains a tough environment and while the near term is uncertain, we are well positioned for growth in the long term.
Dolby has a durable business model strong balance sheet and healthy cash flows even with today's tough market conditions are foundational audio technologies are broadly penetrated across a wide variety of content and devices and much of the opportunity Lazar head Dolby Atmos, Dolby vision and imaging patents as we continue to expand further into new use cases like live sports.
User generated content in auto.
We are also excited about Dolby Io as a long term growth factor as it greatly expands our addressable market.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
Great.
Alright, that's perhaps at my portion and turn it over to the operator and our analysts for some Q&A.
Thank you ladies and gentlemen, if you would like to register a question question. Today's question and answer session. You may do so by pressing star one if you would.
Like to withdraw your question Press Star two.
Speaker phone please pick up your handset before entering your request.
Sure to identify yourself and your firm at the outset to be fair to all participants we ask that you limit yourself to one question and a follow up question until all participants have had a chance in the first round.
Time allows we will then come back to answer any remaining questions.
One moment please for the first question.
Yeah.
The first question is from Ralph Shakur with William Blair. Please proceed.
Good afternoon. Thanks for taking the question Kevin just on the macro if you could just maybe give us a perspective, that's obviously changed them fairly dynamically.
You sit here in mid.
November or how is the macro outlook I guess look today versus perhaps how you exited Q4, just trying to get a sense of how dynamic or how things are changing in Dolby.
Yes.
Well I think in terms of the.
Macro environment Ralph.
We can talk about kind of what kind of what the kind of economic narrative is this week versus last week the week before and I think the word of the day, there's still uncertainty and what will be there to be next week, but I think.
Fundamentally we have a really strong position in our foundational revenues in the end markets will stabilize and that's when we expect to return to growth and better visibility and we continue to see.
We continue to see is great demand for immersive experiences and specifically Dolby Atmos and Dolby vision.
And.
We gave some examples of that a moment ago, but the World Cup in Dolby vision, we're really excited about.
Movies and television and devices in the living room will continue to be.
What are the growth drivers for Dolby Atmos Dolby vision this year.
And of course.
Really excited about.
Music and auto user generated content in mobile and those are things that are contributing to revenue, but they are in their early days, we're getting our first partners. Our first models, we have yet to have the time to what comes next is driving further into lineups, adding more partners and so we're really confident that those are going to become big contributors to.
<unk>.
Dolby Atmos, Dolby vision and imaging band growth.
But over the long term, where we see.
The opportunity to double it so.
Yes.
Great and then maybe a follow up.
Robert Robert could you just remind us in terms of mobile.
A pretty stiff year over year decline a little bit more color on the driver of that and then just sort of fast forwarding as we think about the next fiscal year.
I know you have some headwinds with foundational and some growth with Atmos and vision, but if you could sort of walk us through you know starting with broadcast and mobile in CE.
We set our marble models, which which line items would you expect.
Perhaps be growing year over year in 2020 through that'd be really helpful. Thank you.
Yeah, Hey, Hey, Ralph.
Mobile <unk> decreased 9% year over year in fiscal 'twenty two.
Last year.
<unk> from timing of certain deals, including our recoveries and then we had some solid growth in Dolby Atmos and Dolby vision.
And then in Q4, we saw that the units were lower intermodal space in terms of next year.
If we talk about one level uncertainty and our guidance is kind of.
More directional than anything that we're going to see declines in unit shipments, particularly in Tvs in North America, and Europe , where were higher we had higher attach rates and then globally for PC and CE more pronounced in the first quarter.
Because they are easier comps in the back half of the year. That's why the Q1 is a little bit more acute.
As some of these markets started to decrease in fiscal year 'twenty, two we're going to be coming off those compares in fiscal year 'twenty. Three so Q1 is really the first.
Compare off of starting to decline in Q1 of last year. So.
Those are the markets I would say are going to be.
Down next year, and then we will see other growth in Dolby Atmos vision and imaging to offset those units.
Okay. Thank you.
Thank you Mr. Josh Shanker.
The next question is from Steven Frankel with friends and Paul. Please proceed.
Good afternoon.
As we think about that.
The growth trajectory that you're talking about for vision and Atmos and patents.
It's a little slower obviously than less over the last year little slower than I think everyone was expecting to what extent is it this uncertain environment, that's either causing design decisions to be delayed.
For customers to hesitate, adding those premium technologies, because it's going to raise the cost of.
Bill of materials.
Yes, well.
We still see great demand for people that for adoption of the technologies.
Like I said just in the last few weeks, we've added pulsar Lotus Robo intermodal on the automotive side.
And and yes.
We did come in a little bit lower than the expectation.
The expectation, we set last quarter we.
We did have a couple of litigations that took longer but we grew 30% and thats on the strength of movies and television.
It was also driven by the improvement in the box office for Dolby cinema, which.
That growth next year, but probably not the level of box office improvements that we had coming off of those endemic lows.
And so.
At 15% to 25%, we are allowing for a range of outcomes in that guidance because we.
We see we continue to see great demand signals across each of the areas we've talked about.
At the same time, we recognize that we have been seeing engagements take a little longer. So we allowed for that in a range of outcomes.
Okay.
So just as you frame that a little further.
You're not necessarily getting pushed back because of the incremental cost it's more about.
The demand picture and.
Decision cycles.
Okay.
Yeah, Yeah. So I think that's a fair characterization. So what we're not seeing is slowdown and people wanting to adopt it we're not getting slowed down by the by.
Price is not the reason, we're slowing down it's just an environment where.
Everybody is affected by this in some way shape or form and that can affect the time it takes to get.
Transaction cycles done I mean for as Robert said earlier.
Earlier as you know our licensing business is based on unit shipments and in general.
Our revenue comes in we estimate what shift each quarter and we true it up the next quarter or two.
To the extent that those engagements are delaying more often than not it means that we might be.
Signing it fewer months before the the first shipment then we might have but.
Pat past units or.
Deciding on minimum volumes that that is where I think there's a lot of attention cycles as people look at how all of this affects their business and so some of those engagement cycles are taking longer.
Okay, and then for Robert what was the true up in the quarter.
Yes.
The trip and quarters about $3 million.
To the positive side.
To the positive yes similar.
So similar to Q3.
Yes.
Okay.
And.
Are you getting any pushback from customers around the notion of.
Fixed minimum payment contracts in this environment.
Okay.
I don't think I don't think we've seen pervasive pushback on the notion of the volume commitments I mean as far as we're concerned essentially it's about being on those devices and how many are going to ship and whether theyre doing minimum value because it tends to affect the timing of when it comes in right, it's pretty rare that someone would ever can.
Get to more than they are sure they can ship.
So.
I think that.
It's not a significant driver to what were.
What we've seen but.
There are some that are that are.
Thinking about what minimums, they want to commit to given the uncertainty they're facing but from a Dolby perspective.
That's just a matter of the timing of when that comes in right.
And.
I also want to add Steve to your to your previous question I think it's important to understand that in any environment as it relates to Dolby as we're building these ecosystems.
It is it is entirely plausible that category of revenue grows.
20%, one year and goes up to 30%. The next year and is 20% again and the reason the reason it can do that is because we're building. These ecosystems like we're doing with music, where we have increased volume of content and streaming services and a more valuable proposition to autos and other devices people to use to enjoy music. The same can be said for our users.
Iterate content ecosystem and as those develop we become we gain a sense of confidence that we're going to get on a significant percentage of advisers of devices, but as theyre developing the timing of the revenue will have a lot to do with which partners. We get first which models. They decided to do first how quickly do they decided to go into their line.
And so when we give.
So again, we think that were.
We feel we feel confident in the opportunity to double the size of those revenues over the next three to five years.
And.
Our targeting 15% to 25% per year.
Okay, Great. That's helpful. Thank you.
Thank you Mr Frankl.
Your next question is from Paul Chung with Jpmorgan. Please proceed.
Hi, Thanks for taking my questions. So just a follow up on that.
The revenue guidance for Q1 in the year next year.
So should we expect from <unk>.
Large mobile quarter.
Maybe shifting into Q2 is that the right way to kind of think about it I mean, just some help on the shape of revenues for licensing for the year.
Get you to that kind of low single digit growth.
Q1 has typically been your strongest for the for the past two years.
Fiscal year.
Yeah.
So for mobile and in a couple of these areas. Some of the Q1 declines are more pronounced in Q1 than Q4 years.
Yes, some of the deals some of the transactions that we talked about earlier are more.
Pushed out beyond Q1 than they were in the prior year. So it was more heavily weighted in Q1 of last year.
Okay and then on.
Dolby thought whats the contribution today.
In product sales.
And.
It was the contribution for 'twenty three.
Product guidance is it included in there and then the margin profile has rebounded quite strongly on products.
Where do we go as we move through the year next year and what's.
What's the kind of I O contribution on margin product.
Yes so.
Let me try to take that in turn so.
So yes revenue from Dolby Io is included in our product and services line.
It is contributing and growing its not large enough to highlight for you is one of the major growth factors this year, but as I said earlier were.
We're seeing greater engagement, we're involved in a lot of conversations that we think are where the futures going in terms of these really immersive.
Virtual experiences.
And so.
So we're excited about that and we could talk more about that but let me get to the other part of your question, which is the margin improvement.
There was.
Throughout the year, we like many we're hit with some of the supply chain. So.
Supply chain challenges as it relates to the manufacturing of our products. Obviously products is not a large part of our business, but nonetheless, we were affected and so that affected our margins.
It could be.
The parts it could be shipping them to where they need to be all of that and the team.
It was immediately on top of that and has come up with solutions, which have resulted in the improvement in gross margins, which is closer to what we what we would target on an ongoing basis.
Got you and then lastly on cash flows you know it was a bit lighter than expected, but still generating close to.
$300 million so what's the outlook for free cash as we think about 'twenty, three and kind of conversion rates there and you.
You stepped up the buyback share materially in the quarter and for the fiscal year at half a billion so including.
Including the dividend kind of exceeding free cash flow for this year, which is fine given your cash balance, but how do we think about the pace next year and should we expect kind of a similar buybacks and dividends to kind of exceed free cash flow next year to kind of support shareholder returns here and a difficult environment. Thank you.
Yeah, Hey, Paul first I would just say that our cash flow from operations generally correlate well with our net income and you should see that to continue over time, there of course will be quarterly fluctuations in working capital the timing of payments.
Timely receipts et cetera, but that's a pretty good.
Benchmark to hold that against.
As it relates to the buyback for 'twenty three.
If you think about.
Our policy our policy has always been lost setting dilution from stock based compensation.
Fortunately I have a very strong balance sheet, we've got healthy cash flows as you just noted.
And we look at our capital allocations regulators for optimization opportunities and you did see that we stepped it up in the second half of 'twenty two.
Going forward, we will continue to look at our capital allocation portfolio between investing in the business and opportunities we see.
And returned to shareholders based on the facts and circumstances at the time, but for now our intent is to at least offset dilution from stock based compensation and then we will make adjustments as needed and you did see that we did increase the dividend, 8% going forward as well so.
We've got a balanced asset allocation between return to shareholders and investing in our business for growth.
Okay.
Great. Thank you.
Thank you Mr Chang.
The last question is from Jim Goss with Barrington Research. Please proceed.
Alright, thank you.
I do like the fact, you've focused on the foundational technologies that does give a good perspective core business plus the growth elements.
I am curious, though over time do you re categorized certain of what are currently gross elements into foundational for example, 10 years into it.
Atmos become Dolby digital plus has sort of a foundational and then you're moving on to other things.
And.
And how should we think of the mix of revenues.
As.
And as the growth elements.
Take over from the foundational elements for what are currently foundational elements.
Yeah great.
Great question Jim.
I would start by saying that.
We are never done at Dolby inventing what it means to have a dolby experience. So we're always looking for.
The next the next great Dolby experience and we're always looking for.
Ways to bring it to more content.
More experiences.
The content that people.
Most engage with.
And so.
Clearly I've said for the mid term, we expect Dolby Atmos, Dolby vision and imaging patents to be in that in that growth mode, and we see that opportunity to double them over that period of time growing 15% to 25% annually.
So.
Yeah.
I have on occasion thought what am I going to do when.
When we're on.
Such a high percentage of devices with those experiences.
Yes, maybe there'd be shifts in by then of course, we would we would expect of ourselves to have.
The next set of great Dolby experiences that we're talking about.
Okay, and then since you're sort of creating the kind of the.
Categories.
Currently the two decided how how you redefine them over time then.
On there.
Well again.
The basis for four foundational versus Dolby vision, Dolby Atmos and imaging patents is to help.
To help you understand the growth drivers in.
Our audio codecs and our audio patents are.
So pervasive across so many consumer devices and so.
Essential to the entertainment content ecosystem that it is more.
More sensitive to the macro environment, and what's going on with consumer devices.
And that's why we set that apart from Dolby Atmos Dolby vision imaging patent switch aren't immune to the macroeconomic environment, but are much more about getting on more of those devices that are shipping getting more licensees onboard.
Okay and.
The hardware side of the TV business has been very competitive.
Vizio has focused on a couple of sort of a lost leader.
Units.
That had been growing more rapidly.
And I'm wondering if is that a.
Is that phenomenon, which I'm sure they're not the only one doing that sort of thing.
Coming out to be a help to you in terms of growing the you know.
The Atmos and vision.
Royalty revenue stream.
Yeah, well, you know coming back to <unk>.
Comment I made.
A few minutes ago.
With each of these ecosystems that I would look at the movies and television content ecosystem for Dolby vision and Atmos as one that we have a lot of scale with in terms of content and distribution.
Music and auto is.
Is really coming along all three of the top five streaming services as an increasing amount of content and then user generated content with mobile devices, we do it.
There is pattern recognition here because this is really our business model for a long time around ecosystems, new experiences new technologies for getting the content to people new devices, but fundamentally we are about.
About understanding what the creative or the content creators.
Whats going to help them.
Tell a better story as we bring out more emotion and your content and then making sure that you can get that ever where you'd like to get that content on every device you'd like to enjoy it on so when we get to a certain point and building an ecosystem. We develop a lot of confidence that we can get that we can significantly increase our adoption in those areas.
At that point at half the rate of growth has a lot to do with.
Which which when partners come onboard which.
<unk>, which models do they start with how far do they go in the lineup and that kind of and I'm I'm I'm relating that to your point because.
Yeah Vizio.
Along with so those are examples of customers have taken us deep into their lineups and so.
Look some of that.
There is there are different strategies some some.
Some are reacting by looking for share and focusing across our lineup some are going to focus even more on premium.
Over time, our of course, our goal is to bring the Dolby Atmos Dolby vision experience to everybody, but when you're when you're.
In the mode that we're in with Atmos vision and imaging.
The growth the where we are in that range.
And where we grow uneven here has a lot to do with.
Which which models we're getting on first windows are launching in shipping and which ones turn out to be the top sellers.
Okay, and one last one I was.
I'm wondering over what period of time you feel the.
Toby that I O.
Revenues and profitability will become significant and would be more likely to pay attention to them.
Terms of it.
Yeah.
<unk>.
Fair question I mean, we're in this because we think it's a really significant opportunity for us I mean it significantly.
Gently expands the types of experiences.
Spans not only our available market, but the types of.
Customers and companies, we have the opportunity to do business with.
And.
Like I said, we're of course generating revenues day in it it's growing and we are going to break that out when we get to.
Certain size and scale.
So I don't think I'm going to predict exactly when that will be.
But I am excited about.
Both the progress, we're making with the use cases, we have in market today like.
Realtime streaming and interactivity and also these discussions where we believe we're finding ourselves in the heart of these discussions around what it's going to be in the future to have a truly immersive experience.
We made some you know again, we've made some really good progress. So one thing I was excited about was we made some progress with our plug ins with the.
Unreal engine is the environment that a lot of these.
Worlds are built on and in March we made available a plug in for this real time streaming which means that if you're building a virtual event you can in real time ultra low latency stream in whatever you want to stream into this virtual environment.
<unk>.
<unk> event movie.
<unk> and <unk>.
Or you can capture what youre doing in the virtual world and stream it to the outside world and this quarter we.
We added a plug in and it's an open beta so its a plug in for adding into that the interactivity and so that means now you can be streaming that same concert, but the audience will be able to have that fully engaging experience, where they're hearing great quality.
Music from the performance, but they can also hear the ambient noise. They can talk to one another the plug ins just make it much easier for developers to build those experience and bring them to life and get them into the world.
Alright, thanks very much.
Thank you Mr Bast.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.