Q3 2023 Dolby Laboratories Inc Earnings Call
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 will be in a listen only mode. Afterwards, you'll be invited to participate in it.
Then answer session at that time, if you have a question you need to press star one on your telephone as a reminder, this call is being recorded Thursday August 3rd 2023, I would now like to turn the conference call over to latest cross Cal.
Askey problems Dolby laboratories. Please go ahead Liz.
Good afternoon, and welcome to Dolby Laboratories' third quarter 2023 earnings Conference call.
Joining me today are Kevin Yeaman, Dolby Laboratories', CEO and Robert Park the CFO .
As a reminder, today's discussion will include forward looking statements, including our Q4 and fiscal 2023 outlook and our assumptions underlying that outlook.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today, including among other things the impact of current macroeconomic issues ongoing supply chain issues inflation changes in consumer spending and geopolitical instability on our business and other risks.
And uncertainty is specific to 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 captured forward looking statements as well as in the risk factors section of our most recent quarterly Form 10-Q.
Dolby assumes no obligation and does not intend to update any forward looking statements made during the call as a result of new information or future events.
During today's call, we will discuss non-GAAP financial measures.
Reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the interactive Analyst Center on the Investor Relations section of our website.
So with that introduction behind us Kevin Let's get started what are you seeing in the business for Q3 came in about where we expected and our outlook for the year is in line with what we shared last quarter.
What we're focused on every day is driving towards sustainable double digit growth by bringing more dolby experiences to more people and more types of content.
With our foundational audio technologies, we have a diversified base and we continue to work to strengthen our position across each of our end markets.
Over the long term, having this diversified base of revenues is a very strong position to begin.
As it relates to Dolby Atmos, Dolby vision and imaging patents were focused on the design wins that drive long term growth.
And our three areas of focus continue to be movies and television.
Music, including automotive and user generated content.
And if I take a step back there's just never been a time, where we're seeing greater demand for entertainment content and Thats what creates opportunities for Dolby on the focus areas. You. Just mentioned can you talk about progress with movies MTV.
So with movies and television we're focused on driving adoption across all your living room devices and beyond Pcs mobile devices and.
And driving that demand starts with being a part of the content that people care. Most about we partner with the top creators who are passionate about continuing to push the boundaries on the experience that they're creating.
Theres been a lot of excitement this quarter around the summer's blockbusters.
The cinema movie goers can enjoy both Barbie and Oppenheimer in Dolby cinema. So we have a strong presence across movies and television and that includes sports and sports is an area, where we continue to make progress.
Sports is of course, a big demand driver for devices, particularly Tvs. Many of you likely loved the same sports team today that you did 10 or 25 years ago and these events are what bring communities together people are emotionally attached to these experiences and they want to have the best experience. However, they are watching their game or their match.
This quarter sports fans, we're able to enjoy the French open and Dolby vision Dolby Atmos.
Wimbledon in Dolby Atmos on Sky, Germany.
And the UEFA championship games, including the finals, where man city to come to win are available in Dolby Atmos.
On the service side Max launch their top tier service, Max Ultimate with Dolby Atmos and Dolby vision. So now consumers can enjoy more content in Dolby across services, including HBO discovery and Warner Brothers as.
As we've talked about regional streaming partners and local Oems are a significant part of the market and so we continue to focus on increasing our presence and this quarter Tcl, who earlier this year announced that Dolby vision and Dolby Atmos will be included in all of their new <unk> TV models in the U S announced that they are expanding.
Revision in Dolby Atmos into all of the original models in India.
<unk> launched a local line of Tvs with Dolby vision, and Dolby Atmos Tvs in India.
And we added our first pay TV partner in Vietnam. So.
So we continue to make good progress with these regional providers, we're focused on expanding further into the lineups with our global partners and that's what continues to drive growth in this area.
Can you talk about what youre seeing with music, but once again it all starts with content and globally. The library of songs in Dolby Atmos from.
From artists across genres continues to grow and just this quarter. We added the beach boys Snoop dog and many more more than 85% of the global Billboard Top 100 artists continue to create music in Dolby Atmos, and we're expanding further into regional content.
This quarter Wink music, a free streaming service available to India. Airtel is 360 million subscribers announced that they are going to support Dolby Atmos music.
We now have three of the top five streaming services in India and there are thousands of songs by local artist available in Dolby Atmos from the biggest music labels, including Sarah Gama T series, and Josh Raj films.
Expanding local music catalogs in Dolby Atmos music is important because it brings more consumers into the Dolby Atmos music experience and it creates more value for our hardware partners, which creates for us the opportunity to gain adoption across a much wider range of devices that include sound bars phones.
Smart speakers, and particularly automotive anywhere that consumers enjoy music.
Jeff mentioned several device categories, where you're driving growth with Dolby Atmos music can you talk more about bringing the Dolby Atmos music experience to the car.
Yes from the early days when we first started demonstrating Dolby Atmos music one of the questions. We always got whether it was artists or music labels is are we going to be able to have this experience in the car because people love their music experience in the car and it's the perfect environment for Dolby Atmos music and our partners continue to add more models.
Across more markets, which is increasing the availability of Dolby atmos to consumers nearly half of our partners now have multiple car models with Dolby Atmos.
This quarter, Neo and Lotus, which started in the domestic Chinese market have now launched cars in Europe .
And Mercedes has over a dozen car models available with Dolby Atmos and they continue to add and ship more models globally.
So in just over two years, we went from our first announcement to having nine car manufacturers and it's still early days. Our current partners are still ramping up and we continue to engage with more auto manufacturers.
Today, you talked about the growing demand for different types of content. What are you seeing with user generated content well.
Well with user generated content more and more people are able to unleash their creativity and their storytelling and it's increasing the amount and the types of content and by bringing the power of Dolby vision, we're enabling people to capture the experience that inspires them to share those videos in the most realistic and lifelike way.
We have great momentum in China, where people can create and share their stories on social media platforms that include Wechat, Billy Billy and QQ from a device perspective, Dolby vision capture as a part of iOS globally and with Android, we have our first device wins with Xiaomi <unk> and vivo.
This quarter, India's largest short video platform <unk> became our latest social media platform to adopt Dolby vision.
More than 300 million subscribers and they can now create and share their stories and Dolby vision with their iOS devices or their xiaomi phones.
We also added a partner in Singapore. This quarter did see is a short film video platform that now supports Dolby vision and Dolby Atmos. So their global community of storytellers can now create and share films in Dolby.
And Motorola became our latest partner to announce and start shipping their first Dolby vision playback phone.
Growing our user generated content ecosystem is all about continuing to expand further the services, giving access to creators to create and Dolby and Thats what creates more demand for our advice partners to expand further into their lineups and of course to bring on new partners as you look beyond movies, and TV music and user generated.
Content, what else does the team working on well.
Well of course, we're really excited about the areas. We just talked about but we're also always working on a number of new things.
We haven't talked about gaming.
May have seen earlier this week that Sony made an announcement about Playstation five and Dolby Atmos as it relates to Dolby Io.
We're seeing a lot of interest in online immersive experiences personalized experiences that the promise of increasing audience engagement.
In particular.
Our ability to provide high quality audio and video streamed and ultra low latency along with the ability to have natural sounding conversations between participants opens up the possibility of new experiences that are developers and potential customers are really excited about.
Stepping back whats exciting is that there continues to be a tremendous amount of innovation on both content creation and storytelling and those storytellers are always looking to push the boundaries of the stories. They can tell and of course, we see the same thing with our hardware partners, who are looking to push the boundaries.
Of what's possible.
And that's what creates opportunities for us we're always hard at work reinventing what it means to have a dolby experience and bringing the experiences that are most important to people to life.
Kevin do you want to do a quick wrap up before Robert comes on to talk about the numbers.
Yeah, well this is our passion, it's enabling artists and the creator and all of us to tell better stories and to bring out the full emotion of those experiences theres been a significant increase in the amount of content available to us as consumers. There are more types of content. There are more ways to enjoy that content, there's more ways to receive an experience.
That content and across the board, that's what creates opportunities for Dolby to make a difference in each of those experiences and all the ways in which they're delivered.
So we're going to continue to focus on raising the bar on the quality of those experiences we have been doing that for decades, and I am confident in the growth opportunities ahead.
Thanks, Kevin Robert can you walk us through the financials for the quarter of.
Of course before we get into the details I'd like to highlight a couple of things first total revenue of $298 million was in line with the guidance, we provided last quarter.
Second based on what we're seeing today revenue outlook for the year is expected to range from one point to eight 5 billion to $1 315 billion.
This results in 2% to 5% growth year over year also in line with what we shared last quarter.
With that as context, let's turn to the details for Q3.
Q3 revenue of $298 million was up 3% year over year.
Licensing revenue was $273 million up 1% year over year growth in our Dolby Atmos, Dolby vision and imaging patent category, primarily in other markets PC and broadcast more than offset lower revenue from foundational audio category, primarily in mobile CE NPC.
<unk> and services revenue was $25 million up 24% year over year, driven by higher cinema product sales.
Now, let's talk about licensing revenue by end market.
As a reminder, our licensing business is based on unit shipments. We also have transactions that reflect revenue from units shipped in prior periods, which we call recoveries and minimum volume commitments or all or a portion of the revenue for a given period is recognized upfront.
These transactions are all related to unit shipments and the only difference is timing.
Broadcast represented about 38% of total licensing in Q3 of 2023 up 4 million or 4% year over year with higher revenue from minimum volume commitments and imaging patents.
Revenue from foundational technology is roughly flat and higher recoveries offsetting lower revenue from unit shipments and minimum volume commitments.
Mobile represented about 18% of total licensing in Q3, 23 down $13 million or 20% on a year over year basis, driven by lower revenue from minimum volume commitments, primarily impacting foundational technologies.
Okay.
PC represented about 11% of total licensing in Q3 23.
<unk> 3 million or 9% on a year over year basis, driven by higher revenue from minimum volume commitments and imaging patents, partially offset by lower unit shipments primarily impacting foundational technologies.
Consumer electronics represented about 13% of total licensing in Q3, 23 down $4 million or 11% on a year over year basis, driven primarily by a lower unit shipments of sound bars, and DMA is primarily impacting foundational technologies.
Other markets represented about 20% of total licensing in Q3, 23 up $15 million or 36% on a year over year basis, driven by higher patent pool admin fees related to imaging patents, a higher true up in gaming and increased adoption of Dolby Atmos in auto.
Now, let's turn to expenses and margins.
Total non-GAAP gross margin in the third quarter was 87% of revenue versus 88% in the third quarter of last year due to higher mix of products and services revenue.
non-GAAP operating expenses in the third quarter were $193 million compared to $179 million in the third quarter of fiscal year 'twenty two.
The increase was primarily driven by higher labor timing of patent program and higher travel.
During the quarter, we recorded a non-GAAP restructuring charge of about $17 million in the quarter comprised of severance and related benefits along with charges related to the exit of a lease facility as we continue to align resources to our most impactful opportunities and optimize our geo footprint.
non-GAAP operating income was $65 million or 22% of revenue compared to 26% of revenue in Q3 of last year. The non-GAAP income tax rate was 25, 6% compared to 13, 9% in Q3 of last year, which included more discreet items in this year.
Net income on a non-GAAP basis was 54 million or <unk> 55 per diluted share compared to $69 million or <unk> 68 per diluted share in Q3 of last year. During the third quarter, we generated $121 million in cash from operations compared to $173 million generated in last year's fiscal Q3.
We ended the third quarter with about $987 million in cash and investments.
During the third quarter, we bought back about 295000 shares of our common stock and ended the quarter with $237 million of stock repurchase authorization available going forward.
We also announced today a cash dividend of <unk> 27 per share the dividend will be payable on August 22023 to shareholders of record on August 14th 2023. Thank.
Thank you Robert with that let's turn to FY2023 guidance, we continue to operate in a challenging and uncertain environment for the full year fiscal 2023, we continue to expect that our revenue from foundation of audio technologies will decline low single digits year over year, reflecting lower unit shipments and PC.
A broadcast and mobile <unk>.
Consistent with what we've said previously.
We are on track to hit our target of 15% to 25% growth in Dolby Atmos, Dolby vision and imaging patents driven by growth in broadcast and other markets.
We expect this will more than offset the declines in foundational audio that we're expecting with these assumptions. Our full year 2020 revenue is expected to range from one to eight 5 billion to $1 315 billion within this anticipate licensing revenue to range from $1 $1 5 billion to $1 to $1 billion.
With growth in other markets and broadcast driven by Dolby Atmos, Dolby vision and imaging patents outpacing the decline in PC and CE, primarily impacting revenue from foundational technologies Prada.
Products and services revenue is expected to range from $100 million to $105 million.
non-GAAP gross margin is estimated to be roughly 88%.
non-GAAP operating expenses are expected to range from $760 million to $770 million we.
We continue to be disciplined with our spend and a review of our resource envelope and allocation on a regular basis.
We expect operating margins to be roughly 30% on a non-GAAP basis for the year.
We anticipate non-GAAP diluted earnings per share of $3 30.
To $3 50.
Thanks, Robert any closing thoughts before we open it up for questions.
Of course, we continue to make progress are confident in our long term growth opportunities and believe the fundamentals of adobe's durable operating model balance sheet and cash flows remain strong.
Alright with that we are ready for questions operator.
Okay.
Thank you, ladies and gentlemen, if you wish to register a question for today's question answer session. You may do so by pressing star one.
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To be fair to all participants we ask that you limit yourself to one question and a follow up question into all participants have had a chance in the first round. If time allows we will then come back to answer any remaining questions.
We'll pause for just a moment to rearrange the queue.
Yeah.
Okay.
Okay.
Our first question comes from Brown, Scott Scott Walker from William Blair. Please go ahead.
Good afternoon. Thanks for taking the question Kevin just on.
On the macro if you just kind of take a step back.
Sitting today, maybe relative.
Relative to let's say last quarter, and perhaps if you could sort of go back to when you provided the initial outlook for this fiscal year, how would you sort of.
Characterize the macro now versus when you provided your outlook as well.
Yes, well I think.
When we entered the year we.
Expected that we would see lower unit shipments across a number of our end markets, particularly PC and mobile and that's what we've seen play out. So I guess I would say some of the things we were expecting at the beginning of the year that transpired and as I look.
To where we are on macro now or.
It is encouraging to see economists abundance increasingly giving chances for a soft landing in the U S.
At the same time.
Turning to our partners, particularly in areas like mobile RPC I would say there is still.
Understandably cautious it's been dynamic period of time and they are still working through some of those issues.
And of course, we're a global global company. So the real feel of the economic environment differs depending on where you are.
Okay, Great and then just looking at products and services gross margin. It looks like there was a little break in trend there just curious what's driving that.
Hey, Ralph it's Robert here in terms of product and service gross margin.
In the third quarter.
Lower gross margins attributable to higher excess and obsolete reserves.
In the quarter, but if you look at in terms of the full year.
It should be closer to the mid teens and we're not quite back to what I would say the pre pandemic levels that we'd like to get back to you, but in the current period with the volumes are lower than they were pre pandemic levels. They are slightly depressed.
Okay. Thanks, Robert Thanks, Kevin.
Thank you.
Our next question comes from Steven Frankel from Rosen law.
Securities. Please go ahead.
Okay.
Last quarter, I think one of the dynamics.
Some of the deals kind of got pulled in and signed earlier than expected.
What's the environment like now if you go to do.
Annual negotiations with some of these larger customers are you seeing them.
Pushback and take their time or do you think the decision making patterns are going to return to normal.
That's a tough one to generalize, Steve I think even last quarter, we observed in the <unk>.
Later part of last year, we had some deals that took longer than in the first half of this year. We had some deals that came in earlier in the year, it really as facts and circumstances based or whats the partner.
What are they prioritizing what's their dynamic.
But of course all of that is considered into our guidance for the for the quarter and the year, which is.
Coming in about in line with what we expected when we last spoke.
So.
I think stepping back a level, what we're really focused on is.
The demand signals around our key focus areas that on that front.
We've been able to add the partners, we're seeking to add for Dolby vision capture and mobile with this.
This year, including <unk> vivo and Xiaomi.
We've continued to add auto partners.
And we've continued to make progress in TV, particularly with some of the regional partners, India was a highlight again this quarter. So.
So the demands there and I don't think I can generalize on deal timing.
It can always vary in the climates.
<unk>, what we expected it would be.
Okay.
So there was a.
Big step up in goodwill and intangibles for the quarter was that related to.
Managing IP pools or is there something else that.
You acquired in the quarter.
Hey, Steve the step up in intangibles and goodwill related to the acquisition we talked about.
Last quarter, which is Mpeg la.
To strengthen and diversify our imaging patent portfolio.
Just wanted to make sure and then what were true ups in the quarter and were there any material recoveries in the quarter that you would call out.
Hey, Steve Yes.
Trucks are really a non factor this quarter.
Positive about $1 million, so nothing really to note in terms of our Trups from last quarter's volume of course, they vary by and device, but overall, it's about $1 million.
Okay and then.
There is a noticeable decrease in.
Pace of the buyback versus last year, So what does that say about your capital allocation strategy.
Going forward.
Yes, Steve.
With respect to the buyback what we've said is our policy is really to at least offset dilution from stock based compensation and Thats, what youre seeing were doing right now is executing on that plan.
Last year was.
<unk> accelerated our heightened level of buyback, but for this year.
Kind of go with the policy of.
Offsetting our dilution.
Okay, and then on the restructuring.
Can you give us any.
Sales on kind of what particular areas you were deemphasizing that.
Projects, you might be pulling people off versus areas, where you're investing.
Okay.
Most of it Steve it was across a range of areas and they were areas.
Areas that we'd identified core.
Efficiency across a broad range of areas.
I wouldn't attribute to any one project or initiative.
Some of it was facilities related.
And so.
Nothing that is directly certainly no nothing as it relates to a change in any of the business focus areas, we've been talking about.
Okay, Great I'll jump back in the queue. Thank you.
Our next question comes from Jim Goss.
Please go ahead.
Hi.
I don't.
Again on a couple of moments slate, so maybe I missed this but I didn't hear a lot of comments about music and I'm wondering if there are.
Any further developments.
On that particular application.
Yeah, we talked about the fact that we continue to add artists and songs great momentum on the on the artist side, we did add a new service in India Wink, which.
We now have three of the top music services in India.
A large catalog of local music with three major labels.
So.
On the on the content and services side, a lot of progress that's what creates the demand for the device side and all the ways that people experience music and then on that front.
Notice that.
Neo and Lotus was initially launched in China have now launched in Europe , Mercedes launched for our models.
So we continue to have.
Strong engagement and strong pipeline for bringing more auto manufacturers onboard.
Okay.
And you are seeing this these are.
Applications as having any significant impact in terms of.
Any of the licensing revenues or any other way.
Yes, well, if we look at it on.
Its always tough for us to look at this on an annual basis and.
Automotive has consistently been one of the categories Robert highlights as a driver of increases in other markets.
And that's that really is a result of Dolby Atmos.
Yes.
Cars.
The other areas for music of course are sound bars speakers et cetera that falls in our CE category, which.
The foundational side has.
Lower unit volumes this year, but then thats being partially offset.
That's being offset to some extent by.
Increased adoption of Atmos and vision and some of that would be driven by music.
Okay is that gaming another 20% roughly equally split them between gaming and automotive.
We havent broken the category, but it is as you pointed out it's gaming it's automotive it's Dolby cinema.
<unk>.
Contribute to that category also our patent administrator fees for our licensing pools. So those are the categories and.
When they rise to individually large enough then that's.
That's when we would make it a category of its own.
Yes.
Okay.
Youre very focused on Atmos and vision.
It should be obviously and thats to increase penetration is driving the company right now.
We always look for the next big thing.
Are there any things.
More of that can be done in terms of sound quality and placement.
<unk>.
Remodels, probably not considering right now it always seems that something might come along and I'm just wondering if your engineers.
Developing things that might not be obvious on the surface that could create that extra category or even a nuance that can command some higher royalty rates in the future say, what's the top level products.
They're always focused on the next thing we.
We just had our R Tech summit, a couple of weeks ago, and that's a combination of tech talks a kind of a hackathon if you will top ideas.
And.
What they're doing and that we can hopefully what they are doing and I believe what they are doing year round is yes. They are looking at the current state of our technology the future state of technology.
What types of experiences that can make possible, obviously, we engage across the ecosystem, whether its creators content owners and distributors and where hardware manufacturers are pushing the boundaries and.
Looking to solve the problems that are going to pave the way for that next that next set of experiences and in that respect.
There's a lot of things that go into that equation of the types of things, we're thinking about whether it's where RMB or take us what the implications of a our AI are but.
That's what they are always thinking about and yes, we have a lot of things we're excited about.
Okay well. Thank you. Thank you very much.
I will now turn the call over to Kevin for closing remarks.
Okay, great well. Thank you everybody for joining us today, and we look forward to updating you again soon.
Ladies and gentlemen that concludes today's call. Thank you for all joining you may now disconnect.
Yeah.
Thank you.
Yeah.