Q4 2024 Dolby Laboratories Inc Earnings Call
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Speaker Change: Hello ladies and gentlemen. Thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal fourth quarter results.
Speaker Change: 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.
Speaker Change: To ask a question, please press star 1 on your telephone keypad. As a reminder, this call is being recorded Tuesday, November 19, 2024. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead.
Peter Goldmacher: Good afternoon and welcome to Dolby Laboratories fourth quarter 2024 earnings conference call.
Peter Goldmacher: Joining me today are Kevin Yeaman, Dolby Laboratory CEO, and Robert Park, Dolby Laboratory CFO.
Peter Goldmacher: As a reminder, today's discussion will include forward-looking statements, including our fiscal 2025 first quarter and full year outlook, management's expectations for our future performance, and other statements regarding our plans, opportunities, and expectations.
Peter Goldmacher: 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 changes in customer demand, changes in laws and regulations, and the impact of macroeconomic events on our business.
Peter Goldmacher: A discussion of these and additional risks and uncertainties can be found in our earnings press release, as well as in the Risk Factors section of our Forms 10-K and 10-2. Dolby assumes no obligation to update any forward-looking statements.
During today's call, we will discuss non-GAAP financial measures.
Peter Goldmacher: These measures should be considered in addition to and not a substitute for GAAP measures. A 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. With that, I'd like to turn the call over to Kevin.
Kevin Yeaman: Looking back on the quarter in the year, global consumer electronic sales underwhelmed all year and the box office never found its footing.
Kevin Yeaman: At the same time, we made solid progress in many important areas, including strong momentum in content creation and new partner wins, particularly music, sports, and automotive.
Kevin Yeaman: We're excited about the growth opportunities going forward. We're seeing good momentum for Dolby Atmos and Dolby Vision. The GE licensing business gives us a stronger position in imaging patents, and we expect the Theo acquisition to accelerate our emerging Dolby I-O business.
Kevin Yeaman: I'd like to spend a few minutes on some Q4 highlights before I share some perspectives on FY25.
Kevin Yeaman: Starting with content, one of the most important aspects of our ecosystem, sports and music are growing in their ability to drive the business forward.
Kevin Yeaman: First, with sports, we spoke last quarter about the increasing amount of sports content available in Dolby, with major events including Wimbledon, the Olympics, soccer, and cricket, as well as the decision by Max to stream all of its live sports content in Dolby Atmos and Dolby Vision.
Kevin Yeaman: This fall, both Major League Baseball Championship Series were broadcast in Dolby Atmos and Dolby Vision on Macs, and the World Series was broadcast in Dolby Vision on Fox. We also had wins in important regional markets, including eGaming in China, with the League of Legends final streaming live in Dolby Atmos.
Kevin Yeaman: and more e-gaming in India, with the Battlegrounds Grand Finals premiering in Dolby Atmos on Disney Star. And we continue to have strong traction in Dolby Atmos and Dolby Vision in TV and movies, including Netflix, Disney and Apple.
Kevin Yeaman: Turning to music, the momentum continues to build, with over 1,200 studios globally equipped with Dolby Atmos capabilities, and over 90% of Billboard's global top 100 artists having released music in Dolby Atmos.
Kevin Yeaman: Music is a big driver for multiple device categories and is the number one driver for Dolby Atmos adoption on automotive.
Kevin Yeaman: Speaking of automotive, we continue to make good progress. We came into the year with 10 OEM partners for Dolby Atmos.
During the year, we more than doubled that.
Kevin Yeaman: So entering 2025, we have more than 20 partners and a strong pipeline. In the fourth quarter, we signed up two more partners. Wei, a Chinese car company that specializes in premium crossovers and SUVs. And Smart, a joint venture between Mercedes and Geely.
Kevin Yeaman: The in-car entertainment experience is an investment priority for automotive OEMs and remains a bright spot for us going forward. In TVs, we're seeing growth of Dolby Atmos and Dolby Vision in mid-range TVs, complementing strong adoption in higher-end TVs.
Kevin Yeaman: TCL and Hisense continue to grow their adoption, while brands like Philips, Xiaomi, BPL in India, and Polytron in Indonesia are rolling out Dolby Atmos and Dolby Vision on more affordable TVs.
Kevin Yeaman: Our speaker and soundbar partners, including TCL, JBL, Yamaha, Klipsch and Sharp, announced new products with Dolby Atmos.
Kevin Yeaman: and Vizio announced the first Dolby Atmos enabled soundbar to retail for less than $100.
Kevin Yeaman: Meta announced that in the MetaQuest, its Mixed Reality headset will include Dolby Atmos.
Kevin Yeaman: So just to recap the quarter and the year, while consumer device sales remain soft and last year's strikes continue to impact the cinema business, we continue to increase the amount of content and the number of devices taking advantage of Dolby Atmos and Dolby Vision.
Kevin Yeaman: bringing the Dolby experience to more people around the world. Looking forward to FY25, while the market forecast for aggregate device sales are flattish, we do see revenue from foundational audio technology stabilizing.
Kevin Yeaman: We're excited about the momentum we have in automotive and the progress we are making in growing adoption in mobile and TV. The GE deal adds to the strength of our imaging patent licensing portfolio.
Kevin Yeaman: and Theo improves our opportunity with Dolby I O by bringing on a great roster of customers including the NFL, NASCAR and Sky and a broader product portfolio in a compelling emerging market.
Kevin Yeaman: The cinema industry is optimistic about the box office slate, which is good for our cinema business. We're confident about our long-term opportunities and our ability to generate growth. With that, I'd like to turn the call over to Robert to discuss the details of our financial performance.
Robert Park: Thank you, Kevin. Revenue for the quarter came in at $305 million, up 5% year-over-year. Non-GAAP earnings of 81 cents per share were up 25% year-over-year, driven by lower tax rate and higher gross margins in the quarter.
Robert Park: Licensing revenue was $283 million, including $7 million from the GE licensing acquisition, up 7% year-over-year.
Products and services revenue was $22 million, down 13% year-over-year.
Robert Park: We generated $116 million in operating cash flow. We repurchased $20 million of common stock and have $402 million remaining on our share repurchase plan authorization.
Robert Park: We declared a $0.33 dividend, up 10% from our dividend a year ago, and ended the quarter with cash and investments of approximately $571 million.
Robert Park: We also closed a $250 million credit facility for additional cost-efficient financial flexibility.
Robert Park: For the full year fiscal 24, we reported non-GAAP earnings of $3.79, up 6%, and above the high end of guidance, on revenues of $1.27 billion, which was down 2% year-over-year.
Robert Park: For the year, Dolby Atmos, Dolby Vision, and Imaging Patents revenue came in a little better than we expected coming into the year, growing approximately 14%.
Robert Park: Dolby Atmos and Dolby Vision grew in line with our expectations, and imaging patents came in stronger than expected due to earlier than anticipated revenue recognition from a deal with a large partner.
Robert Park: This growth was offset by headwinds in our foundational audio technologies revenue, which came in lower than we expected, declining approximately 10%.
Robert Park: Dolby Atmos, Dolby Vision and imaging patents were just over 40% of licensing revenue for the year and foundational was just under 60% of licensing revenue for the year.
Robert Park: Detailed licensing revenue performance by end market is on the IR portion of our website. As a reminder, timing of recoveries, minimum volume commitments, and true ups can drive quarterly volatility, but trends tend to be smoother over time.
Robert Park: Looking at some end market specific performance, we perform pretty much as expected in mobile and consumer electronics.
Robert Park: which were down slightly for the full year and PCs which were up 14% for the full year primarily due to the timing of deals
Robert Park: Broadcast was weaker than expected down 9% due to weaker set-top-box shipments and lower recoveries as we discussed last quarter. And other grew 11% in line with our expectations as strong growth in auto was partially offset by lower revenue in gaming and Dolby Cinema.
Robert Park: Moving on to guidance. For the first fiscal quarter of 2025, we expect non-GAAP earnings to be between $0.96 and $1.11 on a range of revenue between $330 million and $360 million.
Robert Park: Within that, we expect licensing revenue to be between $305 million and $335 million.
Robert Park: Gross margins should be approximately 90% on a non-GAAP basis, and we expect non-GAAP operating expenses to be between $190 million and $200 million.
Robert Park: For the full year, we expect non-GAAP earnings to be between $3.99 and $4.14, on revenue between $1.33 billion and $1.39 billion.
Robert Park: We expect license revenue to be between $1.22 billion and $1.28 billion, and non-GAAP operating expenses to be between $765 million and $775 million.
Robert Park: This guidance implies operating margin expansion of roughly 2 percentage points as we continue to focus on aligning our resources to the most compelling opportunities.
Robert Park: The GE licensing deal is expected to contribute roughly $55 million to total revenue and be accretive to non-GAAP operating margins and earnings.
Robert Park: We expect revenue from foundational audio technology to be roughly flat, consistent with the market expectation for overall device shipments.
Robert Park: Revenue from Dolby Atmos, Dolby Vision, and imaging patents should see roughly 15% growth in FY25.
Robert Park: Dolby Atmos and Dolby Vision is expected to grow roughly 15% organically and imaging patents is expected to grow roughly 15% as the acquired revenue from GE licensing is partially offset by the tough comp in imaging patents.
Robert Park: From an end market perspective, we expect consumer electronics to be down mid-single digits, and broadcasting PC to be flattish. We expect mid-teens growth in mobile, driven by the GE licensing acquisition and recoveries.
Robert Park: and mid-teens growth and other on Strength and Auto and Dolby Cinema. One comment on our fiscal year 25 gap results I'd like to make everyone aware of.
Robert Park: We expect to expense approximately $30 million in amortization of intangibles related to the GE licensing acquisition. This will negatively impact GAAP earnings by about $0.25. This has no impact on cash flow or non-GAAP earnings.
Robert Park: To wrap things up, the creation and distribution of Dolby-enabled content continues to drive growth in our ecosystem and our partners are very engaged.
Robert Park: Our financials remain solid and we are well positioned for strong growth when economic conditions improve.
Speaker Change: With that, I'd like to turn the call back over to Peter for some closing comments.
The End of the World
Peter Goldmacher: Thanks Robert. Two more quick things before I turn the call back to the operator to open up the lines for Q&A. The first is we've rewritten the business overview and MD&A section over 10k to enhance understanding of our key offerings and markets.
Peter Goldmacher: and second we're going to have a casual event for investors at CES on Wednesday January 8th from 7 to 9 a.m.
Peter Goldmacher: We'll be in quiet period, so there won't be any formal remarks or commentary on the business, but we always appreciate the opportunity to show off our technology. If you'd like to join us, please reach out to me for details or send a note to IR at dolby.com. With that, operator, can we please open the call for Q&A?
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you.
Speaker Change: Your first question comes from the line of Patrick Schall with Barrington Research. Your line is open.
Speaker Change: Thank you. I was just wondering with some of the recent technology acquisitions like with CEO, the extent to which like you're able to enter into new revenue generating verticals such as with like the CEO ads side of things, or if that would just be part of the traditional licensing model.
Speaker Change: Thank you. It was about a year ago that we really refocused this effort on the Sports Entertainment Vertical specifically. And what we're focused on is delivering
Speaker Change: Solutions to companies that are looking to offer real-time interactive experiences that are increasing audio engagement
audience engagement.
the customers.
Speaker Change: who we would often see together as separate companies. We're now a combined force focusing on building these experiences. And it also brings a more complete solution to bear. So we're excited about the combination. If I look over this last year, we brought on a lot of new customers that are starting with some percentage of their volume or perhaps one of their many entities.
Speaker Change: So we think as we go forward, we have an opportunity to make them successful and expand those accounts. And with EO, we have the opportunity to go win a lot of new customers.
Speaker Change: Okay, and then, you know, just with the shift in administrations and the expectations on tariffs, I guess, how has that sort of, like, informed your expectations, maybe on, like, the foundational revenue side, you know, to extent that, you know, potential tariffs impact prices and shipping volumes?
Speaker Change: We are seeing foundational stabilizing into next year. As you know, it's been under pressure the last several years as unit shipment volumes were down. On top of that, coming into FY24, we had some tough comps. So as we go into FY25,
Speaker Change: The comps are stable and our customers are expressing more confidence that things have stabilized for them and that they're looking to get constructive going forward. So we continue to monitor the environment for any changes, but too early for us to speculate on the specific implications.
Okay, thank you.
Speaker Change: Your next question comes from Ralph Schachart with William Blair. Your line is open.
Good afternoon, thanks for taking the question.
Speaker Change: So lower single-digit growth organically just want to kind of confirm that
Speaker Change: within sort of what you're thinking. And then assuming that's true, maybe Kevin, can you maybe give some perspective on...
Speaker Change: the potential for sustainable growth from here. I know the market's still pretty dynamic, but it sounds like you had a lot of headwinds as you're exiting this fiscal year. It sounds like foundation is stabilizing, so good growth momentum in the new products. Maybe you can sort of help us frame growth going from here as well. Thank you.
Yeah, thanks Ralph.
Speaker Change: So, you know, at the highest level, we're still targeting low single-digit growth and foundational. And, you know, as you point out, we see that stabilizing going to FY25, so that's a big improvement over the last several years.
Speaker Change: And then we see Dolby Atmos and Dolby Vision growing at about 15% Organically, imaging patents is overcoming a tough comp, but with the GE licensing deal, we're at about 15% overall there. So, you know, our overall formula is if we can grow foundational low single digits and hit our target of 15 to 25% for Atmos, Vision, and imaging patents,
Speaker Change: that gets us around that double digit mark. On top of that, of course, we are excited about the opportunity we have with Dolby I O and of course, we have a strong innovation pipeline.
Speaker Change: Great. Maybe just on Dolby IO, maybe give some perspective on the growth profile this year. I know it's probably coming off of a small base, but maybe a better question to ask is, you know, when can it start to really kind of contribute to overall results going forward? Thanks.
Speaker Change: Yes, so our WIO revenue is reflected in services, in the product and services line. And as you point out, yes, it's coming off a smaller number, but we do expect strong growth.
Speaker Change: And like I said, the focus is on, we've won a lot of great customers this last year, where we have a lot of potential for expansion and cross-selling with the addition of Theo. And combined, we're focused on really growing the number of customers as we go into FY25.
Okay. Thanks, Kevin.
Your next question comes from Stephen
Good afternoon and maybe just a little more insight into
Speaker Change: The split in the patent business now between the Tough Comp and GE
Speaker Change: What's the organic growth of the patent business implied in that plus 15 in total?
Yeah, so thanks, Steve.
a large transaction land earlier than we expected.
Speaker Change: So that's the comp we're overcoming. Dolby Atmos and Dolby Vision organically is growing 15%. Organically, imaging patents will be down as a result of that comp. And then with GE licensing, the category is up about 15% higher.
down single digits or more than that?
down mid to high single digits.
Thank you.
Speaker Change: This will conclude today's question and answer session as well as today's call. Thank you for joining. You may now disconnect your lines.
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