Q1 2025 Dolby Laboratories Inc Earnings Call
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Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing first quarter fiscal year 2025 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. To ask a question, press star 1 on your telephone keypad. As a reminder, this call is being recorded Wednesday, January 29, 2025.
Peter Goldmacher: I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President, MMSTER Relations. Peter, please go ahead.
Peter Goldmacher: Thank you, operator, and good afternoon. Welcome to Dolby Laboratories first quarter 2025 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories CEO, and Robert Park, Dolby Laboratories CFO.
Peter Goldmacher: As a reminder, today's discussion will include forward-looking statements, including our fiscal 2025 second quarter and full year outlook and our assumptions underlying that outlook.
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, the impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending, and geopolitical instability on our business.
Peter Goldmacher: 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 Factor section of our most recently quarterly report on Form 10-Q.
Peter Goldmacher: 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.
Peter Goldmacher: 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 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: Thanks, Peter, and thanks to everyone for joining us today for the first quarter FY25 earnings call.
Kevin Yeaman: Both licensing revenue and total revenue came in towards the high end of the range of the guidance that we provided on our last earnings call, and non-GAAP earnings for the quarter came in above the high end of the range.
Kevin Yeaman: It's a strong start to the year, which gives us confidence that we are on track to achieve the annual financial guidance we gave on the fourth quarter earnings call.
Kevin Yeaman: We continue to expect foundational revenues to be roughly flat for the full year.
Kevin Yeaman: And we have robust engagement from our broad ecosystem of content creators, distributors, and OEM partners. Dolby Atmos, Dolby Vision, and imaging patents are well positioned to grow roughly 15% for the full year. And we continue to expect to grow non-GAP earnings faster than revenue.
Kevin Yeaman: I'll cover a few of the highlights for the quarter and then I'll turn the call over to Robert to review the financials.
Kevin Yeaman: Our creative community continues to show strong support for Dolby Atmos and Dolby Vision.
Kevin Yeaman: All eight of the 2025 Grammy nominees for Best New Artist are available in Dolby Atmos.
Kevin Yeaman: And 7 out of 8 Grammy nominees for Record of the Year and Album of the Year are available in Dolby Atmos.
Kevin Yeaman: For calendar year 2024, over 80% of the domestic box office and almost 70% of the global box office came from Hollywood and local titles released in Dolby Atmos and Dolby Vision.
Kevin Yeaman: We wrapped up CES a few weeks ago, and the Dolby Experience was on display across the show floor, including in cars, TVs, PCs, and soundbars.
Kevin Yeaman: Starting with auto, we have announced partnerships with over 20 OEMs and those 20 plus OEM brands have over 60 models in market with Dolby Atmos.
Kevin Yeaman: Many of our partners, after starting with their high-end models, are expanding Dolby Atmos deeper into their lineups. One of our earliest partners, Mercedes, had over 15 models in market by the end of 2024. We are also excited that Lee Auto has the first car in market with both Dolby Atmos and Dolby Vision.
Kevin Yeaman: In-car entertainment is an investment priority for automotive and consumers are spending more time enjoying entertainment in their cars, whether they are waiting to pick someone up or getting a charge.
Kevin Yeaman: With Dolby Atmos and Dolby Vision, the car is transformed into a high-end entertainment experience, and we are excited about the growth opportunity ahead.
Kevin Yeaman: The broader ecosystem around in-car entertainment also continues to coalesce around the Dolby experience.
Kevin Yeaman: At CES, Samsung Display announced that it will include Dolby Vision in automotive displays, and Texas Instruments announced that it is now supporting Dolby Atmos in its new family of chips for automakers, all making it easier for OEMs to adopt and implement.
Kevin Yeaman: Also Pioneer demonstrated Dolby Atmos as an aftermarket solution in a four channel sound system.
Kevin Yeaman: We continue to make progress with further adoption on TVs. In November, Amazon announced that the Fire TV Omni Mini LED will support Dolby Atmos and Dolby Vision.
from partners including Hisense.
Kevin Yeaman: Also this quarter, Amazon launched its first soundbar supporting Dolby Atmos, Harman Kardon introduced the Enchant soundbar lineup with Dolby Atmos, and Samsung announced new soundbars with Dolby Atmos to complement their TVs.
Kevin Yeaman: Looking forward, with a solid first quarter behind us, we remain optimistic for the rest of FY25 and beyond.
Kevin Yeaman: We like what we are seeing and hearing from our partners. Our ecosystem is strong. Our momentum with creatives and distributors continues to build, and that energy continues to propel our opportunities with our OEM partners.
Kevin Yeaman: And so with that, I'll turn it over to Robert, who will take you through the financials in a bit more detail.
Robert Park: Thanks Kevin, and thanks for everyone joining us on the call today. Before we review the quarter in some detail, I'd like to hit the highlights.
Robert Park: Our value proposition remains strong, our financials are solid, and we are confident in our long-term growth prospects.
Robert Park: Q1 revenue was $357 million, up 13% compared to the year-ago quarter. Licensing revenue of $330 million, was up 12% year-over-year. This includes a $17 million favorable true-up for Q4 fiscal 24 shipments reported that were above our original estimate.
Robert Park: The true up was across all end markets, but was most notable in broadcast and auto. Products and services revenue was $27 million, up 22% year over year.
Robert Park: Detailed licensing performance by NMARC is on our IR website and as a reminder timing of recoveries, minimum volume commitments, and true ups can drive volatility between quarters.
Robert Park: A notable movement this quarter was in mobile, which was up 74% year-over-year. The two main reasons for this increase are revenue from GE licensing and the timing of minimum volume commitments.
Robert Park: Moving to the bottom line, in Q1, we earned $1.14 per diluted share on a non-gap basis, above the high end of our guidance, primarily due to a stronger revenue, and we generated $107 million in operating cash flow.
Robert Park: We repurchased $15 million worth of common stock and have about $387 million remaining on our repurchase plan authorization.
Robert Park: We declared a 33 cent dividend up 10 percent from our dividend a year ago and ended the quarter with cash and investments of approximately $611 million.
Robert Park: GAAP operating expenses in the quarter included a restructuring charge of approximately $5 million as we continue to align our resources with our business priorities.
Turning to guidance.
Robert Park: Our full year revenue is typically weighted more towards the first half of the year. Last year the weighting was 53%-47% first half to second half, and we expect a similar weighting this year.
Gross margin should be approximately 91% on a non-GAAP basis.
Robert Park: We expect non-GAAP operating expenses to be between $190 million and $200 million.
Robert Park: Our affected tax rate for Q2 is projected to be around 18.5% on a non-gap basis.
Robert Park: So, as a result, we estimate that non-GAAP EPS should be between $1.19 and $1.34 per diluted share.
Robert Park: Moving on to the full year, we are maintaining our full year guidance for revenue and earnings. To repeat and reiterate what we said last quarter, 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 licensed 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: We expect revenue from foundational audio technology to be roughly flat, and revenue from Dolby Atmos, Dolby Vision, and imaging patents to grow roughly 15%.
there's no change to what we communicated last quarter.
Robert Park: Broadcast and PC are expected to be flattish and consumer electronics is expected to be down mid-single digits for the year.
Robert Park: To wrap things up, the creation and distribution of DOLBY enabled content continues to grow nicely, and our partners are still very engaged. Our financials remain strong, and we are well positioned for long-term growth.
Robert Park: With that, I'd like to turn it back to the operator to open the line for your questions.
Operator
Speaker Change: Thank you and once again everyone it is Star One. If you have a question we'll go first to Stephen Frankel, Rosenblatt Securities.
Stephen Frankel: Good afternoon. I appreciate the opportunity to ask some questions. And the comment on the relative flatness of foundational for the year, was that also true in Q1, or are you seeing any different trends in the beginning of the year?
Robert Park: Hey Steve, it's Robert here. You know we focus on the full year being our view is still to be flattish but nothing in Q1 indicated anything other than that.
Okay, and then in the outside...
Robert Park: outsized growth in mobile in Q1. Was that simply a pull-in of something that maybe you thought would land later in the year, or that's just the timing of the ebbs and flows of these deals, or is there anything kind of a level deeper about...
Robert Park: penetration rates or deal sizes that we can read into this number as well.
Speaker Change: Two things, Steve. One is just, as you know, within mobile we've talked about the fact that there's more higher prevalence of minimum volume commitments, so timing can vary from corridor to corridor on mobile. The other thing is the integration of GE licensing. While that affected all markets, mobile had the largest impact.
Okay, and then...
Speaker Change: On your CES review, the Samsung OLED screens for cars seems pretty exciting.
What do you think the timetable is?
Speaker Change: for that to be beginning to show up in models. Is that something that happens pretty quickly or is this your typical OEM auto design cycle that these vehicles could be a couple years out?
Speaker Change: have put ourselves at the center of that. As you know, we were demonstrating the first car to have Dolby Vision in market. That's Lee Auto at CES. We were demonstrating that.
Speaker Change: So we think that the ecosystem is ready for it. I think the Samsung...
Speaker Change: partnership in particular shows that they also see the opportunity and so having them natively integrating Dolby Vision into their displays for automotive I think both validates the the opportunity and it makes it easier for implementation cycles.
Speaker Change: We've obviously, you know, we've been working on this, Steve, so we would expect more progress throughout the year. And we're excited to extend what we've done with Dolby Atmos in the car to include Dolby Vision and Dolby Atmos.
One last quick one for Robert.
outsized
Speaker Change: drew up in the quarter. Was that one manufacturer in particular, or it was just in general in Q4 you undershot where actual volumes ended up?
Speaker Change: Yeah, there's not one particular vendor, excuse me, OEM or partner that stands out. It was really up across all markets, but particularly in TVs and auto.
Okay, great. Thank you. I'll jump back in the queue.
We'll take the next question from Patrick Schull, Barrington Research.
Hi, thank you.
Speaker Change: Yeah, I think the biggest factors there from a market point of view are automotive, where we feel great about the momentum we have, and it's just a matter of the pace of adoption and especially the pace of rollout, so that's the biggest variable there.
Speaker Change: Dolby Atmos and Dolby Vision. The increase from 25% a couple of years before that was the work that we've been saying that we're doing paying off and that's working with TV manufacturers to extend the Dolby experience deeper into their lineups.
Speaker Change: where we have particular traction with the likes of Hisense, TCL, they're also doing well market share wise.
Speaker Change: And then mobile, where we're, you know, one of our highest focus areas is getting more Dolby Vision and Dolby Vision Capture in mobile, and on the content side, bringing up to speed the ecosystem for user captured content, being able to share and edit that content.
Speaker Change: So those are the three areas and so what's going to drive it, what would produce upside is if more of those things are shipping and obviously the pace of wins and getting them into the market and how popular those models are.
Speaker Change: Okay, thank you. Then on Dolby Cinema, I guess, could you provide any sort of update on the screen base for that?
Speaker Change: Yeah, we we did add screens this quarter. It wasn't a significant increase, but it's getting going again Certainly after the last four years where it's been a tough environment for exhibitors to invest we've seen
Speaker Change: a significant pickup in the outlook for being able to add screens going forward. We did see year-over-year improvement in both Dolby Cinema and Cinema products.
Speaker Change: So we're working with our partners there, and as I think, as we said before, over these last four years, the percentage of the box office
where they want to invest is in premium screens.
All right. Thank you.
Up next, we'll hear from Ralph Shackert-William Blair.
You can compare and contrast as you look out.
Speaker Change: into 2025 now versus maybe a year ago as you're looking out in 2024. Maybe speak to some of the product momentum you see now versus maybe you saw then and obviously the macro environment foundational is better but just maybe if you could start there and then I'll follow up for either you or Robert. Thanks.
Speaker Change: which is why we guided to Roughly Flat for Foundational and they continue to be highly engaged on Dolby Atmos, Dolby Vision and we continue to be
Speaker Change: excited about that. I think also as it relates to automotive, we more than doubled the number of OEM partners over the course of FY24. Most of those partners are looking to extend
to expand deeper into their lineups.
Speaker Change: We've now added, we have Dolby Vision with Leoto, we have obviously a pipeline that we're looking to grow there, so I think we're just, one of our higher growth areas is coming off a larger base and we continue to have strong momentum.
Speaker Change: In TV in the living room, just getting that ball rolling again where we were You know at 25% of 4k TVs for a couple for about two years Having risen that to 30% and continuing to have a lot of initiatives in the pipeline to keep
Speaker Change: to keep that growing. And, you know, as I also said earlier, we're optimistic about the further potential for Dolby Vision, Dolby Vision Capture, and the mobile ecosystem.
Speaker Change: Great and then I'm just going to follow up and I get a lot of investor questions.
Speaker Change: I know you did a while ago, and then the model sort of pivoted since then. So maybe if you could take a step back and sort of frame the opportunity for us.
Speaker Change: and then just to maybe kind of bolt on to that. As we think about I-O, it's, I guess, the benefits and the in-app environment are pretty clear. But maybe if you could speak to the opportunity beyond apps, you know, is there an enterprise play here or sort of give us a sense of, you know, how that product could evolve over time. Thank you.
Speaker Change: Yeah, of course. So, yeah, you talked about the pivot, which was coming into FY24 when we went from kind of a self-service developer model
Speaker Change: to recognizing a very strong demand signal for companies in and around sports that are looking to offer more real-time, continue to evolve and improve their real-time
Speaker Change: which are such an important part of how their audiences are engaging these days.
In particular, our ability to stream high-quality audio-video content.
Speaker Change: in ultra-low latency, so we can do it in seconds, we can do it in sub-seconds, whereas the average today could be 7 seconds, but you could have 15, you could have 25. And that makes it hard to have an experience where you're watching the game, I'm watching the game, you're in Chicago, I'm in San Francisco, I see the touchdown 15 seconds before you. And on top of that, we've built other functionality. And of course, with Theo, we've brought on a great list of customers that are in our target areas.
and we have a more complete solution.
So I would say Ralph that
Speaker Change: It continues to be those digital experiences we think are, we see as a significant investment priority for these organizations. And so that continues to be the first thing we're going to talk about. But yes, it does extend into experiences that might not be
Speaker Change: Digital One customer that we added earlier this year, which has now gotten up to speed and is using the solution is Paddy Power, which Paddy Power is...
Speaker Change: sports betting shop in Ireland. It's the first of the Flutter, it was the original Flutter company, which Flutter now has over 15 entities. And Paddy Power is using us for their in-shop experience. And so
Speaker Change: You know, when you go into the shop and you're watching the horse race, for them, low latency has always been important, but, you know, they were doing it early, so they were using...
Speaker Change: sort of a start-up and some of their own stuff, and the rail liability was a real problem. It would cut out, even if it was going, you might not be able to discern the number of the horse, and so they went forward with us.
Speaker Change: We're now live in 600 betting shops, each of those shops can have up to two dozen or more streams going on of different events at any given time, and the reliability has just gone up dramatically, and so they've had a dramatic reduction in service calls because they're now getting the high-quality audio-video stream in low latency.
Speaker Change: and of course, we're excited about the fact that they're part of a larger group and that we look forward to that creating more opportunities to go forward.
Great. Thanks, Kevin.
Speaker Change: Everyone, at this time, there are no further questions. Does management have any closing remarks?
Speaker Change: No, thank you for joining us, and we look forward to keeping you up to speed on our progress. Thank you.
Speaker Change: Thank you. And once again, ladies and gentlemen, that does conclude this conference. Thank you all for your participation. You may now disconnect.