Q3 2019 Earnings Call
You were currently on hold for the Dolby Laboratories conference call discussing fiscal third quarter results. At this time, we are assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.
You are currently on hold for the Dolby Laboratories conference call discussing fiscal third year.
Quarter results.
At this time, we are assembling to.
Jeeze audience and plan to be underway. Shortly we appreciate your patience and please remain on the line.
Ladies and gentlemen, thank you for standing by and welcome to the Dolby Laboratories Conference call discussing third.
Quarter results during the presentation, all participants will be in a listen only mode.
Afterwards if.
Afterwards, you will be invited to participate in a question answer session.
At that time, if you have a question you will need to press star one on your telephone.
As a reminder, this call is being recorded Thursday August 1st 2019, I would now like to turn the conference over to Trey Cindy <unk> director of Investor Relations at Dolby Laboratories.
Please go ahead Jason.
Good afternoon.
Welcome to Dolby Laboratories' third quarter, 20, Nike Inc. earnings Conference call.
Joining me today are Kevin Yemen.
Dolby Laboratories', President and CEO .
And Lewis Chew Executive Vice President and Chief Financial Officer.
As a reminder, today's discussion will include forward looking statements.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today.
Under the section captioned risk factors.
Well as in our most recent report on Form 10-Q .
Dolby assumes no obligation and does not intend to update any forward looking statements made during this call as a result of your information or future events.
During today's call, we will discuss GAAP and non-GAAP financial measures.
A reconciliation between the two is available in our earnings press release and.
In the Dolby Laboratories' Investor Relations data sheet on the Investor Relations section of our website.
Actually the content of today's call Lewis will begin with a recap of Dolbys financial results and provide our fiscal 20, Nike outlook and Kevin will finish with a discussion of the business.
So those introductions behind us I will now turn the call to US okay. Thanks, Jason Good afternoon everybody.
As a reminder, a we adopted the new revenue accounting standards AOCI six or six beginning this year that we use the full retrospective method and that required us to recap previous your revenue under 606.
In our earnings release, we've included a table that shows the quarterly up waiting revenue figures as adjusted under six or six into the same table that we published last quarter.
So any comparisons I make the prior year revenue numbers are with respect to the six or six recasted numbers.
I think it's worth noting that Q3 of last year was the quarter most impacted by the six so six recast with a large portion of revenue I you as originally reported under signal by shifting out a down quarter in the prior quarters and prior years due to six or six.
So let's jump into the numbers.
In the third quarter, why 19 total revenue was $302 million compared to 338 million in Q2.
And 215 million in last year's Q3.
Licensing revenue for the quarter was 272 million, while products and services was 30 million.
Our licensing revenue was in line with expectations, while products and services was about $10 million below the midpoint of original guidance.
Here's a further breakdown licensing by end markets.
Broadcast represented about 49% of total licensing in the third quarter.
Broadcast revenues were up about 60% year over year.
And.
As I alluded to a second ago Q3 is a particularly tough quarter to discuss year over year comparison because of the impact of the six so six recast on last year's Q3 numbers, but having said that I think it's worth noting that Dolby technologies are adopted into more TV models and set top boxes now than they were a year ago and of course, that's something we focus on to drive the ongoing revenue growth.
On a sequential basis broadcast revenues were up about 10% and that was due mostly to higher recovery.
Mobile devices represented approximately 17% of total licensing in third quarter.
Year over year mobile was up about a 140%.
Similar to what I said in broadcast recognizing that the six or six recasted affecting the year over year comparison I can also say that Dolby technologies are more widely adopted into mobile device today than they were a year ago.
On a sequential basis mobile licensing revenue decrease by about 30% due mainly to timing of revenue under contracts.
Consumer electronics represented about 11% of our total licensing in the third quarter.
See you light up about 3% year over year, it was down about 36% sequentially.
Year over year, we saw higher volume from Dia means and the sequential decline was driven by timing of revenue under contract, which was partially offset by higher revenue from sound bars and from home theater equipment.
[noise] PC represented about 9% of total licensing in the third quarter.
PC was up year over year by about 49%.
And again to six wells six recast effect is this comparison.
But aside from that we see continuing downward pressure on our PC ASP due to mix.
And this is being somewhat offset by PC starting to adopt our newer technologies Dolby Atmos and Dolby vision.
On a sequential basis PC revenue was down by about 40% and this is mostly due to timing of revenue under contracts.
Other markets.
Our licensing and other markets represented about 14% of total licensing in the third quarter.
They were up by about 4% year over year, mostly from Dolby cinema revenue increases.
And on a sequential basis other licensing increased by about 7% driven by Dolby cinema and by game.
Product and services revenue was $30.3 million in Q3 compared to $28 million in Q2, and 31 million in last year's Q3.
As I mentioned earlier Q3 product revenue was about 10 million less than the midpoint of what we had guided.
We saw lower than expected revenues from cinema products in China, and the sales ramp up some of our newer offerings from both cinema products and Dolby voice was less than we had projected.
Based on what we're seeing we will be lowering our full year outlook for product sales more on that in a minute when I review the full forward outlook.
Let's now review margins and operating expenses.
Total gross margin in the third quarter was 86.9% on a GAAP basis.
And 87.4% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was 12.8% in the third quarter.
Compared to 26.7% in Q2.
Andy the decrease was mainly due to higher inventory charges for excess and obsolescence.
Product and services gross margin on a non-GAAP basis was 16.3% in the third quarter compared to 30.4% in Q2 and the reason for the decrease is consistent with what I just said for GAAP margins.
Operating expenses in the third quarter on a GAAP basis were $228.2 million compared to $198.8 million in the second quarter.
The Q3 GAAP total included $30.2 million of restructuring expenses 27 million. This was a charge for at least building that we exited during the quarter.
And of that 27 million about 15 million represented a noncash write down of fixed assets associated with the facility that we exited.
The other 3 million of restructuring was a charge for severances and the related benefits for a number of positions that we eliminated in our marketing group during the quarter as part of the reorganization and as as we reallocated resources for investments in future marketing programs.
So with two non-GAAP operating expenses on a non-GAAP basis were $178.2 million in Q3 compared to $178.7 million in the second quarter.
Operating income in the third quarter was 30 point $34.3 million on a GAAP basis or a 11.3% of revenue.
Compared to an operating loss of $7.6 million in Q3 of last year and note that the prior year Q3 number was affected by the six so six recast because the revenue for that quarter changed significantly as part of the recast while operating expenses were largely unaffected by the six and six recast.
Operating income on a non-GAAP basis in Q3.
Was $85.9 million or 28.4% of revenue compared to $11.4 million or 5.3% of revenue in Q3 of last year.
The effective income tax rate in Q3 was 5.2% on a GAAP basis and was 15.1% on a non-GAAP basis and both of those rates benefited from discrete tax items that were recorded in the third quarter.
Net income on a GAAP basis in the third quarter was $39.6 million or 38 cents per diluted share compared to $3.1 million or three cents per diluted share in last year's Q3.
Net income on a non-GAAP basis in the third quarter was $79.3 million or 76 cents per diluted share compared to $18.8 million or 18 cents per diluted share in Q3 of last year.
During the third quarter, we generated about $90 million in cash from operations and ended the quarter with a little over $1 billion in cash and investments.
We bought back about 1.4 million shares of our common stock in Q3 and ended the quarter with $65 million of stock repurchase authorization still available.
In our press release today, we announced that the board of directors has approved an additional $350 million.
Giving us a new total of about $415 million of stock repurchase authorization available as of today.
We also announced today a cash dividend of 19 cents per share, which will be payable on August twentyth 2019 to shareholders of record on August 12 2019.
So now let me cover the outlook starting with the full year.
For F Y 19, we are slightly raising the midpoint of our guidance for licensing revenue, but we are lowering our guidance for products and services revenue as I mentioned, a few minutes ago.
So accordingly, we now anticipate that total revenue for the year will range from $1.230 billion to $1.250 billion.
Within that total we estimate that licensing will range from $1.100 billion.
To $1 billion $110 million, while products and services are estimated to range from 130 million to $140 million.
Here's certain factors and assumptions that are incorporated into the full year outlook.
We are anticipating that our revenues in the broadcast market will grow.
As we see Dolby technologies incorporated in more Tvs and set top boxes, and I mentioned that earlier, even the quarterly comment.
In PC licensing will continue to see downward pressure from ASP due to mix, but some of that will be offset by more adoption of newer technologies.
Consumer electronics is projected to grow modestly.
And we expect mobile revenues to increase and we are seeing organic growth helped by further penetration and also the year over year mobile comparison is impacted by the six or six recast.
We expect growth in other licensing from Dolby cinema, and gaming and finally in products and services, we do anticipate for the full year growth in some of our products Dolby voice and Dolby cinema and as a side note as it relates to Dolby cinema. The product revenue growth is in connection with those transactions that include an element of fixed amounts that are paid or committed upfront and I discussed this on previous calls.
Gross margin for the year is projected to be around 87% plus or minus on a GAAP basis, and about 88% plus or minus on a non-GAAP basis.
Operating expenses are projected to range from $821 million to $825 million on a GAAP basis.
And from $708 million to $712 million on a non-GAAP basis.
Other income is estimated to range from $25 million to $26 million for the year.
The effective income tax rate for the year on a GAAP basis is expected to range from 9% to 10% and that includes discrete adjustments that we recorded the share that relate to use tax reform.
And the non-GAAP effective income tax rate for the year is expected to range from 17% to 18%.
So for Q4 of 14 19, we anticipate the total revenue will range from $288 million to $308 million.
Within that we estimate that licensing will range from 258 million to $268 million, while products and services is projected to range from $30 million to $40 million.
Q4 gross margin on a GAAP basis is estimated to be around 86% and non-GAAP gross margin estimated to be around 87% plus or minus.
Operating expenses in Q4 projected range from 199 million to 203 million on a GAAP basis.
And from 178 million to $182 million on a non-GAAP basis.
And other income is projected to range from $5 million to $6 million for the quarter.
Our effective tax rate for Q4 is projected to range from 18% to 20% on both a GAAP and non-GAAP basis.
So based on a combination of factors I just went over we estimate the Q4 diluted earnings per share will range from 45 cents to 51 cents on a GAAP basis and from 62 cents to 68 cents on a non-GAAP basis.
So with that I would like to turn it over to Kevin Kevin.
Thank you Lewis and good afternoon, everyone.
This quarter, we continue to see Dolby vision, and Dolby Atmos experience is becoming increasingly available to more people around the world.
Last month, Apple announced broader support of the combined Dolby vision and Dolby Atmos experience.
Already supporting Dolby vision in iPhone 10, IPO eight.
IPad pro.
Apple announced the addition of Dolby Atmos to these products starting with the next iOS release later this fall.
On top of that Mac book users will also be able to enjoy the combined Dolby vision and Dolby Atmos experience beginning with the next macko S. Catalina.
This is all in addition to the Apple TV for K, which became the first DMEA support the combined Dolby vision and Dolby Atmos experience over a year ago.
Apple customers will be able to enjoy the largest collection of Dolby vision and Dolby Atmos content available.
Apple now has over 500 titles available in Dolby vision, and 300 titles available in Dolby Atmos.
The continued adoption by our partners like Apple of both Dolby Dolby Atmos, Dolby vision and Dolby Atmos into their products reflects the momentum we have gained in establishing the Dolby experience as the best way to enjoy entertainment content.
Many of our partners increased their support by announcing new devices this quarter that support our technologies.
Consumers are now able to have a combined to Dolby vision and Dolby Atmos experience through set top boxes.
Verizon enabled their fios TV, one platform with support for the combined experience and their customers can now enjoy Netflix content in both Dolby vision and Dolby Atmos.
Additionally, SFR a pay TV operator in France recently announced they would be supporting Dolby vision and Dolby Atmos on its latest set top box to launch later this month.
We have also seen continued progress this year and have a Dolby vision adopted more broadly across TV lineups and at lower price points.
Amazon highlighted the support of Dolby vision on the launch of the Toshiba Fire. TV addition.
Vizio announced Dolby vision will be supported across their entire Fourk TV lineup.
With Vizio the announcement Dolby vision Tvs are now available starting at $250.
We also saw continued momentum with Soundbars.
This quarter, Samsung, Sony and Vizio, each introduced new sound bars, supporting Dolby Atmos at lower price points within their product lineups.
Dolby Atmos enabled sound bars are now available below $300.
In addition to apples announcement, we continue to see momentum in the adoption of Dolby vision and Dolby Atmos within Pcs.
Lenovo and Dell announced Dolby vision support across more of their Pcs.
Also Samsung announced their notebook seven will support Dolby Atmos.
A year ago, the first Tcs to support Dolby vision had just been introduced and now Apple Dell Lenovo will have Dcs supporting the combines Dolby vision and Dolby Atmos experience.
As the number of Dolby vision, and Dolby Atmos devices increases we have also seen the amount of content for these devices continue to grow.
We now have over 10 partners streaming Dolby vision and Dolby Atmos content.
These partners combined to enable over 1900 pieces of content in Dolby vision and over 1200 pieces of content in Dolby Atmos.
Pieces of content the movie titles and individual episodes of the series.
And in addition to the success with theatrical and episodic content, we see a great opportunity for Dolby vision, and Dolby Atmos to enhance new types of content.
The European Football Champions League final was broadcast in Dolby Atmos with BT in Europe , and CCTV in China.
In June Sky, TV broadcasting ill White and music festival in the UK in Dolby Atmos.
Earlier this quarter, we announced our partnership with Universal Music group to bring the Dolby Atmos experienced a music content.
Our partnership will enable thousands of songs within the UGI library to be mixed in Dolby Atmos across a diverse group of artists and genres.
Similar to the impact it has on theatrical or episodic content Dolby Atmos creates an immersive experience in the way you enjoy your favorite song.
I am excited about the opportunity ahead of us to bring the Dolby Atmos music experience to the growing number of atmos devices available today and into the future.
Let me spend a minute on Dolby audio which continues to be strong.
We have broad adoption of Dolby digital plus across developed markets and we continue to expand in emerging markets.
DTC one of the leading broadcasters in Vietnam began supporting Dolby digital plus in their OTG services. This quarter after launching Dolby digital plus in their broadcast service last year.
At the same time, we are gaining momentum in the us and Europe for the transition from DD plus to AC for our next generation audio solution.
Earlier this quarter several of the major us network stations and affiliates, including NBC Universal Fox Univision and the pro TV group jointly announced the deployment of the HCFC 3.0 audio standard with AC four in 40 of the largest us television markets by the end of 2020.
In Poland AC four was recently mandated within the audio standard for you Hdtvs by mid 2020.
This adds to the support received in Italy, and the Nordic countries that have also specified AC for as the sole next generation audio solution within their broadcasting standards for you HD content.
Let me shift to cinema.
We first introduced Dolby Atmos to the cinema about seven years ago and as of this quarter. We now have over 5000 cinema screens installed or committed with Dolby Atmos.
This presents spans across 90 countries around the world with more than 1400 theatrical titles that have mix than mixed in Dolby Atmos.
Dolby cinema, which enables the combined Dolby Atmos and Dolby vision experience continued momentum globally.
The first Dolby cinema in Germany is now open in Munich with our partner can novelists.
In China, we now have over 50 sites open across a growing number of partners.
This quarter, we added suiting cinema as a partner, bringing us to 10 Dolby cinema partners in China.
Globally, there are about 225, Dolby cinema screens open.
With a total of over 400, Dolby cinema screens open or committed.
There are now over 250 theatrical titles that have been released or announced in Dolby vision and Dolby Atmos.
And nine of the 10 got global box office films, so far none of the top 10 have been available in Dolby cinema.
Let me touch on Dolby voice.
Last quarter, a partnership with Blue Jeans, we announced the rooms as a service offering the first units from this new service model were shipped this quarter and we have seen strong traction with customer engagement with this new offering.
Building off that momentum, we recently announced our partnership with logged in logged in announced that they will be elevating the experience for their go to room offering by adding Dolby voice room, which will be made available later this month.
So to wrap up we continue to see the momentum of Dolby vision, and Dolby Atmos across a broad range of products and price points. The available content has grown significantly and I'm excited about the opportunity to expand Dolby vision, Dolby Atmos and Dolby voice into new experiences.
All of this gives us confidence that we will continue to deliver revenue and earnings growth.
I look forward to updating you next quarter and with that I will turn it over to QNX.
Thank you, ladies and gentlemen, if you wish to register for a question for todays question and answer session. You may do so by pressing star one.
I would like to withdraw your question Press Star two.
You are on Speakerphone, please pick up your handset before entering your request please be sure to identify yourself your firm.
At the outset.
To be fair all participants we ask that you limit yourself to one question and one follow up question until all participants have had a chance in the first round. If time allows we will then come back to answer any remaining questions.
One moment please for the first question.
And your first question comes from Steven Frankel with Dougherty. Please go ahead.
Good afternoon, and thank you Kevin lets start with what's not working in the product business, maybe a little more specific on what happened because it does seem like on the cinema side.
You are growing your installed base in China. So we know at least theres some of that activity going forward. So what stunned at the product business and what are you going to plan to do to try to restart that.
Sure so.
So first of all Steve you're right to draw that distinction between the Dolby cinema business and the broader cinema products business, we continue to see.
Around the world across our businesses.
Our customers our partners the creative community wanting to invest in.
The the premium entertainment experiences across streaming cost cinema.
Across the board.
The cinema products business of course is much more.
Reliant on the longer tail of cinema screens over 100000 screens around the world and China has been one of as you know.
One of the faster the fastest growing market I think a couple of years ago. They were doing just under 20000, new screens, a year and I think this year, they're under 10000.
So of course, we knew that was slowing coming into the year it slowed more than we expected and as it slowed.
We've seen competition heat up for fighting for a smaller number of screens.
In terms of what we're doing we we have.
Expanded our portfolio.
We have had some success with some.
Larger exhibitors doing.
Longer term.
Purchasing contracts for the full suite of what Dolby has to offer.
We did see some some some things push out into future quarters from from one of those in particular, but I think the broader point is that we're excited about the opportunity to go in and offer.
A broader solution and we're seeing a lot of interest in that from from exhibitors.
He is one of the factors impacting this business is with the shift to premium.
The multiplexes are shrinking there's fewer screens in the leonard than there used to be in.
Do you get a Dolby cinema screen in there and an IMAX screen, but there there are fewer.
Vanilla boxes to put atmos in your other cinema products it.
I view them as independent variables I'd, there may be some relation, but I don't think that the shift to premium.
Is.
Directly traded off against the number of screens overall, but I do think that we you know China was on.
Torrid pace for many years there. It's now slowed down obviously, there's a lot of macroeconomic factors, which are you know it's hard for me to draw straight line through any one of them, but that that clearly contributes.
So just in general we've seen.
A slower environment for those other screens, but again I don't think I would I don't think I would attribute that directly to the shift toward premium.
I think that it.
But I do believe that people continue to intend to upgrade their larger premium screens as they recognize that.
When you when you invest in quality when you have such a.
Our unique way to experience a film that that will bring bring in bigger audiences and it's also brought in higher box office revenues and so.
Thats hosts it.
And in your prepared remarks, I heard you kick off voice is one of the areas that hasn't ramped this quickly.
As you had anticipated and I think the the new room as a service is kind of interesting.
What's not working and voice and is this doing as a service offering is that the fix to get rid of the capital expenditure.
Well I think that part of it is the the transitioning from a capex to an Opex model I think a big part of it is I think it's a more natural way for people who are looking to convert.
Sign up for a huddle room experience for the the.
Collaborative audio video with everything.
Including the Dolby experience, it's a more.
It's more natural to the natural sales motion of our partners and to the purchasing notion of their customers Thats why we believe that the room. The as a service offering is promising it didn't kick in until partway through this last quarter.
We are pleased with the demand we're seeing.
Of course, as you would expect one of the implications of that from a revenue perspective as it will come in overtime, rather than upfront so thats an adjustment for us.
And we're excited now to have signed up logging in for their go to room, offering and thats going to be launching this quarter.
Okay, and then one last one the over the last year or so you've talked a lot about the ability to return to double digit topline growth.
How significant of a hurdle now is this down tick in the product business in your goal of getting back to double digit.
Top line growth.
Well I think the the Formula remains the same and again I would note that licensing is remained healthy across the board.
As I said in my remarks, we.
To us, it's all about making sure that.
Dolby experiences are perforating in all the ways that you enjoy your entertainment and of course, there will be ebbs and flows by any one product category.
Our market, but the the the Formula I've talked to you about is we do believe we continue to believe that we can.
Grow the the core business and then on top of that we have a number of new experiences in the form of.
Dolby vision Dolby cinema Dolby voice.
Which are.
We have great initial adoption, but still a tremendous.
Amount of growth ahead of them so.
That's the formula hasn't changed and we still feel very good about our progress in terms of adoption and how that sets up the future.
And would you still believe that you can get back to double digit revenue growth.
As it continues to be my belief and my goal to get back to double digit revenue growth yes.
All right. Thank you Kevin.
Our next question comes from Ralph Schackart with William Blair. Please go ahead.
Hi, good afternoon, just to maybe kind of touch on the products and service category one last time.
I think you noted China sales ramp from products and then voice is sort of the the contributors to the.
The line coming 10 million below and then you also talked about some products potentially getting pushed out I was just wondering if maybe you could kind of size between those four factors that had the which one had the biggest sort of impact on the quarter.
Hey, Ralph it's Louis.
I think Thats fair question, we as you know we'd all first of all just for the whole audience product and services revenue make up about 10% of the company. So let's just put that in perspective, and we don't typically breakout CRADA between the different categories, but directionally I would say that the discussion that Kevin had around cinema products and some of these circumstances like to China and the demand was a larger part of that missed then deploy site.
Okay and then.
Just in terms of your 19 outlook, Kevin or Lewis, who ever talked about it growing new products around 65% or so level in some upside that weve seen in licensing today I'm just curious how that how thats playing out for half why 19 is that still sort of the right way to think about the growth in those categories.
Yes. It is we still feel we still feel good about that and it's driven by.
The the continued adoption of Dolby vision the growth and.
Dolby cinema.
As well as.
Our entire imaging portfolio, and our Dolby voice products, but yet we still we said coming into the year that we'd be at least 65% is how we saw it last year and we still feel good that it will be at least that level yes.
Great one more and I know you don't give 2020 guidance on this call, but anything that you're seeing in the business today that would.
Sort of suspend or sort of break the momentum in the licensing business is your marching towards a high single digit growth eventually to get to double digit growth at some point.
Well.
I'll I'll quote you in that to make clear, we're not going to give guidance for fiscal 20 I'll say.
To the inverse of your question I think that the positive indicators are the continued adoption of Dolby vision, Dolby Atmos and all that all the data points I highlighted on the call.
You know I guess.
In terms of things that could derail that I mean, certainly.
No we've not we've been fortunate not to have seen any.
Apart from the dynamic in the slowdown in new screens are the as it relates to cinema in China, we haven't seen any real direct impacts if any of the macro concerns as it relates to.
The trade situation with China or any of the effects with that somebody is something we'll keep watching I don't have any specific information that.
That leads me to think it will go one way or the other but obviously that'd be that'd be something we'd be keeping an eye on.
Okay. Thanks, Kevin Thanks Louis.
Yes.
And our next question comes from Eric Wold with B. Riley. Please go ahead.
Thank you good afternoon.
Maybe just following up on the last question I know.
Yes, Kevin or lose it you're not going to give guidance for for 20, but maybe just kind of thinking about the various.
Licensing segments any.
Your thoughts around meaningful changes in momentum or direction of each of the license revenues heading into next year anything that can kind of changes what were seeing in 19.
Well I think.
If I were to kind of go through the markets I think for.
I think for broadcast one of the biggest factors continues to be.
How aggressively our partners.
The ops, our new technologies within their line up so as you know we have broad adoption across.
The major TV manufacturers and they've had varying paces of how quickly they move that throughout their for cadence of HD lineup. So thats one of the factors we saw vizio and now this year that will be their entire four K line up.
So certainly one of the factors and the more we see that the better the better it is for us.
The other big dynamic within our broadcast spaces is set top boxes, and you know I talked today about.
Two of the first set top boxes that will support Dolby vision and Dolby Atmos.
You know of course set top box cycles tend to you know they have their pace, but that's a good initial indicator and certainly.
That could be another driver in the broadcast segment.
Mobile that's an area. We've said we think we can grow we've got some great.
Adoption or.
Couldn't be more thrilled that.
Apple will now support both Dolby vision and Dolby Atmos on the iPhone.
An iPad and MCE less.
The.
We had Samsung announced its latest.
Galaxy earlier this year with Dolby Atmos Oppo signed up this year, so again were.
In.
Side of Apple were on kind of a few models. We could go deeper I think a lot of that has to do with the use case contacts I talk today about.
Our relationship with Universal Music group and that's so that's great for us because one of the key pillars of everything we do is having compelling content. Obviously, we have some great Dolby Atmos devices and so we're looking forward to the opportunity to.
Do the work to to work with somebody to connect those dots and if we can do that and that's that's another compelling value proposition for not just mobile devices, but speaker products and in any way that people like to enjoy their music. So those are some of the drivers across those areas will has talked a little bit about DC.
Again the the.
The headwind in that one is the continued.
Balancing in in price between the full solution that includes physical media playback, that's getting lower over time as everybody shifts to.
See digital media, but on the other hand, we're seeing really good.
Adoption of Dolby vision, and Dolby Atmos Mpcs so.
It's all about the pace of adoption at the end of the day and I think the the more we can get this keep this virtuous cycle going to more content partners more content.
And raising awareness and then of course, you know Dolby cinema, we see.
We continue to grow in the U.S., we plan a lot of seeds over the last.
Year, and a half with partners in Europe in China.
Japan.
And a few other places and we're in the early days of those Rollouts. So we see a good opportunity to keep expanding those relationships and and also to continue to sign up to sign up new partners. So that will be.
That we expect to continue to be a growth driver.
Thank you and just one more quick follow up were made can you hit on given that the integration of Dolby vision and you aren't going to set up box is that I guess, how how key is that too.
Getting into emerging markets, given the set top box and probably be still very much a required.
In those markets and then on understood a new opportunity how soon could smart speakers b.
Meaningful for Tobey. Thank you.
Yeah I think.
On the first question I think it does.
It does vary somewhat by market.
In terms of.
You know how much they're looking to go to set top box services over IP TV or cable.
I would say it really varies but its an important category for us I think in all markets and in some emerging markets as you point out, it's particularly its particularly important.
Second part of the question Oh, Yeah look I think that.
You know anywhere where there's an immersive audio experience, we think that we have on a best way to do it and so it's an interesting category for us and I think it again, we're we're looking to.
Increase the types of content and experiences we're increasing the library of movies and TV content live events.
Although those are the things that put us in a position to to go and try to compel.
More people to adopt in more ways.
Thank you.
Operator.
Okay.
[laughter].
Yeah.
My apologies, we will take our next question from Paul Cheng with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question so.
First on.
On broadcast.
You know if I take a look at the past two quarters.
The revenue run rate has accelerated quite nicely.
Relative to past three years. So so first is this kind of a function of.
Six or six changes or has there been any shifting classification maybe from.
Other revenues or is this just solid organic growth kind of driven by Dolby vision adoption could you know kind of expand on the dynamics there.
Sure.
Oh, Okay I hate it first of all this is Louis.
First of all yes to confirm that in broadcast which for those who don't know is made up of TV and set top box business. The four overarching comment is that in fact as Kevin mentioned in his comments, we are being adopted into more TV models and things like set top boxes and and of course, if you look year over year or the impact of things like Dolby vision is going to show a growing trend. So yes broadcast has been very important a healthy business for us.
Secondly, when you look purely at the year over year comparison, I did try to point out there of course that is to some degree affected by the six so six recast because last year's Q3 was affected by a recast. So it's really really hard at this juncture to make pure apples and apples comparison, because the accounting is lined up but it was a year ago, a different set of deals and circumstances. So I think it is a combination of those but I think overall, we do feel like broadcast is fundamentally for us a strong a growing business and the types of things you would see would be adoption of things like Dolby vision into more models or.
As Kevin mentioned this is the first two set top boxes that have mentioned Dolby vision, which means that's not even in our revenue yet so we see continued opportunity going forward.
Thanks for that and then can you remind us in general what you're.
Your penetration rate for.
Overall TV supervision I know in the past you mentioned there was some low percentage on overall TV, but are you kind of seeing more of your partners rollout vision to more skews.
And then if not what's kind of holding them back from from doing so across our whole product line up.
Let me hit the numbers part or Paul and I will turn it over to Kevin. So yeah, we do not routinely publisher disclose it penetration rate or whatever that number is we just wanted to get higher so let me turn it over to Kevin to talk more organically about at the strategy to get into more models. Yeah. We have seen we have seen some of our partners announced Dolby vision throughout their forecast light up we've seen it with I mentioned vizio, we've seen it with.
Westell associated with Tcl so so.
I think that's.
That's where it starts I think in terms of you know what.
What are the right you put it what are the barriers I guess you know.
Each provider has its own strategy, which kind of informs what their what their next priorities are and how quickly they adopt it but you know our goal is to keep supporting those that are ready and to keep bringing more content to life and overtime. We found that if we keep executing on that formula.
We ended up on a very large percentage.
Okay. Thanks, and then my last question is on.
On free cash so if I look at free cash flow. Your your cash from operations, it's down about 18% year to date.
And then your Capex levels are up this year about 25 million. So you're kind of overall free cash flow is is down about 42% how should I kind of interpret that decline is this more of a timing issue.
And then your free cash flow conversion that has been quite good over the past two years, it's been around that.
270 million Mark for the past two years so.
Are we on kind of track to hit that Mark this year. Thank you.
Well that was one long ask question Paul Okay. So far I know you like a long question [laughter] I like them fundamentally the cash flow models of business has not changed very strong, but the dynamics you see our two some of that to some.
Effect.
Impacted by some of the six dollarssix adoption, which does affect our balance sheet. We've also grown a little bit on the inventory side to support some of these newer product launches on the Capex side. There I think the level that we're at now represents kind what we see running so I don't think there's any significant changes going on with Capex, we're kind of in that $100 million dollar year class of which a good chunk of that is for our ongoing expansion of Dolby cinema. So overall I would say that we.
Expect this business to continue to be a very strong cash flow producing business, where the revenue and earnings does translate directly to cash flow generation, but on a quarter to quarter basis. There can be some fluctuations and remember we are only in the third quarter of adopting some six we finish working through a whole year of that and some of the balance sheet impact from that and then I think you'll start to normalize.
Thank you very much.
All right.
And our next question comes from Jim Goss with Barrington Research. Please go ahead Sir.
All right. Thanks.
I was wondering with if there are any specific constraints or a push back you're getting in terms of expanding Dolby cinema. I know you said, you're looking at Europe , China, Japan is placed as you planned it some seeds there is there something that's.
Yeah, holding that back at all and are you viewing it as much branding for license sales is there anything else.
Anyway or is this just a category you're trying to push.
We view this as a really attractive opportunity to a number of things that we see it as an attractive business opportunity, we see it as a great way to.
Show consumers and Creatives and exhibitors are what what Adobe experience is all about and so.
Yeah were so so I would say kind of both [laughter], okay, and yeah, what I said planted seeds I mean.
I think that we're we're seeing a the number you know we started off as you'll remember in the U.S. and China was where the program started off and we've been very busy growing those are those are our two largest market. The U.S. is the largest in China is the second largest today in terms of screen counts and over this last year and a half we've seen path. They come onboard in Europe . We've seen cannot was opened its first screen in Munich. This quarter, we saw Odeon Leicester square earlier this year so.
When I say seeds I mean, we've won partners, who intend to roll out more screens and we've got our first.
First ones first of all his life, Japan, We opened our first later last year I think we've now got to we've got a couple more on the way so.
So I I think that we're you know we're benefiting from the fact that.
Just the people are have a much better understanding of what the experience is all about.
Clearly we've got.
Fantastic flow of content I mean last year, we were on.
All 10 of the top global box office leader. So far this year were nine of the 10 I would say we're still in the running to get in the top 10 for the year. So.
You know I think all of those things are things that make it easier for somebody to.
To understand what this is about and and take that leap with us to to.
Really improve movie going experience and broad interest in general and understanding that the premium large format experience premium experiences I think are increasingly people understand that.
That's the way to bring more people to the to the movies, especially for the big Big titles.
Okay, and Kevin I've noticed a.
A lot more atmos.
Applications than vision I Wonder is there reluctance of.
The economic model you would require to do have a complete.
Atmos plus vision equals Dolby cinema package or is there something else that might be our cinema, specifically in the cinema applications, yeah, yeah, well, that's because we Dolby Atmos became available in the cinema.
Before we had.
Dolby cinema as an offering so.
Yeah Yeah.
Yes, we and we don't Dolby Dolby vision is not available in the cinema in any other way then the Dolby cinema experience right.
Okay and the other question I'd have is relates to the.
Apple terms or even have been pointing toward.
What what exactly like how many models or do you expect them to be on Anda.
Are there.
Hi, there.
Certain broader.
Availability of vision and Atmos, those phones or what it what else is available with Apple Apple maybe it's other devices as well.
Yes, well today, you can enjoy Dolby vision on iPhone 10, iPhone eight the iPad pro and they've announced recently that beginning in the fall you're going to be able to enjoy Dolby vision and Dolby Atmos on all of those devices. The Apple for K TV was already the first DNA.
On which you could enjoy the combined experience and then they also announced that they will be adding both Dolby vision and Dolby Atmos for the first time.
To the backlog so.
So yeah, we're going to.
I think.
Apple pretty broad Apple consumers will have broad, florida across their favorite devices and they do.
Currently at the single largest library of of Dolby vision, and Dolby Atmos content. So.
And that's been it's been steadily increasing I gave some of the numbers earlier and there are currently over 500 titles in Dolby vision 300 in Dolby Atmos, but thats been steadily on the rise.
Alright, thanks very much appreciate it.
Yeah. Thanks, Joe.
And as a reminder, if you would like to ask us.
My apologies as a reminder, if you'd like to ask a question that is star one on your telephone keypad and we'll take our next question from Steven Frankel with Dougherty. Please go ahead.
The Apple capabilities Atmos on a phone is that passed through to an app most capable device or on headphones can I get the virtual atmos experience.
For some kind of enhance value.
Yeah, I'm the well in general I would say are when we're.
Talking about our Dolby Atmos wins for mobile devices were talking about the experience you have while experiencing on those mobile devices as opposed to.
Passing through too.
Even if it does support a pass through what I'm talking about Dolby Atmos on mobile to mobile devices, I'm talking about being able to experience Dolby Atmos on those devices.
Okay, Great and then one last one for Louis because we don't want him to feel.
Left out any material true ups or downs in the quarter or have you got this thing down locked down Pat now.
Please say that again, Steve I was too busy make our e-commerce .
Yes.
Any material true ups for true downs from earlier in the year in.
Just reported quarter.
Oh sure Yeah. So the true up this quarter was approximately $7 million and thats consistent with last quarter as well.
Great. Thank you.
Yes, no problem.
Now I don't feel left out.
And it appears that is all the time, we have for question and answers for today I would like to turn things back to our speakers for any additional or closing remarks.
Great well. Thank you all for joining and we look forward to speaking to you again soon.
And this does conclude today's call. Thank you for your participation you may now disconnect.