Dolby Laboratories, Inc.
Q2 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal second quarter results. As a reminder, this call is being recorded, Tuesday, May 4, 2021. I would now like to turn the conference over to Jason Dea, Senior Director of Finance and Investor Relations for Dolby Laboratories. Please go ahead, Jason.

[Jason Dea:]

Good afternoon. Welcome to Dolby Laboratories Second Quarter 2021 Earnings Conference Call. Joining me today are Kevin Yeaman, 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, including our third quarter and second half fiscal 2021 outlook.

[Kevin Yeaman:]

Thank you, Jason, and good afternoon, everyone. With another strong performance in-licensing revenues this quarter, we are off to a solid start to our fiscal year. Our first half fiscal 2021 revenues have grown about 10% compared to the first half of fiscal 2020, and earnings have grown at an even higher rate. Our financial results reflect the strength of Dolby's business model and the broad adoption of Dolby Technologies across the devices and services that consumers are seeking to enjoy their content. Before Lewis takes you through the numbers, I wanted to highlight some of the areas of our progress and the recent examples of how Dolby is enabling a broader range of content. With a growing number of content experiences becoming Dolby experiences, we add to our value proposition for deeper adoption in existing device categories, and we address the use cases for adoption in new device categories, which together drive our opportunities for growth. With Dolby Atmos for music, we are enabling a significant step forward in how people can enjoy their favorite songs, which is creating new opportunities to expand the adoption of Dolby Atmos to a broader range of devices and services. Lucid motors announced that they will be bringing the first automobile to market that will include Dolby Atmos. The Lucid Air will enable the Dolby Atmos for music experience for the car and is the first example of a significant opportunity to address the primary entertainment use case within automotive. Lucid is just 1 example of how we are creating more ways for consumers to enjoy a growing library of music and Dolby Atmos.

[Lewis Chew:]

Okay. Thank you, Kevin. Good afternoon, everybody. And of course, may the force be with you. As Kevin said, our financial results were very solid this quarter. Revenue and earnings both coming in higher than we previously guided. So let me go through a few details for everyone. Second quarter revenue of $320 million was above our guidance range of $280 million to $310 million, as the volumes that we had were higher-than-expected in several of our end markets. And then we also benefited from a true-up of about $15 million in the quarter for Q1 shipments reported that were above our estimate. On a year-over-year basis, second quarter revenue was down from last year's $352 million due to lower recoveries and lower revenue from cinema-related business partially offset by higher adoption of Dolby Technologies and higher market volume in areas like PC and TV. On a sequential basis, total revenue was down from Q1 due to lower recoveries and lower seasonality, and both of these were anticipated when we gave our guidance at the beginning of the quarter. So the Q2 revenue was comprised of $304 million in-licensing and $16 million in products and services. So let's go through the trends in-licensing revenue by end market, starting with broadcast.

[Kevin Yeaman:]

All right. Thank you, Lewis. I promised you I would wait until you got through your remarks to acknowledge our other news for the day.

[Lewis Chew:]

Thank you for doing that.

[Kevin Yeaman:]

Yes. As I'm sure most of you or all of you saw, we also announced today that Lewis has made a decision to retire later this year. And I want to acknowledge the impact that Lewis has had. Over the last 9 years, Lewis has played an integral role in building our strong financial position, navigating new business models, and just overall supporting the expansion of Dolby Experiences. I can't thank Lewis enough for everything he's done for Dolby. He's built a very strong team. He's mentored countless employees, both within and beyond the finance organization. And Lewis is going to be working closely with me to ensure a smooth transition as we work to identify our next CFO. So we've still got Lewis. We're going to enjoy that for now. And then we'll be happy to that Lewis has a lot more time to focus on his family. And of course, Lewis, we will wish you all the best.

[Lewis Chew:]

So Kevin, is it true that when I first told you, you said good riddance?

[Kevin Yeaman:]

I think you might have misinterpreted that.

[Lewis Chew:]

Well. Yes, it's a whistle moment, but thank you. Thank you to yourself and the Board, investors for most of all for putting up with my bad humor. I can't believe now that they actually have books out there called Dad Jokes because I think all my jokes probably fit that category, but it has definitely been a privilege to serve as the company's CFO and lot of great memories. And since we're all about the experience, I can definitely say that I've had my own unique Dolby experience here. So I look forward to a smooth transition as we move on to the next phase. Company is in great shape. Great shape, great promise ahead. So I will happily watch from sidelines.

[Kevin Yeaman:]

All right. Well, Lewis, I haven't heard anyone disagree with you yet when you talk about the quality of your humor. And we are going to make sure and get the most out of your remaining transition time. And with that, I'm sure our audience is eager to get to questions. We've covered a lot of ground. And so let's turn it over to Q&A.

[Operator:]

Your first question comes from the line of Ralph Schackart with William Blair.

[Ralph Schackart:]

A couple if I could. Just first on Dolby. Kevin, I know you get this question often, but just now that you've had another quarter to work with work with it? Just any sense of kind of framing the opportunity for investors? And then maybe also too, just in terms of the price, obviously, you have some pricing on the website. Just curious sort of what the receptivity has been on that sort of pricing plan, if it's priced effectively and efficiently? And just kind of maybe what are some of the hurdles from, I guess, gaming or use cases and customers going forward?

[Kevin Yeaman:]

Sure, Ralph. Thanks for the question. Well, look, in terms of the opportunity, we're continue to be excited. We think there's a significant opportunity and the things to focus on, really, as it relates to our opportunity is the increasing demand for real-time interactivity and doing that in a high quality way, and we feel like we bring a lot of expertise to bear in addressing that as well as just the amount of media content that is being created and consumed every day in the cloud. And we think we can do a lot to help people create great content, great quality content out of that. We are excited about our announcement with Box or a partnership with Box, I should say, it's said to partner with them. This is going to enable their customers that enable the Dolby integration to have their users able to improve their content easily right where they store their content. And we've seen a lot of interest in the media and entertainment space. Box has a very large presence in media entertainment. So this is going to allow them to improve their audio much more easily and with a broad range of content. So we're excited about that. And across the board, we're focused on continuing to get more developers signing up, more developers engaged with our APIs. And yes, the pricing, as you point out, is on the website. And yes, so far, I would say things are going well as far as that goes.

[Ralph Schackart:]

Great. And then just in terms of cities and states are talking about reopening and capacity constraints eased. Just curious what you're seeing on the cinema side or hearing from exhibitors and what's contemplated in the guide for cinema for the balance of fiscal '21?

[Kevin Yeaman:]

Yes. So I'll start with the high level. Lewis, I don't know if you might want to chime in more specifically on the guidance. But Ralph, it still is -- I mean, as you point out, it's still city by city, country by country. But in general, we've seen continued -- certainly signs of opening up here in the U.S. I think Europe is beginning to get right back in the right direction. In Asia, they've been -- they're more open. What we've seen is that there have -- there have been some very successful releases. I mentioned a few of them in my prepared remarks. But what I would also say is that the box office has skewed more heavily toward the premium experiences. And so we continue to believe that when people do go back to the movies, they're going to want to experience in the best possible way. So we think the premium experience is where the action is going to be. And that's where -- and that's where, of course, we're always focused. So yes, we do expect, obviously, there's -- with all the appropriate qualifications around uncertainty. We do see things -- the way we see it right now, we see things continuing to to improve throughout the rest of this year, although, of course, the pace is somewhat uncertain.

[Ralph Schackart:]

Great. And just last, Lewis, just want to wish you congratulations on retirement. This call certainly won't be the same without on it. And hopefully, you've reserved a Lucid to enjoy retirement?

[Lewis Chew:]

Yes. With the pandemic thing, Ralph, I wish I could see the demo, why shall see the demos almost ironic is really here the demo, but see the car in the demo because from the people who I've heard who have experienced it, I've heard, it's nothing short of phenomenal. And I believe that there's no reason for them to blow smoke up my, you know what. So yes, I think it will be nice going forward to see some of these cool things evolve anyway.

[Operator:]

Your next question comes from the line of Steven Frankel with Colliers.

[Steven Frankel:]

Lewis, in the back half, are there any material changes in timing shifts between Q3 and Q4 versus last year? I know we had a couple of those in the front half?

[Lewis Chew:]

Yes. This year, I think the back half is a little bit more calm. So I would say, as a high level answer, no. I think we had more of that -- more of that complexity in the first half of this year. I think now that we've given you guidance for Q3, and I've given you a fairly tight framework for revenue in Q4, we don't have as much of that noise between the 2 quarters this year.

[Steven Frankel:]

Okay. And Kevin, I'm looking for a little more detail on the box relationship. Is this like are you integrated directly in box or so that I can just kind of check a box and get the product? Or do I have to separately come to Dolby and sign up and once I sign up, it's easy to use within Box?

[Kevin Yeaman:]

Yes. Thanks, Steve. You sign up with Box. So what happens is if Box will has included us as 1 of their partner integrations. And any IT administrator can sign up with Box or work directly with Box to enable their users to access they Dolby's audio enhancement APIs. And at that point, the -- so the users, the payments running through the enterprise. And at that point, it's pretty much as simple as selecting a file and pressing the Dolby button and it comes back with the Dolby enhanced audio content.

[Steven Frankel:]

Okay. That's pretty good. What have you found is the most effective channel for recruiting developers so far with IL.

[Kevin Yeaman:]

Well, I think that -- I would say the -- first of all, it's the events, which, of course, for this -- for the -- since we launched Dolby.io, we've been we've been in virtual mode, but we have been participating in an increasing number of events, whether that's south by Southwest or university Hackathons and getting people engaged and then looking for that to spread by word-of-mouth amongst developers. Obviously, some of our wins have drawn attention, which brings more people into explore. And I think as we look forward, I think there are -- there will be increased opportunities to -- based on the other great things that are going on around Dolby to find ways to authentically connect with developers and get more people coming to learn what we can do for them. Because as I said earlier, there is a massive amount of content, an increasing number of minutes of interactivity. And what we're confident about is that we can improve the quality of those like nobody else.

[Steven Frankel:]

Great. And then on vision, any update on progress with live content being broadcast and vision.

[Kevin Yeaman:]

I'm pausing, Steve, because I'm -- I don't know that I'm as current on that, but we continue to be engaged across a number of opportunities to get larger scale. To date, it's largely been many event specific kind of broadcast. But especially now that we're starting to come out the other side of the pandemic so that you get more live events, which is often the first kind of protocol for that kind of thing and some of the tires ructions being lifted, is 1 of the dynamics around both Atmos and vision in new events was just that in the beginning, it requires a few more people and everybody wanted to minimize the number of people. So we've continued to have a number of private and public kind of event streaming and vision and/or Atmos, and we definitely see some of that activity beginning to pick up again.

[Steven Frankel:]

Thank you, and I'll echo Ralph's comment. Lewis enjoy your retirement.

[Lewis Chew:]

Thank you. Steve. Great working with you.

[Operator:]

Your next question comes from the line of Paul Chung with JPMorgan.

[Paul Chung:]

So just another follow-up on Box. So how do we size the opportunity here, just taking their audio file base and the growth rates that you're seeing or uploads were up 50%. What if we assume kind of 100% usage of the Dolby kind of media processing API? How big is that and how to size that? And then what about on the video side and vision mentioned there? Any potential for vision there as well?

[Kevin Yeaman:]

So as it relates to the first part of your question, look, it's early days. We're just out of the gate here with the box integration. But again, we're very excited about it because -- because of the opportunity to work with box and there are substantial presence in media and entertainment. I mean we've, we've had a lot of interest in that space. To give you some hypothetical examples of how someone might want to employ our media APIs in that world. As you could imagine, a production company that has people doing voiceovers around the world with varied degrees of quality. That can all be run through our APIs to get a high level of quality. It could be podcasters or newscasters are doing interviews, using their phone outside you could employ Dolby to clean that up. And they're endless examples because it can imply to a lot of different content. But we're right out of the gate. So we're going to be partnering closely with FOX to show their customers what we can do, so that they can begin enabling that and getting usage. And I think -- I'm sorry, can you remind me the second part of your question?

[Paul Chung:]

Video.

[Kevin Yeaman:]

Vision. Yes. So yes, right now, the interactivity is, of course, audio video. Our media APIs are focused on audio enhancement that you can you can be sure that across our portfolio of APIs, as we look at our road map, we see opportunities to bring our vision and imaging expertise to that platform.

[Paul Chung:]

Okay. Great. And the use case makes great sense. Any other use cases? Can you share that, that would fit well with this business? Is there a use case for gaming apps and time spent there? Or even live streaming audio or video or not even live.

[Kevin Yeaman:]

In the broad sense, I'm going to say, yes and yes, as it relates to potential applications. To give you a couple of examples. We had an announcement recently, I think it was last week or rather customer always had an announcement. Display is a social media company, which allows their creative community to share in the revenue from advertising. And they have taken advantage of Dolby.io to enable those creators to interact directly with their fans. So that's kind of a very social live example of what can be done. We're also looking at all forms of virtual events. We're working with a company by the name of Home, which also connects artists with fans for live virtual concerts and also kind of special experiences. So those are some of the more examples of what we're doing. But again, it's where people are looking to have greater real-time interactivity and high-quality and improve the quality of their media content across the board.

[Paul Chung:]

Got you. And then last question for Lewis, and I will miss the dad jokes, but I'll give you a free cash flow question. So you had a pretty strong performance in the first half. Kind of relative to previous years. Should we expect kind of the second half to be kind of higher than the first half similar to how you've seen over the past couple of years? Or how do we think about kind of seasonality given revenue guide is slightly lower in the second half versus first half?

[Lewis Chew:]

Yes. Probably the -- since I didn't give a projection for cash flow because probably the biggest swing factor is things like collection and receivables as opposed to the core business. I would say that your question is spot on in the sense that now that we've lapped 606 and left that first year in our rearview mirror, you can see that our cash flows are now much more highly correlated to our earnings. So I'd say going forward, without Paul necessarily taking on any 1 quarter as our revenue and earnings grow, I firmly believe that you'll see that translated into equivalent amount of cash flow as well because we are now all normalized on the whole 606, extra quarter of balance sheet on there because of the estimated revenue and all that. So that's why you're starting to see these quarters where the cash flow from operations is highly linked to the pattern in our net income.

[Operator:]

Your next question comes from the line of Jim Goss with Barrington Research.

[Jim Goss:]

Dolby's traditionally thought in terms of maybe a several year lead time from a technology introduction to when it begins to contribute meaningfully. I think over the past couple of years, we've seen Atmos envision do that. Is Io the current version of that? Or are there other things in mind like music that you think of in those terms. And on a related basis, with IO, the pricing is obviously going to be a different type of pricing than the traditional royalties you have, do you think of it in terms of creating contributions in a different way that might match up with the type of pricing you've had or might it be even better when the usage gets more robust. How would you -- a prior question about framing out the opportunity. I'd like to know a little bit more about that as well.

[Kevin Yeaman:]

Sure. So thanks, Jim. To take your last question first. Again, the way to think about it is what we're looking to do is power as many minutes of interactivity as possible and to improve as enhance the quality of as many media minutes of content as possible because the way we earn revenue is on a permanent processed basis. So this is really -- these are -- this all starts from our long-held belief that the decades of experience that we have, doing the best in audio/video quality, the IP that we have and the know-how that we have can be applied beyond the realms of premium entertainment, movies and TV, gaming, music and apply to all the ways, all the apps and services that we're using every day. So our that's what we see as the opportunity. And to your point on kind of cycle times, yes, bringing up an ecosystem like bringing Dolby Vision to life for the first time or to the Atmos to life for the first time. You've experienced a couple of times with us the kind of length of time it takes. To bring up the first content partner, the first device partner and build from there. I would say that the subsequent cycles might be somewhat shorter than that initial cycle, in other words, applying it to a new realm of content. But in the world of Dolby.io that holds the promise of being a much kind of faster experiment and learn cycle time. So it enables us to put new capabilities on the developer platform. With a goal of learning quickly how developers are responding to it, what more they like to see and how we can apply our know-how, our experience, and in some cases, IP that we already have. In some cases, it will new innovation to serve that world.

[Jim Goss:]

Okay. And one other area. In the Dolby Cinema. AMC has been your primary partner in the United States. It's had a number of issues. It's focused on recently. I was wondering if there's room for another partner in the U.S. or if you're pretty much tied to that AMC being the 1 and only partner in terms of Dolby Cinema here, and then in markets outside the U.S., the other way you can grow is to develop new partners in those markets as well. I wonder if you could give any update on that sort of process?

[Kevin Yeaman:]

Yes. Clearly, this has been a difficult -- we've come through a pretty difficult time for the industry. So first and foremost, they've been focused on keeping up with the implications of the pandemic. But at the same time, we have remained very much engaged with our partners. I mentioned in my prepared remarks that we did add a partner in China. And we added about 4 new screens. Obviously, that was tempered by the pandemic, but there's still like I said, I think that when people come back, we're already seeing that the box office has been skewing pretty notably more toward premium experiences than pre pandemic and and that's consistent with our thesis that when people do come back, they're going to want to experience it in the best possible way.

[Jim Goss:]

Okay. And -- but aside from the one in China, that's pretty much where you are at this stage, but that could be another opportunity?

[Kevin Yeaman:]

Yes, that's the only partner we had in this quarter. Although we have multiple -- as you know, we have multiple partners in China that are up and running.

[Jim Goss:]

Okay. And Lewis, I would also agree. I wish you well. And whatever your next venture is.

[Lewis Chew:]

Thanks, Jim. I appreciate it.

[Operator:]

There are no further questions at this time. I would like to turn the conference back over to Kevin Yeaman for any closing remarks.

[Kevin Yeaman:]

Great. Well, thank you, everybody, for joining us. We very much appreciate the questions. And of course, we look forward to keeping you updated on our progress.

[Operator:]

This concludes today's conference call. You may now disconnect.