Dolby Laboratories, Inc.
Q1 2016 Earnings Call Transcript

Published: 28 Jan 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call Discussing Fiscal First Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you’ll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded, Wednesday, January 27, 2016. I would now like to turn the conference call over to Elena Carr, Director of Corporate Finance and Investor Relations for Dolby Laboratories. Please go ahead, Elena.

[Elena Carr:]

Good afternoon and welcome to the Dolby Laboratories’ first quarter 2016 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. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. A discussion of some of these risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Risk Factors, as well as on our most-recent report on Form 10-K. 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. 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. As for the content of today’s call, Lewis will begin with a recap of Dolby’s financial results and provide our fiscal 2016 outlook and Kevin will finish with a discussion of the business. So, with that introduction behind us, I’ll now turn the call over to Lewis.

[Lewis Chew:]

Thanks Elena and good afternoon everyone. Now, let me spend a few minutes going through the financials before I turn it over to Kevin. So, total company revenue in the first quarter was $241 million of which licensing was $211 million and products and services were $30 million and here are some additional details by the various market segments. A broadcast represented about 48% of total licensing in the first quarter. Revenues in this market were up sequentially by about 8% due to higher back payments and higher volumes from TVs, which were offset partially by lower set-top box revenue. Year-over-year broadcast was up by about 15%, driven mainly the higher back payments along also with higher volume in TVs. PC revenues represented about 15% of total licensing in the first quarter. PC licensing was down about 9% sequentially due mainly to lower back payments and PC was down about 8% year-over-year driven mostly by lower unit volume. Consumer electronics in Q1 comprised about 13% of total licensing. They were up about 10% sequentially from Q4 due mainly to seasonality and year-over-year consumer electronics were down about 9% due to lower unit volume in AVRs, Blu-rays, and DVD players, offsets partially by higher volume in DMAs and sound bars. Mobile devices represented about 10% of licensing revenue in Q1. They were down about 21% sequentially and about 40% year-over-year, and much of this declined both the sequential and the year-over-year was due to timing of amounts under contractual arrangements, which we had anticipated. In addition, unit volume was lower than we had projected. Looking forward into Q2, we anticipate that mobile will continue to be around 10% to 11% of total licensing revenue. Revenues in other markets were approximately 14% of total licensing in the first quarter. They were up sequentially by about 29% from the fourth quarter, mostly due to seasonally higher revenue from gaming. Year-over-year other markets licensing was up by about 4% also mainly due to higher gaming. Products and services revenue was $29.7 million in Q1, compared to $29.4 million in Q4 and $17.6 million in Q1 of last year. The increase year-over-year was mainly due to a full quarter of sales volume from our Doremi acquisition, compared to only a partial quarter in last year’s Q1. And there might also have been a positive effect in cinemas installing or upgrading equipment in time for this year’s holiday movie season, which included the release of Star Wars

[Kevin Yeaman:]

Thank you Lewis and good afternoon to everyone, who’s joining us today. Now that Lewis has taken us through the numbers, I’d like to talk about the progress we are making on our plan to return to double-digit growth. We have two major areas of focus. First, expanding our leadership role in audio solutions for entertainment content. Second, bringing auto visual experiences to markets that are new for us. It was an exciting quarter for Dolby. Dolby technologies were our great display at CES and we have new partner announcements for each of our three new offering

[Operator:]

Thank you, ladies and gentlemen. [Operator Instructions] And your first question comes from Steven Frankel with Dougherty.

[Steven Frankel:]

Good afternoon, Kevin. Could you elaborate just a little bit on the timing issue around these mobile payments? And will we see basically what was a full year's worth of revenue in one or two quarters in the back half? And what's behind that change in timing?

[Lewis Chew:]

Hey, Steve this is Lewis. Well, first of all, I'll say that, historically, it’s not unusual for us to have contractual arrangements with customers that have timing elements to it. And what I was just pointing out is that the timing in some of the contractual arrangements literally had more of that revenue coming in, in parts of last year than this year. And so I was just pointing out that was not a market factor and that’s the bulk of what’s driving those fluctuations. I think you were referring to what I mentioned in my script, right.

[Steven Frankel:]

Yes.

[Lewis Chew:]

Yes.

[Steven Frankel:]

And how many mobile SKUs are you in today versus a year ago?

[Lewis Chew:]

Versus a year ago? Probably slightly more. We really haven’t had a – I mean it’s really hard to say accurately, because we don’t consistently talk about things like number of SKUs that we’re in. But over the course of last year, what I sort of see off the top of my head is additions by some of these valued partners of ours, whether they be Lenovo adding SKUs in things like pads and high-end phones. And for the most part, if what you are alluding to is when we were previously in very high-running models, like from Samsung, that’s way in our past. That’s not in effect here.

[Kevin Yeaman:]

Steve, as Lewis said, we expect mobile to be 10% or 11% of revenue again in the second quarter. Some of our – well, I don’t have the exact SKU count, some of the bigger customers are LG, Lenovo, Amazon, that are making wide use of Dolby technologies. And we’ve gotten a great reception from the – we continue to improve that experience. I mentioned in the script that Netflix is now streaming Dolby Digital Plus content in Dolby Digital Plus-enabled devices. It really does make a big difference. We’ve got a couple of customers that are using Dolby Atmos. So the value proposition is getting stronger. And I feel good about the pipeline of customer activity we have, and with the goal of adding some people to our lineup during this year.

[Steven Frankel:]

All right. If I could sneak in one more, the LG Dolby Vision announcements were clearly very exciting. How many SKUs do you think you’ll be in at LG when these 2016 TVs ship?

[Kevin Yeaman:]

Well, again, I don’t have a SKU count, Steve, but what I’m excited about is that we’re on however many SKUs of OLED there are – we’re on all the OLEDs and we’re on all the Super UHD LCD TVs. And so that gives us a really broad base for this experience, combined with an increasing amount of content and distribution partners. So, we’re really excited about that that partnership with LG.

[Steven Frankel:]

Great, thank you.

[Operator:]

We’ll go now to Mike Olson with Piper Jaffray.

[Mike Olson:]

Hi, good afternoon. I had kind of a follow-up to that, which is, you’ve gotten good traction on the content side with Dolby Vision, and it’s working its way into the hardware side with some of these recent deals. What’s kind of your sense on how quickly it can go from a feature for more high-end TVs to moving more downstream? And is the right way to think about the addressable market for Dolby Vision that it would be 4K TVs only? Or is there any reason Dolby Vision would ever be on a non-4K TV?

[Kevin Yeaman:]

So far what we’ve seen, as you point out, is that it’s been adopted on 4K televisions. There is no reason why it can’t be adopted on 2K televisions. It’s completely independent of the number of pixels. It just makes every pixel better. And, in fact, we believe it has a dramatic impact, whether you’re talking about 2K or 4K. But to answer your question, on the high-end as it moves into the mid and low-end, I think whether you’re talking about 4K or Dolby Vision both, I think that we’re going to see – we’re going to begin to see this get beyond the high-end this year. I think that we’re seeing companies want to roll out this ultrahigh definition experience pretty quickly. And we’re excited that, with LG, we’re starting with both the OLED line and the Super UHD line.

[Mike Olson:]

Okay. And then on Dolby Cinema, so you now have these two large Dolby Cinema deals

[Lewis Chew:]

Hey, Mike, this is Lewis. I think we’ve consistently said that as we build up to more critical mass of actual theaters running, we’ll have more data to share, but right now we’re not in the position to talk about specific deals. So, why don’t we hold off on that kind of discussion until we have more rolling? Because we obviously feel like that this is a very attractive business to be in and the momentum right now feels very strong. If you consider that it was only just last May when we opened the first one. And as Kevin said in his script, we’re now up to over 200 committed and at attractive economics to us. But right now, a narrow question like are economics in Asia versus U.S. any different, I think is too soon to address that level of question.

[Mike Olson:]

Okay.

[Kevin Yeaman:]

All right, but I can’t help, but take the opportunity to talk – to reiterate how excited we are that we now have 100 screen deals with major partners in each of the U.S. and China. And, as you know, this is a complete value proposition. It includes the audio experience, the visual experience, the design. It’s a complete experience with an economic proposition that reflects that and that’s the case in both markets. And we’re encouraged both by the pipeline of screens we’ve developed so quickly, the number of screens that we’ve been able to implement to date, AMC has been a fantastic partner, and is continuing to aim for 50 screens by the end of the calendar year. And we are really encouraged about how this is progressing. And it’s definitely – it’s good for our goal in 2016 of driving at least $20 million in revenue from our new initiatives, Dolby Cinema and Dolby Voice and it also bodes well for setting a good trajectory going into 2017.

[Mike Olson:]

All right, thank you.

[Operator:]

And we’ll now take a question from Ralph Schackart with William Blair.

[Ralph Schackart:]

Hi, good afternoon. Kevin, I think on the call you had said that you had about 120 customers signed up for voice. I think, historically, you spoke to monetization begins with the implementation. I was just curious of those 120, sort of where you are with that implementation process and monetization effort today? And sort of how should we think about that monetization linearity through 2016?

[Kevin Yeaman:]

So, as we said, there’s about 120 customers signed up, as you just said. I think we signed about 19 last quarter. We’ve been especially focused, Ralph, on within those 120, the very large minutes users. There’s between – call it a handful and a couple handfuls of companies that are just on a very large scale of minutes usage. We have had a couple of those go into implementation quite recently. We’ve got – most of the rest are in implementation now. And that’s significant because the – getting into implementation is what drives the capacity to offer the service and use the service. But then once they are in implementation is when we see the opportunity to drive other revenue from things like selling the Dolby conference phone. So we’re obviously having, I would say, really good traction with people signing up for the service. We’re really excited to have added a partner in PGi this quarter, which will significantly expand the potential. We’re just now getting into the – through the implementations, which will put us in a position to start to drive those additional revenue streams. And the most we’ve said about that quantitatively so far is – I’ll repeat what I said earlier, which is, that we’re looking to drive at least $20 million of revenue this year from Dolby Cinema and Dolby Voice combined.

[Ralph Schackart:]

Great. And then maybe just a clarification question. Is Dolby Vision in your 2016 outlook?

[Kevin Yeaman:]

Well, to the extent that it will affect 2016, yes. But keep in mind that we’re – not all of our partners have announced ship dates. But if we assume that more – Visio, of course, is shipping and beyond that, if others are shipping sometime in the spring timeframe, we’re talking about a quarter’s worth of revenue. So we’re really excited about that. We’re, again, especially excited about the trajectory that puts us on for the program in the long-term and in 2017 specifically because we see now a real critical number of televisions. And that really frees us up to begin to get this experience to more consumers, to give the content creators who have already been really excited about this an outlet to get it to consumers. So, it’s a small – it’s not a big factor in 2016, which is why I haven’t included it in my list of what’s contributing to the $20 million of new. Not to say we won’t see some, but this is really going to be something that we’re looking to begin to see growth in 2017. And I think what’s significant about our progress this quarter, and what we did at CES and what we felt we had to do by CES, is that we feel really good about how we’re setting ourselves up for the future with the Dolby Vision program.

[Ralph Schackart:]

Okay, thank you.

[Operator:]

Our next question will come from Eric Wold with B Riley.

[Eric Wold:]

Hi, good afternoon. A question on Dolby Cinema. So you’re talking about AMC is looking to get 50 of those installed by the end of this calendar year, you know, a good number of those going into existing locations, rebranding of AMC Prime, et cetera. And you announced this morning talking about Wanda on a five-year outlook for the 100. Should we assume that most of the Wanda installs are going to be in brand-new to-be-built theaters? And then if you kind of combined everyone together, is there a sense of how many total Dolby Cinemas could be up and running by the end of 2016 and 2017?

[Kevin Yeaman:]

Well, so, first of all, you are right that AMC – it’s a mix. I mean, AMC includes both repositioning the – converting AMC, existing AMC Prime locations into Dolby Cinemas. Those tend to go the fastest because – and then there are – after that, it’s a combination of new builds and renovations of current screens that weren’t previously PLFs of any kind necessarily. And in China, no doubt that a lot of the growth is coming from new builds. So we’ll – I’m sure we’ll – it’s likely that we’ll see a greater proportion of our screens coming out of new builds. Early days with Wanda, I mean, we just announced it this morning. I said we expect the first one to be open in the spring. I think it’s too early for me to give any guidance as to how quickly that might roll out, but we’re excited to have them as a partner and we’re excited to broaden our footprint into China.

[Eric Wold:]

And then just one quick follow-up on Wanda. Do you know if these Dolby Cinemas are going into locations where there is an IMAX screen in that auditorium – in that multiplex? Or is Wanda mostly using this as the ability to kind of put a large-format screen in a market where they don’t have the rights to IMAX?

[Kevin Yeaman:]

I’m not really in a position to get any details yet on the rollout plans with Wanda. It’s early days.

[Eric Wold:]

Understood. Appreciate it. Thank you, guys.

[Operator:]

We’ll now go to Paul Coster with JPMorgan.

[Paul Coster:]

Yes, thanks very much. Kevin, you’d previously talked of the licensing opportunities associated with these new initiatives as being of equal magnitude to other categories of licensing, arguably in the hundreds of millions. Can you just update us on that line of thinking? And which of these do you think is most likely to get to that kind of order of magnitude and on what timeframe?

[Kevin Yeaman:]

Yes, I continue to believe that each of our – that these new initiatives we’re talking about have that capability. Each of these are opportunities that we think have the opportunity to be hundreds of millions of dollars. Which one gets there first? Really, I don’t want to take the pressure off any of my teams to think they are going to be first. Look, I think if I were to compare and contrast, I mean, Dolby Cinema is at a point now where we feel like with these – with over 200 screens committed, that we are really quickly moving into execution mode, and it’s a matter of working with our existing partners to make them as successful as they can be. And if we do that, we’ll be well on a path toward our goals with Dolby Cinema. And there is interest and demand beyond that. With Dolby Voice, again, it’s about getting more of these large companies into implementation and showing that we can then establish the monetization streams beyond just implementation itself, including the sale of the Dolby conference phone. Again, we’ll see some of that kicking in this year. And we are happy to significantly expand our footprint of available customers with PGi. And Dolby Vision is – again, it’s likely to be a very – a small factor for 2016, but we are really excited about how this is setting up for 2017 and beyond. And I mean, you know how that works, because it looks a lot like how our licensed audio technologies look. It’s about, first and foremost, making the partners we have tremendously successful with the choice they’ve made to use Dolby Vision, and then expanding our footprint, both within those partners and throughout – in the first instance, other televisions. But we think there is big opportunity beyond televisions.

[Paul Coster:]

So my follow-up question is, perhaps you could just sort of talk us through a little bit of the process by which you think Dolby Vision becomes de facto standards in the same manner that Dolby Digital did. Is it – now, I guess I’m trying to understand – in isolation, it’s very difficult to understand what the benefit of the HCR technology is. But in side-by-side comparisons, it stands out. But it’s difficult to do a side-by-side when you got so many new formats of TVs coming out every quarter, it seems. So can you just talk to us how you think this eventually gets more broadly adopted?

[Kevin Yeaman:]

I think it starts with making sure that you’re – what we always aim to do, which is meeting the needs of the content creation community, meeting the needs of the distribution community, meeting the needs of the TV manufacturing community, and ultimately delivering an incredible experience to the consumer. And we have our eye on each of those balls at all times. And I think that the proof of that is that we’ve got the largest footprint of – the most content is available in Dolby Vision. And we’ve got a number of major studios. We’ve got Netflix making original content. We’ve got Vudu streaming content. We have, as I said earlier, 80% of the chipset market for televisions is supporting Dolby Vision. And I think you do that when you believe that there’s demand for – there’s going to be more demand for Dolby Vision. And now, we have a great set of television partners that will be coming out and giving a breadth of – making a breadth of TVs at a variety of price points. So I think the first proof point to look at, Paul, is that we are executing across all those parts of the chain. And you need every part of the chain. Obviously, HDR technology is no good in a television if there is no content, and content is no good if there is no TV. And we’ve shown now that we have a critical mass around an ecosystem of Dolby Vision content and playback. In terms of what’s different about it, it is different. And it’s different for a couple of reasons that I’ll highlight. First of all, it supports a wider range of contrast than any other technology that’s available in the market, which, in the future, we think will come into play as people continue to innovate on the amount of contrast available on televisions. Dolby Vision is mastered to a much higher level of contrast than you’re going to see on any TV in a store today that makes it future-proof, in a sense, for the content creator. The other it does – and this is really important, and it’s one of the things that allows us to help our content creation partners master to such a high level of contrast – is that it identifies the capabilities of the display, and it optimizes the playback – which is to say that we are mastering to a very high contrast brightness level, and our technology, whether the TV display has 500 units of brightness or 1,000 units of brightness, we will optimize for that – which means we’re not stretching, we’re not using artificial means to make that happen. It’s in our metadata. And that’s something that we have not seen in other approaches to doing this yet, and we think that it makes for a very big difference. Because the reality is, there’s a lot of display types, and all of them are going to be in demand of these ultrahigh definition experiences of which HDR is clearly, clearly a critical, critical element. And one of the things we’re going to be focusing on, Paul, is just what you mentioned, and that’s making sure that these are differences that you can – that the consumer can recognize. And that’s – we’ve got to do that well to make our partners successful, and to help show that they made the right decision. Because what ultimately makes it the – what makes for broad adoption is meeting the needs of those primary constituencies. And I think we’ve shown we’re off to a good start in each of them.

[Paul Coster:]

Kevin, what does it add to the bill of materials to a TV? Sorry; last question.

[Kevin Yeaman:]

Yes. HDR, per se, doesn’t add much to the bill of materials. What adds to the bill of materials is if you strive for greater brightness or other parameters, which you can now take advantage of because you are HDR-capable. So what you’re going to – so the bottom decision really has to do with what display type you want to have. Is it OLED, Quantum Dot, LED? And what other trade-offs do you want to make in terms of brightness? Because the thing about having Dolby Vision available on the television is it makes some of those choices pay off in a way that they might not have paid off before. Right? So you can get much more bang for increasing your brightness when you have a content pipeline like Dolby Vision. So Dolby Vision itself is not really the bomb cost-driver. It’s the other factors and the brightness.

[Paul Coster:]

Thank you.

[Operator:]

Thank you. And I will go to Jim Goss with Barrington Research.

[Jim Goss:]

Thanks. A little bit more on the HDR idea. It was very prominently mentioned at CES. I’m wondering, is Dolby Vision the primary sort of third-party provider of this category? Do some of the television manufacturers have their own versions of it? Or are there other competitors you’re dealing with? And what sort of share would you have of that market?

[Kevin Yeaman:]

Well, I think the primary – the alternative in market now is essentially a build-your-own type of approach. And there is kind of a standard way, if you will, of kind of building HDR on your own. And again, the advantages of Dolby Vision is the ecosystem of content and distribution that we’re bringing to market with the technology, and the features I just highlighted around mastering to the highest quality, and optimizing for the capabilities of each display. That’s what Dolby Vision brings over and above the most commonly – the most common approaches to doing it yourself.

[Jim Goss:]

And would the other alternatives be incompatible with the content created for Dolby Vision?

[Kevin Yeaman:]

Well, one thing that we are doing with Dolby Vision is, we are offering, as part of our offering, we play back both Dolby Vision content and the most common way of doing it outside of Dolby Vision. We support that as part of our package, just to take the angst out of anyone who is wondering whether that’s going to be able to play back any content – which is to say that a customer who chooses to go forward with the full Dolby Vision package can rest well knowing that it’s going to play back HD – any commonly available HDR content today.

[Jim Goss:]

Okay. And since the contribution from Voice, Vision and Atmos is collectively very small right now, maybe it would be easier to look at how these categories are going to fit into licensing versus product sales. And then in the categories, whether it be gaming or broadcast or whatever other category, or whether there is a brand-new category you need to create to encompass those revenue bases.

[Kevin Yeaman:]

Yes, we’ll keep our eye on that.

[Jim Goss:]

Okay, nothing right now, though?

[Kevin Yeaman:]

No.

[Jim Goss:]

Okay. That’s all for now.

[Operator:]

[Operator Instructions] We’ll take our next question from Steven Frankel with Dougherty.

[Steven Frankel:]

Just one more crack at the voice market. Is there anything that you have learned from the BT experience that will shape how PGi approaches its rollout? Or marketing to customers, or anything that maybe gets to a faster ramp than BT has had.

[Kevin Yeaman:]

Yes, well, first of all, we come into this with a lot of – first of all, experience in the market; and second of all, having done a lot of work upfront with PGi in advance of launching this partnership. So I think we’re going to see a very – we are expecting to be able to get to market very quickly. And obviously, there’s always a lot of work to do to make a partnership like this successful, but we think we’ve done everything we need to do to get off to a quick start.

[Steven Frankel:]

Great. Thanks so much, Kevin.

[Lewis Chew:]

And also, Steve, this is more just a highlight of the companies – it’s probably fair to point out that PGi is more focused as a company on the conferencing services, versus BT might be viewed as more of a broader provider of multiple products and services. Whether or not that’s a plus or minus, I’m just pointing out sort of a factual statement that they are different in the way they are shaped. And of course, PGi actually is a larger – if you look at industry data, they are a larger market share player in this broad space than BT.

[Operator:]

[Operator Instructions] We’ll go now to Evan Snyder with Foresters.

[Evan Snyder:]

Hi, guys. Quick question. I was wondering about the Ultra HD premium logo that was announced at CES. I believe you guys are part of the UHD Alliance. And was wondering if the existence of that premium badge gives greater legitimacy or other force behind alternative HDR implementations? Thanks.

[Kevin Yeaman:]

Yes. We are a member of the Alliance. Your question is whether that gives greater credibility – you cut out – you dropped off on our line toward the end. The question is whether the UHD premium logo gives greater…

[Evan Snyder:]

Yes. Does it provide greater credibility to other HDR alternative implementations?

[Kevin Yeaman:]

Well, again, there are – many of the Dolby Vision-enabled televisions will also carry the UHD logo. So we’ve been a part of that from the very beginning, the UHD Alliance. I think what ultimately is going to give credibility to an HDR offering is having content, having creatives who are excited about making content and making it available in HDR, in solving the problems of the chain of distribution, like we’ve done by getting integrated into 80% of the TV chipset market. And then, ultimately, getting on as many devices as possible in which the consumer is going to enjoy it. So, I think it’s a little early to comment on any of the specific brands and logos we’ve seen. But again, we are compatible with the UHDA Alliance – the UHD premium. We are a part of the Alliance. And we are focused on a robust Dolby Vision content ecosystem and playback experience.

[Evan Snyder:]

Got it. Thanks, guys.

[Operator:]

And there are no more questions at this time.

[Kevin Yeaman:]

Great. Well, thank you again everybody for joining. And we look forward to keeping you up-to-date.

[Operator:]

This concludes today’s conference. Thank you for your participation.