Dolby Laboratories Inc (DLB) 2012 Q4 法說會逐字稿

Welcome to the Dolby Laboratories conference call discussing fiscal fourth-quarter and year-end financial results. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded Thursday, November 8, 2012. I would now like to turn the conference call over to Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, Mr. Hughes.

Thank you, Elizabeth. Good afternoon. Welcome to Dolby Laboratories' fourth-quarter and fiscal 2012 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO; Lewis Chew, Executive Vice President and Chief Financial Officer; and Ramzi Haidamus, Executive Vice President of Marketing and Business Development.

On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 28, 2012, market trends and developments for the industries in which we compete, and in the PC online and portable industries in particular and our expectations and beliefs concerning how those trends and developments will affect our operating results, the capabilities and market acceptance of our products and technologies, expectations relating to licensing arrangements, and our strategic and operational plans and objectives.

These statements are based on management's current expectations and assumptions, that are subject to risks and uncertainties. Actual results may differ materially from those set forth in such statements. Important factors such as general economic, PC, broadcast, consumer electronic, or cinema market conditions could cause actual results to differ materially from those in our forward-looking statements.

These factors are addressed in the earnings press release that we issued today, and under the section captioned Risk Factors, and elsewhere in our most recently quarterly report on Form 10-Q, available at www.SEC.gov, or on our website at www.Dolby.com under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in the Dolby Laboratories investor relations data sheet on our Investor Relations section of our website. As for the structure of this call, Lewis will begin with a recap of Dolby's financial results, and provide our fiscal 2013 outlook. Kevin will finish with a discussion of the business. With that introduction behind us, I will now turn the call over to Lewis.

Thanks Alex, and good afternoon. During my section of the call today, I will cover three main topics. One, I will cover Q4 revenue by market. Two, I will go over our operating expenses and our margins, and three, I'll give a forward outlook as we head into fiscal 2013.

So let me start with the revenue discussion. Total revenue in the fourth quarter was $224.8 million. Within that total, Q4 licensing revenue was $191.2 million, down $14.6 million year over year, or about 7%.

One of the big factors impacting this year-over-year comparison is a significant amount we received from a settlement with RIM in the fourth quarter of last year that was not a repeating item in this year's Q4. If you set aside that one factor, which affected the comparison by roughly $15 million, our Q4 revenue from other markets, primarily mobile devices, was up substantially year over year, and was enough to offset a decline in PC and consumer electronics revenues.

Sequentially, our Q4 licensing revenue increased by $12.7 million, or about 7%. This improvement was also driven by higher activity in the mobile devices area. Let me provide some additional details regarding the various markets that we participate in. In the broadcast market, fourth-quarter revenue was down 4% year-over-year, as we saw a decline in the TV TAM, although our attach rate improved slightly over the same period.

Sequentially, broadcast revenue increased by around 3%. Fourth-quarter PC revenue declined 6% year over year as the anticipation of the upcoming Windows 8 transition resulted in a lower volume of PC activity. Sequentially, our PC revenue was down slightly from Q3, about 1%. In the consumer electronics market, our Q4 revenue was down 10% year-over-year, mainly due to Blu-Ray and DVD. And on a sequential basis, consumer electronics revenue was up by about 3%.

Fourth-quarter revenue from other markets, which includes mobile devices, gaming, automotive, and Via, was down year over year by about 10%, but this includes the RIM settlement that I explained a minute ago. Excluding that item, we saw notable increases both year-over-year and sequentially, driven predominantly by growth in mobile device revenue in both of those time frames.

Fourth-quarter product and services revenue combined were $33.6 million, down 12% year over year, but were up about $4 million sequentially, or about 14%. The year-over-year decline was seen in film-based cinema products, professional broadcast products, and in 3-D. The sequential increase in Q4 over Q3 was mainly driven by a new cinema product which achieved DCI compliance and was released during the fourth quarter.

Let me now move on to margins and the rest of the income statement. Total gross margin in the fourth quarter was 88% on a GAAP basis, and 89% on a non-GAAP basis. Within that, product gross margin on a GAAP basis was 26.6% in the fourth quarter, down nearly 8% sequentially from 34.4% in Q3.

On a non-GAAP basis, product gross margin was 30.5%, down sequentially from 37.2% in Q3. Year-over-year, Q4 product gross margins were down on both a GAAP and non-GAAP basis. The declines I mentioned were due to a combination of lower ASPs and shifts in product mix.

Fourth-quarter GAAP operating expenses were $126.2 million, up $7.5 million sequentially. Non-GAAP operating expenses were $112.2 million, up $12.8 million from the previous quarter. We made additional investments in research and development, as well as sales and marketing programs, and these programs and investments are aimed not only at growing revenue in core businesses, but also extending our reach into newer markets and newer applications.

Fourth-quarter operating income was $71.5 million on a GAAP basis, or 31.8% of revenue. At $87.9 million on a non-GAAP basis, or 39.1% of revenue. The effective tax rate for the fourth quarter was 28.7% on a GAAP basis, and 28% on a non-GAAP basis.

Fourth-quarter GAAP net income was $51.5 million, or $0.49 per diluted share, which was down about $27.6 million year over year, but was roughly flat sequentially. Fourth-quarter non-GAAP net income was $63.8 million, or $0.61 per diluted share, which was also down year over year, but was up about $2.9 million sequentially.

We generated about $77 million in cash flow from operations during Q4, and we finished the fourth quarter with over $1.1 billion in total cash reserves, which would include cash and cash equivalents, as well as both short-term and long-term marketable securities. In the fourth quarter, we repurchased about 2.2 million shares of common stock for approximately $78 million, and we ended the quarter with about $198 million remaining available under our approved stock repurchase program.

I would like to provide an outlook for the new fiscal year 2013. My comments will address both the full year and the first quarter. I would like to start by highlighting a few key items that can and will likely play into our revenue full fiscal year. First is a transition to Windows 8. Based on past history, we know that it is hard to estimate with any precision the timing and impact on Dolby's revenue whenever a new PC operating system becomes available. Businesses are often slower to fully adopt, as compared to consumers. So for the year, we are estimating that PC revenue will be down.

Second is the mobile device market. Some industry research sources are estimating that the smartphone market will grow by more than 20% in 2013. Tablets are also expected to grow significantly. Because this is still a relatively newer area for us, our growth in mobile devices is dependent not only on the growth in market TAM, but also in the success of the devices that we are designed into.

And lastly, there is the topic of consumer spending and the underlying health of the general economy, which impacts our broad-based consumer electronics revenue. Based on what we see today, including the variability that comes from the notable items I mentioned above, we currently estimate that total revenue for fiscal 2013 will range from $900 million to $950 million, of which licensing revenue would be $785 million to $825 million.

We don't anticipate any significant changes in our overall gross margin for the year. With respect to operating expenses, we currently anticipate about $550 million for the year on a GAAP basis, plus or minus, and around $490 million on a non-GAAP basis, plus or minus.

Moving on to discuss the first quarter, for Q1 of fiscal 2013, we anticipate that total revenue will range from $215 million to $225 million. Within that range, we estimate that licensing revenue could increase sequentially by up to $5 million, while product and services revenues are projected to decline. Q1 gross margin is estimated to be approximately 91% on a non-GAAP basis and 90% on a GAAP basis.

Operating expenses in the first quarter of 2013 are projected to be around $120 million on a non-GAAP basis, and around $135 million on a GAAP basis, plus or minus. The increase in Q1 over Q4 is due to a combination of higher investment in R&D, sales and marketing programs, such as Dolby Atmos, and higher personnel costs.

Although we have been on an increasing trend in operating expenses over the last several quarters, we anticipate that this trend will level out during the course of fiscal 2013. We're looking to hold quarterly spending at a rate that normalizes somewhere between $100 million and $125 million (sic) in operating expenses per quarter on a non-GAAP basis.

Other income in Q1 of fiscal 2013 is expected to be approximately $2 million. And our effective tax rate for the quarter is estimated to be about 28%, on both a GAAP and a non-GAAP basis. Based on all elements combined, diluted earnings per share in the first quarter are projected to range from $0.42 to $0.48 on a GAAP basis and $0.54 to $0.60 on a non-GAAP basis. With that, let me now turn the call over to Kevin.

Thank you, Lewis. Good afternoon, everyone. We came into 2012 focused on diversifying our revenue across mobile, online, and broadcast, as well as bringing new technologies to market. Since we are closing out the year, I will recap our priorities and discuss how we did against them, and then share our priorities for 2013. Our first priority was to drive the adoption of Dolby technologies across the mobile market.

We came into the year targeting low to mid-teens attach rate to smartphones, and finished at 15%. This is up from just 4% the prior fiscal year. In the Android ecosystem, Dolby audio formats are now in approximately 25% of smartphone shipments, including the leading Samsung Galaxy S III, and almost 30% of tablet shipments.

In the Amazon ecosystem, the Kindle Fire HD family of devices now incorporates Dolby's next-generation audio solution, which provides a best-in-class audio experience on the device, combined with a fully certified end-to-end solution that delivers the artist's intent to the consumer. This holistic approach ensures the best possible consumer experience.

Moving to the Windows ecosystem, we extended Dolby's technology to all versions of Windows 8, for support of online content in PCs and tablets. With this milestone, we can now focus on bringing Dolby-enabled applications and services to the Windows 8 platform, in order to provide consumers a superior audio experience.

Our second priority coming into the year was to grow our attach rate to global TV and set-top box shipments, and to set ourselves up for additional success in emerging markets. We achieved our goal to grow our TV attach rate by 4 to 5 points, while also achieving a set-top box attach rate of 50%.

In addition, we continued to grow the adoption of Dolby technologies internationally. In China, more than 50% of high-definition channels on air use the Dolby audio format, and it has been adopted as an option in China's terrestrial digital TV standard. In India, 12 channels on air use our technologies, and we continue to make progress working with the broadcast ecosystem to position them in India's standards.

In Southeast Asia, Singapore has included our technologies in its draft specification for digital television. And in the EMEA region, South Africa mandated our technologies into its final specification, while both Austria and Turkey have done the same in their draft specification.

Our third priority coming into the year was to introduce Dolby's next-generation audio format, Dolby Atmos, into cinema, and to grow support throughout the industry. In June, we successfully showcased Dolby Atmos in conjunction with the release of Pixar's Brave, which generated a very positive reaction in the industry. Dolby Atmos enables artists to create and deliver a far more realistic and immersive audio experience. As a result, nine titles across five major studios have incorporated Dolby Atmos.

Some of the films released or to be released in Dolby Atmos include 20th Century Fox's Taken 2; Life of Pi; and Chasing Mavericks. In addition to Warner Brothers' upcoming film The Hobbit, an Unexpected Journey; Dreamworks' Rise of the Guardians; and Paramount's Star Trek Into Darkness. We are targeting 100 screens with Dolby Atmos by the release of The Hobbit.

Finally, we came into the year focused on introducing new technologies in adjacent areas. One of the new technologies we have been working on is Dolby Voice, which will enable service providers such as British Telecom to provide a conference call experience that sounds more like an in-person meeting.

In September, British Telecom announced it would collaborate with us to deploy Dolby Voice in order to achieve this, and it now expects to launch this service in 2013. We look forward to continuing our work with British Telecom, and to keeping you posted on our progress.

With that, let me turn to discussing our priorities for fiscal 2013. Starting with mobile, we continued to focus on growing the adoption of our technologies across mobile devices, including smartphones and tablets. For fiscal 2013, we're looking to increase our attach rate to these fast-growing devices by approximately 5 points.

In addition, we are now focused on providing consumers the ultimate mobile audio experience by connecting Dolby-encoded content from Dolby-supported services such as Netflix and HBO Go to Dolby-enabled devices. This will continue to ensure that consumers don't have to sacrifice quality for convenience, and enable us to expand our technologies across existing ecosystems, and into new ones.

In broadcast, we're focused on repeating the strategy that has worked for us in the US and Europe. That is to work with country-specific operators and standards bodies the across emerging markets to adopt our technologies. We believe the emerging markets opportunity is a significant one, given that they receive over half of the global TV and set-top box shipments, and contain the majority of the worlds population.

While it is too soon to say when these countries will convert to digital television, we are confident that they will, and that we are well-positioned to benefit from this transition. In the meantime, we are forecasting an attach rate increase to televisions and set-top boxes of approximately 3 points in fiscal 2013. In cinema, we are targeting Dolby Atmos on 500 screens globally by summer, and for more than 20 films by the end of calendar 2013.

Finally, in our new initiatives, we expect to launch Dolby Voice commercially in conjunction with British Telecom service, to deliver premium conference calls. We also expect to bring our consumer 3-D technology to market and sign a leading TV OEM.

In summary, the world has changed dramatically over the last few years, and Dolby's investments have allowed us to significantly diversify our revenue base and extend our presence into the many new ways consumers enjoy entertainment content, including online, mobile, and digital broadcasts. We made a lot of progress during 2012, and the milestones we achieved tell us that we are headed in the right correction.

As we enter fiscal 2013, we plan to continue to invest wisely and build upon this momentum to position us for future revenue growth. With that, operator, I will turn the call over to questions.

(Operator Instructions)

We'll go first to Steven Frankel with Dougherty & Company. Please go ahead.

Good afternoon. First of all, could you address the expense growth? Granted, you are investing in all of these initiatives, but it looks fairly aggressive given the revenue outlook. If revenues remain stagnant, would you consider scaling back that investment during the year, or is this your base case?

Wel,l we do see this as another year of investment for us. We don't take that lightly. I think it's important to keep in mind that the composition of our revenue has changed dramatically, and continues to change dramatically, in the sense that a increasing amount of that revenue is coming from devices that are supporting online and mobile content over digital broadcast networks.

So we do find ourselves with a number of early-stage cycles that we are investing in, in emerging market digital broadcast, in the mobile and online ecosystem, and in the new initiatives, some of which we're now bringing to market such as Dolby Atmos, Dolby Voice and consumer 3-D. We have a number of early-stage investment cycles here. We think that it sets us up well for the future, and we think it is important to continue to invest in them.

Okay, and if I can sneak in a follow-up. What do you think it takes for Atmos to become a standard feature of premium formats like Regal's RPX?

Well, I think more of what we're doing. We have major releases now signed up from five major studios, we have nine titles on the way and it is all about content. And we have great enthusiasm from the creative community in terms of really taking advantage of Dolby Atmos, to have a truly differentiated cinema-going experience. And then it is about, of course, bringing more people into the cinema. And we have been working closely with our cinema partners, as we have had our first few releases in the market. And we like what we are seeing, and we think we are on track for good adoption. Like I said earlier, we're aiming for 100 screens by The Hobbit and we're aiming for 500 screens by the summer.

Great, thank you.

We'll take the next question from Paul Coster with JPMorgan. Please go ahead.

Thanks for taking my question, Kevin. I've asked this before, but I just want to get an update on your strategy with regards to Androids and iOS platforms. Are you going to attack them in the same way as you did Windows 8? Or is it a slightly different way of trying to win over those ecosystems?

Well as I said earlier, on Android, we are on 25% of smartphones now, and 30% of tablet shipments. And the approach is a little bit different from the Windows 8 approach, where we are licensed into the -- where we are included in the operating system, albeit now paid directly from the OEMs.

In Android, we have done it by directly working directly with device manufacturers, working with all the supporting players, whether that is the operating system or integrated circuits, and increasingly, working to now connect services to devices, which is what we think really increases the value proposition, is having those Dolby-supported services sending content to these devices. In fact, one of the things we're so excited about with the Amazon win this quarter, and the fact we are now in the Kindle Fire HD lineup is that we are able to deliver the fullest experience we have to offer from content to playback.

Got it. Lewis, in your remarks you said that broadcast was down. You said, I might have misheard this, but it sounded like you were referencing the TAM? Did I hear that correctly? And if so, can you just please elaborate a little bit? Because I would've thought that the TAM is actually expanding at the moment.

Yes I did say that the TAM was down slightly. This is a fourth-quarter revenue comparison, so that wasn't a full-year comparison. I would say that I would not be too alarmed by that. It is a one-quarter data point. Are you concerned about the volume of TVs going down, because I think that what we see going forward is there is actually growing opportunities for us in the part of the world that has not yet adopted digital broadcast standards. But in this quarter, we did see a year-over-year decline in the TV TAM, but our attach rate was up a little.

Okay. Like I said, I guess it is just definitions. I would have thought that the emerging markets is an expansion of your TAM and independent of shipments, but that's okay let's move on. Thank you though, I appreciate your honesty.

But you bring up a good point, so I think I would like to do one little messaging moment and say that from a strategy standpoint, we absolutely agree with that little bit of softball you gave us at the end. We do see this as being an expanding opportunity for us, going forward. So this is a fairly narrow data point that I'm trying explain, what we saw that drove specifically the fourth-quarter revenue.

Got it. Thank you.

Our next question comes from Perry Huang with Goldman Sachs.

I was hoping to ask a question about the mobile segment, and the growth for next year. I think you talked about increasing the attach rate by five points. Should we think about this as driven more by attach to the Android and smartphones and tablets? Or, is Windows 8 coming to market a key driver for the mobile segment? With Surface and the other Windows tablets?

Well, two key drivers are the recent wins that have just come into the market recently. So, those would be the Kindle Fire family and the Windows 8. But we are looking to expand our presence across each of the major mobile ecosystems, and to extend into new ones. And we have, of course, a pipeline of potential design wins that we are working.

Got you. Thank you. That's helpful. And if I could, just a quick follow-up. If I compare the PC licensing revenue growth in the quarter, it was down, I think, 6% year-over-year, you mentioned, Lewis.

Yes.

Versus PC shipments I think it was down 2% year-over-year in the June quarter. So, that was a 4-point differential. Should we think of that, as we think about the PC licensing revenue next year, should we think about that gap as remaining steady?

Well I would say, that those are still relatively precise tolerances that you are talking about there. A market measurement of 2 versus 6. I will say this, baked into the range of guidance that we gave, the $900 million to $950 million, we are anticipating that we'll see a continuing slight drop-off in our PC revenue for next year. But I don't know that I would go so far to say that there's a 4-point percentage point delta between market and Dolby. I would be a little bit careful about extending that too far.

Got you. Thank you. That's very helpful.

We'll move next to Andy Hargreaves with Pacific Crest.

Can you just extend on that, actually? In your 2013 outlook, can you give us any more detail on what your expectations are for market growth in PCs and TVs in the relevant segments?

Well I don't know if I want to walk through every segment, but PC was the question that the gentleman just asked us for. I think the market data out there suggests right now that it is a relatively flattish year. I think the TAM numbers are in the neighborhood of 1.5. I would say right now, even that is a hard number to guess. We have seen a lot of bumping around with PC TAM numbers, just in this last month or so. Baked into our outlook for next year would be a middle of the fairway assumption, that tied to what the market assumptions are, and we did not try to go way out of bounds from that.

Okay. Can you comment on TVs, as well?

I could. Okay. So for TVs, the TAM is relatively flattish. For consumer electronics, we are expecting both Blu-Ray and DVD to continue to decline, mainly because we don't see any reason for that to reverse itself. And probably the thing that is really emerging for us, because I want to stop talking about things going down and talk about things going up, is that in our other markets categories, including mobile phone, I would say it would be fair to anticipate that sometime next year, we will start breaking that out separately, because we are seeing that nicely growing. And I think I said in my prepared comments, that external analysts see that market growing 20%-plus, and we don't have any reason to disagree with that.

Okay. And then just extending on that, is that what you are expecting to be the sequential growth driver in Q1? Mobile phones, meaning?

Oh yes.

Sorry about that. Okay, thank you.

(Operator Instructions)

We'll go next to Ralph Schackart with William Blair. Please go ahead.

This is Chris Barney in for Ralph Schackart. Two quick questions, with the Dolby Voice product, can you detail what the revenue model that you anticipate what with this will be, relative to the traditional licensing model? And second, as this is one of your first forays into the enterprise market. Can you detail if you have your eyes set on incremental enterprise markets over the next couple of years, and if so, what those markets would be? Thanks.

Sure. So I guess the first thing I would say is that moving into Voice, we believe we have a lot of value to offer by continuing to do what we do best, and that is by focusing on differentiating the quality of the experience from capture to playback. I think it is a little early for us to talk about the revenue model. I think we'll talk more about that when we have the service in market, which we expect to be this year.

In terms of adjacencies in that regard, we do believe that the business conferencing market, that this technology is targeted at, is a very attractive one, and that the quality of the audio experience is something that is long overdue for a significant transformation. And we see other applications of voice technologies that we can say the same about, so we are really excited about this initiative, and right now, we're focused on making this initial engagement successful.

Great, thanks.

We'll go next to Sean Leahy with Barrington Research.

Thanks for the question. I'm trying to roughly size up the Atmos opportunity beyond your immediate targets that you laid out. I was wondering what sort of commitment exhibitors have to make in order to make their theaters compatible with the system? Is this a technology that can be easily implemented in most theater sizes? Or is it limited to premium theater configurations? And then, relatedly, I was wondering if the lag in digital conversion internationally helps or hurts your ultimate value proposition there?

The first thing that I would like to remind everybody about is really to Dolby Atmos, is that it is a very scalable system. So as you know, there is a variety of layouts in cinemas, a variety of speaker accounts. And what we are doing is capturing where the creative team wants to the sound to be rendered in the screening room, and we can adapt to a variety speaker counts and configurations to do that.

And what our technology does, in fact, is calibrates for the best experience, given the investment you have made. Having said that, there are a few things that need to be done. In addition to having our processor, they do need to make sure that those speakers are individually amped and powered, because we are no longer grouping them into a number of channels. Some of the premium cinemas that are in the market today have already done that. Others have not. So that is one thing, that's something that needs to be done, in any event.

The second thing is in overhead speakers. From there, there is a certain amount of flexibility exhibitors have to decide how far they want to take it, and how many speakers they want to take it to. Certainly, what we are seeing in the early stage adoption is that you are seeing them tend to go into these premium screens that a number of chains have, and those tend to be better equipped from a starting point than your average screen.

Great, thank you.

(Operator Instructions)

By the way, Operator, while we are waiting for another question to poll, I would like to make one small, whatever would be the verbal version of a typographical error. What I was going over my script, right at the end, when I said that we are looking to hold quarterly spending at a rate, and I said I believe $100 million to $125 million, I meant to say between $120 million to $125 million, which would make more sense, since I gave guidance for this quarter to be $120 million.

We'll take the next question from Steven Frankel with Dougherty & Company.

Just a follow-up on Voice, is this an exclusive arrangement with BT for some period of time, or is this just happens to be your first partner that is ready to go to market?

So, right now we are engaged with them in bringing the service up and running. And it's really a little early for me to go into the details of the arrangement. Again, we are expecting to launch the service this year.

All right. And this is something that runs in network as opposed to in hardware? Correct? Want to give me at least that? Help me understand--?

Absolutely. Yes, our technology is integrated into their infrastructure.

And do you have a longer-term vision of some kind of component that might run in endpoints like smartphones?

I think there's a number of possibilities that this opens up in the future, but probably early for us to talk about at this date.

All right, thanks Kevin.

At this time, we have no questions remaining. I will turn the call back over to Kevin Yeaman for any additional or closing comments.

Great, well thank you all for joining us, and we look forward to speaking with you throughout the quarter.

Ladies and gentlemen that does conclude today's conference. We thank you for your participation.