Dolby Laboratories Inc (DLB) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal second-quarter results. (Operator Instructions) As a reminder, this call is being recorded, Tuesday, April 21, 2015.

I would now like to turn the conference over to Elena Carr, Director of Corporate Finance and Investor Relations for Dolby Laboratories. Please go ahead, Elena.

Good afternoon. Welcome to the Dolby Laboratories second-quarter 2015 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 caption risk factors as 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 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 datasheet on the investor relations section of our website.

As for the content of this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2015 outlook. And Kevin will finish with a discussion of the business.

So with that introduction behind us, I now turn the call over to Lewis.

Thanks, Elena. Good afternoon, everyone. Thanks for joining our call. Let's get right to the numbers. Our second-quarter revenue was $271.9 million. And within that total, licensing was $243.3 million and products and services were $28.6 million.

I would like to make a quick comment on the comparison of licensing revenue year over year. Last year in Q2, total licensing was $258.6 million, but that included a one-time back payment settlement of $24.7 million. So if I exclude that notable item from the comparison, then our total licensing would be 4% higher than last year's Q2.

The breakout of this year's Q2 licensing by major market is as follows. Broadcast represented about 42% of total licensing in the second quarter. Revenues in this market were up sequentially by about 14%, mainly due to seasonality.

And year over year, Q2 broadcast licensing was down about 15% due to last year's notable back payment that I mentioned a minute ago. So excluding that item from the comparison, broadcast licensing was up about 8% over last year, driven by higher unit volume in TVs and set-top boxes.

PC revenues represented about 17% of our total licensing in the second quarter. They were up by about 14% sequentially, as one of our large customers reported higher units than we had projected for this quarter, due mainly to timing. Year over year, PC licensing was down about 2%.

Consumer electronic revenues in Q2 were about 15% of total licensing. They were up about 22% sequentially, driven by seasonality. And year over year, consumer electronics increased by about 8% due to higher back payments and higher volume in certain products, such as sound bars, offset partially by lower revenue from Blu-ray and DVD.

Mobile devices represented about 11% of licensing revenue in Q2. They were down about 19% sequentially and about 14% year over year. The sequential trend was driven by higher timing of revenues in Q1 relating to a customer contract. And this is consistent with what we had projected at the beginning of the quarter when we provided our Q2 outlook.

Revenues in other markets represented approximately 15% of total licensing in the second quarter and were up by about 34% over Q1, mainly due to seasonality. And on a year-over-year basis, other markets grew about 14% in Q2, as we saw higher revenues from gaming and Dolby Voice and Via.

Product and services revenue was $28.6 million in Q2, which was $11 million higher than Q1 and $8.6 million above last year's Q2. Both trends were about what we had projected and were driven by sales of Doremi products, since we acquired Doremi Labs in Q1 earlier this year.

Total gross margin in the second quarter was 90.8% on a GAAP basis and 92% on a non-GAAP basis. Product gross margin on a GAAP basis was 20.7% in the second quarter compared to 5.1% in Q1 and 29.3% in last year's second quarter.

Product gross margin on a non-GAAP basis was 29.6% in the second quarter compared to 17.2% in Q1 and 35.8% in last year's Q2. The improvement from the first quarter to second was driven by higher volume.

Operating expenses in the second quarter on a GAAP basis were $168.2 million compared to $161.3 million in the first quarter. And on a non-GAAP basis, operating expenses were $149.5 million in Q2 compared to $141.7 million in Q1. Operating income in the second quarter was $78.6 million on a GAAP basis or 28.9% of revenue and $100.7 million on a non-GAAP basis or 37% of revenue.

The effective tax rate for the quarter was 26.7% on a GAAP basis and 26% on a non-GAAP basis. Net income in the second quarter was $58 million on a GAAP basis or 21.3% of revenue and was $74.9 million on a non-GAAP basis or 27.6% of revenue.

And diluted earnings per share in the second quarter were $0.56 on a GAAP basis compared to $0.40 in the first quarter and $0.73 in Q2 of last year. On a non-GAAP basis, Q2 diluted earnings per share were $0.72 compared to $0.56 in Q1 and $0.88 in Q2 of last year.

Cash flow from operations was $164 million for the quarter. As a reminder, last quarter I highlighted the fact that cash flow from operations in Q1 was unusually low because of timing issues in receivables and accruals. And as is often the case, those issues reversed course in Q2, such that our year-to-date cash flow from operations is back to a more typical level for us and the cumulative number through two quarters is $167 million.

During the second quarter, we repurchased about $15 million of our common stock and have $227 million remaining of our stock repurchase authorization. We also announced a cash dividend today of $0.10 per share, which will be paid on May 12, 2015, to shareholders of record on May 4, 2015.

As of the end of Q2, we have slightly more than $1 billion in total cash and investments, which includes cash and cash equivalents as well as both short- and long-term marketable securities.

So looking forward, here is the outlook for Q3 and the full year. In the third quarter, we estimate that total revenue will range from $230 million to $240 million. Within that, we anticipate that licensing revenue will range from $200 million to $210 million and products and services revenue, combined, would be about $30 million.

Within the Q3 estimate, we anticipate that our PC licensing revenue in Q3 will be down by about 20% year over year due to lower mix of optical disc. And we also anticipate that mobile will remain at about 11% or 12% of our total licensing.

Gross margin in the third quarter is estimated to range from 89% to 90% on a GAAP basis and 90% to 91% on a non-GAAP basis. Operating expenses in the third quarter are projected to range from $167 million to $171 million on a GAAP basis and from $148 million to $152 million on a non-GAAP basis.

Other income in the third quarter is expected to be approximately $1 million. And our effective tax rate for the third quarter is estimated to be around 26% on both a GAAP and non-GAAP basis.

Based on a combination of the factors I just went over, diluted earnings per share in the third quarter are projected to range from $0.27 to $0.33 on a GAAP basis and from $0.43 to $0.49 on a non-GAAP basis.

Moving on to the full year, we are maintaining our estimate of total revenue for fiscal 2015 at a range of $970 million to $1 billion. Within that, we anticipate that licensing will range from $865 million to $885 million and products and services will range from $105 million to $115 million.

Full-year operating expenses are estimated to range from $660 million to $670 million on a GAAP basis and from $585 million to $595 million on a non-GAAP basis. We estimate that full-year gross margins on a GAAP basis will range from 89% to 90%, with non-GAAP gross margins about a point higher. Other income is estimated to be around $4 million for the year and the effective tax rate for the year is estimated to range from 25% to 26%.

Now I would like to turn the call over to Kevin Yeaman. Kevin?

Thank you, Lewis. And good afternoon, everyone. We had a solid quarter, with strong performance in broadcast. And with mobile coming in right about where we expected.

Today I would like to spend a few minutes updating you on the progress we have made in our new initiatives, which played an important role in our plan to deliver long-term sustainable growth.

I will start with Dolby Cinema, which brings Dolby Vision and Dolby Atmos together to deliver the ultimate movie-going experience. I am excited to say that we have announced two key Dolby Cinema partners this quarter: AMC Theaters and the Walt Disney Studios.

Let me start with AMC. We announced that we will be partnering with AMC to deploy Dolby Cinema at AMC Prime across the United States, with four sites up and running by May and up to 10 sites by the end of the summer.

The first sites will be installed at some of the highest grossing complexes in the country and will result in a fantastic platform to extend the Dolby Cinema program. Over time, we are looking to work together to deploy 100 Dolby Cinema at AMC Prime sites.

Now of course, every great cinematic experience needs great content. We are thrilled that Disney and Pixar are the first studios to announce their commitment to create Dolby Vision theatrical titles for release in Dolby Cinema locations. These include Tomorrowland, Inside Out, and The Jungle Book, with Tomorrowland being released next month.

Dolby Vision, combined with Dolby Atmos, pulls moviegoers more deeply into the story through breathtaking sound and captivating images. We are excited to be working with AMC and Disney to deliver the total cinema experience. I am pleased that Dolby Cinema is off to a strong start and I look forward to keeping you up to date on our progress.

Let me turn to Dolby Atmos, which continues to get broad adoption in the cinema and beyond. There are now over 1,000 screens committed globally and more than 275 titles released or announced in Dolby Atmos. 13 of the 15 highest grossing titles in 2014 were in Dolby Atmos, and we have a strong slate of titles in 2015, including upcoming titles such as The Avengers: Age of Ultron, and Ant-Man.

Dolby Atmos for the home also continues to gain momentum. Dolby Atmos is included in AVRs and Home-theater-in-a-Box systems from Denon, Onkyo, Marantz, Pioneer, Integra, and Yamaha. Dolby Atmos-enabled speakers are currently available from Pioneer, KEF, Triad, Atlantic Technology, Definitive Technology, and Onkyo, and we expect more product launches throughout the year.

Last quarter, I mentioned that the first Dolby Atmos Blu-ray title had been released. Now I am pleased to report that there are around 25 Dolby Atmos Blu-ray titles released or announced from studios such as Paramount, Warner Bros., Lionsgate, and Universal, including Gravity, American Sniper, and The Hunger Games: Mockingjay.

Dolby Atmos most continues to be adopted in mobile devices to create immersive audio experiences on the go. Our solution creates a richer and more compelling experience over headphones or speakers.

This quarter, Lenovo announced three new Atmos-enabled mobile devices: the Lenovo A7000, which is the first smartphone to include Dolby Atmos; as well as two Lenovo A series tablets.

We are also seeing applications for Dolby Atmos in virtual reality. This quarter, we announced that we are partnering with Jaunt, a provider of virtual reality content, to enable the next generation of immersive storytelling in cinematic virtual reality. The precision placement of audio objects in virtual reality allows content creators to ensure that viewers always know what is happening and where it is happening. Dolby Atmos is a perfect solution for this new and growing experience.

Now let me update you on Dolby Vision. We recently reached a significant milestone as the first TV with Dolby Vision was announced by Vizio. The new Vizio Reference series will feature Dolby Vision and is the most sophisticated and technologically advanced television made by Vizio.

Dolby Vision is, of course, our end-to-end imaging solution, which gives creative teams the freedom to use the full gamut of colors, brightness, and contrast, resulting in an enhanced entertainment experience.

On the content side, Warner Bros. has announced that they will be mastering titles in Dolby Vision for home distribution. That first slate of titles will include Edge of Tomorrow, Into the Storm, and The Lego Movie, with initial distribution via VUDU, Walmart's video-on-demand service.

Turning to Dolby Voice, our partnership with BT continues to gain traction, with about 50 customers signed up. The service transforms conference calls by giving attendees the sound and feel of in-person meetings.

During the quarter, BT Meet Me with Dolby Voice launched in Asia Pacific and Africa and so is now available globally. The Dolby Voice solution is also being made available in more use cases, as BT has integrated the service into its Cisco WebEx and Microsoft Lync services. We are excited about the continued momentum with Dolby Voice and recently Gartner analyst Steve Blood said it best when he tweeted that he had died and gone to audio conference heaven after a demo.

So with that, let me wrap up. Even as we continue to roll ahead in the core business with broadcast, mobile, and gaming, we are really excited about the adoption of our new offerings from our audio, imaging, and voice platforms.

We are seeing widespread adoption of Dolby Atmos in both the cinema and the home, with additional applications emerging. With Dolby Voice, an increased number of customers are signing up for the service and our solution is being applied to broader use cases. Dolby Vision is coming to theaters through Dolby Cinema and to the home with the announcement of the first television from Vizio.

We have made a lot of progress this quarter on our new initiatives and this gives us confidence that we are on the path to drive sustainable long-term growth. I look forward to updating you again next quarter.

And with that, I will turn it over to Q&A.

(Operator Instructions) Steven Frankel, Dougherty.

I was hoping to get a little more detail on Cinema. And perhaps you could start with how many [films] do you think you will have in Dolby Cinema in calendar 2016?

In calendar 2016?

Yes.

Well, so we did talk about 10 sites by the end of the summer. And we are working to get over time 100 sites with AMC. We haven't disclosed the number for 2016, but look, I think going from deploying 10 sites between now and the end of the summer gives you a sense for the pace at which we are able to do this, even at an early stage.

And we are 100% focused on making the 4 sites that we are targeting in May and the 10 sites by the end of the summer a spectacular experience. Because if we do that, then I am confident that there is going to be demand and we are going to be able to roll these out and address a broader audience.

All right. Kevin, my specific question was on the content side. So how many films do you think you will have next year? And when you don't have a film, can the exhibitor put whatever they want unprocessed in their Dolby Cinema?

Right. So right now, we have the first three titles. Obviously, our goal is to have a healthy slate of titles in Dolby Vision and Dolby Atmos that allow for a regular rotation of films through the top screen. That is our goal, ultimately.

In the meantime, yes, we do envision allowing the exhibitors to have the flexibility to bring titles to screens.

Okay. And then let me sneak in one last follow-up, which is what are capital expenditures likely to (technical difficulty) be?

It is still early, but we figured somebody would want to get some gauge for this. So for the first four theaters, which are the ones that are really on the slate right now, we anticipate that that will be somewhere in the neighborhood of a $3 million to $4 million investment by us to get those rolling. And then over time, we will keep you posted on how that progresses, because obviously, those are the first four.

Okay, great. Thank you.

Ralph Schackart, William Blair.

Kevin, I was wondering if you maybe could give us a little bit of perspective on some of the recent R&D ramp and spend. And then I think historically, you have talked about it. At some point, the R&D will moderate and we should see more commercial wins and/or more products sustain longer-term revenue growth.

Are you thinking, perhaps, maybe 2015 might be sort of the ramp or the peak year for R&D spend? And maybe some of the sales and marketing continues to support those efforts into 2016? But maybe you can give us some perspective on those dynamics.

Sure. We are pleased that we are seeing a number of those early wins that we talked about looking for as we look to move these businesses to scale. With wins that I just talked about in Dolby Cinema with AMC and Disney, with Vizio for Dolby Vision. Great progress in Dolby Atmos.

And as it relates to the spending directly, let me start by addressing total operating expenses. The peak, actually, was really three years, four years back, when we were increasing OpEx at a rate of about -- just around 15% annually. We brought it down to 10% last year.

This year, we are looking at something single digits. And that includes having brought on the Doremi acquisition, which was virtually the entire year of spending from there.

So we have been, in total, bringing those expenses down. And within that, we are regularly allocating resources based on which projects are getting traction in the market and allocating between research and development, sales and marketing, as the market really leads us to do.

Now -- so we believe we have begun to moderate -- we have, in fact, moderated the rate of growth. We are very conscious of the spend levels. Obviously, the reason we are doing this -- we have stated this -- is because we believe that in addition to the growth we have in front of us in the core business, in areas like broadcast and mobile, we look to these new initiatives to be an important cornerstone of how we return to long-term sustainable growth.

This year, I have said we will see -- we are seeing some revenues, as you know, from Dolby Voice. We will be seeing some revenue from Dolby Cinema. What I would -- what I believe is that across this portfolio of initiatives that we have in play right now with Dolby Cinema, Dolby Vision, Dolby Voice, the combination of these new initiatives will be -- we expect -- I expect them to be a factor in our growth rate for 2016.

Okay, that's helpful. Thank you.

Mike Olson, Piper Jaffray.

So just following on your last comment there, Kevin. If you look at Atmos, Vision, Cinema, or Voice, not to make you kind of rank your initiatives here, but which do you feel has kind of the potential to have the most material impact to revenue most quickly?

In other words, what would you suggest we should be focusing most on in these various initiatives as far as, as you just mentioned, potential revenue impact in 2016?

Yes. I do -- I get asked this internally as well. And I do refuse to pick my favorite child. I am excited about each of these initiatives.

I think the answer to your question has a lot to do with -- I mean, all of them have the potential at this point for hitting a revenue growth curve. And it all comes down to making sure that these first experiences for our customers -- in the case of Dolby Cinema, as we bring the four screens up for Tomorrowland; as we get to the 10 sites by the end of the summer; Inside Out comes into play. We are -- if we have what we believe we can do, which is a really spectacular experience, then that is what will drive the pace of adoption and the pace of revenue growth. We absolutely believe that we have a real opportunity here to build a sustainable, profitable business.

With Dolby Voice, the pipeline is building really nicely. And we are seeing the pipeline shift toward much larger enterprises. And so the key for revenue growth and the pace of revenue growth there is going to be all about the adoption cycle.

As you know, these are large enterprise accounts and adoption cycles. It is time for us to sink our teeth into some of those larger accounts with BT and get the adoption going. And that is what I think will determine the pace of adoption there.

And as it relates to Dolby Vision, obviously the big milestone to have the first announced television with Dolby Vision. I think that also has a lot to do with the broader market.

The good news is HDR is clearly on everybody's agenda. We were very early to recognize that. We have been in the game for five years -- seven years, really. And so as a result, we have the most complete and highest quality solution available for the playback of consumer HDR content.

And like most of our areas of focus, that requires great content and it requires playback. And on the content side, we are well on our way to broad adoption on the creative and distribution side. Publicly, Warner has come out and talked about their plans for Dolby Vision content for the home. We are just -- couldn't be more thrilled that Disney has come forth with support for titles in the Cinema.

And we have got broad engagement across the creative and distribution community. And that is no small feat and it is a requirement to succeed in something like HDR.

When I look to the playback side, we have got our first public win. We are really excited about that. And again, we have a complete solution that is implementable today, highly flexible, adopts to a very high level of contrast and color gamut, and puts what we think will be -- [we think] it is generally acknowledged HDR will be a big part of -- will be the wow factor for wherever ultra-high definition settles out. And we have a solution available today.

So I think that pace will have a lot to do with the industry pace, but it is clearly getting started. All of these opportunities -- I mean, when I look at our platforms in audio with Dolby Atmos, in imaging, led by Dolby Vision, and voice communications led by Dolby Voice, each of these platforms, we think, all of them have the opportunity to be as large or larger than any of the markets we talk about today.

So our focus right now is get the initiatives that rest on each of those platforms to scale, starting with the initial wins, which you are seeing come through now. And so we have to make -- we are focused, like I said, on making those first customer experiences as often as we know we can make them. And that is what is going to drive the pace of additional adoption and revenue growth.

Again, net at the end of the day, as I look forward from where we are at right now, I do expect the portfolio of these initiatives -- even if I can't -- you know, it is a portfolio. And I think, as I look at them as a portfolio, I do expect that the combination of these initiatives will be a factor in the growth rate we look at for 2016.

All right. Thanks. If I could sneak in one other quick one. Is there anything you can say about how Dolby's technology may or may not be incorporated in the upcoming release of Windows 10?

No, I don't think I -- as usual, we are just not in a position to announce things that are not ours to announce.

Okay. Yes. I thought that might be a shorter answer than the previous question. All right; thanks a lot.

(Operator Instructions) Steven Frankel, Dougherty.

Kevin, I'd like to follow up on your Dolby Voice comment. If you are at 50 customers today, what was that number last quarter?

Well, so first of all, it is 50 customers signed up. They are in various stages of deployment or preparing for deployment. And I think the number -- I think the last number we gave was a couple of quarters ago and it was around -- 20.

It was in the 20s.

In the 20s. Yes.

Thank you.

All right. I don't think we have any other questions. So -- well, thank you all for joining us today. And as always, we look forward to keeping you up-to-date throughout the quarter and when we speak again next quarter. Thank you.

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