Dolby Laboratories Inc (DLB) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call fiscal second quarter results. (Operator Instructions) As a reminder, this call is being recorded, Tuesday, April 24, 2018.

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.

Good afternoon. Welcome to Dolby Laboratories' Second Quarter 2018 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 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 2 is available on 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 this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2018 outlook, and Kevin will finish with a discussion of the business.

So let's go ahead and get started. Lewis?

Okay. Thanks, Elena, and good afternoon, everyone. Our total revenue in the second quarter was $301 million, of which $273 million was from licensing and $28 million was from products and services, and we continue to see positive momentum in our revenue. We are raising our revenue outlook for the full year. We are also increasing the range of estimated operating expenses. And I'll have more comments on these 2 topics in just a few minutes. But first, let me jump back to Q2 results, starting with some commentary on our end markets.

Broadcast represented about 39% of total licensing in our second quarter. Our revenues in this market increased about 4% sequentially and was flat year-over-year. The sequential increase was driven mainly by some higher activity that we saw in TVs and set-top boxes and as with the TV trend being helped by holiday seasonality. And year-over-year, we saw a higher revenue in TVs offset by some lower volumes in set-top boxes. So that's broadcast.

In mobile devices. Our mobile devices represented approximately 21% of our total licensing in the second quarter. Mobile revenue was down by about 6% sequentially but increased year-over-year by more than 100%. The sequential decline was mainly due to a large recovery in Q1 that didn't repeat in Q2 nor did we expected to, and the year-over-year increase was due to some higher penetration we're getting in new models and also helped by timing of payments.

Consumer electronics, and this represented about 13% of total licensing in the second quarter. Consumer electronics licensing in Q2 was up by about 32% sequentially and up slightly year-over-year. The sequential increase was driven mainly by holiday seasonality and along with some higher penetration we're getting into DMAs.

PC represented about 12% of total licensing in the second quarter, and PC was up about 19% sequentially but down by about 15% year-over-year. The sequential increase was due primarily to higher volume and higher recoveries, and the year-over-year decline reflected lower recoveries along with lower blended ASPs due mainly to mix.

Licensing in other markets represented about 15% of total licensing in the second quarter. Other licensing increased by about 2% sequentially and about 19% year-over-year. The sequential increase was due primarily to higher revenue from Dolby Cinema and seasonally higher revenue from gaming, and this was partially offset by lower fees from Via and lower revenue from automotive. The year-over-year increase was driven by higher revenue from Dolby Cinema and from gaming.

Products and services revenue was $28.2 million in Q2 compared to $29.8 million in Q1 and $25.9 million in last year's Q2. And we saw a year-over-year growth from Cinema products as well as an Dolby Voice.

Let's move on to margins and our operating expenses. Total gross margin in the second quarter was 89.7% on a GAAP basis and 90.2% on a non-GAAP basis. Product gross margin on a GAAP basis was 31.2% in the second quarter compared to 31.7% in Q1, and product gross margin on a non-GAAP basis was 34.6% in the second quarter compared to 35.1% in Q1. Operating expenses in the second quarter on a GAAP basis were $184.1 million compared to $174.7 million in the first quarter, and operating expenses on a non-GAAP basis were $166.3 million in Q2 compared to $155.9 million in the first quarter. Operating income in the second quarter was $86.3 million on a GAAP basis or 28.6% of revenue and was $105.7 million on a non-GAAP basis or 35.1% of revenue. Other income in the quarter was $3.2 million for both GAAP and non-GAAP, and the effective income tax rate for the quarter was 20.9% on a GAAP basis and 23.2% on a non-GAAP basis.

Net income on a GAAP basis for the second quarter was $70.6 million or $0.66 per diluted share compared to $0.49 per diluted share in last year's Q2. Net income on a non-GAAP basis in the second quarter was $83.5 million or $0.78 per diluted share compared to $0.63 in Q2 of last year.

During the second quarter, we generated about $80 million in cash from operations and ended the quarter with about $1.2 billion in cash and investments. We bought back about 78,000 shares of our common stock in Q2, and we ended the quarter with about $117 million of stock repurchase authorization still available to us. We also announced today a cash dividend of $0.16 per share, which will be payable on May 16, 2018, to shareholders of record on May 7, 2018.

So now let me provide the outlook for the full year and for Q3. For the full year FY '18, we now anticipate that total revenue will range from $1,165,000,000 to $1,185,000,000. And within the revenue total, we estimate that licensing will range from $1,035,000,000 to $1,055,000,000, while products and services are estimated for the year to be around $130 million.

Here are some of the factors that are incorporated into this annual outlook. We anticipate that broadcast revenues will be flat-to-modestly up as higher revenues from consumer imaging will be somewhat offset by lower recoveries. Mobile will be up significantly over last year due to higher adoption of audio and consumer imaging along with the positive impact from a large recovery we got in Q1. PC licensing will likely to be down, while consumer electronics should be up modestly. And in the other category, other licensing is also projected to be up modestly and thus will be benefiting from growth in Dolby Cinema, gaming, and Dolby Voice, offset partially by lower recoveries. And finally, product revenue is expected to grow for the year, driven by higher volume from Cinema products and from Dolby Voice.

Gross margin for the year is projected to be around 88%, plus or minus, on a GAAP basis and about 89%, plus or minus, on a non-GAAP basis.

Let me turn to OpEx. I mentioned in my opening comments that we are increasing our range of operating expenses for the year, and here are the primary reasons. Currency exchange rates have been unfavorable to us as it relates to the local expenses that are non-U. S. operations, and it looks like that's persisting, and so this will negatively impact the dollar value of those foreign expenses for the year. As such, we are now projecting full year operating expenses to range from $744 million to $749 million on a GAAP basis and from $670 million to $675 million on a non-GAAP basis. Other income is estimated to range from $11 million to $13 million for the year, and the effective income tax rate for the remaining 2 quarters of the year is expected to range from 20% to 23%. Adding that to the actual tax we recorded in Q1 and Q2 would yield a full year tax rate on a GAAP basis of about 69%, plus or minus.

Now let me cover the quarter ahead of us, Q3. For Q3 of FY '18, we anticipate that total revenue will range from $310 million to $320 million. And within that, we estimate that licensing will range from $280 million to $290 million, while products and services are projected to be around $30 million. Q3 gross margin on a GAAP basis is estimated to be around 89%, and the non-GAAP gross margin is estimated to be around 90%. Operating expenses in Q3 are projected to range from $190 million to $194 million on a GAAP basis and from $172 million to $176 million on a non-GAAP basis. Other income is projected to be around $3 million for the quarter, and the effective tax rate is estimated to range from 20% to 23%. Based on the combination of the factors I just covered, we estimate that Q3 diluted earnings per share will range from $0.64 to $0.70 on a GAAP basis and from $0.78 to $0.84 on a non-GAAP basis.

So now I'd like to turn it over to Kevin. Kevin?

Thank you, Lewis, and good afternoon, everyone. We made a lot of great progress this quarter as we continue to expand our leadership in audio entertainment and bring our new audiovisual experiences to more consumers around the world. In fact, we're seeing revenue growth on both our audio business as well as our new initiatives.

Let me start with Dolby Atmos. It was a big quarter for mobile. Samsung announced support for Dolby Atmos in the Galaxy S9 at Mobile World Congress in late February. More recently, Huawei announced its first mobile phones with Dolby Atmos. This significantly expands the availability of Dolby Atmos on mobile devices. And by the way, in both these wins, Dolby Atmos will be delivered with AC-4. So this further drives adoption of our next-generation codec, which delivers higher efficiency and more features. Beyond mobile, VIZIO announced its first 3 sound bars with Dolby Atmos. We now have 11 sound bar partners supporting Dolby Atmos, and recent launches from LG and Sony have price points starting below $600.

The number of televisions with Dolby Atmos is also growing. Last quarter, we announced that TCL and Skyworth will be joining LG in offering Dolby Atmos TVs. This quarter, Hisense, KONKA and Changhong all announced TVs with Dolby Atmos. More Dolby Atmos content is available with over 975 theatrical titles announced to release and global support from major OTT services. Throughout the year, BT and Sky Sports have been delivering live sports in Dolby Atmos. And more recently, both Comcast and DIRECTV delivered portions of the Winter Olympics in Dolby Atmos.

Now let me turn to Dolby Vision. Earlier this month, VIZIO announced the expansion of Dolby Vision beyond its mid- and high-end models into the E-Series. As a result, TVs with Dolby Vision are now available at price points as low as $350. We have nearly 15 Dolby Vision TV partners with an increasing number of mainstream models with Dolby Vision. We've made some great progress in expanding the reach of Dolby Vision to more people through more devices. As you know, Dolby Vision was included in iPhone X, iPhone 8, iPad Pro and Apple 4K TV at the start of the year. And the first PCs with Dolby Vision have now been launched from Lenovo. More Blu-ray players are coming to market from Dolby Vision from partners such as Sony, Panasonic and LG. At the same time, the amount of Dolby Vision content continues to increase around the world. There are nearly 300 movies available in Dolby Vision on iTunes and more than 300 hours on Netflix. In China, there are now over 1,200 Chinese titles in Dolby Vision available through Tencent and ITE. And recently, in Europe, Rakuten, one of the largest services in the region, launched its service with Dolby Vision and Dolby Atmos in Spain, the U.K., France, Germany and Italy. We're seeing widespread industry adoption of Dolby Vision, and these experiences are moving to the mainstream.

Now let's turn to Dolby Cinema. This quarter, we announced 2 new partners: Jinyi, one of the largest cinema chains in China, will be rolling out 20 Dolby Cinema screens. This adds to our presence in the growing Chinese market where we now have 7 Dolby Cinema partners. Also this quarter, Shochiku Multiplex Theaters announced its plan to roll out the first Dolby Cinema in Japan. Jinyi and Shochiku join a growing list of partners for Dolby Cinema. The number of locations has grown rapidly over the past year with 143 now open compared to about 90 a year ago. In total, we have over 380 Dolby Cinema locations open or committed around the world. It was another great quarter for Dolby Cinema content with titles such as Black Panther and Ready Player One. The overall content pipeline continues to grow with over 165 titles in Dolby Vision and Dolby Atmos announced or released. We continue to see support from all major studios. And last week, Disney announced 20 titles in Dolby Atmos and Dolby Vision, adding to a growing slate of movies to be shown at Dolby Cinema, including 2 upcoming Star Wars titles and 2 titles in the Avengers franchise. We look forward to working with our partners to make the best moviegoing experience more broadly available around the world.

Now let's turn to Dolby Voice. This quarter, we announced the camera product as a companion device to the Dolby Voice conference phone. Together, this is the Dolby Voice Room solution. In addition to all of the benefits of the Dolby Voice audio experience, Dolby Voice Room introduces new innovations to the video experience. This combination creates an experience that more closely resembles an in-person meeting. The Dolby Voice Room is easy to set up, and the initial reaction from the market has been very positive. Our first go-to-market partners are BlueJeans and Highfive, and we think that this product will address a broader set of customers in the growing huddle room space.

So to wrap up, we continue to see great momentum for our newest Dolby experiences and continue to grow our audio business. Dolby Vision and Dolby Atmos are becoming increasingly available on mainstream devices, we added new Dolby Cinema partners this quarter and we expanded our Dolby Voice offering. All of this creates opportunities for increased revenue growth and broadens the number of people that will enjoy Dolby experiences. I look forward to updating you next quarter.

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

(Operator Instructions) We'll take our first question from Mike Olson from Piper Jaffray.

I had 2 questions, if I could. First one is, with your continued success in mobile, obviously, being an important driver, is there anything you can say about how mobile pricing for technologies like Dolby Vision and Atmos compare to implementations on nonmobile stuff like TVs, PCs or other consumer electronics?

Well, you wanted to start us right off with a tough one now, Mike.

Sorry, about that.

In general, we don't make broad comments about pricing. I would say that it's well known in the industry that there's a connection between volume and size of customer and the typical factors, but it's really hard to make a general comment about pricing in mobile versus the "rest of our business."

Okay, no problem. Secondly, are you still looking for a doubling of new initiative revenue year-over-year in 2018, which would imply, I think, around $120 million versus $60 million-or-so last year? And if so, within that new initiative revenue, can you say what the largest contributor will be between Vision and Cinema? I'm assuming it's not Voice.

Yes. We are looking to double revenue from new initiatives this year, you're right, that would put it at around $120 million. We are getting a contribution from all 3 of the initiatives, including Voice, Dolby Cinema and consumer imaging which, you remember, includes both Dolby Vision and our imaging patent licensing programs. I talked about a number of the wins on the call today, but we're seeing good contribution from all of them.

Yes. That was the easier question, Mike. Thank you.

And we'll take our next question from Steven Frankel with Dougherty.

So let me follow up Mike's difficult question with my own possibly difficult question. Should we still anticipate that your large mobile customer that pays once a year does that again in the June quarter? Or has something changed in the way that arrangement flows through the year?

Well, let me go back to even something that I said last year, Steven, to play off of that, which was I highlighted last year that we had timing of payments. And by the way, that's not a new topic per se because in all the years I've been here, almost every year we have issues with timing of payments. But last year, I did indicate that timing of payments affected that bump in Q3 and that going forward, we would see similar circumstances in future years. And so our view have not changed on that.

Okay. And then -- and I think in past years, you kind of characterized where you thought mobile would be as a percentage of license revenue for the year or for the June quarter. I wonder if you might hazard a guess on that.

Yes, we haven't published a number for the year. But you can see in this quarter, it was 20-something-percent, and that's probably a little bit on the high side because it's not evenly weighted throughout the year. But certainly, we expect to see substantial growth in mobile revenues year-over-year this year.

And you can see the fundamentals underlying that. I mean coming into the year, getting Dolby Vision adopted on Apple; now this quarter, Dolby Atmos with AC-4 on Samsung and Huawei. I'm really pleased with the progress we've made in demonstrating the value that our audio and video technologies can provide. And at the same time, there is still opportunity throughout the mobile ecosystem. So that will continue to be a big focus for us, but it's definitely one of the big highlights in the quarter and one of the big highlights in the year.

Yes.

Great. And on Voice, do you have some proof points in the huddle room market that leads you to believe that you can materially ramp that business?

Well, yes. A couple of things. One is, the -- as Lewis said, one of the growth drivers in products this quarter was the Dolby Voice business. And that's -- our big go-to-market partners in this huddle room space are Highfive and BlueJeans, so we had a couple of good solid quarters. We entered those markets kind of coming into the year with BlueJeans and middle of last year with Highfive. So a lot of it is based on the reactions we're getting from customers, from the pipeline and the revenue results for the first half of the year.

And partners, and the partners.

The partners are excited about it. It's -- it really is a -- it's an incredible value proposition. I mean, I -- it -- I think we've all kind of accepted what the quality of an audio/video conference call should and can be like, and this really raises the bar in both the audio and the video experience. And now that we've pivoted the business toward this huddle room space, we're in a sales cycle where it's much more natural to buy equipment for rooms that may not have it or that have equipment that's overly complex for the room that it's coming into. And so we're optimistic that we're on the right path. And by adding -- by bringing the Dolby audio/video experience together, I think that for customers who felt like they were forced to choose between this amazing natural voice experience and an easily integrated video experience, they don't have to make that choice now. And of course, we brought innovation to it as well. I mean, it's much -- it's highly effective at the kind of shadowy environments that are typical to these rooms. It has a whiteboard feature where cameras typically pointed at the table, it's static, we don't have any moving parts, but it can pick up a whiteboard on the sidewall, so perpendicular to where the people are, and it'll straighten that out, make it look like you're looking at it straight on, and it just makes for a really natural conferencing experience. So I'm excited because of the value proposition, because of the feedback we're getting from partners and because of the pipeline we see developing.

And are these partners positioning you as their premium offering? Or is this a mainstream huddle room offering for them with premium features because of your technology?

It varies by the partner. I think in one case, it is positioned as a premium offering, but I think the premium offering is the predominant offering. In another case, it's marketed as the huddle room solution for those customers who choose to purchase hardware. So in one case, the hardware is an integral partner of the solution with each purchase. And in the other case, the equipment is optional, but Dolby is the huddle room solution for that.

And we'll take our next question from Ralph Schackart with William Blair.

First on the increased revenue outlook again. Kevin, maybe if you could just give us a sense sort of what are the main driver or drivers of the second time that you've raised outlook in the top line for the year, some perspective on that would be great. And then on the increased outlook also on OpEx, was that predominantly just the unfavorable currency movement that's driving that increased OpEx? Or was there sort of increased spend also within the business in there as well?

Sure. So let me take the first one, and I'll let Lewis give some more color on the OpEx. As far as the revenue guidance, you'll notice that we increased the bottom end of the range substantially and the top end slightly. And that really reflects the fact that we're halfway through the year. What I think is really -- one of the things I like about the way this year is shaping up is we're seeing strength really on a broad basis. So we have growth in the audio business. We have success in the new initiatives. We're on track to double revenue from those new initiatives. And so the bringing up of the bottom end of the range really reflects the fact that we're halfway through the year. And we like what we're seeing for the first half, and we see that continuing into the second half. And if I had to highlight a couple of things beyond that, one, again, is the fact that we are on track to double revenue from new initiatives, and we're getting contribution from each of them. And then, as we talked about earlier, mobile, and the fact that we're getting adoption this year of both Dolby Vision and Dolby Atmos in mobile devices.

Yes. And then there's a little pocket you didn't even mention, Kevin, like I made a comment in my thing about consumer electronics being slightly better than we thought. So yes, it's really -- it feels very solid right now. Okay, Ralph. On the OpEx, the short answer is yes. For us, raising the range this quarter, it predominantly is being driven by the FX. And if the natural follow-on question is why now, at the end of last quarter, we were really only 1 quarter in on the full year. And if I look back in history, most years, things sort of normalize through the year. So we don't typically cry or whine about FX. But now 2 quarters in, I use the word persisted in my prepared comments because that is what we're seeing. We're seeing a persistent environment where the global economy has decided to create these conditions. And so we've baked in the amount for the full year. And it's -- it is the -- essentially the driver of this increase.

(Operator Instructions) We'll take our next question from Paul Chung with JPMorgan.

So a couple from me. So first on R&D spend. I assume the bulk of R&D is now going towards new products, now with Vision, Cinema and Voice kind of finding their footing. Can you expand on where you’re putting incremental capital to work?

Yes, well, I would say, first of all, as with any business, in each of those new businesses, there is recurring engineering investment, there's investment in the next generations of those technologies and products. We just brought the new Dolby Voice product to market this quarter. And at the same time, we do have always some investment in the what's next category. There's always some great things going on at the labs, at Dolby Laboratories. And over the longer term, as we've expanded from audio entertainment into the audiovisual for entertainment and communications, we really believe we have the opportunity to improve a very wide range of audiovisual experiences. And so we continue to invest in new things. But I wouldn't want to -- you to conclude that all R&D goes into just new things because like any -- as I said, like any business, there's always recurring engineering and customer support and the evolution of those product offerings.

All right. And then how should we think about the pace of spending in the short to medium term?

Sure. I would say, aside from the update I gave today, which focused a lot on FX, which is unusual for us but just the way we're shaped, it just happened we grew in those years. The pace of spending is actually fairly consistent with our active coming into the year because broadly speaking, by far, the largest driver by a wide margin of the uptick this year is driven by this FX.

Got you. And then last question is, any update on capital allocation priorities? Should we expect any kind of material changes to the strategy over the course of the year?

Sure. I think it's -- I've been on record saying that we do have a multipronged capital allocation strategy. We do pay dividends, we do buybacks, we have acquisitions from time to time. So I think going forward, we're going to continue to do that. I think all 3 of those items appeal to various parts of the audience listening in, in here. And on the buyback, of course, in any given quarter, that can tend to fluctuate but longer term, at minimum, we like to at least offset the dilution that comes from our stock comp.

(Operator Instructions) And we'll take our next question from Jim Goss with Barrington Research.

This is Pat Sholl on for Jim. Just one question related to Dolby Cinema. Thanks for the updates on the increased signings that you guys are getting across a number of partners. I was wondering if you could provide a little bit of color on just how the product indexes in terms of box office relative to your screen footprint as it is right now. And then just that if you could repeat what you said on the number of total installed at the end of the quarter.

Yes, so -- well, let me start with that. We said that we have 143 Dolby Cinemas up and running as compared to about 90 a year ago. As you pointed out, we've continued to add more partners this quarter. We are really -- we're very pleased with the performance of our screens, both qualitatively because, of course, we do consumer surveys; and quantitatively, the first screen averages are very, very strong, and I think that's a function of the quality of the experience.

And we do have a follow-up question from Ralph Schackart with William Blair.

Just 1 or 2 more quickly. On mobile, you talked about higher penetration rates and as well as payment timings in the quarter -- I'm sorry, for the year-over-year growth of 100-plus-percent. Can you just provide maybe a little bit more color in terms of where the higher weighting may be between those 2? And then, Kevin, surprised nobody asked this quarter, but just wanted to get your current thinking on the long-term goal in terms of if you still see margins towards that double-digit growth rate?

Sure. What I probably can't do, Ralph, is sort of give you some sort of pro rata breakdown by quarter. But clearly, I want to highlight that the driver for the increased revenue in mobile this year is from us being in the new models or our higher volume from new models. But this quarter, we also were helped by the fact that the timing of payments was not evenly spread throughout the year. So we had more land this quarter that you could argue as revenue that's attributable to a full fiscal year, but it's really hard for me to break that down other than to say that it was helped by both.

Yes. And Ralph, it continues to be our goal to return to sustainable double-digit revenue growth. I really like our progress. As you pointed out earlier, we've raised guidance in each of the last couple quarters, and that's because we're getting a strong contribution across the business. As I said, we're growing in both the audio business as well as our new initiatives, and we're getting contribution across our new initiatives. And that's the formula that we need to continue to get to achieve our goal of sustainable double-digit revenue growth.

And that does conclude our question-and-answer session for today. I'd like to turn the conference call back to Kevin Yeaman for any additional or closing comments.

Great. Well, thank you, everybody, for joining us today. And we look forward to updating you again soon.

And that concludes today's conference call. We thank you all for your participation, and you may now disconnect.