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 will be invited to participate in a question-and-answer session. As a reminder, this call is being recorded, Wednesday, January 29, 2020. I would now like to turn the conference over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead. Jason.

Good afternoon. Welcome to Dolby Laboratories' first quarter 2020 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-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 information 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 2020 outlook, and Kevin will finish with a discussion of the business. So, with that, introduction behind us. I will now turn the call to Lewis.

Thank you, Jason, and good afternoon everyone. Let's dive into the Q1 numbers. First quarter revenue was $292 million, down from $299 million in Q4 and $302 million in last year’s Q1. This revenue aligns with the guidance we provided at the start of the quarter. We anticipated a year-over-year decline in Q1 revenue due to lower product revenue, which I'll discuss shortly, as well as reduced recoveries, though this decline was partially offset by increased adoption of some Dolby technologies. We do expect year-over-year growth in Q2 and for the full year, more on that in the outlook section. In terms of Q1 revenue breakdown, licensing accounted for $258 million, while products and services contributed $34 million, making up the $292 million total. Regarding licensing revenue by end market, broadcast made up about 40% of total licensing in the first quarter, with revenues increasing by about 2% year-over-year, driven by higher adoption of Dolby Vision and Dolby Atmos, although this was partially offset by contract revenue timing. Sequentially, broadcast revenue was down 13% due to lower recoveries and timing issues. Consumer electronics contributed about 19% of total licensing in Q1, with a 12% year-over-year increase driven by higher volume and adoption. Sequentially, consumer electronics grew by 31%, benefiting from holiday seasonality and increased volume from devices like DMAs and speakers. Mobile devices accounted for 13% of total licensing, showing a 1% increase year-over-year but down 24% sequentially, mainly due to revenue timing and lower recoveries. PC licensing represented 12% of total licensing in Q1, rising 38% year-over-year and 29% sequentially, largely due to higher recoveries and increased adoption of Dolby technologies. Other markets, which made up 16% of total licensing, experienced a 32% year-over-year decline primarily from lower automotive recoveries, while remaining flat sequentially as growth in Dolby Cinema balanced lower gaming revenue associated with console lifecycle issues. Products and services revenue was consistent at $34 million in Q1, the same as in Q4 but lower than $42 million in last year’s Q1. This year-over-year decline is due to the absence of hybrid deals in Dolby Cinema that occurred in Q1 last year. Now moving to margins and operating expenses, the total gross margin for Q1 was 87.2% on a GAAP basis and 87.7% on a non-GAAP basis. Gross margin for products and services on a GAAP basis was 27% in Q1, up from 14.2% in Q4, while the non-GAAP measure stood at 29.7% in Q1, compared to 18.9% in Q4. The improvement in margins is mainly due to reduced inventory write-downs. Operating expenses on a GAAP basis in the first quarter amounted to $206 million, slightly higher than $201.6 million in Q4. These expenses were about $8 million lower than our guided range, with over $4 million saved from a favorable resolution of a property tax dispute earlier than expected. Additionally, spending was lower in several legal areas and marketing spending, mainly due to timing. We still anticipate the activity will occur but later in the year. Non-GAAP operating expenses were $182 million in Q1, compared to $177.5 million in Q4, and the same comments apply here regarding GAAP expenses. Operating income for Q1 was $48.6 million on a GAAP basis, representing 16.6% of revenue, compared to $68.7 million or 22.7% of revenue in last year’s Q1. On a non-GAAP basis, operating income was $74.1 million or 25.4% of revenue, down from $92 million or 30.4% of revenue year-over-year. The effective income tax rates for Q1 were 10.8% on a GAAP basis and 18.3% on a non-GAAP basis, with the GAAP tax rate being lower due to some discrete items that helped us this quarter. Net income on a GAAP basis for Q1 was $48.8 million or $0.47 per diluted share, down from $98.2 million or $0.93 per share in last year’s Q1. Expectedly, EPS dropped from last year due to revenue decreases, compounded by last year’s Q1 net income that included a $35 million tax benefit related to U.S. tax reform. Regarding guidance, GAAP EPS for the quarter exceeded our projections thanks to lower operating expenses and taxes. Net income on a non-GAAP basis was $65.5 million or $0.64 per diluted share in Q1, compared to $78.7 million or $0.74 per diluted share in last year’s Q1, with the decline resulting from revenue and expense trends already mentioned. Non-GAAP EPS also surpassed our guidance due to revenues reaching the upper end of our projections and lower expenses than expected. In the first quarter, we generated approximately $31 million in cash from operations, which was less than last year’s Q1, mainly driven by the decline in income mentioned earlier. We ended Q1 with over $1 billion in cash and investments, bought back around 430,000 shares, and had about $330 million in stock repurchase authorization remaining. We also declared a cash dividend of $0.22 per share, payable on February 20, 2020, to shareholders recorded by February 10, 2020. Looking ahead, we are maintaining our guidance for the year with a slight adjustment to income taxes. For fiscal 2020, we estimate total revenue will range from $1.3 billion to $1.35 billion. Licensing is anticipated to range from $1.16 billion to $1.2 billion, while products and services are expected to range from $130 million to $160 million. Factors considered in this outlook include anticipated growth in broadcast revenue from increased adoption of Dolby Atmos and Dolby Vision, though we project lower recoveries to offset this. In mobile, we expect revenue to surpass the company average due to contributions from branded technologies and our patent licensing program. Consumer electronics are projected to grow because of DMAs, sound bars, and smart speakers. For PC licensing, we're looking at higher recoveries along with increased adoption, though this may be offset by downward pressure on ASPs. We expect growth in Dolby Cinema and similar new screen additions this fiscal year as last, but we also anticipate lower recoveries in automotive and decreased gaming revenue due to console lifecycles. Products and services are projected to remain flat for cinema products while Dolby Voice is expected to expand. Gross margin on a GAAP basis is expected to range from 87% to 88%, while non-GAAP gross margins are estimated between 88% and 89%. Operating expenses are expected to be between $829 million and $849 million on a GAAP basis, and from $740 million to $760 million on a non-GAAP basis. Other income is projected between $15 million and $20 million for both GAAP and non-GAAP. The effective income tax rate is expected to be between 17% and 19% on a GAAP basis, and from 18% to 20% on a non-GAAP basis. Based on these factors, we anticipate diluted earnings per share for the full year to range from $2.64 to $2.74 on a GAAP basis, and from $3.40 to $3.50 on a non-GAAP basis. Now, let's turn to the numbers for Q2. For the second quarter of fiscal 2020, we expect total revenue to be between $370 million and $390 million, with licensing projected at $345 million to $355 million, and products and services estimated between $25 million and $35 million. Last year's Q2 total revenue was $338 million, so our forecast indicates a year-over-year growth of approximately 9% to 15%. This expected growth results from factors including higher recoveries, increased adoption of Dolby technologies, and timing of revenue from contracts. Gross margins for Q2 are predicted to be around 89% on a GAAP basis and about 90% on a non-GAAP basis. Operating expenses are estimated between $213 million and $219 million on a GAAP basis, and between $191 million and $197 million on a non-GAAP basis. Other income is expected to fall between $4 million and $5 million for the quarter, and the effective tax rate in Q2 is projected to range from 18% to 20% for both GAAP and non-GAAP. So, based on all these factors, we estimate that Q2 diluted earnings per share will fall between $0.97 and $1.03 on a GAAP basis, and from $1.15 to $1.21 on a non-GAAP basis. Now, I will turn it over to Kevin.

Thank you, Lewis, and good afternoon everyone. We're off to a strong start in 2020 and we are well-positioned for another year of mid to high single-digit revenue growth and even higher earnings per share growth. And we remain focused on the opportunity to accelerate that growth further. Our focus within the consumer entertainment ecosystem continues to be growing the number of devices that support Dolby Vision and Dolby Atmos, broadening the device category to include our technologies by enabling new forms of content like music and increasing the value we bring to these devices with new innovations. This quarter we made progress in all three of these areas. Dolby Vision and Dolby Atmos experiences are becoming increasingly available to hundreds of millions of consumers around the world. And at the same time we believe the opportunity is still ahead of us given the early stages of these adoption cycles. Over the course of 2019, we saw steady growth in the adoption rate of Dolby Vision within 4K TVs, as our partners like VIZIO, Panasonic, and TP Vision added support of Dolby Vision deeper within their lineups. More recently at CES we continued to see that momentum with Skyworth, Sony, and Hisense, each adding support for the combined Dolby Vision and Dolby Atmos experience into additional models within their TV lineups. Over the last year, Dolby Vision TVs have become increasingly affordable across a wide range of price points and are now available below $250. Beyond TV, we remain focused on enabling Dolby Vision and Dolby Atmos across a broad range of devices. Last year in the PC space, Dell shipped their first PCs that support Dolby Vision, and Apple began to support their combined Dolby Vision and Dolby Atmos experience within MacBook products, joining Lenovo. This year at CES, Lenovo increased the number of models that support the combined experience within their latest PC lineups. Asus also announced their first gaming laptops that include support for Dolby Atmos. We have also seen growing adoption of Dolby Atmos within sound bars, all five of the best sound bars at CES 2020 named by Digital Trends include support for Dolby Atmos. The content for these devices continues to expand with the recent launch of Disney+ and Apple TV+. Both services make the combined Dolby experience available after standard pricing rather than reserving it for a premium tier. This gives consumers more reason to seek Dolby Vision and Dolby Atmos experiences within their devices. The impressive list of content available to consumers around the world continues to grow with the strong support of our partners like Netflix, Amazon, Rakuten, Tencent, and iQiYi. There are now over 2800 pieces of content available in Dolby Vision and 1800 pieces of content in Dolby Atmos. We continue to see our partners highlight Dolby Vision and Dolby Atmos with their high profile titles such as Netflix's The Irishman and Apple's The Morning Show. Last quarter we began enabling music content with Dolby Atmos, which enables us to bring additional value to devices and create opportunities to increase our relevance in new device categories. This quarter we premiered a series of artist stories featuring some of today's biggest names in music including Post Malone, Lizzo, Coldplay, and J Balvin. These stories highlight the emotional reactions from artists when they experience their music in Dolby Atmos. We also enabled live Atmos experiences at the American Music Awards including performances from Post Malone, Lizzo, and Dua Lipa. There has been a strong positive reaction for music in Dolby experience from both artists and consumers. It has clearly sparked a lot of interest. And this is exactly the type of innovation that gets our partners more reason to adopt our technologies. The Amazon Echo Studio and Amazon Music HD were the first smart speaker and streaming service to enable the Dolby Atmos music experience to consumers and it's received highly favorable reviews after its first few months of being available in the market. TIDAL, an artist-owned music platform, became the second streaming service to support Dolby Atmos music. With Tidal HiFi, consumers are now able to enjoy the Dolby Atmos music experience on Atmos-enabled Android devices including Samsung, Oppo, and Sony mobile phones. The Dolby Atmos music experience is bringing new value to mobile phones and smart speakers which will give us the opportunity to increase the adoption of Dolby Atmos within these devices and create new opportunities in areas like automotive and headphones. We also remain focused on continuing innovation and increasing the value proposition of Dolby Vision and Dolby Atmos. At CES, we launched Dolby Vision IQ along with our partners LG and Panasonic. Dolby Vision IQ intelligently optimizes the picture on your TV at every moment by adjusting to the surrounding light and the type of content that you are watching as you switch channels. Named as Engadget’s best home theater product of CES 2020, Dolby Vision IQ is providing another reason to adopt the Dolby Vision experience and brings additional value to each device. Let me shift now to Dolby Cinema. This past quarter, some of 2019's top blockbuster movies, Star Wars: Rise of Skywalker, Frozen 2, and Joker came to the big screen featuring Dolby Vision and Dolby Atmos. In 2019, all of the top 10 global box office titles were available in Dolby Cinema. We also continue to expand the global footprint of Dolby Cinema. Just last week, we entered into a new partnership with Shin Kong cinemas, which will enable the first Dolby Cinema in Taiwan. Overall, we now have about 250 Dolby Cinema sites open globally across 11 countries and over 20 exhibitor partners. In addition to growing the number of Dolby experiences that people are enjoying through movies, TV, and music, we see compelling opportunities to enable more Dolby experiences beyond entertainment. We had a solid quarter for Dolby Voice as our rooms as a service offering is driving a growing number of Dolby Voice rooms. Beyond this, we are excited by the opportunity to broaden the availability of Dolby experiences. For example, we have created a platform for developers to access certain Dolby technologies that enable higher quality media and communications experiences within their applications and services. These initial examples can range from enhancing the quality of an online learning course or improving the communication within an app that connects you to a medical advisor. We believe these offerings can both reinforce our existing propositions as well as create new revenue opportunities. We're still in the early stages of these efforts and I look forward to updating you more as we progress. So to wrap up, this quarter we continued to make progress across each of our growth areas. The amount of Dolby Vision and Dolby Atmos content continues to grow driving higher adoption of Dolby experience within our partners' devices. We've received a strong reception for the Dolby Atmos music experience from artists and consumers which gives more reasons for partners to adopt Dolby on more devices. We continue to bring new value to our partners and consumers with our latest innovations like Dolby Vision IQ. And at the same time, we are growing the ways that people can have the Dolby experience including the expansion beyond entertainment. As the number of Dolby experiences available to people around the world grows, we continue to strengthen our opportunities to drive revenue and earnings growth in 2020 and beyond. I look forward to updating you next quarter. And with that, I will turn it over to Q&A.

Thank you ladies and gentlemen. We will take our first question from Steven Frankel with Dougherty & Company. Please go ahead.

Good afternoon. Kevin, do you have any metrics you might be able to share with us about this increased penetration of Vision and Atmos? I mean, I've certainly noticed at CES a lot more TVs with the combined experience. I just wonder if you're able to quantify that for us at all?

Well, first of all, as we mentioned last quarter, for 2019, we saw Dolby Vision on about 10% of 4K TVs, which represented around half of the overall TV market. This marked the third consecutive year of doubling the units with Dolby Vision. As we enter this year, we aim to maintain that pace and look to double those numbers again. A key factor in this is that, as you may have noticed in 2019, several partners have further expanded their offerings. So, we ended 2019 with a higher exit rate compared to the average for the year. At CES, we observed more partners, such as Sony, Skyworth, and Hisense, broadening their offerings as well. So, in terms of metrics, we're focused on sustaining our momentum to double those volumes. Regarding the integration of Dolby Vision and Dolby Atmos, Dolby Vision is present on more TVs than Dolby Atmos, but a significant number of those TVs feature the combined experience.

Okay. And then in music, what should we watch for? What's the next big event? Is it another label? Is it more smart speakers, more artists coming out in support of you? How should we judge the progress as we go through the year?

I believe it's all of those factors, and I want to emphasize how strongly we've started this first quarter. We've launched our first smart speaker and Amazon Music HD streaming, added TIDAL HiFi, and received tremendous engagement and support from the artistic community, which has led to collaborations with UMG and Warner. Moving forward, we aim to maintain this momentum by increasing the amount of music available and continuing to foster relationships with artists who want to create and share their music in this manner. Our marketing efforts in the first quarter were very effective in promoting this, and consumer reactions have been positive. Ultimately, we want to see revenue growth. These initiatives lay the groundwork for expanding content streams to more devices and integrating our technologies into them. This will involve collaborating with our streaming partners to activate the Dolby Atmos music experience on current Dolby Atmos devices in the market, as well as promoting more devices that enhance this experience. I believe this opens up many opportunities, especially in mobile phone lineups where users want this experience on their devices, and it also presents a strong offering for automobiles, among other areas.

Okay, great. And then a couple of cash flow questions. So I understand that tough year-over-year comparison in cash flow. But just in general free cash flow as a percentage of EBITDA was kind of at the low end of recent history. Was there anything in particular in this quarter that might have in the short run negatively impacted cash flow generation?

Yes. In the short term, this quarter includes a significant item where we have the entire annual incentive plan payout. We typically don't distribute that quarterly, so this quarter reflects a full year's payout, which impacts our accruals. Overall, we have completed our first annual review under 606. Moving forward, we aim for a strong connection between our earnings and cash flow generation. This specific quarter includes all the payouts of the annual incentives, which are reflected in the operating cash flow for this quarter.

Okay, great. That's helpful. And then, I couldn't help noticing that the buyback pace had slowed significantly in the quarter. Is that related to the same issue? Or have you kind of made a higher level decision that you might scale back the pace of the buyback?

No. We consistently have said in the past that as a company we have a phenomenal business model that not only generates a lot of profit from our operations and our innovations, but a significant portion that goes into returning it in form of dividends and buybacks. This quarter in particular though because it was Q4 and there's a protracted period for us. You may recall that when we announced Q4 earnings, it was later, because with the year-end and us filing the K almost concurrently with that, it gave us a shorter window to execute. Otherwise, no, we've not changed our philosophy on that. So we really feel very comfortable that our overarching philosophy on returning cash and doing buybacks is not changed at all.

Great. Thank you.

Thank you. We'll now take our next question from Paul Chung with JPMorgan.

Hey guys, thanks for taking my questions. So first on the Amazon Echo Studio speaker. Can you just expand on how you've secured Atmos on the speaker, how long it took, etc.? And is there some near-term opportunity to maybe expand across kind of a whole smart speaker space? Does your guidance kind of reflect potential wins or is it a function of existing wins and market demand?

We have developed a strong relationship with Amazon over many years, particularly through their support of Dolby Vision and Dolby Atmos on Fire TV devices and Amazon Prime Video. This relationship has allowed us to share possibilities, such as the ability to pair two Echo Studios for a Dolby Atmos experience with Prime Video content. Additionally, we have introduced a brand-new music experience in collaboration with not only the Echo Studio team but also the Amazon Music HD team, making it an exciting opportunity for this new experience. It’s a result of our longstanding relationship and our capacity to innovate together.

Clearly, there's an opportunity to extend the Dolby Atmos experience to more smart speakers and home audio products, as well as in automotive and mobile devices next year. While you inquired about near-term opportunities, I can affirm that we are actively involved in various discussions regarding all these device types, generating significant interest and excitement. As for the timing of announcements and market launches, we'd prefer everything to be imminent, but each partner has its own timelines and release schedules. We'll continue our efforts to secure more content and expand its availability through additional streaming platforms. We have a plan in place to capitalize on the enthusiasm surrounding this experience, bolstered by strong support from artists and partners. We will remain focused on our work, and we believe that positive developments will follow.

Okay, great. And then just on cinema, I mean, when can we start kind of splitting out the segment on the licensing part, not the product sales. But you've had a lot of locations running for quite a while now, kind of any clarity on current contributions, future contributions per screen? And how to think about the future pipeline and then kind of any near-term impact from the Coronavirus in the near term particularly in China?

Hey, Paul, this is Lewis. Your question covers a lot, so let me break it down piece by piece. As we mentioned in our prepared remarks, we currently have about 250 screens, and the business is performing well. I noted last quarter that Dolby Cinema revenues remain below 5% of our total revenue. That's why we haven't separated it out yet, but we’re looking for ways to share more information with you. Kevin pointed out that we continue to expand our presence, opening more locations in new areas. Regarding your last point about the Coronavirus situation in China, any Dolby Cinema locations there will be impacted like others, but it’s a relatively small part of our overall business. As I mentioned, the Dolby Cinema segment as a whole is still under 5% of our company, and the impact from China represents just a small fraction of that. Most of our 250 screens are actually located around the world, with the largest portion in the U.S., accounting for over half. Did I cover everything you wanted to know about cinema?

Yes. You did. Thank you very much.

Thanks.

Thank you. We'll now take our next question from Jim Goss with Barrington Research.

Thanks. Before I proceed, I want to follow up on what you mentioned. You said Dolby Cinema revenue is less than 5% of total revenues. I'm curious about what portion of your total revenues is influenced by the technologies that make up Dolby Cinema, particularly Vision and Atmos. Can you provide any insights on that? I believe the significance extends beyond just Dolby Cinema itself, and I think it's a crucial aspect to consider.

Yes. I will provide the first part of the answer and then let Kevin share additional details. This question has been raised before, and we do not disclose our revenue specifically by technology. If you're asking about the total revenue from Dolby Vision and Dolby Atmos, these technologies are indeed being integrated into various areas. As you noted, it's not limited to Dolby Cinema; they are also found in TVs, mobile devices, and some PCs, and they will soon be present in set-top boxes. Dolby Vision and Dolby Atmos are central to our company’s growth. However, we cannot specify what percentage of our revenue is derived from these technologies because that's not how we organize our business. We focus more on our revenue by end market, which is why I provide information on revenue from broadcasts, PCs, and mobile phones. We find that approach more useful. As Kevin mentioned previously, with the introduction of Dolby Atmos for music, we expect this technology to generate revenue across various sectors, including some where we currently have limited presence, such as the automotive industry. Therefore, we will continue to discuss our revenue in relation to the markets we serve rather than specifying the percentage from Dolby Vision and Dolby Atmos.

Okay. Are you finding the - your strategy in terms of Atmos and Vision, the branding and the exposure in key markets different in different markets in what you're dealing in terms of the impact on the categories they affect, the United States versus Europe versus wherever else you might be able to be generating revenues?

Well, we certainly have teams in each of those markets. And I would say, we have a combination of what we would consider to be global marketing efforts. Certainly when they're talking about title marketing initiatives with Dolby Cinema or musicians, these are investments that we typically think of as being relevant to the world. Now how you actually reach people in each of those markets. We do have teams in each of those markets to either make the appropriate adaptations or in some cases to run programs that are more specific to those markets. But I think the big development for us in marketing this quarter was the coming-out party for Dolby Music. And what you see with these artists stories around their experience with Dolby Atmos music is having I think the intended effect, which is it's celebrating artists and how excited they are. It’s getting a number of impressions and engagement with consumers which are at higher levels than we've seen at Dolby. And then ultimately what it's doing is increasing engagement with partners and our customers so that they see the value it brings and that they have a story to tell their consumers about why this is important.

Okay. And maybe lastly a little bit more on the Dolby Music since you first brought that up again. Is the relationship of the artist in terms of celebrity sponsorship? Or is there something more to it in terms of how they create the music? How the music might get played back? And what equipment you might sell and what royalties you might be able to generate to tie into this whole process?

It always starts with a passion for wanting to promote this experience, as is the case with movie directors, musicians, or any creatives we work with. They talk about what Dolby Atmos does for them and the stories they wish to share with consumers. In regard to your question about our goals, one of them is to get the experience license into more devices. This is separate from our marketing and promotion efforts. The approach varies depending on the program; we may promote it through social media or run spots during events like the American Music Awards. Most of the marketing budget goes into production and creative assets, along with spreading the word, but this is unrelated to licensing.

Okay. I mean, all of these things have to ultimately come to the bottom line and I'm just looking at how the pieces are tied together. But I appreciate…

Again, I think for us first and foremost starts with a genuine passion for what we do. Our goal is to provide these creatives with a palette to tell stories in a more meaningful way. And each of our programs starts with that. And I think that it gives us opportunities to promote the experience in moments that can have big impact.

Okay. Thanks very much.

Thank you. It seems we have no further questions at this time. Mr. Yeaman, I'd like to hand the conference back to you for any additional or closing remarks.

Well, thank you everybody for joining us today. And we look forward to keeping you posted on our progress. Thank you.

Thank you. And that does conclude today's conference. Thank you all for your participation. You may now disconnect.