Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Second 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, Monday, May 4, 2020. I would now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

Good afternoon. Welcome to Dolby Laboratories second 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, including our third quarter fiscal 2020 outlook and our assumptions underlying outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. In particular, we're currently in the midst of the COVID-19 pandemic. Each step of its continued impact on our business will depend on several factors including the severity, duration and extent of the pandemic as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements as well as in the Risk Factors section of our most recent Quarterly 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 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 third quarter fiscal 2020 outlook. And Kevin will finish with a discussion of the business. So those introductions behind us, I will now turn the call over to Lewis.

Okay. Thank you, Jason. Good afternoon, everyone, and thank you all for joining this call. We are reporting today that revenues and operating income are up over last year, and the adoption of Dolby technologies continue to expand. We have a strong business model and our financial position is solid. However, the COVID-19 pandemic has caused a lot of stress and uncertainty in the economy. This affected the level of growth we were able to achieve in Q2, and has also limited the visibility into the near-term. As I go through the numbers today, my commentary will include some perspectives on how the economic environment has impacted the numbers and give you a sense for how that might continue until things recover. Later on, Kevin will talk more broadly about our people and the business and how we are managing through the COVID-19 situation, so that we can emerge from this downturn as strong as ever. Second quarter revenue was $352 million compared to $292 million in Q1 and $338 million in Q2 of last year. Total revenue of $352 million was about $30 million below the midpoint of the guidance that we gave at the beginning of the quarter, and all of this was due to lower volume and consumer activity related to the pandemic. In other words, the temporary shutdowns around the globe and the lower consumer purchases of electronic devices. Based on our analysis, we estimated that licensing revenue was negatively impacted by the pandemic by about $25 million for the quarter and that was heavily concentrated in China. In our products and services category, which mainly serve the cinema industry, those revenues were about $7 million below the midpoint, and we believe most of that delta was also tied to the pandemic. Let me now talk about the composition of our revenue by end-market. So let's start with Broadcast, which is the market category we use for licensing revenue that we get from TVs and set-top boxes. Broadcast represented about 39% of total licensing in the second quarter. Broadcast revenues were up by about 5% year-over-year, driven by higher recoveries and also higher adoption of Dolby Vision and Dolby Atmos. This was partially offset by lower volume because of the pandemic, which is broadly affecting TVs and set-top boxes. On a sequential basis, Broadcast was up by about 26% due to higher recoveries and timing of activity in our patent programs. Our Mobile devices category consists of mobile phones and tablets, but not laptops. In Q2, Mobile represented approximately 23% of total licensing. Mobile was up about 13% over last year, driven primarily by growth in our patent programs. On a sequential basis, Mobile is up by more than a 100% due to timing of revenue under contract as well as growth in our patent programs. Consumer Electronics is our next market category and this captures a broad range of home entertainment gear, such as soundbars and smart speakers, DMAs, which are your Apple TV and Fire TV type devices, audio/video receivers and Blu-ray players. About 15% of total licensing in the second quarter was in our Consumer Electronics category. On a year-over-year basis, CE licensing increased by about 10% driven by higher volume for more adoption. PC, which consists of desktop and laptop computers, represented about 14% of total licensing in the second quarter. PC was up by about 11% year-over-year, mainly due to higher recoveries then offset partially by lower volumes due to the pandemic. Our last category, Other Markets licensing includes revenue from automotive, Dolby Cinema box office revenue sharing, gaming consoles and Dolby Voice licensing. In Q2, other markets represented about 9% of total licensing. They were down by about 16% year-over-year as we saw lower volume and lower recoveries in automotive and lower revenues from Dolby Cinema, all of which was due to the pandemic. So let's move on now to products and services revenue, which was $23 million in Q2 compared to $34 million in Q1 and $28 million in last year's Q2. Most of this revenue comes from equipment that we sell to cinema exhibitors. The cinema industry has been particularly hard hit by the pandemic, and that’s evident in the Q2 shortfall against our guidance. Total gross margin in the second quarter was 89.5% on a GAAP basis and 90.2% on a non-GAAP basis. Products and services gross margin on a GAAP basis was minus 2.8% in the second quarter compared to 27% in Q1. The usually low gross margin in products and services in Q2 reflects a large drop in demand because of the pandemic and that rippled into higher excess and obsolescence charges and lower production volumes, which meant lower recovery of fixed costs. Operating expenses in the second quarter on a GAAP basis were $209 million compared to $206 million in Q1, and about $4 million less than the low-end of the range that we had guided. As you might expect, we had lower travel and tradeshow-related expenses because of the pandemic. We also had some marketing activities that were pushed out and some activities that utilized consulting and outside services that were impacted by shutdowns. Operating income in the second quarter was $105.9 million on a GAAP basis or 30.1% of revenue compared to $102.9 million or 30.4% of revenue in Q2 of last year. During the second quarter, we generated about $66 million in cash from operations, which compares to about $49 million generated in last year's second quarter. We ended the second quarter with a little over $1 billion in cash and investments. During Q2, we bought back about 1 million shares of our common stock and ended the quarter with about $260 million of stock repurchase authorization still available. We also announced today a cash dividend of $0.22 per diluted share, which will be payable on May 27, 2020 to shareholders of record on May 18, 2020.

Thank you, Lewis, and good afternoon, everyone. Lewis just went through a lot of information clearly as much as uncertain as we look out over the next few months. At the same time, we are well positioned to navigate these challenging times. We have a strong value proposition, a strong business model, and a strong balance sheet, and we are confident in our long-term opportunities. Our top priority has been and will continue to be the safety and wellbeing of our people. As of today, approximately 95% of our workforce is working from home. We have in place a business continuity plan, and while nobody ever wants to have to use it, it has served us well. In terms of how it has affected our work, we are able to continue to conduct our business from product releases, integrations and certifications of Dolby technologies. We can't fully replicate the ability to wow our customers with live demos, but we have increased our focus on our ability to conduct online demos and training. This infrastructure team has not missed a beat, continuing to stay on schedule, while working even harder to meet the needs of our work-from-home employees. I want to take a moment to thank our people. Our people are the magic behind the Dolby experience and our future innovations, and I speak for everyone on our team when I say that our hearts go out to those who are most impacted by this pandemic. Let me turn to the business. While the environment is uncertain, we continue to believe that consumers want to be immersed in their content and that quality matters. If anything, we are reminded of the importance of shared stories and experiences. Our strong financial position allows us to maintain a focus on long-term success. Across the company, we are actively recalibrating priorities in recognition of the fact that there are many changes to the work that can and should be done in the near term to best achieve our long-term goals. In cinema, the vast majority of screens around the world are closed, including all of our Dolby Cinema screens. We are confident that when it is safe to do so, consumers will return to the theaters and Dolby Cinema is the best way to see a movie. During the quarter, we entered into agreements with two new exhibitor partners that will bring the first Dolby Cinema to South Korea and Saudi Arabia. We currently have 250 Dolby Cinema locations and eagerly await an exciting slate of titles. As it relates to our licensing business, the combination of retail closures and economic conditions has significantly impacted sales of most home entertainment and mobile products. Disruptions related to the pandemic have impacted the near-term priorities of some of our partners, and in some cases this may affect the timing of new products and partnerships. We continue to engage with our partners in this environment, and what remains consistent is the value that they see Dolby brings to the experiences we are enabling or planning to enable on their devices and services. Even within this environment, we continue to see examples of progress in the adoption of Dolby Vision and Dolby Atmos. One area that has seen growth during the current environment has been the increased consumption of streaming content from our partners like Netflix, Apple, Amazon and Disney, all of whom are streaming content in Dolby Vision and Dolby Atmos. We continue to see broader adoption across an increasing number of partners. As conditions improve, we believe we will return to our path of long-term growth.

Thank you, sir. And the first question today will come from Steven Frankel, Dougherty.

Good afternoon. So Kevin, given this environment doesn't look like it's going to get any better in the short run, can you give us a little more insight into your thought process on reducing the run rate of expenses? And how much of the current quarter’s expenses were kind of the temporary work-from-home bump? And what's the right run rate going forward?

Sure. I'll turn it over to Lewis to talk a little bit more about the composition of the current quarter's expense. But as we look forward, our first guiding principle is making sure that we're focused on strength as we come out of this in relation to our long-term opportunity. Some things you would expect are naturally lower, such as travel expenses and trade shows, but we are reviewing each of our projects as it relates to what we can do in the near-term to come out in a very strong position. I would say that as we sit here today, we don't have as much visibility as we would normally have on how the rest of this year plays out. Therefore, we will be watching for indicators in each of our businesses, whether that's how consumer spending is returning or how people are coming back to the movies.

Sure. I would say that the guidance provided reflects some lower spending due to obvious reasons, such as lower travel, significantly lower travel expenses, and a lower rate of hiring than what we were originally modeling. There's probably some use of outside services that are lower. However, in terms of the guidance, we've not baked in a lot of unusual one-time expenses per se. We did see a higher bad debt expense in the quarter, and while I wouldn't expect to run at that level every quarter, there may be some customers who run into issues.

Okay. And then Lewis, if you could give us just a little more detail on whether the guidance you gave for the current quarter is the normal run rate or if there's still more work-from-home-related kind of one-time expenses in that number?

Sure. The guidance does reflect a lower spending primarily for obvious things like travel. As far as expenses for work-from-home, we did incur some higher costs associated with that initial ramp-up, but I don’t think that repeats every quarter. As I mentioned, we had a higher bad debt expense due to the pandemic, but I wouldn’t expect to maintain that level going forward.

Yes. In terms of anticipating a ramp, it really is a wide range of factors that we believe affect overall consumer demand. However, many of our products are still shipping through various channels, and we feel confident about our long-term opportunity.

Okay. Thank you.

Our next question comes from Eric Wold, B. Riley.

Thank you. Good afternoon, guys. I know there's a lot of uncertainty out there; you've kind of baked into your 15% to 25% assumed unit volume decline in your guidance. Can you clarify if that decline is mainly based on what you think demand will be from the consumer standpoint? How much of that is supply chain-driven? Is your supply chain back ramping that can meet the demand if it's there?

Right. It's a scenario that we modeled based on a wide range of data points, and I'll turn it over to Lewis for more detail. Lewis?

Hey Eric. We take a two-pronged approach; we look at customer data and individual market segments while also examining industry-wide reports. However, the data in this environment has been fairly scattered. So it's quite difficult to separate supply chain issues from consumer demand issues, but what we do know is that the supply chain is getting better, and the market response remains critical for us.

Very helpful. Thank you.

Next we'll hear from Ralph Schackart, William Blair.

Good afternoon. As we think about the COVID environment right now, do you see any parallels between this situation and the great recession in 2008 and 2009 in terms of the decline? And how do you think Dolby is positioned coming out of COVID versus 2008 and 2009?

We haven't spent a lot of time comparing the two, as the environment then and now is quite different. Our business has also evolved a lot, transitioning from DVD revenue to newer technologies. There are a lot of things that are hard to draw parallels from. However, we feel very good about our ability to significantly increase our adoption rate of Dolby Vision and Dolby Atmos this year. When consumer spending returns, we will be prepared to capitalize on those opportunities.

Okay. That's helpful. Thank you.

And we'll go to Jim Goss, Barrington Research.

Thanks. A couple of questions. First, do you see new opportunities for lower-value units mobile, as Apple recently launched models at different price points?

Yes, it's great to see us getting adopted in new models, and we aim to find ways to get our technology adopted broadly across different models. While we don't specifically comment on customers, we look to ensure that Dolby technology improves the experience regardless of price points.

Okay. Can I ask one other thing related to Dolby Music? You mentioned the new Pearl Jam release. Do you have an opportunity to create remasters and rereleases of classic albums?

We have increasing engagement across the artistic community. Our focus right now is encouraging artists to adopt the technology and create these experiences in Dolby, connecting that experience to more ways to enjoy it through playback devices.

Okay. So the content will just be the fuel for the product sales and the license sales as has historically been the case?

That is the most direct path for us to revenue. We will also explore other opportunities over time to enhance value.

At this time, there are no further questions. I'll hand back to Kevin Yeaman for any additional or closing remarks.

Great. Thank you, everybody, for joining us today, and we look forward to keeping you updated as we progress. Thank you.

Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.