Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Third Quarter Results. During the presentation, all participants will be in a listen-only mode. As a reminder, this call is being recorded, Wednesday, August 7, 2024. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead.

Thank you, operator. And good afternoon, everyone. Welcome to Dolby Laboratories' third quarter 2024 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories CEO; and Robert Park, our CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2024 fourth quarter and full-year outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending, and geopolitical instability on our business. A discussion of these risks 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 non-GAAP financial measures. A reconciliation between GAAP to non-GAAP financial measures is available in our earnings press release and in the Interactive Analyst Center on the Investor Relations section of our website. With that, I'd like to turn the call over to Kevin.

Thank you, Peter. And thanks to everyone joining us on the call today. Revenue for the quarter came in just above the midpoint of the range that we provided you on the last earnings call and earnings were above the high end of the range. For the full year, we now expect revenue to be down approximately 1% to 2%, which is at the lower end of what we've been expecting throughout the year. We are not making any changes to our non-GAAP EPS guidance for the year. Our foundational audio revenue is coming in lower than we expected as global device sales in aggregate have been soft all year and we are seeing lower than expected units in set-top boxes and gaming consoles for the second half of the year. In products and services, cinema products are coming in lower than we expected as the box office remains sluggish and exhibitors continue to push out CapEx. Dolby Atmos and Dolby Vision are performing slightly ahead of our expectations as strong content growth continues to drive device attach rates. Dynamics remain stable and ongoing engagement from the broader ecosystem of creators, distributors and device manufacturers are driving a steady stream of product launches across all device families. We continue to be confident in our growth opportunity with Dolby Atmos and Dolby Vision and we have a strong position with our foundational audio technologies, which are well-positioned as our end markets return to more normal cycles. Moving on to the highlights for the quarter. We continue to enjoy momentum in content for Dolby Atmos and Dolby Vision, which is driving growth in autos, TVs, and mobile, our three biggest areas of opportunity. Starting with content, I'm happy to share that as of this spring, over 25,000 TV shows and movies have been made available in Dolby Vision, a significant milestone considering that we launched Dolby Vision in October of 2015 with just 13 movies from one studio and one TV OEM. Since that initial launch, Dolby has worked across the ecosystem on a global basis to add studios, production companies, product partners, content service providers and device partners to the Dolby Vision story. And we are taking that Dolby Vision momentum in TV and movies into live sports. Comcast Xfinity in the US and a variety of global partners are making the Olympics available in Dolby Atmos and Dolby Vision, which builds on the momentum we've seen throughout this year. In Q3 alone, the Cricket World Cup, European Championship soccer, Wimbledon, NHL, and NBA post-seasons were all available in Dolby Atmos and Dolby Vision. And of course, we aren't stopping there. In May, Tencent Music cited Dolby Atmos music on their earnings call, mentioning that we help them to drive 20% year-over-year growth by making their music offerings more attractive and stickier, which is something we love to hear. And Audible recently announced that they will continue to expand their library of Dolby Atmos content with full cast audio productions of all seven Harry Potter books scheduled to premiere in late 2025. Moving on to automotive. GM announced this quarter that the 2025 Cadillac OPTIQ will feature Dolby Atmos, our first car with GM. Also, this quarter, Rivian announced that the second generation of its flagship vehicle, the R1, will support Dolby Atmos. And Hyundai announced that its luxury brand Genesis will make Dolby Atmos standard across five models starting in Korea. We now have 20 OEM partners for Dolby Atmos, and the momentum continues to build. In TVs, we are seeing a slight uptick in attach rates. Hisense and TCL, which are both strong adopters of Dolby Atmos and Dolby Vision, continue to gain market share and we continue to get incremental wins as other TV OEMs look to bring Dolby Atmos and Dolby Vision deeper into their lineups in order to compete more aggressively in certain markets. Also contributing to the momentum are additional drivers like the growth in sports content that we just covered. Lastly, in mobile, in addition to the steady rollout of new models from most of our mobile OEM partners, Transsion added a Dolby enabled low-cost phone to consumers in Malaysia, as the company continues to sell affordably priced, higher-end phones aggressively into Africa, the Middle East, India, and Southeast Asia. Moving on to M&A. I'd like to briefly discuss our pending acquisition of GE licensing, which complements, strengthens, and expands Dolby's patent offerings, particularly in imaging and represents a compelling financial profile of durable, recurring high-margin revenue. This transaction adds a significant portfolio of video codec technologies that provide best-in-class video compression while also enabling better overall picture quality and higher resolution, which is particularly important in applications like streaming and video conferencing. In addition to strengthening our current video patent licensing programs, this acquisition continues to position us well for new licensing opportunities. These patents are primarily monetized through patent pools, which are collaborative licensing structures that enable industry efficiency and promote long-term growth by facilitating the adoption of its next-generation standardized technologies. We expect the transaction to close by the end of the fiscal year and expect it to be accretive on a non-GAAP basis to operating margins and EPS in fiscal 2025. Also on M&A, we recently enhanced our Dolby.io offering with the acquisition of THEO Technologies for $55 million. As we've talked about, we are seeing demand from companies in sports and entertainment who are looking to create real-time and personalized experiences. THEO addresses a similar customer base with complementary technologies. This acquisition gives us more momentum from both a product and customer perspective and a stronger foundation to build on. Neither of these deals will have a material impact on FY24. In summary, we continue to operate in an uncertain and dynamic market environment with lower unit shipments and cinema box office weighing on revenues this year, particularly in foundational. At the same time, we continue to grow our Dolby Atmos and Dolby Vision content ecosystems across movie, TV, sports, and music and to grow device adoption, particularly in automotive, TV, and mobile. We remain committed to growing earnings faster than revenue while investing in a healthy portfolio of innovation and we are strengthening our imaging offerings with a financially attractive acquisition. I continue to be very excited about the opportunities in front of us and the opportunity to deliver revenue and earnings growth. And with that, I'll turn the call over to Robert.

Thanks, Kevin. And thanks to everyone joining us on this call today. Before we review the quarter in some detail, I'd like to hit the highlights. First, revenues for Q3 were above the midpoint of the range we laid out on the Q2 earnings call and profitability came in above the high end of the range. Second, the environment remains uncertain and dynamic. Our revenue guidance for the full year is skewing towards the lower end of what we've been describing as roughly flat all year and our non-GAAP EPS range is unchanged. And third, as I have said before, we feel good about our long-term growth prospects and our value proposition remains strong and our financials are solid. Q3 revenue was $289 million, down 3% compared to the year-ago quarter but above the midpoint of guidance we shared with you on the last earnings call. Licensing revenue of $267 million was down 2% year-over-year. Products and services revenue was $22 million, down 14% year-over-year. Detailed licensing performance by end market is on our IR website, but I'd like to point out some noteworthy details. As a reminder, timing of recoveries, minimum volume commitments, and true-ups can drive volatility between quarters. For example, mobile, which benefited from minimum volume commitments this quarter, was up 25% year-over-year but will still be down slightly for the full year. Similarly, consumer electronics revenue was down 18% year-over-year in the quarter but we expect revenue to be down slightly for the full year. We expect Broadcast revenue to be down year-over-year for the full year, driven by tough comps in terms of timing and size of deals, and lower set-top box revenue. On the flip side, we continue to expect solid growth in other markets, driven by imaging patent admin fees and increased adoption of Dolby Atmos and auto. PC is benefiting from minimum volume commitments and slightly higher unit volumes. Moving to the bottom line. We earned $0.71 per diluted share on a non-GAAP basis, above the high end of our guidance, primarily due to stronger revenue, lower operating expenses, and higher nonoperating income, and we generated $21 million in operating cash flow. As a reminder, cash flow will fluctuate quarter-to-quarter due to timing of deals but over time, operating cash flow will correlate to non-GAAP net income. GAAP operating expenses included a restructuring charge of approximately $4 million for severance and related benefits as we continue to align resources with our strategic priorities. Moving on. We repurchased $35 million of common stock and we have $72 million remaining on our repurchase plan authorization. We recently received board approval to increase the existing share repurchase authorization by $350 million, bringing our total authorization to about $420 million. We declared a $0.30 dividend, up 11% from our dividend a year ago and ended the quarter with cash and investments of just under $1 billion. Turning to guidance. It continues to be an uncertain and dynamic market. Device shipments remain soft and the box office remains sluggish, which has negative implications for both our licensing and product and services revenue. At the same time, we continue to see steady growth of content created and distributed in Dolby technology, strong engagement from our partners, and revenue from Dolby Atmos and Dolby Vision and imaging patents is performing a bit better than expected. For Q4 fiscal '24, we expect revenue to be between $300 million and $320 million. Within that, licensing revenue is estimated to range from $275 million to $295 million. Gross margins should be approximately 88% on a non-GAAP basis. We expect non-GAAP operating expenses to be between $190 million and $200 million. Our effective tax rate for Q2 is projected to be around 23% on a non-GAAP basis. So as a result, we estimate that non-GAAP EPS should be between $0.61 and $0.76 per diluted share. This Q4 guidance implies full-year revenue between $1.27 billion and $1.29 billion, at the lower end of what we've been describing as roughly flat revenue all year as we are seeing lower than expected unit shipments and lower revenue from cinema. However, we still expect non-GAAP earnings to be within the range we've been discussing all year of $3.60 and $3.75. To wrap things up, the creation and distribution of Dolby enabled content continues to grow nicely and our partners are still very engaged. Our financials remain solid and we are well positioned for growth when economic conditions improve. With that, I'd like to turn it back to the operator to open the line for your questions.

Our first question comes from Ralph Schackart with William Blair.

Kevin, just on the macro, just to kick it off. Just curious what you observed this quarter in relation to what you observed last quarter. Was it sort of within bounds maybe at the lower end, given sort of the slight tweak to guidance but anything you could add on the macro? And then I have a follow-up.

Yes, regarding the macro environment, we're experiencing much of what we've seen throughout the year. It's been a challenging landscape for our OEM customers over the last few years; however, they seem to be cautiously optimistic that conditions are stabilizing and are looking for growth opportunities. We also continue to see strong engagement with content distribution devices for Dolby Atmos and Dolby Vision. Specifically this quarter, we observed some softness in set-top boxes and gaming consoles. Industry analysts, along with our customers and partners, had anticipated an uptick in set-top box sales this year after addressing a large inventory from last year, but we are seeing that remain flat. As a result, we had a negative true-up in Q3 of $8 million, primarily from set-top boxes, along with ongoing weakness in gaming consoles, which we expect to persist through the year. On the positive side, we had some early results in Q3 that did not appear in line with our guidance for that quarter. Additionally, the box office performance remained soft through the end of Q3, leading to delays in cinema product purchases. I would attribute these two factors to the slight adjustment, but I wouldn’t describe it as a significant macro change.

And just one more, just on the new patents that you acquired from GE. Curious if you could leverage these patents either into existing products or potentially for future products? I know it's in part that they've applied to video compression. So overall curious perhaps could this help your Dolby.io efforts as well.

We're always looking for opportunities that can expand or accelerate our existing business initiatives. This is particularly focused on our imaging patent business, where we license through patent pools, collaborative licensing structures. This presents a unique opportunity for us to acquire an attractive patent portfolio, especially in the video codec technology space. It enhances our presence in imaging patents and provides durable revenue streams, and we expect it to positively impact both non-GAAP operating income and EPS in the first year. This quarter, we also acquired a start-up called THEO Technologies, which enhances our Dolby.io offering. We're focused on sports and entertainment companies that want to deliver more interactive digital experiences. THEO has a video player with features that boost interactivity and serves a similar customer base. This acquisition allows us to provide a more complete solution and can increase sales momentum through cross-selling opportunities. We share several customer prospects and are receiving very positive feedback, which makes us excited about this acquisition as well.

First, I'd like to ask about Atmos in cars. You gave a number of usage points, including Cadillac OPTIQ, Rivian, Genesis. In the Genesis, with five different models being used, that's pretty rare, I think, to this point. But I'm wondering if you're seeing that in a number of the other applications. And do you feel you are picking up momentum in broadening the usage within cars?

We are thrilled to have Cadillac on board with the first model. Additionally, we have Rivian, and Hyundai is now offering five models in Korea. We currently have 20 OEM partners, and we continue to see many of them expanding into additional models and building more comprehensive lineups. In terms of Dolby Atmos and Dolby Vision for automotive, we are performing better than we anticipated at the start of the year. This success stems from deepening our lineups, continuously introducing new models, and several of these models surpassing their unit projections.

And the way you're monetizing this is payment for something that is not based on royalties but more on an installation basis in the products area. Is that correct?

It's our typical model. We get an amount for each car.

And the movie business is at a low point, obviously, but it's been starting to recover and expectations are pretty high for '25 and '26. I'm wondering if that's prompting you to increase the number of theater installations either domestically or internationally or both? And just any comments you might have on that. But also the real monetization has been via TV applications, other consumer products. And I wonder if you might also elaborate on just how that penetration continues to go and whether you're getting similar royalties as you move to expanded lower priced SKUs?

We began the year anticipating that the box office would be impacted by the ongoing effects of the strikes and alterations to the release schedule. Through the end of June, the performance was perhaps softer than anticipated. However, both we and the industry maintain an optimistic outlook for 2025 and 2026, as many exciting titles are set to be released. It's encouraging to see a strong start for the September quarter. In response to your question, even though we've observed some delays in product sales until later this year or next year, we are experiencing heightened engagement with Dolby Cinema. Additionally, we recently introduced the capability to integrate Dolby Vision and Dolby Atmos into existing exhibitor-branded products. Throughout the pandemic and beyond, the proportion of box office revenue from premium large format experiences, including Dolby Cinema, has significantly grown. Exhibitors recognize this trend, leading to increased engagement as they aim to expand their premium experience offerings in light of the potential box office opportunities in 2025 and 2026.

In the United States, your contract remains exclusive with AMC for the full vision Atmos package, and I believe that will continue. Are you identifying additional markets around the world where you are boosting penetration and aiming to achieve similar increases in device shipments?

You mentioned device shipments. Are you referring to Dolby Cinema? Yes, AMC is our partner in the US, and they have over 150 screens, making them a great partner for us. We also have several partners in Japan, Europe, and Korea, where Megabox recently announced plans to expand with us. We have a solid presence and demand globally. As we enter next year, it is encouraging that Q4 has started well, and we are optimistic about increasing the number of Dolby Cinema installations.

We have no further questions at this time. With that, we will conclude today's conference call. Thank you all for your participation. You may now disconnect.