Earnings Call Transcript - DLB Q1 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing First Quarter Fiscal Year 2025 results. As a reminder, this call is being recorded, Wednesday, January 29, 2025. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President and Investor Relations. Peter, please go ahead.

Peter Goldmacher, Vice President and Investor Relations

Thank you, operator, and good afternoon. Welcome to Dolby Laboratories first quarter 2025 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories CEO; and Robert Park, Dolby Laboratories CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2025 second 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 and additional risks and uncertainties can be found in the earnings press release 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 and 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.

Kevin Yeaman, CEO

Thanks, Peter, and thanks to everyone for joining us today for the first quarter FY '25 earnings call. Both licensing revenue and total revenue came in towards the high end of the range of the guidance that we provided on our last earnings call, and non-GAAP earnings for the quarter came in above the high end of the range. It's a strong start to the year, which gives us confidence that we are on track to achieve the annual financial guidance we gave on the fourth quarter earnings call. We continue to expect foundational revenues to be roughly flat for the full year, and we have robust engagement from our broad ecosystem of content creators, distributors, and OEM partners. Dolby Atmos, Dolby Vision, and imaging patents are well positioned to grow roughly 15% for the full year, and we continue to expect to grow non-GAAP earnings faster than revenue. I'll cover a few of the highlights for the quarter, and then I'll turn the call over to Robert to review the financials. Our creative community continues to show strong support for Dolby Atmos and Dolby Vision. All 8 of the 2025 Grammy nominees for Best New Artist are available in Dolby Atmos, and 7 out of 8 Grammy nominees for Record of the Year and Album of the Year are available in Dolby Atmos. For calendar year 2024, over 80% of the domestic box office and almost 70% of the global box office came from Hollywood and local titles released in Dolby Atmos and Dolby Vision. In addition to music and movies, the momentum continues to build across music, TV, live sports, and user-generated content. We wrapped up CES a few weeks ago, and the Dolby experience was on display across the show floor, including in cars, TVs, PCs, and soundbars. Starting with auto, we have announced partnerships with over 20 OEMs, and those 20-plus OEM brands have over 60 models in the market with Dolby Atmos. Many of our partners, after starting with their high-end models, are expanding Dolby Atmos deeper into their lineups. One of our earliest partners, Mercedes, had over 15 models in the market by the end of 2024. We are also excited that Li Auto has the first car in the market with both Dolby Atmos and Dolby Vision. In-car entertainment is an investment priority for automotive, and consumers are spending more time enjoying entertainment in their cars, whether they're waiting to pick someone up or getting a charge. With Dolby Atmos and Dolby Vision, the car has transformed into a high-end entertainment experience, and we are excited about the growth opportunity ahead. The broader ecosystem around in-car entertainment also continues to coalesce around the Dolby experience. At CES, Samsung Display announced that it will include Dolby Vision in automotive displays, and Texas Instruments announced that it is now supporting Dolby Atmos in its new family of chips for automakers, all making it easier for OEMs to adopt and implement. Also, Pioneer demonstrated Dolby Atmos as an aftermarket solution in a 4-channel sound system. We continue to make progress with further adoption on TVs. In November, Amazon announced that the Fire TV Omni Mini-LED will support Dolby Atmos and Dolby Vision. There were a lot of new Dolby Atmos and Dolby Vision enabled TV launches at CES from partners including Hisense, TCL, Panasonic, Sharp, and RCA. In PCs, OEMs including Asus, Dell, Lenovo, and Samsung all announced new computers, laptops, or peripherals that support Dolby Atmos and/or Dolby Vision. Also, this quarter, Amazon launched its first sound bars supporting Dolby Atmos. Harman Kardon introduced the Enchant soundbar lineup with Dolby Atmos, and Samsung announced new soundbars with Dolby Atmos to complement their TVs. Looking forward, with a solid first quarter behind us, we remain optimistic for the rest of FY '25 and beyond. We like what we are seeing and hearing from our partners. Our ecosystem is strong. Our momentum with creatives and distributors continues to build, and that energy continues to propel our opportunities with our OEM partners. And so with that, I'll turn it over to Robert, who will take you through the financials in a bit more detail.

Robert Park, CFO

Thanks, Kevin, and thanks for everyone joining us on the call today. Before we review the quarter in some detail, I'd like to hit the highlights. Revenue for Q1 was near the high end of the range we laid out in the Q4 earnings call, primarily driven by a favorable true-up, and earnings came in above the high end of the range. We are off to a good start for fiscal '25. At the same time, it's early in the year, so we're keeping our full year guidance unchanged. We are making progress on the business front and our partners remain engaged. Our value proposition remains strong, our financials are solid, and we are confident in our long-term growth prospects. Q1 revenue was $357 million, up 13% compared to the year-ago quarter. Licensing revenue of $330 million was up 12% year-over-year. This includes a $70 million favorable true-up for Q4 fiscal '24 shipments reported that were above our original estimate. The true-up was across all end markets but was most notable in broadcast and auto. Products and services revenue was $27 million, up 22% year-over-year. Detailed licensing performance by end market is on our IR website. And as a reminder, the timing of recoveries, minimum volume commitments, and true-ups can drive volatility between quarters. A notable movement this quarter was in mobile, which was up 74% year-over-year. The two main reasons for this increase are revenue from GE licensing and the timing of minimum volume commitments. Moving to the bottom line, in Q1, we earned $1.14 per diluted share on a non-GAAP basis above the high end of our guidance, primarily due to stronger revenue, and we generated $107 million in operating cash flow. We repurchased $15 million worth of common stock and have about $387 million remaining on our repurchase plan authorization. We declared a $0.33 dividend, up 10% from our dividend a year ago and ended the quarter with cash and investments of approximately $611 million. GAAP operating expenses in the quarter included a restructuring charge of approximately $5 million as we continue to align our resources with our business priorities. Turning to guidance, our full-year revenue is typically weighted more towards the first half of the year. Last year, the weighting was 53%, 47% first half to second half, and we expect a similar weighting this year. For Q2 fiscal year '25, we expect revenue between $355 million and $385 million. Within that, licensing revenue is estimated to range from $330 million to $360 million. Gross margin should be approximately 91% 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 18.5% on a non-GAAP basis. As a result, we estimate that non-GAAP EPS should be between $1.19 and $1.34 per diluted share. Moving on to the full year, we are maintaining our full-year guidance for revenue and earnings. To repeat and reiterate what we said last quarter, for the full year, we expect non-GAAP earnings to be between $3.99 and $4.14 on revenue between $1.33 billion and $1.39 billion. We expect license revenue to be between $1.22 billion and $1.28 billion, and non-GAAP operating expenses to be between $765 million and $775 million. We expect revenue from foundational audio technology to be roughly flat and revenue from Dolby Atmos, Dolby Vision, and imaging patents to grow roughly 15%. From an end market perspective, there's no change to what we communicated last quarter. We expect growth in mobile and other markets. Broadcast and PC are expected to be flattish and consumer electronics is expected to be down mid-single digits for the year. 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 strong, and we are well-positioned for long-term growth. With that, I'd like to turn it back to the operator to open the line for your questions.

Operator, Operator

We'll go first to Steven Frankel from Rosenblatt Securities.

Steven Frankel, Analyst

I appreciate the opportunity to ask some questions. And the comment on the relative flatness of foundational for the year, was that also true in Q1, or are you seeing any different trends in the beginning of the year?

Robert Park, CFO

Steve, it's Robert here. We are still expecting the full year to be relatively flat, and so far in Q1, there have been no indications to suggest otherwise.

Steven Frankel, Analyst

Okay. And then in the outsized growth in mobile in Q1, was that simply a pull-in of something that maybe you thought would land later in the year, or that's just the timing of the ebbs and flows of these deals? Or is there anything kind of a level deeper about penetration rates or deal sizes that we could read into this number as well?

Kevin Yeaman, CEO

Two things, Steve. First, as you know, within mobile, we've mentioned that there is a higher prevalence of minimum volume commitments, so the timing can vary from quarter to quarter in mobile. Second, while the integration of GE licensing affected all markets, mobile experienced the largest impact.

Steven Frankel, Analyst

Okay. And then on your CES review, the Samsung OLED screens for cars seem pretty exciting. What do you think the timetable is for that to be beginning to show up in models? Is that something that happens pretty quickly, or is this your typical OEM auto design cycle that these vehicles could be a couple of years out?

Kevin Yeaman, CEO

We are very enthusiastic about the potential with Dolby Vision and the strong momentum we have with Dolby Atmos. In-car entertainment is a major investment focus for the automotive industry, and we have positioned ourselves at its core. We had the opportunity to showcase the first car equipped with Dolby Vision at CES, which is Li Auto. We believe the ecosystem is ready for this innovation. The partnership with Samsung particularly indicates that they recognize the opportunity as well. Their integration of Dolby Vision into automotive displays both supports this potential and simplifies the implementation process. We have been actively working on this, and we anticipate making further advancements throughout the year. We are eager to build on our existing work with Dolby Atmos in vehicles by incorporating Dolby Vision alongside it.

Steven Frankel, Analyst

Okay. One last quick one for Robert. On the outsized true-up in the quarter, was that one manufacturer in particular or was it just in general, in Q4, you undershot where actual volumes ended up?

Robert Park, CFO

Yes. There's not one particular OEM or partner that stands out. It was really up across all markets, but particularly in TVs and auto.

Operator, Operator

We'll take the next question from Patrick Sholl, Barrington Research.

Patrick Sholl, Analyst

Just on the expected growth for Atmos Vision and the image patent licensing. Can you maybe talk about some of the key variables that would take you to like the higher end of your target growth range for that versus what might be kind of a drag in 2025?

Kevin Yeaman, CEO

Yes. The main factors from the end market perspective are in the automotive sector, where we are optimistic about our momentum, and it primarily concerns the pace of adoption and rollout. This is the key variable. We will keep you updated on our progress every quarter. In the TV market, our adoption rate for 4K TVs with Dolby Atmos and Dolby Vision increased to 30% last year, up from 25% a couple of years ago. This growth reflects our successful work with TV manufacturers to enhance the Dolby experience across their product lines, particularly with companies like Hisense and TCL, which are also performing well in terms of market share. In the mobile sector, we are focusing on increasing the adoption of Dolby Vision and Dolby Vision capture. On the content side, we are enhancing the ecosystem for user-generated content, enabling sharing and editing capabilities. These are the three key areas. What could drive further growth would be an increase in shipments and the number of wins, along with the popularity of these models in the market.

Patrick Sholl, Analyst

Okay. Just then on Dolby Cinema, I guess, could you provide any sort of update on the screen base for that?

Kevin Yeaman, CEO

Yes, we did add screens this quarter. It wasn't a significant increase, but it's getting going again. Certainly, after the last four years, where it's been a tough environment for exhibitors to invest, we've seen a significant pickup in the outlook for being able to add screens going forward. We did see year-over-year improvement in both Dolby Cinema and cinema products. So we're working with our partners there. As I think we said before, over these last four years, the percentage of the box office that accrues to the premium screens, the premium large format screens like Dolby Cinema, has increased significantly. As exhibitors are beginning to look forward, they have greater confidence in the '25 and '26 box office, and they look to invest where they want to invest in premium screens.

Operator, Operator

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

Ralph Schackart, Analyst

If you compare contrast as you look out into 2025 now versus maybe a year ago as you're looking out in 2024, maybe speak to some of the product momentum you see now versus maybe you saw then? And obviously, the macro environment foundational is better. But just maybe if you could start there and then I'll follow up for either you or Robert.

Kevin Yeaman, CEO

Thank you, Ralph. First, we entered the year expressing that our customers and partners were increasingly optimistic about a stabilized environment, which is why we projected flat growth for foundational products. They remain highly engaged with Dolby Atmos and Dolby Vision, and we're excited about that. In the automotive sector, we have more than doubled the number of OEM partners in fiscal year '24, with many looking to expand their offerings. We have Dolby Vision with Li Auto and are working on growing our pipeline there. Our automotive segment continues to show strong momentum. In the television market, we're revitalizing growth, increasing the share of 4K TVs from 25% to 30%, and have numerous initiatives planned to sustain that growth. Additionally, we are optimistic about the future potential of Dolby Vision, Dolby Vision Capture, and the mobile ecosystem.

Ralph Schackart, Analyst

Great. I'd like to follow up on IO. Many investors are curious about how you view the opportunity. I know you previously provided some insight, but the model has shifted since then. Could you take a step back and outline the opportunity for us? Additionally, while the advantages in the in-app environment are quite evident, can you elaborate on the potential beyond apps? Is there a possibility for enterprise applications, or how do you see this product evolving in the future?

Kevin Yeaman, CEO

Yes, certainly. You mentioned the shift we made as we entered fiscal year 2024, moving away from a self-service developer model to addressing a strong demand from companies in the sports sector seeking to enhance their real-time interactive digital experiences, which are vital for audience engagement. Our capability to stream high-quality audio and video with ultra-low latency is a key factor; we can achieve this in seconds, and sometimes in fractions of a second, while the average delay can be 7 seconds or even longer. This creates a problematic viewing experience where one person in Chicago could see a touchdown 15 seconds ahead of someone in San Francisco. Additionally, we've developed other functionalities and, through THEO, have onboarded several key customers within our target markets, resulting in a more comprehensive solution. Continuing to prioritize digital experiences remains a significant investment for these organizations. We also recognize that this extends into non-digital experiences. For instance, Paddy Power, a sports betting company in Ireland and part of the larger Flutter group, has successfully integrated our solution in its shops. They previously encountered issues with low latency and unreliable streaming using older methods, which made it difficult to provide a smooth experience. Now, with our services live in 600 shops, each capable of streaming multiple events simultaneously, we've greatly improved reliability and reduced service calls, allowing them to deliver high-quality streaming. We’re excited about their inclusion in a broader group and anticipate further opportunities as we move forward.

Operator, Operator

Everyone at this time, there are no further questions. Does the management have any closing remarks?

Kevin Yeaman, CEO

No. Thank you for joining us, and we look forward to keeping you up to speed on our progress. Thank you.

Operator, Operator

Thank you. And once again, ladies and gentlemen, that does conclude this conference. Thank you all for your participation. You may now disconnect.