William Blair 46th Annual Growth Stock Conference

Our internet analyst, William Blair, thanks for attending our annual growth stock conference. I have to tell you from compliance, check our website for disclosures. We're really excited to have Kevin back, as he usually attends our conference every year. I think what's different this year, we've been doing a lot of meetings and NDRs with Dolby, and it's probably the most exciting kind of growth story I've seen in a while. Maybe take you back to Consumer Electronics Show. It was the first year, I would say, in many years where they had a very expansive sort of corridor, as the europeans would say tons of products and tons of devices and i think what you'll hear today is kevin talk about how they've made these investments particularly in music you'll hear talk about auto and the growth is starting to uh to come back as uh as they've been talking about for a while so i'll keep that brief we're going to do a a q a session and i asked kevin if he could maybe spend a few extra minutes on the the overview of dolby because i know there's various levels of knowledge kind of the evolution and and kind of where we are today and then from there we'll start to talk about growth sound like good jumping off point sounds great great yeah thanks

roth um so yeah we'll talk a little about about who dolby is hopefully you've experienced dolby in your lives because uh for over 60 years dolby has been a part of the movies the music the stories the moments that that stick with people for a very long time from uh star wars to avatar from the grateful dead to taylor swift we were in the walkman to your home theater and now your car and your virtual reality headset um whether you were getting content over a cassette tape or a dvd disc or uh now your favorite streaming platform um it's in dolby um and and we're and we're continuing to invent and reinvent what it means to have a quality entertainment experience and in fact i get um to this day a lot of people will come up to me and share their first experience with dolby and when i started at dolby 20 years ago that was often the button on the cassette tape player or the first time they experienced surround sound in the movies but increasingly what i hear about is the first time somebody was wowed by dolby atmos in the car or how excited they are that they can capture Dolby Vision content on their phone and share that content in Dolby Vision over Instagram. I was recently speaking to a group of college students and the number one answer on the board was music over their phone and their headphones and how impactful Dolby Atmos music is. And so we're everywhere. We're movies, TV, gaming, sports, social media content, whether it's on your phone, your television, your gaming console, your PC, your virtual reality headset, your car, Dolby is there. And the way Dolby builds these ecosystems is that we do partner broadly across these ecosystems. We work with the content creators, we work with the content owners and distributors, we work with the device manufacturers, we work with their supply chains chipset companies software companies to make all of this possible so for content creators that means we're working with them to provide the technology the know-how plugging into the plug-in tools into their workflow to allow them to create in dolby we're enhancing their audio video palette which is what they use to tell stories and the net result of that is that All 30 of the top grossing box office movies domestically last year were in Dolby Atmos and Dolby Vision. About 95% of the top 100 billboard musicians are mixing music in Dolby Atmos. And as I said earlier, you can now, if you have an iPhone, you can capture content in Dolby Vision. You can share that content over Instagram. We're all creators today. As it relates to the content platforms, this ranges from traditional broadcast to all your major streaming providers, Apple, Netflix, Disney, Amazon, Tencent in China, it's global, increasingly social media platforms, including Meta and Daoyin in China. And we're providing them with the technologies and tools to be able to take what this artist created in Dolby and to be able to distribute it efficiently. in this dolby experience to get it to the devices which is where we partner with device manufacturers to be able to offer these differentiated dolby experiences whether it's in your home or in your car or something that you're wearing and this ranges from apple to xiaomi from samsung and lg to hisense and tcl from mercedes and cadillac to byd and neo it really is a cast of thousands this very broad network of dolby enabled partners and customers that make these experiences possible now where we generate the majority of our revenue is from those device at the point of playback the device manufacturers um we're we're enabling these ecosystems um to set up that business model where we're charging a royalty each time that that a device or a car or something is selling with dolby in it that's the majority of our revenue it's a high margin 98 gross margin consistently profitable business with a lot of leverage it's very defensible it's you've got that that network ecosystem that we've built over decades that i just talked about we've got a portfolio of intellectual property that's been built up over decades and then we have this position in the market where Dolby is embedded in billions and billions of devices so it's a very difficult model to replicate and as Ralph talked about we're really excited about some of the growth drivers that we have right here right now that are coming together that we've been investing in for a number of years auto in car entertainment experience we're getting a we have a lot of momentum and a lot of room for growth we still a lot of room to grow in the living room with the television experience I've mentioned social media a couple of times obviously the the primary use case on mobile devices and and and many other devices and probably future use cases like wearables. That's a place where we're getting a lot of new adoption. And beyond that, we're also now bringing new value to the content platforms where we're providing value to those content platforms as a bank customer. And so that opens up a whole new market opportunity for Dolby. And what's really driving that is that increasingly, these content platforms are differentiating on experience. Whereas not too long ago, the primary vector for differentiation was access to content, which content you have, how much content you can create. It's about the experience. Well, that's, that's always wheelhouse. That's what we do. That's what we've wake up thinking about for over 60 years, is how we make that experience more immersive, how we enable artists and creatives to create those experiences, how we make the experience more emotive, more visceral. And that's where we're seeing opportunities to provide new products, new offerings to content platforms, and that significantly opens up Dolby's opportunity as we go forward.

Great, and a few years ago, you broke up the business to foundational and new products. Can you sort of frame that for investors, provide the split and maybe mechanically help them think about how the business is growing again?

Yeah, thank you. So this was, I think, just after the onset of the pandemic that we provided this breakout. It was in response to everybody wanting to understand, everybody could see that it was affecting the macro environment and how would that affect Dolby? We broke it out between our foundational audio technologies, which are the core audio codecs, which are essential to the way most entertainment audio content is delivered. And that was characterized by pretty high attach rates across a very broad range of devices, which is to say that the effect of the macro is, there is an effect on that part of the business because it has such broad adoption that if you ask kind of what's affecting that part of the business, the macro trends are gonna be one of the top factors. On the other hand, we had and have Dolby Atmos, Dolby Vision, our imaging patents would still have significant room for increased adoption. So that part of the portfolio, I mean, of course, nothing's immune to the macro, but it's been able to grow through thick and thin. It's grown about 20% a year over the last five years through all of these changes in macro, whether we're talking about the pandemic or supply chain disruptions or trade policy or geopolitical developments. But whereas foundational was it was off during the first year of the pandemic, 2020. I don't know if you all remember in 2021, maybe you all contributed to this, unexpected to us, everybody went out and bought TVs and PCs. So 2021 was a great year for foundational. The next three years after that, we suffered from the hangover of all those pandemic purchases, especially around PCs, also TVs. We were seeing coming off those highs, our foundational revenues were down. And at the beginning of that period, mind you, foundational was making up like 80% of our business because these newer technologies were just kind of coming to market. So scroll forward to today, the last couple of years, not that the macro environment still doesn't have a lot going on, but we've stabilized the last couple of years because it really was that hangover that was really affecting us through that. And importantly, as I said, Dolby Atmos, Dolby Vision, the imaging patents, those have been growing 20% a year. So whereas that was 20% of the revenue at the beginning of this period of time we're talking about, now it's approaching 50%. So now you have that growth part of the business really contributing more significantly to the top line growth rate. That's how we've been able to get back, Ralph, to organic growth. And it's why we're excited going forward is because that continues to grow as a part of the business and we continue to be really excited about the growth drivers with that part of the business.

Great. And then maybe kind of double click on the growth drivers. Can you walk us through auto success you've had initially sort of in China and how that's expanded to other parts of the world. Walk through mobile if you could, and then as well as televisions. And then maybe when you're discussing mobile, sort of walk us through Meta and Xiaomi. Am I saying that right?

Yeah, you got it.

And Xiaomi as well.

Xiaomi, Daoyin, I always make Peter, don't feel bad. I always make Peter do an enunciation for me if I'm reading that, but I'm getting better at it.

But if you could walk through those drivers to bring a finer point to how you're growing.

Absolutely. so automotive is really exciting um we brought uh and and the breakthrough for us in automotive was uh applying dolby atmos to music um and you know for us that starts with working with the creatives it starts with working with the labels it's in the started at capitol records and abbey road um working with musicians to help them uh create in dolby atmos and what we found was that they were just in awe of this experience. Many of them were brought to tears the first time they heard their first song in Dolby Atmos. Not even their song, just their favorite song from some other artists. And they consistently describe it as just a completely different way to experience their music. It puts you in the music. When we get that kind of reaction, we know we're really on to something now what they cared about was uh they cared a lot about the car they also cared about mobile in the home but the car is just it's a classic way that we all experience music um and so that's what set the stage um around again it's around the same time the beginning of the pandemic is when we were starting to do this turns out by the way that was a pretty good new product to be bringing to market during the pandemic because um we would our engineers had kind of uh souped up cars in their driveways because we didn't have any commercial partners yet to be dolby atmos capable and the beauty of it is we could drive it to the homes of i mean using the royal we our team could drive these cars to uh music executives musicians car executives um and demo them outside their homes and people would welcome them with open arms because we were all starved for for attention so that was kind of the backdrop now scroll forward over you know the first three four years of dolby atmos being available to cars we now have 35 auto manufacturers to your point really to take out first in china where they just move very quickly and aggressively the product cycles are fast um and the in-car entertainment experience is very advanced um there's also a lot of research that says that in china in particular people spend a lot of time in their car while they're not driving their car so in effect it could be the best like home theater experience you have is in is in your car um and by the way that's increasingly true we find here in the us as well and it could be simply you're waiting to pick up kids for practice it could be that you're you know taking a few minutes before you as you wind down from work but people do spend time in their car and the in-car entertainment experience therefore is a big focus and dolby atmos is a really compelling offering as it relates to uploading that experience So 35 OEMs, we've now expanded well beyond China throughout the entire Cadillac EV lineup. Mercedes is one of our first customers outside of China. They've adopted across a very broad range of their models. Most recently, BMW announced that they're launching. Hyundai announced that they're launching with kind of a more of an affordable implementation footprint. so that was that was really good um and then china is also spreading to the rest of the world so at the paris auto show denza launched its uh i'm sorry byd launched its denza lineup which is its premium auto model for europe um all with dolby atmos as a standard um we're also seeing early traction with dolby vision so we've got a handful of our first dolby vision customers in china and um and ultimately we think this goes beyond the music experience in the car to the entirety of the audio visual experience in the car one could argue transportation and as we spend less time having to actually be focused on driving the car that really we think opens up the possibilities for that audio visual experience um that was automotive um in um in tv one of the things we're really excited about is is is a new product offering um dolby vision 2. so dolby vision came to market um around 2016-17 as of last year it was on about 30 of tvs um as was dolby atmos you're getting you're getting dolby vision dolby atmos experience on about 30 of tvs very high penetration at the high end of the television market um and then um we have partners like hisense and tcl that that had gone pretty deep into the mid. But our opportunity is to get broader adoption in that mid to low end. So Dolby Vision 2 is a significant evolution beyond Dolby Vision in terms of the quality experience. We were demonstrating this at CES. There are a number of technical features and a number of things that improves. But I think one of the things that really stands out is for the mid-range in particular, We had two $300 TVs, one 4K Dolby Vision, the other 4K Dolby Vision 2, and it's just so stunningly better. Dolby Vision and Dolby Vision 2 is all about contrast. You get darker, dark, darker blacks, brighter highlights, a broader range of color. But Dolby Vision 2, we think, is what will really re-accelerate increasing the adoption among television manufacturers because it really scratches the itch they have to come up with compelling reasons for people to go and upgrade their television, especially at that mid to low end tier. And then mobile. Social media is an area that again started in China. So we have very broad support across platforms like Billy Billy, Tencent. I mentioned Daoyin. Red Note is another Another notable provider started there, and what that did was created the the value proposition for wanting to be able to play back and capture content on your phone opening up the market for Dolby Vision on phones. So we have most of the major mobile providers there. Xiaomi Oppo honor starting at the high end is usually does with still a lot of room to grow and expand deeper into those lineups. Apple, I should note, was the first to adopt Dolby Vision Capture. So all iPhone, the entire iPhone lineup supports Dolby Atmos, Dolby Vision Playback, Dolby Vision Capture. What's new this year is that during the first quarter, Instagram began supporting Dolby Vision. They quickly followed that up with adoption on Facebook. And so this is just supporting our ability to go sell this value proposition to to mobile phone providers to get Dolby Vision supported on more phones. I think it's also will create opportunities across wearables generally as we look forward. And then we also have, on the licensing front, as it relates to the imaging patent portfolio, and this kind of begins to cross over into what I said about how we're providing value to the content platforms in addition to device manufacturers, is we license, our patent licensing business mostly operates through patent pools, where we are one of many licensors who come together to offer device manufacturers freedom to operate around around in this case video codecs and historically those pools have been licensing device manufacturers now they're licensing the content platforms as well so that started about again coming in this year there are about 40 licensors they're up to about half a dozen licensees paying customers includes that is global we have they have ByteDance in China they've got roku here in the us so um this represents a significant uh expansion of the potential for that imaging licensing program um and we're really excited about the potential for that as well

yeah maybe you kind of uh frame that uh with a little bit more detail i think on the call on the calls you talked about that being potentially a new incremental 10 of revenue within three years so i think you kind of went through the um through the patent side but maybe also if you could frame the streaming site as well with some of the uh the new products on optiview yeah

so um as i said most of our revenue most all of our revenue today comes from device licensing and and sales into the smaller amount of sales into the cinema um we do think that in three years 10 of our revenue uh can be coming from content platforms and we're doing everything we can to accelerate that and increase that opportunity part of that is what i just said the imaging patent uh uh programs being now expanded to include those content platforms and the other is our new initiative around dolby optivue um dolby optivue um really the genesis of dolby optivue was a self-service developer platform that we stood up several years ago putting up some capabilities that we thought would be valued to developers the demand signal that we saw coming out of that was particularly around sports and sports betting the ability to stream high quality audio video content in ultra low latency and to be able to do it in a synchronized way which is important if you're trying to do more real-time interactive offerings to increase audience engagement because if i see the touchdown you know 10 seconds before you see the touchdown it's kind of not a very fun social experience right so we're doing it in so we can do it sub-second and we can do it in a synchronized way um so a couple of years ago we refocused from the broad-based self-service program to okay we believe there's a real opportunity to lead the way in sports and sports betting um serving customers which could be streamers but it could also be the the the leagues the teams the apps and services that that are are promoting those sports so customers include NFL and NASCAR more recently includes sports information and and genius sports which are technology providers to the sports betting industry and so we have a player we have this ability to stream in very low latency we now have an ad insertion technology which allows you to insert personalized ads at that pace and to be able to adapt in real time to the screen size but our our the way we see the opportunity the way we've always seen the opportunity is the ability is here's how the world is changing the world wants to change um for as long as i've been watching sports we all see the same experience we see you know we tune into nbc we see the same experience um the promise of of streaming has always been that we can personalize that experience to what most engages you. And while more and more sports is going the way of streaming, you're mostly, we're just watching the same thing on a streaming platform. And so the promise now, we've been previewing this quarter, starting at NAB, our sports intelligence platform, which takes us further, which is to be able to customize, which highlights your seeing in between plays versus what I'm seeing in between plays or inserting content from that might be of interest to you as it relates to, geez, this moment in the game is a lot like this moment from 1982 when these teams faced each other. Or it could also be that maybe Peter's more interested in the technical aspects of the sport, and I'm more interested in the energy and the emotion around the sport. And so that would inform the experience we're getting. The opportunities are really endless, because really what we ought to have is the ability to understand whether you're engaged, and if you're not engaged, what might engage you. You think about the potential, for instance, with fantasy sports like that, it was obviously an opportunity where each of us might have a very different things that we want to focus on even different camera shots within the same game. So early days, but this is getting really strong resonance from our customers. And like I said, we've got a good group of customers like the NFL, like NASCAR, Genius Sports, Sports Information Systems, who are still scaling, you know, the ultra low latency streaming, the synchronized delivery, and are also interested, everybody's interested in getting to this world where we're truly personalizing these experiences and increasing fan engagement. So between Dolby OptiView and imaging patents, that's what I'm talking about when I say in three years, we could have 10% of our revenue coming from content platforms. So content platforms could be ByteDance and Roku. It could be NFL and NASCAR in this context. Obviously, that's a considerable expansion of our opportunity. So early days, we're really excited about where we're going with this. AI is accelerating it. It's enabling it. It's an important part of how we're building it, and so we're so we we that's that's what's exciting us a few minutes left i'll pause see if there's any questions out here.

All right, maybe just the balance sheet it's always been a sort of a pushback by investors that they'll be here carries a lot of cash maybe too much and let more recently, at least from my observation been using the balance sheet more about the G patents. i think you've bought back more stock year to date than you have all of last year but maybe philosophically has something changed there uh in terms of like cash deployment

um so um so yes last year we did uh have a great opportunity to build on our imaging patent portfolio um for a very creative acquisition which was a use of capital we've always of course We have a recurring dividend that we've increased every year, but one during the pandemic, and from time to time we've bought back stock over and above what it takes to offset dilution. Since 2020 that we've returned about $2 billion and to your point, yes, this year, today, we've bought back more stock than we had all of last year, and that's something that we continue to look at each quarter. look at each quarter and with the board and look at where the opportunities are to deploy cash and decide the balance of returning to shareholders.

Question. All right. No conversation be complete without AI. So can you maybe talk about the tools you're developing today for the content creators and how you see AI sort of evolving both internally at Dolby and sort of the products you could offer to the end market?

Yeah. Well, I mean, I would start by saying the foundation is everything that we've talked about, which which is that Dolby has decades of research into how humans perceive sight and sound in the context of entertainment and how this network ecosystem of thousands of customers and partners come together to make that happen. And so AI creates the opportunity for us to create products and to train models that accelerate what we've always aimed to do, which is reinvent the entertainment experience. And I'll give you two short examples given the time we have. One, we just talked about Dolby OptiView. I mean, this whole notion of being able to personalize the experience is something that has been talked about for many years. We were demonstrating early versions of it 10 years ago at CES, but the technology just wasn't there to really make it happen. AI is what's making it possible. And we are very much developing all of our products technologies are being developed with the help of AI, and importantly, it's integrating that with data and AI models that allows us to do that kind of work. But Ralph, also in our in just our core business, I mean, Dolby technologies are licensing technologies are essential to the way entertainment content is delivered today. And as our partners look to further avail themselves of the use of AI, we find that they are also looking to make sure that their infrastructure, their systems, which Dolby is a part of, is robust. And so AI is giving us the ability to introduce new features into that. So one example is dialogue enhancement. is the problem of you know with the increasing the professionalism TV content where you've got huge explosions and then slight whispers and you struggle to find a comfortable listening volume or everybody's just using subtitles. But actually extracting the dialogue from that is a very difficult task and we've built our own model based on data we've had subjective data and a lot of other data to make that a part of the Dolby foundational offering that's getting really good feedback another model we've built is around mixing audio so we can now capture audio on the phone but not everybody can be a professional audio mixer and obviously if all you do is capture it it actually doesn't sound very good you've probably experienced this but we've built AI models which we think are going to be able to help people to be you know get close to what an audio professional audio mixer would do with that so these are all these are ways that we are building AI models and applying that to both our existing technologies and creating new opportunities in the future great

unfortunately we are out of time I think everybody for their interest in Dolby Kevin thank you for your time and the breakout will be in Jenny B which is on

the second floor thank you very much thanks for thanks thanks everybody for joining us this morning