Dolby Laboratories, Inc. (NYSE:DLB) Q1 2024 Earnings Call Transcript

Dolby Laboratories, Inc. (NYSE:DLB) Q1 2024 Earnings Name Transcript February 1, 2024

Dolby Laboratories, Inc. isn’t one of many 30 hottest shares amongst hedge funds on the finish of the third quarter (see the main points right here).

Operator: Women and gents, thanks for standing by. Welcome to the Dolby Laboratories Convention Name discussing Fiscal First Quarter Outcomes. [Operator Instructions] As a reminder, this name is being recorded, Thursday, February 1, 2024. I’d now like to show the convention over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go forward.

Peter Goldmacher: Good afternoon. Welcome to Dolby Laboratories first quarter 2024 earnings convention name. Becoming a member of me at present are Kevin Yeaman, Dolby Labs CEO; and Robert Park, our CFO. As a reminder, at present’s dialogue will embody forward-looking statements, together with our fiscal 2024, second quarter and full 12 months outlook and our assumptions underlying that outlook. These statements are topic to dangers and uncertainties which will trigger precise outcomes to vary materially from the statements made at present, together with, amongst different issues, the influence of present macroeconomic occasions, ongoing provide chain points inflation charges, modifications in client spending and geopolitical instability on our enterprise. A dialogue of those and extra dangers and uncertainties could be discovered within the earnings press launch that we issued at present beneath the part captioned forward-looking statements in addition to within the Danger Elements part of our most up-to-date report on Kind 10-Q.

Dolby assumes no obligation and doesn’t intend to replace any forward-looking statements made throughout this name because of new data or future occasions. Throughout at present’s name, we’ll focus on non-GAAP monetary measures. A reconciliation between GAAP and non-GAAP monetary measures is accessible in our earnings press launch and within the Interactive Analyst Middle on the Investor Relations part of our web site. With that, I’d like to show the decision over to Kevin.

Kevin Yeaman: Thanks, Peter and because of everybody for becoming a member of us at present. Income for the quarter got here in about the place we anticipated and earnings had been higher than we anticipated. Our steering for the complete 12 months is unchanged and Robert will share detailed steering for the second quarter in a couple of minutes. As we speak, I’d prefer to cowl 3 matters. First, I’d prefer to make some transient feedback on the macro surroundings. Second, I’d like to speak about our enterprise and the momentum we’re seeing in Dolby Atmos and Dolby Imaginative and prescient. And third, I’ll wrap up my portion of the decision with some transient closing ideas. So first on the macro, not a lot has modified. Spending on client electronics is the most important issue impacting our foundational choices. We aren’t seeing something that might trigger us to alter our FY ’24 steering for mid-single-digit declines in foundational licensing income.

Because it pertains to Dolby Atmos and Dolby Imaginative and prescient, we proceed to have robust engagement throughout creators, distributors and gadget producers and we stay snug with our full 12 months steering for prime single-digit development for Dolby Atmos and Dolby Imaginative and prescient. Over time, we proceed to anticipate foundational to return to low single-digit development and Dolby Atmos and Dolby Imaginative and prescient and imaging patents to develop at a 3- to 5-year CAGR of between 15% and 25%. So let me flip to the enterprise. As we speak, I’ll concentrate on Dolby Atmos and Dolby Imaginative and prescient that are the largest parts of our development alternative within the midterm and an essential a part of the trail to returning the corporate to double-digit development over time. We take a look at the chance with Dolby Atmos and Dolby Imaginative and prescient, primarily by means of the lens of market ecosystems which is the intersection of gadget, distribution and content material.

Our major focus for brand new wins in automotive is with Dolby Atmos Music. For TV, it’s TV reveals, together with sports activities and films. And for cell, it’s movies through user-generated content material. In every ecosystem we serve, we concentrate on enabling nice content material which provides us the chance to develop our OEM partnerships. The actual worth of an OEM partnership is realized over years and many years as our companions undertake extra of our know-how and put our know-how on extra of their gadgets. I share this attitude with you that will help you perceive why we stay so enthusiastic about ongoing momentum within the artistic group and assured and optimistic in regards to the long-term alternative for our enterprise. Should you recall, final quarter, we described the virtuous cycle of Dolby Atmos and Dolby Imaginative and prescient.

We work with creators and distributors to create high-quality content material in Dolby. In order that when customers purchase Dolby-enabled gadgets, they take pleasure in a extra partaking and immersive audio and visible expertise. The virtuous cycle for Dolby is as extra gadgets assist the Dolby expertise, the extra content material creators wish to create in Dolby and the extra distributors wish to ship that content material. On the creator and distributor facet of the cycle, we proceed to see very robust adoption of Dolby Atmos and Dolby Imaginative and prescient. Artists proceed to leverage Dolby for his or her greatest work. We’re within the midst of award season and the breadth of Dolby adoption and momentum is evident by means of this lens. Each nominee for Document, Album, Track and New Artist of the Yr for the 2024 Grammy’s used Dolby Atmos.

92% of the Billboard 2023 year-end high 100 artists can be found in Dolby Atmos. And over 100 reveals in Dolby Applied sciences had been nominated throughout the Emmys and the Oscars together with Emmy Winners; Succession and The final of Us. We proceed to extend the provision of Dolby content material by means of distribution companions, together with Z5, an Indian OTT service for the 120 million month-to-month energetic customers which introduced Dolby Imaginative and prescient assist on its platform shortly after including assist for Dolby Atmos earlier in 2023. These highlights reinforce the momentum Dolby Atmos and Dolby Imaginative and prescient have within the artists and streaming communities of their quest to ship the most effective audiovisual expertise as attainable. We’re centered on making these experiences out there on as many gadgets as attainable.

We simply returned from CES, the place Dolby Atmos and Dolby Imaginative and prescient had been on full show throughout the present ground, significantly in the lounge in gadgets like TVs and soundbars. And we proceed to be featured in lineup bulletins from our companions, together with TCL, LG and Hisense. We even have robust engagement with Dolby Atmos FlexConnect, our new front room resolution that allows customers to put wi-fi audio system paired with a TV wherever in a room and routinely get an immersive Dolby Atmos expertise. Hisense introduced that they’d start supporting Dolby Atmos FlexConnect on their TVs. In gaming, Alienware and ASUS, two of the world’s main gaming monitor producers introduced assist for Dolby Imaginative and prescient. An enormous focus of the present for us was our rising presence in auto.

We loved optimistic reactions from our Dolby Atmos-enabled demo automotive which delivers a completely immersive Dolby Atmos expertise in an reasonably priced midsized automotive with an ordinary 4-channel, 8 speaker sound system. As well as, Apple just lately introduced assist for Dolby Atmos in CarPlay. Broadening our market alternative by enabling auto OEMs to supply customers a number of methods to expertise Dolby Atmos of their automobiles. On the OEM facet, as of the top of the primary quarter, we’ve introduced agreements with 13 auto OEMs, up from 10 on the finish of the fourth quarter. One in all our new companions this quarter is Zeekr, the premium EV model of Chinese language automaker Geely. They introduced that the Zeekr 007 which is anticipated to retail for lower than $30,000 will assist Dolby Atmos and they’ll be doing that through an over-the-air replace later this 12 months.

Curiously, about half of our OEM partnerships are with Chinese language EV producers that are rapidly changing into a number of the hottest automobiles on the highway in China and Europe. We’re additionally excited that the Apple Imaginative and prescient Professional which begins transport tomorrow will embody Dolby Atmos and Dolby Imaginative and prescient. We imagine Apple’s spatial computing surroundings with Dolby Atmos and Dolby Imaginative and prescient will proceed to broaden the horizons of what’s attainable with sight and sound. To sum up on Dolby Atmos and Dolby Imaginative and prescient, we proceed to make progress on a number of fronts. This progress offers us confidence in our expectation for a multiyear CAGR of 15% to 25% for Dolby Atmos, Dolby Imaginative and prescient and imaging patents. Wanting past Dolby Atmos and Dolby Imaginative and prescient. We’ve talked to you about our alternative with Dolby.io, the place we’re centered on enabling extra partaking real-time and personalised experiences in sports activities and leisure.

We’re seeing robust demand for our ultra-low latency real-time streaming product. And whereas it’s early days, we simply closed our first 7-figure offers. I’d prefer to wrap up my feedback with some closing ideas. It was a stable quarter and our outlook for the 12 months is unchanged. Wanting ahead, our foundational choices stay robust and we’ve got momentum with Dolby Atmos and Dolby Imaginative and prescient. We proceed to spend money on innovation and engaging new areas of development, together with Dolby.io and we’ve got a robust margin profile with wholesome money technology. All of this offers us confidence in our alternative to develop income and earnings going ahead. And with that, I’ll flip it over to Robert.

Robert Park: Thanks, Kevin. Earlier than we get to the detailed financials, I’d prefer to share 3 ideas. First, income for Q1 was inside the vary we specified by the This autumn earnings name and profitability got here in greater than steering, primarily on account of timing of spend. Second, whereas the surroundings stays unsure, our steering for the complete 12 months stays unchanged. And third, as I’ve mentioned earlier than, we be ok with our long-term prospects as our worth proposition stays robust and our financials are stable. Q1 income was $316 million, down 6% in comparison with the 12 months in the past quarter and simply above the midpoint of steering we shared with you on the final earnings name. Licensing income of $294 million was down 5% year-over-year. Services income was $22 million, down 19% year-over-year, pushed by decrease cinema product gross sales and got here in decrease than anticipated on account of timing of orders now anticipated later within the 12 months.

Detailed licensing efficiency by finish market is on our IR web site however I’d prefer to level out some noteworthy particulars. As a reminder, timing of recoveries, minimal quantity commitments and true-ups can drive volatility between quarters. And we noticed that dynamic in cell this quarter as we anticipated. In Q1, cell income was down about 45% year-over-year on account of these components however we nonetheless anticipate cell to be down solely barely for the complete 12 months. Our finish market outlook for the complete 12 months is unchanged from final quarter’s name. We proceed to anticipate stable development in different markets and PC ought to profit from barely greater items, greater income in imaging patents and recoveries. This improve will probably be offset by slight declines in broadcast, CE and cell.

Whereas we see development in Dolby Atmos and Dolby Imaginative and prescient in these markets this 12 months, the general income declines are primarily on account of robust comps when it comes to timing and dimension of offers and true-ups in foundational and imaging patents. Transferring to the underside line; in Q1 we earned $1.01 per diluted share on a non-GAAP foundation, above the excessive finish of our steering, primarily on account of decrease working bills associated to timing of patent program spend, greater different earnings and decrease taxes. We generated $8 million in working money move. As a reminder, over time, working money move will correlate to non-GAAP internet earnings however this quarter, we had quite a lot of timing points working towards us. Transferring on; we repurchased $8 million of widespread inventory and have $132 million remaining on our repurchase plan authorization.

We declared a $0.30 dividend, up 11% from our dividend a 12 months in the past and ended the quarter with money and investments of just below $900 million. We recorded a $6 million non-GAAP restructuring cost within the quarter, in keeping with the restructuring plan we communicated final quarter and accomplished in November. Turning to steering; there’s nonetheless uncertainty available in the market and our steering assumes no materials change within the macroeconomic surroundings. Whereas we proceed to see regular development of content material created and distributed in Dolby know-how and robust engagement from our companions, gadget shipments stay tender and issues are simply taking longer to get finished. For Q2 ’24, we anticipate income to be between $345 million and $375 million. Inside that, licensing income is estimated to vary from $320 million to $350 million.

Gross margin must be roughly 90% on a non-GAAP foundation. We anticipate non-GAAP working bills to be between $180 million and $190 million. Our efficient tax charge for Q2 is projected to be round 20% on a non-GAAP foundation. So because of this, we estimate that non-GAAP EPS must be between $1.14 and $1.29 per diluted share. Our full 12 months steering for fiscal 12 months ’24 is unchanged at roughly flat income. Embedded on this steering is an assumption of a mid-single-digit decline in foundational audio licensing income offset by excessive single-digit development in Dolby Atmos, Dolby Imaginative and prescient and imaging patent licensing income and flat product and providers income. Non-GAAP gross margin must be roughly 89%. Non-GAAP working bills for the complete 12 months must be within the $740 million to $750 million vary which can end in a few 1 to 2 proportion level enchancment in working margins on a full 12 months foundation.

On the underside line, we predict non-GAAP EPS between $3.60 and $3.75 per diluted share. To wrap issues up, the creation and distribution of Dolby-enabled content material continues to develop properly. Our companions are nonetheless very engaged. Our financials stay robust and we’re effectively positioned for development when financial situations enhance. With that, I’d like to show it again to the operator to open the road on your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first query comes from the road of Ralph Schackart with William Blair.

Ralph Schackart: Kevin, perhaps type of return to a few of your introductory feedback on macro. I believe you talked about a number of the macro being the identical as final name however perhaps simply type of taking a step again as you look out into 2024 this 12 months and in case you evaluate the place you might be at present versus in case you appeared out into 2023. Possibly simply type of give an evaluation of the relative macro, I assume, this 12 months versus final 12 months whenever you had been looking.

Kevin Yeaman: Sure. Thanks for the query, Ralph. So after all, because it pertains to our foundational revenues, the largest macro issue is the variety of gadget shipments. And as we mentioned, we haven’t seen something that might trigger us to alter our outlook for that. Because it pertains to type of the general surroundings which you’re referring to, I’d remind you that what — we didn’t say that we noticed a few huge offers delays. What we did see was that it’s been a few years of an unsure and altering type of financial surroundings. And quite a lot of corporations are devoting consideration cycles to creating their changes to concentrate on that. And that simply has had an impact total of — some offers may take one other month or two to get that gadget win.

It may take one other month or two for a companion to get from a tool win to a product in market or typically they’ve their product able to go they usually would possibly, for numerous causes, resolve to launch it a number of months later. So all of that was the dynamic we talked about that we had been seeing the cumulative impact of final quarter once we guided to excessive single-digit development in Dolby Atmos and Dolby Imaginative and prescient and imaging patents. And we’re nonetheless rising; we nonetheless see development of excessive single digits. We proceed to have actually robust engagement throughout the ecosystem. We proceed to see excessive single-digit development for the 12 months. And we proceed to be assured that with the engagement we’ve got and the wins that we’re getting that we will return to the 15% to 25% CAGR over that midterm 3- to 5-year interval.

Ralph Schackart: Nice. After which perhaps simply type of circling again a bit bit to CES, you had some feedback within the ready remarks. So perhaps simply give an evaluation of how CES went this 12 months maybe versus final 12 months? Any momentum you’re seeing no less than maybe with like preliminary conversations popping out of this 12 months?

Kevin Yeaman: Sure. So I believe one spotlight for us was simply that as you stroll the present ground Dolby is all over the place throughout the present ground. And we had been featured in numerous our companions’ lineup bulletins. We had been featured throughout the lounge — throughout all front room gadgets. In order that was an actual spotlight type of exterior of the Dolby house round all over the place. Throughout the Dolby house, after all, we had been displaying all the things we do however I’d say automotive is the place we simply had quite a lot of engagement, quite a lot of exercise. We had quite a bit to share. We had a demo automotive which actually reveals the complete energy of the Dolby Atmos expertise for a automotive at an reasonably priced value level with 4 channels and eight audio system, quite a lot of curiosity in that. We had in numerous automobiles, it’s nothing like really experiencing Dolby Atmos to get enthusiastic about Dolby Atmos within the automotive.

And we’ve got a very sturdy pipeline, actually robust engagement, virtually each main auto producer is represented on the present and we had lots of people coming by means of. So these had been a number of the highlights for us, Ralph.

Ralph Schackart: Nice. Possibly one final one and I’ll flip it over. And traditionally, Dolby has been type of an expert client technique. And quite a lot of instances, your newer merchandise begin fairly excessive in gadgets and make their method into extra mass market costs. Something you’re observing within the auto market that might type of recommend that, that might alter. Issues perhaps maybe choosing up the place you would possibly see Atmos transfer to your inexpensive autos. Simply would love your ideas on that.

Kevin Yeaman: Sure, it’s an awesome query as a result of, as , that’s — our purpose is to have Dolby Atmos be the way in which all people experiences music within the automotive. And it’s early days. We’re at 13 OEM wins. That’s up from 10 final quarter. We’ve solely been at it a few years. Simply over half of these are transport available in the market; lots of them will probably be coming to market this 12 months. We’ve already seen companions like Mercedes lengthen to — they’re already as much as 10 fashions. And we anticipate to launch extra this 12 months. This quarter, I discussed Zeekr by Geely in China, that mannequin they introduced goes to be at a value level of just below $30,000. So I do imagine that there’s something in regards to the Dolby Atmos expertise, the significance of music within the automotive which mixed with the engagements we’re having that we imagine we’ve got the chance to get to the mainstream at the same time as we began out on the excessive finish right here.