Elena Carr - Director-Corporate Finance & Investor Relations Lewis Chew - Chief Financial Officer & Executive Vice President Kevin J. Yeaman - President, Chief Executive Officer & Director.

Mike J. Olson - Piper Jaffray & Co (Broker) Steven B. Frankel - Dougherty & Co. LLC Eric Wold - B. Riley & Co. LLC Paul Coster - JPMorgan Securities LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call Discussing Fiscal Fourth 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, Wednesday, October 21, 2015. I would now like to turn the conference call over to Elena Carr, Director of Corporate Finance and Investor Relations for Dolby Laboratories. Please go ahead, Elena..

Thank you. Good afternoon. Welcome to Dolby Laboratories' fourth quarter 2015 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.

These statements are subject to risks and uncertainties and may cause actual results to differ materially from the statements made today. A discussion of some of these risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Risk Factors as well as in our most-recent 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'll 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 this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2016 outlook and Kevin will finish with a discussion of the business. So, with that introduction behind us, I will now turn the call over to Lewis..

Thank you, Elena, for the great introduction. Good afternoon everyone. I think I'll jump right into the Q4 numbers. Total company revenue was $229.5 million in the fourth quarter; and within that, licensing was $200.1 million and products and services were $29.4 million. Our revenues for the quarter came in at the low end of our range.

Our original guidance was $230 million to $240 million, as we saw set-top boxes and consumer electronics a little lower than we expected for the quarter. So, let me provide you a little more details on each of the major markets that we serve, focusing mainly on quarter-over-quarter and year-over-year trends.

Broadcast represented about 46% of total licensing in the fourth quarter. Revenues in this market were down sequentially by about 4% due to lower back payments and year-over-year broadcast was down about 7% due to lower volumes from TVs and set-top boxes. And we do expect this area to resume growth in Q1 of the new year.

PC revenues represented about 18% of total licensing in the fourth quarter. PC licensing was down about 5% sequentially and about 11% year-over-year. And both of these comparisons were impacted by declines in PC market volumes along with lower mix of optical disc-enabled units. Consumer electronics in Q4 comprised about 13% of total licensing.

They were up about 13% sequentially from Q3 mainly due to a snap back as Q3 had been seasonally weak. Year-over-year, consumer electronics were down about 8%, driven mainly by lower volumes across various categories including Blu-ray, DVD and AVRs. Mobile devices. Mobile devices represented about 13% of licensing revenue in Q4.

They were down about 2% sequentially and up about 10% year-over-year and the increase over last year's Q4 was due mainly to higher volumes. Revenues in other markets were approximately 10% of total licensing in the fourth quarter.

They were down by about 7% from the third quarter as revenue from gaming consoles was below market trend due to timing of units reported. But we anticipate going forward that we will track more closely to market in this area.

Year-over-year, other markets licensing was up by about 11% due to higher automotive revenue and also new revenue from Dolby Voice. Products and services revenue was $29.4 million in Q4 compared to $26.8 million in Q3 and $18 million in Q4 of fiscal 2014.

The increase over last year's Q4 was due primarily to new revenues from our acquisition of Doremi Labs in Q1 of this year. We also had higher sales of Dolby Atmos-related products. Let me now cover the rest of the income statement. Total gross margin in the fourth quarter was 89% on a GAAP basis and 90.1% on a non-GAAP basis.

Product gross margin on a GAAP basis was 21.7% in the fourth quarter compared to 11.4% in Q3 and 25% in last year's fourth quarter. Product gross margin on a non-GAAP basis was 29.3% in the fourth quarter compared to 20.2% in Q3 and 31.9% in last year's Q4.

The sequential improvement over Q3 was driven by higher volume and lower inventory obsolescence, while the year-over-year difference was due mainly to changes in product mix. Operating expenses in the fourth quarter on a GAAP basis were $170.4 million compared to $161.9 million in the third quarter.

On a non-GAAP basis, operating expenses were $152.3 million in Q4 compared to $143.6 million in the third quarter. Operating income in the fourth quarter was $33.8 million on a GAAP basis or 14.7% of revenue, and $54.5 million on a non-GAAP basis or 23.7% of revenue.

Also, on a GAAP basis, our fourth quarter results included a pre-tax gain of about $26 million from the sale of real estate, which has been recorded in other income. This gain has been excluded from our non-GAAP results. The effective tax rate for the fourth quarter was 27.5% on a GAAP basis and 24.4% on a non-GAAP basis.

The GAAP basis tax rate was higher because the gain on sale of real estate that I just mentioned was U.S. based and, therefore, had a higher marginal tax rate than the company's blended average. Net income in the fourth quarter was $44.5 million on a GAAP basis or 19.4% of revenue and was $42.3 million on a non-GAAP basis or 18.4% of revenue.

Diluted earnings per share in the fourth quarter on a GAAP basis were $0.43 compared to $0.34 in the third quarter and $0.44 in Q4 of last year. And if I apply taxes, the sale of the property I mentioned contributed about $0.16 of GAAP EPS this fourth quarter.

On a non-GAAP basis, fourth quarter diluted earnings per share were $0.41 compared to $0.49 in Q3 and $0.58 in Q4 of last year. So, let me summarize really quickly the full-year fiscal 2015 results before I cover Q4 cash flow and cash balances.

Total revenue for fiscal 2015 for the full year was $967 million, a slight increase over the $960 million in the prior year. Operating expenses for the year were $662 million on a GAAP basis and $587 million on a non-GAAP basis. Operating income for the year was $211 million on a GAAP basis and $297 million on a non-GAAP basis.

Net income was $175 million – I'm sorry, $179 million or $1.73 per diluted share on a GAAP basis and was $227 million or $2.19 per diluted share on a non-GAAP basis. Moving on to cash now, during Q4, we generated over $80 million in cash from operations.

We also bought back about 1.8 million shares of our common stock during the quarter for a little over $59 million and ended the quarter with $992 million in cash and investments.

As a result of our buyback activity in the fourth quarter, we were able to reduce the outstanding share count by over 1 million shares and that's versus last year's Q4 and we have about $150 million remaining of stock repurchase authorization as of the end of Q4 and we do plan to continue using our buyback program to reduce the outstanding share count during fiscal 2016.

We'll provide an update on this program every quarter. We also announced today that we've increased our quarterly cash dividend to $0.12 per share, it was $0.10 last quarter, payable on November 10, 2015 to shareholders of record on November 2, 2015. So, that's the year we just finished.

Now, I'd like to provide an outlook for fiscal 2016, starting with the first quarter and then for the full year. We estimate that in Q1 total revenue will range from $235 million to $245 million.

Within that, we anticipate that licensing revenue will range from $210 million to $220 million, while products and services revenue would be about $25 million. Incorporated into our estimates are the following considerations.

We anticipate that broadcast licensing will grow modestly year-over-year, while PC licensing revenue could be flat to slightly down. We estimate that mobile will be around 11% or 12% of our total licensing and consumer electronics licensing revenue is projected to be similar to what it was last year.

Gross margin in the first quarter is estimated to range from 89% to 90% on a GAAP basis and 90% to 91% on a non-GAAP basis. Operating expenses in the first quarter are projected range from $174 million to $177 million on a GAAP basis and from $152 million to $155 million on a non-GAAP basis. Let me take a second here.

I'd like to note that our fiscal 2016 is a 53-week year compared to our normal 52-week year and this happens every five years or six years.

We have included the extra week in the first quarter and the impact in our expenses from this extra week, mostly from an extra week payroll, is estimated to be around $5 million to $6 million and is included in the Q1 expense outlook I just provided, both GAAP and non-GAAP.

Quarters two and three and four of the fiscal year will be 13-week quarters as is normal. Other income in the first quarter is projected to be approximately $1 million and our effective tax rate for the first quarter is estimated to be around 26% on both the GAAP and non-GAAP basis.

Based on a combination of the factors I just went over, diluted earnings per share in the first quarter are projected to range from $0.26 to $0.32 on a GAAP basis and from $0.43 to $0.49 on a non-GAAP basis.

For the full fiscal year 2016, we estimate that total revenue will range from $1 billion to $1.030 billion, which would represent growth of approximately 3% to 6% over 2015. The areas that we see driving this growth are broadcast and mobile from our core businesses, along with Dolby Cinema and Dolby Voice from our new initiatives.

Also, we recently acquired a set of patents that fits within our existing patent licensing programs. So, we have baked in about $10 million of new revenue in FY 2016 from this acquisition. Partially offsetting the growth drivers in FY 2016 are downward revenue trends we anticipate in PC, DVD and Blu-ray.

Licensing revenue for fiscal 2016 is estimated to range from $905 million to $925 million and products and services should range from $95 million to $105 million. Full-year operating expenses are estimated to range from $610 million to $620 million on a non-GAAP basis and from $689 million to $699 million on a GAAP basis.

Both of these ranges include the extra week that I mentioned earlier and the impact is about 1 point. Within the expense total, G&A expenses are expected to be flat to down for the year. Full-year gross margins on a GAAP basis are projected to range from 89% to 90% and non-GAAP gross margins should be about 1 point higher.

And the effective tax rate for the year is projected to be around 26%. Summing this all up, in fiscal 2016, we expect to show a revenue growth rate that is at or above the growth in operating expenses, which is an important step towards our longer-term financial goal of double-digit growth in revenues and earnings.

And with that, I will now turn the call over to Kevin Yeaman.

Kevin?.

Impossible – Rogue Nation, and Inside Out. We're off to a great start and we are excited to continue to work with our partners to deliver revenue growth this year. As I look to next year, we are focused on delivering revenue growth from these new initiatives.

Another thing we're looking at is the number of people that are having Dolby-branded audiovisual experiences and wanting more. We see this happening at Dolby Cinemas as hundreds of thousands of people have now come through Dolby Cinemas and the data shows they plan on going back.

Tens of thousands of users can now take advantage of the Dolby Voice experience and our usage numbers are going up as users get more exposure to the high-quality conference call experience. All of these are indicators that we are on the right path. So, in summary, we are broadening the impact of our core audio technologies across more markets.

We are taking advantage of the solid foundation we have built to deliver new and better experiences. We've made great strides in our new initiatives and expect them to contribute to our revenue growth in FY 2016. I look forward to updating you on our progress throughout the year. And with that, I'll turn it over to Q&A..

Thank you. One moment please for our first question. And your first question will come from Mike Olson with Piper Jaffray..

Hey. Good afternoon. On the Dolby Cinema, sounds like that's tracking a lot faster.

Does rolling it out much faster with this AMC deal lead to more expenses than you had expected due to kind of early implementation in the upcoming year?.

Hey, Mike. This is Lewis. I wouldn't associate it with more expenses. It may involve a little more capital, but it's well within the parameters of what we can afford. But the Dolby Cinema initiative right now is leveraging an existing set of activity.

So, I don't think you should think of that as something that drives a lot more personnel costs, if that's kind of what you're asking, adding more head count or people, if that's kind of what you're getting at..

That's certainly part of what we baked into our operating expense guidance this year are the sales and marketing expenses to take advantage of this opportunity. And we've obviously baked that into our guidance..

Yeah..

And we're excited about the feedback we've gotten from consumers, reviews we've gotten from the industry. And that's why we're in a position to significantly accelerate the deployment of Dolby Cinema..

Okay. And the model here is you don't get paid a ton upfront. It's kind of more in the rev share ongoing.

Is that how to think about it?.

It is a rev share ongoing. It is. And so, we're excited that it will begin contributing this year. The one similarity to our licensing business is that will be one quarter in arrears. We'll get reports at the end of the quarter in the following quarter and recognize them as we get that.

We have about 10 sites, as I said, coming into this year, and we're looking to deploy 50 – have 50 in total with AMC by the end of calendar 2016, we've (26:00) a couple other partners that we're in the process of rolling out with. We believe we can add additional partners.

And so, we're very optimistic about our ability to deliver revenue this year and then grow that revenue in future years..

Yeah..

Okay. And then one other one on Dolby Vision. So, you now have one line of commercially-available TVs through VIZIO and you said you have a couple other partners, but they aren't shipping yet.

Is that correct? What are the other partners again? It's TCL and someone else?.

Skyworth..

Yeah, TCL and Skyworth..

Okay. Got you. And they are not shipping yet, right, but maybe....

They are not yet shipping..

Okay. Perfect. I think that's all I had. Thank you..

Thanks, Mike..

Next, we'll hear from Steven Frankel with Dougherty & Company..

All right. Good afternoon.

To follow-up on Mike's question, TCL and Skyworth, could you tell us if they're going to be in the market in 2016 rather than 2015? And kind of where is their price point relative to where VIZIO is today?.

Yes, we expect those to be 2016, not 2015, shipments..

Yeah..

I don't have information yet on their pricing. The VIZIO Reference Series is, of course, a high-end SKU. So, as we go into 2016, we'll be looking to execute on the wins we have, getting those into the market. We'll be looking to expand into the breadth of the product line of each of the partners we already have..

Yeah..

And of course, we're really focused on bringing on additional partners. And one of the – some of the momentum we've seen this quarter is we've had very good traction, very good uptake, on the chipset providers and continued momentum on content and distribution..

Yeah..

And just to clarify, TCL, Skyworth and VIZIO, are those the only three Vision partners you have today?.

Announced..

Yes, those are the only announced TV partners..

I guess I was trying to cut it finer.

Do you have other partners that you haven't announced yet?.

If we haven't announced them, there is probably a reason for it. No, those are the three that we've announced (28:18)..

Let me take another shot. On the Cinema side, it's great this is rolling out faster.

Kind of where do you need to get to have a critical mass that we start to see it have an impact on the numbers? Does it take getting to 50 or could you start to see some revenue help before you had 50 units up and running?.

Well, let me back up for just a second. You talk about the new initiatives and their impact on our guidance this year, right? Obviously, we have a lot. So, I guess, the direct answer to your question is yes. We see it having an impact. It's going to contribute this year..

Yeah..

And in total, as I look at these new initiatives, obviously, our guidance, we've a lot of revenue streams and we have ranges within each one of those. I'd like to see at least $20 million come from Dolby Cinema and Dolby Voice this year and that's in part....

Combined..

Combined. And that's in part, because it does contribute to 2016 revenue growth, but I also believe, at that point, we will have achieved the things we need to achieve to show that we're hitting a curve for future years. And with Dolby Cinema, you're on to that.

It's 10 screens now, looking to have a total of 50 screens with AMC by the end of 2016 in addition to our other partners. You can see how that scales over time.

And with Dolby Voice, like I said, it's getting these large accounts in implementation, getting them using this service, because that's what drives additional revenues and, in particular, the potential to sell the Dolby Conference Phone..

Great. Thank you..

From B. Riley, we'll hear from Eric Wold..

Thank you and good afternoon. Quick question on Dolby Voice.

Can you characterize where you are in the development of that kind of with carriers away from BT, kind of how much that could represent due to the cost you're putting in the guidance for this year?.

Yeah, we are engaging with other potential partners and it is absolutely a goal of ours to expand the reach of the service this year. And what we have proven so far is that this is a very compelling experience that it's a differentiator in the selection process for audio conferencing.

And like I said earlier, for those customers that we do have implementation, the usage stats go up over time as word spreads and as people come to appreciate the experience. And so, it's our goal to get those large accounts in implementation and drive revenue from those accounts. It's also our goal to expand our reach through additional partners..

And maybe tying back to the question that Mike asked earlier, Eric, on a different front, we have incorporated the additional investment we need to make to secure some of that additional activity into the numbers we already guided..

Okay. Perfect. And then just one follow-up. On the patents you said you acquired, you incorporated the $10 million of revenue for this year.

Is that revenue from licenses that may have already been signed and tied to those patents when you acquired them or ones you kind of expect to get kind of throughout the year?.

These are revenues that, right now, if we look at it, would be more in the vein of what we see as an existing stream of revenues from the patents that we acquired. Over time, we also see the opportunity for that revenue stream to grow.

But we thought it would be important to highlight the sort of scale of what we're expecting from that amount this year..

Perfect. Thank you..

From JPMorgan, we'll go to Paul Coster,.

So, thanks for taking the question. On the OpEx front, obviously, you're still spending and it's going to be on sales and R&D.

Can you give us some sense of where that spend is and why it's going up year-on-year after having made all of this investment in these new products that are now just coming to market?.

Well, I would say a couple things. Lewis may want to add.

In addition to the factor that Lewis mentioned as it relates to the quarter, which is the extra week of payroll, the growth is really being driven by – where we're increasing investment is in sales and marketing programs around these initiatives that are showing success and that are getting very positive early feedback in the market.

On the R&D side, there – it's true obviously that we've done the development to get these to market. It's also true that there are ongoing engineering initiatives to continue to meet the needs of customers in the market and advance the initiative.

So, you're going to see it in the areas of R&D and sales and marketing, that's mostly in the area of the growth initiatives that we've articulated..

Okay. And then, so Vision is explicitly not going to be material in the next fiscal year. But as we think about the calendar year, I think it's presumably reasonable to think that the first generation of HDR TVs will come to market in the holiday season of 2016, which should lead to licensing at the beginning of calendar year 2017.

What's wrong with that statement?.

I don't see anything wrong with that statement. I mean, our assumption is that we – this is the time to capitalize on this momentum we've built with the early wins, the chipset support, the content support.

We're going forward with the assumption that people are making their decisions now, as you described, that HDR's happening and that this is the time to capitalize on the work we've done over these last years..

And of the three initiatives, would you describe this as the largest potential in terms of bottom-line impact at Dolby?.

Well, I'd certainly describe it as the one that's the most akin to our traditional business model. And so, I think it's probably the easiest for people who....

Understand (34:28)..

...who follow us to model what that looks like relative to it's a very classic kind of Dolby model. Now, I see a great – as I guess I likened this before, Paul, it's – when people ask me who is my favorite child, I talk about what's special about each of them. And the same is true of each of these initiatives.

I mean, Dolby Vision, I think, is a very big opportunity, a very profitable opportunity. It looks a lot like the Dolby Digital Plus business at full – at success. That's what it looks like. I believe Voice is a very exciting opportunity.

I think that, in and of itself, this audio conferencing opportunity is getting very strong reviews and is a good growth opportunity. And I think, beyond that, it opens the door to quite a number of very attractive adjacent opportunities for us in this communications space.

Dolby Cinema is, I believe, just a – here we have an opportunity to take a business that we've been in for a very long time, the cinema business, built a lot of respect broadly across the industry, have traditionally been subject, like anybody else who serves this space, to the ebbs and flows of capital investment, and build a sustainable growth revenue stream over time in a way that's very high profile, something that I think of all these initiatives has real opportunity to reestablish in the minds of new consumers, younger consumers, what Dolby is all about..

Doremi, (36:00) yeah..

And that's what we're seeing. So, I'm excited about each of them. Fundamentally, I look at each of them and say each one of them has the potential to be as large as any of the markets we talk about today. And then, beyond that, each of them have kind of their own interesting set of adjacencies.

And this is a big year for us, because Voice is here at this point where these large customers are in implementation, so it's now time for us to show that we can convert that to everything we hope this to be..

Yeah..

Dolby Cinema is clearly off to a great start, and this is a big year for us to scale that and to continue this momentum we've got. And as we started off with your question, Dolby Vision, HDR is happening. People are going to be making important decisions.

That's what we've been preparing for and we're excited to have the opportunity to go win some of that business..

Hey, Paul, this is Lewis. I would like to come back to – you started off this question with a question about OpEx. So, just to clarify for the year, if you simply take the midpoint of the numbers we put out there, would suggest that revenue grows 5% and expenses grow about 4.7%.

And the reason I highlighted that extra week is because that really only does happen every five years or six years. So, if you net that out, we do see a picture where this year's OpEx growth is more like 4%, which is significantly lower even in this year where OpEx grew 8% and three years ago was 16%.

So, I do think we are sticking to our promise and our commitment to slow down the rate of growth in that OpEx. And in fact, what Kevin didn't say is even when we set the budget for this year, we have areas, these newer areas, that are getting more investment, but we reallocate it.

So, I think you should understand that there were areas that we did scale back as they did complete their work. And this is no time to get into all that, not to mention I probably couldn't get into too many details.

And then, from a revenue standpoint, you asked whether or not Vision was baked into this year's number, and yeah, in my prepared comments I did not highlight Vision as one of the revenue opportunities. So, that actually ends up, from my book, being a good upside case for future years that we have what we believe to be growth coming.

Part of that comes, though, as you know, from just the timing, right? From a physical standpoint, TVs would have to be out now and shipping by Christmas for us to realize any substantial revenues in FY 2016.

So, that's why I think, Kevin, the focus this year is just getting Vision into more and more SKUs, and the question earlier about being with more manufacturers, that will be the big thing this year. And in FY 2017, we would see more revenue.

And then, the last comment, even on FY 2016 revenues, when we look at the total growth for the year, seems like a reasonable target for us and it also shapes up to be a little bit more in the back-half loaded, just because of the way everything shakes out, but just highlighting that as a small subtlety within the numbers.

But certainly, our objective this year is absolutely to have revenue grow at or above the OpEx level..

All right. Well, I mean, I do hope that when Kevin's kids graduate college, the cost of supporting them will diminish. Thank you..

We're going to get everyone to pitch in, college jobs, all the rest. No, as Lewis says, we are – that is our focus this year is it's establishing the growth from these new initiatives, but it's also being really focused on delivering both revenue and earnings growth..

Yeah..

And once again....

Operator, any more questions?.

.

Okay. Well, thanks again, everyone, for joining us today and we look forward to updating you soon..

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation..