Presentation:.

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal First 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.

[Operator Instructions] As a reminder, this call is being recorded today, Wednesday, January 30, 2019. I would now like to turn the conference call over to Elena Carr, Director of Investor Relations for Dolby Laboratories. Please go ahead, Elena..

Good afternoon. Welcome to Dolby Laboratories' first quarter 2018 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 that 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 Form 10-K.

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 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 today's call, Lewis will begin with the recap of our results and provide our outlook for 2019, and Kevin will finish with the discussion of the business. So I will now turn it over to Lewis..

Okay. Good afternoon, everybody, and thank you for joining our first quarter call. A quick reminder from some comments I made last earnings call last quarter. The new revenue accounting standard formally referred to as 606 i.e.

ASC 606 became effective for us at the beginning of the year, and we adopted that new standard using the full retrospective method and that required us to recast prior year's revenue by applying these new rules retrospectively.

So, during my comments today, any comparisons I make to prior year revenue numbers are in reference to those 606 recasted numbers. And in the earnings release that we put out today, we included a table that shows FY 2018 revenue as adjusted under 606 by quarter. So, hopefully that will be helpful.

So, here are the Q1 results, in the first quarter of FY 2019, total revenue was $302 million. Within that, licensing revenue was $260 million, which was in line with our expectations, while products and services was $42 million, which was a little above the projections we had for the quarter.

Total revenue in Q1 of last year was $300 million and that included a large recovery of more than $20 million in mobile licensing that did not repeat in this year's Q1. So, let's review the trends that we saw in licensing revenue in the end markets that we serve. First, broadcast.

Broadcast represented about 38% of total licensing in the first quarter and revenues in this market were down about 2% sequentially, reflecting lower recoveries offset partially by seasonally higher TV revenue. Year-over-year broadcast was down about 9% due to lower recoveries and timing of revenue.

Consumer electronics represented about 17% of total licensing in the first quarter. Licensing in this area increased sequentially by about 8% and year-over-year by about 16%.

The sequential growth was driven by seasonally higher volume and sound bars, DMAs and home theater offset partially by lower recoveries, and year-over-year we saw higher revenue from DMAs, sound bars and other products. Mobile devices represented approximately 13% of total licensing in the first quarter.

On a sequential basis, the percentage increase was quite large because this was an instance where the Q4, 2018 mobile number was significantly reduced by the recast, which impacts the sequential trend. So, if I set aside the impact from the recast, mobile business in Q1, 2019 was about comparable to Q4.

Year-over-year mobile was down about 40% or a little over 40% due primarily to the large recovery we got in Q1 last year that didn't repeat in this year's Q1. PC represented about 9% of total licensing in the first quarter. PC was down sequentially by about 11% and this was driven by lower ASP due to mix as well as lower recoveries.

PC year-over-year increased by around 14% now is due primarily to timing of revenue under contract. Licensing and other markets represented about 23% of total licensing in the first quarter. They were up about 35% sequentially and about 37% year-over-year.

In both cases, the increase was driven by gaining higher recoveries in auto and higher revenue from Dolby Cinema. So that's licensing. Products and services revenue was $42.1 million in Q1 that compared to $25.9 million in Q4 and $29.4 million in last year's Q1 and the prior year numbers were not materially affected by the 606 recast.

The growth in products and services was largely driven by Dolby Cinema arrangements that have fixed amounts, paid or committed upfront along with the percentage of box office over time. The upfront amounts are accounted for as product sales and any ongoing share of box office, the percentage share will be accounted for as licensing revenue.

And also in Q1 in products and services, we had growth in cinema products and in Dolby Voice products. So, stepping back and recapping the overall revenue for the quarter, Q1 of last year was $300 million and that included a large mobile recovery of $20 million plus.

We didn't have that in this year's Q1, but we grew in Dolby Cinema, consumer electronics and gaming to more than offset that factor and finish this year's Q1 at $302 million. So let's move onto margins and operating expenses. Total gross margin in the first quarter was 87.2% on a GAAP basis and 87.8% on a non-GAAP basis.

Products and services gross margin on a gap basis was 35.3% in the first quarter compared to 20.2% in Q4. And products and services gross margins on a non-GAAP basis was 37.8% in the first quarter compared to 23.8% in Q4. Our operating expenses in the first quarter on a GAAP basis were $195.1 million compared to $196.8 million in the fourth quarter.

Operating expenses on a non-GAAP basis were $173.4 million in Q1 compared to $178.6 million in the fourth quarter. Operating income in the first quarter was $68.7 million on a GAAP basis or 22.7% revenue compared to $94 million or 31.4% of revenue in Q1 of last year.

Operating income on a non-GAAP basis in Q1 was $92 million or 30.4% of revenue compared to $114.4 million or 38.2% of revenue in Q1 of last year. Income taxes on a GAAP basis was a benefit of $24.1 million, which includes $35 million of credits relating to US tax reform. And the non-GAAP income tax rate in Q1 was 19.2%.

Net income on a GAAP basis in the first quarter was $98.2 million or $0.93 per diluted share compared to a loss of $53.3 million or $0.52 per diluted share in last year's Q1. And just to note that last year's Q1 net results did include a discrete tax charge of $138 million for US tax reform.

So, net income on a non-GAAP basis in the first quarter was $78.7 million or $0.74 per diluted share and that compared to $95.4 million or $0.90 per diluted share in Q1 of last year. During the first quarter we generated about $57 million in cash from operations and ended the quarter with over $1.1 billion in cash and investments.

We bought back about 1.6 million shares of our common stock in Q1 and ended the quarter with $239 million of stock repurchase authorization still available. We also announced today a cash dividend of $0.19 per share, which will be payable on February 21, 2019 to shareholders of record on February 12, 2019.

Now let me cover the outlook starting with the full year. For the full year FY 2019, we are maintaining the guidance ranges for both revenue and operating expense that we gave last quarter. We estimate the total revenue will range from $1.240 billion to $1.280 billion.

Within that total, we estimate that licensing will range from $1.80 billion to $1.120 billion. While products and services are estimated to range from $150 million to $170 million for the year. We've now completed our recap of last year's revenue under 606 and the FY 2018 recasted revenue was $1.55 billion.

Now, the final recasted revenue for FY 2018 is lower than the estimate I provided at last call and the primary reason for the difference between 605 and 606 revenue for FY 2018 remains the same.

Namely, under 606 certain revenue were shifted to prior years, in some cases as far back as five years due to some differences in accounting related to multi-year contracts. So, getting back to my discussion of the FY 2019 forward outlook, incorporated into the revenue range for the year that FY 2019 are the following factors.

We estimate that broadcast revenue will grow, as we see our technologies incorporated into more TVs and set-top boxes. In PC licensing, we'll continue to see downward pressure from ASP due to mix, but some of that will be offset by more adoption of our newer technologies.

Consumer electronics is projected to grow modestly driven by sound bars and DMAs. We expect mobile revenues to increase, we are seeing some organic growth helped by further penetration also the year-over-year mobile comparison is impacted by the recast. We expect growth in other licensing from Dolby Cinema, gaming and Dolby Voice.

And finally in product and services, we anticipate growth in cinema products, Dolby Voice and Dolby Cinema. As it relates to Dolby Cinema, the product revenue growth is associated with those transactions that include an element of fixed amounts paid or committed upfront like I discussed earlier.

Gross margin for the year is projected to be around 87% plus or minus on a GAAP basis and about 88% plus or minus on a non-GAAP basis. Operating expenses are projected to range from $786 million to $796 million on a GAAP basis and from $705 million to $715 million on a non-GAAP basis.

Other income is estimated to range from $21 million to $24 million for the year and the effective income tax rate for the year on a GAAP basis is expected to range from 13% to 15% reflecting adjustments recorded this year for revised estimates and new legislation pertaining to US tax reform.

And then the non-GAAP effective tax rate for the year is expected to range from 19% to 21%. Let's move on to second quarter outlook. For Q2 of FY 2019, we anticipate that total revenue will range from $325 million to $345 million.

Within that we estimate the licensing will range from $295 million to $305 million, while products and services is projected to range from $30 million to $40 million. Q2 gross margin on a GAAP basis is estimated to be around 88% and the non-GAAP gross margin is estimated to be around 89% plus or minus.

Operating expenses in Q2 are projected to range from $206 million to $210 million on a GAAP basis and from $186 million to $190 million on a non-GAAP basis. Other income is projected to be around $5 million for the quarter.

And regarding the effective tax rate on a GAAP basis, we anticipated in Q2, we will report a discrete tax expense of $18 million to $22 million to account for a revision of US tax reform that was just enacted into law earlier this month. And because of this our GAAP tax rate in Q2 is estimated to range from 38% to 42%.

Our non-GAAP effective tax rate for Q2 is projected to range from 19% to 21%. So, based on a combination of the factors, I just covered, we estimate that Q2 diluted earnings per share will range from $0.48 to $0.54 on a GAAP basis and from $0.81 to $0.87 on a non-GAAP basis. So now I would like to hand it over to Kevin.

Kevin?.

Thank you, Lewis, and good afternoon, everyone. We're off to a strong start to 2019. We're just back from CES where Dolby Vision and Dolby Atmos, but once again on display across the show floor. Before diving in, it's worth reflecting our journey.

Three years ago, Dolby Vision was introduced at CES with LG and VIZIO TVs, while Dolby Atmos was just moving beyond AVRs to sound bars. In 2017 at CES, Sony announced support for Dolby Vision and our first combined Dolby Vision and Dolby Atmos experience was launched by LG.

Last year, we saw the adoption of these experiences on an increasing range of device types and content services. This year Dolby Vision and Dolby Atmos have become robust ecosystems with increasing momentum across a broad range of content and devices. New announcements included Panasonic's first TV with Dolby Vision and Dolby Atmos.

They joined eight other partners that have embraced the combined experience for TVs including LG, Sony and TCL. Dell announced its first Dolby Vision PC, and Lenovo expanded its support for the combined Dolby Vision and Dolby Atmos experience further into its line of PCs.

Also at CES, we demonstrated our solutions for mobile including iPhone support of Dolby Vision as well as Samsung and Huawei smartphones with Dolby Atmos. In the home entertainment space, we showcased Apple 4K TV as well as the Amazon 4K Fire TV, both of which support the combined Dolby Vision and Dolby Atmos experience.

The number of sound bars supporting Dolby Atmos continues to grow and are available in a broad range of price points. And Xbox, which is the first game console with the combined experience is now in market. We expect the first pay TV set-top boxes with Dolby Vision and Dolby Atmos in market later this year.

Partners such as iTunes, Netflix, Amazon, Rakuten, Tencent and iQiyi are streaming an increasing amount of content Dolby Vision and Dolby Atmos. For example as it relates to Dolby Vision, iTunes currently has over 400 movies and Netflix has over 500 hours of content.

We are also bringing the Dolby Vision and Dolby Atmos experience to more forms of content including live sports. Some examples of major live sporting events broadcasting in Dolby Atmos this year were Premier League Soccer in Europe and the Winter Olympics. We've also had a number of trials in Dolby Vision.

And this quarter marked the first live professional sports broadcast in North America in Dolby Atmos, as Direct TV began broadcasting, select NBA games in November. We have a robust ecosystem with a broad base of content and consumer products, and even with a strong presence most of the opportunity is still ahead of us. Let's turn to Dolby Cinema.

We currently have more than 20 exhibitor partners with about 200 screens open and another 200 committed. This quarter Tahoe Cinemas in China announced plans to open 10 Dolby Cinema screens. This adds to our growing presence in the Chinese market where we now have eight Dolby Cinema partners including Wanda, Jinyi and CGV.

We're excited that the first Dolby Cinema opened in the UK at Odeon Leicester Square, which is one of the most iconic venues in Europe and a frequent home to movie premieres. Also this quarter, the first Dolby cinema in Japan opened with T-Joy.

There are now over 200 titles, which have been released or announced in Dolby Vision and Dolby Atmos including the top 15 box office leaders in 2018. Beyond Dolby Atmos, Dolby Vision and Dolby Cinema, we continue to apply our innovations across the many ways in which people experience entertainment and communications.

Recent examples include, Dolby Voice Room, which includes an integrated video solution to go along with the Dolby Conference Phone. We see a solid uptake of Dolby Voice Room in our first full quarter of sales, and we're encouraged by the growth in the pipeline.

More recently, we launched Dolby Dimension, which is the first wireless headphone optimized for entertainment in the home. It allows people to have more immersive experiences in situations where they were otherwise making compromises. And we are happy to see the initial response. It is currently available on Amazon as well as the dolby.com website.

So, to wrap up, I'm pleased with our start to the year. We are seeing growing momentum for Dolby Atmos, Dolby Vision and Dolby Cinema. We have a healthy pipeline of innovation, which will enable us to elevate a broad range of audio visual and communication experiences, as we are doing most recently with Dolby Voice Room and Dolby Dimension.

All of this gives us confidence that we will continue to deliver revenue and earnings growth. I look forward to updating you next quarter. And with that I'll turn it over to Q&A..

Thank you. [Operator Instructions] And we will take our first question from Steven Frankel with Dougherty. Please go ahead..

Steven Frankel:.

Kevin Yeaman:.

Steven Frankel:.

Kevin Yeaman:.

Steven Frankel:.

Lewis Chew:.

Steven Frankel:.

Kevin Yeaman:.

Steven Frankel:.

Kevin Yeaman:.

Steven Frankel:.

Lewis Chew:.

Kevin Yeaman:.

Lewis Chew:.

We will now take our next question from Ralph Schackart with William Blair. Please go ahead..

Eric Kogut:.

Kevin Yeaman:.

Eric Kogut:.

Kevin Yeaman:.

Lewis Chew:.

Kevin Yeaman:.

Eric Kogut:.

Our next question will come from Eric Wold with B. Riley. Please go head..

Eric Wold:.

Kevin Yeaman:.

Eric Wold:.

Lewis Chew:.

Eric Wold:.

We will now take our next question from Jim Goss with Barrington Research. Please go ahead..

James Goss:.

Lewis Chew:.

James Goss:.

Lewis Chew:.

James Goss:.

Kevin Yeaman:.

James Goss:.

Kevin Yeaman:.

James Goss:.

Kevin Yeaman:.

James Goss:.

Kevin Yeaman:.

[Operator Instructions] We will take our next question from Paul Chung with JPMorgan. Please go head..

Paul Chung:.

Lewis Chew:.

Kevin Yeaman:.

Lewis Chew:.

Paul Chung:.

Lewis Chew:.

Paul Chung:.

Lewis Chew:.

Paul Chung:.

Lewis Chew:.

Paul Chung:.

And this concludes today's question-and-answer session. I'd now like to turn the call back over to Kevin for any additional or closing remarks..

Great. Thank you all for joining, and we look forward to keeping you updated on our progress..

This concludes today's conference. Thank you for your participation. You may now disconnect..