Dolby Laboratories Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 15, 2021

There are 8 speakers on the call.

Operator

Thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing fiscal 4th 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 Tuesday, November 16, 2021.

Operator

I would now like to turn the conference call over to your host, Ashley Shonoa, with Senior Manager, Investor Relations for Dolby Laboratories. Please go ahead, Ashley.

Speaker 1

Good afternoon. Welcome to Dolby Laboratories' 4th Quarter 2021 Earnings Conference Call. Joining me today are Kevin Gehman, Dolby Laboratories' CEO and Robert Park, CFO. As a reminder, today's discussion will include forward looking statements, including our first quarter fiscal 2022 outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the extent of the continuing impact of COVID-nineteen on our business.

Speaker 1

A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward Looking Statements as well as in the Risk Factors section of our most recent annual report on Form 10 ks. Dolby assumes no obligation and does not intend to update 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, Kevin will start with a discussion of the business and Robert will follow with a recap of Dolby's financial results and provide our Q1 fiscal 2022 outlook. So with that introduction behind us, I will now turn the call over to Kevin.

Speaker 2

Thank you, Ashley, and good afternoon, everyone. Our Q4 EPS came in above our midpoint, while revenue came in toward the low end of our guidance range. Looking at the full year, We had a strong fiscal 2021 with 10% revenue growth and our highest operating margin since fiscal 2014. And we created considerable momentum across many of our growth initiatives that will allow more people to be entertained by premium Dolby experiences. Consumers can now easily record, edit and share their videos in Dolby Vision with their Apple iPhone.

Speaker 2

Music in Dolby is being enjoyed by a significantly larger audience with the launch of Dolby Atmos on Apple Music And we have the first partners who will enable the Dolby Atmos music experience in the car with Mercedes Benz and Lucid Motors. And gamers can now play some of their favorite titles in Dolby Vision for the first time on the latest Xbox. During FY 2021, our revenues benefited from robust increases in consumer device shipments, combined with increased adoption of Dolby Atmos and Dolby Vision, partially offset by a decrease in Cinema related revenues. As we enter FY 'twenty two, We are expecting revenue growth in the mid to high single digits as we anticipate a shift in those factors with accelerating growth of Dolby Atmos and Dolby Vision And a partial recovery in cinema related revenues offset by a macro slowdown in consumer device shipments. It has been a dynamic environment and before Robert takes you through the numbers in more detail, including a discussion on our licensing end markets, I want to walk you through some of the most important factors as we think about long term revenue growth.

Speaker 2

Our foundational audio technologies, Increased adoption of Dolby Atmos and Dolby Vision and our opportunity to expand our addressable market with initiatives like Dolby. Io. Let's start with our foundational audio technologies, which include Dolby Digital Plus, AC 4 and our audio patent licensing. These foundational technologies made up roughly 3 quarters of our licensing business in FY 2021 and have high attach rates across a diverse set of devices and end markets. In FY 2021, our foundational audio technologies grew about 11% year over year, Grew about 11% year over year due largely to robust global shipments of PCs and higher TV volumes, particularly in North America and Europe.

Speaker 2

We also benefited from higher than normal true ups coming into the year. As we look ahead to FY 2022, industry analyst reports indicate that we will not see the level of market growth we saw in the previous year, Noting uncertainties around global supply constraints and consumer spending. Of course, we partner with OEMs across multiple device categories And each of them is impacted differently. When we take all of this into account, we expect a decrease in the low single digits for our foundational audio revenues. Over the long term, we expect our foundational licensing revenue to generally reflect market trends in device shipments, Driven by our strong presence across a wide set of consumer devices and markets with opportunities to increase adoption in certain areas like mobile and automotive.

Speaker 2

The remainder of our licensing revenue includes Dolby Atmos, Dolby Vision and our imaging patent technologies, where growth is being driven primarily by new adoption and new licensees. This portion of our licensing revenue also includes Dolby Cinema, where we expect strong year over year growth as box office recovers from low attendance throughout FY 2021 driven by the pandemic. In total, this portion is approaching 1 quarter of our licensing revenue And grew nearly 20% in FY 2021. We see this growth accelerating to over 35% in FY 2022. Our continued momentum with Dolby Vision and Dolby Atmos is a key driver here and I'd like to take a few minutes to highlight our progress in these areas.

Speaker 2

Let me start with Dolby Atmos Music. The response from artists and consumers is clear. Dolby Atmos creates a whole new way to enjoy music. The engagement continues to build with some of the world's most popular music artists like Justin Bieber and The Weeknd Describing the Dolby Atmos music experience as game changing and an immersive world where you can feel every detail. We also recently launched a new venue, Dolby live at Park MGM, where concert attendees will be able to enjoy their favorite artists with the ultimate Dolby Atmos music experience And then seek the experience in all the ways they enjoy music.

Speaker 2

Amazon Music recently announced that they are making Dolby Atmos music experiences more broadly available to their subscribers. The music and Dolby experience significantly increases the value that Dolby brings across a wide range of devices, including mobile, PC and speaker products. Our growing presence in music has created a new value proposition for Dolby in the automotive space. Mercedes Benz announced last That they are adopting the Dolby Atmos music experience in 2 of their top luxury cars, the Mercedes Maybach and the Mercedes Benz S Class. And just yesterday, Chinese electric carmaker NIO announced they are including Dolby Atmos in their ET7 model.

Speaker 2

We are excited that these new partnerships add to our early momentum within automotive that started with Lucid Air earlier this year, which is now on the road in the U. S. We're just at the beginning of the significant opportunity we see ahead in this space. This quarter the launch of the iPhone 13 lineup again highlighted the capability to enable consumers to record and share their videos in Dolby Vision. With a significant increase to the amount of Dolby Vision content being created through the iPhone, we are seeing a range of content platforms Now enabling support for Dolby Vision for the first time.

Speaker 2

This quarter, Bilibili, one of China's largest social video sites, Began to support the upload and sharing of user generated Dolby Vision content. More recently, Vimeo became the 1st all in one platform to support playback of Dolby Vision content for the Apple ecosystem. With more content platforms supporting Dolby Vision content to broader audiences and use cases, we look to drive increased adoption of Dolby Vision playback and capture Across more devices, particularly in mobile and PC. We are also building momentum to enable more live broadcast events in Dolby. Comcast delivered the 2021 MLB World Series and playoff games in Dolby Vision on FOX Sports.

Speaker 2

Thursday night football games will be available in Dolby Vision through Fox and NBC will be delivering select college football games in Dolby Vision. Growing the number of Dolby content experiences, especially live content with dedicated followings provides more impetus for greater adoption of Dolby Vision and Dolby Atmos. Gaming and Dolby Vision is now available on the Xbox Series X and S, Marking the first time gamers can enjoy playing in the combined Dolby experience. Microsoft also expanded their support of the combined experience by adding Dolby Vision to their Surface devices. In the living room, we see our partners like Amazon, Xiaomi, TCL and Sky Highlight the combined Dolby Vision and Dolby Atmos experience in their latest TV launches.

Speaker 2

And we continue to garner support from streaming services With Hulu adding Dolby Vision this quarter. The newest soundbar products from LG and Sonos showcase support for Dolby Atmos and in mobile, We saw new Android phones and tablets this quarter from Samsung, Xiaomi and Realme with Dolby Technologies. With a solid foundation and increasing adoption of Dolby Atmos and Dolby Vision, we are able to broadly address the world of premium Content experiences like movies, TV and music and are confident in our ability to drive continued growth. With Dolby. Io, our developer first API platform, we see an opportunity to greatly expand our addressable market by focusing on use cases that benefit from Dolby's unique experience in media and communications.

Speaker 2

While our platform has broad applicability across a range of use cases. We are focusing where we think we can offer the most differentiation, Virtual live performances, online and hybrid events, social audio, premium education, gaming And content production. Each of these verticals represents an opportunity of 100 of billions of minutes annually And collectively, we estimate the addressable market to be about $5,000,000,000 and growing. With the breadth and depth of our expertise, we are enabling higher quality capture, processing and playback capabilities compared to what is currently available in the market. Last quarter, we released a major platform update, which puts us in a position to address more of our Our next question comes from the line of David.

Speaker 2

Hi, good morning everyone. I'm going to turn the call over to Eric. Hi, good morning everyone. I'm going to turn the call over to Eric. Hi, good morning everyone.

Speaker 2

I'm going to turn the call over to Eric. Hi, good morning everyone.

Speaker 3

I'm going to turn the call over to Eric.

Speaker 2

Hi, good morning everyone. I'm going to turn the call over to Eric. Hi, good morning everyone. And learn from our engagement with developers, we continue to introduce new APIs and features that address the needs of developers and improve the overall developer experience. With these recent improvements, we are beginning to see increased self-service activity and with our new leadership in place, We are focused on increasing awareness and building the pipeline.

Speaker 2

This quarter we saw a number of new music distribution services, Including United Masters, integrating our music mastering API and enabling their users to create high quality music tracks. Also Cloudinary recently launched an integration of Dolby IO's audio enhanced APIs with their media flows product, Allowing their customers to easily improve the audio quality of their videos. While we are still in the early days of Dolby. Io, We are excited about the significant opportunity ahead. Before I wrap up, let me spend a minute on our operating model.

Speaker 2

We significantly increased operating margins in FY 2021 due to a combination of gross margin improvements and reduced spending levels due to COVID. We anticipate a partial return of some of these operating expenses in FY 2022 like travel and events as well as a few specific items like 53rd week of payroll. At the same time, on the strength of our operating model, including our improved gross margins, We will continue to generate higher operating margins as compared to our pre pandemic levels, while investing in our growth areas. So in summary, we have a strong foundation and fiscal 2021 was highlighted by significant wins like Dolby Atmos on Apple Music, the first that will support Dolby Atmos and enabling Dolby Vision across a wider range of content from live events to gaming to user generated content. We see much of the opportunity ahead as we drive broader adoption across more content and more devices, even as we seek to All of this gives us confidence in our ability to drive long term revenue and earnings growth as we look to FY 'twenty two and beyond.

Speaker 2

So before the financials, I would like to welcome our new Chief Financial Officer, Robert Park. Robert is an experienced leader with a track record of guiding companies through growth, while delivering operational excellence and accountability. Robert has been on board for about 4 weeks now. We are excited to have his expertise as we work towards Dolby's next phase of growth. And with that, I'll hand it over to Robert to take us through the financials in more detail.

Speaker 3

Great. Thank you, Kevin. Good afternoon, everybody. I'm very Excited to be here and join the Dolby team. I hope that in the near term I get a chance to meet you all, if not in person, at least virtually.

Speaker 3

So let's go through the numbers for Q4 and full year 2021 and then I'll take you through our outlook for fiscal year 2022. Total revenue in the 4th quarter $285,000,000 which was within the total revenue guidance range we provided and also included a favorable true up of about $3,000,000 for Q3 shipments reported that were above the original estimate. Revenue landed towards the low end of our guidance range due to timing of the deal that pushed out of the quarter and is now to $1,160,000,000 in fiscal year 2020 generating 10% year over year growth. Within that licensing revenue was $1,210,000,000 products and services revenue was $67,000,000 On a year over year basis, 4th quarter revenue was about $14,000,000 above last year's Q4 As we benefited from greater adoption of Dolby Vision and Dolby Atmos and higher cinema related revenues, partially offset by lower true ups. Q4 revenue was comprised of $266,000,000 in licensing and $19,000,000 in products and services.

Speaker 3

Let's discuss the full year and year over year quarterly trends in licensing revenue by end market and I will also highlight the key factors as we look ahead to fiscal 2022. Broadcast represented about 39% of the total licensing in fiscal year 2021. Our full year revenues grew by $1,000,000 or 8% on a year over year basis, driven by higher adoption of Dolby Vision and Dolby Atmos in TVs and set top boxes. We also saw higher foundational audio revenues Due to increased TV shipments in North America and Europe compared to fiscal 2020. In Q4, we saw broadcast revenues decline from prior year's Q4 As we saw lower true ups for foundational audio revenues on a year over year basis, partially offset by higher revenues from Dolby Vision and Dolby Atmos.

Speaker 3

As we look at the fiscal 2022, we currently anticipate broadcast revenues to grow in the low single digits from fiscal 2021, driven by higher adoption of Dolby Vision, Dolby Atmos and growth in our imaging patent programs. These growth factors are projected to be partially offset by lower foundational audio revenues As we see lower recoveries and lower true ups on a year over year basis and industry analysts are projecting TV shipments to be flat to down low single digit. Mobile represented approximately 22% of total licensing in fiscal 2021. Mobile revenue increased by 34,000,000 2020 as our foundational audio revenues benefited from timing of revenues and we saw higher Dolby Vision revenues from increased adoption. Our Q4 mobile revenues were up about 2% as compared to the prior year due to higher adoption of Dolby Vision and Dolby Atmos.

Speaker 3

In fiscal year 'twenty two, we anticipate that mobile revenues could grow mid to high single digits, driven by increasing adoption of Dolby Vision and Dolby Atmos, as well as growth in our imaging patent programs. These factors will be partially offset by lower foundational audio revenues due to timing of revenues under contract. Consumer Electronics represent about 15% of total licensing in fiscal year 2021. On a year over year basis, CE licensing increased by 29,000,000 Or 19%, driven by higher foundational audio revenues as a result of increased unit volumes in sound bars and ABRs, We also saw growth from higher adoption of Dolby Atmos and Dolby Vision across CE devices. Our Q4 CE revenues increased 28% compared prior year, which was in line with full year growth drivers of both higher foundational audio revenues and growing adoption of Dolby Atmos As you look ahead to fiscal year 2022, we see CE revenues relatively flat year over year.

Speaker 3

We expect to see higher revenues from Dolby Vision and Dolby Atmos adoption as well as increasing contributions from our imaging These growth drivers will be partially offset by lower foundational audio revenues as industry analysts are estimating unit volumes DMAs and soundbar to decrease year over year and we anticipate lower CE recoveries. PC represented about 12% of total licensing in fiscal year 2021. Our fiscal year 2021 PC revenues were higher than prior year by about $10,000,000 or 7%, Driven by higher foundational audio revenues as a result of strong PC shipments throughout the year and growing revenues from Dolby Atmos and Dolby Vision. These growth factors were partially offset by lower recoveries compared to fiscal year 2020. Our Q4 PC revenues were about 7 higher compared to prior year Q4 driven by increased Dolby Vision and Dolby Atmos revenue.

Speaker 3

As we look ahead to fiscal year 2022, we see low to mid single digit In our PC revenues, as more PCs continue to adopt Dolby Vision and Dolby Atmos as well as growth in our imaging patent programs. Other markets represent about 12% of total licensing in fiscal year 2021. They were up about $26,000,000 or 21% year over year, Driven by higher revenues from gaming due to the console refresh cycle and higher foundational revenues related to patents. In Q4, we saw other markets grow about 26% year over year due to increased Dolby Cinema revenues as theaters reopened and higher revenues from gaming. As we look ahead to fiscal 2022, we anticipate that other markets revenues could grow at an even higher rate Over 25% as we estimate Dolby Cinema revenues to continue momentum in Q4 as more people are able to turn to the movies.

Speaker 3

And we also see continued growth in gaming. Beyond licensing, our products and services revenue was $67,000,000 in fiscal year 2021 compared to $83,000,000 in fiscal year Prior year included about 2 quarters of pre pandemic activity related to our cinema products business and included revenues for our communications hardware business, which we exited in early fiscal year 2021. Products and services revenue in Q4 was $19,000,000 compared to $14,000,000 in last year's Q4. The year over year increase reflects higher demand in the cinema industry. Total gross margin in the 4th quarter was 89.2% on a GAAP basis 90.0 percent on a non GAAP basis.

Speaker 3

Operating expenses in the 4th quarter on a GAAP basis were 214,000,000 Operating expenses in the 4th quarter on a non GAAP basis were $189,900,000 compared to $176,500,000 in the prior year. Operating expenses were at the low end of our guidance for Q4. Operating income in the 4th quarter was $40,400,000 on a GAAP basis or 14.2 percent Revenue compared to $30,100,000 or 11.1 percent of revenue in Q4 of last year. Operating income in the 4th quarter on a non GAAP basis was 66 point $6,000,000 or 23.4 percent of revenue compared to $54,300,000 or 20 percent of revenue in Q4 of last year. On a full year basis, operating income was $340,400,000 on a GAAP basis or about 26.9 percent of revenue compared to 218 point $7,000,000 or 18.8 percent in fiscal 2020.

Speaker 3

Full year operating income in fiscal 2021 on a non GAAP basis was 450,700,000 Or about 35.2 percent of revenue compared to $317,900,000 or 27.4 percent in the prior year. Income tax in Q4 was minus 3% on a GAAP basis and 13% on a non GAAP basis. Our tax rate benefited from a number of discrete items, Including return provision true ups. Net income on a GAAP basis in the 4th quarter was $44,200,000 or $0.42 per diluted Compared to $26,800,000 or $0.26 per diluted share in last year's Q4. Net income on a non GAAP basis in 4th quarter was $60,400,000 or $0.58 per diluted share compared to $45,800,000 or $0.45 per diluted share in Q4 of last During the Q4, we generated $110,000,000 in cash from operations compared to $113,000,000 generated in last year's 4th quarter.

Speaker 3

We ended the 4th quarter with about $1,300,000,000 in cash and investments. During the Q4, we bought back about 1,000,000 shares of our common Stock ended the quarter with about $291,000,000 of stock repurchase authorization available going forward. We also announced today a cash dividend of 0.25 to shareholders record on November 30, 2021. Now let's turn to guidance for fiscal 2022. We currently estimate total fiscal year 2022 revenues range from $1,340,000,000 to $1,400,000,000 This would result in about 5% to 9% of year over year growth As compared to the $1,280,000,000 in fiscal year 2021.

Speaker 3

Within this, licensing revenue could range from 1,260,000,000 to $1,315,000,000 compared to $1,214,000,000 in fiscal year 2021, which Strong growth in our other markets for increased Dolby Cinema and gaming revenues, as well as growth in mobile, PC and to a lesser extent broadcast Due to increasing adoption of Dolby Vision and Dolby Atmos and growth in our imaging patent programs, partially offset by lower foundational audio revenues. For products and services revenues, we anticipate this could range from $75,000,000 to $90,000,000 for fiscal year 2022 with improvements in cinema products and growth in dolby. Io. Gross margin for fiscal year 2022 are expected to be relatively consistent with fiscal year 2021. Let me shift to operating We have several factors that impact our year over year expectations.

Speaker 3

1st, fiscal 2022 is a 53 week fiscal year for us and that results in an Thanks for the color on Q1. As Kevin mentioned, we also see a return on some expenses like travel and events that were lower during the pandemic. In addition to normal annual merit increases that will typically go in effect in fiscal Q2. Lastly, we continue to invest in areas like Dolby Vision, Dolby Atmos and Dolby. Io.

Speaker 3

With these considerations, we are estimating operating expenses for fiscal 2022 could range from 869,000,000 To $889,000,000 on a GAAP basis and between $750,000,000 to $770,000,000 on a non GAAP basis. With all of this, our business model remains very strong as we expect to deliver operating margins between 24% To 26% on a GAAP basis and between 34% 36% on a non GAAP basis. Based on the factors above, We estimate that full year diluted earnings per share will range from $2.53 to $3.03 on a GAAP basis and $3.52 to $4.02 on a non GAAP basis. Let me shift to how that translates into what we see for fiscal Q1. For Q1, we see total revenues ranging from $345,000,000 to $375,000,000 Within that, licensing revenues range from $330,000,000 to $355,000,000 Note that in the prior year Q1, we benefited from a significant favorable true up of over 21,000,000 For Q4 fiscal 2020 shipments that was larger than normal given the volatility of conditions during the pandemic.

Speaker 3

Last year's Q1 also benefited from recoveries and timing of revenue under contract. This is partially offset by increasing adoption of Dolby Vision and Dolby Atmos and growth in our imaging Q1 products and services revenue could range from $15,000,000 to $20,000,000 Let me move on to the rest of the P and L outlook for Q1. Q1 gross margin on a GAAP basis is expected to be 90% to 91% and the non GAAP gross margin is estimated to be about 91% to 92 Operating expenses in Q1 on a GAAP basis are estimated to range from $221,000,000 to 231,000,000 Operating expenses in Q1 on a non GAAP basis are estimated to range from $190,000,000 to $200,000,000 which contemplates the impact of the 53 Fiscal year. Other income is projected to range from $1,000,000 to $2,000,000 for the Q1 and our effective tax rate for Q1 is Projected to range from 18% to 19% on both the GAAP and non GAAP basis. Based on the combination of the factors I just covered, estimate that Q1 diluted earnings per share could range from $0.71 to $0.86 on a GAAP basis and from $0.98 to $1.13 on a non GAAP basis.

Speaker 3

With that, let's move on to Q and A. Operator, can you please queue up the first question?

Operator

Thank you, ladies and gentlemen. If you are on a speakerphone, please pick up your handset before entering your request. Please be sure to identify yourself and your firm at the To be fair to all participants, we ask that you limit yourself to one question and a follow-up question until all participants have had a chance in the 1st round. If time allows, we will then come back to answer any remaining questions. One moment please for the first question.

Operator

The first question is from the line of Raj Spad with William Blair. You may proceed.

Speaker 4

Good afternoon. Thanks for taking the question and thanks for the increased disclosure. Very helpful. I guess first question is on the FY 2022 revenue guide Foundational audio revenues. Kevin, I think you called for a decrease in low single digits.

Speaker 4

Just curious if that's sort of even based Sort of factored into there, which I'm guessing it is, and maybe just a broader commentary on the macro environment with chip shortages, etcetera, and how that might be That portion for the guidance.

Speaker 2

Yes, Ralph. I guess the most I can say about the macro environment As you observed, there's still it's still dynamic. And when we forecast, as you know, we start with industry analyst reports and I would say that The unit shipment estimate, it does vary by device category. Some are a little up, some are a little down. Overall, we might best characterize it as kind of flattish with people noting a lot of uncertainty around supply chain And consumer spending.

Speaker 2

The reason why this year then that's just slightly down single digits in our estimation is That we did have the larger than normal true up that we're lapping from Q1 of last year and we also had the timing of a particular contact across So given that the unit environment is kind of flattish, it's a little more sensitive to those things. So you can see we did had that 11% growth last year and this year we see low single digits. But going forward, Ralph, I think what's I also want to make sure it's clear that it's a really strong foundation. It's diversified across a lot of different devices, across a lot of different geographies. When we look back several years dating back to a couple of years before the pandemic, this is on average.

Speaker 2

It's Growing low single digits. And so that's kind of how we look at it going forward. And in any given year, it's going to be based on these individual dynamics. And obviously these last couple of years have been particularly dynamic.

Speaker 4

Great. And then appreciate you Framing the Dolby. Io opportunity for us tonight. On the call you talked about increasing API features and some improvements and then also I think seeing some increase in self serve activity. Just curious had some of the features or functionality been a limitation to adoption or is that just Some product enhancements that you see necessary to sort of I guess drive further adoption going forward?

Speaker 2

Yes, Ralph, Thanks. I think I'd frame it like this. As you know, we've been WIO has been in market for it's about 18 months now, Right. So if I were to simplify that into a couple of phases, I would say Phase 1 was we were getting our first APIs out into the world. They tended to focus on where we're highly differentiated improving audio quality, improving capture, being able to spatialize voice And that gave us a lot of confidence that there is value to being able to improve media In communications across all these applications and services that we use every day.

Speaker 2

During that time, we also learned a lot and we learned a lot on About scale and specifically to get to the use cases we want to get to and maximize usage, kind of how many users do we need to support For audio and video whether it's passive or people that are Speakers, and as you know we had a major update in July around that. We've continued actually now to advance that. We've also added a lot more in terms of differentiation. So the way I would characterize where we are today, Ralph, is that I feel like Now that that phage relief has been in market for a few months and we've rolled that out to all of our existing customers and we've Tested it and they've expanded their use cases and usage and it's getting great feedback that we are now we think In a position to compete on kind of the scale and what we learned during the customers we have today and we Have a very robust schedule of continuing to differentiate and we've in fact Even a couple of weeks ago, we're introducing some new features that continue to raise the bar on So yes, so more recently we've begun to see that take the form of some really exciting self-service activity.

Speaker 2

As you know, we brought a new leader on board towards the end of June. And In addition to being focused on the roadmap and all the things we just talked about, she's really focused on now really increasing awareness, building the increasing the pipeline. So we're excited about what's ahead.

Speaker 4

One more quick one if I could. It doesn't seem like any earnings call for calendar Q3 would be complete without Essie and Company and how they might benefit from the metaverse, but Just love your thoughts on that, Kevin, be it on the foundational side or I guess vision or Atmos or any other technologies. Thank you.

Speaker 2

Sure. I guess I would start by saying that, well, first of all, I think the metaverse, I guess, can take many forms, but ultimately It is an audiovisual experience and I think that has I think that creates opportunities across both Foundational and what we're doing with Dolby IO and likely more immediately with Dolby IO because of the form it takes Which is that developers can come in and it's certainly something that the team is watching closely as we build the roadmap and think about The use cases that we're going after and engaging with. I mean, I think Some of our developers, they even define themselves as virtual environments and maybe by extension the metaverse. But Where there is an audio video experience like that, we certainly see that as opportunity across Dolby.

Speaker 4

Great. Thanks, Kevin.

Operator

Thank you. The next question is from the line of Steven Frankel with Cowen. You may proceed.

Speaker 5

Good afternoon. Thanks for the opportunity. You guys in your script I said something that I've never heard Dolby talk about before, this notion of a contract that slipped out of the quarter and into the New fiscal year. So I wonder what you could tell us

Speaker 6

about that and how

Speaker 5

we should think about it?

Speaker 2

Yes. So Steve, first of all, as you know, the vast majority of our revenue comes From royalties that are reported estimated quarterly and then chewed up based on royalty reports quarterly. But there are also We do have revenue from things like recoveries. We have contracts that have things like minimum commitments, which means that we might have periodic Payments that usually are at least once a year, but they're periodic. And there's a lot of reasons why when we're forecasting revenue, a recovery or one of those payments could shift in timing.

Speaker 2

So that's and this one just happened across a fiscal year, yes.

Speaker 5

Okay. And does it shift into Q1 or given where Q1 revenue landed, it's going to end up later in the year?

Speaker 2

It's included in our range of estimates for Q1. We certainly see it in FY 2022. And remember that as it relates to Q1 That we had a couple of things going on there as well. 1, we're lapping the larger than normal true up from last year. And last year we highlighted that Q1 last year did benefit from Recovery and another and some of the timing of those contract payments.

Speaker 2

So That's why you're seeing the spreads in the Q1 trend compared to last year.

Speaker 5

Shifting over to Dot IO, I'm hoping you could lay out for us maybe some markers that we could look How are we as outsiders supposed to judge the success of IO in fiscal 2022?

Speaker 2

Yes. So, I would say Steve that 1st and foremost, I talked today about While IO can be applied to a very broad set of use cases, I talked about the use cases where We think we can really bring significant differentiation. So I would watch for our ability to bring developers And talk about experiences within those focus verticals. And then over time, of course, we look To we will we do look to share more specific metrics with you and that I would look to That's likely to include number of active developers, revenue run rate. We're not there yet.

Speaker 2

So in the meantime, I would focus on Our ability to bring great experiences to life.

Speaker 5

And it was a significant quarter for hiring given the pace of the last few quarters. Maybe you could share some insight as to Where those bodies are going?

Speaker 2

Yes. So Two things. One is certainly as it relates to our growth initiatives and as you can tell from One is, as it relates to Atmos and Vision, we're focusing on context where we're making a lot of progress like music, like gaming, like automotive. And we were also focusing on Dolby. Io.

Speaker 2

I would also say that I think during The pandemic, we had probably fallen behind in hiring a little bit and we did manage to catch up a little bit in last quarter. That's kind of an across the board comment.

Speaker 5

Okay. And then last one, where do you think the vision market share is in the 4 ks market as we head into another holiday season In terms

Speaker 2

of the life of this year? Yes. So for TVs, We focus on the percent of 4 ks TVs, which we think are about 60% of the market. We think we're at about between 20% 25% and I've learned to give a range because I've learned that Intranos will adjust their numbers and arrears and so My number will move around a little bit. That's up from 10% in 2019 and 15% to 20% in last year.

Speaker 2

I would also note, Steve, that Dolby Atmos on 4 ks TVs is catching up to that number pretty quickly. And remember that a lot of our growth in Dolby Vision is also will be coming from Mobile, PC and other use cases. Where we still have outside of the Apple ecosystem, We're still really at the pretty early stages as it relates to PC. You probably saw that we added Xiaomi with Dolby Vision playback Last quarter, so that's kind of where how we see that. So I guess I would we talked about Sorry, go ahead.

Speaker 2

And then the only the last one

Speaker 5

I'd slip in is any Comments around where the backlog stands in cinema today and what's the stated discussions and how the world's opened up about And new screen signings for the New Year, especially given the slate in 2022?

Speaker 2

Yes, we do see I mean we have some new openings scheduled. We would still expect it to be A lower number than pre pandemic years, but of course we expect growth in Dolby Cinema revenues just from the return to the box office And also the fact that Dolby Cinema and Premium formats in general are garnering higher share of the box And Steve, if I could come back one second to add to the Atmos, you asked specifically about fees and So think about that category and that category is a growth driver. We do believe that the combination of Dolby Atmos, Dolby Vision, the imaging patent portfolio, which currently is Approaching a quarter of the licensing revenue, we see that having the potential to As high as the foundational revenue is today. And I just give you that as a way of thinking about it at the Stepping back a little bit from attach rates on TV, etcetera.

Speaker 5

That's really helpful. Thank you.

Operator

Thank you. The next question is from the line of Paul Chung with JPMorgan. You may proceed.

Speaker 7

Hi, thanks for taking my question. So just on Atmos, particularly in auto, you're really starting at Hi, Ann here at Mercedes. So, do you expect to see kind of further adoption across Mercedes, are you seeing accelerating discussions with other OEMs? And then how do we think about the auto opportunity in particular? Will this be kind of higher ASP per car given kind of the multiple Speakers or is the right way to think about it like per car side?

Speaker 7

That's the first question.

Speaker 2

Yes, thanks. We're excited about the automotive opportunity. I think in terms of our demo experiences and our ability to wow people right now, our automotive Atmos Music demos are very high on that list. And yes, you're right, we're starting with some high end Cars and wins and that, I think you see that as a pattern with everything we do, right? Whether it's what we've done with Dolby Vision and Dolby Atmos in any context, Usually that's going to start at the HILIG models.

Speaker 2

But of course, like always, we're looking to make the Atmos music experience as Broadly available across all the ways in which people enjoy music and their other entertainment experiences. And to circle back to another of your Questions, yes. While we still aren't going to go into specific ASPs, We do anticipate that the automotive would be amongst our higher and quite a bit higher than the average.

Speaker 7

And then on the Atmos music streaming side, what's been the feedback at Apple Music and is that generating interest from other large streaming services and will that eventually kind of translate over into auto demand At some point.

Speaker 2

Yes. Well, we've I think the response from our partners, from consumers, from artists has been really strong. I mean you've seen the And you can see the reviews out there and the social media posts from artists and from consumers. We're just Really excited about the reception and the momentum and of course that generates interest from other potential partners whether it's services or OEMs and that's we also did as you saw we Did some engaged in some great marketing activities last quarter, which also helped to raise that awareness. So, yes, that generates interest and That's where we have to go execute and that's why we're one of the many reasons why we're able to forecast kind of growth we are in that part of our revenue.

Speaker 7

Got you. And did I hear you correctly on I know that it's going to be included in product revenue, the contribution there and How much of that contribution, 75% to 90% is from the IO business? Did I hear that correctly?

Speaker 3

Hey, Paul, it's Robert Park. Yes, it's sitting in Products and Services. It's considered a service, so it's not included with licensing. And when it's big enough, we will include it or break it out separately.

Speaker 7

Okay. And then last question from me Go ahead.

Speaker 2

No, it's okay. Go ahead.

Speaker 7

Yes. So free cash flow hit a record this year, primarily on earnings, which is always nice And your revenue and op margin guidance kind of suggest pretty strong profitability again, Despite some comeback in OpEx and discretionary spend, so can we expect free cash flow up in 2022 as well? And then will you be increasing CapEx on more cinema build, etcetera? And then given the cash balance and Pretty strong free cash flow generation over the past couple of years. Should we expect some more aggressiveness on buybacks in any other investments?

Speaker 7

Thank you.

Speaker 3

Yes, I'll start with the last one on the buybacks. We did increase the buyback this quarter $96,000,000 versus Q3. So we bought back $39,000,000 It's kind of impacted by the shorter window of the buyback. But we expect to buybacks with a focus at least to offset dilution and we'll also continue to be optimistic. And with our authorization, we have $291,000,000 remaining It provides an opportunity, and it represents our intent to continue to return cash to shareholders and that's what we want to do in terms of a balanced capital allocation.

Speaker 3

We're also investing But the capital expenditures for 2020 are not expected to be much different than they were for fiscal year 2021.

Speaker 7

Great. Thank you.

Operator

Thank you. The next question is from the line of Jim Gross with Baraton Research, you may proceed.

Speaker 6

Good afternoon. The Operating expense guidance was roughly $10,000,000 a quarter above what I think we were Sort of budgeting and I wonder if you might break it down in terms of where the key growth elements would be In that category in the operating expense relative to the 3 major categories?

Speaker 3

Yes, good question. If I Step back and I think about the architecture and the model that we have, first off, we're guiding our operating margins at midpoint of 35%. So that's our kind of our North Star Try and maintain a healthy operating margin given the revenue that we have, which is stronger than our pre pendant operating margins. That said, there are a number of factors driving the impact, Increase in OpEx in fiscal year 2022. First, this is the year we have, of course, the year I'm here, a 53 week fiscal year for us, Which adds an extra week of expenses for items like payroll, depreciation and rent.

Speaker 3

Also our annual Focal increases go into effect in Q2, which is And then, the 3rd item is really spending partial return of expenses that were hampered during the pandemic like travel, events, Facilities and others. But we also routinely rebalanced our investments into the areas that we think are most impactful like Dot IO, Atmos and Vision, particularly in gaming and cars. So, I think it's a balanced approach to making sure we invest for the future in both innovation and growth. Just you know that extra 53rd week is not small, it's between $7,000,000 $8,000,000 by itself.

Speaker 6

Okay. That's good. And like and within those expenses, does R and D sort of maintain sort of the relationship it's had or does that Get bigger or smaller as you're pursuing this growth?

Speaker 3

It's going to grow commensurate with the Close to the business. So yes, we're going to continue investing in R and D, absolutely.

Speaker 6

Okay. And then the other category I'd like to ask That is the foundational technologies. I don't know if I've heard you talk about it quite in the same way, but it makes a lot of sense, of course. Could you frame out roughly what share of total would be represented by that category and how Some of the major categories would be in terms of what you deem to be foundational versus the growth elements?

Speaker 2

Yes, sure. So this is foundational as A percentage of licensing revenue is about 3 quarters of licensing revenue Roughly. And that is and what you can really think of that as a grouping Of our technologies and what we group there are the ones that tend to have really high adoption rates across broad segments of our revenue. So This is Dolby Digital Plus AC4, our audio patents. And then the approaching 25 Dolby Atmos, Dolby Vision and our imaging patent portfolios and that's where we're seeing growth rates accelerating from 20 Last year to over 35% this year and that would include the Dolby Cinema licensing revenues as well.

Speaker 6

And just tying into that, is the management process and the people looking at foundational versus some of the growth elements, Like is it all the same or are there different management techniques and different people assigned to those areas?

Speaker 2

We're not organized that way. We're really sharing that construct to help as a way of helping people to understand our revenue drivers. And I think it's In that regard because on one hand we have our foundational which while there are There's always categories that we're looking to grow into. It's a large base with high attach rates. So it's much more sensitive to kind of the overall Dynamic around what's happening with unit shipments, whereas our offerings like Dolby Atmos, Dolby Vision, our imaging Patent portfolios are all about the new wins and the new licensees that we've been talking about and that's what's driving the growth.

Speaker 2

Organizationally, we have people who are selling all of those things. We have Engineers that are engineering all of those things. Some people might be specific to one thing, a lot of people being across more than one thing. So this is really a way to think about how to understand our revenue growth drivers going forward.

Speaker 6

All right. Thanks, Kevin. Appreciate it.

Operator

There are no additional questions. I will now pass it back over to Kevin Neiman for closing remarks.

Speaker 2

Great. Well, thank you everybody for joining us today. Thank you for the questions and we look forward So seeing you throughout the quarter and updating you again next quarter. Thank you.

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Earnings Conference Call
Dolby Laboratories Q4 2021
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