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, Wednesday, January 29, 2020. I would now like to turn the conference over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead. Jason.

Good afternoon. Welcome to Dolby Laboratories' first quarter 2020 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 report on 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 information 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 a recap of Dolby's financial results and provide our fiscal 2020 outlook, and Kevin will finish with a discussion of the business. So, with that, introduction behind us. I will now turn the call to Lewis.

Okay. Thank you, Jason and good afternoon everyone. I think we'll get right into the Q1 numbers. First quarter revenue was $292 million compared to $299 million in Q4 and $302 million in last year Q1. Overall revenue for the quarter was in line with the guidance that we provided at the beginning of the quarter. And as a reminder, we were expecting Q1 revenue to be down year-over-year because of lower product revenue which I'll expand on in a minute and lower recoveries, and this was offset partially by higher adoption in some of our Dolby technologies. Having said that, we are expecting year-over-year growth in Q2 and for the full year and more on that when I go in the outlook. So back in Q1 revenue discussion, for the quarter licensing was $258 million, while products and services were $34 million, and that's breakdown of the $292 I said as I can go. Here's my commentary on licensing revenue by end market. Broadcast represented about 40% of total licensing in first quarter. Broadcast revenues were up by about 2% year-over-year. We saw some growth from higher adoption of Dolby Vision and Dolby Atmos and this was partially offset timing of revenue under contracts. On a sequential basis broadcast is down about 13% due to lower recoveries and some timing of revenue. Consumer electronics represented about 19% of total licensing in the first quarter. On a year-to-year basis consumer electronics licensing increased by about 12%. This was driven by higher volume, and we saw more adoption. On a sequential basis CE increased by about 31%, this was helped by holiday seasonality along with higher volume from devices like DMAs and speakers. Mobile devices for the quarter represented about 13% of total licensing and mobile was up about 1% over…

Thank you, Lewis, and good afternoon everyone. We're off to a strong start in 2020 and we are well-positioned for another year of mid to high single digit revenue growth and even higher earnings per share growth. And we remain focused on the opportunity to accelerate that growth further. Our focus within the consumer entertainment ecosystem continues to be growing the number of devices that support Dolby Vision and Dolby Atmos, broadening the device category to include our technologies by enabling new forms of content like music and increasing the value we bring to these devices with new innovations. This quarter we made progress in all three of these areas. Dolby Vision and Dolby Atmos experiences are becoming increasingly available to hundreds of millions of consumers around the world. And at the same time we believe the opportunity is still ahead of us given the early stages of these adoption cycles. Over the course of 2019, we saw steady growth in the adoption rate of Dolby Vision within 4K TVs, as our partners like VIZIO, Panasonic and TP Vision added support of Dolby Vision deeper within their lineups. More recently at CES we continue to see that momentum with Skyworth, Sony and Hisense, each adding support for the combined Dolby Vision and Dolby Atmos experience into additional models within their TV lineups. Over the last year, Dolby Vision TVs have become increasingly affordable across a wide range of price points and are now available below $250. Beyond TV, we remain focused on enabling Dolby Vision and Dolby Atmos across a broad range of devices. Last year in the PC space, Dell shipped their first PCs that support Dolby Vision and Apple began to support their combined Dolby Vision and Dolby Atmos experience within MacBook products, joining Lenovo. This year at…

Thank you ladies and gentlemen. [Operator Instructions]. We will take our first question from Steven Frankel with Dougherty & Company. Please go ahead.

Good afternoon. Kevin, do you have any metrics you might be able to share with us about this increased penetration of Vision and Atmos? I mean, I've certainly noticed at CES a lot more TVs with the combined experience. I just wonder if you're able to quantify that for us at all?

Well, so first of all, we did -- as we said last quarter, we -- for 2019, we were on about 10% of 4K TVs with Dolby Vision and 4K TVs were about half of the overall TV market. And that was the third year in a row of doubling the number of units out there with Dolby Vision. So, as we go into this year, we're looking to continue to stay on that pace of getting to somewhere around doubling those numbers. And the -- part of the foundation for that is, as I said, and it sounds like you've observed during 2019, we had a number of partners that were expanding further into their lineup. So of course we came out of 2019 with a higher exit rate than the average for the year. And then at CES we saw more partners expanding like Sony, like Skyworth, like Hisense. So metric wise, Steve, we're looking to stay on the pace of continuing to double those volumes. And as it relates to the combined Dolby Vision, Dolby Atmos experience, Dolby Vision is on more TVs than Dolby Atmos, but it's a healthy portion of those TVs that also have the combined experience.

Okay. And then in music, what should we watch for? What's the next big event? Is it another label? Is it more smart speakers, more artists coming out in support of you? How should we judge the progress as we go through the year?

Well, I think it's all of those things, Steve, and I would need to gloss over the point of just how strongly we've come out of the gate in this first quarter, because we've come from a standing start to our first smart speaker, Amazon Music HD streaming, adding TIDAL HiFi and just a phenomenal amount of engagement and support from the artistic community, which is what has led to UMG and Warner coming onboard. So, as we go forward, you want to see us continue that strength into an increasing amount of music available to continuing to stoke the fire that we've created with artists who want to create their music in this way and they want their consumers to experience it. I think our marketing efforts in Q1 were really effective that -- in highlighting that and so we're seeing good reaction from consumers as well. And then ultimately, of course, you want to see revenue. And these are all the things that set the foundation for getting content streams to more devices and to getting our technologies on those devices. That will include by the way working with our streaming partners to activate the Dolby Atmos Music experience on Dolby Atmos devices that are in the market today as well as of course selling into more devices that enable this experience. And as I've said, I believe this opens up the possibility for a lot of new devices. It take us deeper I think into mobile phone lineups where people want to have this experience on mobile devices. I think that it gives us a very compelling proposition in the automobile as a couple of examples.

Okay, great. And then a couple of cash flow questions. So I understand that tough year-over-year comparison in cash flow. But just in general free cash flow as a percentage of EBITDA was kind of at the low end of recent history. Was there anything in particular in this quarter that might have in the short run negatively impacted cash flow generation?

Yes. In the short run this is the quarter, Steve, were the one big notable items that we have incentive plan to all payout in the quarter. We don't do that quarterly. So you have a whole year's worth of that payout this quarter which reflects in the pay down on some of our accruals. So yes, I would say as a more macro comment than now we're -- we've completed our first lap -- annual lap on 606. We should go back to being a company where there's a very tight correlation between our earnings and our cash flow generation. And so this quarter specifically of course we have the payouts of all the annual incentives that show up in this quarter's cash flow, operating cash flow.

Okay, great. That's helpful. And then, I couldn't help noticing that the buyback pace had slowed significantly in the quarter. Is that related to the same issue? Or have you kind of made a higher level decision that you might scale back the pace of the buyback?

No. We consistently have said in the past that as a company we have a phenomenal business model that not only generates a lot of profit from our operations and our innovations, but a significant portion that goes into returning it in form of dividends and buybacks. This quarter in particular though because it was Q4 and there's a protracted period for us. You may recall that when we announced Q4 earnings, it was later, because with the year-end and us filing the K almost concurrently with that, it gave us a shorter window to execute. Otherwise, no, we've not changed our philosophy on that. So we really feel very comfortable that our overarching philosophy on returning cash and doing buybacks is not changed at all.

Great. Thank you.

Thank you. We'll now take our next question from Paul Chung with JPMorgan.

Hey guys. Thanks for taking my questions. So first on the Amazon Echo Studio speaker. Can you just expand on how you've secured Atmos on the speaker, how long it took, et cetera? And is there some near-term opportunity to maybe expand across kind of a whole smart speaker space? Does your guidance kind of reflect potential wins or is it a function of existing wins and market demand?

Well, so first of all as it relates to Amazon, I would say that we've had a strong relationship with Amazon that has evolved over many years including their support of Dolby Vision and Dolby Atmos on their Fire TV devices on Amazon Prime Video. And its -- those relationships that evolved into the ability to kind of share with each other what's possible. And in this case there was, in one respect, a natural follow on because you can pair two echo studios together to get the Dolby Atmos experience related to your Prime Video content. And then we had -- and then, of course the ability to bring this entirely new music experience to life and being able to partner with not just the Echo Studio team but the Amazon Music HD team. It was just a great entree for this entirely new experience. So it's a combination of building that kind of a relationship over many years and then having the kind of relationship where -- that we can introduce these new innovations together. Clearly the opportunity is to expand that Dolby Atmos experience to additional smart speakers and home speaker products to -- and as I've said, areas like automotive and the next year in mobile devices. I think you described it -- I think you ask whether there's a near-term opportunity? I would say that we are absolutely engaged in a broad range of discussions across all those device types. And I think we've created a lot of interest and energy around them. In terms of timing of announcements and when they come to market, if we had our way then everything would be near term, but obviously each partner has its own roadmaps, its release schedules and how -- and the cadence of how they want to go about those things. So, we'll just keep doing what we do which is getting more content, getting more of it available through more streaming platforms. And then, we think we know -- I think we know -- we have a roadmap for what we do when we have this much energy around experience like this and the kind of support we have from artists and partners. And so, we're going to keep our heads down and keep doing that, and we think that things will happen.

Okay, great. And then just on cinema, I mean, when can we start kind of splitting out the segment on the licensing part, not the product sales. But you've had a lot of locations running for quite a while now, kind of any clarity on current contributions, future contributions per screen? And how to think about the future pipeline and then kind of any near-term impact from the Coronavirus in the near term particularly in China?

Hey, Paul, this is Lewis. There's a lot of in that question. So let me see if I can kick off the pieces one-by-one. As we said in our prepared comments or in the neighborhood 250 screens now. The business is doing well. I mentioned last quarter, and the same is true this quarter because you can imagine each quarter incrementally, the numbers don't go up significantly, that Dolby Cinema revenues were still less than 5% of our company's revenue. So that's why we've not yet broken it out separately, but we continue to look for ways to provide you as much information as we can. Kevin mentioned that we are continuing to expand our footprint to actually get to because we're continued to have more locations opened up in areas we've not been before. And to your last point, yes, in terms of the Coronavirus issue that are going on in China. To the extent that there are Dolby Cinema locations out there and those will be affected like everyone else, but it’s a pretty small piece of a company. Like I said, even at the business in total, I want to reaffirm that it's below 5% of the company and the China piece is a small slice of that. And in fact the majority of our 250 screens are not in China. They are just spread around the world with the biggest chunk in the U.S. which is over half that number, about half the number give or take. So that's -- did I answered everything you asked about cinema.

Yes. You did. Thank you very much.

Thanks.

Thank you. We'll now take our next question from Jim Goss with Barrington Research.

Thanks. Before I get to what I was going to do, just following up on what you were talking about. You mentioned Dolby Cinema revenue is about -- or Dolby Cinema about a less than 5% of total revenues. I'm wondering what share of your total revenues are touched by the technologies that comprise Dolby Cinema in Vision and Atmos? Do you have anyway guessing about that? Because I think the payoff isn't that just in the Dolby Cinema, but that's kind of the whole thesis, so I think that this is driving much greater importance than it by itself?

Yes. I think I'll give you the first piece of it and then I'll hand it over to Kevin to add any color. But as this kind of question has been asked before. We don't break out our revenue per se by technology. So just doing -- if you're saying, hey, Lewis, what's total from Dolby Vision and Dolby Atmos? Of course, those technologies are now spreading into a lot of areas. As you pointed out, it's not just in Dolby Cinema, but it is of course TVs, mobile devices, some PCs, soon be in set-top boxes. So, yes, Dolby Vision and Dolby Atmos are the very core of the growth engine of this company. So -- but unfortunately we don't have a way to say, here is X percent of our revenue comes from that, because that's not how we break our business. We try to do that more by end market, Jim. That's why I go through and kind of give you some sense of how much revenue is coming from broadcast versus PCs versus mobile phone. We think that's a little more useful. And as Kevin just said a second ago, with the advent of Dolby Atmos for music, that's another example of technology, but we hope it will drive revenue in multiple vertical areas including some areas we don't have a lot of presence in today like automotive. So I think that's what we'll continue to talk about our revenue more by the markets we address and things like that as opposed to saying, here's what percent of our revenue comes from Dolby Vision and Dolby Atmos.

Okay. Are you finding the - your strategy in terms of Atmos and Vision, the branding and the exposure in key markets different in different markets in what you're dealing in terms of the impact on the categories they affect, the United States versus Europe versus wherever else you might be able to be generating revenues?

Well, we certainly have teams in each of those markets. And I would say, we have a combination of what we would consider to be global marketing efforts. Certainly when they're talking about title marketing initiatives with Dolby Cinema or musicians, these are investments that we typically think of as being relevant to the world. Now how you actually reach people in each of those markets. We do have teams in each of those markets to either make the appropriate adaptations or in some cases to run programs that are more specific to those markets. But I think the big development for us in marketing this quarter was the coming-out party for Dolby Music. And what you see with these artists stories around their experience with Dolby Atmos music is having I think the intended effect, which is it's celebrating artists and how excited they are. It’s getting a number of impressions and engagement with consumers which are at higher levels than we've seen at Dolby. And then ultimately what it's doing is increasing engagement with partners and our customers so that they see the value it brings and that they have a story to tell their consumers about why this is important.

Okay. And maybe lastly a little bit more on the Dolby Music since you first brought that up again. Is the relationship of the artist in terms of celebrity sponsorship? Or is there something more to it in terms of how they create the music. How the music might get played back. And what equipment you might sell and what royalties you might be able to generate to tie into this whole process?

Well, so first of all, it always starts with -- and this is true whether it's a movie director or a musician or any of the creatives that we deal with, it always starts with a passion for wanting to promote this experience, because they -- in fact, in these artist stories, they speak about what Dolby Atmos does for them and the story that they want to be able to tell consumers. So it always starts there. Where are -- to jump to the end of your question, in terms of our ultimate -- one of our goals is to of course get the experience license into additional devices. That really have nothing to do with the marketing and promotion arrangements. And in between it really depends on the program, whether we're looking to promote it through social media or we did -- you saw some work at the American Music Awards. There were some TV spots that ran selectively. So most of their marketing budget goes into our production and creative assets. The cost associated with that and then spreading the word. But it's unrelated to licensing it, if that's what you're asking.

Okay. I mean, all of these things have to ultimately come to the bottom line and I'm just looking at how the pieces are tied together. But I appreciate…

Again, I think for us first and foremost starts with a genuine passion for what we do. Our goal is to provide these creatives with a palette to tell stories in a more meaningful way. And each of our programs starts with that. And I think that it gives us opportunities to promote the experience in moments that can have big impact.

Okay. Thanks very much.

Thank you. [Operator Instructions] Appears we have no further questions in the queue at this time. Mr. Yeaman, I'd like to turn the conference back over to you for any additional or closing remarks.

Well, thank you everybody for joining us today. And we look forward to keeping you posted on our progress. Thank you.

Thank you. And that does conclude today's conference. Thank you all for your participation. You may now disconnect.