Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Second 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, Monday, May 4, 2020. I would now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

Good afternoon. Welcome to Dolby Laboratories second 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, including our third quarter fiscal 2020 outlook and our assumptions underlined outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. In particular, we're currently in the midst of the COVID-19 pandemic. Each step of its continued impact on our business will depend on several factors including the severity, duration and extent of the pandemic as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continued to evolve and remain uncertain at this time. A discussion of these and additional risks and uncertainties can be found in 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 Quarterly 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 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 a recap of Dolby's financial results and provide our third quarter fiscal 2020 outlook. And Kevin will finish with a discussion of the business. So those introductions behind us, I will now turn the call over to Lewis. Lewis?

Okay. Thank you, Jason. Pretty fun doing this on remote. Okay. Good afternoon, everyone, and thank you all for joining this call and, of course, we may look forward to be with you. We are reporting today that revenues and operating income are up over last year, and the adoption of Dolby technologies continue to expand. We have a strong business model and our financial position is solid. And having said that, the COVID-19 pandemic has caused a lot of stress and uncertainty in the economy. This affected the level of growth we were able to achieve in Q2, and has also limited the visibility into the near-term. So as I go through the numbers today, my commentary will include some perspectives on how the economic environment has impacted the numbers and give you a sense for how that might continue until things recover. Later on, Kevin will talk more broadly about our people and the business and how we are managing through the COVID-19 situation, so that we can emerge from this downturn as strong as ever. So let's go through the numbers. Second quarter revenue was $352 million compared to $292 million in Q1 and $338 million in Q2 of last year. Total revenue of $352 million was about $30 million below the midpoint of the guidance that we gave at the beginning of the quarter, and all of this was due to lower volume and consumer activity related to the pandemic. In other words, the temporary shutdowns around the globe and the lower consumer purchases of electronic devices. Based on our analysis, we estimated that licensing revenue was negatively impacted by the pandemic by about $25 million for the quarter and that was heavily concentrated in China. And in our products and services category, which mainly serve…

Thank you, Lewis, and good afternoon, everyone. Lewis just went through a lot of information clearly as much as uncertain as we look out over the next few months. At the same time, we are well positioned to navigate these challenging times. We have a strong value proposition, a strong business model, and a strong balance sheet and we are confident in our long-term opportunities. I will talk more about our business in a moment, including the implications of the current environment. Let me start with where it all begins, which is our people. Our top priority each step of the way, have been and will continue to be the safety and wellbeing of our people. As of today, approximately 95% of our workforce is working from home. We have in place a business continuity plan and while nobody ever wants to have to use it, it has served as well. In terms of how it has affected our work, we are able to continue to conduct our business from product releases, integrations and certifications of Dolby technologies. We, of course, can't fully replicate the ability to wow our customers with live demos or engage in certain aspects of our research and development that rely on our labs. One of our responses has been to increase our focus on our ability to conduct online demos and training for our customers and partners. This important infrastructure team has not missed a beat, continuing to stay on schedule, while working even harder to meet the needs of our work-from-home employees. I want to take a moment to thank our people. Our people are the magic behind the Dolby experience and our future innovations, and I speak for everyone on our team when I say that our hearts go out to those who…

Thank you, sir. [Operator Instructions] And the first question today will come from Steven Frankel, Dougherty.

Good afternoon. So Kevin, given this environment doesn't look like it's going to get any better in the short run, and it may take a few quarters to come out of this. Can you give us a little more insight into your thought process on reducing the run rate of expenses? And maybe kind of how much of the Q1 – this current quarter’s expenses were kind of the temporary work-from-home bump. And so what's the right run rate going forward?

Sure. So I'll turn it over to Lewis to talk a little bit more about the composition of the Q2 expense. But as we look forward, Steve, I guess first of all, our first guiding principle is making sure that we're focused for strength as we come out of this and as it relates to our long-term opportunity. And so that does have an effect on the things we can do in the near-term. It really varies on a business-by-business and customer-by-customer basis. Some things you would expect are naturally lower things, such as travel expenses and trade shows, but we are reviewing each of our projects and programs as it relates to what we can do in the near-term to come out the other side of this in a very strong position as the world returns back to some – whatever that new normal is. I would say that, of course, as we sit here today, we don't have – we have less visibility than we would normally have as to how the rest of this year plays out. And so we're going to continue to be watching for indicators in each of our businesses, whether that's how consumer spending is coming back, how people are coming back to the movies and what social distancing restrictions they might be under. And as we watch those indicators, we will also be – continued to recalibrate how we're thinking about operating expenses.

Okay. And then Lewis, if you maybe give us just a little more detail on – is the guidance you gave for the current quarter is that kind of the normal run rate or is there still some more work-from-home kind of one-time expenses in that number as well?

Sure. I would say that the guidance that we gave does reflect the spirit of your question, which is temporarily we see some lower spending primarily for obvious things like lower travel, significantly lower travel. A lower rate of hiring than what we were originally modeling. There's probably some use of outside services, consulting, et cetera that are lower. These things that are maybe what you might think of as discretionary as long as it doesn't impede our progress on key projects. Yes, I wouldn't say that we've baked in a lot of unusual one-timers per se in the guidance that we gave for OpEx. And this past quarter, we had some expenses for that first ramp-up of work-from-home, but I don't think that repeats every quarter. As I also mentioned in Q2 that we just reported, we did have a higher bad debt expense in the quarter, and I would not expect going forward to run at that level every quarter, although, over history from time-to-time we have a little bump for things like this. Although, we've never had a pandemic, but there might be some customers who run into some issues and then we had the reserve for that.

Okay. And assuming life does start to recover, how much of an insight do you think you'll get into your customer's production volumes as they ramp up? Or do you feel like it's going to be more based on your feeling of the overall economy versus specific feedback, and you might have to play catch up to the extent that things start to ramp?

Sorry, Steve, can you just explain – I understood your question except for the catch up – catching up.

So in other words, are you going to be able to anticipate this ramp by talking to your customers and understanding how they recover? Or is it more likely to be, in essence, you're seeing it in the rear view mirror when you get the actual production reports until we're almost back to the old method of revenue rack that you're seeing it in the statements as opposed to in your estimates of your production volumes?

Yes. So in terms of – in the course of any given quarter, what are the signs? It really is a wide range of factors. I'm sure many of the ones you look at, including industry analysts reports, economic reports, of course, we do get some anecdotal information from some of our customers throughout the quarter. Sometimes we reach out to see what we can learn from them. At the end of the day, of course, we don't know for certain across the entirety of our business until we have those reports and we can record that information. But I think in terms of how that affects the work we do. I mean, we are still engaged with all of our partners who are interested in adapting Dolby Vision and Dolby Atmos. And, of course, you would expect there are going to be cases where because of the circumstances of an individual partner or environment, they might change their plans as it relates to launches or product plans. But importantly, it's not that we're not losing deals or business. Many of our products are still shipping through a lot of lens here, and we feel confident in that long-term opportunity. So the work we have to do certainly will be informed to some degree by what's happening in the market, but more specifically by how our partners are reacting to that environment.

Okay. Thank you.

Our next question comes from Eric Wold, B. Riley.

Thank you. Good afternoon, guys. So just a follow-up on kind of the last set of questions, I guess, I know there's a lot of uncertainty out there, you've kind of baked into your 15% to 25% assumed unit volume decline in the June quarter guidance. Safe to say that framing that, is that mainly based on what you think demand will be from the consumer standpoint? I mean, how much of that is supply chain driven? Is your supply chain back ramping that can meet the demand if it's there or there's some portion of both supply and demand baked into that decline?

Right. Well, first of all, it's really a – it’s scenario that we modeled based on a wide range of data points to give you context on how we could see the quarter play out. But for more detail on that, why don't I turn it over to Lewis, he and his team have been doing a great job consolidating all of these data points. Lewis?

Hey Eric. It’s Lewis arguing.

Hey, how are you doing?

I'd say that we try to leverage the approach we always take, which is we typically take a two-pronged approach at minimum. We go at the ground up, looking at customer data and individual market segments, and then from the top down, looking at industry-wide reports and our economic data. So in constructing the scenario, the one thing we did notice that I kind of alluded to in my prepared comments was that the data in this environment was fairly scattered. Normally when you think about this process, you will be getting data from these parallel tracks, sort of at the same time, and they sort of corroborate each other and you can sort of interpolate. But in this environment, there is different timing. I mean, you're talking about some industries where in a normal year they might only issue an industry update once every six months, not every six days or every six weeks. And so we basically looked at as many different inputs as we reasonably could in the different markets we serve and ultimately try to come up with a range of scenarios that would at least sound like that could happen. I think it's very difficult for us to sit here today and pretend like we know more than anyone else. And not saying that that's our projection and it's better than anyone else. But it does utilize a lot of these sources. But as Kevin said, we recognize and have to accept the reality that they're more scattered this time and even those data points could have a little less of a degree of certainty. But nevertheless, the fundamental approach is similar. We try and look at data by markets, data from customers and data at an overall economic level and say, what does this…

Okay. Very helpful. I guess my follow-up question would be, I guess, you always commented your strong balance sheet is kind of allowing the company to take advantage of opportunities as they arise. I guess, which disruption could be viewed as one kind of how long-term some of the things would go. I guess, I know you bought back about twice as much on buybacks in the March quarter as you did in December quarter. Was that all kind of done before things really starting to get better on COVID? And would you anticipate still being active buying back shares in this environment? Or are you likely to rein that in, so you get a little more visibility? Thanks.

Yes. There's a lot embedded in that question, so maybe I'll start off with a quick commercial reminder that we really truly do have a very, very solid financial position we come from. I think Kevin mentioned in his prepared comments, we have ended the quarter, ended this quarter with a little over $1 billion in cash and investments and no debt. So that helps us prepare for the long-term. You're right. We did buyback a good chunk of stock this last quarter. I would say that it was probably time more towards the earlier part of the quarter. It's not uncommon for us to conduct that activity. Once we've gotten our numbers out, we try to do that as straightforward way as we can. And then the second thing I would say is we have not suspended our buyback program. And as you can see, we also declared a dividend today as well. I don't want to imply that we're being namby-pamby and pretending like there's not issues out there environment, but we are in a good position. And you know from the past too that we don't project how much we buyback into a quarter. So I think it's just fairly leave it at that that we have not suspended our buyback program. We did declare a dividend and as Kevin said in his prepared comments, we are continuing to invest in programs that drive the growth of the company. So I think this is all – these are all things that I'm happy that we can sit here to be saying today about Dolby.

Thank you.

You're welcome.

Our next question will come from Ralph Schackart, William Blair.

Good afternoon. Two questions if I could. First for Kevin, actually I think both for Kevin. So as we think about the COVID environment right now, what's going on and if there's any parallels you could think about or draw that 2008 and 2009 being the great recession that we saw there, just in terms of the decline that you're seeing today versus historically? And then how do you think Dolby is positioned, assuming recovery begin at some point going forward, coming out of COVID versus 2008 and 2009. I think you had much more exposure to PCs versus perhaps more diversification on this go around? And then maybe a follow-up to that, on the call you talked about growing international partnerships for Atmos and Vision, I think you said you may not track for significant increase in 4K TVs this year. And then I think also, Kevin, you may have said COVID may affect during the licensing comments, certain timing partnerships. Just kind of want some more clarification on that latter point. Thank you.

Sure. Thanks, Ralph. So on the first part of your question, we haven't spent a lot of time comparing it to 2008, 2009. We think it's a very different kind of environment than what we were seeing then. And our business has also changed a lot. I mean, that was a time that we were still transitioning from DVD revenue and also in the middle of the adoption of Dolby Digital Plus and Digital Broadcast or a company is in a different place. And I think there are a lot of things that are hard to draw parallels from as it relates to this environment that we're in. So if you have more specific questions, I can take those. But let me get to the second part of your question. We are still – they said we're still very – we feel very good about our ability to significantly increase our adoption rate of Dolby Vision and Dolby Atmos this year. That was a big deal, of course, coming into the year. Obviously, how much revenue you get from that increased adoption depends on unit shipping. But when you set your sights on the certain time when consumer spending returns, every win we can get now is an increase in revenue event, and we continue to add engagements across the Board. As it relates to your question about timing, I think to give one partner specifically, as I'm not going to talk to the name and specifics, but we do have a partner who's going to launch Dolby Vision, Dolby Atmos TV, a few weeks ago, and they've decided to delay our launch. They still are going to include Dolby. It's still a win for us. There's a no a whole lot of reasons why someone might want to do…

Okay. That's helpful. Thanks Kevin.

Next we'll hear from Paul Chung, JPMorgan.

Hi guys. Thanks for taking my questions. So just first, how do you take your kind of cinema strategy, the change kind of given the Corona impact? Do you expect maybe to proceed with digital cinema investments, maybe when COVID dies down? Or will you see kind of future investments on hold for awhile? And then what would that kind of impact beyond CapEx for the rest of this year and next?

Yes. So let me take the first part and then Lewis maybe even comment on the CapEx part. So as it relates to our cinema strategy, I would say that a lot of them – we’ve taken a lot of our cues from the keys of our partners. And I'm confident that people are going to want to come back to the movies. And when they do, it's the higher quality PLF screen. So they're going to fill up first and Dolby Cinema is the best way to see a movie. I think that – and for that matter, Dolby Atmos and Cinemas is another way to upgrade that experience. And I think that this is going to be a time where I think exhibitors, many of the exhibitors we speak to while, they clearly aren't able – most of – many of them are not able to act in this environment. They are still engaged with us in discussions for some later point in time. But that later point in time is highly uncertain right now. So what we're going to be watching is do the cinemas open up? When do they open up? And right now we're seeing anywhere from June to – some of our larger partners, it's early July and that's large part due to the fact that the big titles are now scheduled to start rolling out again in mid-July. What social distancing guidelines are they going to be under because most people will be under restrictions. And then within that, how many of those seats that are available are filling up? Those are all the things we're going to be watching to be able to think about the pace of our long-term strategy and how that plays out going forward. Lewis, do you want to talk about how we’re seeing CapEx right now?

Sure. If I think back, Paul for a second to what I said and the guidance outlook that we gave, I believe I said that we're really not expecting much Dolby Cinema revenue share this quarter just because of the fact that when they're shutdown, they're not generating revenue, we get a 1%. So I'd say as a add-on to that and sort of the natural outcome, right now the activity in terms of new Dolby Cinema build is significantly reduced from where it was even just a couple months ago. And so we have adjusted our CapEx expectations accordingly, did not have super optimistic expectations for new builds for the rest of this year. Beyond that, we'll monitor going forward. The Dolby Cinema investments that we've made over the years, we could easily and reasonably handle that within our normal business model and the amount of cash we generate and it is obviously a great vehicle for us to show people what the best movie experience is out there. But for the near-term and looking into Q3 and possibly into Q4, we do expect that there'll be a significantly lower level of Dolby Cinema build outs, than we would have originally anticipated. And that really is driven by our partners. We don't do that on our own stores because they're all with someone else the screen.

Got you. And then my follow-up on the revenue front. Any color you can kind of provide on the specific regions? For example, are you seeing any trends, consumer demand, kind of emerging in Asia where retail outlets are kind of opening up more? Just curious to hear what you're hearing from your OEM customers as of late? Thank you.

Yes. Well, first of all we're seeing that our partners are having a big increase in minute volume. And much of our revenue as you know is about getting the – our hardware and our experience, installed in huddle rooms and other spaces. And of course, most offices around the world are closed. But we are to a point, hearing particularly in Asia, early signs of companies wanting to make sure that they're recognizing that parts of their employee population might be working from home for quite some time or alternating people in and out. And as a result, they're going to want ways to effectively collaborate for the people who were in the office with the people work-from-home. So we could see some of that as we go forward.

And we'll go to Jim Goss, Barrington Research.

Thanks. A couple of questions. First one on the mobile side, you mentioned the iPhone SE was a new opportunity for you? I know there's also been a notion that the iPhone 12 might be pushed back for a couple months. And I'm wondering is this a similar analogous to the television area where as you get into the lower price point units that they have a similar value to the higher price point units. So they'll have a greater value out of the SE than any delay you get out of the 12? And are there other lower value units that you think you're providing opportunity as well?

Hey, Jim. This is Lewis. How are you doing?

Good.

Yes. Well, first of all, it's great to see us getting adopted in a new models. That fundamentally is the crux of our business strategy. We think that the Dolby technology makes things look better, sound better, just improve the whole experience. So we do enjoy it when our technology makes it into the lower end units. We stopped that we don't specifically comment at a customer level and it doesn't matter whether that customer starts with letter A or the letter Z. But in general, yes, I think we look to find a way to get our technology adopted broadly across different models. I think we hesitate to infer that there's some sort of a linear up and to the right correlation because depending on who the customer is and what the model is you're talking about, there's natural curves between pricing and volume. And that's true for any customer large and small. But at the very core of our strategy is in fact to get adopted, not just in the hiring models. And in fact, if you think about what Kevin was saying about Dolby Vision, which is going into TVs, specifically, one of the things we aim to do is to have Dolby Vision adopted broadly throughout all the TV. Just to be clear here. Okay. That's it.

Okay. Can I ask one other thing related to Dolby Music?

Yes.

You mentioned the new Pearl Jam, there’ll be at in most release. Do you have an opportunity to create remasters and rereleases of classic albums? And how would you monetize that with Dolby Music?

Well, we have increasing engagement across the artistic community. That includes everything from new album launches and quite a lot of remastered library content. And our focus right now is on encouraging artists to adopt the technology and to create these experiences in Dolby and on looking to bring that experience, connect that experiences to more ways to enjoy it, whether it be smart speakers, sound bars and beyond.

Okay. So the contents will just be the fuel for the product sales and the license sales as is historically been the case?

That is the most direct path for us to revenue. I certainly think over time it could create other interesting opportunities for us. But our focus right now is on supporting those artists and have gotten very excited about offering their music this way and trying to increase the adoption on playback devices.

Okay. Thank you very much.

And everyone at this time, there are no further questions. I'll hand back to Kevin Yeaman for any additional or closing remarks.

Great. Well, thank you everybody for joining us today and we look forward to keeping you updated as we progress. Thank you.

And ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.