Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Third Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you’ll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded Monday, August 3rd, 2020. I’d 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 third 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 fourth quarter and full year fiscal 2020 outlook and our assumptions underlying that outlook. These statements are subject to risk and uncertainties that may cause actual results to differ materially from the statements made today. In particular, we are currently in the midst of the COVID-19 pandemic. The extent 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 continue to evolve and remain uncertain at this time. The discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today, under the section caption 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 datasheet 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 would now turn the call to Lewis.

All right. Thank you, Jason. All right good afternoon, everyone and I hope you’re all staying safe out there. I’m glad to report that Q3 revenues came in at the high end of the scenario that we provided three months ago and our earnings were above the range, as we had a large tax benefit in the quarter to go along with some lower than projected operating expenses. And while we did do better than Q3 outlook, it’s worth noting that the numbers were lower than the original forecast from the start of the year before COVID-19 came into the picture. So here are the numbers. Third quarter revenue was $247 million, compared to $352 million in Q2, and $302 million in Q3 of last year. Our Q3 revenue guidance coming into the quarter was a range of $225 million to $250 million. If I compare that to what we assumed in our guidance, revenues from TVs, PC and Mobile were at the higher end, while Consumer Electronics and set-top boxes were at the lower end of our scenario. Products and services were at the high end of the range, but remember, that we had lowered our expectations by 70% to 80% because of the significant impact of COVID-19 shutdowns on the Cinema industry. Now looking at total company quarter-over-quarter, revenue was down by about $105 million from Q2, roughly half of that was driven by timing of revenue under contracts as well as lower recoveries. And roughly the other half that was attributable to the impact from COVID-19, which includes; lower royalties from unit shipments across a variety of devices; lower sales of cinema products and services, and lower revenue from box office share at Dolby Cinemas. Now looking at total company year-over-year, revenue was down by about $55…

Thank you, Lewis and good afternoon, everyone. With the strength of our financial model, balance sheet and value proposition, Dolby continues to be well positioned to navigate through these challenging times. Our people continue to bring their creativity and passion to enable more Dolby experiences to more people around the world. While our Q3 revenues came in at the high end of our scenarios, there is still a lot of uncertainty across many of the markets in which we operate. In addition to lower consumer spending, the pandemic has resulted in some shifts in the timing of new customer wins and revenues. At the same time, our partners remain deeply engaged with enabling new Dolby Vision and Dolby Atmos experiences. As consumer spending does return, we are confident that with our strong positioning across a broad range of devices and services, we will return to our path of driving revenue and earnings growth. Our formula for growth has always started with increasing the amount of compelling content available at Dolby. The Dolby Vision and Dolby Atmos experience in Movie and TV content has led to growing adoption across a broad range of devices. We are also expanding the Dolby experience areas such as Gaming and Music, that broaden our value proposition and create more opportunities in device categories like Mobile, PC and automotive. In addition, we’re beginning to address a growing population of content beyond premium entertainment, most recently with the launch of our developer platform, Dolby.io. All of this gives us confidence in our ability to drive long-term growth. Let’s turn to some of the highlights this quarter. As people are watching a growing amount of stream content, Dolby Vision and Dolby Atmos continues to be highlighted within the content that matters most to people. The highly anticipated releases…

Thank you, ladies and gentlemen [Operator Instructions] Your first question comes from Ralph Schackart with William Blair.

Good afternoon. Two questions, if I could. Lewis, I think the old guidance contemplated down 15% to down 25% for units and the Q4 outlook in a blended basis talks about, you know, an increase of 5% for units. So just curious if you could give some sense of the improvement you might be seeing there and if there’s any way to sort of give us an update to what was previously down 15% to up – I’m sorry, down 25% just to get a sense for you know, how that improved – the outlook may have improved?

Sure. And first, just to clarify for everyone in the audience, that original reference Ralph made to the down 15% or 25% was one of the comments we made last quarter when we gave guidance that was in reference to, let’s just say, our expectation before COVID-19 hit that was not a sequential reference. So relative to that reference, Ralph, we probably came in at the better end of that range, which is what allowed us – one of the reasons that allowed us to get current quarter Q3 revenue into the upper end of our range. The 5%, I mentioned is now more than absolute value comparison. It’s kind of saying, okay, from Q3 to Q4, what do we see happening in units? And like I said, in all my caveats, I want to make sure everyone understands that we don’t have the normal crystal ball that we might normally expect to have. But in the context of all the data points that we assembled, we’re assuming that from Q3 to Q4, that broadly across categories, device volume picks up by 5%. That would probably mean then that relative to the other reference you had before, the decrease from previous expectation is probably a little bit better than that 15% to 25% for Q3, but we’re trying to move away from that, because it gets harder and harder to make comparison as each quarter progresses to what we originally thought of as pre-COVID-19. So I hope that explains how those two numbers work. It isn’t like we went from minus 15% to 25% and that became a plus 5%, those are two very different comparison points. So let me pause to see if you have any think further to add to that, that I may or may not have made clear.

I’m good at my end with that. Thanks, Lewis. One more the lot heavier and then one quick one for Kevin. On the income tax, you talked about $36 million benefits for certain items resolved in the quarter. Any extra color you could add to that?

Yeah, I’ll take that first. As with any company, we, at, you know, especially the size of our company, we do have uncertain tax positions for which we’ve not benefited on our P&L. And during the quarter, we had a couple of items that were large enough to have been resolved this quarter by a lapse of statutes that then we took this quarter and those are discrete items. And the reason it has to be taken that way, because you really can’t forecast those in advance until you get past the final point which that statute has expired.

Okay, great. Then last one, Kevin. Kevin, you talked about some shifts of new customer wins and revenue and prepared remarks, assuming that’s just due to COVID, perhaps for better release windows, but just want to see if there is any extra color you could add to those remarks?

Yeah, sure. And I mean, first of all, Ralph, I – of course, want to highlight that start with the fact that we have a lot of great wins, with our first soundbar with Sonos, our first TV with Xiaomi and a number of partners expanding their presence. But yes, as part of the implications of COVID, there are some deals that we would hope to sign that we’d be pushing out into next year that often tends to be in some of the newer things we’re doing. And yeah, there’s also some of the absent of major events that often would drive new waves of adoption and we’ll take the Olympics, for example historically that’s been a very major moment for us and our partners. But we are continued to be very pleased with the engagement we have. And like I said, we did see a lot of great events during the quarter.

Okay. Thanks, Kevin. Thanks, Lewis.

Yeah.

Our next question will come from Paul Chung with JP Morgan.

Hi, guys. Thanks for taking my question. So just on Broadcast, you know, you had a pretty big dip in the third quarter. Do you see kind of a bounce back in Q4? Or is it going to be kind of the 5% sequential unit increase that you’re talking about? And then, you know, are you seeing any different demand trends in different regions and then I have a follow up?

Yeah, well I start with that one and I’ll let Kevin add any color if he chooses. First of all, I’ll point out that the Broadcast that you’ve referred to that’s effectively baked into our guidance, because not withstanding those numbers, our revenue for the quarter did come in at the high end of our range. And as I pointed out, TV was one of the areas that we saw relative strength. Everything here is in the context of the COVID-19 environment, so relative strength. And like I said in my prepared comments, we have some elements of timing of revenue and also difference in recoveries that might be affecting some of those comparisons. And then looking forward to the current – into the Q4 outlook that I provided, we are currently assuming 5%, roughly 5% and that’s a plus or minus I know it’s tricky to be too precise in this environment, but roughly 5% plus or minus improvement broadly across all categories, but I don’t really have a breakdown for you at the Broadcast level does not you know, probably not a big enough number to try to start breaking into pieces, but we would anticipate that Broadcast would be a part of that story as well.

Okay. And then you know, I’ve been looking at your OpEx, I know your costs were down 11% pretty good, possibly, maybe some, you know, low discretion across like many companies in the quarter, but it looks like your costs are down year-on-year for 4Q that kind of at a slower pace. Are there any kind of new permanent costs that you can carry over or is that 4Q kind of the new quarterly run rate we can think about? I know you have a bump maybe next – in the December quarter on some stock comp, but any thoughts there would be helpful?

Sure. As we transition from Q3 to Q4, first we have to acknowledge that the Q3 expenses were extraordinarily low. Virtually no travel, I’m sure we’re not that different from other companies, but virtually no travel, very limited expenses from outside services and consultants, very low hiring. I think these are things that to some degree will continue but I think as we transition into Q4, one highlight for us is that, Q3 benefited from tightening of some of our discretionary programs, Paul. So your high-level question is a chunk of our spending discrete and variable. Yes, it is and particularly in areas like marketing where we have a number of campaigns we plan in advance for the full year. And we even signaled at the beginning of this year that we had some cool things planned for marketing. Some of those were moved into Q4. And actually some of you out there listening to this call may have seen some of the cool things that are running right now that connect our incredible technologies to some pretty big names and things going on out there. So I think there’s the timing of some of those marketing programs that shifted from Q3 into Q4, which causes almost like a double whammy to your question, Paul, because it makes the Q3 number bigger and then that money now is being spent in Q4. We have some similar things going on and legal. I think to a small degree we have – we did actually have some, although we’ve had a reduced level, we did have some hiring that we did in Q3. So the full impact of that will be felt in Q4. So there’s – those are a handful of things but net-net, I think we are still running at you know a noticeably lower expense level now than we would have been thinking of pre-COVID, but maybe those are the three or four things to think about transitioning from Q3 to Q4, timing of programs and legal and marketing, probably travel, expenditures not being so close to zero and like they were this quarter and some outside services and then the ripple effect of some personnel costs that affect us in Q4 more than Q3.

Got you, very helpful. Last question. So your free cash flow looks pretty good. You know it’s up $70 million for the fiscal year. You know you had some lower CapEx, you had some benefits from working cap timing. You know are we on track to kind of exceed last year’s level, even you know despite your weaker sales this year? Anything you want to call out during the quarter as well? Thank you.

Sure. It is fun, Paul, to get a question in the quarter where we did that well. Yeah, what you’re seeing is something that I think both Jason and I have committed to from the very beginning is once we lapped 606 and some of the things that affected our balance sheet because of that, you’re seeing work its way through. So yeah, the cash flow this quarter – not – even net cash flow after CapEx, but even cash flow from operations were very, very favorable. And some of that you saw was from us reducing some of our working capital, getting contract assets down and receivables being pretty steady. So going forward, as I’ve often said, our businesses to this topic is pretty straightforward to the extent that we think of our ability to generate net earnings translating very heavily into the ability to generate cash flow. It’s just sometimes from a timing standpoint, it doesn’t always line up in a particular quarter. So this quarter was a good affirmation of that statement. And going forward, yeah, we’ll continue to probably be a little bit more cautious about CapEx than we were before COVID-19 hit that just natural award in an environment where we want to look carefully at all those investments that we make.

Thank you.

Your next question will come from Jim Goss with Barrington Research.

Thanks. I’m wondering if the pandemic is providing any window recover for you to secure some additional Dolby Cinema deals in various markets? To the extent that Dolby has a certain consumer-facing element that might may be benefiting such as some of the – a number of companies that have done better than others in a downturn. And I think you’ve held up well. And does this give you some opportunity domestically or internationally?

Well, first of all, Jim, we are – yeah, we do believe that once cinemas reopen that people are going to want to have the best experience in the Dolby Cinema, what we believe, is the best experience available. I think in terms of opportunities to expand the footprint, it really right now depends a lot region-by-region, partner-by-partner and what their individual circumstances are. I’m sure you won’t be surprised to hear that that many of them are you know currently holding back on any form of capital investment. We did – as I said at our second partner in Saudi Arabia, we opened our first screen in South Korea, which we’re excited about. So we’ll look for those opportunities. But right now, we’re – you know we’re keeping in touch with our partners and what their reopening plans are. Like I said that really – I just give you a point in time where more than ever I really can’t generalize on that front, because it really depends on the individual circumstances.

Okay. And if you look at the mix issue in terms of licensing revenues and Mobile certainly you know reign supreme in the quarter. I’m wondering, if and PC fared relatively well vis-a-vis the others. Are you thinking those sort of types of trends you have developed in this quarter would be sustainable into the fourth quarter? Or do you think any of the other categories may experience better pickup than was the case in this quarter?

Well, I’ll let Lewis comment on any trends about this quarter and the guidance, but I will say that Mobile continues to be an area of strong focus for us. And as you know, we have Dolby Vision and Dolby Atmos included throughout Apple’s ecosystem. We have a number of high-end devices for Dolby Atmos in a number of Android devices. And most of that was on the initial push from our presence in streaming of movies in television. A big reason for the focus we have on initiatives like Music content and as well as Gaming content is to bring more experiences to those devices, then the types – where people are spending time. And that will increase the value of the partners, for the partners that have already adopted Dolby Vision and Dolby Atmos, but we also think that, that has the potential to bring it into a much broader category of devices.

And then to your quantitative question, Jim, just to reiterate. The assumption we’ve made in the scenario we painted for Q4 is, broadly speaking, a 5% uptick in volume, plus or minus across all categories. If we look back at what we saw in Q3 of maybe some indicators of that. I think I said that PCs and Mobile were a little better than say set-top boxes and Consumer Electronics and there are some natural dynamics for that, not the least which is, what kind of things can people more easily or more readily buy without having to go into a store, because as we can see from all the news around that shutdowns are still pretty prevalent, in the sense that, there’s not a lot of heavy traffic going into stores. And so that will be something for you to think about in your modeling as you look at Q4, what you think about those factors. But we didn’t break down the 5. So that’s probably as much as I can add in terms of color, vis-à-vis your question about PC and mobile, reigning supreme and whether those trends will continue.

All right. Thanks very much.

[Operator Instructions] That will conclude today’s question-and-answer session. I’d like to turn the conference call over to Kevin Yeaman for any additional or closing remarks.

Well, I want to thank everybody for joining us today, and we look forward to keeping you updated on our progress. Thank you.

That will conclude today’s conference. Thank you for your participation. You may now disconnect.