Ladies and gentlemen, thank you for standing by, and welcome to the Dolby Laboratories Conference Call discussing Fiscal First Quarter Results. [Operator Instructions] As a reminder, this call is being recorded, Thursday, January 28, 2021. 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 2021 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 second quarter fiscal 2021 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. In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time. 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-K. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today’s call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website. After the content of today’s call, Lewis will begin with a recap of Dolby’s financial results and provide our second quarter 2021 outlook, and Kevin will finish with the discussion of the business. So with that introduction behind us, I will now turn the call over to Lewis.

Okay. Thank you, Jason. Good afternoon, everybody. Thanks for joining the call. I think I’ll jump right into the numbers. First quarter revenue was $390 million, which was above the guidance range of $330 million to $360 million and was also above the $271 million we saw in Q4 and the $292 million in Q1 of last year. Revenues were better than what we guided as we had a true-up in the quarter of about $20 million that relates to Q4 shipments, and we also had some recoveries in Q1 that came in sooner in the year than we thought., so that’s more of a shift in timing within the fiscal year. Q1 also benefited from higher estimated market TAMs. In terms of the sequential growth from Q4, Q1 benefited from timing of revenue under contracts and higher recoveries along with higher adoption, and this was consistent with what I highlighted at the beginning of the quarter. And in addition, sequential growth was helped by holiday seasonality, which is sort of a typical factor. In the year-over-year comparison, all of our cinema-related revenue streams were down significantly from last year’s Q1, and that’s because of COVID. But then more than offsetting that were higher revenues from timing under contracts, higher recoveries, and greater adoption of Dolby. So the Q1 revenue of $390 million was composed of $373 million in licensing and $17 million in products and services. So, let me discuss the trends in-licensing revenue by end market starting with Broadcast. Broadcast represented about 37% of total licensing in the first quarter. Broadcast revenues increased by about 36% year-over-year and that was driven by higher recoveries, higher adoption of Dolby including our patent programs, and a higher true-up, which relates to the Q4 shipments and this was offset partially by…

Thank you, Lewis and good afternoon everyone. Our fiscal year is off to a great start, and we continue to enable Dolby experiences to more people around the world. Dolby Vision and Dolby Atmos are increasingly available across a broad range of new devices and services, and we are enabling more Dolby experiences in music and gaming, which is adding to our value proposition for broader adoption in areas such as Mobile and PC. On top of that, we are excited about bringing Dolby to address everyday virtual experiences and interactions through Dolby.io. All of this adds to our confidence in the significant growth opportunities that we see ahead of us. As consumers spend an increased amount of time enjoying content within their homes, it is clear that the quality of these experiences matter. And Dolby Vision and Dolby Atmos are consistently highlighted among the devices and services that enable the best way for people to enjoy their content. The combined Dolby experience was highlighted at CES throughout the latest TV lineups from our partners, including LG, Sony and Panasonic. TCL and Skyworth also announced they are adding support for Dolby Vision IQ, which optimizes the picture on your TV to the surrounding light and the content being viewed. Earlier this quarter, OPPO launched their first TVs, which includes support for the combined Dolby Vision and Dolby Atmos experience. And Dolby Atmos continues to be highlighted among the top sound bars in the market, including the latest products announced at CES from LG, JBL and TCL. As we move beyond the living room, our partners are increasing the ways in which consumers can enjoy Dolby experience, including new adoption and headphones. Apple is supporting Dolby Atmos in AirPods Max, adding to the ways the consumer can enjoy the Dolby experience…

Thank you. [Operator Instructions] We’ll take our first question from Steven Frankel with Colliers.

Good afternoon. So, Kevin, just picking up on the staging of the combined Atmos Vision experience, especially in the TV market, maybe give us a feel for how much you think that combined experience has increased for the 2021 TVs versus 2020. So do you have any numbers you’d like to share with us or any comments along those lines?

Well, thanks, Steve. So first of all, as you know, we have said that we were on about 10% of 4K TVs, which are about half of the TV market in ‘19, and we grew to kind of the mid- to high teens in ‘20. And even throughout ‘20, increasingly, we are seeing the combination of Vision and Atmos on those TVs, and I don’t have any specific numbers in terms of attach rate for you, but can I tell you that we’re pleased at CES with the presence of Dolby Vision and Dolby Atmos, the increasing presence across the TV lineups that were announced and also the additional partners for Dolby Vision IQ. So at the end of the day, we continue to see a significant opportunity to broaden both Dolby Vision and build the Atmos in the living room, whether that’s in TV or sound bars, and as well as progress in other devices. And then, of course, we think that the work we’ve done to expand into new experiences, gaming, music and the beginnings of user-generated mobile-first content, really expands the opportunity in PC, Mobile and beyond.

And picking up on music. Maybe an update on the device side and how many types of new devices might we expect in 2021? And when do you think we’ll start seeing aftermarket car devices with Atmos?

So ultimately, Steve, we would envision that any of these devices that we’re winning with Dolby Atmos will be able to ultimately support the Dolby Atmos music experience. And right now, that’s just a matter of the pace at which are – we – our streaming service partners expand the support for those devices in the market. And what I would say is the – a big focus for us is continuing to create more outlets for Dolby Atmos music. And so certainly, adding streaming services is a big focus of ours. And I think that’s what will stimulate the – more demand for Dolby Atmos, specifically for music on devices that may not have yet been compelled to have it, including automotive.

Great. And then one last one picking up on your cinema comments, and I know IMAX has talked about how they’ve gained market share from the plain vanilla theatrical experience in China as stock markets recovered. Can you share any data on how your business has fared post recovery in China?

Yes. So first of all, clearly, China is far ahead of the U.S. in terms of coming out the other side of COVID. There have been some – they’ve had some great box office titles, which have led to great weekends and great weeks at a time. And I can say that we have seen, from our perspective, a higher percentage of that box office is in Dolby Cinema. And I think that just is consistent with our hypothesis, which is that when the big titles come back, people are going to want to see big titles in the cinema and that they’re going to want to see them in the best possible way.

Great. And then I’ll sneak in one last one. So on IO, how should we judge this business over the next few quarters? Should it be around the number of events you’re running for developers or the number of new designs? How should we think about the business in the short run?

Yes. Clearly, it’s – we’ve been in market now for about 8 months, as you know. So it’s early days. What we’re most focused on is getting people to the platform, getting developers using the APIs and then, of course, getting more of them – putting them into production and becoming a paid customer for those APIs. And as we do that, we’re learning a lot about where the best opportunities for us lie and that better informs our road map to keep evolving on a regular basis. So yes, it’s about how many developers are engaging with us and how many people are ultimately using our APIs in the context of their services and operations.

Great. Thank you.

Next, we will move on to Paul Chung with JPMorgan.

Hi, thanks for taking my question. So just another follow-up on the IO business, I know its early days, but can you help us kind of frame the potential there? And then I know you have some pricing info on the website, but – how did margins kind of shake out over time? And then any kind of meaningful anchor clients you want to call out across any of the verticals?

Sure. So I guess, I’ll – let me start with the market. And again, this is early days. So we’re excited about – we’re excited about the opportunity. And as we see it – I highlighted a couple of those opportunities is that I think that we’re seeing an increase in demand for applications and services of all types to enable interactivity in their applications. And that’s exactly what we’re aiming to do. There’s also, as you know, an increasing amount of media content in the cloud created by all of us. And we see a significant opportunity to provide every creator with the capability to improve the quality of that content. And specifically today, we’re beginning with the ability to clean up recorded audio. Some of our early customers on the recorded audio side, we have a platform VEED.IO, which people use to prepare and post content to social media and other channels. We have a customer on the name of Say It Now, which is a digital platform for the automotive industry and one of the features of that is that you can do seller videos. And we are – they are using us to improve the audio quality across all of those seller videos, which is – we’ve seen interest from other people who do similar kind of activities. On the interactivity side, I highlighted in my remarks, Kiddom, we’re excited about that. We think online education is in that sweet spot of the need for real time communication combined with high-quality media. I would – we also have an interesting customer by the name of Talkspirit, which is an online collaboration platform, which is using our full suite of APIs. So those are a couple of the highlights for now. And we’re – like I said, we’re focused on continuing to get more developers engaged, and we look forward to sharing more with you as we go forward.

Okay, great. Thanks. And then my follow-up is on – if I think about fiscal year ‘21, [indiscernible] the second half revenues in line with your guidance? The mix shift to licensing benefit, kind of slower pace of OpEx, maybe implies maybe a 35% operating margin for the full year. And then maybe possibly free cash flow well above $300 million. Is this kind of a fair assessment? Is this kind of the new normal for the business, at least until cinema comes back, maybe next calendar year that it may weigh in costs and margins? Thank you.

Hey, Paul, this is Lewis. How are you doing? A lot of, as usual, your question contains a lot of detail that we didn’t provide. But that’s okay. I think it’s a fair question, but I think to be fair, we purposefully tried to give all of you on the call here today some color for what we’re seeing in the revenue scenario. Because revenue is such a big driver of activities, we didn’t give any flavor for OpEx because we’re managing that a little bit more quarter-to-quarter right now. You saw that this quarter, we came in below target because we pushed out some of the marketing initiatives that – from a timing standpoint, only. So I think it would be best for me not to comment off the cup on the specificity of your numbers from now other than to say that as a business, we have historically been a very strong, both margin and cash flow-producing company. And once we get over the hump of COVID, I don’t see any reason why we wouldn’t return to that same structure. But right now, we still are in the middle of COVID, and we should not pretend that we haven’t been affected by COVID because before COVID hit our revenues, we’re running at a higher rate, setting aside the quarter that we just reported, which had its own goodness in there. So how about if down the road as we get closer to the end of the tunnel for the COVID will get more specifically into forecasting the margins looking further out over time. For now, all I can do is point you toward the guidance that I provided today for Q2, which does have margin information in it and then indicate that right now, the most we’re comfortable saying is that we see a scenario of revenue in the second half in the mid- to high 500s.

Thanks. Thanks, guys.

Yes.

[Operator Instructions] We’ll move next to Jim Goss with Barrington Research.

Thank you. I would like you, if you would, to get a little more granular on the – that tremendous gain in mobile revenues in terms of percentage change in share. Is it broad-based or are there specific providers? I know Apple has been a pretty important partner for you? What can you talk about in terms of that? How much was pull forward? And what may we expect in the coming quarters?

Hey, Jim. This is Lewis. I probably went over it fairly quickly in my script. So I apologize for that. But the vast majority of the benefit we saw that caused the Mobile numbers to look so impressive this quarter relative to us would say a normalized number is revenue that from a timing standpoint landed in this quarter. We have historically not attributed to that to any specific customer because that’s not our practice to do that. But I’d point out that last year we had some timing of revenues that would have landed maybe in the second quarter. So I tried to highlight that. But clearly, the bump that we saw in Mobile revenue this quarter came from revenues that were disproportionately landing in Q1 versus the rest of the year, which is not uncommon for us as a company. We have a variety of different structures or transactions with customers that cause that to happen, that’s pretty normal. But beyond that, we really can’t comment on any specific customers, no matter what letter of the alpha that they start with.

Okay. And in a number of times in the past, you’ve reported a much better than expected quarter and then it seemed a lot of it was pulled forward from the next quarter or two. It doesn’t seem that, that’s the case this time, given your second quarter guidance it seems pretty consistent with what we’ve been expecting for that quarter. So is that a sign that your overall level of business despite COVID is better than – at the elevated levels relative to what you might have hoped for?

Hey, Jim, Lewis again. There was a portion of our goodness in Q1 that was a shift in timing. I would say that any time we head into a new year, especially in this environment with COVID, we model as best as we can. Not only which deals we think we will be able to realize that when they might land and to what degree, how much? And there was some of that revenue that landed in Q1 that we might have mentally been modeling more for the second half of the year. I would say less so Q2, I wouldn’t call it a pull forward, just please understand that in a big wide range of customers that we have, it’s not a pure science when something will occur. It’s not like putting something on a manufacturing line and modeling out when it’s going to come out the other end. We have a lot of things that go into a transaction, not the least of which is negotiating a variety of terms. So there is some revenue in Q1 that we believe would normally we would have – would have thought it would have landed in the second half of the year. If I had to size that, it’s probably in that sort of $15 million to $20 million worth. But obviously, the quarter was very strong anyway. But I wouldn’t say that a large part of that came out of Q2. The primary reason I highlighted in my prepared comments about Q2 was, I made some comments last quarter about how we saw Q2 shaping up. And then since that time, the market TAMs have bumped up modestly. So that’s why the Q2 bumped up, but it wasn’t affected as much by this comment you’re asking me about the timing shift from revenue we thought could have landed in another quarter, that was more from the second half of the year moving into Q1.

Okay. And one other follow-up would be, I’m wondering, with the advent of multiple services, Atmos and Vision in particular, could you talk about royalty rate trends in terms of you may be getting multiple bites at the apple in certain of the devices versus the one you might have had in the past. And is that helping somewhat of this disparity and the improved margins you’ve highlighted that you didn’t want to get into that much? But in terms of affecting the top line, is that part of what’s going on?

Hey, Jim, I’ll take the first cut at this, and then if there’s any color that Kevin wants to add. But I think at a very high level – the primary thing that is driving our improved margins at the highest level is really the mix of our revenue. Because COVID has disproportionately impacted our products and services revenue and driven those down disproportionately to our licensing, where licensing continues to grow, the licensing revenue just naturally carries a much higher-margin than the products piece of the equation. So therefore, that’s what would benefit the total company margins, it’s more of a mix between that, as opposed to some sort of pricing leverage we have from licensing more products, because licensing, just as a general comment, inherently carries a very high-margin within our business construct.

Yes. That’s – I think Lewis has covered the margin – the margin part of the question. And of course, when we come in higher, as we did in Q1, because of that margin structure, it has a strong benefit to operating margins. In terms of your ASP question, clearly, getting a bit more adoption of experiences like Dolby Vision and Dolby Atmos on top of the license that they already have Dolby Digital Plus or other of our technologies, certainly, that takes the form of a higher ASP, which is a big part of what contributes to our organic growth. It’s about getting on more devices, and it’s about broadening the value proposition on those devices. And so that’s what we’re focused on every day, and we’re pretty pleased with the progress this quarter.

Okay. That’s great. Thank you.

Everyone, that does conclude our question-and-answer session. At this time, I’d like to turn it back to Kevin Yeaman for any closing remarks.

Great. Thank you everybody for joining us today and we look forward to speaking with you again soon.

This concludes today’s conference. We do thank you all for your participation. You may now disconnect.