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 Thursday, February 02, 2023. I would now like to turn the conference call over to Maggie O'Donnell, Head of Investor Relations for Dolby Laboratories. Please go ahead, Maggie.

Thank you. Good afternoon, and thank you everyone for joining. Welcome to Dolby's first quarter 2023 earnings conference call. Joining me today are Kevin Yeaman, our -- Dolby Laboratories' CEO; and Robert Park, our CFO. As a reminder, today's discussion will include forward-looking statements including our second quarter and fiscal 2023 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 impact of current macroeconomic events, COVID-19, supply chain issues, inflation, changes in consumer spending and geopolitical instability on our business. 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 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 non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available on our earnings press release and in the new Interactive Analyst Center on the Investor Relations section of our website. So, last quarter, we spent some time covering 2022, what we were seeing as we were going into 2023 with a focus on the long-term growth. Now, we're one quarter into the year, so Kevin, let's get started in our conversation. Can you start with giving us a take on your Q1 results?

Yes, of course. And thanks everybody for joining us today. So, I guess I'd start by saying it's nice to start the year with results coming in higher than what we expected when we came into the quarter. That's largely because we see some transactions landing earlier in the year than we originally expected. The underlying trends in our business are pretty consistent with what we thought coming into the year. There are, of course, some end markets that are a little higher, some that are lower. Robert will take us through all those details in just a moment. But like I said, when I net all that out, pretty consistent with what we saw coming into the year. So, it's early in the year. We continue to be operating in an uncertain environment. So, we're going to keep focusing on what we can control and what guides growth in the long-term.

Okay, great. So, looking further ahead, how are you feeling about long-term growth?

There is -- there continues to be strong demand from consumers for entertainment content, and demand for content to be more immersive and engaging. And that's what drives demand for Dolby experiences. So, this quarter, we continue to make progress on each of our key focus areas, movies and TV, music, user-generated content. And so, we continue to be confident that we can double our revenues from Dolby Atmos, Dolby Vision and imaging patents over the next three to five years, which means we continue to target annual growth of 15% to 25%. And of course, our foundational audio technologies are essential to the ecosystem for entertainment audio. They're delivered across a very broad range of consumer entertainment devices. And so, while that does make it sensitive to macro trends, it's a very strong position to be in. And when the market settles down, we expect this to be a contributor to growth. And then, of course, we continue to be focused on opportunity to bring the Dolby experience to an even wider range of use cases and that's what we're doing with Dolby.io. So, overall, we continue to be very confident in our long-term opportunity.

That's great to hear. So, just a few weeks ago, we were at CES in Las Vegas. What were some of the highlights for Dolby from your perspective?

Well, there were two big stories for us at CES this year. Dolby Atmos Music and Movies & TV in the living room. Let me start with music. So, we kicked off CES with a concert by Imagine Dragons, which was live in Dolby Atmos. It took place at Dolby Live in Las Vegas. And Dolby Live is a venue where one of the things that is exciting about it is that we can engage with artists to create an experience that they want to deliver. And the result was that the energy and the excitement from the band and from the thousands of fans and partners who joined us was just fantastic. And so, this is important because this is where the ecosystem starts for us. It is all about our ability to inspire creators to want to create in Dolby. And artist passion for Dolby Atmos continues to grow. We now have 85% of Billboard's Top 100 artists in 2022 have one or more songs in Dolby Atmos. There's increasing availability of content on streaming services, so you can stream through Apple, Amazon, TIDAL, there's Melon in South Korea, Tencent in China. And it's this combination of content and availability that's what creates the value proposition for the playback experience and our device partners. And as I've shared before, the Car Experience is a big focus for us. And that's -- not just for us, that's the whole industry. It's often -- it's very quickly the first question from artists, from music labels, from streaming services, they want to know what the Car Experience is like and consumers care deeply about that. And so, over the past year, we've added more than half a dozen car manufacturers, including Mercedes, Volvo, Lucid. At CES, Mercedes was featuring their electric…

Great. And you mentioned specifically Movies & TV at CES. What stood out to you there?

Well, with Movies & TV, what was great about that was that our story was being told through the voice of our partners. This was across the show floor. So, as I talked about last quarter, a big focus of ours in that area is growing beyond the premium tier of televisions and expanding that deeper into their lineup. So, that's why it was so great to see announcements from partners like TCL. TCL announced that Dolby Vision and Dolby Atmos will now be included on all of their new 4K TV models in the U.S. Hisense is another great example. They announced several new TVs that are going to include Dolby Vision and Dolby Atmos. And it wasn't just TVs. So, Samsung and LG announced their new soundbar models with Dolby Atmos. And what was exciting about their announcements is that they're taking -- they're becoming a part of smaller form factors, Dolby Atmos is. And so, this creates the potential for a broader audience and to expand the reach of Dolby Atmos. And we continue to make progress on the content side as well. So, we have -- already have a very strong presence, and we also have added Peacock to the roster of streaming companies that are streaming in Dolby Vision. We talked about this last quarter, Maggie, but the World Cup was available in Dolby Vision and Dolby Atmos. So that was exciting. And excited to share that Comcast will be broadcasting the Super Bowl on Fox in Dolby Vision next week. And so, if anyone out there is throwing a Super Bowl party, it's not too late. And there is a Dolby page on Amazon store, which can point you toward all of our great partner products.

That's great. So, what other highlights were there for the quarter beyond what happened and what was announced at CES?

Well, we haven't yet talked about mobile and Dolby Vision capture. And as we've talked about before, Dolby Vision capture on mobile devices enables people to capture and share life's moments in a more realistic way on the device that we carry with us daily, every hour of the day. So, we're focused on continuing to expand that value proposition. And so, we're excited that Vivo this quarter adopted Dolby Vision capture and playback on its flagship phone. They joined Apple and Xiaomi. And OPPO launched its first phone with Dolby Atmos and Dolby Vision playback. And so, we look forward to continuing to drive more momentum in mobile. We also haven't talked about Dolby.io, where we're focused on bringing Dolby to a far wider range of use cases. We're seeing more developers signing up for accounts. We are seeing strong growth in the number of active developers who are working with our APIs for the first time. And what we're enabling these developers to do is to make day-to-day interactions in the apps and services that, that we're all using every day more immersive and more lifelike in how they sound and how they feel.

Great. So, before I hand it over to Robert to go through the numbers, is there anything else that you want to add and close on?

Yes. Well, if I take a step back again, this quarter, I think further demonstrates that we continue to bring more Dolby experiences to more people around the world. There is an ever-increasing demand for content and for that content to be more engaging and immersive, and making that happen is what we do at Dolby. So, continues to be uncertain environment and that's not new. I mean in a lot of different ways it's been an uncertain environment for a number of years now. And what I'm most proud of is all that the team has been able to accomplish during this period, and they've done it by staying focused, focused on where Dolby can make a difference and focused on where the biggest opportunities are. And so, we're creating momentum across each of our ecosystems. We've launched entirely new ecosystems in the form of Dolby Atmos Music and we're just talking about user-generated content. And so, the long-term trends point to more opportunity. And we come at this from a position of strength. We have a very strong financial position with strong cash flows, a solid business model. I'm confident that our foundational technologies will continue to be central to the entertainment experience for many years to come. We continue to grow the adoption of Dolby Atmos and Dolby Vision, and we're reaching more use cases with Dolby.io. So, we're going to stay focused on raising the bar on all of these experiences and growing the business.

Great. Thanks so much, Kevin. So, Robert, before we get into all the details, I was thinking it would be helpful if you start out with some of the key things that investors and analysts should be focused on in our results.

Yes. Thanks, Maggie. Yes, before we get into the details, I wanted to point out three main highlights. First, total revenue of $335 million was higher than the guidance that we provided last quarter, largely due to transactions closing earlier in the year than anticipated and higher products revenue. As it relates to trends in our underlying business, we are on track with where we thought we would be coming into the year overall. We came in a little higher than expected in broadcast and gaming, mostly driven by higher Q4 shipments than we had estimated, lower in PC, driven by further weakness in the market and lower box office proceeds, which negatively impacted Dolby Cinema revenues. Second, operating expenses of $175 million on a non-GAAP basis were lower than we had guided for the quarter, which is mostly due to timing of marketing and patent program spend and lower labor costs. We will continue to be deliberate about our hiring, evaluate our long-term priorities and opportunities and make spending adjustments accordingly. Third, I'm going to talk about guidance in detail in a few minutes. But based on where we're seeing today, our outlook for the full year is consistent with what we said last quarter. It's nice to start the year with a quarter that came in better than our expectations, but at the same time, it's still early in the year and we continue to operate in a very uncertain environment. With that as the backdrop, let's get into the Q1 details. Q1 revenue was down 5% year-over-year, primarily due to mobile, PC, broadcast and consumer electronics, consistent with the overall trends in the market. This was partially offset by adoption of Dolby Atmos and Dolby Vision and higher products and services revenue. Q1 was comprised of $308…

Great. Thank you, Robert. Operator, I think we're ready to turn it over to questions.

Absolutely. [Operator Instructions] Your first question comes from Steven Frankel with Rosenblatt. Please proceed.

Thank you. Kevin, congratulations on the Super Bowl. That's a long-time coming. That's a big win. Maybe start with what do you think finally tipped Comcast and Fox to do this?

Well, I think as with all of our big wins, this has been a journey from the team. We start off with movies and TVs. For movies, you have three months to produce. And for TV shows, you have days to weeks to months. And then, we get started on live sport, obviously, you have a matter of seconds. So, it's a combination of engagement with community, it's working through all the [Technical Difficulty]. It's working. The mixers are the creators, and then, of course, it's always working through all of the business arrangements that go far beyond just Dolby. There's all the rights and all the other things that are going on. But we're just super pleased to have the Super Bowl coming right after World Cup, just not long ago. And this is the kind of thing that we think really broadens demand for the Dolby experience.

Okay. And on the notion that you had some minimum paid contracts that were signed earlier in the year than you expected, was there any strategic reason for that to happen? Or was this just -- it's hard to tell when those are coming in and they just came in? Any kind of characterization you can give us?

I think it's more the latter than the former, Steve. And remember that our transactions, we have two types. There's the minimum volume commitments like you just pointed to, there's also recoveries [per past] (ph) practice. Those are both types of transactions we have. And we do our best to predict when those are going to sign throughout the year, and we -- some of those were landed earlier this year, which is a -- it's a nice way to start, but I wouldn't -- I don't think at this point -- I think it would be too early for me to draw any particular trends from that information.

Okay. And one -- I'll sneak one more in, and this probably is going to be difficult for you to answer, but let me try. Obviously, you have one large TV maker that -- you have one large TV maker that's yet to get the Vision religion. You have a lot of others that have. But in -- everybody outside the one, where do you think you are in your ultimate penetration? In 2023, are you 70% there? Are you not even that high yet?

Well, I think, I mean, obviously, we're patient and persistent. So, one thing we do is we are always looking to continue to increase the value that we're providing. We just talked about Super Bowl coming after the World Cup, that's another example how we will be hard at work, increasing the value proposition to bring as many partners on board as we can. What we talked about coming into the year in terms of increasing the attach rate is we have a very strong presence at the premium end of our partner lineups, and we're really looking to drive that all the way through their 4K lineups. And so, that's why -- that's the significance of an announcement like TCLs where all of their 4K models going forward in the U.S. will be Dolby Vision and Dolby Atmos. We also feel like we have an opportunity to increase penetration as it relates to the big box retailers and some of the house white label brands that they have. So, we still think there's room to grow, Steve. And it was -- as you know, it was one of the biggest drivers of the strong growth in Dolby Vision and Dolby Atmos last year and we continue to see it to be a big growth driver this year.

Okay. Thank you. I'll jump back in the queue.

Thank you. The next question comes from the line of Paul Chung with J.P. Morgan. Please proceed.

Hey, guys. Thanks for taking my questions. So, just talk about the -- I know you mentioned it briefly, but if you could talk about kind of the traction and momentum you saw at CES, particularly for Atmos in the car and for io? Have you seen some uptick in interest from other auto OEMs and app developers? And I guess, I know it's early days, but how do we think about sizing Atmos in the car in terms of both kind of a reasonable auto penetration rate and respective ASPs for car kind of in both the near-term and long-term? It sounds like a pretty interesting opportunity.

Yes. So, as it relates to music, I think what was really fun about CES for us this year was the opportunity to really tangibly demonstrate the entire ecosystem, starting with the concert in Dolby Atmos, but having all of our partners there throughout the ecosystem, punctuated, of course, by the ability for people to actually experience Dolby Atmos Music in the Mercedes and at some of the partners Bose -- like what Bose had going on. So, that -- yes, there's a lot of great momentum there. And we had a lot of engagement going into CES and we have very strong engagement coming out of CES. The team is busy at work, working with major players from throughout the ecosystem, throughout the industry, and working with them on their plan. So, it was a good -- it was a very good show for Dolby Atmos Music. I think it was the highlight of our show really. We also were -- we did have an io presence. We were demonstrating -- in fact, our customers -- some of our customers and developers were demonstrating what they have built with Dolby.io. And so, that was a nice opportunity for us to, I guess, cross pollinate, if you will, some of our partners from the broad ecosystems that we serve and give them an opportunity to see what we're doing with Dolby.io. We had a lot of partners that were using both real-time streaming and our ability to have audio/video interactions with large audiences and sophisticated spatialization. And I think that what we continue to be excited about is we feel like we're still at the early stages with the companies that are looking to build the next-generation virtual experiences of the future. And to be clear that it's most immersive, that can be in a headset environment, but these are experiences that are largely going to be enjoyed on PCs and mobile devices. And with io, developers can build those experiences. And so, yes, we did have customers there that were demonstrating some of those experiences and it sparks ideas of what other partners might want to be able to do in the future.

Got you. Thanks for that. And then, the OpEx guide was reiterated, up modestly for the year. Where do you kind of see some flexibility for additional cost execution, maybe on the SG&A line? And then, on R&D, where you kind of putting new investments to work? And how do we think about the spend related to Atmos, Vision, io? Are those kind of ongoing expenses or bulk of those costs are behind us and it's kind of new innovations that you're investing in for the most part?

Well, the first thing I would say is that we endeavor to be and are very dynamic in our allocation of resources. So, we're regularly shifting resources between initiatives and it relates to Dolby Atmos and Dolby Vision that includes shifting resources between ecosystems that are getting more mature to newer ecosystems. And so, while the headline number is the increase of about 2%, underneath that, we are constantly moving people and resources to where the biggest opportunities are of the future.

Got you. And then, lastly on Cinema...

By the way, Paul, you asked so many questions the first time. I feel like -- I just remembered that I felt like I forgot part of it, which is to just say that our -- we've said our goal is for -- we would like Dolby Atmos Music to be the way everybody experiences music all the time everywhere and on every car. And we aim that -- we aim high and we stay focused on building these ecosystems. And we have a track record of being able to get to some pretty high adoption rates, but we set our sights on being relevant to all the ways people enjoy music.

Yes. I thought the demo was excellent. So, on Cinema, where are you in terms of footprint today? And are there expectations to kind of expand after some pauses here maybe with other partners? And then, talk about the expectations for kind of contribution from this business on maybe an annual run rate business and margin profile would be very helpful. Thank you.

Well, to answer your first question, we're at 2...

287.

287 Dolby Cinema screens. I think we added seven, is that right, Robert?

Added five.

Added five. The new screens coming online is still lower than pre-pandemic. That's still an industry, obviously, that is also subject to all of the uncertainties in the world and they're all in varying positions as it relates to their ability to invest right now. But I think the Avatar was a big win for the industry. A lot of that will be Q1 box office, but it was great to see that. And I do -- and we are still -- our partners are still engaged. They're still thinking about the future and we do see an opportunity to continue to expand. Because we think that what has held true throughout this period of time is that more a greater percentage of people who are going to the movies are wanting to go to -- are wanting to have the most immersive experience. And so, the premium experiences are getting a greater share of the box office. And so, we continue to have strong engagement as people are thinking about their future plans for how they grow their portfolio of high-end experiences.

Thank you so much.

And today -- I guess the other part of your question, today, that's, as you know, the Dolby Cinema is a shared box office. We -- that's part of our other markets licensing revenue. And not breaking that up separately, yes, that's still in the other category.

Okay, great. Thank you.

Thank you. The next question comes from the line of Ralph Schackart with William Blair. Please proceed.

Good afternoon. Thanks for taking the question. Within products revenue, with the strong growth there, you called out io as contributing to that growth. And just curious if you could sort of give us a sense of the contribution there. I'm sure you don't want to break out the exact number, but just perhaps some relative contribution or growth rate or any sort of context you could add there would be great.

Hey, Ralph. Most of that growth came from cinema products, if you will. There were some growth in io, but the majority of that growth came from cinema products through higher supply of services and stores that we have, but also increased demand for some of our audio processors and other equipment.

Okay. And then, just kind of turning to the macro, it sounds like so far where we are early in January it's playing out as you expected, I guess, which is good in terms of the way you guided. But you obviously have a lot of global customers. But as you talk to them about the -- as you look through the year, maybe just give us some perspective and sort of what they're thinking on the macro? Is it sort of the same? Is it marginally worse, any better? Any pockets that may be have changed as you look forward since last call?

Well, it very much depends on the partner, but I would say the one word that would come up consistently and that I probably already said it doesn't time is uncertainty. I mean, it is an uncertain environment. And I wouldn't go so far as saying there haven't been any changes, it's just that as far as our guidance goes, there have been some end markets and partners that have seen things a little -- that have been a little better than what we estimated coming into the year and some that have been a little to the downside, and net-net as a portfolio across all of these devices and ecosystems, we see the underlying business at about where we saw it coming into the year.

Okay. Thanks, Kevin.

I think Robert said at the outset, we did see -- specifically, we saw -- for the first quarter, we saw broadcast and gaming coming a little higher. Q4 shipments were a little higher than we'd estimated. I would say, PC, we already saw unit shipment weakness coming into the year, might be just slightly lower, then that continue to soften a bit. Box office for Q4 was light. Again, most of -- a lot of Avatar will benefit Q1. I think mobile unit shipments are down and we've seen a lot of news around that in this earnings cycle so far. And we saw units coming down to the year. And also, we -- as we've said before, minimum volume commitment arrangements are more prevalent in our mobile space, which maybe makes us a little less sensitive than it might otherwise be on a quarter-to-quarter basis. And of course, we have a pipeline that we're working for things like our user-generated content, value proposition and other use cases on the mobile phone.

Okay. Thanks for that extra color.

Thank you. The next question comes from the line of Jim Goss with Barrington Research. Please proceed.

Okay, thanks. One question related to the Atmos for music. You mentioned the live event that involved Imagine Dragons. And I was wondering to the extent that Atmos is striving to recreate a live experience, what exactly did it add to the live event?

Well, what it adds, Jim, is working with the -- and let me back up a minute. So, Dolby Live is that -- running all year round. It tends to have top artists who are doing residencies. They can be shorter or longer residencies, but they tend to be doing more than one performance, which is great for us, because they're investing that much time, it also creates the opportunity to invest more time in thinking about Dolby Atmos and what can be done with Dolby Atmos. And at that large scale, it's about creating that spatialization of -- and that Dolby Atmos experience where you are immersed in the performance. And that's what we do at Dolby Live. And depending on the performance, that could be a combination of the pre-recorded backtracks, but it is also the live. And that means working with the mixers so that they know what the artist wants and making that happen real time. The other thing that is spectacular about it is that you really do get that experience wherever you are in that arena. And that is something that people really notice compared to other environments. And so -- and for us, again, it's just -- it's this opportunity to engage with each of these top name artists who are coming through Dolby Live throughout the year. It's an opportunity to have 5,000 or so fans each night get exposed to Dolby Atmos Music. And yes, so it's a great showcase for Dolby Atmos.

Okay. And if -- how are you thinking in terms of the primary monetization avenues for Atmos -- for music? Is it -- [will involve] (ph) the PCs or phones or what type of devices do you think you're going to get the greatest revenue generation from with this particular application?

Well, let's start by saying yes and yes. We're looking to improve the experience on all the devices that people enjoy music on. But our -- I would say the focus that stands out today is the car. Because as I said earlier, the entire industry is passionate about that experience and automobile manufacturers are always looking to push the boundaries on that experience. We've got great engagement across the industry as you've seen from our wins over the last year, year and a half. So, automotive is a big focus of ours. But around the show floor and of course, at our booth, you could also experience Dolby Atmos on sound bars, phones. So, all the ways you listen to music, we would like to bring Dolby Atmos to that experience.

Okay. And one other thing. To the extent that there are some TV price wars as they attempt to monetize their smart TV features, is there any impact you can talk about with Dolby including -- kind of include that features [indiscernible] generation from those types of devices?

Well, what I will say I guess is that we are -- as I said, we are looking -- a big focus of ours is bringing Dolby Vision and Dolby Atmos deeper and deeper into lineups. And so, the fact that you can now get a Dolby Vision, Dolby Atmos experience for, I want to say, I think [$215] (ph) probably at the low end that, you can -- I don't know if I'm exactly precise on that, so you can check the Dolby page on Amazon on that, but that's good for us. The more we get -- obviously, the more we get into those lower price points, the broader the audience for Dolby Vision and Dolby Atmos and the more momentum that we can build because awareness of how great the experience is and word-of-mouth and more availability, all of that is what helps to build momentum in each of these ecosystems.

Okay. That's -- so the penetration in the television area has -- is running its course pretty well? [indiscernible]

Yes. Sorry, Jim. I didn't hear that fully, but I think you asked whether I thought that was going well. And yes, like you said, I mean, the Dolby Vision, Dolby Atmos in the living room, which TV being the primary device there is our largest driver for Dolby Atmos and Dolby Vision last year. And again, we see that as a big driver this year of our growth in those areas.

All right. Thank you very much.

And I'm sorry, if I missed a part of your question, you can repeat it. I just didn't -- that didn't come through clear.

No, that's okay. I'll follow-up later on.

Thank you. There are no additional questions at this time. That concludes the Dolby Laboratories conference call discussing fiscal first quarter results. Thank you. You may now disconnect your lines.