Welcome to the Dolby Laboratories Conference Call discussing Fiscal Fourth 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. As a reminder, this call is being recorded, Wednesday, October 26, 2016. I would now like to turn the conference over to Elena Carr, Director of Corporate Finance and Investor Relations for Dolby Laboratories. Please go ahead, Elena.

Good afternoon. Welcome to Dolby Laboratories' fourth quarter 2016 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO; and Lewis Chew, Executive Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. A discussion of some of these risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Risk Factors, as well as in our most recent report on Form 10-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 this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2017 outlook, and Kevin will finish with a discussion of the business. So with that introduction behind us, I will now turn the call over to Lewis.

Thanks, Elena. And I still find it so impressive you can do that entire thing from memory. It's awesome. Anyway, good afternoon, everyone. We finished the year with Q4 revenue coming in at $233 million, which was about $3 million above the high end of our range. So as a result, full year FY 2016 revenue was $1.026 billion or 5.7% higher than FY 2015 revenue of $971 million. Let me go through our Q4 results in more detail and then I will provide an outlook for fiscal 2017. Fourth quarter revenue was comprised of $203 million in licensing and $30 million in products and services. As a reminder, we indicated last quarter that Q3 licensing revenue benefited from higher timing of payments compared to Q4, and that's the main reason behind the sequential decrease in licensing from Q3 to Q4. This affects our comparisons most notably in mobile and in PC and then, to a lesser extent, in the consumer electronics category. So here is my commentary on each of the key markets that we serve. I believe I said commentary when I meant category. Broadcast represented about 52% of total licensing in the fourth quarter. Revenues in this market were up sequentially by about 7% and also up year-over-year by about 12%. Both increases were driven by higher recoveries and higher volume in TVs, offset partially by lower volume in set-top boxes. PC revenues were about 14% of total licensing in the fourth quarter. PC licensing was down sequentially by about 38% and year-over-year by about 18%. Both trends were impacted by timing of payments that were shifted higher in Q3 versus Q4 of this year. We also had lower recoveries year-over-year. Mobile devices represented approximately 9% of licensing revenue in the fourth quarter. They were down sequentially…

Thank you, Lewis, and good afternoon, everyone. Now that Lewis has been through the numbers for the quarter, I'd like to discuss the progress we've made this year. We entered the year with a focus on growing our leadership position in audio solutions for entertainment content and bringing audiovisual experiences to market that are new for us. Our progress is clear. We continue to grow the presence of Dolby Audio and Dolby Atmos in broadcast, mobile and online use cases. Dolby Vision is shipping in televisions globally and being adopted by an increasing number of partners. Dolby Cinema commitments grew significantly and deployments are accelerating. Dolby Voice is available through a growing number of partners. At the same time, we returned to revenue and earnings growth and we expect to deliver growth again in 2017. This year, we achieved a major milestone with the inclusion of Dolby Audio in iOS. Dolby Audio is integrated in Safari and iTunes and now Apple customers can enjoy content in Dolby Audio on the Apple TV, Mac, iPad and iPhone. In addition to Apple, Dolby Audio is integrated in mobile devices on models from Lenovo, LG and ZTE. During the year, Netflix, which was already streaming to a broad range of devices in Dolby Audio, began streaming Dolby Audio to mobile devices. In addition to Netflix, of the over 40 OTT providers streaming in Dolby, services from Apple, Tencent and ITE are also making Dolby Audio available to mobile devices. Going forward, we look to build on this momentum by expanding our presence with new and existing mobile device partners. We had another strong year in broadcast. Dolby Audio is an established format in developed markets like North America and Western Europe, and we are well positioned in areas like Africa, India and China,…

Thank you, ladies and gentlemen. Your first question comes from Mike Olson with Piper Jaffray. Mike J. Olson - Piper Jaffray & Co.: Hey, good afternoon. Just two questions. Can you say what new initiative revenue ended up at for fiscal 2016? I think you were shooting for somewhere around $20 million. And then what you are potentially expecting it to look like for 2017? And then, secondly, do you have any Dolby Digital patents that run out this year or in the near-term? And is there any potential impact on the business from that? Or are you basically covered because Dolby Digital Plus patents don't expire until later and that's what's taking over? We've gotten a few questions about that, so I was curious on how you are thinking about it. Thanks.

That was a good way to start it off, Mike, with a lot of stuff. Why don't I do this? This is Lewis. Let me give a recap of what we did on the new initiative revenue from a numbers standpoint, and then I will kick it over to Kevin to give some color behind that. For those on the call who don't remember, at the beginning of this fiscal year, we indicated that we thought we could get roughly $20 million from new revenue streams. And on top of that I indicated about $10 million from new patent revenue from patent acquisitions we made. So in reference to that $30 million in total, we came in just around that, just a little under that, but close enough for government work. So let me stop there, turn it over to you, Kevin, to give any color on that.

Right. So that is comprised of the new initiatives that I've been talking about. It's Dolby Vision. It's Dolby Voice. It's our Consumer Imaging, which includes both Dolby Vision and the licensing of our IP portfolio, including the patents that Lewis referenced. So we are pleased with where we came out. What I'm really pleased about is the progress and the momentum we have in each of these areas with the growing number of commitments, the growing availability of each of these solutions. We see much of our growth coming from these new initiatives this year. And in fact, I believe that we can grow the revenue from new revenue streams 2X to 3X a year for the next couple of years. On your second question, yeah, you know our plan here has always been to migrate the world to Dolby Digital Plus, to Dolby Atmos. That has been our offering as we've gone into digital broadcast and as we've gone into mobile. And so the adoption of our technologies in those markets, whether it's broadcast, whether it's mobile, online use cases, streaming, has been a big story for us for a couple of years. And that's what gives us confidence that we've managed the transition from optical disc to new use cases, including the offering of new and improved technologies that are more optimized for those use cases. And that's, of course, all reflected in the guidance that Lewis summarized. Mike J. Olson - Piper Jaffray & Co.: All right, thanks very much.

We will now move to Steven Frankel with Dougherty. Steven Frankel - Dougherty & Co. LLC: Good afternoon. Kevin, maybe we could start with the recent win at LeEco in mobile with Atmos. Maybe tell us what's the use case there and do you think you can convince other Android handset makers beyond the handful that you have today to follow their lead?

Well, the use case is an improved audio experience. It's louder and clear. It's a richer audio experience. We're seeing, of course, the – now that we're – we're now adopted throughout iOS and LeEco is the latest addition to our lineup. We're really excited to have them. And in fact our partnership with them has only deepened as we work with them on encoding their content in Dolby Audio, Dolby Vision in a TV coming out with them and Dolby Audio on mobile. So I believe we do expect growth in mobile this year, and that's because we see an opportunity to continue to have people adopt these improved experiences. We're also making it easier for people to get content to those devices. That's a big part of the value proposition. It's a big part of the promise which is now a reality, solidified by the fact that partners like Netflix have begun streaming those richer Dolby content streams to mobile devices, whereas they started with television and moved into PC. Now we've got the mobile devices with the content to really make it come to life. Steven Frankel - Dougherty & Co. LLC: Okay. And, Lewis, I don't want you to feel left out. So maybe you could just give us a little more detail on why the licensing business saw gross margin pressure in the quarter. And does that continue? And what does normalized CapEx look like, now that the building has been built and fully outfitted?

What you are saying is you gave Kevin the easy question and gave me the harder ones. Steven Frankel - Dougherty & Co. LLC: Would you expect anything different?

No. Okay. So actually from the standpoint of margins, they were pretty close to what we anticipated. Over time, we will keep updating you. I think I mentioned that even going forward into next year, we see mix affecting that. So, for example, we currently categorize our stream of ongoing revenue from Dolby Cinema within licensing and the other category. And it's fair to say that because of the way that business is structured we make investment, we have depreciation, that the margins would not be at the 98% – 97% level that you would see in pure licensing. So that does affect that. Also, we do have amortization of IP portfolio that we've acquired which also creates a slightly different margin structure. Those are probably the two primary things that are affecting the licensing margin. In terms of CapEx, we've been running – if I normalize what we've been doing for the regular business and set aside things for building improvements or whatever 20% to 30% a quarter, and I think that's not a bad model to use, but I will update you each quarter because the bulk of that really is driven on an ongoing basis by investments that we're making in Dolby Cinema. Our normal company CapEx has not changed dramatically in terms of equipment that we need for engineers and things of that nature. It's really that the new CapEx that we are funding is for investment in the Dolby Cinemas, which you are quite familiar with. Steven Frankel - Dougherty & Co. LLC: And in your guidance, how many cinemas do you think you'll have opened by Q4?

Well...

By Q4 of which...?

By next year?

By Q4 next year? Steven Frankel - Dougherty & Co. LLC: Yeah, next year.

Yeah. Well, yeah, I'd like to add 100 Dolby Cinema locations this year. Steven Frankel - Dougherty & Co. LLC: Great. Thank you.

All right.

We will now go to Ralph Schackart with William Blair. Ralph E. Schackart - William Blair & Co. LLC: Good afternoon. First question on licensing revenue growth, not sure if this is for Kevin or Lewis. But if we look at the guide at the midpoint, let's call it $960 million or so in licensing revenue, it's up roughly $40 million to $45 million year-over-year in terms of absolute dollar contribution. Should we look at that in the context, Kevin, with your comments, where that $20 million should perhaps double or go up 3X year-over-year?

Well, let me make sure I understand your question. So yeah, a lot of the growth is coming from the new initiatives, which is spread across – when you take each of the initiatives, it will be spread across broadcast, other – or some products, some mobile. It's spread across those areas and that's a big part of the growth in the audio part of the business. Like I said, I think – we see growth opportunities in mobile this year. And of course there's puts and takes. I mean, we still see the PC market being relatively weak, certain categories within CE, and then where we see opportunities, as I said, mobile. Also sound bars is a category where we see opportunity and an area where we have some momentum with Dolby Atmos. Ralph E. Schackart - William Blair & Co. LLC: And then any chance you can give us some color in terms of what the larger contributor of that sort of growth for 2017 would be in terms of Cinema, Voice or the Imaging and I guess mobile as well?

They are all contributing. That's the great thing about this. We came into the year with – without, actually, the first Dolby Vision TV having shipped yet and a handful of Dolby Cinema screens. And given the work we have done over this year to get more television for the market, get more cinemas in the market, get more Dolby Voice partners, we see all of those as contributors in 2017. Ralph E. Schackart - William Blair & Co. LLC: Okay. One last one, and just on broadcast, I want to make sure I understood that correctly. Were you calling for that total licensing stream from broadcast to be flat year-over-year? And then within that context, Imaging would be up, is that the correct interpretation?

Yeah, I think you got it. Ralph E. Schackart - William Blair & Co. LLC: Okay. Anything that would cause kind of that robust growth that we saw in 2016 to sort of playing out in 2017?

Please say that again. Ralph E. Schackart - William Blair & Co. LLC: Sure. So with broadcast growing in 2016 and then I guess my assumption, right or wrong, is that the line item will be flat 2017 over 2016, just curious what would sort of cause that sort of growth shift?

Yeah. So just as a reminder, I kind of – I tried to talk slowly during my prepared comments, Ralph. But we had a stronger-than-expected year for recoveries in broadcast. And so we are not baking in that level of strength in recoveries next year. So that's tampering down some of the normal organic growth and that's why I said longer term we do see broadcast as an ongoing growth area for us. FY 2017 is just coming off a – they actually beat their revenue targets for the year. Ralph E. Schackart - William Blair & Co. LLC: Okay. Thanks for the clarification.

We'll now go to Jim Goss with Barrington Research.

Thanks. The nature of your relationship with AMC and Dolby Cinema is sort of a joint venture, or something similar to what IMAX has done. Does that wind up getting some impact on both licensing and product sales when you do it that way? And does the domestic AMC relationship also characterize what you do with Wanda and other international markets?

Hey, Jim, this is Lewis. I'll take the first half, and then I'll let Kevin comment more broadly on the strategy. For the most part, we currently run the Dolby Cinema business as an ongoing stream of revenue. From time to time, there may be transactions that land as a one-time sale. But for the most part, we are currently viewing it as being an ongoing revenue stream, and we would classify that within licensing.

Okay.

So, Kevin, do you want to comment on – he asked about whether the AMC has any color on Wanda and whether there's any interplay between those two.

We are engaged with them independently. I would – obviously, they have a relation to one another. But they are both great strategic partners, from our point of view. And I mean, really I think we are fortunate to have started with Wanda in China and AMC as our anchor partners, both strong, growing companies who share our passion for investing in the best possible movie-going experience.

Okay. And is that JV relationship similar, U.S. and China? And is that – that's the pattern you would take?

Yeah. Let me just be clear in case – I don't want to create any confusion. I think JV or joint venture could be taken as some term of art that we don't intend. These are standard commercial relationships for – and we share in the box office revenue. And I would say structurally in that respect they are very similar in terms of one another.

Yeah. Okay. And to the extent that you now have these new features, does it portend maybe somewhat of a revival in any of the physical media of Blu-ray, whatever? Or do you think that really will not change the trend of streaming?

Well, clearly, as far as we're concerned, we want to improve the experience for consumers, whether they go to the movies, whether they like to own a Blu-ray Disc or whether they like to stream from their favorite streaming provider. So we are agnostic as far as that goes. And I will say that, yes, certainly there are a lot of people that still enjoy to get the Blu-ray quality experience, and those that provide those experiences are interested in us leveling that and taking advantage of all the premium features available on UHD televisions, including Dolby Vision and Dolby Atmos.

Okay. And then lastly, to the extent that the new initiatives are collectively maybe in the, say, a $30 million category that you are talking about, and there are several initiatives and they seem to overlap in a variety of the licensing revenue categories and then into maybe product sales. Is there a way to map like each of the Cinema, Vision and Voice in terms of where they might be almost in a different sort of matrix relative to the way you have categorized the revenues traditionally, just to, say, measure the progress in those areas?

Hey, Jim, this is Lewis. As you can imagine, for a number that relatively small against a $1 billion company, we don't have a map we can provide you. But generally, the revenues are landing in broadcast, mobile and other. And then, over time, I think we had said that as things like Dolby Cinema get larger, we would seek to get it large enough to be able to break that out for you separately. Right now, for example, Dolby Cinema is lumped in other. And then also for Dolby Voice, if we have sales of Dolby Conference Phone, that will show up in product sales. So right now it's really hard for us to try to get that level of detail out in a matrix, but we will try to make sure we keep providing you enough information so you can see where it's going.

Okay. I appreciate that and thank you.

All right.

We will now go to Eric Wold with B. Riley.

Thank you. Good afternoon. Another question I – two question, one on Dolby Cinema, a follow-up there. How do you think about the opportunity to sign other large players domestically with Dolby Cinema other than AMC? And maybe how – not trying to get granular in these conversations, but maybe how would you characterize those? And will it be any push-backs that others may have that AMC maybe didn't have? And then secondly, if you think about the cadence of license revenue this year, just confirming that we're going to see a similar spike in Q3 that we saw last year around mobile, PC and in consumer electronics with that new customer. If that's the case, should we expect a similar kind of quarter-to-quarter move between two, three and four? Or is there anything that would have been more unusual last year that won't repeat this year?

Do you want to take the second one and then I'll -

I will take the second one and you take the first one.

Well, why don't you go ahead and then I will come back?

All right. So let me take the first one. Yes. In fact even when we went over results for Q3 of this past year, Eric, I tried to signal that we would expect that. So now that I'm giving guidance for FY 2017 although I'll stop short of trying to break down the revenue by quarter because I don't think that's appropriate. We do expect an uplift in Q3 from the timing of revenues. And you used the word spike. I think that's probably not a bad word to use. But we will see a spike in Q3. And the size and nature of the spike, all else held equal, would be of similar scale to what we saw this year.

So, related to Dolby Cinema, so one thing you asked is, what do our partners see in us that others might not have? There's a certain element of timing as it relates to any of our offerings. We tend to partner up with companies that have made quality of experience a particular priority, what we're doing resonates with them. And whether you are talking about Dolby Cinema or what we're doing in mobile or what we're doing in broadcast, there are always some that are ready to go there. And both AMC and Wanda are tremendously aligned with us in terms of their belief that consumers – more people will go to the movies and for a better quality experience. In terms of how we're thinking about additional partners, I'll tell you, my first thought is that having come into the year with about 10 screens and now having commitments for about 300, my primary focus is getting as many of those as we can deployed in 2017, making sure they are a great experience, making sure that consumers know that it's the best way to see a movie. And I think if we keep doing that, then I expect we won't have trouble finding additional partners in the future.

Perfect. Thank you, guys.

And we'll move on to Paul Chung with JPMorgan.

Hi. Thanks for taking my question. So a couple of them on new initiatives, on Cinema. Can you give us a sense of the unit economics, or is it still early to tell?

Hey, Paul. This is Lewis. It is too early to break that out because, as Kevin said, we were operating about 40 now. I'd say, as time goes along, when might I start thinking about doing that? I don't know. Let's get over the 100-screen mark and maybe we can think about that. But right now, there's such a wide range of economics between the different screens and it's a relatively small number of screens compared to the total plan we have. As Kevin said, we're now up to 300-ish that are committed, which is incredible considering that two years ago that number was zero. We'd like to get a little more critical mass before we start trying to break those unit economics out.

Okay. So the pricing details can kind of change as the Cinemas kind of become validated and the profits come running in?

Well, if you're referring to Lewis' comments on volatility, I think that's just the natural – not all screens are the same in terms of their attendance and performance. They are coming in at different points in the year. Without a full year of box office, it's hard to do any valid comparisons. I think that's what – but the economics don't vary with a partner by – to that degree now.

Okay. On Vision, should we expect any new material partnerships before CES of 2017?

Well, again, let me start by saying how pleased we are that we've gone from the first television hitting the market at the end of last calendar year to where we are today with a growing number of partners. We've added a couple of partners in China, so we're really getting that ecosystem up and going. So again, I'm going to – we did a lot of work in 2016 which we're going to be focused on getting to market in 2017, which is going to – which is going to – which is what's going to help us reach those 2X to 3X a year for the next couple of years on new initiatives. But absolutely, it's our goal to continue to spread the Dolby Vision experience. We've been focused very much on the high-end TV market. We're going to continue to be focused on that and look for new partners. We believe there could be opportunities this year to expand beyond TV. And so, we're very focused on that and making sure that we keep this momentum going, not just through 2017 but beyond 2017.

Got you. And then last one from me, just going back to the patent expiry on Dolby Digital, what is the potential amount of revenue that could be lost in full year 2017 or 2018, or has – have most of those relationships been finished up with Dolby Digital Plus? Thank you.

We don't break out revenue by technology. I guess my answer to that question is that we have given our guidance. We are growing and we are making progress in all the ways that people are enjoying entertainment in the future, and we are doing it with new experiences like Dolby Audio and Dolby Atmos.

Thank you.

We will take a follow-up from Steven Frankel with Dougherty. Steven Frankel - Dougherty & Co. LLC: Good afternoon. Kevin, I just want to follow-up on the comment you made about new use cases for Vision. Was that in reference to the Google DMA or is there something else that you might want to tell us about?

Well, so the DMA is our first Dolby Vision-capable device that is not a television. And look, I've said in the past, I think there are a lot of screens, entertainment screens beyond television that are going to benefit from HDR technologies. We are very focused right now on driving the successful results with the partners we have in the television space. But I don't have anything more specific other than to observe that as we go through 2017, we would like to find opportunities to provide this Dolby Vision experience even beyond the television use case. Steven Frankel - Dougherty & Co. LLC: Okay. And how many Vision SKUs are available today or by the end of this year?

Right now that the – we weren't – the SKU number is so – some people have one SKU for a model, and others, it might be five for what looks like the same TV. So I think the way to think about it is that, with LG, we are included on all of their 2016 OLED and Super HD models. That translates to some number of SKUs, but it means we are effectively across their UHD lineup. With VIZIO, we are on the top three out of their five lines. And in China, we have four partners, have each – are either in – just in market or soon coming to market with their first high-end models in Dolby Vision. Steven Frankel - Dougherty & Co. LLC: Okay. Thank you.

And there are no other questions at this time.

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

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.