Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Second Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session [Operator Instructions]. As a reminder, this call is being recorded today, Wednesday, May 1, 2019. I would now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, sir.

Good afternoon. Welcome to Dolby Laboratories' second quarter 2019 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. Reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website. As for the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2019 outlook. And Kevin will finish with a discussion of the business. So with that introduction behind us, I'll now the call over to Lewis.

Thank you, Jason. Welcome to your first earnings call, nice job. Good afternoon, everyone. Of course, I'd like to start by reminding everyone that beginning this year, we adopted a new revenue accounting standard ASC 606 using the full retrospective method, which required us a recast previous year revenue under 606. So like we did last quarter, we've included a table in the earnings release that we put out today that shows the FY '18 revenue figures as adjusted under 606 broken out by quarter. And any of the comparisons that I make to prior year revenue numbers are with respect to those 606 recast numbers. So let's get through the Q2 results. In the second quarter of FY '19, total revenue was $338 million. And within that, licensing revenue was $310 million, while products and services was $28 million. Total revenue in Q2 of last year was $300 million. Here are some comments on activity in end markets that we serve. Broadcast represented about 39% of total licensing in the second quarter. Broadcast revenues were up 22% sequentially and 38% year-over-year. In both cases, the increases were driven by higher revenue from consumer imaging, which includes both Dolby vision and our imaging patent portfolio along with higher recoveries. And the sequential trend was partially offset by lower seasonality in TV. Mobile devices represented approximately 22% of total licensing in the second quarter. On the sequential basis, mobile increased by over 90%, driven by timing of revenue under contracts. Year-over-year, mobile was down about 2% due primarily to timing of revenue, partially offset by higher volume from increased adoption. Consumer electronics represented about 14% of total licensing in the second quarter, and licensing in this area increased sequentially by about 2% due primarily to DMA. And consumer electronics on the…

Thank you, Lewis and good afternoon everyone. Q2 was another strong quarter. Our focus continues to be on enabling more people around the world to have Dolby experiences. In these past few months in the time of year that include many of our trade shows, with CES, Mobile World Congress, Enterprise Connect, Cinema Con and NAB. And as we participate in each of these trade shows, it gives us the opportunity to reflect on the progress we’re making and the opportunities ahead. We started this quarter at CES where there was a noticeable shift in the conversations with our partners. The discussion has increasingly involved and focused on how and when they will be adopting Dolby Vision and Dolby Atmos into their products compared to previously answering the why. It is clear now that Dolby Vision and Dolby Atmos have become robust ecosystems. The momentum for the combined Dolby Vision and Dolby Atmos experience with MTV is an example of just how far we have come. At CES Panasonic added to the list of top TV OEMs that support the combined experience, they join LG, Sony and TCL to name a few. After announcing its first TV with Dolby Vision and Dolby Atmos, Panasonic strengthened that support by announcing five additional models with the combined experience. In this quarter, TP Vision also announced that 90% of its Philips UHD TV line up for Europe will include the combines Dolby Vision and Dolby Atmos experience. Also at CES, Dell announced its first PC supporting Dolby Vision and is now available in market. Over the past year, we’ve seen a growing number of our partners highlight how the PC experience can be enhanced by Dolby Vision and Dolby Atmos. So as we continued to Mobile World Congress, we saw even more examples…

Thank you [Operator Instructions]. We'll hear first from Steven Frankel with Dougherty.

Kevin, let me just start with a high level question. What's the strategic implications of TCL following in the steps of Panasonic and Phillips in doing both HDR10 plus and Dolby Vision, given you have such a large lead on the content side. So what do you think this say to content creators and the rest of the CE makers that maybe haven't adopted Dolby vision yet?

Well, we feel really great about where we are with Dolby Vision strategically. And not only do we have, as you point out, critical mass and content across wide number of geographies, content types, content mediums, we also have a critical mass of device manufacturers. So we are focused on continuing to scale those opportunities. Like I said, we have great momentum and yet a lot of opportunity ahead of us. We continue to focus on connecting the dots so that all of our device partners get the benefit of all that content out there and similarly, all the content out there gets the benefit of all those devices that are increasingly supporting Dolby Vision and Dolby Atmos. And then we are also focused on working with them to make sure that consumers appreciate the difference they are getting, because at the end of the day, it's a spectacular experience.

I wish Game of Thrones had been in Dolby Vision last week. That might have made a difference. And Lewis just to drill in on your comments in the mobile business. When you -- timing you're referring to your large customer that pays once a year, that now occurs in the March quarter. Is that correct?

Well, without regard to a reference to a particular customer, remember one of the big things about 606 was the phase shifting from one quarter to the previous quarter in general. So, if you look at what we were talking about in previous years, it's not uncommon to see things that used to be talked about in Q3, let's say, which will be now happening in Q2. And that's probably across not just any one large customer, but any of the customers who report revenue to us quarterly is now booked real-time in the quarter where those shipments occur.

Okay. Now that you're into 606, were there any meaningful true-ups or true-downs recorded this quarter relative to what you estimated in the prior quarter?

Yes. Relative to what we had estimated last quarter, the true-up this quarter was approximately $8 million. We view that as being within the range of the kind of things we've modeled before, not particularly -- I would not call that overly significant, and we'll continue to track that and monitor that. But, yes, we feel pretty good about the first quarter out of the gates and we are pretty close.

And was that $8 million in any one bucket in particular or that was spread across the balance of the portfolio?

Well, yes, first of all, it's in licensing, it’s not a product, but it was spread. So I would not say that there is any particular large market or customer transaction, it was just reflection of this new world we live in where we're required to make some pretty complex estimations at the beginning of the quarter, given the multiple threads we have running through our business. I think, the team did a pretty good job.

Okay. And then, Kevin, given the cash balance, given where the stock is, what’s the Board’s thought process of either getting more aggressive on the buyback or some other method of maybe returning some incremental cash to shareholders?

Well, our focus is -- and the Board focuses on continuing to capitalize on the opportunity that we think we've created for ourselves and to drive growth, obviously also driving shareholder value. So that's all part of the same discussion. And as you know, we have been returning cash to shareholders via both buybacks and dividends, and we continue to visit that equation on a regular basis.

We'll hear next from Eric Wold of B. Riley.

Thanks, I appreciate it. I guess, as you look at the kind of deep audio and technology portfolio you developed over the years, audience at Dolby facility over the years, now it goes deeper into voice and then extending into video and cinema. I guess, where do you see holes in the portfolio that you'd want to address over the next two to three, three to five years? And can you address those internally or do you need to start looking back towards acquisitions? And then, the follow-up question kind of latching on to Steve's last question. As you need to move into acquisitions more aggressively, again, I guess what would be the range of multiples that you'd be comfortable of paying, and how do you kind of address that vis-à-vis the multiples you're paying in the stock buyback program.

Yes. I don't know if I can get that hypothetical except to say that, historically, we have done a number of acquisitions. We tended to be focused on early stage technology companies that are adding value to our portfolio of operators. I feel very good about where our breadth of technology investment right now, we feel great about where we are in the cycle with our audio technologies. Obviously, we feel like we're on to something special with Dolby Vision, with our consumer imaging technologies, and we have a lot of opportunity in front of us, as well as the Dolby Voice proposition, and we see those coming together in some interesting ways as we look to the future, the combination of not just Dolby Vision and Dolby Atmos but the opportunity to incorporate some of our voice expertise into consumer products going forward is also an interesting opportunity for us.

Okay. And just in general then on the multiples you’ll be comfortable paying if you were to look for acquisitions?

Again, that's a little -- I don't know, I can't answer it that hypothetically. I mean, that really depends on a lot of factors. I don't have a hard and fast multiple. It has much more to do with the gaps we’re filling and the total contribution to our value.

Got it. Thanks, guys.

[Operator instructions] We’ll go next to Jim Goss with Barrington Research.

Thanks. One line question I'd like to pursue regards the mobile aspect. Traditionally, while it's easy to sort of see why the appeal of Vision and Atmos in television or in a theatrical space, the mobile device manufacturers seem to have been more reluctant to be paying extra for incremental products and services, especially when they may have not been viewed is incrementally that much better. And they were always worried about margins. And I'm wondering if you could talk about sort of the shift in mentality that may have occurred that may have left you broaden your appeal and your impact in that particular sector. And what you might point to in terms of growth trajectory, you ought to be able to achieve in the phones and tablets and whatever other devices like that?

Yes. I guess, I'd start by saying that I think that across our portfolio, we obviously have a very diverse set of devices from mobile phones up to automobiles, and they're all focused on price. So, to come in with Dolby Vision, Dolby Atmos or any of our solutions, what you have to have is a compelling value proposition that they believe that their consumers are going to care about. And we think that the fact that we've had so much progress on with Dolby Vision and Dolby Atmos in this space over the last 18 to 24 months is very, very encouraging. We're onto something. And, our focus today is of course to continue broadening the presence of devices but also to make sure that we're getting as much content to those devices so that people can experience it that way. And all that as adds up to what we see as a great opportunity for us to continue to grow in that category.

In the, say, the cellphone area, are -- is the appeal of Atmos in headsets that could create the much more better sound enough of an appeal that some are finding that to be something they can sell as an incremental reason to buy one device over another, may be particularly with some of the Chinese manufacturers that are trying to combat some of the industry leaders right now?

Well, I guess, I would go back to what I said in the call, which is just we saw Sony at Mobile World Congress announced its first phone to include Dolby Atmos, OPPO announced its first phone to include Dolby Atmos, Samsung and Huawei are including Dolby Atmos. So, I think that we're really pleased with that. And I think that clearly it's a sign that the mobile -- the smartphone is clearly entertainment device that people are using for a lot of forms of entertainment that weren't as common four or five years ago. So, it's good progress.

Okay. And maybe one other thing, in terms of share of TV manufacturers or TV SKUs, however, you'd want to state it? Where are you right now versus the progress you've been able to achieve and where do you think you can head with that? Because broadcast category has been substantial, obviously?

Well, I think, we're in, I think the latest it says 14, 15 TV OEMs of the top 15. And most of our presence is as it relates to the UHD TVs which is an increasing share of the television market overall. And within that UHD space, consistently we started out at the higher end of the UHD TVs, but we do have notable partners who are going deeper than that. With VIZIO, with TCL, I mentioned earlier that TP Vision is straight out of the gate going into 90% of its UHD line, [indiscernible] is another one that comes to mind. So, we're making good progress. And I think as the UHD share begins to grow, or continues to grow, I should say, and as we continue to work with our partners to drive the value proposition, deepen our lineup, that's another big growth opportunity for us.

We'll hear next from Paul Chung with JP Morgan.

Hi. Thanks for taking my question. So, first up on broadcast. So, you put up some nice top-line there. Can you just expand on what regions, kind of channels, products drove that strength. And are we at a point where this segment can start accelerating after some years of flattish growth?

Hey, Paul. This is Lewis. We don't break out our market data by region. We don't get down to that level of granularity. But, as to sort of play off of what I said before, we were up sequentially and year-over-year, driven by the success we're seeing broadly across our consumer imaging offering, which includes, both Dolby Vision and our consumer imaging patent programs. And so, I think you should think of that as being broadly across broadcast because we don’t break out by region. And as you know broadcast is a combination of TV and set-top boxes. And right now that would be primarily TVs because we have not yet announced Vision and set-top boxes. And going forward, we maintain that broadcast continues to be a growth opportunity to us in a couple of different ways. One, there are many large regions around the world that have not reached the level of adoption we see, for example in the U.S. and Europe; and two, consumer imaging is relatively new compared to audios. So, we see more opportunity for further penetration that would land in broadcast as well. And I think Kevin mentioned in this comments that it’s only later this year that we expect moving to first set-top box of pay TV operators to offer Dolby Vision and Dolby Atmos, and that's a beginning of what could be a growth opportunity there. So, we really love that broadcast segment and we do it as being an element of growth going forward.

And then, given the kind of tough way to compare top-line given 606 changes, are you guys at a point where you can provide free cash flow guide for the full-year? It looks like CapEx stepped up but I think that's really the cinema, but if you could provide kind of CapEx guide and free cash flow guide that'd be really helpful.

Okay. We will take that under advise. And I think for CapEx, we've been consistent the last couple of years saying that our run rate of CapEx per year is in sort of that $100 million a year, plus or minus. I think that's relatively easy to address. You’re right, I don’t specifically forecast the free cash flow. But our business is relatively predictable and balance sheet is very clean. If you look at it this quarter, we saw some growth in receivables and inventories but the rest of it is pretty clean. So, CapEx, you are looking for the CapEx piece of the equation, think of it being around $100 million is what we're modeling right now, give or take.

Okay. And then, last question is on cinema. If you could -- Kevin if you could update us on how many installs we stand at, kind of what's in the pipeline, and any kind of contribution that you can provide there? Thank you.

Sure. We have about 215 screens open in about increasing number of countries around the world, we’re currently up and live in 10 countries. The U.S. continues to be the largest market of installs followed by China. In fact, we just added a good new partner in China in the last several days. And I'm excited to see the growth in France and we just added our second screen in UK and our second screen in Japan. So, we're beginning to broaden that footprint. We've been adding at about 60 to 70 per year. So, that's our current guidance, if you will. But, yes, we're feeling good about where we are. It's well-received by consumers, it's well-received by our exhibitor partners. And like everybody in industry, we’re pretty excited about the performance of Avengers: Endgame this weekend.

[Operator Instructions] We’ll hear again from Steven Frankel with Dougherty.

Kevin, let's put aside Endgame, which obviously busted every records, but how are the cinema screens performing relative to the way you modeled them when you started in this business and maybe how you rejiggered the model a year ago?

Well, I think that -- well, a couple of things. First, I would say that I would separate our -- what we originally had modeled for China from rest of the world because I think I'd said both in our products business and our Dolby Cinema business, we have seen less than we expected, generally in China, which is not to say that we don't have a lot of great engagement there, and we're happy with the business we have and we're continuing to expand screen count. But, I would say across the board over the last 12 months or so, China's just been generally slower in cinema than what we've been experiencing previous to that what we've been expecting. Outside of that, we have been very pleased with the performance. So, I mean, obviously it depends on box office and it helps when you have an Avengers: Endgame weekend. But, even setting that aside, when we look at the per screen attendance relative to other PLF formats when we look at the average prices relative to other premium formats, we are very, very pleased with what we're seeing from Dolby Cinema.

Have you seen any material benefit from move towards subscription?

Well, I think, what we're seeing is that when -- with the programs that include premium offerings, it gives people another reason to try the premium experiences, and that's good for us. Because once people experience it, consistently, we get great feedback. They want to have that experience again. That's how word spreads. And so, we are seeing -- we see that as a positive for both for attendance and for getting more people familiar with what the Dolby Cinema experience is all about.

And were there any meaningful new tests of vision outside the U.S. in live events? I know occasionally over the last couple of years, there have been some live event tests, any more of those occurred, or are there any more coming up in the next quarter or so?

Yes. I don't think I have anything notable since we last spoke. But as you know, we've had a number of great tests over the last 12 months and we do expect - and we do have more in the works to come. So, all part of the process of getting to more live sports content in both Dolby Vision and Dolby Atmos, where, of course, we do have commercial services up and going. And as Lewis noted a moment ago, we are expecting our first pay-TV set-top boxes with both Dolby Vision and Dolby Atmos combined this year.

Let me sneak one last one in. What does the transition to ATSC 3.0 mean for you? And does that have a kind of follow on effect on the pay-TV guys if they try to match the features of 3.0?

Well, first of all, the ATSC 3.0 rollout in the U.S. is supporting AC-4. So, that's great for us because it gets to the next generation of our experience and allows for greater efficiency, it's natively designed to work well with Dolby Atmos, and it also has a lot of features enhancements, which we think that can add value to our partners and consumers as we go forward. We're seeing great traction as well in Europe. We have a number of countries that have begun to transmit using AC-4. And so, overall, I feel great about where we are in that technology cycle and with the adoption that we're getting around the world.

And again, if that gets adopted over the year, does that put pressure on the pay-TV universe to adopt AC-4 for as well so they can match feature for feature what the already your guys are doing?

I don't know if I'd say that puts pressure on them. But I think that there is a little bit of a virtuous circle in the sense that more device manufacturers are supporting AC-4 that gives you one more reason or less barrier to adopting it. I think that everybody knows what's going on in the industry. So, the fact that you get adoption in one place and then another place and then another place, people are going to take note of that and they're going to understand the reason why that's actually helpful to us. And, but ultimately, what we're -- what we feel good about is the value proposition of AC-4. That's what we're selling. And what we're selling is a more efficient way to deliver higher quality experiences, like Dolby Atmos, and that's what AC-4 is all about. So, all of that combined to give us confidence across the markets we operate.

And did you have -- I'm sorry for growing on, but one more. Did you have any involvement with this new Netflix initiative announced today around high quality audio?

Well, that high quality service that they've announced, is delivered via our technologies. And, they're now allowing -- they will now where bandwidth allows use -- allocate more bandwidth to the audio experience. So, that's -- so it's a Dolby experience with more bandwidth. So, of course, we're all in favor of it. And our teams partner very closely with Netflix and our other partners around services like that. But, this is their way of providing even better quality to their customers. And anytime that people recognize the value of high quality audio and video, that's people playing in our tune will love it.

[Operator Instructions] And with no other questions, I'd like to hand things back to Kevin for closing remarks.

Great. Thank you everyone for joining today. And we look forward to updating you on our progress. Thank you.

That does conclude today's conference. Again, thank you all for joining us.