Ladies and gentlemen, thank you for standing by and welcome to the Dolby Laboratories Conference Call discussing Third 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 Thursday, August 1, 2019. I would now like to turn the conference over to Jason Dea, Director of Investor Relations at Dolby Laboratories. Please go ahead, Jason.

Good afternoon. Welcome to Dolby Laboratories' third 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 was 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'll 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 today's call, Lewis will begin with the 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 will now turn the call over to Lewis.

Okay. Thanks, Jason. Good afternoon, everybody. As a reminder, we adopted the new revenue accounting standard ASC 606 beginning this year, and we use the full retrospective method and that required us to recast previous year's revenue under 606. In our earnings release, we've included a table that shows the quarterly FY '18 revenue figures as adjusted, under 606 and this is the same table that we published last quarter. So any comparisons I make to prior year revenue numbers are with respect to the 606 re-casted numbers. I think it's worth noting that Q3 of last year was the quarter most impacted by the 606 recast, with a large portion of revenue i.e. as originally reported under 605, shifting out of that quarter in the prior quarters and prior years due to 606. So, let’s jump into the numbers. In the third quarter of FY '19, total revenue was $302 million compared to $338 million in Q2 and $215 million in last year's Q3. Licensing revenue for the quarter was $272 million, while products and services was $30 million. Our licensing revenue was in line with expectations, while products and services was about $10 million below the midpoint of original guidance. Here's a further breakdown of licensing by end-markets. Broadcast represented about 49% of total licensing in the third quarter. Broadcast revenues were up about 60% year-over-year, and as I alluded to a second ago, Q3 is a particularly tough quarter to discuss year-over-year comparison, because of the impact of the 606 recast on last year's Q3 numbers. But having said that, I think it's worth noting that Dolby Technologies are adopted in the more TV models and set-top boxes now than they were a year-ago and of course that's something we focus on to drive the ongoing revenue…

Thank you, Lewis. And good afternoon, everyone. This quarter, we continue to see Dolby Vision and Dolby Atmos experiences becoming increasingly available to more people around the world. Last month, Apple announced broader support of the combined Dolby Vision and Dolby Atmos experience. Already supporting Dolby Vision in iPhone 10 iPhone 8, iPad Pro, Apple announced the addition of Dolby Atmos to these products, starting with the next iOS release later this fall. On top of that, MacBook users will also be able to enjoy the combined Dolby Vision and Dolby Atmos experience, beginning with the next Mac OS Catalina. This is all in addition to the Apple TV 4K which became the first DMA to support the combined Dolby Vision and Dolby Atmos experience over a year-ago. Apple customers will be able to enjoy the largest collection of Dolby Vision and Dolby Atmos content available. Apple now has over 500 titles available on Dolby Vision and 300 titles available in Dolby Atmos. The continued adoption by our partners like Apple of both Dolby Vision and Dolby Atmos into their products reflects the momentum we have gained in establishing the Dolby experience as the best way to enjoy entertainment content. Many of our partners increased their support by announcing new devices this quarter that support our technologies. Consumers are now able to have a combined Dolby Vision and Dolby Atmos experience through set-top boxes. Verizon enabled their FiOS TV one platform with support for the combined experience and their customers can now enjoy Netflix content in both Dolby Vision and Dolby Atmos. Additionally SFR a pay-TV operator in France recently announced they would be supporting Dolby Vision and Dolby Atmos on its latest set-top box to launch later this month. We’ve also seen continued progress this year in having Dolby…

[Operator Instructions] And your first question comes from Steven Frankel with Dougherty. Please go ahead.

Good afternoon. And thank you. Kevin, let's start with what's now working in the product business, maybe a little more specific on what happened because it does seem like on the Cinema side, you were growing your install base in China, so we know at least there is some of that activity going forward. So what stunted the product business, and what are you going to plan to do to try to restart that?

Sure. So, first of all, Steve, you're right to draw that distinction between the Dolby Cinema business and the broader Cinema products business, we continue to see around the world and across our businesses, our customers, our partners, the creative community wanting to invest in the premium entertainment experiences across streaming, across Cinema, across the board. The Cinema products business, of course, is much more reliant on the longer-tail of Cinema screens, over 100,000 screens around the world. And China has been one of, as you know, one of the fastest-growing market. I think a couple of years ago they were doing just under 20,000 new screens a year and I think this year they are under 10,000. So, of course, we knew that was slowing coming into the year. It slowed more than we expected and as it slowed, we've seen competition heat up for -- fighting for a smaller number of screens. In terms of what we're doing, we have expanded our portfolio, we have had some success with some larger exhibitors doing longer-term purchasing contracts for the full suite of what Dolby has to offer. We did see some things push out into future quarters from one of those, in particular, but I think the broader point is that we're excited about the opportunity to go in and offer broader solution and we're seeing a lot of interest in that from exhibitors.

Is one of the factors impacting this business is with the shift to premium, the multiplexes are shrinking there's fewer screens than there used to be. And you get a Dolby Cinema screen in there and IMAX screen, but there are fewer vanilla boxes to put Atmos in your other Cinema products in?

I view them as independent variables. I think there may be some relation. But I don't think that the shift to premium is directly traded off against the number of screens overall. But I do think that we -- China was on a torrid pace for many years there It's now slowed down, obviously there is a lot of macroeconomic factors which are, it's hard for me to draw a straight line through any one of them, but that clearly contributes. So just in general, we've seen a slower environment for those other screens, but again, I don't think I would attribute that directly to the shift toward premium. I think that -- but I do believe that people continue to intend to upgrade their larger premium screens as they recognize that when you invest in quality, when you have such a unique way to experience a film that will bring in bigger audiences and it's also brought in higher box office revenues. So that's how we see it.

And in your prepared remarks, I heard you kick off Voice is one of the areas that hasn't ramped as quickly as you had anticipated, and I think the new Room as a Service is kind of interesting, what's not working in Voice and is this doing as a Service offering is that the fix to get rid of the capital expenditure?

Well, I think that part of it is the transitioning from a CapEx to an OpEx model. I think a big part of it is, I think it's a more natural way for people who are looking to convert side out for a huddle room experience for the collaborative, audio, video with everything including the Dolby experience. It's a more - it's more natural to -- to the natural sales motion of our partners and to the purchasing motion of their customers. That's why we believe that the Room as a Service offering is promising. It didn't kick in until partway through this last quarter, we are pleased with the demand we're seeing. Of course, as you would expect one of the implications of that from a revenue perspective, is it will come in over time, rather than upfront. So that's an adjustment for us and we're excited now to have signed up LogMeIn for their GoToRoom offering and that's going to be launching this quarter.

Okay. And then one last one. Over the last year or so, you've talked a lot about the ability to return to double-digit top line growth. How significant of our hurdle now is this down tick in the product business in your goal of getting back to double-digit top line growth?

Well, I think the formula remains the same, and again I would note that licensing has remained healthy across the board. As I said in my remarks, we -- to us it's all about making sure that Dolby experiences are proliferating in all the ways that you enjoy your entertainment. And of course there will be ebbs and flows by any one product category or market, but the formula I've talked to you about is, we do believe -- we continue to believe that we can grow the core business. And then on top of that we have a number of new experiences in the form of Dolby Vision, Dolby Cinema, Dolby Voice, which are -- have great initial adoption, but still a tremendous amount of growth ahead of them. So that's -- the formula hasn't changed and we still feel very good about our progress in terms of adoption and now that sets up the future.

And would you still believe that you can get back to double-digit revenue growth?

As it continues to be my belief and my goal to get back to double-digit revenue growth. Yes.

All right. Thank you, Kevin.

Our next question comes from Ralph Schackart with William Blair. Please go ahead.

Good afternoon. Just to maybe kind of touch on the products and category, one last time. I think you'd noted China sales ramp from products and then Voice is sort of the contributors to the line coming $10 million below. And then you also talked about some products potentially getting pushed out. I'm just wondering if maybe you could kind of size between those four factors that had the -- which one had the biggest sort of impact on the quarter?

Hi, Ralph. It's Lewis. I think that's fair question. Yes. As you know, we don't -- first of all, just for the whole audience products and services revenue make up about 10% of the company. So let's just put that in perspective, and we don't typically break out products between the different categories. But directionally, I would say that the discussion that Kevin had around Cinema products and some of these circumstances like to China and the demand was a larger part of that may stay on the Voice side

Okay. And then just in terms of your '19 outlook Kevin or Lewis whoever talked about it growing new products around the 65% or so level and some upside that we've seen in licensing today. I'm just curious how that's playing out for FY '19. Is it still sort of the right way to think about the growth in those categories?

Yes. As we still feel good about that and it's driven by the continued adoption of Dolby Vision, the growth in Dolby Cinema, as well as our entire imaging portfolio and our Dolby Voice products. But yes, we still -- we said coming into the year that we'd be at least 65% is how we saw it, since last year and we still feel good that it will be at least that level.

Yes. Great. One more. And I know you don't give 2020 guidance in this call, but anything that you're seeing in the business today that would sort of suspend or sort of break the momentum in the licensing business as you're marching towards high single-digit growth eventually to get to double-digit growth at some point?

Well. I'll quote you in that. To be clear, we're not going to give guidance for fiscal '20. I will say to the inverse of your question, I think the positive indicators are, the continued adoption of Dolby Vision,. Dolby Atmos and all the data points I highlighted on the call. I guess, in terms of things that could derail that I mean certainly we've not -- we've been fortunate not to have seen any -- apart from the dynamic in the slowdown in new screens as it relates to Cinema in China. We haven't seen any real direct impacts of any of the macro concerns, as it relates to the trade situation with China or any of the effects with that. It's obviously something we'll keep watching. I don't have any specific information that that leads me to think it will go one way or the other, but obviously that would be something we'll be keeping an eye on.

Okay. Thanks, Kevin. Thanks, Lewis

And our next question comes from Eric Wold with B. Riley. Please go ahead.

Thank you. Good afternoon. Maybe just following up on the last question, I know Kevin and Lewis that you're not going to give guidance for ' 20, but maybe just kind of thinking about the various licensing segments. Any thoughts around meaningful changes in momentum or direction of each of the lines heading into next year. Anything that can kind of change those, what we're seeing in '19?

Well, I think if I were to kind of go through the market, I think for broadcast, one of the biggest factors continues to be how aggressively our partners adopt our new technologies within their line-up. So, as you know, we have broad adoption across the major TV manufacturers and they've had varying paces of how quickly they move that throughout their 4K HD line-up, so that's one of the factors. We saw VIZIO announce this year that it will be their entire 4K line-up. So certainly one of the factors in the more we see that the better it is for us. The other big dynamic within our broadcast basis is set-top boxes and I talked today about two of the first set-top boxes that will support Dolby Vision and Dolby Atmos, of course set-top box cycles tend to -- they have their pace, but that's a good initial indicator and certainly that could be another driver in the broadcast segment. Mobile, that's an area we said we think we can grow. We've got some great adoption. We couldn't be more thrilled that Apple will now support both Dolby Vision and Dolby Atmos on the iPhone, and the iPad and Mac OS. The -- we had Samsung announced its latest Galaxy earlier this year with Dolby Atmos, OPPO signed up this year. So again we're -- outside of Apple we're on kind of a few models we could go deeper. I think a lot of that has to do with the use-case context. I talked today about our relationship with Universal Music Group and that's great for us because one of the key pillars of everything we do is having compelling content. Obviously, we have some great Dolby Atmos devices. And so we're looking forward to the opportunity to…

Thank you. And this won't give follow up if I may, can you hit on the integration of Dolby Vision into set-top boxes, I guess how key is that to getting into emerging markets, given that set-top boxes will be still very much required in those markets. And then on just a new opportunity, how soon could smart speakers be meaningful for Dolby? Thank you.

Yes, I think on the first question, I think it does vary somewhat by market in terms of how much they're looking to go to set-top box services over IPTV or in cable, I would say It really varies. But it's an important category for us, I think in all markets and in some emerging markets, as you point out, it's particularly important. Second part of the question? Yes look, I think that anywhere where there is an immersive audio experience, we think that we have the best way to do it. And so it's an interesting category for us. And I think -- and again where we're looking to increase the types of content and experiences. We're increasing the library of movies and TV content, live events, I think all of -- those are the things that put us in a position to go and try to compel more people to adopt it in more ways .

Thank you.

Operator?

My apologies. We'll take our next question from Paul Chung with JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my question. So first on broadcast, if I take a look at the past two quarters the revenue run rate has accelerated quite nicely, relative to the past three years. So, first, is this kind of a function of 606 changes or has there been any shift in classification maybe from other revenues or is this just solid organic growth kind of driven by Dolby Vision adoption. If you could kind of expand on the dynamics there?

Sure I'll hit the first Paul. This is Lewis. First of all, yes, to confirm that in broadcast which for those who don't know is made up of TV and set-top box business, the first overarching comment is that, in fact, as Kevin mentioned in his comments, we are being adopted into more TV models and things like set-top boxes. And of course, if you look year-over-year the impact of things like Dolby Vision is going to show a growing trend. So yes, broadcast is very important and healthy business for us. Secondly, when you look purely at the year-over-year comparison I did try to point out that, of course, that is to some degree affected by the 606 recast because last year's Q3 was affected by the recast. So it's really, hard at this juncture to make pure apples and apples comparison, because the accounting is lined up, but it was a year ago a different set of deals and circumstances. So I think it is a combination of those. But I think overall, we do feel like broadcast is fundamentally for us a strong a growing business and the types of things, you would see with the adoption of things like Dolby Vision into more models or, as Kevin mentioned, this is the first two set-top boxes that have mentioned Dolby Vision which that's not even in our revenue yet, so we see continued opportunity going forward.

Thanks for that. And then can you remind us, in general what your penetration rate for overall TV for Vision. I know in the past you mentioned it was low percentage on overall TVs, but are you kind of seeing more of your partners rollout Vision to more SKUs? And then, if not, what kind of holding them back from doing so across their whole product line up?

Let me hit the numbers part, Paul and I will turn it over to Kevin. So yes, we do not routinely publish or disclose the penetration rate. Whatever that number is we just want it to get higher. So let me turn it over to Kevin to talk more organically about the strategy to get into more models and stuff like that.

Yes, we have seen some of our partners announce Dolby Vision throughout their 4-K line-up. We've seen it with, I mentioned VIZIO, we've seen it with Bestow. We've seen it with TCL. So I think that's where it starts. I think in terms of what are the -- you put it, what are the barriers I guess. Each provider has its own strategy which kind of informs what their next priorities are and how quickly they adopt it. But our goal is to keep supporting those that are ready and to keep bringing more content to life and over time, we found that if we keep executing on that formula, we can end up on a very large percentage.

Okay. Thanks. And then my last question is on, free cash. So if I look at free cash flow, your cash from operations, it's down about 18% kind of year-to-date and then your CapEx levels are up this year about $25 million. So you're kind of overall free cash flow is down about 42%. How should I kind of interpreting that decline is this more of a timing issue? And then, your free cash flow conversion has been quite good over the past 2 years, it's been around that $270 million mark for the past 2 years. So are we on kind of track to hit that mark this year? Thank you.

That was one long asked questions, Paul. Okay. So first of all...

I know you like these long questions

Yes I like them. Fundamentally, the cash flow model of the business has not changed. Very strong, but the dynamics. You see our to some effect impacted by some of the 606 adoption, which does affect our balance sheet. We've also grown a little bit on the inventory side to support some of these newer product launches. On the CapEx side there, I think the level that we're at now represents kind of what we see running. So I don't think there's any significant changes going on with CapEx. We're kind of in that $100 million a year class, of which a good chunk of that is for our ongoing expansion of Dolby Cinema. So overall I would say that we expect this business to continue to be a very strong cash flow producing business where the revenue and earnings does translate directly to cash flow generation. But on a quarter-to-quarter basis, there can be some fluctuations, and remember we are only in the third quarter of adopting 606, we'll be finished working through a whole year of that and some of the balance sheet impact from that. And then I think they will start to normalize.

Thank you very much.

And our next question comes from Jim Goss with Barrington Research. Please go ahead, sir.

All right, thanks. I was wondering with, if there are any specific constraints or push back, you're getting in terms of expanding Dolby Cinema, I know you said you're looking at Europe, China and Japan as places you planted at some seeds. Is there something that's holding that back at all? And are you viewing it as much branding for license sales. Is anything else anyway or is this category, you're trying to push?

We view this is a really attractive opportunity to a number of things that we see it as an attractive business opportunity. We see it as a great way to show consumers, and creatives and exhibitors what Dolby experience is all about. And so, I would say, kind of both. And yes, we planted seeds, I mean I think that we're seeing the number -- we started off as you'll remember in the US and China was where the program started off and we've been very busy growing those are – those are our two largest market in the US is the largest and China is the second largest today in terms of screen counts and over this last year and a half, we've seen Pathe come on-board in Europe, we've seen Kinopolis opened its first screen in Munich, this quarter, we saw Odeon Leicester Square earlier this year. So when I say seeds, I mean we've won partners who intend to roll out more screens and we've got our first ones -- first one is live. Japan we opened our first later last year, I think we've now got two, we've got a couple more on the way. So I think that we are benefiting from the fact that, just the people are - have a much better understanding of what the experience is all about. Clearly, we've got a fantastic flow of content. I mean, last year we were on all 10 of the top global box office leaders, so far this year we're 9 of the 10, I would say, we're still in the running to get in the top 10 for the year. So I think all of those things are things that make it easier for somebody to understand what this is about and take that leap with us to really improve the movie going experience. And then, there's broad interest in general and understanding that the premium large format experience premium experiences, I think are increasingly people understand that that's the way to bring more people to the movies, especially for the big titles.

Okay. And Kevin, I have noticed a lot more Atmos applications then Vision I wonder is there a reluctance of the economic model you'd require to do a complete Atmos Plus Vision equals Dolby Cinema package or is there something else that might be?

Are you talking about Cinema specifically?

In the cinema application, yes.

Yes. Well, that's because Dolby Atmos became available in the cinema before we had Dolby Cinema as an offering. So we don't -- Dolby Vision is not available in the cinema in any other way, then the Dolby Cinema experience.

Okay. And the other question I have relates to the Apple terms even you've been pointing toward. What exactly -- how many models do you expect them to be on, and are there certain broader availability of Vision and Atmos and those phones or what else is available with Apple? Maybe it's other devices as well?

Yes. Well today you can enjoy Dolby Vision on iPhone 10, iPhone 8, the iPad Pro and they've announced recently that beginning in the fall, you're going to be able to enjoy Dolby Vision and Dolby Atmos on all of those devices. The Apple 4K TV was already the first DMA on which you can enjoy the combined experience and then they also announced that they will be adding both Dolby Vision and Dolby Atmos for the first time to the Macbook, So yes, we're going to -- I think Apple consumers will have broad support across their favorite devices and they do currently out the single largest library of Dolby Vision and Dolby Atmos content. And that's been steadily increasing, I gave some of the numbers earlier, and they're currently over 500 titles in Dolby Vision, 300 in Dolby Atmos but that's been steadily on the rise.

All right, thanks very much. Appreciate it.

Yes. Thank you.

[Operator Instructions] And we'll take our next question from Steven Frankel with Dougherty. Please go ahead.

The Apple capabilities, Atmos on a phone is that pass-through to an Atmos capable device or on headphones can I get the virtual Atmos experience or some kind of an enhanced audio?

Yes. In general, I will say our -- when we're talking about our Dolby Atmos wins for mobile devices, we're talking about the experience you have while experiencing on those mobile devices, as opposed to passing through to -- even if it does support a pass-through when I'm talking about Dolby Atmos on mobile devices, I'm talking about being able to experience Dolby Atmos on those devices.

Okay. Great. And then one last one for Lewis, because we don't want him to feel left out. Any material true-up balance in the quarter or have you got this thing down lockdown patent now?

Can you say that again, Steve, I was too busy making the [ph] comment?

Any material true-ups or true-downs from earlier in the year in the just reported quarter?

Sure, yes. So the true-up this quarter was approximately $7 million and that's consistent with last quarter as well.

Great, thank you.

Yes, no problem. Now I don't feel left out.

And it appears that is all the time we have for question-and-answers for today. I would like to turn things back to the speakers for any additional or closing remarks.

Great. Well, thank you all for joining and we look forward to speaking to you again soon.

And this does conclude today's call. Thank you for your participation. You may now disconnect.