Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Fourth Quarter and Fiscal 2020 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, November 12, 2020. I'd now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead, Jason.

Good afternoon. Welcome to Dolby Laboratories fourth quarter 2020 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, including our first quarter and second quarter fiscal 2021 outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time. A discussion of these and additional risks and uncertainties can be found in the earnings press release that is 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 GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet, on the Investor Relations section of our website. After the content of today's call, Lewis will begin with a recap of Dolby's financial results and provide our first and second quarter 2021 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.

All right. Thank you, Jason, and congratulations in advance for the impending arrival of your second child. So good afternoon, everyone. I hope everyone is doing well. Our Q4 revenue was above our guidance, but we are still down on a year-over-year basis and that reflects the ongoing impact of the pandemic. So let's go through the numbers. Fourth quarter revenue was $271 million compared to $247 million in Q3 and $299 million in Q4 of last year. Our revenue guidance coming into the fourth quarter was a range of $225 million to $255 million. So compared to guidance, revenues were better than what we projected as we had a true-up of about $25 million in the quarter related to Q3 shipments, which was about $15 million higher than the true-up that we had last quarter, and with most of that improvement coming from TVs and set-top boxes, and PCs. Total company revenue in Q4 increased sequentially by $24 million compared to Q3 as we benefited from higher unit volumes in TVs, set-top boxes, DMAs and PCs, along with the higher true-up that I just discussed, and all of this was partially offset by lower revenue from mobile due to timing under contracts, and I will discuss that in a second. Now looking at Q4 on a year-over-year basis, total company revenue is down by $28 million from last year's Q4 and we can attribute that mainly to COVID-19, especially in products and services, which were down by about $20 million or nearly 60% below last year. The composition of Q4 revenue was $257 million in licensing and $14 million in products and services. So let's break down licensing revenue by end market, starting with broadcast. Broadcast represented about 47% of total licensing in the fourth quarter. Broadcast revenues increased…

Thank you, Lewis, and thank you everybody for joining us today. I want to focus my comments on three main areas today. I will start by highlighting our continued progress, increasing the number of Dolby Vision and Dolby Atmos experiences around the world. I'll then spend a few minutes on the changes we have made in our cinema and conferencing hardware business to adjust to the evolving conditions in certain markets. And then I will share some thoughts on the exciting opportunity for Dolby to address a new world of content through our developer platform and related initiatives. Before we move on, I do want to take a moment to thank our employees for their dedication and creativity. In a year where we all face challenges and disruptions, they have continued to bring more Dolby experiences to more people around the world, and they are the driving force behind the Dolby magic. Let me start with the Dolby Vision and Dolby Atmos ecosystem that continues to grow. With the launch of iPhone 12, consumers are now able to see the benefits of Dolby Vision when they record video and share it. We are excited about the opportunity to support this ecosystem so the Dolby Vision content can be enjoyed on social media, video sharing sites, and more. This will vastly expand the content that can be enjoyed in Dolby Vision, adding more reasons for devices and services to adopt our technology and creating new opportunities for Dolby. During 2020, we continue to grow the presence of Dolby Vision and Dolby Atmos across the many ways that people enjoy movie and TV content. At the beginning of the year, we saw the launches of Disney+ and Apple TV+ with the combined Dolby experience. Google Play, Showtime and PBS all began streaming…

Thank you, ladies and gentlemen. [Operator Instructions] Your first question comes from Steven Frankel with Colliers.

Good afternoon, and thanks for the opportunity. Kevin, I want you to talk a little bit about the Dolby.io opportunity. Maybe tell us a little bit about the go-to-market approach and specifically around voice. How do you take voice, which has so much promise embedded into some higher volume applications, where it can really make a difference to the consumer?

Thanks, Steve. Yes, we're really excited about the opportunity to improve so many different types of experiences, including the Dolby Voice. And in terms of how we're bringing it to market, we are first focused on our engagement with developers. We've brought a lot of people on board who have a lot of experience doing that, knowing them with the teams that we have that understand how to apply our technology and expertise to improve media and interaction experiences. So it really is about reaching out to developers, growing that community, bringing them to our platform, make it easy for them to understand how they can employ these technologies, and then also learning from them to then evolve our offerings and bring to bear more of our expertise and more of our IP portfolio to solve new challenges. And of course, over the last six months, our product teams have had the opportunity to engage with a lot of potential developers and customers relative to deploying these technologies. As it relates to Dolby Voice, it's about the interactivity that we experienced in our apps and services every day, and so that runs across telehealth, online education. We see opportunities in that where entertainment needs communications to work in areas like in the future. We're talking to people about areas like social media or live streaming platforms where people want to introduce interactivity. These are all areas that we see opportunities to bring Dolby Voice to life through the developer platform.

And your existing partners like BlueJeans, should we expect them to adopt the software approach as well, so even without your hardware you can get that same experience?

They do that today, Steve. So BlueJeans has the Dolby Voice service integrated into their full platform. So you do not require the Dolby hardware to get that experience, and we continue to work with BlueJeans and consumers. BlueJeans customers will continue to enjoy the Dolby Voice experience when they're participating over their mobile devices and their PCs like so many of us are doing for so many hours a day.

Great. And you didn’t mention anything about gaming, given the two new platforms just hitting the market, both of which are sold out. Have you seen that in the numbers in the September quarter, or is that coming in the December quarter?

Coming, we're about to go through a refresh cycle. I didn’t touch on it briefly Steve, but I'm sure you're aware, Xbox is supporting Dolby Vision and Dolby Atmos for gaming and we're really excited about that. And so, yes, of course, where – the refresh cycle is something that is likely to benefit us in the coming – these couple of quarters. And gaming is a big area of focus for us across the globe. Certainly, we're focused on making that Xbox experience so successful and a bit of an ecosystem of content as possible. But beyond that, we believe that we can add value in mobile gaming and other areas.

And then just one last one. Where do you think your market share is today in Dolby Vision in 4K TVs, given that what you're talking about the phenomenon and new geographies and more modest?

Yes. The - so first of all, Steve, I will say the data is still coming in on that, because, of course, we will get our Q4 reports in the coming weeks and the industry analysts are not quite – well, maybe it’s not possible, they're not fully adapted to this uncertain environment. So the numbers are still coming in. But we're confident that we are going to end up somewhere between 15% and 20% Dolby Vision to 4K TVs and that 4K TVs are probably coming in this last fiscal year for us at somewhere just over 50% of the market.

All right. Thank you, Kevin.

We’ll take our next question from Ralph Schackart with William Blair.

Good evening. First question on the true-up that you called out in the quarter, less than 25 months, a little bit larger than the normal. If you could talk about maybe 15 higher than expected. Any more color on that as 606 are affecting the true-up this quarter?

Sure. And we've been very transparent about this even before we launched 606 that we’re going to have this. First of all, I'll reassure you that our processes is very solid, applied very consistently. And the biggest piece of that bump in true-up was new data that we got in on some of the key TAM in the markets we work on were higher than what had been published at the TAM at the time we did the estimate and that was across several different categories. So, of course, we flow that right through and that affects the number of units that our customers report, because I think I've talked about this in the past that our technique uses interpolation, where we use multiple data points, customer inputs, market share data points and also TAM data. And so the biggest thing driving that uptick in the true-up was an uptick in the TAM data versus what we had been through the estimate for Q…

Okay. And then we get a lot of questions on the opportunity for I/O, there’s obviously a lot of excitement around, it sounds like you're making great progress in the quarter. Anyway that sort of give us a sense of how to frame this opportunity and put some numbers around it in a range of – that’s very wide. And if not, just sort of like maybe the building blocks, how to think of potential size on it?

Yes. Obviously, Ralph, let me back up. But we’re - we do think this is a big opportunity. And for a very long time, I've said that we believe we can improve any audio visual experience and this is what gives us the opportunity to expand that Dolby experience far beyond our traditional realms. We're about six months in. And so right now, what we're focused on is engagement with developers. As I think, we have a number of – growing number of initial customers that are out there using the platform. And we definitely look forward to providing more data as we go forward here. But we're excited about the customers that we're engaged with and that are coming on right now.

All right. Great. One more, Kevin. Just if you can kind of take a step back and envision that post-COVID world, but hopefully we get too sooner rather than later. Maybe just some updated thoughts on your kind of long-term goal to march back to double-digit growth. We are sort of confident around that prior statement that you've talked about before?

Yes. Well, I feel I'm really pleased with our portfolio of growth opportunities. And I think on the Dolby Vision and Dolby Atmos portfolios, we talked about – we probably have the strongest progress in the living room for movies and TV. I mean as we just talked about that puts us at about 15% to 20% attached to 4K TVs really even earlier stage with PCs and mobile devices. And we do believe that this focus on additional forms of content, gaming, music now are the key to really opening up those opportunities for us. And I think that with Apple embracing the ability to capture, share, edit, content in Dolby Vision, I think that just is the best testament to how the Dolby experience can apply far beyond even those more traditional forms of content. So that's a big growth area. And then as we talked about – we’re just talking about Dolby.io. So we’re really excited about the ability to serve those new markets and new industries, unlocking the creativity of developers with the decades of experience and technology we have in making for the best high quality media and interactions. And so we do see that as another significant growth opportunity.

Great. Thanks, Kevin. Thanks, Lewis.

Our next question comes from Paul Chung with JPMorgan.

Hi guys. Thanks for taking my questions. So just on your guidance, as you – timing of contracts with one of your largest customers just shifting into F1Q from F2Q, so are we going to see better relative performance in PCs and Mobile in 1Q?

Well, I stopped sort of giving a breakdown by market because those tend to move around, but yes, this year we do see more of that timing of contracts issue affecting us in Q1 versus last year's in Q2, but for the first half as a whole, it tends to be relatively similar. I should remind you too, that as we roll on as each year goes along, we do get additional customers and get more penetration. So it's not necessarily the same items every year. It's just something we have to live with now under 606. But yes, to your question, Paul, clearly this year, we see a little bit more of that benefit from the timing of contract issue falling into Q1 versus Q2 than it did last year, where it fell more into Q2 versus Q1.

Okay. And then secondly, can you talk about the Dolby Vision recording capability on the iPhone? You got a lot of good air time during the event, which is great exposure there. So is there incremental revenue associated with this feature and are you getting interest from other prominent OEMs kind of looking at this?

Yes. So again, we couldn't be more thrilled to have Apple embraced Dolby Vision for capture and sharing of content. And obviously we're not going to get into the specific economics of our relationship with Apple, but I think it does a couple of things for us. One, it again is an amazing example of how Dolby can apply far beyond movies, TV, and even gaming and music. Secondly, yes, we do think it opens up over time the opportunity to bring that experience to a broader audience. And then third, we think in a world of a large and growing ecosystem of Dolby Vision content in these new areas that there could be some interesting opportunities in some of our newer initiatives to help people get the most out of that content.

Great. Thanks guys. Great job.

All right, Paul. Thanks.

We’ll take our next question from Eric Wold with B. Riley Securities.

Thank you. Good afternoon, guys. A couple of questions to follow-up on kind of always the conversation around Dolby.io. I know it's early, six months in, and not going to talking about guidance. Is there were – maybe frame kind of what the average deal size or user size could look like? Or you're trying to think about what the best way to think about the revenue ramp as you gain penetration, or is it going to be just so many smaller [indiscernible] user's revenue flow just that’s not the right way to think about it?

Well, as you said, it's early, but I think we can already see that there will be a pretty broad distribution, right. There will be customers that are certainly in historical Dolby standards are – might be lower per customer. But I think there's also some opportunities to have some reasonably large customers. It's all going be about their scale and their use case. So right now we're seeing early adoption are in areas like improving recorded audio in a number of use cases like SoundCloud, podcasts, [indiscernible] is online platform for the automobile industry for those looking to digitize. So people do videos of the car they are selling and we clean up that audio for them. So for those customers, the value proposition is a better quality experience. In some cases, saving them time and money on what they were doing to clean it up. And so the revenue potential is very much a function of the delivery of services and the same is true on the interactivity side. And many of our customers are just kind of they're getting there on top and have the potential to grow quite a lot more from where they're today.

And then, last question, obviously this question you get all the time with a $1.2 billion in cash and no debt and seemingly very strong free cash flow trends do continue. At what point obviously there's a need to put that to you to bring home your pocket, but what's the – that kind of need to be [indiscernible] using in some manners, obviously you are buying back stock, but there's clearly a limit there to agree. Do acquisitions come more into play, or just nothing really inside that can really make a dent in that?

Well, first of all, we regularly review our capital allocation and as you point out, we have also returned cash buybacks and a recurring dividend. I would say that we're always looking for potential acquisitions that could accelerate our business, historically that's tended to be that you might think of as technology tuck-ins. And I think as we go into new areas, that will also open up new opportunities for us to consider. But we'll make those decisions based on where we see opportunities to accelerate and expand the opportunities that were in pursuit off.

Got it. Thank you, guys.

Okay. Eric, thanks.

Our next question comes from Jim Goss with Barrington Research.

Thanks. A couple more things on the iPhone 12 capability with the vision capture. Are you thinking that capability is sufficient for the device we use more for professional content and that – maybe it might be over to some extent for regular consumers? And also to the extent that you are pretty important to this, potentially to the iPhone 12 sales, do you think Apple is going to use Dolby Vision as one of the marketing capabilities that it's going to be pushing given what they did do in their own show?

They could run an ad, Kevin.

Yes. Thanks Jim. So yes, one of the ads Apple has been running besides those and I've seen it on sports does in fact highlight the ability to take professional quality video in Dolby Vision. And so to answer your question, it's both, I mean, there are – many of the – many themes that you've seen in movies actually have been – many of them even shot with an iPhone. So the iPhone is a professional device and a consumer device and Dolby Vision brings out the best for both. So it's also a great way to capturing content. I mean, we've been trying it and it's amazing. And it looks more real and like what you experience. And so today you can – I know at a [indiscernible] you can use it in the photos app. You could use it in iMovie, you can use it in the Clips. So we look forward to supporting clubbing out the ecosystem of apps and services that can support it both for professional use and for consumers.

Okay. And I think that most is included on the phones also can headphones do hooked up to them and take advantage of the Atmos capabilities or do they have to be a specially produced headphones?

Well for Atmos playback, the iPhone supports iPhone playback, so to say, AirPods Pro. If you're asking about capture, we don't yet have capture, but there's always negative.

One other thing on the Dolby Cinema installations, China has actually recovered a lot more quickly because of the lockdown capabilities they had. Are you seeing any pick up in the potential for installations to go on there versus various ways which are behind in this spread?

Yes. Well, we certainly had more discussion – engagement in China, recently we had in many other parts of the world because as you say, they are opened and they've actually had some really good weeks with local titles. So I would say of the parts of the world where we would still see some nearer to an activity in that regard. Yes, China would be among that list. But overall, certainly we expect a lower pace of deployment for Dolby Cinemas screenings and equipment through the – until we get to the other side of this recovery. But yes, China is definitely one of the markets that stand out as being better than the others.

Does the vaccine news finally create any higher degree of conversation with the parties you're dealing with for either of U.S. or Europe or elsewhere to create that light at the end of the tunnel where you can start talking again?

Well, I talk to partners in all of the markets that I think none of us know when the industry is going to recover. I mean, obviously most of our screens are actually open, but of course, attendance is affected by the attendance restrictions and the time of the title. So, yes, I think that any news that could help with seeing that light at the end of the tunnel obviously is great. But I think most of all we do believe that studios are keep creating great movies and that there are audiences that are going to want to see [indiscernible] to see the best experiences. We just can't right now predict any better than anybody else when we're going to – when that day is going to come.

Okay. Thank you.

Thanks, Jim.

And we'll take our next question from Ivan Feinseth with Tigress Financial Partners.

Thank you for taking my call and congratulations on the great results in a difficult time. Did you start to work with Apple early on for the designing the iPhone 12 to incorporate Dolby Vision? And is there some things that are unique to the iPhone 12 that allow it to be in? Or will you be able to work with other phone manufacturers as well? And we’ll see this soon in some other brands.

Well, we have a longstanding relationship with Apple and they support Dolby Vision and Dolby Atmos playback throughout their all ecosystem. And so yes, we've been working with them for some time to bring this experience to life. And our first focus is on making it a successful ecosystem. I mean, one thing, of course, that is true in Apple, is that they have all of the apps and the services and the devices and the entire ecosystem to bring an experience like this to life at scale. So job number one for us is to help them make that as successful as it could possibly be and to open up that ecosystem to other apps and services. And then from there, yes, so the time was certainly give an opportunity for this to be something that opens up new opportunities for us

With other phone manufacturers as well.

Right.

Also in your decision to get out of a conferencing, you mean just the conferencing hardware you're still going to focus on implementing Dolby Voice into other conferencing products?

That's right. We're still supporting our enterprise communications partners or winding down the sale of the digital hardware for comp insurance.

And with the cash you have, when you think about acquisitions, is there any specific direction you envision like that you could extend your brand to continue?

Well, I think what we've been doing for the day has been in addition to expanding the presence of Dolby Vision, Dolby, Atmos across our existing categories. We see opportunities in new forms of content in gaming and music. But with Dolby.io, we are extending into all the ways in which we enjoy media and interactivity experiences. So when we think about acquisitions, it's through that lens. Are there opportunities that could accelerate or expand our opportunity? We don't look at it like we have this capital, so we need to go to an acquisition. And that's something that we're always – we're obviously like any company, we’re always looking at the opportunities that come our way.

Thank you very much, and good luck going forward.

Thank you.

It appears we have no further questions. I'd like to turn the conference back to Kevin Yeaman for any additional or closing remarks.

Thank you everybody for joining us today. Thanks for the questions. And we look forward to updating you on our progress. Have a great day.

That does conclude today's conference. We thank you for your participation. You may now disconnect.