All right, beautiful. So why don't we get started here? My name is Eric Woodring. I lead the hardware coverage here at Morgan Stanley. I am... I'm pleased to welcome Robert Park, CFO of Dolby Labs, and John Couling, SVP of Entertainment, to our conference. This is actually the first time I've hosted you guys, obviously, and so really helpful for me to understand the story, get the story out there. And so we'll dive into a bunch of different parts of the business. But just for background, Robert's been at Dolby as CFO for more than two years now. Prior to Dolby, he was at BlueJeans. He's held a variety of senior finance roles over time. John's been at Dolby for over 15 years. Obviously, again, held a number of different roles.
Gentlemen, thank you very much for joining us today.
Pleasure.
Before I begin, maybe just one last thing I need to mention, that important disclosures can be found at the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay.
Let's go.
So, I think maybe the best place to start is just high level. I think most people have heard of Dolby, whether it's watching movies, understanding what Dolby Atmos is, even for Apple users, listening to songs in Spatial Audio or Dolby Atmos. So, but I don't know how many people actually know what Dolby does. And so can you maybe just walk through the history of the company, you know, what solutions you sell, and maybe weave in, you know, what the underlying kind of core value proposition is of Dolby?
Yeah.
Welcome there.
Why, why don't I take a start on that? And so, yeah, good, good morning.
How long you been there?
Morning, folks. Actually, it's a little more than 15 years. It's nearly 26. So, that means... How much time do we have? 'Cause we could do a long time for history, right?
Thirty minutes.
The company is six decades, so no, I'll maybe do a shorter version. So yeah, I think a lot of people have heard of Dolby. Metrics tell us that. In fact, probably a lot of you have heard Dolby-
Mm-hmm
... as you say, whether in the movie theater, on your phone, on your television. What we do is we really innovate in the area of sight and sound.
Mm-hmm.
What we're trying to do is create these experiences together with content creators to really move the medium forward. That might be music, that might be sports, that might be movies. And to create those in Dolby creates a more engaging, immersive experience. Over the years, that hasn't changed.
Mm.
That is what we do. What perhaps has changed in that time, if you ask a little bit about history, is the entertainment space and how we receive entertainment really changes dramatically over the years. We used to have analog, and it moved to digital. We used to watch on broadcast over-the-air television, now we stream. We used to, you know, listen to CDs, now we stream, you know, to our headphones in our phone or in our car. So the delivery and the style of entertainment has changed dramatically, and Dolby has really engaged in those transitions.
Mm-hmm.
I think that's the best way to think about our history. You know, we were there in the transition from analog to digital. We were there in the transition from broadcast to streaming, providing technologies that really power those transitions, that underpin the way that those transitions can happen from a sight or sound perspective, and more recently, both. In order to set ourselves up really to deliver the value of these great, you know, creative arts and great music, movies, brought into as many people's homes or movie theaters as possible. And that's, I think what we've always done, and as the market changes, so we seek to continue to do that. In terms of our customers, you know, it's very broad.
As I say, it's all the way from, you know, the musician and the movie director, all the way through to the consumer electronics manufacturer, the automotive maker. And what we try to do across all those partners is deliver them a lot of value in those transitions and deliver them a lot of value in terms of improving their product. Might be their record, might be their mobile phone.
Mm-hmm.
And we believe in our model of being able to work with everybody, that we can do that in quite a unique way.
Okay, perfect.
Well, I'd like... If there are three things you would take away from Dolby is one, it's a very durable company. Been around almost six decades. It's always been the technological leader-
Yeah
... in the art and the science of sight and sound. As John said, we've been through many technological shifts and economic cycles over the last six decades and come out stronger at the end of each one. The second thing is that we have a very hard-to-replicate business model with a very powerful entertainment ecosystem, we'll talk about a little bit more, with very strong financial fundamentals, pristine balance sheet, high gross margins, and very healthy cash flows. And the third thing is we're getting into our most exciting phase yet, with a lot of robust opportunities for growth.
Perfect. That's a great start. Maybe one additional question to build off of that is, you know, how do we think about the competitive environment? Meaning, we hear a lot about Dolby. I'm not sure if we hear about a competitor to Dolby, necessarily. So how do we think about competition? And maybe, in addition to that, kind of what is the competitive advantage or the technological advantage you have? Is it the defensibility of your IP? How do we think about kind of the-
Yeah
... the place that you have in the market and the stability of that?
So maybe I'll start there. So yeah, there's always competition and strong competition, and that's healthy. That's something I think helps drive us to make better solutions and serve our partners better, and I don't think that has changed in the past, and it's certainly there, you know, right now and something that we're always aware of. I think the thing I commented before that's sort of unique to us is we're able to through the years build these relationships across a very broad set of the entertainment space. So I have partners, and my team has partners that are, you know, making content, that are distributing that content, that are making the devices or the parts that go into those devices that you use to actually experience content. And that is quite a powerful ecosystem.
You know, if you go to the store to buy a TV, you buy it because you want to watch something.
Mm-hmm.
You might be a sports fan, and you really want to, you know, be part of the game, or you might be a movie buff, and you want to see the latest movie. You're buying it because sound and pictures is gonna fill your living room, your kitchen, your bedroom, wherever you're gonna put it. And so that whole entertainment experience is the sum of those parts. It's the sum of what you create, it's the sum of how it gets to you, and it's the sum of what you're watching or experiencing or listening to it on. And Dolby has relationships in all of those places, and that's fairly unique, I think, pretty unique. And that allows us to create this, what we call virtuous cycle, virtuous circle of-
Mm-hmm
... you know, if the content is made in Dolby, the best way to experience that is a device made in Dolby.
Mm-hmm.
If there are more devices in Dolby, well, as a content creator, of course, I want to make in Dolby because that's how the best experiences are heard or, or seen.
Mm.
And so this broad ecosystem reinforces itself from the perspective of, you know, creating greater and greater value for each of its participants.
Perfect. And maybe last big picture question is just, you know, when I think about these kind of different end markets, I kind of think about TAM and what that TAM might be growing. And so is there a way that you can kind of describe or size the market TAM for yourselves and penetration within that, and maybe again, what that growth rate might look like over time?
Yes, great question. So our TAM is consumer electronics. Think of over 1 billion cell phones, mobile phones, PCs, TVs, sound bars, speakers, set-top boxes, and 90 million autos sold annually. So that's kind of our market in terms of our TAM. If you look at our licensing business, about two-thirds of that licensing business is made up of our foundational audio technologies. That's a technology that's been around a while, that is deep and wide across a wide swath of consumer electronic devices. And that will tend to grow at the rate of consumer electronic growth over time, plus a few points as we find more and more licensees. It's deep penetration.
It's kind of gonna grow at the market growth, slightly higher that, probably low single digits is what we'd expect over time. Then, the rest of our licensing businesses comes from Dolby Atmos, Dolby Vision, and our imaging patent portfolio, which is much earlier in the adoption cycle or licensee cycle than our foundational audio technologies. And that growth is driven more by getting on more and more devices that are being shipped and penetration. We've got, for example, about... We're on about a quarter of 4K TVs today with Dolby Atmos and Dolby Vision, so there's a lot of headroom left. So that we believe will grow. We expect it to grow faster than the market, and we expect it to grow somewhere in the 15%-25% CAGR rate in the medium term.
Okay, very helpful. So, let's talk more about licensing.
Mm-hmm.
I think, maybe to break it down and be somewhat simple about it, like what exactly are you licensing to your customers? And who are you licensing it to? To kind of help investors try to understand, again, more of this end market growth and kind of how you get there, and the points of differentiation.
So, maybe in terms of the second part there, who we license to.
Sure.
So, we are delivering technologies to the whole of the consumer electronics supply chain. Particularly, we insert our technologies and work with the IT companies-
Mm-hmm
... software companies that build, you know, the core components that create the end device. And that helps the marketplace be able to adopt, you know, quite quickly and simply, and in order to be able to make these technologies widely available. And then we deliver technologies and our brand and our patent rights to the end manufacturer. So, it might be your phone, your PC, your television, your sound bar, your car. That's where we would actually have the final technology delivery and also where the customer pays us for the technology as we send it. And I say the value that they're getting is that technology delivery, but then also the whole ecosystem of content and so forth that comes to then within that device.
And so it is that end manufacturer that we think about from a profit perspective or revenue perspective.
Okay, perfect. So, you guys mentioned Dolby Atmos, Dolby Vision.
Mm-hmm.
Obviously, a faster growing business than the traditional kind of foundational audio licensing business. Can you maybe just describe exactly what Dolby Atmos and Dolby Vision are? Like, why is it differentiated?
Yeah.
Why is it growing so fast? Why is it so exciting for you guys today?
Yeah. So happy to do that—'cause that's, that's, that's my, that's my world, and so thank you for that. So what Dolby Atmos does is technically it changes the way that audio is created. From simple channels, you might have had stereo or 5.1, to something quite different, which is objects. And that allows an incredible amount of creative freedom in terms of the way that you make soundtrack, a song or a sports broadcast or a game, any of those examples. It creates a level of fidelity.
Mm-hmm
... clarity, detail within the experience. And so from a consumer perspective, you're in the game. You're, you know, in the emotion of the song. From a creative perspective, it's like, you know, I'm a painter, and you just put on all these additional colors. You just gave me so much more to work with. I can create an experience that is far more immersive, far more compelling, far more emotional than what you'd had before. What that does is just, you know, create higher value content.
Mm-hmm.
Of course, for the consumer, something that's just much more immersive and enjoyable. What Dolby Vision does, Dolby Vision takes video and, it again, expands that palette, literally more colors in the case of Dolby Vision. And also more dynamic range, in order to create, again, these experiences that are richer, clearer, with greater detail, and deliver that, you know, through to the home consumer. So your 4K television has, you know, a better picture quality with Dolby Vision. With your Dolby Atmos phone, you know, you can listen to music in this immersive way and have a much greater, richer experience consequently. And the key to any of these technologies for us is, you know, we deliver value to the whole of the entertainment, you know, chain.
You know, this is something that's exciting for a creative. They can, you know, work in Dolby Vision and Dolby Atmos and create something that's a—for them, a better piece of art, or a better broadcast. For the distributor, you're creating something of higher value, so your content is of higher value. For the device maker, again, it's a way to show the consumer, "Hey, this is a better quality phone. This is a better quality PC. This is... You know, you as a user are gonna get a better experience." And so those technologies have components that affect all the different parts of that partner ecosystem.
Okay. That's
And-
Sorry, go ahead.
I was just gonna say, I'll give an example of we had a car manufacturer come in, and the engineers, the audio engineers from this very large car manufacturer in Europe, came in, and he was telling me why they're adopting Dolby Atmos in the car. It's because they, as scientists in the art of audio, hit a ceiling to what they could do with the music, what they could do with the sound inside the car. This is a luxury car. And the Dolby Atmos helped them break through it, mathematically, scientifically. Anybody can make sound and music louder. That's not the point.
It's the transparency of the music coming through you and how you want to hear it, the chorus, the lead singer, the cellist, and how you can put those in objects, almost unlimited, around the car. And regardless of, well, a certain amount of speakers, but you can make that sound, as they called it, more transparent. And once you've demoed a Dolby Atmos car, you, your car will sound flat-
Yeah.
After that. So go, go buy a Mercedes-Maybach as soon as you're done here.
We'll all get right on it.
A lot more than that. A lot more affordable than that.
Just again, kind of like putting numbers to it, again, you talked about kind of that, that 16%-25% take rate for Dolby Vision, Dolby Atmos. What kind of gets you there? Is that mostly a penetration game? Is there a pricing aspect to that? What kind of the factors underpinning that growth?
So the factors that, that's gonna be more driven by more attach rates, so a higher penetration going into those cars and electronic devices over time. So the relentless pursuit of getting more design wins, getting the design wins to turn into manufacturing, and finally going off and being shipped. So it is increasing that attach rate. And the Dolby approach is many times been, and we start at the premium, at the very highest ends, the Mercedes-Benz S-Class and the Mercedes-Maybachs, but they're slowly pushing it down to their other lineups, and that's the same way we do with 4K TVs. We start at the higher end, but as you can see with TCL and Hisense, they're pushing it down to all their 4K TVs. And so that's our approach to increase penetration.
It's called the land and expand, and that's the way we're growing Dolby Atmos and Dolby Vision.
Okay, perfect. You touched on, right, we touched on automotive. It's been a focus for you guys-
Right
... obviously, within that licensing business. I think you have 13 auto OEM agreements. Maybe my question is, what inning are we in for this opportunity? Again, as consumers, we see a lot of Dolby in our consumer electronics, like we talked about in our TVs and things that we listen to and things that we look at on our phone. Where are we in the auto, on the auto ramp? Like, what inning is implementation?
You're thinking baseball?
Yeah.
He, yeah, he's from England.
Right.
Heh, heh, I guess cricket innings too, right? Okay.
We're fairly early in that cycle, I guess. I'm trying to map baseball. Maybe sort of early in the second, I would say.
Top of the second.
Yeah, top of the second. There you go. Thank you. Yeah, it's... I'm learning. Yeah, I would—let's say top of the second. I think that's about right. Right, we have those early wins.
Mm-hmm.
We have a pipeline behind that. We have, you know, cars coming to market. It's an industry that's starting to move more quickly. I think historically, automotive has been a very slow transition industry. I think, you know, that has changed. The market's moving much more quickly, and it's more competitive. For example, our China customers move very quickly. And so we see a lot of opportunity in that pipeline to continue to expand. As Robert said, you know, the cars you get today are from a luxury maker like Mercedes. But we can see that this experience applies to a very wide range of automobiles.
And, you know, music in your car, podcasts in your car, you know, our partners tell us, you know, there are people who, you know, they'll drive home, they'll sit outside, and they will finish listening to the thing they were listening to. You know, they're using their car, stationary, parked outside their apartment, parked outside their house, as it's one of the best, you know, entertainment environments that they have and one that's there. It's a unique experience, right? The car is your private space, and, you know, you choose to share it as you do. So it's like, you know, you sing songs with your kids on the way to school, or it's, you know, your decompression space after the commute home.
It's this unique environment where entertainment is becoming just more and more important.
Mm-hmm.
That's what we hear, and so our pipeline, we believe, will reflect that.
Okay. And then maybe last question on licensing before we turn to the remaining part of your business.
Mm-hmm
... and then get into kind of the what's going on right now in the market. Just help us think through the margin profile of this licensing business. Is this a relatively flat margin business? Is there an opportunity to expand margins in this business? If so, how?
... margins are high.
Yes.
Um, so-
Nice to see as a hardware analyst.
It's not a bad thing to have in today's market, to have a 90% gross margin, 9%+ gross margins, and even higher for our licensing business. Yes, there should be leverage in the model as we continue to grow, particularly as we in G&A other areas, where we should see scale over time. You've seen what we've done over the last few quarters for Dolby. We're not afraid to streamline the organization. We've made some changes over the last few quarters, and as a result, you can see a 1-2 percentage point margin expansion, and actually a reduction in operating expenses year-over-year, and we're gonna continue to do that.
We continue to look at being more efficient and effective in meeting our top-line goals, and I don't think we ever stop doing that.
Okay, perfect. Yeah, I just want to touch on kind of the remaining 10% of your business, which is products and services, and just help the audience understand kind of what do you sell in this category? What are your primary customers? How do we think about the growth rate of that business?
Yes, so the primary customers in that space are movie theaters, exhibitors.
Mm.
So we actually, you know, manufacture partners, the hardware that goes into a movie theater, particularly for the sound aspect and, and for some of the playback equipment. And, yeah, that's a small part of Dolby's business overall, but the movie theater is an important part of how we not just, work with the industry overall, but also how we can present our experience to the consumer. We've talked a lot about what these experiences are, but, you know, you have to actually be part of it. Like, if you... Robert said, "Sit in that car, it's amazing." You sit in that movie theater, it's amazing. And that's the way we think we can really reach a lot of consumers and help build the brand, and also, you know, a lot of our story, more broadly.
Okay.
Yeah, that's where the products are aimed.
Okay, perfect. So maybe, maybe if we turn to, I guess, now that we have an understanding of what you guys do, let's, let's talk about kind of the current trends in, in the market and in business. So, you know, as, as a consumer hardware analyst, you know, I would talk about demand being fairly uneven these days. It's a very challenging market, especially as we came, kind of, came off of that COVID peak.
Yeah, I think we see dynamic, I think-
Dynamic.
Yeah, yeah, I use dynamic.
I actually like that.
Yeah.
That's actually a glass half full. I hear too many people on my side call it uneven, which...
Yeah.
So it's a dynamic market today. Macro still got some uncertainty. Maybe can you guys just talk about some of the demand trends that you're seeing in the market broadly, sitting from the position that you guys come at the market from?
Yeah, what we're seeing coming into Q1, and we thought coming into the year, is kind of device sales are kind of soft still.
Mm-hmm.
As a result, you're seeing the impact on our foundational audio revenue, which is two-thirds of our licensing revenue. It's a dynamic and inconsistent environment today.
Yeah.
Where we do see growth is in other markets, particularly auto. We have, obviously, you can see the trends we see in auto. And PCs are gonna benefit from slightly higher units from a very low 2023.
Mm-hmm.
as well as increased adoption with our imaging licensing technology and recovery. So those are kind of the markets. And then we see slight declines in broadcast, which are TVs and set-top boxes, mobile phones, and consumer electronics in general.
Right.
Device sales are kind of sluggish-
Yeah
... even this year, and that's what we kinda saw coming into the year.
Okay. And can you talk, you know, bigger picture, you know, what's... So you guys, fiscal 2024, kind of flat revenue growth. What is the also kind of like macro dynamics underpinning that guide? I mean, how are you guys thinking about the world over the next 12 months?
Yes, maybe, maybe I'll comment on the sub product thing.
Yeah.
I think one thing about, so you say uneven, dynamic, I mean, they're just two halves of the-
Yeah
the same, you know, thing for the consumer electronics market. There's definitely this, this uneven. And so what it does is it causes partners to be a little more thoughtful, cautious, or slower in ultimately, you know, bringing out new products, making decisions on products, and just overall sort of time to, you know, bring things to market. And I think that affects us from the perspective of just how fast we can, you know, grow some of our technologies or ultimately how fast new things are coming in. And that's, I think, just a, you know, a state of the market, and I think you characterize it well with uneven, and that we do see.
And I'd say, it's dynamic. I would use inconsistent.
Yeah.
That's how I talk to my kids. Inconsistent. But what's not inconsistent is the demand for immersive experiences. That is not inconsistent. Demand is there, it's very high. Our partners are engaged. It's taking a little longer to get deals done just because they're distracted to the same-
Yeah
... things you're seeing in your portfolio companies are also seeing. But eventually, it's not a product market fit, it's the timing.
Okay.
So, getting the Dolby Atmos and Dolby Vision technology in there is just a matter of time, and things are just, in this market, taking a little bit longer. But the insatiable appetite for content is still there. That's not inconsistent, and we make that content more immersive and better, and that's what we do.
So that's a great point, and I want to talk to that, which is, you know, longer term, outside of the market, because obviously the market will go through cycles, as it always does. What gets you back to that goal of double-digit top-line growth? Again, what would the things that you guys can control?
Yeah.
What do you need to do to get back to that point?
So, a couple of things need to happen to get back to double-digit growth. First, we need a little bit of stability in the marketplace. We need device shipments to stabilize, get back to low single digits, which will drive about two-thirds of our licensing revenue back to positive from what it is a negative today. And then continue our relentless pursuit of increasing adoption and penetration with Dolby Atmos and imaging technologies. And doing that, and growing that 15%-25% CAGR over the medium term, will get us to that high single-digit to low double-digit range. And John here can talk about how we're getting there. The three areas where we see the most growth opportunity for Dolby Atmos and Dolby Vision is music. You can see the progress we've made in music.
We're on 90% of the Billboard 100 artists are recording in Dolby Atmos, and Dolby Atmos in the car and other places. The living room and TV, bringing movies and TV shows to the living room, and mobile, particularly, mobile vision capture, Dolby Vision capture. The ability to capture videos in Dolby Vision is key to our-
Yeah, It, it sort of speaks a little to how the innovation works, right? We, you know, bring Dolby Vision into the television. It's used for, you know, movie creation or, or higher-end production, but now you can actually shoot that yourself on your cell phone, right?
Mm-hmm.
We have that's in your iPhone can record in Dolby Vision, and we have other partners and other mobile manufacturers in Android that are building that in. So that's another opportunity that expands the technology and expands the use of the technology, and then gives us, you know, other place to drive adoption.
Okay. Can you talk maybe about the mix of your business geographically in terms of are there any trends that you'd call out for what's happening in the U.S. versus what's happening internationally? Whether when it comes to growth rates or adoption or interest in the usage of Dolby Vision, Dolby Atmos.
Yeah, maybe a little context, and then you can probably talk to the numbers. We are from a go-to-market, from a, you know, customer-partner perspective, very broad across the globe.
Mm-hmm.
Content is something that's actually, you know, quite different around the world. We joked about baseball earlier-
Yeah
... and cricket, right? You know, sports is very different. Soccer is football in other places. So if you wanna create these content experiences that really matter to a market, you have to do that in the market. You know, you have to drive the content that matters, whether it's the shows or the music or whatever that might be. We do have a footprint of partners and therefore support and sales and so forth around the world to actually support that and drive that. Likewise, a lot of our OEM partners, our consumer electronics manufacturers, they operate in this global market too.
So to be able to work with them across the world is really important and ultimately allows us to, you know, expand our business at that regional level, as well as at sort of a single headquarters level. And then you can talk about, yeah, so split.
Yeah, Dolby is truly a global company. About one-third of our revenue is domestic, and two-thirds of our revenue is based out of international. And what we're seeing is, we've seen progress and a lot of adoption in Asia, particularly in China, the car and TVs, et cetera. The U.S. and Europe are typically more mature businesses for us.
Okay, perfect. Robert, you mentioned earlier talking about being more efficient, making some changes over the last few quarters. Can you maybe just double-click into that and talk about how in 2024 and beyond, you're kind of the focus on efficiency, what exactly that means, how that improves kind of the value proposition of this business overall going forward?
Yeah, it's, you know, ruthlessly prioritizing and making sure we're redeploying our resources to the highest impact areas. We don't do that in one big swoop, we do that as we go. As we see an opportunity, we will make a change, and you've seen our ability to do that. We never stop trying to be more streamlined or more efficient and effective in meeting our top-line goals, and we'll continue to do that.
Cool. another-
I'll just say that, you know, we expect to grow earnings faster than revenue over time.
Right.
There is leverage in the model.
Right. Okay. Can you talk about as we think of kind of the expansion and penetration of Dolby, whether that's vision or sound, are there any barriers that we'd need to consider to your ability to do that? Again, whether it's signing on new partners, more geographic expansion. Again, if we take away kind of the growth rates of the market-
Yeah
... but anything to consider on that front?
Yeah, but I think you're talking in a way about like the adoption cycle, right? So, you know, for us to have adoption in the market-
Mm-hmm
... obviously, the first thing is we've got to be present, we've got to have the technologies ready, and we've got to, you know, bring value to those different participants. But then there's some very practical things, right? If you want to build a consumer electronics device, you need to have the technology available in the components that you buy. So one of the things that, that we focus on is to make sure that there's adoption within chip partners-
Mm
... or software partners, who build the components that ultimately then make that end consumer electronics or the car or, or whatever it might be. So that's an area of focus for us to enable that supply chain so that it's easy for manufacturers to adopt. So if they're in a particular region or a particular model line, and they feel like, "Okay, now's the time for us to move to Dolby," you know, the content's ready, the market's ready, the competitive environment says, "Hey, now it's time to move," that the pieces are available, for them. And it takes, you know, a little bit of time for that to develop, and we're, you know, further through that in some markets 'cause they're more mature than perhaps in other markets, and that's an area of focus for us.
And then what you see is, you know, we would, you know, potentially with a customer, they might announce their first product, probably their higher-end product, and then they would move to, you know, further down their model line as they build the value and ultimately build that story for their customers. And each of the different markets works at different paces.
Mm-hmm.
So, you know, TVs come out sort of roughly once a year, phones a little bit faster, 6-9 months in some cases, you know, cars a little bit longer, although they're now getting faster, and it's a much more dynamic market than from a speed of adoption perspective. And so, you know, the things that at least I look for within our business is we're looking for those points of proof of value, right? Where, hey, here's a new service that launches in a market because that, you know, creates that value and for the whole ecosystem and therefore, that value for the consumer. Or here's, you know, some high-profile content. It might be a big sports event, for example, because that's one of the things that causes people to go and upgrade their equipment.
or as you said, a particular OEM win, and then how we expand that within their portfolio. So all, all different ways of understanding how that adoption cycle is working.
How do you guys—you know, when I, when I hear you, I think a little about innovation. You use the term immersion a lot-
Mm-hmm.
-which I think is important. As we think about new technologies that continue to come out, it becomes more and more about-
Yeah
These immersive experiences. How do you guys, as Dolby, think about the future of innovation when it comes to sound and film and any, and imaging and vision? And again, maybe my question simplistically is kind of like, what's next? What always is coming down the pipeline for you guys as you think about these shifts in technology?
Yeah, I mean, research and continuous innovation is important to us, obviously. I mean, as Robert said, we've been around quite a while, and we've innovated through big industry transitions. We've innovated within those transitions, and that's something that obviously we continue to want to do and work to do. I think we have a unique perspective on that innovation because of this broad set of relationships that we have, and we can understand what might be happening in the hardware environment that, you know, creates new capabilities. But we also are connected with these creators.
Mm-hmm.
And one of the unique things about real creative people is they always have new ideas. I mean, I've been at Dolby 25, 26 years, and at no point have I met an artist who said, "Yeah, I'm out of ideas. I've got no more stories. I've got no more songs. Like, I, I'm totally satisfied with everything that I've done." No, no, not, not at all, right? They're, they're endlessly creative, and they're always like, "You know, I would love to be able to do this. Why can't I do this? And what can you create that lets me do that?
I need a button for that or an experience for that, or..." And so that is this rich source of ideas that we're able to look at and go: Okay, I can see that, and I can see what's happening in the hardware environment that might make that happen, and let's go build the technology that puts all of that together.
Right.
There are spaces today where people are innovating, obviously. You know, there's a lot of work right now in, like, head-mounted displays.
Mm-hmm.
It's clearly an area with a lot of momentum. There's a lot of innovation happening in the automobile space, a lot of innovation in your camera and your phone. So, you know, the market is not short of ideas, and I think for us, uniquely, it's a sort of blend of both the art and the science.
Okay, perfect. If we pivot just a bit, Robert, I'm gonna turn to you, and you know, if we just talk about kind of big picture capital allocation priorities, where do those stand today? How to think about that moving forward, and if you can just kind of weave in the philosophy on M&A, how that plays into capital allocation broadly?
Sure. I'll start with the capital allocation. So we look at our capital allocation quarterly between investing in the business and return to shareholders through buyback and dividends.
Mm-hmm.
Our policy and, our intent has been on, on buyback, is to at least offset the impact of stock-based compensation, and we have been doing that. This year, we also increased the dividend, and we've been doing the dividend, and increasing the dividend, I think, for the past 10 years. And if you look in the, the last decade, I think we've returned almost $4 billion back to shareholders in the, in terms of, either buyback and/or dividends, and, we'll continue to do that. In terms of... and continue to look at, at that quarterly. M&A, we don't do a lot of M&A.
Mm-hmm.
We do—we'll do some M&A. Typically, they're around, you know, for our foundational businesses, accretive businesses that help diversify and strengthen our technology portfolio. And we may do smaller deals to help our growth businesses, more product-oriented or ways to accelerate growth in some of our growth areas. But we have an active pipeline. We just are very discerning about what we'll do.
Got it. Cool. So, maybe use the remaining time, last question is, as we sit here today, what do you... what's the message you wanna tell everyone in terms of what do you think is most underappreciated and/or most exciting about this company and the path forward? If we take away, again, the market and just think about what Dolby Vision is doing in terms of innovation, what's most underappreciated? What gets you most excited about it?
Maybe I'll do the excitement, and you do the underappreciated. Sorry about that. You know, from an exciting, you know, perspective, it's. I think Robert touched on it, right? The consumer interest in storytelling, in experiences, in being closer to the action, in being closer to the artist, that continues to be an incredibly powerful, you know, thing that we see across the market all over the world.
Mm-hmm.
And so being in a position to actually provide technologies and work with companies that serve that is incredibly exciting. And being at the forefront of those experiences, it's exciting both when you work with people in that space and then when you see consumers get that experience.
Mm-hmm.
And that gives us a lot of confidence in ultimately we're doing something that has real value.
Right.
What excites him is different than what excites me. What excites me is money. So, I would say, our business model may be underappreciated by people, how durable and powerful the ecosystem is. You know, $1.3 billion in revenue, 90%+ gross margins, 30%+ operating margins, very healthy cash flows, and a pristine balance sheet with no debt. Those are very nice things for CFOs to look at-
Mm-hmm
... but it's the opportunities for growth and innovation. I wasn't kidding when I said it's an insatiable appetite there for content and immersive experiences. That is not ending, and innovation's changing. The car's been around 100 years, but innovation over the last 10 years has been exponential, and we're a part of that innovation, going on into the car, mobile phone, TVs. And Dolby has always been pushing the envelope in terms of being a technology leader in those changes. So that's very exciting to me, along with the financial fundamentals.
Cool. Well, that just about takes us to time. John, Robert, thank you very much for coming.
Thank you.
Great. Thank you.
Thank you, guys.
Thank you.
Much appreciated. Thank you.
Go see Dune Two in a Dolby theater.
Oh, yes.
Well, now.
A little plug, sorry. We need some box office.
Thank you, guys, and I appreciate it, guys.
Great.
Thank you.
Thank you.
Appreciate that.