Good afternoon, everyone. Thanks for coming to the last session. I'm actually not a J.P. Morgan person. Our J.P. Morgan person isn't here. I actually do IR for Dolby Labs, so very, very friendly, friendly interview here.
Well, we can also have... We can open it up.
Yes.
If anybody has a question as we're going, just raise your hand. We don't have to wait till-
Yeah, much-
Till we're done.
... better if you guys have questions. But with me is Kevin Yeaman, our President and CEO, a 17-year veteran. 17?
Of Dolby.
17-year veteran of Dolby. Maybe the best way to start is just a brief intro to the company. What struck me when I joined Dolby eight months ago is it's a 60-year-old tech business that has had multiple innovator dilemma situations in front of it. Yet every time we're faced with a new technology or a new paradigm, we seem to have emerged, come out the other side, a stronger and better business. Just from your perspective, if you had to encapsulate the last 60 years in a three-minute thought process, how would you describe the situation and where we find ourselves now?
I know it is, right? This is, like, a lot of qualifications to that. No, thank you, Peter. I first of all would start by saying that, you know, our passion at Dolby is bringing to life high-quality audiovisual experiences. We do that across movies, TV, sports, music, gaming. We do it because we are obsessed with the science and the engineering of sight and sound, and we do it by building robust ecosystems, starting with the content creation community. That's where we start. We like to validate that what we do matters by finding movie directors, musicians who look at what we can do for them, and they see a palette to better tell their story. And then we work across content, distribution, to devices, which is where we make the majority of our revenue, devices and cinemas.
So you might think of us as, from a revenue perspective, having a TAM of, you know, ±2 billion devices and 100,000 cinemas. And the way we create that value is by working across that ecosystem. And, you know, to Peter's point, we've been through, at Dolby, a number of technical transitions, a number of economic cycles. As he said, I've been here 17 years, and just in that time, I was coming in on the tail end of the analog-to-digital transition. I came in at a time that, where we were beginning to see that there was going to be a transition from physical media to streaming. We've seen standard def to high def, high def to 4K.
What's significant about that is that each of those, the technology upgrade cycles, that give people a reason to go buy more devices, that drives high-margin revenue for us from our existing position. But we are also always innovating, so with each of those cycles, we significantly increased the amount of technology we're bringing to these experiences and these devices. And that's what has consistently driven our business. So, today we're about $1.3 billion of revenue. About $1.2 billion of that is licensing revenue. That has about 98% gross margins. And, you know, on the one hand, we have our branded Dolby Audio codecs, Dolby Digital Plus, our patent licensing portfolios. That's about two-thirds of our licensing business.
Has very high adoption rates across a very broad variety of consumer devices. And so, the consumer spending environment and consumer device shipments are a big factor on that business. And upgrade cycles or consumer spending cycles drive high-margin revenue and opportunities for us to bring more to those devices. Dolby Atmos and Dolby Vision are our premium audio and visual experiences, respectively. It's now about a third of our business. It's grown considerably since its introduction in about 2016, is when it really started coming to life. That's been the higher growth, higher growth part of our business, very prevalent across movies and TV. More recently, we've brought the Dolby Atmos experience to music, which is driving really strong demand for cars, where people love to have a great music experience.
And I feel like, Peter, if I don't stop soon, I'm not gonna let you answer, ask any more questions.
Yeah.
This is what happens toward the end of the day. Once you wind me up, I just keep talking.
So you started to describe the revenue model a little bit. 90% of our revenue is licensed revenue, very high margin, and within that, within that, license revenue, about two-thirds of that license revenue is what we call foundational revenue, and one-third of that license revenue is Atmos, Vision and imaging patents. Can you talk a little bit about that foundational business and how it correlates to device sales? And then a little bit, that same question for Atmos and Vision and the impact of device sales on that business.
Mm-hmm. Yeah. So, first I would say that it is a single business in how we run the business and how we drive demand, but the distinction here is that foundational, which is our branded audio codecs and the audio patents, have very high adoption across TVs, PCs, mobile devices. And so we really started providing this distinction early into the pandemic when everybody had a lot of questions about: How is the macroeconomic environment and consumer spending gonna affect your business? And, you know, we were down in 2020 off supply chain concerns and the initial effects of the pandemic.
2021 was a great year with the pandemic purchasing, and the last three years have been with that part of the business has been declining about 5% a year as the industry has been going through all of the uncertainty that we're that that that all of us have been adjusting to every day. But over the long run, we still see that as a growth business. We believe that the economy will stabilize, people will begin buying devices again, and we always look for, you know, what might drive that next upgrade cycle that will help people to go out and want to replace their devices. That drives revenue growth for us.
On Atmos and Vision, it's far more about getting on more of the devices that are shipping than how many devices are shipping, because we're earlier in that growth cycle. So Dolby Atmos and Dolby Vision was on about 25% of 4K TVs last year, so we still have considerable room to grow. And then at even earlier stages, we have, I mentioned earlier, automotive, where, we brought Dolby Atmos to music streaming, starting with Amazon in 2019. Apple Music began supporting us, I think it was the spring of 2021, and since then, we've added about 14 auto manufacturers. It's one of the higher growth parts of our business as we are seeing, a healthy pipeline of new auto manufacturers. The ones we have in market are adding a lot of models, Mercedes, NIO, Li Auto.
We're getting higher volumes on each of those, so that's been a bright spot for us.
So, to recap, you, two-thirds of that licensing business is tied to device sales, and you would expect that if and when device sales strengthen, then that part of the business would grow again, and that's probably the highest margin segment of the business. And then on Dolby Atmos and Dolby Vision, there's growth there because that market is still under-penetrated. But what are the things... What do you think are the two or three most important things that are going to drive that growth in Dolby Atmos and Dolby Vision? You mentioned autos. What are the other key indicators you look for for traction in that business, or things you can do, we can do as a company to drive that growth?
Yeah, so, for Dolby Atmos and Dolby Vision, we've said that we're targeting 15%-25% CAGR over the next three-five years. And our top three focus areas are continuing to drive more adoption in movies and TVs, and that's driven by the strong presence we have in movie and TV content, and also an increasing presence in sports content. So, most recently, Max has announced and has begun to stream all of its sports content in Dolby Atmos and Dolby Vision, which is driving a lot of other demand. We also have support around the globe. The Indian Premier League in India will be streaming in Dolby Atmos and Dolby Vision. We're looking forward to the Olympics later this year. So that continues to be a big focus for us.
Music and automotive, we're still in the early days with, but with a lot of momentum, and so we think that can be... It's our largest percent grower right now, and we think it can, it has a lot of room to grow. And then mobile is our second-largest end market as a company. Still a lot of room to grow in Atmos and Vision, particularly focused on the adoption of Dolby Vision in the mobile space. We, over the last 18 months, have brought on most of the major mobile phone OEMs in China: Xiaomi, OPPO, HONOR, to name a few. And they are bringing the ability to both capture in Dolby Vision.
We have broad support in China across social media and video sharing sites, so you're seeing it adopted by influencers and people just wanting to have the best quality experience in their own videos. So those are the three primary focus areas for us: TV in the living room, automotive with music, and mobile devices, particularly with the Dolby Vision experience.
Great. We have a question from the audience. Any words of encouragement on Dolby Vision at Samsung?
Oh, so you have, people are able to submit the questions?
Yeah.
That's great. I would start with Samsung is, you know, one of our largest and longest-standing customers, and over the last several years, they've really embraced Dolby Atmos across their TV lineup, across their soundbar lineup. It's included on the Galaxy. And we think we have a strong value proposition with Dolby Vision, and we will continue to strengthen it by expanding to more types of content and more experiences. But they, as implied by the question, Samsung is not, has not yet adopted Dolby Vision, but we will, we will continue to work on that.
Maybe, maybe since we're on the competitive thread, can you talk a little bit about the competitive environment, who we see competitively, why we win when we win, and why we lose if we lose?
Yeah, well, this might sound a little cliché, but our biggest competition is do it yourself or is what we have good enough? What really creates the strength and the sustainability of our business is the strength of these ecosystems. They usually start with a unique technology, which is, you know... We're an R&D company at heart, so it's very well thought through and protected by patents and IP. Over time, the defensibility and the sustainability of these businesses is really about the ecosystem and the ecosystem of content, the ecosystem of distribution, combined with our presence on the devices that makes it very sustainable.
Maybe-
I feel like there was a second part to your question. Yes.
... Thanks. Sorry, just on the competitors, I mean, are there any other competitors? That didn't sound like there were any. I didn't quite get the answer to that.
Yeah, no, fair enough. There are competitors across each aspect of our business, very few that do all of it. You know, when we're talking about audio codecs, there are patent licensing pools that we're a part of, like HE-AAC and AAC, so that's a part of our foundational revenues, and we share in those licensing pools, as do other licensors. There are smaller competitors that do virtualized audio technologies or other things, but no one that competes across the entirety of the ecosystem that we've built. But again, there is, you know, the do-it-yourself is a real competitor, who is particularly when we're going through a new cycle like Atmos and Vision.
You know, we have to compel people to believe that, you know, this is a significant improvement over the audio or video experience they could otherwise offer.
You're at around $1.3 billion now. Have you put out any type of long-term revenue goals based on either growth in your current customer base or the rollout of your next wave of technology offerings? And any, perhaps, I don't know, if litigation is potentially material to, to winning new, new licensees.
What we've said in terms of long-term revenue guidance is we are. Our goal is to get to sustainable double-digit growth. As we talked about a minute ago, in the foundational, where we have these large attach rates, we believe that we will return to low single-digit growth in that part of the portfolio, and that in these higher growth areas, with a CAGR of 15%-25%, that gets us to about the double-digit rate. And of course, we always have a number of new initiatives in the pipeline, which we expect to contribute to growth as well.
Gotcha. And just in terms of the device variability, when you have your larger customers, like Samsung, do they peak out? Are they, the larger ones, flat fee at some point?
Typically, even for our larger customers, it's tied to device shipments. What we do often have are minimum volume commitments, for which they would pay above a certain amount. That's particularly prevalent in mobile, but it can happen throughout other parts of the business.
They have a minimum, but not a max?
On the licensing side, that's right, yeah.
Okay.
The patent licensing pools that we participate in sometimes have caps for particular use cases, but that's us participating as a licensor to that pool.
Where are you right now in terms of adoption on the content creation for Dolby Vision, on that side of the equation?
Very strong in movies and TV. It's over 75% of the box office in both Vision and Atmos, higher for either one of them individually. We're supported across Netflix, Apple, Disney+, most of the major streamers in China and regional around the world. That's where we first brought Atmos and Vision to life. In music, we've got Amazon, Apple, TIDAL. We have most of the major streaming services in China, large regional providers in Korea and India and Singapore. Sports is where we're seeing some momentum at the moment. I mentioned that Max has announced that they'll stream all of their sports content in Dolby Atmos and Dolby Vision, which is also generating a lot of interest from a lot of other partners. Typically, sports takes longer for us.
When we usually start with the movies, audio mixers literally have three months to spend on the sound, and by the time you get to sports, you have seconds. So all the tools come together, and we're... We will be part of the Olympics, so it's an area of focus. That's important because it does drive where we have-- I mentioned we're on 25% of 4K TVs. At the high end, the attach rate is very high. At the low to mid-end, it's smaller and growing, but sports is a really compelling content experience for driving those sales.
Can you spend a little more time talking about the opportunity in automotive? You don't break it out explicitly. It's in the other category. How big can it be? What's the use case? Where are you? If it was a baseball game, what inning would we be in, and how do you view the opportunity at a high level?
Yeah, we're in the early days on music and automotive. The experience is music, and what's so compelling about the Dolby Atmos experience for music is that most of our other experiences, whether it's movies, TV, Dolby Atmos was an upgrade from surround sound. In music, we're going from stereo, sometimes mono, so it really is just a completely different experience. And when we were, as we always do, beginning with the creative community, the first things that musicians and labels and the streaming services wanted to know was whether we were gonna have a solution for the car. They cared about, of course, the home, definitely mobile, and the car. And, you know, we've added about 14 manufacturers in just over two years.
Mercedes has gone from starting with the Maybach to being on, I think about 15 models. You can now get it in their, in their SUV. I forgot the rest of your question. You had a lot of parts to your question.
Just-
Oh, how big could it be? So yeah, it is included. We break down our license revenue by end market, so broadcast, which is TVs and set-top boxes, that's our largest market. Mobile is the second largest. PC and consumer electronics, which includes sound bars and other home accessories, are about tied for three, four, depending on the day. And then we have other. We break it out separately when it's 10% of licensing revenue. Auto is another. It's been a big driver of growth in that category. And, you know, we do very much believe it has the potential to be broken out as a separate licensing category in the future.
Do Atmos and Vision get a little bit better every year, or will there be, like, a 2.0 and 3.0, you know, whatever the-
Mm-hmm
... time cycle, the technology cycle time is?
Yeah, we are always doing recurring innovation for a few reasons. One is, as you know, devices themselves evolve, and we bring it to new contexts. We're always looking to refine and improve. The other thing that happens is that the creative community gets more familiar with the technology. So a lot of it has to do with how Dolby Atmos or Dolby Vision is exercised creatively. And as time goes on, that becomes more the case. And then, beyond that, we always have a certain amount of our R&D investment about what's next, what's beyond Dolby Atmos, and what's beyond Dolby Vision, and how can we access new market opportunities.
So when does that come, that next big one, where step function change over what you have today?
Yeah. So, first of all, like I said, I do believe we're still using the word step function, that we do have these as Atmos and Vision are still in the stage where we are quite confident that for the use cases we're focused on, we can get to very high attach rates. And there are sometimes inflection points where in one year, you know, historically, these adoption cycles will get a big bump that perhaps, you know, we might not have predicted. Beyond that, in terms of looking at what might drive the next upgrade cycle, you know, I went through a lot of the upgrade cycles that I've seen just in the 17 years at Dolby.
I would say that, we're in a phase where I don't think there's a common upgrade cycle factor that the industry is speaking to. I think it's been a period of time where everybody's been kind of focused on supply chain and what they've been focused on. But we are very engaged with all aspects of the ecosystem, from content distribution to OEM. We think that, we have done a lot of recruiting around AI, around spatial computing. We also have a really strong emphasis on sports, and we think those are some of the areas where it's likely to come from. And an area where we've been investing in, both in terms of our own internal product development and working with our partners on where they're going and how we can support them.
Now it's time for your favorite question. Dolby has $952 million on its balance sheet and no debt. Can you talk to us a little bit about the philosophy of capital allocation within the company?
Yeah. So we do have, like as Peter said earlier, we have a strong cash generation. And we return cash to shareholders through a combination of a buyback program, where we at minimum offset stock-based comp. We have a dividend program, which we've increased all but one year at the onset of the pandemic, and we have from time to time bought back more shares than is required to offset stock dilution. In total, over about 10 years, we've returned about $4 billion of cash to shareholders, and we continue to review that on a quarterly basis.
When you go out on the road and you meet with investors, is there an element of the story you feel like the investment community doesn't fully appreciate or isn't fully aware of? Is there some part of the story that you think just isn't well understood?
Well, look, I think that depends on where people are in the story, but I think certainly for people who are new to the story, I think that at first glance, we are a technology licensing company. Which is true. We generate our revenue per device based on licensing into those devices. But that does not give one a full appreciation for the work that we do to build those ecosystem and that's what builds the sustainability of the business, and these long and sustained relationships which have grown over time.
We also, in the course of doing that, have the opportunity to become trusted partners, where we begin to partner with them on what they're looking to accomplish in the future as it relates to their audiovisual experiences, which gives us the opportunity to, you know, increasingly be included in their new device offerings, and collaborate with them on what's next.
Let me open it up to this inquisitive crowd, see if there's anyone out there has any questions.
There have been a lot of great questions.
Yeah.
There's one.
... Just Dolby Cinema and where that is in the adoption cycle?
Yeah, absolutely. So, we have two aspects to our cinema biz. One is we do have some product sales, which is really for the entirety of the cinema market. Audio processing allows for Dolby Atmos. Our Dolby Cinema business is our fully branded experience, which includes Dolby Vision, Dolby Atmos, and that is a different model, that we provide the audio-visual equipment, and we earn a percentage of the box office. We are on about 300 screens. And the last three years, given you know the struggles that the industry has been through, have not been a big time of investment for the exhibitor industry. But I think the industry is quite optimistic going into 2025 and 2026, particularly this year, which is an off year for the box office.
That's due in no small part to the strike and the amount of time it took to kind of get the scheduling back together. So there is a lot of content slated to come out in 2025 and 2026. And what we've seen, beginning with the pandemic, is a significant increase in the percentage of the box office that goes to premium large format screens like Dolby Cinema. So it's getting more people when they go to see their favorite, you know, to see Dune or the big movies, want to see it in the best possible way. And so you're seeing more of the box office go to experiences like Dolby Cinema.
And so we think there's still a significant opportunity to expand Dolby Cinema, and the pipeline's strong, and we're beginning to see people preparing to invest in the, those high-end experiences as we go into 2025.
How many theaters are there today?
About 300. And PLF, Dolby has about 300 Dolby Cinemas. The total cinema market is 100-something thousand screens. The PLF market specifically is about 5,000. That includes exhibitor-branded PLFs, so they have their own experience that doesn't have an outside provider like Dolby or IMAX.
You get more on, you know, you get more in an actual Dolby Cinema per seat, correct?
Yeah, we share in a percentage of the ticket revenue.
How fast is that 300 growing, and how fast do you expect it to?
We've been growing the last couple of years at a rate of 20-25 a year. Again, investment has been muted through all the challenges the industry's been through. Prior to that, we were more at a rate of, like, 50-60.
Where do you think it eventually gets when we get into a more normal exhibitor cycle?
I guess right now, we'd have our sights set on getting back to that 50 or 60, and we think, and we'll go from there.
What is the investment required by the exhibitor to put in a Dolby Cinema?
Mm-hmm.
What's the payback for them?
It varies considerably based on the state of the screen they're starting with, and also whether it's a new build or a refurb. If it's a new build, much of what we would have done can be done at little incremental cost. So it really runs the gamut in terms of investment. Also, what more they want to do. So it could go from hundreds of thousands to $1 million, depending on how they're gonna approach the project. But, and the second part of your question?
ROI for them.
Um-
How quickly is the payback?
The incremental box office for screen on Dolby Cinema has been very strong for them. I obviously, it's gonna vary by exhibitor, but one of the things that is very attractive to them is that we, as I mentioned earlier, we have over 75% of the box office in Dolby Vision and Dolby Atmos, which allows them to be very flexible and responsive to which movies are attracting the biggest audiences, which has allowed them to get that strong return.
Great. If we have a last 20-second question, we can squeeze it in now. If not, Kevin, thank you.
Great. Well, thank you all for spending the time today. Appreciate it.