Good afternoon. I'm Steve Frankel, analyst here at Rosenblatt, and it's my pleasure today to host a conversation with Dolby Laboratories. We're joined today by Robert Park, the company's CFO, and along for the ride also is Peter Goldmacher, head of IR. I'm gonna try ,to make this interactive, so if you have any questions and you're in the audience, please use the link at the bottom of the screen. Okay, Robert, you know, to me, one of the most compelling parts of the Dolby story is this virtuous circle that drives the business, that it begins with content creators and runs through consumers and device makers. Maybe start by telling us, how did Dolby get here, and, and why does Dolby hold such a critical role in the entertainment ecosystem today on a global basis? It's not just a U.S. thing.
Yeah, first, Steve, thanks for including us in your conference, and it's great to meet everyone virtually. So I'd start off by saying, you know, for Dolby, I've been here three years, but it's been around since 1965. Dolby is founded on the belief that people want to have compelling and immersive experiences. That's our North Star for everything we do. You know, we are the science behind unlocking the power of sight and sound. We create awe-inspiring experiences, and as you said, we've been on the forefront of multiple audio and, and now video revolutions over the last six decades. I know it's been a long time. Think about transitions from mono to stereo, from surround to spatial audio, analog to multiple iterations of digital, terrestrial traditional broadcasting to streaming, you know, and Dolby's come out stronger on the other end each time.
You know, and our strength and staying power really stems from our ability to combine our expertise in signal processing, you know, that's the science behind it, with our close relationships with artists and creators to continually bring the right technology to the creative community to help them tell their stories better. We tell their stories better. We've been involved with content creators since the beginning. We don't make movies. We make movies better. We don't make TV shows. We make TV shows better, and we definitely don't make music. I'm tone deaf. I can't hold a tune. We make music a lot better. So what we want to do, and we've done over time, is take that experience of the music studio, bring that into your mobile phone, bring that into your car.
Take that theatrical experience you see watching Maverick or a number of these top movies that are done in Dolby Atmos and Dolby Vision, bring that to your living room, bring that to your PC, bring that to your devices. And finally, where we get paid is our technology solutions optimize the delivery and playback of this content, and that's where we get paid for being able to play back in Dolby Atmos and Dolby Vision on the devices for that best immersive audio and video experience.
Okay, and, you know, a lot of the early success was driven by mandate, where Dolby had to be in DVD players and PCs and TVs. And while that's true, that now is the kind of the low single-digit, plus or minus a couple%, part of the business we call foundational audio, and the real exciting part of the story are these premium technologies, Atmos and Vision, and your imaging patents. For the uninitiated, what's the value add with these solutions, and what's the competitive landscape look like for somebody that might wanna do Atmos but wants to deliver a similar effect?
Great. I'd start by saying, I think all of our businesses are exciting, but what you said about Dolby Atmos and Dolby Vision, let me get into that in a little bit more detail, why that really is pushing the edge in terms of immersive experiences, so the first thing we do is we provide creative tools for artists to do unique things with their content. You know, Dolby Atmos is an evolution of spatial audio that allows the precise placement and movement of sound in a three-dimensional space. Think stereo as left and right, think surround as left, right, front, center, and spatial audio, our three-dimensional space is anywhere. I'll talk more about that in just a second. Dolby Vision is a visual technology. It uses HDR, high dynamic range, to improve the quality in images in movies, TV shows, and games.
You know, it makes the images appear more realistic, and that's what we really want. It enhances the details in both dark and bright areas. It amplifies color. I think it's got about a million-to-one contrast ratio, and it also provides metadata to adjust the picture based on the display capabilities of the device, and that's important in something like Dolby, where we're in billions of devices. And in order to play back that content recorded in Dolby Atmos and Dolby Vision, you need Dolby Atmos and Dolby Vision in the playback device. So the business model gives the tools to creators. We don't charge them for that. We want them to make it as easy as possible to tell those stories and create the best experience, and then work with their device manufacturers to implement the playback technology.
So think about Dolby Atmos, and what does that mean, left, right, up, right? Well, let's say you're watching a movie, and a car is coming off a bridge, starting the top left side of the screen and crashing on the bottom right of the screen. Well, that sound, and directors have told us, they can actually want that sound to go from top left to bottom right without being tethered to channels or left, right, front, and center. Music, you can have the lead singer music and sound coming right in front of you and the chorus above you and around you. That's the level of differentiation you can have with music and with movies and TV shows. There are. You know, there are alternatives out there.
I'm not gonna name them, but there are alternatives out there, but they are not Dolby Atmos, and they are not Dolby Vision. We continue to believe that Dolby Atmos and Dolby Vision are the best solution for audio and video experiences. You know, our value proposition is strong, and our value proposition is about the whole ecosystem, not technology for technology's sake, just on the playback device. So that's our, if you will, strength and staying power.
I think to prove your point, while there are alternatives, you know, Vision and Atmos continue to expand their reach. We talked about music. One you didn't bring up, but I think is important to bring up, is live sports. NFL games, the Olympics just came through in Vision and Atmos, if you were a Comcast customer, and it does make a difference as a consumer if you experience it that way.
Live sports is new for us, and it's a great use case for bringing that immersive, not just premium content, but live sports, in high contrast, brightness, as well as that sound. Yes, if you watched the Olympics, I'm glad the Olympics are over, 'cause I was. After work, you'd go home and watch it on streaming, and you could watch on Peacock any of the events, and I was staying up late at night because it is a great experience, and we're gonna see more and more of that as we go forward.
Okay, I know you are loath to talk about unit economics, but maybe we could just get you to agree that taking a device like a TV from foundational, where it has the Dolby Digital Plus codec, to something that carries Atmos and Vision, gets you significantly more revenue per unit, correct? So that's really the key to the growth story, is driving higher penetration of Vision and Atmos.
So we can agree that licensing, you know, increasing the number of Dolby technologies on each device that ships is one of the factors that will drive growth faster than underlying market growth. So yes, increasing the ARPU. The more technologies that are on every device, the more we get paid on each of the devices. In terms of our philosophy for pricing and how we think about pricing, pricing is based on a couple of factors. One, the value we provide to the end market, and two, the volume of devices, the number of devices that are out there.
For example, the per-unit royalty on mobile devices, which has 1.3 billion units out there, is gonna be lower than it would be for TVs, and which would be much lower than it would be for automobiles if you think about that in terms of the number of units out there and the value you provide to each of those units.
Okay, and then maybe to set the stage a little bit, give us some hints of kinda where are Atmos and Vision in TVs and PCs and mobile, and where are you in penetration, and so what's the upside?
Yeah, I'll say a few things, and just to talk about the drivers and that, and you spoke to one of them. Live sports is one of the most important factors driving growth in Dolby Atmos and Dolby Vision. The creation of content in Dolby Atmos and Dolby Vision is the creation of content in Dolby Atmos and Dolby Vision. The more great content that gets created, the better the value proposition. Live TV shows, excuse me, live sports, premium content, all of that will drive more and more use cases for people to absorb and digest and entertain themselves with Dolby Atmos and Dolby Vision. In TVs in particular, we have a very high attach rate at the high end, high end of 4K TVs. Our next leg of growth is in TVs that come in, you know, the mid-market to entry-level.
Going from a luxury premium to the entry-level and lower markets, and you've seen some of that in the last year or so in terms of manufacturers like TCL and Hisense pushing us through their lineup, not just on the high end, and some smaller manufacturers that are more regional. We believe live sports is a big push for that because that's more of an everyday use case in terms of experiencing Dolby Atmos and Dolby Vision, and we think that will drive more mid-market and lower-end, and big box retailer and regional brand TV. So over time, we believe Dolby Atmos and Dolby Vision will move from just a premium experience, and the competition will make it such a sort of table stakes, if you will.
And then the same thing is true for cars. We started with the high-end luxury brands like Mercedes, Lotus, Volvo, et cetera, but over time, we believe that the Dolby Atmos experience will be a must-have technology for all cars. Similarly to when the rear-view camera and side cameras were only done on high-end cars, you are starting to see that more and more proliferation in the entry-level and mid-level cars. We believe Dolby Atmos is the way to experience both music and podcasts and books on in your car. This is. I mean, you live in Florida, I live in San Francisco. I spend a lot of time in my car. Once you have experienced Dolby Atmos, and our OEMs and our partners would say the same thing, it is hard to go back to a non-Atmos experience. It falls kind of flat.
I definitely can echo that. And what kind of breaks the market up? Is it just time to get you from the high end of the market to more mass-market platforms, or do they need to do anything different in the car to enable this?
Yeah, so, with Mercedes, they started with the Maybach and the S-Class. When you have 30-plus speakers, an amplifier, a subwoofer, speakers in the seats, speaker under the floorboards, it's a different implementation, and a little easier probably to do Dolby Atmos with that level of hardware, technology, the chips, the head units. To make that work in a four-channel or six-speaker car with a little less power takes technical work, and that's part of what we do in R&D, is to make that sound equivalent in a lower-end car. So that's what we work with our partners in terms of drivers, power, speaker location, chipsets, to make sure that what we certify as a Dolby Atmos experience can be pushed down to other cars, and that's what we're doing right now.
You did a demo, right, at CES last year, that you had Atmos running on, what, a four or six-speaker Toyota?
A four-channel, six-speaker car. That's correct. And if you heard it, hopefully you heard it, it was pretty amazing. So you can't compare that to a Maybach, where it may shake your body a little bit, but you can compare that to any four-channel, six-speaker car you've ever been in and played Rocket Man. It's just. it's a false equivalent, but it's the best Atmos experience you can have in a four-channel car.
Okay. And now to kind of put a finer point on it, one of the things you did when you came in three years ago, was to help investors better understand these two revenue streams. So maybe update us on what's the split today between the foundational unit-driven business and this Atmos Vision piece, and what are the two growth dynamics right now, and how do we expect that to change going forward?
Yeah. Thanks, Steve. So, in 2021, we used to show a kind of monolithic licensing model by end market, and if you looked at it that way, what you really didn't see were the dynamics or growth drivers, 'cause they had different dynamics running each piece. This is not how we operate, but this is kind of the. If you wanna look at the business relative to external factors and other factors, the framework we did was to break this out.
So for licensing revenue, what we did was we said, "Okay, the core of our business, which is the foundational audio technologies, which includes audio patents and our audio codecs, like Dolby Digital, Digital Plus, AC-4, those technologies are widely adopted, high attach rates across a wide and deep set of consumer devices." And what we, we've said and what we've seen is, that growth over time will generally reflect the growth of those consumer electronic devices that they're in. And it's more sensitive to the macroeconomic trends. As shipments go up in 2021, we saw revenue go up. As shipments started coming down in 2022 and beyond, we saw that impact with our foundational revenue. And in 2023, that was about two-thirds of our licensing revenue.
The other third of our licensing revenue is Dolby Atmos, Dolby Vision, and our Imaging Patent Portfolio, which are much earlier in the adoption or licensee penetration cycle. So we can grow faster than device growth as we sign new licensees and expand adoption within our existing licensees. So while it's less susceptible to macroeconomic conditions, it's not immune, but we can grow faster, and we've seen that grow faster than unit shipments. In an area where unit shipments are coming down, Dolby Atmos, Dolby Vision, Imaging are still growing, and this year we said it'd grow in the low double digits. Again, it's about two-thirds and one-third at the end of fiscal 2023 and 2024 when all is said and done.
If obviously Atmos and Vision Imaging are growing faster and foundational is still coming down, we expect it to be a larger portion as well.
Then in 2022 and 2023, what was the growth of Atmos and Vision? It was a higher growth rate, right? That was kind of the trend line that's been higher than this.
Yeah, yeah. In 2022, Atmos, Vision, Imaging patents was. it was roughly 30% of revenue, running at roughly 30%. In 2023, it was about, just over a third and growing at 20%.
Okay. And is there, if the overall environment recovers, would we expect Atmos and Vision to kind of return to that 20%-ish growth rate?
Yeah, the formula for us to get to that targeted double-digit growth rate is, we need a little help from the macroeconomic environment. We need consumer electronic devices to get back to low single-digit growth away from the negative growth that we've seen. And then we need to continue driving adoption of Dolby Atmos and Dolby Vision in those devices, and get those device wins that we talk about every quarter, that ultimately will push through in terms of unit shipments. It's hard to time exactly when that'll push through, from design win to actually shipping into the market, but we know that these are the right steps that get us there.
That's what we're gonna continue doing, is to continue getting these device wins, in particular auto, mobile, and, as we said, mid-market, regional brands, and entry-level TVs as well.
And you'd made comments earlier in the fiscal year that there had been a slowdown in kind of that pipeline of Atmos and Vision. Either decisions weren't being made, or decisions were made and products weren't coming into the market as smoothly as they might have in past years. Any update on what's happening now in terms of that process?
Yeah, I don't think I would say that the pipeline was shrinking. We have a very engaged pipeline. It's the fact that our customer. We have a very sticky product. We have a very long-term, recurring revenue stream with them. What does take time in this particular market is trying to time the when and the size of the deals that will be signed, whether it be one model, two models, 10 models. That's part of the discussion, because these partners and OEMs are also dealing with their own economic realities of their own businesses. And so whether we get to the top five in their top three priorities, or number three in the top three priorities, is what we have to contend with.
And getting to that head unit in the car, working with the chip makers to make sure they have the chipsets available, working with the speaker and the other components to make sure they're ready to go, and also getting the manufacturers to prioritize the new units with Dolby Atmos and Dolby Vision, versus pushing out, and they're still doing that, pushing out some of the legacy products that may not have it. So we always say, "I can't time it exactly, but we know we'll get it." The timing of when these deals come to fruition, and we talk about the big ones every quarter, whether it be Cadillac, others, in terms of other brands for mobile and TVs that we talk about every quarter.
That gives us that confidence that we're getting momentum, there's value proposition. It's just that timing or, or trying to predict the timing of when these deals. Some come in sooner, some have come in sooner than we thought, like in auto, and some may take a little longer. It's just hard to predict.
Okay, and going back to TVs for a minute, you really have, as I would portray it, two big opportunities. One is, as you said, to go downmarket with a lot of your existing partners, and then you have one TV maker, Samsung, who has sat out this party. Help us understand why you think Samsung has been so resistant to Dolby Vision, and what do you think that has done to their business, if anything?
You can see in terms of market share, it's all public information out there. You can see what's happened over the last few years in terms of market share from legacy and some challenger brands that are coming up. For Samsung, I can't speak for Samsung, and Samsung have their own priorities. They have things they need to focus in on. We said the same thing with Dolby Atmos a while back, but they've adopted Dolby Atmos across their lineup of TVs, soundbars, and laptops and mobile phones. Vision might be a little different because they have their own proprietary technology, HDR10+, but it's not Dolby Vision, and what you're seeing is other TV brands adopting Dolby Vision and Dolby Atmos, starting to grow faster.
We believe our value proposition is the fact that brand matters, experience matters, and at the low end, if you can have a Dolby Atmos and Vision experience at a lower price point, especially in this economic market, it just kinda makes sense. But I can't speak to their decisions and what specifically is gonna make that leap, but we're anything but persistent.
Okay, and, and to put this in perspective, there was a period of time before you got to the company where we as investors had the conversation with management about Samsung loves your Dolby Digital Plus in their phones. Apple's not doing anything. Why the hell won't Apple do anything? And lo and behold, today, Apple, I would say, is your poster child for the Dolby experience, right? You're in basically everything Apple makes today.
Apple's a terrific partner. We're innovation partners with them. You know, not only just the things they make, but the future of entertainment, the future experience, spatial computing. We're working with them, as you know, on the Vision Pro, hardware that they had. Not just as a, you know, not as if millions and millions of units are gonna be sold, but it's pushing how we think about content, how we think about content delivery. How can the new experience of premium entertainment be? What is that future? Working with them as a technology partner just shows that we're trying to innovate with our partners to be one step ahead of them, on where the puck is going relative to entertainment, and that's a perfect example.
Okay. You know, traditionally, Dolby hasn't made a lot of acquisitions, but you've made two interesting ones in the last few months. Maybe talk to us about what you bought and why, and how that helps transform the business going forward.
We did a small acquisition, THEO. It's complementary technology to our Dolby.io. Think of it as a front end to our back end. It's a small start-up, it's a small deal, but accelerates our time to market. They're primarily known to have a video player. It's used by top-tier live sports and video-on-demand services today. But they're more than just a player. They've got a number of ecosystems that support ad serving, translation, transcription, analytics, lots of opportunities for us to cross-sell. We could have built our own. It would've taken time. We've been in many deals where they would buy a player from THEO and use our ultra-low latency technology and put those two together.
Sort of like the peanut butter and chocolate, we feel that it's a much better offering, and some of our pipeline customers have said it makes complete sense to have it all from one vendor, where you have the player, as well as the ability to do sub-500-millisecond, ultra-low latency live streaming, particularly in the area of sports and sports entertainment. So makes a lot of sense, increased our time to market, and we saw a lot of signals and demand from our pipeline of it makes a perfect fit, and it was available, so that was a smaller deal. The GE deal, which is a little bit bigger, is also in an area where it's our sweet spot.
Our sweet spot is licensing, IP, and this unique opportunity to get over five thousand patents, primarily in the area of video and media streaming. You know, this strengthens, complements, and expands our portfolio today in emerging patent space, and it's both current and next-generation standardized technology, HEVC, VVC, VP9, and AV1. So it's an important part of our strategy. We believe we can run it very efficiently. It's got very attractive financial profile. Expected to be accretive. It's not a material impact to fiscal 2024. It's not zero, but we don't believe it's material. We do expect it to be accretive to both non-GAAP operating margins and EPS next year. So, more to come in November on what that looks like for 2025.
But, really excited that this became available, and it again fits in our wheelhouse. It's not very often that you get an opportunity to pick up assets or a business like that at this scale.
Okay. Now let's switch gears a little bit and talk about the two of your two bets on the cinema business, the historical product business, and then the Dolby Cinema branded experience. Because, yes, it's only 10% of revenue, but it's an interesting way to make the Dolby experience come alive. We're headed into 2025, which could be one of the best years in the box office ever, given all the movies that got pushed into 2025. So tell us where you are in that business, and what you're seeing from customers.
Yeah, so let's, let's break this up a little bit. The two pieces are a little bit different. So our Dolby Cinema business, as you said, is what we believe is the best way to experience a movie, and that business model is we provide the hardware, projector, speakers, all the other things, to the exhibitor, and we get paid as a percentage of box office, and that sits in licensing revenue. They're essentially licensing this technology for the Dolby Cinema experience. What's been a challenge. We've got about 280 screens today.
But the challenge with that, with our exhibitors over the last year or two, when obviously COVID is a piece of it, strikes hurt, and the box office of blockbuster names that have pushed out, as you said, to 2025 and 2026, is they have to do a lot. There is a lot of capital to build a cinema, to take a PLF and build it to our Dolby Cinema specs. We still believe sight lines, accoutrements, acoustics, baffling, all the things that have to happen to make it a great experience. We believe next year, and they feel optimistic about the slate, lineup, so their financial condition to push out more of those Dolby Cinemas should accelerate again.
So we wanna be on more screens, and we've been told by directors and producers, "We want more screens that have Dolby Cinema because we believe that's the best way to experience them." So the reason we have it, yes, it's in our licensing business. Yeah, it's not a huge part of our business, but it's strategically super important for us because it helps us help the creative community tell their story better on a big screen, on the PLF screen, and then taking that experience and bringing it as best you can into the living room. That's getting the awareness of the Dolby Atmos and Dolby Vision experience. That's what we have for the Dolby Cinema experience. We also have over 8,000 Dolby Atmos screens.
So, may not have the projector, it may not be in Dolby Vision, but they have that Dolby Atmos sound in over 8,000 screens, where they buy our equipment to help enable just at least the immersive sound and audio you get when you go to a theater. We want DC screens. We have Atmos screens, and then finally, what we believe we have a third offering we're pushing out next year, which is you can have the Dolby Atmos, which is projector and Dolby Vision, but you don't have to do all of the build-out that's required for Dolby Cinema.
That's gonna be more like a Dolby Atmos and Dolby Vision movie experience, and they can leverage their existing PLFs they have today, which is much less capital outlay for them, much easier to deploy, and then the velocity can be much faster. And that business model is also a percentage of box office, so not as much capital upfront for those for the exhibitors as well. We're excited about that. We're excited about the slate for 2025. I think the first one is in November, that I'm excited. It's Gladiator II or the remake. It's November, which is our next year, fiscal year, and then, as you know, the slate is pretty promising for fiscal 2025.
Okay, and so people will understand that these 200-some, 280 screens, you have roughly 100 in the U.S. with AMC, right? And the rest, China is your next biggest market?
Yeah, we've got the U.S. with AMC, we've got China, and then we've got cinemas throughout Japan, South Korea, and also Europe.
Okay, great. Other question that always comes up with investors is capital allocation. Now, conversation changes a little this week because you just spent $500 million on the, the GE acquisition of patents, but still you have a business that's got no debt, generates $300 million a year in free cash flow, kind of in a steady-state. Yet your buybacks have been just enough to offset dilution for the most part. You haven't done anything more aggressive in terms of shrinking the cap. Kind of, why do you take this posture, and what needs to happen to maybe take a more aggressive posture towards buying back stock?
So I'll take the buyback and talk about that in the context of our overall allocation of capital, like, philosophy and how we think about this, and we discuss this every quarter with the board and with ourselves. Yeah, you just noticed we did spend $500 million this quarter on acquisition, so we have half of the capital that you talked about just on Monday. We think about it in kind of three areas. The first and foremost, the best way to create long-term enterprise value is to take those resources and invest it in your business.
How can we grow a sustainable, robust, recurring revenue stream within our businesses today, and look at our portfolio of opportunities that we can do internally, whether it be Dolby Atmos, Vision, Cinema, capital required to build that out, whether it be anything we might be doing in R&D and other opportunities we have in entertainment, we look at that. The second kinda way we look at that is inorganic. Where can we find attractive assets that are out there that will either accelerate time to market from a product perspective or strengthen our existing licensing business that we have today? And we've kinda done two of those this quarter. We did another one last year, but we don't do very many of these, but that's not to say that we don't look at an active pipeline all the time.
And then the third is, how can we be friendly to shareholders? And a couple of things what I would say is, we can do that through buyback and dividend. We've had a dividend program for, I think, a decade. We increased it every year, except for one during COVID. And for buyback, what I would say is, yes, we've had a posture and policy to offset dilution, so there's no dilution on that. But if you look over the last several ten years, we've done a number of accelerated or step-up buybacks. So in fiscal 2022, as units were coming down, revenue was shrinking, we bought back $530 million worth of shares in fiscal 2022. That's just two years ago.
So when it makes sense, we will, we can step up the buyback program. Over the last 10 years, I think we've returned about $4 billion or over $4 billion back in the form of buyback and dividends, and see, it's something we look at every quarter, and you can see we used half of it this one quarter.
Yeah. You know, one of the other hallmarks of your tenure at Dolby is, you know, fresh look at expenses. Dolby traditionally kinda spent money 'cause they had fat margins, and they really weren't thinking about expense growth. And you have done a great job, and you have talked now about growing earnings faster than revenue going forward. In doing this, are we risking getting at a point where some of the pure innovation or the science projects that Dolby always had going on have to be limited, or are there still other places to cut without kinda risking that you're missing the next new thing because you've limited your R&D scope?
So research is the lifeblood of our business, and we're always investing in innovation that will drive long-term growth, and I think that's what you meant by science projects.
Yes.
The name of our company is Dolby Laboratories. It's not Dolby Save Money. It's we do that in the spirit of, yes, we're committed to controlling and growing earnings faster than revenue, even in a declining revenue and flat revenue environment, and we've done that. I think you've seen over the last three years, our expected fiscal 2024 OpEx is lower than it was in fiscal 2023, and our growth pace is lower than it was in 2022. That's because we've really looked at focusing our energy on the most important areas and de-investing in places that don't need to be invested in, if you will. And we've taken that as a surgical approach.
If you look at the last eight quarters, 10 quarters of quarterly, we've done, we've made changes, structural changes, I think six of the last 10 quarters, just because when we see an opportunity, we're gonna do it. We're not gonna just wait till it all bundles together and do one cut at a time. And I don't think we ever stop trying to be more streamlined or trying to be more effective. With respect to R&D, I think we spend about 18%-19% on a non-GAAP basis of our revenue on R&D, and I don't think that's gonna change. We're continue investing it. But what has changed is being more clear on the commercial value of what we're building. Not building, you know, science projects, technology for technology's sake, or that's pretty cool.
It's in the lens of: Who will pay for it? What's the value to the customer? And what's the commercial value of that? And ending the project when we don't see that it's not clear or obvious, but we are still pushing the envelope on how you think about entertainment, and we have ideas to do that. So I think about our R&D spend is there's a portion of that that's spent on today's product set and technology set, so making Atmos and Vision more use cases for that, different sizes, smaller TVs, different cars, different speaker sets, different technologies that are out there, because that investment has a long-term recurring revenue stream for us. Then you have.
You know, I think about Atmos and Vision today is not the same thing as Atmos and Vision was ten years ago. Then you have sort of that horizon two. How do you make Dolby Vision better, Dolby Vision IQ, Dolby Atmos, FlexConnect? These are things that add small ARPUs, but also make the product more valuable, if you will, to the consumer. And then you've got a smaller portion that does pure research with engineers, with PhDs. They've got more degrees than a thermometer on solving hard math and science problems, and that's what we were born with, and that's sort of in our DNA. So that, that's not gonna stop, and through all these adjustments and structural changes, you can kinda see R&D as a percentage of revenue is pretty healthy.
Okay, and let's spend a couple minutes talking about Dolby.io, 'cause that's a great example of how you started something with a pretty broad brush, and after a couple years, decided to focus in on one area where you thought you could be successful. So what's gonna make IO and Millicast a successful business? Kinda, what have you discovered?
So let's start off with the premise of Dolby.io and how it came to be. Our business today, for the most part, is tethered to unit shipments. That's how we get paid on devices, unit shipments, so it's got a TAM that's identifiable. What Dolby.io does for us, it untethers us from device shipments and allows us to expand the TAM to get value and add value in the ecosystem on creating high-quality audio and video in a low-latency environment, and that's what we have today, and now it's ultra-low latency with Millicast. We believe that when we started, it was started as a developer platform, a self-serve, product-led growth approach, where developers would take our SDKs and embed them into their own code and we would get paid on the usage there.
But what that was great is understanding the use cases, understanding how the product works at scale. What it didn't work as much is getting revenue at scale. It's mostly SMBs, very small developers, and we saw great use cases, and that's a great way to test and push out product, but not in terms of a scaled business. Over the last nine months, we've tried to move towards more of an enterprise sales, where we saw a signal from large companies who were interested in it, but just a couple of developers were using it. So we're working on deals at the enterprise level, where we can implement these technologies at scale, for live sports and sports entertainment, and we're starting to see that. But it's.
I would still say it's still nascent, it's still a startup, and it's still sitting in our services revenue, and we believe longer term, this enables us to have revenue and recurring revenue streams outside of unit shipments.
Right, and the killer app probably in the next couple years is in-game betting. Live sports is probably your-
Live sports, live sports betting, you know, ultra-low latency. A couple things that it provides. Value is if you're in a stadium and you don't have the greatest seats, you can provide multiple views in the stadium on your mobile or device to see multiple views of the same activity. You cannot have latency in that. It's a terrible experience to have even one and a half, two-second latency. You've got the sound doesn't match what you're seeing. Same with racing and other ways, where you only see one view, you can see multiple views, and you need to have that ultra-low latency.
In sports betting, keeping the window open for, and most latency is eight to fifteen seconds, fifteen seconds or plus longer, that's where the majority of the action comes in, within the last several seconds of when the window closes. And with the proliferation of in-game betting, not just betting on the game, but betting on points within the game or, prop betting, which is betting on within the game, you need ultra-low latency to be able to bet on a serve, a game, an inning, a pitch. You can't have eight to fifteen seconds delay. It just doesn't work that way. So those are obvious use cases, but there are much larger, broad applications. And if you go to THEO's website, you can see the sports brands that are using them.
That's great. Well, I really appreciated your time today, Robert, and looking forward to what the next year's gonna bring.
Well, again, thank you very much, Steve, for hosting us and having us here, and glad to meet everybody, and if anyone has any more questions, Steve knows everything. He can answer 'em, or he'll refer 'em to me or Peter. Thanks.
Great. Thank you.