All right, good morning. Why don't we go ahead and get started? I'm Ralph Schachart, Internet Analyst here at William Blair. Thanks again for attending our annual Growth Stack Conference. Today we're really excited to have Kevin back from Dolby to give you an overview on the business. Just a quick overview of the company, because I think it'll help level set. I've covered the company since the IPO, which was a long time ago. Through the history of Dolby, every time there's been a product cycle, you've seen the business sort of grow on top of each other. If you go way back to when there was analog surround, to digital surround, to mobile, to now what we would call streaming, and then whatever's beyond streaming, Dolby as the business has sort of grown and become larger over time.
I think at this point, if you look over the last four years, the business has been relatively flat. I think what we'll focus on today is sort of coming out of that flat period. The business is starting to grow again. They'll add about 200 basis points of margin expansion as a result of the business growing. I think that'll be sort of the focus here today. We'll do a fireside format instead of a presentation, and then definitely some questions at the end, time for questions at the end. I think the breakouts and Sullivan, if I'm not mistaken. I have to tell you to check our website for disclosures, so my compliance officer doesn't get mad at me. With that, we'll go ahead and kick it off. Maybe Dolby, sort of an overview, Kevin, to kick things off.
You've been here for a long time, previous role as a CFO, have transitioned and been in the CEO role for a while. Maybe kind of walk us through the evolution of Dolby as you see it through your eyes and kind of where we are today.
Yeah, thanks, Ralph. And thanks for having me. Thanks, everybody, for coming to learn a little more about Dolby. Yeah, I joined right after the IPO, so along with you, about 20 years. Hopefully you all have had some experience with Dolby. I think one of the great things about working at Dolby is that you often have people share their first experience with Dolby. That could have been, depending on the generation, the button on the cassette player that eliminated noise for music. It could have been the first time that they experienced surround sound in the theater. Oftentimes that was Star Wars, is what people remember. Of course, what we've been doing is working through these transitions and through the changing times to make sure that we still have those moments. We get those moments.
We get people who are excited about the first time they experienced Dolby Cinema and Dolby Vision and Dolby Atmos. Increasingly, it's about the first time they're experiencing Dolby Atmos in the car, which is one of our newest initiatives. That's what, ultimately, what everybody in our company is focused on is providing the technologies required for these ecosystems to deliver high-quality entertainment, often producing these spectacular moments that people remember forever. While also meeting the efficiency needs of all the people that have to do all the work to produce that content, get it through the chain, whether you're back in the broadcast center or in the mixing truck, that's what we do at Dolby. Yes, the company's been around for 65 years. I've enjoyed 20 years of that journey, about 15 as CEO.
Obviously during that time, we've seen a lot of different economic cycles. To Ralph's point, we've seen a lot of technology transitions. Just since I've been at Dolby, analog to digital, DVD to streaming, standard F to high def to 4K. Those are some of the technology transitions that were really critical to the work that we do. Each of those times, we've not only made those transitions, but we've also introduced new technologies, which have enabled us to add more value on the devices that we're on and also expand into new ecosystems. We've gone from movies and TV to gaming to sports to music, and more recently to user-generated content. I think that's the way we've been able to make those transitions is, I think, first of all, we're very clear on our role in the industry.
We have a group of people that is passionate about focusing on the science and the engineering of sight and sound to bring to life these spectacular experiences. Again, to meet the quality and efficiency needs of these ecosystems that we serve. Which is the second thing. I think it's important to maybe just spend a moment on what I mean by ecosystems. For us, that means that while we earn revenue on a royalty for each device that includes our technology, depending on how much technology is in that device, the way we earn that revenue is by serving the needs of the artistic content creation community. We're providing them with the ability to expand their palette with our technologies. Audio video is their medium.
We're working with everybody in the distribution chain, content owners, streamers, broadcasters, to make sure that what that creator intended can efficiently be delivered to the device. We're working with the device manufacturer to meet their goals and objectives as it relates to kind of how they want to bring this offering to consumers. Ultimately, it's the consumer that then gets to enjoy this more compelling, more emotive experience. That's why over 65 years, so many of the films, so much of the music, so many of the stories that people love and remember are in Dolby. From Star Wars to Avatar, from The Grateful Dead to Taylor Swift, from the World Cup to the Super Bowl, from your Walkman to your home theater to your DVDs to streaming, Dolby's a part of that.
Right. A few years ago, I think when Robert joined, you broke out the revenue from foundational to growth products, which I think has been helpful for investors. Maybe if you could sort of give an overview of what that means to investors and sort of give us a sense of the relative growth between the products.
Yeah, of course. We now provide this breakout between foundational audio technologies and Dolby Atmos, Dolby Vision, and our imaging patents to give you a sense of how to relate it to the macroeconomic environment, which has been a pretty big feature in our thinking, really, since the onset of the pandemic. The foundational audio technologies include our licensed—we have patent pool technologies where we contribute patents along with other patent holders in accordance with standards that are collaboratively established with the industry and that we innovate into. They meet needs around compression and content delivery, et cetera. That is one of the technologies that is included in foundational. The other is our branded Dolby Audio Codecs. This is where we are building these ecosystems, again to meet the core needs of delivery for multichannel audio, which you might relate to as stereo or surround.
What those two technologies have in common is that they have been around for a little while, so they have very significant attach rates across a very wide number of devices. The point of which, as you think about Dolby's growth, is that what's happening with the health of consumer device shipments overall is going to be a pretty big factor in what the growth rate will be for the foundational audio technologies. Last year, that was about 60% of our licensing revenue. We think that going forward, we think over the midterm, it can grow in the low single- digits. I'm sure we'll talk more about that in a moment. Dolby Atmos, Dolby Vision, and imaging patents, obviously, health of consumer device shipments affects everything we do.
These are technologies that are well established, yet still have a lot of room to grow in attach rate. We have been growing the attach rates of Dolby Atmos, Dolby Vision, and the imaging patents. That category, we've been able to grow over the last four years at a compound annual growth rate of about 20%. Four years ago, that made up 15% of the revenue. Today, it makes up 40% of that licensing revenue. That's how to think about the foundational versus Dolby Atmos, Dolby Vision, imaging patents.
Great. Just kind of drilling in on that, can you give an overview of getting some feedback on this? Thanks. An overview of foundational, I think we covered that, actually. Can we drill in a little bit more to Atmos and Vision and the imaging patents and maybe what that means at the consumer level and then maybe what value that adds to your ecosystem as well?
Yeah. Again, at the consumer level, if we're doing our jobs, you're just more immersed in the story. It's a more emotive experience. If we take Dolby Atmos and Dolby Vision, the value, what really makes it special, I think, is that we are expanding the palette for the artist. When we first conceive of something like Dolby Atmos and Dolby Vision, the first place we go is to the creative community. Each of those came to life via the movies and TV ecosystem. With Dolby Atmos, when we were first demoing that to directors, I'm always looking for, and even more so the team that is doing all this work is looking for, the artist, that moment where they realize they can express something that they weren't able to express with the previous version of the technology.
As it relates to Dolby Atmos, I remember a couple of moments that I happened to be a part of. One of them was there was a director who had shot a scene where it was a car chase scene and there was a crash. The car flipped off the screen sort of towards you and off the top of the screen. He got so excited because he did not want to use that scene because he felt like he could not keep people in the audio experience. With Dolby Atmos, he believed he could keep people in. Dolby Atmos is a far more spatialized experience. If you were creating a movie, if you think of surround sound, which you are all familiar with, your creative control is to direct which of five spots in the room you want the sounds to come from.
If you're in a cinema with 50 speakers, it's just grouped into groups of five, and it's coming from one of those directions. With Dolby Atmos, they are mixing the sound in a 3D interface. It would kind of look like a gaming mixing to you because you can put up to 128 objects at any one point in time in the room. Then Dolby, with our technology, will process that, whether it's 50 speakers in a cinema or two earbuds, and try to replicate that as faithfully as possible. That is why when he saw this car flipping off the screen, he said, "Oh, now I can keep that scene and I can keep the audience in that scene." It is a similar moment with Dolby Vision where one director was, we were halfway through a presentation.
He just screamed in the middle of it, "Oh, now I can use night as a character," which is I can't say that creatively I necessarily understand, but it's the kind of thing I love to hear because I know that they're seeing that we're helping them to better express themselves. What Dolby Vision does is it provides for high dynamic range, much starker difference between the darks and the lights. You get true blacks. You can allocate more between the blacks and the lights. If there's a scene where if behind me there was a window and a skyline scene, it doesn't get washed out. You can get the skin tone, but you can also preserve the detail of what's going on in the background. It also expands the range of color. Standard cinematic dynamic range pre-Dolby Vision was 4,000-8,000 to 1.
Dolby Vision peaks out at over a million to 1. It is just a completely different experience, and that is why they get excited about it. That is why people get it starts with that creative passion because the content owners and the distributors, of course, they want to it is an important constituent to them is who is going to make the content. They want to support them in telling their stories in the best possible way. That, of course, creates the value proposition for device manufacturers who are looking to offer the best possible experiences and stay competitive. Ultimately, it is the consumer who hopefully has one or more of those moments where, "Oh gosh, I remember the first time I saw Dolby in Dolby Cinema.
Now when I listen to Rocket Man in a demo, I cried personally.
Thank you for sharing. I know your joke, but we've had A-list artists who literally, when we introduced Dolby Atmos into music, our team, some of them agreed to be kind of filmed. We were going to give them their first reaction. We had more than one who broke down in tears when they heard their favorite song in Dolby Atmos. It's such an immersive experience. It wasn't usually their song. It was just their favorite song.
Maybe pivoting to OptiView, which is a new term for what used to be called Dolby I/O, which is a newer business model for you, which is more of a SaaS model. Maybe if you provide some perspective on sort of your thoughts for that, maybe an overview of the business first and how you think about the business going forward.
Yeah. The licensing model and the ecosystems we've built is such a great model with 98% gross margins. One of the big differences between that and this software as a service model is that the software as a service model, we are charging based on consumption, based on the amount of content that is streamed and consumed. In particular, we're focused on the area of mainstream sports, including sports betting and also iGaming, because our value proposition is targeted at companies that are increasingly looking to introduce or enhance the real-time interactive digital experiences to increase engagement with their audiences. What Dolby does specifically is we have a video player that they can integrate into that experience. We provide the capability to livestream high-quality audio video in ultra-low latency, which means we can do this in sub-seconds.
On average, and I'm sure you've all experienced this, there's a delay in streaming. It can be, on average, I think it's 7- 8 seconds, but it could go up to 20, 25, 30 seconds. We can do that in sub-second. Importantly, we can also ensure that everybody's getting it at the same time. This is important because if we're trying to engage with one another on one of these apps, if I see the touchdown 20 seconds before you see the touchdown, it's not a very fun interactive experience. We've also introduced a technology which allows for real-time ad insertion at that same rate, taking into consideration the various types of screen types and things that you might be watching on.
We're excited about this opportunity because, first of all, I think sports is part of our business across our whole business where there is a lot of investment in improving the experience. In particular, across the landscape, people are really focused on how to really lean into these digital experiences. Everybody wants to increase engagement with their audiences. We feel like we're hitting the market at a very good time with this offering.
We were in Europe with your team recently, and we were seeing some of the sports betting shops Paddy the last night. Maybe give us some perspective why they would license your technology and sort of the practical use case of when the betting window would close and how your technology sort of optimizes that for that customer.
Yeah. In the sports betting use case, there's a number of reasons to want consistency of delivery and ultra-low latency. I mean, first of all, a lot of the betting comes in kind of late in the window. By streaming in ultra-low latency, you're keeping that window open for 5, 10, 15 seconds longer. Secondly, in something like Paddy Power, where they are using us to stream in all their shops, it's not just a single screen. It can be 50 screens with 50 different events. Sometimes you might have the same event on here and over there. Having it happen in real time and at a consistent level is really critical to them. Yes, like I said, sports betting is one area where this is of really strong interest. Mainstream sports is also very interested in it.
I mean, leagues, teams who are looking to build connections with their audiences and all the companies that are developing around that to support those experiences. Like last quarter, we brought on board a customer by the name of Huddle. And Huddle is a service and application that you can log on to watch anything from college games down to Little League and school games. So maybe some of you have experienced it. And for the highest end, if it's the Big 10, they're going to be charging a per view kind of fee or a subscription. For the rest of it, they're excited to be able to use our real-time ad insertion technology to be able to monetize that part of their service.
Great. Maybe transitioning to the betting model, I think it's maybe sometimes difficult for investors to understand. Can you give some perspective? I know you don't disclose exact royalty rates, but from the range of royalties that maybe start with mobile devices all the way through autos and how they might think about how you monetize those end markets.
Yeah. First of all, our end markets, maybe I should start with the end markets. Our two largest end markets are what we call broadcast, which is essentially TVs and set-top boxes, and mobile. We also break out PC and consumer electronics, which are all the other devices in your home, soundbars and DMAs, et cetera. We have another category. We break out end markets when they become 10% of licensing revenue. Other notably includes automotive, which is one of our fastest growing areas, gaming, the box office share we get from Dolby Cinema. Those are the end markets. The model for device licensing is it's per shipment. After 30-90 days, depending on the customer, after the end of a quarter, they report how much they shipped. We charge an amount per device.
Each of these technologies is an additional price. If you have both foundational technologies and Dolby Atmos and Dolby Vision and imaging patents, then that is going to be a larger royalty for us. Some devices might just have a couple of those technologies. There does tend to be a correlation between kind of volume and price. Mobile is going to tend to be one of our lowest ASPs. I mean, that could be under $1 or tens of cents, depending on how much technology, whereas automotive is going to be typically our highest, where you could be much, much higher than our average.
Maybe if we walk through some of the growth factors, Android, mobile, auto, and some of the others and sort of kind of frame how you're returning back to growth. Maybe to bolt on another one, investors have been really focused. The question I get often is, when does Dolby start really growing again? Maybe we can kind of lead into that and remind us of your long-term growth rate and how you get there.
Yeah. Let me take the second part of the question first. We talked a little bit earlier about this construct between foundational and Dolby Vision, Dolby Atmos, imaging patents. We started breaking that at around 2021. You might remember that 2021 was the year that everybody during the pandemic bought TVs and PCs. There was a big spike in consumer device shipments. We grew quite nicely as a result. Since then, we were seeing declines. It was a pretty big hangover from that in 2022. Even 2023 and 2024, device shipments were still coming down. That weighed on our foundational business. We saw declines in foundational over each of the last three years.
On the other hand, Dolby Atmos, Dolby Vision, and imaging patents, as I said earlier, grew on average a compounded annual growth rate of 20% a year over those four years, based with the same device environment, but it's just that we're getting on more cars. We're getting on more mobile devices. We're getting on more TVs. A couple of things looking forward. One is we came into the year, we saw the consumer device shipment outlook stabilizing. We continue to believe that Dolby Atmos, Dolby Vision, imaging patents can grow at a growth rate of between 15% and 25% a year. That category is now 40% of the revenue. It's going to have a it started at 15% when we broke this out in 2021. One, it's contributing more to the overall growth rate.
Two, as foundational stabilizes, that's what gives us the ability to drive growth. That is why coming into this year, we did guide to growth this year, as you pointed out earlier. That also is the reason, part of the reason, between the guiding for the increase in operating margins, which we also increased last year.
All right. Maybe kind of transitioning to more current events, just on the macro and tariffs. I know you talked about it on the last call, but if you could kind of frame the potential impact if tariffs persist on your model.
Yeah. So what we said on the last call, and I'll just say right away that I don't think I would even today, I'm not sure I would change what I said a month ago on the last call, which is that the tariffs don't impact us significantly directly in the sense of paying tariffs. We have a little bit of cinema product revenue, but it's not material. Obviously, what's important to us, as we've talked about, is device shipments. Tariffs can affect that, but it's a broad range of things. Tariff, trade policy more broadly, just the health of consumer spending, all of those things have an impact on ultimately how many devices are being purchased. I guess it was about a month ago that we were doing our earnings call.
Our take at that time, and like I said, I don't think it will change significantly, is as things stand, we would say it probably looks like there could be some slight headwinds from that. There are some things that mitigate it. As I said, our two largest categories are TV and mobile. It turns out that the point of manufacture for most TVs, even for Chinese manufacturers, is Mexico. That is a good mitigating factor for us. Mobile is a category where, while it's fundamentally based on units shipped, that industry tends to have a higher propensity for us of minimum volume commitments, which is to say that we're not as sensitive in the near term to the fluctuations in device shipments.
As it turns out, auto, which is our fast-growing category for us, most of that is not—we're just getting started really in the U.S. We have a lot of Chinese manufacturers for China. That's not affected. A lot of European manufacturers are shipping into various places. We think it could result in slight headwinds. The main takeaway was that could change on a dime because things are changing every day. We widened the range. We lowered it just a little bit at the midpoint, but we widened the range to reflect the fact that if there is continued escalation or dragging out, then it's really beginning to weigh on the consumer, then that could put us at the lower end of the range.
If we start seeing trade deals and it's resolved kind of at the higher end. I would say compared to a month ago, I don't think there's been any real significant change to what I would say about that.
Great. We're coming close to the end. I'll pause here to see if there's any questions.
Yes.
Sir.
Just regarding pricing power and you're talking about cost of view and some of these things that your technology really allows audiences to do. I'm curious, when you're implementing this on some of the devices, are you able to pay more price? Or what does the conversation look like with some of these OEMs?
I think always our goal is to get a fair price for what we're doing. We are also trying to set it and maintain that price at a rate where we can get these very high adoption rates. That is part of the value of the ecosystem, getting this virtuous cycle where the more content you have, the more devices adopt, the more devices adopt, the more content you get. That becomes what establishes the durability of our ecosystem. Yes, of course, our discussions are always about the value of the technology. We think we establish fair pricing and get strong margins and have a very durable business model where these relationships can last decades and a half.
I guess how does it work between you and the end customer? Are they just putting your technology into their device and then you quote them at the end of it? And then they're kind of unknowingly.
Oh, no, no, no. When we sign on a new customer for a set of technologies and a device type, we're agreeing on the price then. That's when we're agreeing on the price. Over time, like I said, often over decades, they are shipping products against that. Of course, throughout the course of that relationship, we will have discussions about new technologies for those devices or technologies for additional devices. Each one of those is where we would have the pricing discussion.
Can you talk about the ones you deploy today? Your example of the betting site provider, the one named for your product.
Yes. Yes. Now, in the examples I gave, it could be there could also be infrastructure providers who are selling to the sports bettors. For any of these, we could be selling to that kind of white label service provider or to the face to the customer, the sports team, the sports betting.
Are there any partners? Are there any mobile devices for that?
Yes. In fact, the parlor is sort of a use case we hadn't anticipated, but it's an interesting one nonetheless. For the most part, you should think of this as a solution for digital experiences. You'll be experiencing them on your phones and on your PC and across all your devices. Yeah. Yes.
Can you talk about your expansion to the top three of Dolby Cinema?
Yeah, sure. Dolby Cinema is our branded theater experience that is fully inclusive of Dolby Vision and Dolby Atmos. The U.S. is where we have our largest presence, approaching about 170 screens. We announced at CinemaCon earlier this year doing 40 more. We will get to over 200 in the U.S. In Korea, we have a relationship with Megabox where we have, I want to say, about half a dozen screens. We also announced an expansion there. We are seeing more screens go into South Korea. At the same time, we talked about our entry into the Indian market. We are going to be seeing our first six screens go into India. I mean, the cinema market is a whole subject upon itself. The one thing I will say about it is that where there is strength is the premium movie-going experience.
Since four or five years ago, really since the onset of the pandemic, the percentage of the box office that accrues to premium experiences has increased significantly. As the industry comes out of the effects of the pandemic and the strikes and the list of things they've had to deal with, where they're looking to invest is that premium movie-going experience. Dolby Cinema is the best way to experience a movie. We are beginning to see a lot of interest from exhibitors now that they're kind of coming out of that period of time of where they want to invest their capital dollars is in premium movie-going experiences.
Unfortunately, we're out of time. Kevin, thank you so much for attending our conference and for your time today. Thank you for your interest in Dolby. The breakout room will be in Richardson upstairs. Thank you very much.
Thank you.