Good morning. Hello. Thanks for attending our annual Growth Stock Conference. I'm Ralph Schackart, Internet Analyst here at William Blair. Excited to have Kevin Yeaman back at our conference, CEO of Dolby Laboratories. Kevin's going to do a brief overview of the company. I will not provide that at this point. Amanda wants to come up and do a safe harbor. We'll kick off. We're gonna do a fireside chat format.
We may make some forward-looking statements today, so we should note that actual results may differ materially from any of those statements. We may also get into non-GAAP numbers. To see our GAAP reconciliations or to get more info on factors that could cause our results to differ from what we say here, I'll refer you to our investor website, our latest earnings announcement, and the risk factors listed in our latest 10-Q.
Great, and I have to inform everybody to check our website for all the disclosures. Make sure I check the compliance box. Thanks again, Kevin Yeaman, for joining us. As you know, we have kind of a different conference format. We have more generalists versus just sort of tech-focused investors. If you wouldn't mind, maybe spend a few minutes, give us a broad overview of Dolby, the financial model, the problems you're trying to solve for the end markets, and then we'll take it from there.
Sure. Thanks for having me again, and thanks to each of you for coming to learn a little bit more about Dolby. I always enjoy this conference. I'm looking forward to the fireside chat format. I'd like to start by giving you a sense of what we do at Dolby. One of the great things about Dolby, I've been here for quite some time now, is that so many of the people that I encounter, share their first Dolby experience with me. When I first started, this was more often than not, the button on the cassette player or the first time they experienced Star Wars in surround sound.
Increasingly, I'm hearing from people who don't wanna see their movies in any other way than a Dolby Cinema with the full Dolby Atmos and Dolby Vision experience. I hear from people that have just experienced Dolby Atmos music for the first time, perhaps in their car, and they don't want to experience their music any other way. Even on our phones today, we can capture content in Dolby Vision and get more realistic and lifelike videos to share and with our friends. That's the power of the Dolby model when it all comes together. That's our passion at Dolby.
Our passion is enabling artists and the creator in all of us, to tell better stories, and bringing out the full emotion of those experiences, however, consumers receive that content and however they're playing back and experiencing that content. Our financial model is largely driven by licensing revenue. That's the majority of our revenue, and that revenue comes from a royalty per each device that ships with our technologies on it. It's important to understand that, and something I'll refer back to, I'm sure you heard the word ecosystem a lot. For us, it's building these ecosystems, which puts us in a position to increase revenue and have Dolby experiences adopted on more devices. For us, what that means is content, distribution, and then playback.
In the example of Dolby Atmos and Dolby Vision, which are our most immersive audio and imaging experiences, respectively, when we first came up with these experiences, the first place we go is to the creative community. We were sitting down with colorists, sound mixers, movie directors, and what we're looking for is whether we're expanding their palette in a way that inspires them. I'm not much of an artist myself, but I imagine a painter knows everything there is to know about the texture of canvas, and brushes, and the viscosity of paint. In the case of the creatives we work with, sound and light is their palette, and so we're looking to expand that palette in ways that give them an ability to tell a more complete and more emotional story.
Once we're onto something, we work to make sure that we can integrate that into their workflows, that we meet each of the needs they have. We begin working through the distribution channels, each of which has its own unique constraints, whether that's broadcast, streaming, mobile, cinema. That brings us into partnerships with chipset manufacturers, content owners, content distributors, and all of this, all the while, we're of course working with our OEM partners, who are constantly working to advance their hardware capabilities and working with them so that we can bring the full force of these experiences to life. That's what puts us in a position to drive adoption across television, set-top boxes, PCs, mobile devices, and more.
It's these ecosystems, as they grow, that further strengthens the value proposition and makes for a robust and recurring licensing revenue model. We have a very strong brand. We have strong profitability and cash flow, and there's never been a time where there's been a greater demand for entertainment content, and that's what creates opportunities for us and why we're excited about our growth opportunities. We're focused every day on bringing more Dolby experiences to more people and more types of content, and that's what ultimately drives growth and drives shareholder value.
Great. I've sort of coincidentally covered the company since your IPO.
Wow!
makes me old. Would love your perspective. You know, from an outsider looking in, you've evolved from back then, DVD five channel to Blu-ray, that was sort of a, you know, not necessarily a cycle to streaming. I've seen the evolution in the model, but you've kept sort of the core licensing as sort of a basic framework on monetization. I know you're extending into Dolby.io, but I'd love your perspective, I think you've been there about 17 years. Just maybe speak to, you know, how you evolve and how you become relevant during platform changes, and, you know, how you continue to control your destiny.
Yeah, now you're making me feel a little thrown. I think, I'll talk a little bit about how things have evolved, and we could probably spend the rest of the 23 minutes and 21 seconds talking about how dynamic the environment has been in just the last three years. The key to how we have thrived through that evolution, starts with the things that have not changed. You know, one thing that has not changed is, our purpose and our passion, and the passion our people have for staying engaged with the creative communities, the distribution communities, the playback, OEMs, to continue to raise the bar on the quality of these experiences. We've been doing that for decades, and we plan to do it for decades to come.
Another thing that has not changed is people love their content, right? We probably all have favorite movies and TV shows. Most of you, if not all of you, probably have a favorite sports team that probably hasn't changed in 25 years. We're very emotionally attached to these experiences. Another thing that hasn't changed is that throughout all of this time, artists, content creators are never satisfied with the status quo. Over 17 years, there have been periods of time where everybody was on board with wanting to push the bar on immersive experiences. There were periods of time where I felt like we were evangelizing a little bit for the need for more immersive experiences. Artists have always wanted to push the boundaries and to expand their storytelling palette.
I guess I've bridged into one thing that. Those are the things that haven't changed. I think so many things have changed. First of all, there's just more content. There are more types of content, there are more ways to enjoy that content, there are more ways to receive that content. That, across the board, has created opportunities for Dolby to make a difference in each of those experiences and all of the ways in which they're delivered. We have seen many, as you talked about, Ralph, so many technology transitions over this period of time, right? I mean, you know, as you know, when we first met, much of our revenue was from DVD playback. Of course, today, it's all about streaming and broadcast and mobile. That was a major transition.
We've seen major transitions in the playback capabilities from 2K to 4K. Before that, from standard definition to high definition. With each of those shifts comes opportunity. By engaging regularly with the creative community, content distributors, and the OEM community, that's where we find our opportunities to introduce more technologies into more devices and to more experiences. That's also been a change. We've greatly expanded the number of content experiences that Dolby is relevant to and where you can enjoy a Dolby experience. It's not just movies and TV. It's music, it's sports, it's gaming, it's user-generated content. We're constantly looking to expand that relevance, which also makes us relevant to a broader range of devices and use cases.
Those are some of the things that have changed, and the way we, I guess the intro to your question was, you know, how have we evolved? How have we continued to grow through that evolution? It really is by staying engaged across these ecosystem partners. It's by staying really focused on the value that we bring to the world. Especially over these last three years, in what's been a very dynamic environment, we have been very agile about making sure that when we wake up every day, we're focused on the opportunities that are most available to us to go expand the number of Dolby experiences with our partners.
Great. I wanna touch on the macro, but maybe before we get there, you recently changed, so the reporting structure from foundational, sort of IP patents to newer technologies, which is Dolby Vision, Atmos, and Imaging. Maybe for the audience, sort of talk about the dynamics between those licensing revenue streams and how you view both of them.
Yeah. Maybe just, if I could just set that up.
Yeah
... a little bit. There's a couple of constructs you'll see in the way we report. One is we provide information on our licensing revenue by end market, and by that we mean, what's the device target? So we have broadcast, which is primarily TVs and set-top boxes, PC, mobile, consumer electronics, which includes things like sound bars and smart speakers. Then we have another category, which are the collection of things that aren't yet 10% of licensing revenue in their own right, but notably would include automotive, gaming, and Dolby Cinema, which is a licensing as a share of box office.
That information you can see historically about how those markets, and I think that's valuable to investors because I'm sure you each study these markets and have your own views on what the outlook is for those markets. What we introduced more recently, in the last year or two, is we're also sharing a construct of our foundational audio technologies. These are our core audio codecs and audio patents that are essential today to the way entertainment content is delivered across a very broad range of use cases. We're very diversified across the ways that content is delivered, we're diversified geographically, and we're diversified with very high attach rates across televisions, PCs, mobile devices, and more.
We break that out separately, because of our broad presence, that is gonna tend to be more sensitive to the macroeconomic environment. We have our Dolby Atmos and Dolby Vision, our most immersive offerings, combined with our imaging patent portfolio, which are our higher growth areas. They grew about 30% last year. This is where we're seeing much of our growth, because this is where we continue to expand into new use cases and more devices.
Great. Maybe, talk about the macro in a couple, contexts. Just kind of big picture, if we could, sort of get an update on how it's impacting the business. I know it's impacting a lot of companies that attach to consumer end market sales. Then maybe just your perspective, how has the macro evolved since you set your initial guidance to where we are today? Then maybe just to kind of layer onto that, some perspective, is it impacting other end markets maybe more than others?
Sure. As I said a moment ago, foundational, because of our broad presence across so many devices, is gonna be more sensitive to these macroeconomic trends. We came into the year expecting foundational to be down low single digits, and that was because of lower unit shipments across most of the categories I've talked about. We've seen that more pronounced in, if I were gonna call out one category, in PC, but at the same time, because we do have such a diversified base, we've seen some lower, some higher. We're still, you know, it's playing out about the way we expected, coming into the year.
Over the long term, this diversified base of revenues is a very strong position to be in, and we believe that when the economy settles, it will return to growth, and we continue to work to strengthen that position across each of those markets. Dolby Atmos, Dolby Vision, our imaging patents, those have continued to grow throughout this period of time. I said it was 30% last year. That's because it is far more about getting on more of the devices that are shipping right now than it is about how many devices are shipping, put quite simply. Where we continue to see very strong demand is on content creators, content owners, device manufacturers, wanting to invest in these experiences and bring the best possible experiences to life for consumers.
Net-net, we do see the growth in Dolby Vision, Dolby Atmos, and imaging patents. We see growth in licensing because those areas are greater than what we're seeing in foundational. Particularly, we see growth in broadcast, mobile, and the other markets, which again, are automotive, gaming, Dolby Vision, those areas.
Maybe touch on growth a little bit. Maybe kind of give us a little bit more color in terms of what drives the growth, maybe starting at the artist level. You know, my perspective's always been that you come into the professional market, consumers are, you know, see their favorite artist or see their favorite movie. With Dolby, it means something when they go, you know, at a point of purchase or shopping on Amazon. Maybe some more perspective on Atmos, Vision, and imaging in terms of what's driving those growth segments.
Yeah, you've set that up very well because it's driving those content ecosystems that creates the demand for the device at the device level, and we have three primary focus areas right now. One is continuing to invest in the movies and TV ecosystem. It's our most established ecosystem. It was the largest growth driver for that category last year. It'll still be a big growth driver this year. Movies and TV, of course, can be enjoyed across a very broad range of devices, it drives demand across all those areas. You know, in particular for that category, we look at TVs, set-top boxes, soundbars, the living room experience. We have a couple of newer ecosystems for us.
Music, which was first introduced in 2019, has grown very quickly, and again, music is an experience that we enjoy on mobile phones, on soundbars, smart speakers. We're particularly focused on automotive because that is a relatively new opportunity for us, and that's an area where we've been getting a lot of traction. Lastly, I would point to user-generated content. Dolby Vision Capture has been included on the Apple ecosystem since the fall of 2020, and since then, we've been focused on that ecosystem because with a focus on adoption in mobile devices. Now, we have a number of use cases that do apply to mobile devices, movies and TV, music, but the ability to capture in Dolby Vision and play back in Dolby Vision and share and capture creates a big opportunity for us to continue to drive growth in mobile devices.
Mobile's been one of those markets that, I don't know if you've had fits and starts, but I think you had Apple originally in 2016, thereabouts, as sort of the initial partnership. I would have guessed mobile would have been larger sitting here in 2023, but it seems more recently that you're starting to add more of the mobile, OEM licensing agreements, and then auto seems to be a pretty interesting new area for you. Maybe kind of touch on if my observation is sort of correct, maybe a slower build, or at least the way I think maybe investors see it, but mobile maybe starting to catch a little backdraft. It seems like there's quite a bit of new OEM partnerships announced in auto, which I think is a new opportunity.
Mm-hmm.
Maybe kind of touch on those two, if you could, please.
Like I said, the first part of your question, obviously, we would always like to see growth happen, you know, sooner and faster, but we're really excited about the progress we've made. Mobile is up to close to 20% of our licensing revenue last year. We do expect growth this year. As I said earlier, Dolby Atmos drives adoption on mobile devices. We're on the Samsung Galaxy with Dolby Atmos. We're included throughout the Apple ecosystem. Currently, we're very focused on this user-generated content opportunity, and we've had some really exciting wins this year, particularly in China, where OPPO, vivo, and Xiaomi have all had significant announcements around support of Dolby Vision and Dolby Capture. Automotive, I mentioned music launch in 2019.
We've been in market with a solution for automobile manufacturers to play back Dolby Atmos for about two years. By the way, when we started, as we always do with the artists, if not the first question, it was one of the very first questions every time we spoke with an artist or a label. They wanted to know, are people gonna be able to experience this in the car? It's just one of those experiences that people want to be able to have in their car, and it's a perfect environment to have an amazing music experience. Over the last two years, we've brought on nine automotive partners, and this year, Mercedes has announced that they'll be expanding into additional models. Volvo announced the release date for its EX90. Did I get that right? EX90, I think.
At the beginning of next calendar year, we last, in the last month or so, added Guangzhou Automotive, which is the fourth largest manufacturer in China. That continues to be a significant area of focus for us.
Music is a newer area, you know, where you're able to sort of capture royalties, particularly for smart speakers. If you could maybe sort of frame, you know, what's driving the growth there and adoption. I'm sure it starts with the artist, but maybe kind of frame the opportunity since it's a little bit newer one for Dolby.
Yeah, it starts with the experience, and I wish I could start every one of these presentations with a 10-minute, you know, Dolby experience. We have truly seen more than one artist brought to tears the first time that they experienced Dolby Atmos music. Many consumers who said they just don't wanna experience it any other way. The music experience is very powerful. It's emotional to us, and Dolby Atmos really immerses you in a different way. It was 2019 that we launched with Apple Music and their Echo Studio. It was spring of 2021 that Apple adopted Dolby Atmos into Apple Music. Since then, we've been focused on bringing more devices on board.
Just in the last... Just this year, recently, the Sonos Era 300, their premium single speaker solution, supports Dolby Atmos. They've been a great partner for us. JBL, even more recently, announced support for Dolby Atmos in their Boombox single speaker solution. Then again, with the focus on the automotive side, we're engaged throughout the automotive industry. I talked about some of the wins there, but, you know, the watch this space and what to watch from us is to continue to bring on more auto manufacturers and to continue to get deeper and deeper into the lineups of the partners that we've brought on board so far.
Dolby.io is sort of a newer revenue stream. I know it's nascent, but building rapidly, but maybe sort of kind of frame the opportunity, how you're sort of expanding beyond the, sort of traditional, OEM licensing model.
Yeah, like I said, we're always looking to raise the bar, and you know, as it relates to the areas we've just been talking about, we're continuing to do that. We also believe that the Dolby experience has a lot of value to add beyond the premium content and the highest production value content. Specifically, our developer platform, the audience is developers who are building the apps and experiences that we use every day. The idea is for us to bring our decades of know-how, our decades of IP, our ability to solve just about any audio-video challenge, and put that in the hands of developers so that we can unlock the creativity of millions of developers to bring more Dolby experiences into the world.
That's the purpose behind Dolby.io. A couple of things that we're doing. Of the use cases that we, you know, we started out with a set of use cases. We learned quite quickly what we suspected, is that developers, like all of us, care about quality of experience. Where we're starting to see more concentration of interest is around a couple of capabilities. We have one developer who builds virtual events for corporations. They, for instance, did, McDonald's has an annual marketing awards and internal marketing off-site. They built a virtual trade show environment for that. They have a customer that launched an airplane in a virtual hangar. Now, to be clear, people are experiencing it over their PC. They have an avatar.
They're in the experience. There's two challenges this presents that Dolby solves really well. One is, capturing that complexity of an audio environment with that many people and all the ambient noise. I mean, it sounds like you're in the hangar. If you're having a conversation with people, a lot of these solutions today will limit the number of people that you can hear. If you're in a group of eight people, but it can only capture five, somebody steps back, somebody steps forward. That's very disorienting. Plus, you can have music in the background. These larger scale environments, Dolby knows how to solve these at scale and make it very realistic and immersive.
The other technology that it was incorporated to those events and can be incorporated elsewhere, is the ability to real-time stream, and by that I mean hundreds of milliseconds, high-quality audio-video into any kind of environment, really. In the case of these environments, it could be the screening of a movie, it could be the streaming of a live concert performance. Because of the low latency, you can also get interaction with the audience so that you're getting real-time feedback in a realistic kind of environment. Maybe that's more than you bargained for. I will mention one other. We have a developer that we're pretty excited about. It's related to this real-time streaming, ultra-low latency. We have developers who are working to enable high quality and real-time second screen experiences.
You could imagine an in-stadium experience where you really are able to get high quality, multiple angles, but get it in real time so that you're consistent with what's going on.
... Right, maybe it's kind of pulling this together. One of the key focus for investors is how does Dolby get back or return to double-digit growth? I think you're sort of low to mid-single digits for a guide this year, but if you could sort of walk us through the building blocks, how you get back to sustained double-digit growth?
Yes.
Another focus, obviously, is on the OpEx spend, and sort of, you know, does Dolby have the right level of OpEx? If you could sort of, you know, riff on both of those points, that'd be great.
Sure. Let me actually close on my last point as I lead into the next, which is to make it clear that the way the Dolby IL works is that we get paid on usage. It's a, you know, per-minute type of model or per-volume kind of model. Backing out, how do we get to double digit sustainable double-digit growth? As it relates to the foundational audio revenues, as I said, we're expecting that to be down low single digits this year due to the kind of overall environment. We continue to strengthen that, those ecosystems. We have a very broad adoption across many markets, and when the economy settles, we expect that that will return to growth.
With Dolby Atmos, Dolby Vision imaging patents, we believe that we can double revenues from those areas in the next three to five years. We're targeting 15%-25% a year. We believe we're on target for that this year. With that formula, between foundational Atmos Vision imaging patents, that could get us into the ballpark of that double digit, sustainable double digit. Beyond that, we're never done. I mean, we are innovating every day to bring new experiences, to, you know, when we... Once we've done everything we wanna do on movies and TV and music and user-generated content, we see more opportunities to apply Dolby Atmos and Dolby Vision.
Of course, we have initiatives like Dolby.io, which we think can be contributors to that, to that growth rate over this period of time. You mentioned OpEx. We've been running at over 30% non-GAAP operating margins, and we have said that we can continue to do that. I think at double-digit growth, that would give us more flexibility to think about how much of that is leverage to operating margins versus invested in growth. At the same time, we are always looking at opportunities for efficiency, especially in G&A, and we review that regularly. We're looking to be agile with, as I said earlier, focusing on the opportunities where we can bring to life the most, Dolby experiences, but also with our resource allocation and capabilities. We're never done. I see that as a dynamic and continuous process.
Great. We have I'll pause here for a second or a couple minutes if there's any questions and from the audience. All right, I'll ask one just because it's topical.
Sure.
The whole VR, AR movement, Apple had an announcement yesterday. Maybe if you could kind of frame that opportunity? I know it's very expensive, and we're not at mass market pricing at that point, but just sort of how you're thinking about that at Dolby, and how would that potentially be a contributor to growth?
Yeah, I was at the event yesterday before getting on...
I wasn't.
-plane to come here. It was fantastic. Yeah, I was able to get a taste of the experience. I think it's it really opens the mind to how powerful those experiences can be. I think in the Dolby sense, any time that you have, you know, new and increased hardware capabilities to render experiences, anytime you have the creative community inspired by that, we saw that, you know, Bob Iger spoke about that as it relates to Disney and what they see in this experience, that's where we see opportunities to stay engaged with those partners to meet the future needs of future experiences. Dolby Atmos and Dolby Vision can, and we expect will, provide value to these kind of ecosystems.
Also with Dolby.io, while today we're, you know, and one of the, one of the areas that I had mentioned we have some traction is in building kind of virtual events. That's mostly in the sense of engaging through PCs and mobile devices, but, you know, we would like to establish ourselves as the company that developers look to when they're looking to build these highly immersive experiences. I think that AR/VR could only be positive to that.
Great. Unfortunately, we're almost out of time here, but Kevin, really appreciate your time, and always coming back to the conference.
Thank you.
Thank you for all your interest in Dolby and attending William Blair's annual conference. Thank you so much.
Yeah. Thank you for joining us. Thank you, everyone.