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Dolby Laboratories Inc  (NYSE:DLB)
Q2 2019 Earnings Call
May. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fiscal Second Quarter Results. (Operator Instructions) As a reminder, this call is being recorded today Wednesday, May 1, 2019.

I would now like to turn the conference call over to Jason Dea, Director of Investor Relations for Dolby Laboratories. Please go ahead sir.

Jason Dea -- Director, Corporate Finance and Investor Relations

Good afternoon. Welcome to Dolby Laboratories second quarter 2019 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories President and CEO; and Lewis Chew, Executive Vice President and Chief Financial Officer.

As a reminder, today's discussion will include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today. A discussion of some of these risks and uncertainties can be found in the earnings press release that was issued today under the section captioned Risk Factors, as well as in our most recent on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events.

During today's call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website. As for the content of today's call, Lewis will begin with the recap of Dolby's financial results and provide our fiscal 2019 outlook, and Kevin will finish with a discussion of the business.

So with that introduction behind us, I will now turn the call over to Lewis.

Lewis Chew -- Executive Vice President and Chief Financial Officer

Thank you, Jason. Welcome to your first earnings call, nice job. Good afternoon everyone. Of course, I'd like to start by reminding everyone that beginning this year we adopted a new revenue accounting standard, ASC 606, using the full retrospective method which required us to recast previous year's revenue under 606. So, like we did last quarter, we've included a table in the earnings release that we put out today that shows the FY 2018 revenue last year, the FY 2018 revenue figures as adjusted under 606 broken up by quarter, and any of the comparison that I make to prior year revenue numbers are with respect to those 606 recasted numbers. So let's get through the Q2 results.

In the second quarter FY 2019 total revenue was $338 million and within that licensing revenue was $310 million while products and services was $28 million. Total revenue in Q2 of last year was $300 million. Here are some comments on the activity in the end-markets that we serve; Broadcast represented about 39% of total licensing in the second quarter. Broadcast revenues were up 22% sequentially and 38% year-over-year. In both cases, the increases were driven by higher revenue from consumer imaging which includes both, Dolby Vision and our imaging patent portfolio along with higher recoveries. And a sequential trend was partially offset by lower seasonality in TVs.

Mobile devices represented approximately 22% of total licensing in the second quarter. On the sequential basis, Mobile increased by over 90% driven by timing of revenue under contracts. Year-over-year, mobile is down about 2%, due primarily to timing of revenue, partially offset by higher volumes from increased adoption. Consumer electronics represented about 14% of total licensing in the second quarter, and licensing in this area increased sequentially by about 2%, due primarily to DMA. And consumer electronics on a year-over-year basis increased by about 18% driven by higher penetration in patent programs for a variety of CE products and customers.

PC represented about 13% of total licensing in the second quarter, and PC was up sequentially by 78%, primarily due to timing of revenue under contracts. And PC on a year-over-year basis declined by around 6% driven by lower ASPs due to mix. Licensing in other markets represented about 12% of total licensing in the second quarter. They were down by about 40% sequentially, due primarily to seasonality in gaming and lower recoveries in automotive. On a year-over-year basis, other licensing increased by about 6% driven by Via (ph) and Dolby Cinema, but partially offset by lower recoveries in automotive.

Products and services revenue was $28 million in Q2 compared to $42.1 million in Q1, and $27.6 million in last year's Q2. The decrease from Q1 is due mostly to a lower number of Dolby Cinema screens in Q2 that had upfront amounts that are accounted for as product sales; and I talked about this last quarter.

Let's move on to margins and operating expenses. Total gross margin in the second quarter was 89.2% on a GAAP basis, and 89.7% on a non-GAAP basis. Products and services gross margin on a GAAP basis was 26.7% in the second quarter compared to 35.3% in Q1, and products and services gross margin on a non-GAAP basis was 30. 4% in the second quarter compared to 37.8% in Q1. Operating expenses in the second quarter on a GAAP basis were $198.8 million compared to $195.1 million in the first quarter, and operating expenses on a non-GAAP basis were $178.7 million in Q2 compared to $173.4 million in the first quarter.

Operating income in the second quarter was $102.9 million on a GAAP basis or 30.4% of revenue compared to $84.6 million or 28.2% of revenue in Q2 of last year. Operating income on a non-GAAP basis in the second quarter was $124.6 million or 36.8% of revenue compared to $104 million or 34.7% of revenue in Q2 of last year. Income taxes on a GAAP basis was $36.4 million or a 33.1% effective tax rate; and this income tax total includes $18.9 million of discrete tax expense related to U.S. tax reform, and that stems primarily from new legislation that went into effect in Q2 and I had mentioned this last quarter when I gave guidance for Q2. The non-GAAP income tax rate in Q2 was 17.1%.

Net income on a GAAP basis in the second quarter was $73.4 million or $0.70 per diluted share, compared to $65.2 million or $0.61 per diluted share in last year's Q2. Net income on a non-GAAP basis in the second quarter was $109 million or $1.04 per diluted share, compared to $78.1 million or $0.73 per diluted share in Q2 of the prior year. During the second quarter, we generated about $50 million in cash from operations and we ended the quarter with nearly $1.1 billion in cash and investments. We bought back about 1.3 million shares of our common stock in Q2 and ended the quarter with a $154 million of stock repurchase authorization still available. We also announced today a cash dividend of $0.19 per share which will be payable on May 22, 2019, shout out Happy Birthday to my daughter, to shareholders of record on May 14, 2019.

Now let me cover the outlook starting with the full year. For FY 2019 we are maintaining the guidance ranges for both, revenue and operating expense that we gave last quarter. We estimate that total revenue will range from $1.240 billion to $1.280 billion for the year. Within that total, we estimate that licensing will range from $1.080 billion to $1.120 billion, while products and services are estimated to range from $150 million to $170 million.

Here are some factors and assumptions that are incorporated into the revenue outlook for the full year. We anticipate that broadcast revenues will grow as we see our technologies incorporate into more TVs and set-top boxes. In PC licensing, we'll continue to see downward pressure from ASP due to mix but some of that will be offset by more adoption of our newer technologies into the PCs. Consumer electronics is projected to grow modestly and we expect mobile revenues to increase, and we are seeing organic growth helped by further penetration, and also the year-over-year mobile comparison is impacted by the 606 recast, I had discussed that last quarter.

We expect growth in other licensing from Dolby Cinema and gaming. And finally in products and services, we anticipate growth in cinema products, Dolby Voice and Dolby Cinema; and as it relates to Dolby Cinema, the product revenue growth is associated with those transactions that include an element of fixed amounts paid or committed upfront as I've previously discussed.

So moving onto gross margin; gross margin for the year is projected to be around 87% plus or minus on the GAAP basis, and about 88% plus or minus on a non-GAAP basis. Operating expenses are projected to range from $786 million to $796 million on a GAAP basis and from $705 million to $715 million on a non-GAAP basis. Other income is estimated to range from $21 million to $24 million for the year. The effective tax rate for the year on a GAAP basis is expected to range from 11% to 13% which includes discrete adjustments that we've recorded this year pertaining to U.S. tax reform, and the non-GAAP effective income tax rate for the year is expected to range from 19% to 20%.

For the third quarter of FY 2019, we anticipate that total revenue will range from $295 million to $315 million. Within that, we estimate that licensing will range from $260 million to $270 million, while products and services is expected to range from $35 million to $45 million. Q3 gross margin on a GAAP basis is estimated to be around 86%, and the non-GAAP gross margin is estimated to be around 87%, plus or minus. Operating expenses in Q3 are projected to range from $201 million to $205 million on a GAAP basis, and from $181 million to $185 million on a non-GAAP basis. Other income is projected to be around $5 million for the quarter, and our effective tax rate for Q3 is projected to range from 19% to 21% on both, GAAP and non-GAAP basis.

So based on the combination of the fact that I just covered, we estimate that Q3 diluted earnings per share will range from $0.45 to $0.51 on a GAAP basis and from $0.62 to $0.68 on a non-GAAP basis.

So with that, I would like to turn it over to Kevin.

Kevin Yeaman -- President and Chief Executive Officer

Thank you, Lewis, and good afternoon, everyone. Q2 is another strong quarter. Our focus continues to be on enabling more people around the world to have Dolby experiences. In these past few months and the time of the year that include many of our key industry tradeshows with CES, Mobile World Congress, Enterprise Connect, Similar Icon and NAV. And as we participate in each of these tradeshows, it gives us the opportunity to reflect on the progress we're making and the opportunities ahead.

We started this quarter at CES when there was a noticeable shift in the conversations with our partners. The discussion has increasingly evolved to focus on how and when they would be adopting Dolby Vision and Dolby Atmos into their products, compared to previously answering the why; it is clear now that Dolby Vision and Dolby Atmos have become robust ecosystems. The momentum for the combined Dolby Vision and Dolby Atmos experience with MTV is an example of just how far we have come. At CES, Panasonic added to the list of Top TV OEMs that support the combined experience, they joined LG, Sony and TCL to name a few.

After announcing it's first TV with Dolby Vision and Dolby Atmos, Panasonic strengthened that support by announcing five additional models with a combined experience. In this quarter, TP Vision also announced that 90% of it's Philips UHD TV lineup for Europe will include the combined Dolby Vision and Dolby Atmos experience. Also at CES, Dell announced it's first PC supporting Dolby Vision and is now available in market. Over the past year, we've seen a growing number of our partners highlight how the PC experience can be enhanced by Dolby Vision and Dolby Atmos. So as we continue to Mobile World Congress we cited more examples of Dolby experiences being included within the latest PC launches. Lenovo announced their latest ThinkPad T-Series supporting Dolby Vision; and Huawei is including Dolby Atmos within the Matebook X Pro and Matebook 14.

Also during Mobile World Congress, Sony showcased it's first flagship phone, the Xperia1, it's first phone that includes Dolby Atmos. And OPPO recently announced, it will be including Dolby Atmos on it's mobile phones. Last year Samsung and Huawei announced their initial adoption of Dolby Atmos for mobile phones. In this quarter, both partners announced that their latest flagship models, the Samsung Galaxy S10 and Huawei P30 will include Dolby Atmos.

And as you know, Apple supports Dolby Vision across it's mobile devices including the iPhone 8, iPhone 10 and iPad Pro, in addition to brought-in the combined experience with Apple 4K TV. Beyond our presence in TV PC and mobile, we continue to see adoption across the broad range of devices. Amazon 4kFireTV supports the combined Dolby Vision and Dolby Atmos experience and Xbox1 is the first gaming console to include the combined experience. And later this year, we expect the first Dolby Vision and Dolby Atmos experiences to be enabled on Pay TV, set-top boxes.

Next step was Enterprise Connect, which is one of the leading events for the enterprise communications market. And BlueJeans announced the Room-as-a-Service offering featuring Dolby Voice Room. Room-as-a-Service allows BlueJeans customers to access Dolby Voice Room during monthly subscription; this unified solution will simplify the purchasing process and will enable more people to have the Dolby Voice experience.

And then, on the cinema comment, where we announced our newest product offerings and highlighted our progress and expanded the global footprint of Dolby Cinema. This quarter, we opened our first site in Kuwait and we expanded that our presence with additional sites in Japan, France, and U.K. These recent openings add to the broad deployments we have achieved within the U.S. and China markets. In total, Dolby Cinema is currently available in 10 countries and we have more than 20 exhibitor partners with about 215 screens open, and another 200 committed.

Dolby Vision and Dolby Atmos continue to enhance the storytelling and movie-going experience of many of top Box Office films. Captain Marvel and Avengers: Endgame are among the latest notable titles released in the combined experience. There are now over 230 theatrical titles which have been released or announced in Dolby Vision and Dolby Atmos.

Last month at NAV, many of our partners demonstrated their latest content creation and distribution tools and incorporating support for Dolby Vision and Dolby Atmos and AC4. Also during NAV, we demonstrated our cloud-based media processing solution which provides customers with a scalable workflow for high-quality encoding of all their content including content in Dolby formats; this solution is already in use at Sony and Dulux (ph), among other major providers. These tools and services will help to scale the amount of Dolby-enabled content around the world. Partners including iTunes, Netflix, Amazon, Rakuten, Tencent and ITE have all been streaming content in both, Dolby Vision and Dolby Atmos, and we are continuing to see steady growth in the amount of content available. iTunes now has over 450 titles available in Dolby Vision, and over 300 titles available on Dolby Atmos. And Netflix has over 500 hours of content in Dolby Vision, and over 200 hours in Dolby Atmos.

So, as I reflect on how far we've come, I'm excited by our momentum. We continue to see an increasing amount of Dolby Vision and Dolby Atmos content available across a broadening range of products. Dolby Cinema continues to expand with more sites across the larger global footprint. At the same time, we are in the early days of adoption; all of this gives us confidence that we will continue to deliver earnings and revenue growth. I look forward to updating you next quarter.

And with that, I'll turn it over to Q&A.

Questions And Answers

Operator

(Operator Instructions) We'll hear first from Steven Frankel from Dougherty.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Good afternoon, and thank you. Kevin, let me just start with kind of a high-level question. What's the strategic implications of TCL following in the steps of Panasonic and Philips in doing, both HDR10+ and Dolby Vision, given you have such a large lead on the content side? So what do you think this is saying the content creators and the rest of the CE makers that maybe haven't adopted Dolby Vision yet?

Kevin Yeaman -- President and Chief Executive Officer

Well, we feel really great about where we are with Dolby Vision, strategically. And not only do we have as you've pointed out, critical mass of content across a wide number of geographies, content types, content mediums; we also have a critical mass of device manufacturer. So we are focused on continuing to scale those opportunities. Like I said, we have great momentum and yet a lot of opportunity ahead of us. We continue to focus on connecting the dots so that all of our device partners get the benefit of all that content out there, and similarly, all the content out there gets the benefit of all those devices there increasingly supporting Dolby Vision and Dolby Atmos. And then, we're also focused on working with them to make sure that consumers appreciate the difference they're getting because at the end of the day it's a spectacular experience.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Yes, I wish Game of Thrones had been in Dolby Vision last week, that might have made a difference. And Lewis, just to drill in on your comments in the mobile business; when you -- the timing you're referring to your large customer that pays once a year that now occurs in March quarter, is that correct?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Well, with our regard to reference to a particular customer, remember one of the big things about 606 was the phase shifting from one quarter to the previous quarter, in general. So, if you look at what we are talking about in previous years it's not in common to see things that used to be talked about in Q3, let's say, which will be now happening in Q2 and that's broadly across not just any one large customer but any of the customers who report revenue to us quarterly is now booked real-time in the quarter where those shipments occur.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Okay. Now you're into 606, were there any meaningful true-ups or true-downs reported this quarter relative to what you estimated in the prior quarter?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Yes. Relative to what we had estimated last quarter the true-up this quarter was approximately $8 million, we view as being within the range of the kind of things we've modeled before, and I'll particularly -- I would not call that overly significant and will continue to track that and monitor that. But yes, we feel pretty good about the first quarter out of the gates and we are pretty close.

Steven Frankel -- Dougherty & Company LLC -- Analyst

And was that $8 million in any one bucket in particular or that was spread across the balance of the portfolio?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Yes, first of all, it's in licensing, it's not a product but it was spread. So I would not say that there is any particular large market or customer transaction, it was just reflection of this new world we live in where we're required to make some pretty complex estimations at the beginning of the quarter given the multiple spreads we have running through our business. I think the team did a pretty good job.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Okay. And then Kevin, given the cash balance, given where the stock is; what's the Board's thought process of either getting more aggressive on the buyback or some other method of may be returning some incremental cash to shareholders?

Kevin Yeaman -- President and Chief Executive Officer

Well, our focus is, and the Board focus is on continuing to capitalize on the opportunity that we think we've created for ourselves and to drive growth. Obviously, also driving shareholder value; so that's all part of the same discussion. And as you know, we have been returning cash to shareholders by both, buybacks and dividends, and we continue to visit that equation on a regular basis.

Operator

We'll hear next from Eric Wold from B. Riley.

Eric Wold -- B. Riley -- Analyst

I guess, as you look at the -- kind of deep audio technology portfolio you developed over the years, now it's deep into voice and then sending into video and cinema. I guess, where do you seeing holes in the portfolio; day one addressed over the next two to three, three to five years? And can you address those internally or do you just start looking back toward the acquisitions? And then the follow-up question kind of latching onto Steve's last question; as you -- if you need to move into acquisitions more aggressively again, I guess what will be the range of multiples that you would be comfortable paying? And how do you kind of address that vis-a-vis the multiples should pay in a stock buyback program?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Yes, I don't know if I can get hypothetical except to say that historically, we have done a number of acquisitions, we tended to be focused on early stage technology companies that are adding value to our portfolio of offerings. I feel very good about where our breath of technology investment is right now, we feel great about where we are in the cycle with our audio technologies; obviously, we feel like we're on to something special with Dolby Vision or our consumer imaging technologies, and we have a lot of opportunity in front of us, as well as the Dolby Voice proposition. As we see those coming together in some interesting ways as we look to the future, the combination of not just Dolby Vision and Dolby Atmos, but the opportunity to incorporate some of our voice expertise into consumer products going forward is also an interesting opportunity for us.

Eric Wold -- B. Riley -- Analyst

Okay. And then, just in general from a multiple (inaudible) if you want to look for acquisitions?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Again, that's -- Wold, I don't know if I can answer that hypothetically. I mean that really depends on a lot of factors. I don't have a hard and fast multiple it has much more to do with the gaps we're filling and what's the total contribution is to our value.

Operator

(Operator Instructions) We'll go next to James Goss from Barrington Research.

James Goss -- Barrington Research -- Analyst

One line question I'd like to pursue with regards the -- excuse me, the mobile aspect. Traditionally, while it's easy to sort of see why the appeal of Vision and Atmos and television are in a theatrical space. The mobile device manufacturers seem to have been more reluctant to be paying extra for incremental products and services, especially when they may have not been viewed as incrementally that much better, and they were always worried about margins. And I'm wondering if you could talk about sort of the shift of mentality that may have occurred that may have left you broaden your appeal and your impact in that particular sector? And watching my point to in terms of growth trajectory you're ought to be able to achieve in the phones and tablets and whatever other devices like that?

Kevin Yeaman -- President and Chief Executive Officer

Yes, I guess I'd start by saying that I think that across our portfolio we've got us a very diverse set of devices from mobile phones, up to automobiles, and they're all focused on price. So to come in with Dolby Vision, Dolby Atmos or any of our solutions, where you have to have a compelling value proposition that they believe that their consumers are going to care about and we think that the fact that we've had so much progress with Dolby Vision and Dolby Atmos in this space over the last 18 to 24 months is very encouraging that we are onto something.

And our focus today is of course to continue broadening the presence in devices but also to make sure that we're getting as much content through those devices so that people can experience it that way. And all that adds up to what we see as a great opportunity for us to continue to grow in that category.

James Goss -- Barrington Research -- Analyst

In the cellphone area, our -- is the appeal of Atmos in headsets that could create the much more better sound, enough of an appeal that some are finding that to be something they can sell as an incremental reason to buy one device over another? May be, particularly, with some of the Chinese manufacturers that are trying to combat some of the industry leaders right now?

Kevin Yeaman -- President and Chief Executive Officer

Well, I guess I would go back to what I said in the call which is -- just we saw Sony at Mobile World Congress announced it's first phone to include Dolby Atmos, OPPO announced it's first phone to include Dolby Atmos, Samsung and Huawei are including Dolby Atmos; so I think that we're really pleased with that and we think that clearly it's a sign that the mobile -- the smartphone is clearly an entertainment device that people are using for a lot of forms of entertainment, those common -- four or five years ago; so it's a good progress.

James Goss -- Barrington Research -- Analyst

And maybe one other thing; in terms of share of TV manufacturers or TV SKUs, however you want to state it. Where are you right now versus the progress we've been able to achieve? And where do you think you can head with that because broadcast category has been substantial obviously.

Kevin Yeaman -- President and Chief Executive Officer

Well, I think we are in I think the latest size 14 and 15 TV OEMs of the top 15. And most of our presence is as it relates to the UHD TVs which is increasing share of the television market overall and within that UHD space consistently we started out at the higher end of the UHD TV's but we do have notable partners who are going deeper than that with VCL, the TCL. I mentioned earlier that TP Vision is straight out of the gate going into 90% of it's UHD line. That sells another one that comes to mind. So, we are making good progress. And I think as the UHD share continues to grow I should say and as we continue to work with our partners to drive the value proposition deepen our lineups that's another big growth opportunity for us.

Operator

We'll hear next from Paul Chung from JPMorgan.

Paul Chung -- JPMorgan -- Analyst

Thanks for taking my question. First up on broadcast. So, you put up some nice top line there. Can you just expand on what regions the current channels products drive that strength or we got a point where the segment can start accelerating years of flattish growth?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Paul, this is Lewis. We don't break out our market data by region. We get down to that level granularity but as to sort of playing off where I said before we were up sequentially and year-over-year driven by the success we are seeing throughout across our consumer imaging our offerings which concludes both Dolby Vision and our consumer imaging patent programs. And so, I think you should think of that is being broadly across broadcast because we don't break it up a region and as you know broadcast is a combination of TV and set-top boxes and right now that will be primarily TVs because we not yet announced Vision and set-top boxes.

And going forward we maintaining their broadcast continues to be a growth opportunity to us in a couple different ways. One, there are many large regions around the world that have not reached a level of adoption we see for example in the U.S. and Europe; and two, consumer imaging is relatively new compared to audio. So we see more opportunity for further penetration that was land in broadcast is one. I think Kevin mentioned in his comments that it's only later this year that we expect really the first set-top box for PayTV operators to offer Dolby Vision and Dolby Atmos so that's the beginning of what could be the growth there. So we really blocked our broadcast segment. And we do view as being growth going forward.

Paul Chung -- JPMorgan -- Analyst

Okay, great. And then given the current tough way to compare top line given 606 changes, are you guys at a point where you can provide free cash flow guide for the full year? It looks like CapEx stepped up in three months really to cinema but -- kind of if you can provide kind of CapEx guide and free cash flow guide that will be really helpful?

Lewis Chew -- Executive Vice President and Chief Financial Officer

Okay. We'll take that and advice. I think for CapEx we have been consistent for last couple of years saying that our run rate of CapEx for year has been sort of that $100 million a year plus or minus. I think that's relatively easy to address the year. I don't specifically forecast a free cash flow but our business is relatively predicable, the balance sheet is very clean if you look at this quarter we saw some growth in receivables and inventories but the rest of it is pretty clean. So CapEx if you're looking for CapEx PC equation think of it being in around $100 billion a year is what we're modeling right now give or take.

Paul Chung -- JPMorgan -- Analyst

Okay. And then last question is on Cinema. Kevin, if you could update us on how many installs we stand at kind of what's in the pipeline and kind of contribution that you can provide there?

Kevin Yeaman -- President and Chief Executive Officer

Sure. We have about 215 screens open and about increasing number of countries around the world. We are currently up in live in 10 countries. The U.S. continues to be the largest market of installs followed by China in fact we just added a good new partner in China in the last several days. And I'm excited to see the growth in France and we just added our second screen in U.K. and our second screen in Japan. So, we are beginning to broaden that footprint. We have been adding at about 60 to 70 per year so that's our current guidance if you will. But yes, we are feeling good about where we are. It's well received by consumers it's well received by our exhibitor partners and like everybody in the industry we're pretty excited about the performance of Avengers Endgame as we can.

Operator

(Operator Instructions) We'll hear it again from Steven Frankel from Dougherty.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Thank you for indulging me again. Kevin, let's put aside Endgame which obviously busted every record but how are Cinema Screens performing relative to the way you modeled them when you started in this business and maybe how rejiggered the model a year ago?

Kevin Yeaman -- President and Chief Executive Officer

Well, I think a couple of things. First I would say that I would separate what we originally had modeled for China from rest of world. Because as I think I said, those are in our Products business and our Dolby Cinema business. We have seen less than we expected generally in China which is lot to say that we don't have a lot of engagement there and we are happy with business we have and we are continuing to expand screen count. But I would say across the board over the last 12 months or so China has just been generally slower in Cinema than what we have been experiencing previous to that what we have been expecting. Outside of that we have been very pleased with the performance though I mean obviously it depends on box office and it helps when you have the Avengers Endgame weekend but even setting that aside when we look at the per screen attendance relative to other formats when we look at average prices relative to other premium formats we are very, very pleased with what we are seeing from Dolby Cinema.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Have you seen any material benefit from move toward subscription?

Kevin Yeaman -- President and Chief Executive Officer

Well, I think what we're seeing with the programs that include premium offerings it gives people another reason to try premium experiences and that's good for us because once people experience it consistently we get great feedback. They want to have that experience again, that's how work spreads and so we are seeing -- we see that as a positive both for attendance and for getting more people familiar with what the Dolby Cinema experience is all about.

Steven Frankel -- Dougherty & Company LLC -- Analyst

And were there any meaningful new tests of Vision outside the U. S. and in live events. I know occasionally over the last couple of years there have been live event tests. Anymore those occurred or are there anymore coming off in the next quarter or so?

Kevin Yeaman -- President and Chief Executive Officer

Yes, I don't think I have anything notable since we last spoke, but as you go we had a number of great tests over the last 12 months and we do expect and we do have more on the works to come. So all part of the process of getting to more live sports content in both Dolby Vision and Dolby Atmos where of course we do have commercial services up in going. And as Lewis noted a moment ago, we are expecting our first Pay-TV set-top boxes with both Dolby Vision and Dolby Atmos combined this year.

Steven Frankel -- Dougherty & Company LLC -- Analyst

Let me sneak one last one. What is the transition to ATSC3. 0 mean for you and does that have a kind of follow on effect on the Pay-TV guys if they try to match the features of 3.0?

Kevin Yeaman -- President and Chief Executive Officer

Well, first of all the ATSC 3.0 will allow in the U.S. is supporting for AC-4. So, that's great for us because it gets to the next generation of our audio experience, it allows for greater efficiency, it's natively designed to work well with Dolby Atmos and it also has a lot of features enhancements which we think that can add value to our partners and consumers as you we go forward. We are seeing a great traction as well in Europe we have a number of countries that have begun to transmit using AC-4. And so, overall I feel great about where we are in that technology cycle and with the adoption that we are getting around the world.

Steven Frankel -- Dougherty & Company LLC -- Analyst

And again, as that gets adopted over the year, does that put pressure on the Pay-TV universe to adopt AC-4 as well so they can match feature for feature what the already you guys are doing?

Kevin Yeaman -- President and Chief Executive Officer

I don't know if I'd say that it puts pressure on them. But I think that there is a little bit of virtual circle and the sense that more device manufacturers is supporting AC-4 that gives you one more reason or less barrier to adopting it. I think that everybody knows what's going on in the industry. So the fact you get adoption in one place and another place and another place people are going to take note of that and they are going to understand the reason why that's actually helpful to us. But ultimately what we feel good about is the value proposition of AC-4 that's what we're selling and what we're selling is a more efficient way to deliver higher quality experiences like Dolby Atmos and that's what AC-4 is all about. All combines to give us confidence across the markets we operate.

Steven Frankel -- Dougherty & Company LLC -- Analyst

And did you have going on but one more did you have any involvement with this new Netflix initiative announced today around high-quality audio?

Kevin Yeaman -- President and Chief Executive Officer

Well, the high-quality service that they have announced is delivered by our technologies and they're now allowing -- they will now aware bandwidth allows allocate more bandwidth to the audio experience. So, that's of Dolby experience with bandwidth of course we are all in favor of it and our teams partner very closely with Netflix and other partners around services like that but this is their way of providing even better quality to their customers at any time that people recognize the value of high-quality audio and video that's.

Operator

And with no other questions, I'd like to hand things back to Kevin for closing remarks.

Kevin Yeaman -- President and Chief Executive Officer

Great. Thank you everyone for joining today. We look forward to updating you on our progress. Thank you.

Operator

That does conclude today's conference. Again, thank you all for joining us.

Duration: 45 minutes

Call participants:

Jason Dea -- Director, Corporate Finance and Investor Relations

Lewis Chew -- Executive Vice President and Chief Financial Officer

Kevin Yeaman -- President and Chief Executive Officer

Steven Frankel -- Dougherty & Company LLC -- Analyst

Eric Wold -- B. Riley -- Analyst

James Goss -- Barrington Research -- Analyst

Paul Chung -- JPMorgan -- Analyst

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