Dolby Laboratories (DLB) Q1 2022 Earnings Call Transcript

Dolby Laboratories (DLB 0.53%)
Q1 2022 Earnings Call
Feb 03, 2022, 4:30 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 physical -- fiscal, sorry, first quarter results. During the presentation, all participants will be listening-mode only. Afterwards, you will be invited to participate in a question-and-answer session.

[Operator instructions] As a reminder, this call will be recorded, Thursday, February 3, 2022. I would now like to transfer you over to Ashley Schwenoha, senior manager, investor relations for Dolby Laboratories. Please go ahead, Ashley.

Ashley Schwenoha -- Senior Manager, Investor Relations

Good afternoon. Welcome to Dolby Laboratories first quarter 2022 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' CEO; and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our second quarter and fiscal 2022 outlook and our assumptions underlying that outlook.

These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the extent is the continuing impact of COVID-19 on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned forward-looking statements, as well as in the risk factors section of our most recent quarterly report 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, Kevin will start with a discussion of the business, and Robert will follow with a recap of Dolby's financial results and provide our second quarter and fiscal 2022 outlook. So with that introduction behind us, I will now turn the call over to Kevin.

Kevin Yeaman -- President and Chief Executive Officer

Thank you, Ashley, and good afternoon, everyone. It continues to be a dynamic environment. While revenue and EPS finished within our range of guidance, both were impacted by a $6 million negative true-up for lower-than-estimated unit shipments in our foundational audio technologies. As we discussed last quarter, we are seeing year-over-year declines for foundational audio coming off of tough comps, and now issues with the supply chain.

But over the long term, we expect foundational audio to track roughly in line with market demand for the consumer devices we serve. At the same time, we see strength across Dolby Vision, Dolby Atmos, and our imaging patents portfolio, and we remain confident in our ability to grow these revenues at a rate of over 35% this year. We also see positive signs of momentum with Dolby.io. All of this gives us confidence in the opportunity ahead.

Robert will take you through the details of the financials in just a moment. I will start by covering our progress in Dolby Vision and Dolby Atmos. At CES last month, we saw our partnership with Samsung grow stronger as they announced the adoption of Dolby Atmos into their TVs for the first time. Samsung has been showcasing Dolby Atmos across their soundbar, PC, and mobile products for some time, and we are excited that they have decided to offer their TV customers the most immersive audio experience with Dolby Atmos.

During LG's CES keynote, they highlighted their latest OLED TVs, the first to support Dolby Vision gaming at 4K -- in 4K at 120 hertz. And Hisense debuted their first short-throw consumer laser projectors to include the combined Dolby experience. We saw new soundbar products from Samsung and Hisense supporting Dolby Atmos and the latest TVs from Sony, Panasonic, and TCL, all featuring the Dolby Vision and Dolby Atmos experience. Also during the quarter, Walmart's On and Best Buy's Pioneer TVs began supporting Dolby Vision, an important step toward addressing the mass market retailer brands and making Dolby experiences more widely available at all price points.

Beyond the living room, we also made progress this quarter in PC, mobile, and gaming. In November, ASUS adopted Dolby Vision with the launch of their new two-in-one PC, marking their first device to include the combined experience. And more recently, they announced that their latest gaming laptops will also feature Dolby Vision and Dolby Atmos. Dell announced at CES that they will now support the combined Dolby experience across their latest Alienware gaming PC lineup, and they launched a new Alienware gaming headset with Dolby Atmos.

Lenovo previewed their newly designed ThinkPad laptops, which feature Dolby Vision, Dolby Atmos, and Dolby Voice, expanding the number of models that include our communications technology. This quarter also brought new tablets from Lenovo and ASUS and smartphones from Xiaomi and Motorola, highlighting Dolby Technologies. We are also making strides in sports content. Just this week, Comcast announced that they will be broadcasting the 2022 Winter Olympics in Dolby Vision and Dolby Atmos.

This major event adds to the growing list of sports coverage made available in Dolby. And in the world of e-sports, the Honor of Kings Challenger Cup finals was available in Dolby Atmos on Tencent Video and Bilibili. As we enable more Dolby experiences across music, gaming, and sports, we add to our value proposition for new and deeper adoption of Dolby Vision and Dolby Atmos across devices and end markets. While CES was far from normal this year, what remain the same was the strong engagement from our partners and particularly in automotive.

This quarter, Neo highlighted that they will be adding Dolby Atmos into their ET5 model, expanding beyond the ET7 model they announced previously. Consumers and artists alike continue to sing the praises of Dolby Atmos Music, with AMA's New Artist of the Year, Olivia Rodrigo, describing the experience as magical. Two-thirds of the Top 100 billboard artists now have one or more tracks available in Dolby Atmos. As we gain more prominence in the music space, we have more reasons for adoption across mobile, PC, and automotive.

Let me shift to cinema. There are currently about 98% of Dolby Cinemas opened globally with six new sites launched during our fiscal Q1. Even with the uncertainty of the pandemic, we saw ongoing recovery in the box office with titles like "No Time to Die" and "Spider-Man: No Way Home." As moviegoers return to the cinema, we continue to see a preference toward premium experiences, and Dolby Cinema is the ultimate way to experience movies in the theater. Let's talk about our developer platform, Dolby.io, where we are focused on enabling developers to create the most compelling experiences in target markets where we can offer the most differentiation, virtual live performances, online and hybrid events, social audio, premium education, gaming, and content production, which we estimate to represent a market opportunity of about $5 billion and growing.

We are excited about the experiences developers are building and the pace of new developer accounts accelerated this quarter. This increased momentum is due in part to the interest we are seeing for our release of programmable spatial audio. While we have been providing an automated spatial mix for some time, this highly requested feature allows developers to choose where to render real-time voices around the listener. For example, we see developers building virtual concert experiences, virtual reality collaboration platforms, and virtual worlds in which listeners hear people from the location of the speaker or their avatar.

There has been so much demand customers were going into production on the beta ahead of our general availability release this week. We also completed an acquisition this quarter. With Millicast, developers can take the highly interactive experiences they build with Dolby.io and stream them to audiences of more than 60,000 people with ultra-low delay, a capability that is in demand in our focused verticals. Millicast has a notable presence in content production with companies such as NBC, the NFL, and Disney and their expertise in the field makes them a great fit with Dolby.io.

With our unique experience in media and communications, coupled with the ease of self-service on our platform, we are able to expand our capabilities for developers to offer high-quality audio and visual interactions to much larger audiences. To wrap up, while we are still operating in an uncertain economic environment, we continue to have success in growing the number of Dolby Atmos and Dolby Vision experiences to new devices and services. There is much opportunity ahead of us as we enable new experiences through music, gaming, and live content. And we are excited about bringing the Dolby magic to a broader range of experiences and interactions with the power of Dolby.io.

All of this gives us confidence in our ability to drive revenue and earnings growth into the future. And with that, I'd like to hand it over to Robert to take us through the financials.

Robert Park -- Chief Financial Officer

Great. Thank you, Kevin. Good afternoon, everybody. Let's jump into the results for Q1.

Total revenue in the first quarter of $352 million was in the range we provided and included a negative true-up of about $6 million for Q4 2021 shipments reported that were below the original estimate. The negative true-up was primarily in foundational revenue in our gaming and consumer electronics markets. On a year-over-year basis, first quarter revenue was about $38 million below last year's Q1 as we benefited from a $21 million true-up in Q1 2021, which is a $6 million negative true-up in Q1 2022, and the prior year also benefited from timing of revenues under contract. These factors were partially offset by higher adoption of Dolby Atmos, Dolby Vision, and imaging patents within our fiscal Q1 of 2022.

Q1 revenue was comprised of $332.3 million in licensing and $19.3 million in products and services. Let's get into the year-over-year trends in licensing revenue by end market. Broadcast represented 37% of total licensing in fiscal Q1. Broadcast revenues declined by about $18 million or 13% from the prior-year Q1 due to timing of revenue and a larger true-up in the prior year and lower recoveries.

These factors were partially offset by higher adoption of Dolby Atmos and Dolby Vision in TVs and new licenses in our imaging patent programs. Mobile represented 23% of total licensing in fiscal Q1. Mobile decreased by $31 million or 29% compared to Q1 of last year as our foundational audio revenues last year benefited from both high recoveries and timing of revenues under contract, partially offset by new imaging patent licenses. We do see mobile growing for the full year, which I'll cover later.

Consumer electronics represented about 17% of total licensing in fiscal Q1. On a year-over-year basis, Q1 CE licensing increased by approximately $6 million or 11%, driven by higher foundational audio revenues for DMAs and soundbars, as well as higher recoveries. We also saw growth from higher adoption of Dolby Atmos and Dolby Vision across CE devices. These favorable factors were partially offset by the large true-up in the prior year.

PC represented about 10% of total licensing in fiscal Q1. Our Q1 PC revenues increased by 6% or $2 million compared to the prior-year Q1. This increase was driven by new imaging patent licensees, along with higher Dolby Vision adoption. Other markets represented about 13% of total licensing in fiscal Q1.

They were essentially flat year over year as lower revenues from gaming and lower foundational audio patent revenue were essentially offset by higher revenues from Dolby Cinema. Beyond licensing, our products and services revenue in Q1 was $19 million, compared to $70 million in last year's Q1. The year-over-year increase reflects ongoing improvements in the cinema industry globally. Total gross margin in the first quarter was 90.7% on a GAAP basis and 91.3% on a non-GAAP basis.

Operating expenses in the first quarter on a GAAP basis were $228.3 million, compared to $189.8 million in Q1 of the prior year. This increase was primarily caused by a gain of the sale of an asset in the prior year, higher marketing activations tied to Atmos Music and Dolby Live at Park MGM and the extra week of payroll in Q1 2022. Operating expenses in the first quarter on a non-GAAP basis were $195.1 million, compared to $167.1 million in the prior year. Operating expenses were in line with our guidance for Q1.

Operating income in the first quarter was $90.6 million on a GAAP basis or 25.8% of revenue, compared to $164.7 million or 42.3% of revenue in Q1 of last year. Operating income in the first quarter on a non-GAAP basis was $126 million or 35.8% of revenue, compared to $189.7 million or 48% of revenue in Q1 last year. The income tax rate in Q1 was 13% on a GAAP basis and 18% on a non-GAAP basis. Our GAAP rate benefited primarily from a discrete adjustment related to stock-based compensation.

Net income on a GAAP basis in the first quarter was $80 million or $0.77 per share per diluted share compared to $135.2 million or $1.30 per diluted share in last year's Q1. Net income on a non-GAAP basis in the first quarter was $104.5 million or $1.01 per diluted share, compared to $153.3 million, or $1.48 per diluted share in Q1 of last year. During the first quarter, we generated $32 million in cash from operations, compared to $82 million generated in last year's fiscal Q1. We ended the first quarter with about $1.26 billion in cash and investments.

During the first quarter, we bought back about 400,000 shares of our common stock at the end of the quarter with $256 million of stock repurchase authorization available. As is typically the case, our window for repurchases in fiscal Q1 were shorter due to the timing of release of our year-end results. In February, our board authorized an additional $250 million of stock buyback, bringing our total authorization to approximately $506 million to enable expansion of our share buyback program. We also announced today a cash dividend of $0.25 per share.

The dividend will be payable on February 23, 2022, to shareholders of record on February 16, 2022. Shifting to the remainder of the fiscal year. There continues to be uncertainty given the ongoing implications of the pandemic, particularly as it relates to trends in unit shipments that are impacted by supply chain issues and inflation and consumer spending behavior. All of these variables make it more difficult to gather consistent and reliable data.

We are also keeping an eye on transaction cycle times, particularly in our recovery efforts, given the -- given the ongoing travel restrictions caused by the pandemic. With that, let me take you through the outlook for Q2 and the full year. For Q2, we see total revenues ranging from $315 million to $345 million. Within that, licensing revenues could range from $300 million to $325 million.

The revenue increase from last year's Q2 is anticipated to be driven by -- primarily by higher broadcast and PC revenues from Dolby Vision and Dolby Atmos. The other markets category is also expected to be up year over year, assuming continued improved attendance at our Dolby Cinemas. Mobile is anticipated to be relatively flat to prior year as higher revenue from Atmos and Vision is essentially offset by lower foundational audio revenue. Q2 products and services revenue could range from $15 million to $20 million.

Let me move on to the rest of the P&L outlook for Q2. Q2 gross margin on a GAAP basis is expected to be 89%, plus or minus, and the non-GAAP gross margin is estimated to be about 90%, plus or minus. Operating expenses in Q2 on a GAAP basis are estimated to range from $224 million to $236 million. Included in this range is approximately $5 million to $7 million of restructuring charges, primarily for severance and related benefits as we adjusted resources toward the areas where we see the largest opportunities.

Operating expenses in Q2 on a non-GAAP basis are estimated to range from $190 million to $200 million, which contemplates the impact of our annual merit increase. Other income is projected to be around $1 million for the second quarter. And our effective tax rate for Q2 is projected to range from 19% to 20% on a GAAP basis and 18% to 19% on a non-GAAP basis. Based on the combination of factors I just covered, we estimate that Q2 diluted earnings per share could range from $0.42 to $0.57 on a GAAP basis and from $0.72 to $0.87 on a non-GAAP basis.

Moving on to the full year. We are maintaining our fiscal '22 total revenue guidance of $1.34 billion to $1.4 billion. This was a result in about 5% to 9% of year-over-year growth as compared to the $1.28 billion in fiscal year '21. Within this, licensing revenues could range from $1.260 billion to $1.315 billion, compared to $1.214 billion in fiscal year '21, which will result in a 4% to 8% year-over-year growth.

We still anticipate that licensing revenue growth in fiscal '22 will be driven by Atmos, Vision, and imaging patents across all end markets. Our other markets category is still expected to grow over 25%, primarily from Dolby Cinema and to a lesser extent, from gaming, followed by PC and mobile, which we expect to grow mid- to high single digits. And our CE and broadcast markets are anticipated to be relatively flat year over year as growth from Atmos, Vision, and imaging patents is essentially offset by decreases in foundational revenue. Products and services revenue are expected to range from $75 million to $90 million for fiscal year '22 with improvements in Cinema products and growth in Dolby.io.

Gross margins for fiscal year '22 are expected to be relatively consistent with fiscal year '21. With the restructuring charge expected in Q2, operating expenses in fiscal 2022 can now range from $877 million to $897 million on a GAAP basis. On a non-GAAP basis, the expected operating expense range remains unchanged at $750 million to $770 million. As we said last quarter, our business model remains very strong as we expect to deliver operating margins between 24% to 26% on a GAAP basis and between 34% and 36% on a non-GAAP basis.

Based on the factors above, we estimate the full year diluted earnings per share now range from $2.50 to $3 on a GAAP basis. On a non-GAAP basis, full year diluted earnings per share remains unchanged at $3.52 to $4.02. With that, let's move on to Q&A. Operator, can you please queue up the first question?

Questions & Answers:

Operator

Thank you. [Operator instructions] To be fair to all participants, we ask that you limit yourself to one question and a follow-up question until all participants have had the chance in the first round. If time allows, we will come back to answer questions if there are any remaining. One moment, please, for the first question.

Our first question comes from Steven Frankel with Colliers. Steven, please proceed.

Steven Frankel -- Colliers International -- Analyst

Good afternoon and thank you. So on the fact that you're maintaining full year guidance despite the tough revenue picture in Q1 and at least relative to the way I modeled it, a little tougher, Q2, I guess I'd ask, do you have visibility into that back half recovery? Is this year just going to have a different shape than it typically does?

Kevin Yeaman -- President and Chief Executive Officer

It's a couple of things, Steve. We did -- as you can see from our true down, see some lower unit shipments than what we were expecting, and that did flow through to Q1 estimates. We are also seeing strength in Vision, Atmos, imaging patents, those newer areas, and that tends to come in over time. So that is one of the factors in how the year looks.

And also just relative to last year, some of the timing of recoveries and timing of payments was kind of first half loaded last year. So look, it's early in the year. Obviously, the units environment is uncertain, but there are always ins and outs. That's why we have a range.

And what we see on the other side of the latest unit shipment data is continued strength in our newer areas. 

Steven Frankel -- Colliers International -- Analyst

Great. And certainly, the Samsung news at CES would be in that category. Can you give us any color around that decision and how you might expect that relationship to mature from here?

Kevin Yeaman -- President and Chief Executive Officer

Yeah. Well, I think it's a great progression of our relationship. As you know, they've been supporting Dolby Atmos in soundbars and mobile devices. So we're really excited that they're now featuring Dolby Atmos natively on their TV, starting with some of the higher-end models.

And so from here, like always, we look to bring that value to them and continue to bring content to those devices so that they're compelled to take it further and also to look at all the other great things we have to offer.

Steven Frankel -- Colliers International -- Analyst

OK. And then, sneaking one more. On io, I appreciate the color, I wonder if you might share any other tidbits, either customer examples or application examples to help us understand how that business is progressing toward your goals for the year.

Kevin Yeaman -- President and Chief Executive Officer

Yeah. We're -- so I'll give a little more color on some of the things I have mentioned in the script. And by the way, some of this is kind of -- really is hot off the press news. Two of the things I talked about, the programmable spatial audio, the GA process for that literally finished up this morning.

It's been in beta for a few months. We've had -- we've been really excited about the interest. It had been a feature that has been in demand. And even then, we're very excited by the interest.

There's a company by the name of Odyssey, which started using the APIs back in November when they went beta, and they actually decided to use it in production before GA. They used it in -- at CES for a virtual event platform. And we've seen some other really cool uses of it. We have customers building virtual concert experiences where they're using -- one of the ways in which they're using Dolby.io.

is to enable the avatars in the virtual crowd to be able to interact with each other. We have another who's building an online comedy venue so that the comedians can interact with the audience. So we're really excited about that release. And again, it just went into GA today.

And then I'll talk about Millicast. So we -- again, that's just closed in the last day or two. And we're really excited to bring them on board because it really is just a great puzzle piece in our platform. What they do is live ultra-low latency streaming.

So, what that means, Steve, is that all of these examples we've been talking about, the experiences that developers create with Dolby.io., which today, we sort of support about 5,000 active participants, meaning that they're live interacting participants. You can also now live stream those -- that experience to over 60,000 passive listeners. And so we're really excited about it. And they also have some cool customers.

I mentioned in the script, NBC, the NFL, Disney, all of those companies are using it as part of their solution for production. So you can imagine being able to live stream all angles while you're putting these productions together is important. And we think there's a lot of synergy. So obviously, we look to offer our -- the rest of our Dolby.io wears to their customers and vice versa.

Steven Frankel -- Colliers International -- Analyst

Great. Thank you, Kevin.

Operator

Thank you for your question. There are currently no further questions queued. [Operator instructions] Our next question is with Paul Chung with JPMorgan. Paul, please proceed.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Hi, thanks for taking my questions. So just on the Samsung adoption, you know, what kind of spurred that in your view? And is there kind of a higher probability today of maybe seeing Dolby Vision adoption, some nice momentum on the audio side given there?

Kevin Yeaman -- President and Chief Executive Officer

Well, I think in our -- I guess from where we sit, we view it as a natural progression over a relationship that spans many years and decades for that matter. But in more recent history, it's been about continuing, getting those first engagements with them in soundbars, PCs, mobile devices. It's been about continuing to bring more value to the Dolby Atmos experience by bringing more content to life, including not just movies and TV but gaming and sports and beyond. And so I think that's kind of the progression that leads us to their announcement that they'll support Dolby Atmos in their TVs.

And I think as we look forward to whether it's Dolby Vision or any other technology, we just keep working that playbook. We can never predict when or if who is going to adopt it, but we -- our playbook is to keep doing what we're doing. And as it relates to Dolby Vision, that means continuing to expand beyond our significant presence in movies and TV to other forms of content. Like sports, you can catch the Winter Olympics over Comcast in Vision and Atmos.

Gaming, we're continuing to make a lot of progress there with Xbox supporting Vision and Atmos. So that's the playbook, and we're going to stick to it.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Great. And then on mobile, so 1Q was a bit softer than what we were kind of expecting. What changed since the previous quarter when you initially guided there? You have a key customer putting up some record shipments. So just trying to reconcile the two.

Kevin Yeaman -- President and Chief Executive Officer

Yeah. So the first thing I'd say is that we do see growth in mobile for the year, and that is driven by growth in Dolby Vision and Dolby Atmos adoption. We do have some -- that being offset somewhat by recoveries and timing of payments compared to the prior year. And on a quarterly basis, that's where you're seeing that come through in the first quarter.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Gotcha. And then on Atmos in the car, with Benz and NIO here, are you gaining more interest from other auto OEMs? Are you seeing some momentum there as well?

Kevin Yeaman -- President and Chief Executive Officer

Yeah. I mean, first of all, yes, we're really excited about our relationship with Mercedes and with NIO and Lucid. It's -- I think it's one of the most impactful demos we have right now is getting people in the car and hearing their favorites in Dolby Atmos in the car. And yeah, we have really strong engagement across the industry.

That was a primary -- we just have a lot of things to focus on at CES, but that was certainly top of mind for us. We had good engagement and we had our Dolby demo cars there to help us.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Gotcha. And then the acquisition, you haven't done one in quite some time. Is this kind of a signal of more priority to maybe pursue some acquisitions? And then should we expect some kind of accelerating buybacks in the coming quarters from the increasing capacity bid? Thanks.

Kevin Yeaman -- President and Chief Executive Officer

Sure. So why don't I take the first question? So first of all, we're really excited about Millicast. It was just a great fit in terms of their presence in exactly something we wanted to do with our platform and where we wanted to take the platform. And so it's just a great fit.

I do think that -- and I've said for some time, I think that there will be opportunities in io to look for acquisitions that fill out our platform and along the way, bring on customers and presence in our target verticals. But yeah, this one is a great fit, and we're excited to have them. Robert?

Robert Park -- Chief Financial Officer

Yeah. Hey, Paul, it's Robert. Regarding the buyback, yes, the authorization was there to provide enough headroom to -- and you'll see a meaningful step-up in our buyback over the next few quarters here, and we needed the headroom in order to do that. So we got that done this month.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Great. Thank you.

Operator

Thanks for your questions. There are still currently no further questions registered. [Operator instructions] Well, with that being said, I will pass the call back over to Kevin for closing remarks.

Kevin Yeaman -- President and Chief Executive Officer

OK. Well, thank you, everybody, for joining us today. We will stay focused on continuing to drive adoption in Vision and Dolby Atmos and work toward getting our momentum with Dolby.io, and we look forward to keeping you apprised of our progress. Thanks for joining.

Duration: 34 minutes

Call participants:

Ashley Schwenoha -- Senior Manager, Investor Relations

Kevin Yeaman -- President and Chief Executive Officer

Robert Park -- Chief Financial Officer

Steven Frankel -- Colliers International -- Analyst

Paul Chung -- JPMorgan Chase and Company -- Analyst

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