Dolby Laboratories, Inc. (DLB) Earnings Call Transcript & Summary

Hello, everyone. So welcome to the JPMorgan TMC Conference today. My name is Paul Chung, and I cover applying emerging tech here at the firm. I'm very happy to have Dolby CFO, Lewis Chew, here with us today. And just before we start, if you have any questions, please submit them into the question queue, and I'll try and incorporate them into this lively discussion. I hope we're going to have...

It was nice. Yes.

So Lewis, hello, and thanks for your time today.

Thanks for having me. It's great.

Yes. So can you provide us like a brief overview of the firm? And then we'll get right into the questions after that.

Sure. Dolby is a long-standing company. I think we've been around now for 53, 54 years, iconic brand, known for inventing surround sound. Currently running annual revenues in the neighborhood of $1.2 billion a year, generating non-GAAP operating margins above 30%, significant places where you'll see us would be everything from TVs and set-top boxes to mobile phones, game modules. Now branching out into things like music and hopefully seeing us in automobiles. And then obviously, recently launching into APIs for developer apps. So yes, solid company with good growth, good margins and lots of technology. There's your devils, that was like the nickel tour, right, Paul?

That was fine. That was the nice elevator pitch. I like it. So Lewis, we've known you for a very long time, but just talk about an update on CFO transitioning. You're a young guy, so what's going on?

Sure, sure. Yes. I think what you're referring to, Paul, is that our most recent quarterly earnings, the company did announce that I intend to retire later this year. With that announcement, the company has started search considering internal and external candidates. I think Kevin, our CEO, does expect me to hang around and help with the transition in the sense that, hopefully, the company will be able to attract a great candidate as he puts it an upgrade from me, a great candidate to come in and then I can bridge and do some transition work to make it as seamless as possible. So it's still early days, but the company is in great shape. I should point out that the team that works with me in my org at Dolby is phenomenal. They get all the credit for the great stuff that we've done certainly on the finance side. So I have no lack of confidence about their ability to keep the ball rolling even in my apps and so it's a really good time.

Okay. Great. So let's jump right into what investors are all talking about is Dolby.io. What is the service? How do you make money? What's the intent? All that good stuff, and then we can get into specifics as well.

Yes. And I'll try not to make these too long because I know that I tease you about the super long questions, but then I have the super long answers. So it's almost like I'm throwing rocks in the wrong place here. But just in a nutshell, Dolby.io is something that Dolby launched a little over a year ago, offering APIs that are aimed at the developer app world, developer apps. It's a platform for app developers to embed our APIs and any app they want to develop where they want to make the audio better, better quality audio. It's still early days. We've seen some take-up in various examples. So I'm sure you're asking questions. And the interesting thing for Dolby is that this is really our way to address a whole world of content that's out there, whether you want to think of it as being app developed content or even just user-generated content that we were not addressing before with traditional Dolby, which was the highly produced, I call it, movies, TV shows and live sports that is the core of the company today that drives substantially all of our revenues. So Dolby.io, like I said, it's APIs for developer apps, supposed to be low friction, easy to use. People can go to the website right now, even as we're speaking, just go check out Dolby.io, you can see quite a bit of information on how easy it is for app developers to use some of the Dolby magic in their app. So I'll stop there, Paul, and see where do you want to go from there.

Yes. So let's get into specifics. So some clients you've mentioned publicly box see it now, Kim, SoundCloud. Can you provide kind of the use cases for each? And how we should think about how the firm will monetize those kind of streams? I have a general idea, and maybe I'll ask you that after.

Sure. Yes, in the early days, because the -- even using the word apps and developer means this world that's almost too big for words. So in the early days, some of these customers we've talked about publicly, Paul, that you mentioned, are in areas like distance learning or some telemedicine. In the case of Say It Now, Say It Now is interesting because Say It Now as a company that develop an app so that auto mechanics could send videos back to their customers for repair. So you could see that or alternatively, people could take a video of a car that they're trying to sell. So you can start to see that there are many different flavors of how the Dolby APIs can be embedded into an app. It's not pigeon holed into, oh, you're just surround sound for movies. I mean, in fact, one of the reasons why we launched Dolby.io is because there's so much creativity out there in the world that does somehow involve audio that they might want to have better, we don't want to be responsible for identifying what those are. We want the app developer to say, I want to make my audio better. But in the examples that you gave, those would be some of the things. Tell It, like I said, distance learning, telemedicine and some retail-type applications.

And then what are some other kind of use cases, for example, gaming, podcasts, streaming services? And then would it be monetized as per user usage for a month or -- and then kind of the visibility you get from an actual user using something that's been enhanced with Dolby.io?

Yes. This will probably evolve over time. But right now today, the offerings in Dolby.io are pretty straightforward. Think of it as being in 2 buckets. There are APIs we offer for interactive communication and then there's APIs we offer for media processing. So in the interactive communication example, it will be something where you've used our API to embed into an app where there's actually live communication going on, maybe something like this, although I don't want to use this as an example because, obviously, this is a big market. This notion of video conferencing. But let's say, you have an app where you need to be communicating with someone live. Then the way we would monetize that is if you are using the Dolby API in that interaction, we are being paid for all the minutes that, that interaction is happening for however many people are doing it. So if it's 3 people all doing some sort of interaction. I don't know what that interaction might be. It could be learning something or communicating or doing some educational format. Then we will be getting paid for every one of those minutes at benefiting from. So that's interactive. On the media processing side, let's say, Paul, that you are somebody who wanted to -- you're using an app to record a podcast and you wanted it in Dolby then, and the podcast was 30 minutes, then we monetize that by charging you for 30 minutes worth of processing time to create that podcast, which is more of a recorded media. So it's really like these 2 ways right now that we'll monetize. I'm sure, over time, the picture will evolve. And while I'll say, sure, over time, it's likely that, that picture will evolve and get more robust and more complex. But right now, like I said, we have a finite number of APIs on the website and that's how we monetize. And by the way, the website also publishes what the price that you would be paying for that process as well. So it's very upfront when people download these APIs, they kind of know what they're getting into. So it's a very straightforward, like I said, low friction type of business.

Yes. And people are getting excited about like a SoundCloud, for example, but that would be probably more on the media processing side and not per stream per user and probably so gaming where is it based off of kind of usage in terms of people spending time on games. So those 2 aspects, if you could expand on those?

Yes. I don't know that we have a lot of applications right now in gaming for the API market. Over time, there could be some. But you mentioned SoundCloud. And SoundCloud is also a bit of a unique example, too, of a larger customer where they are using our technology to allow customers to do music mastering in Dolby, using the Dolby magic to technology. And then they pay for every time that they do that. And in that case, then, I think it's more of an instance that they pay for. Like if you do a song, you pay a certain price for a song or multiples of songs, you pay a certain price for that, too. But it still addresses your general questions, which is we are monetizing based on how people use our technology as opposed to the core of Dolby, which, as you know, we monetize from device sales where a device is sold and we earn a royalty per device. And that's somewhat independent of whether or not the person is really using it or not for Dolby, if you will.

Got it, Lewis. And then can you talk about your like target app developers? Is it more just SMB? Or can you provide for Zoom or Teladoc or one of these bigger players?

Yes. In these early days, the foundational approach that we're trying to take is to make these APIs available to a wide swath of developers, which means that we are now doing things that maybe we didn't use to do before, which is to show up at developer conferences, do more digital marketing. And the underlying theory, Paul, is that there's a lot of work going on out there in the world where creative developers are coming up with apps that we can't even imagine ourselves. And because the use of mixed media is so common now and almost everything you do, the reality is that many of those apps will involve some form of audio or video. And if that's the case, we want to be available to them. So I'd say that unlike, let's say, core Dolby, where we might say, target the automotive market, I wouldn't want to imply that there's a select number of markets that we've targeted. We are making it available broadly. However, having said that, your question is still very, very valid because what's emerged are some certain verticals where people seem to be grabbing on to and saying, this could be very applicable in my vertical. So we're trying to learn from that and say, "Oh, okay." So that vertical. Let's take distance learning as an example. If we're finding that lots of developers and distance learning are using our API, we want to learn from that, "Aha, pardon." You're going to miss these bad jokes, by the way. So we want to learn from that and say, "Oh, if this is a vertical that we're more applicable to, let's go after that. Let's put some our sales efforts or whatever are the efforts you need to get more acceleration there." But like I said, that started from an app deciding to use it as opposed to us sitting in our room and saying, "Hmm, here the 3 verticals that matter, the target dose, let's go after that." So I just want to be clear that the way it's evolving is a little bit of a symbiotic thing, maybe not symbiotic because I thought that's not the right word. It's an evolutionary process for these vertical markets. I think over time, it's fair to assume, too, that the number of vertical applications, you see us in will expand as more people find out about these APIs and decide to use them.

Got you. Because I think the thinking was that in the SMB channel, at least, the budgets aren't as large as, say, from a Zoom or Teladoc. So it actually helps them accelerate the audio quality quite quickly.

Also, one other thing to point out, too, in the SMB market, you could argue that because of our size, I'm not apologizing for our size. We're -- like I said, we're over $1 billion of revenue, but we're not super giant. We can't afford right now, Paul, to think about setting up sales teams for all these possible avenues because that's just too high touch. I mean core Dolby, it's worth doing that because you're going to put a core team on what, Amazon, Microsoft, Apple, of course. But in this area where we don't even know which apps will succeed and which ones won't, we want it to be relatively low friction and have a lot of leverage so that the website and the digital marketing allows us to amplify the number of potential people who are using it. And then if one hits, then we'll follow that up.

So it'll evolve over time. So I had a question -- an incoming question. So what kind of metrics do you plan to disclose like over time on io, number of developers, number of customers, revenue, the pricing is on the website and then kind of when should we expect something?

I think those were good examples. For us internally, the kinds of things you would imagine, we're watching are at a basic level, how many people are doing downloads. How many people are signing up for the trial period? How many people are now paying for? How many apps have started using this? And I think our view, Paul, is that hopefully, sooner rather than later, we will seek to share some of this data with you and the rest of the public so that you can gauge how we're going. I think to be fair to ourselves, we really only launched this a little over a year ago. And if you look at historic Dolby, it usually takes quite a while and anything new that we launched before we started putting out data. But we understand that with Dolby.io, there is some -- a high degree of interest in these metrics. And so we are looking at some of those common metrics. And of course, we are looking at what might be some typical practices in this space. I mean we're relatively new to the API world, but APIs and developer apps are not new. So we're kind of looking out there in the landscape and saying, "What are the types of things that investors usually like to hear about?" And we'll try to have that guide what we disclose to the public.

Okay. And then what other IP can you expand? Can you essentially expand anything in your IP portfolio and translate back over time? And when is Vision going to be there?

Yes. Anything is probably too much of a stretch. But one of the things for me, as the finance guy, that's very exciting about Dolby.io is that it's not a completely new thing into true sense from a business standpoint because we, as Dolby, have in our -- within our 4 walls, if you will, an incredible array of relevant technology to today's world. Won't you agree? I mean we are known for our audio and now for our video. I mean Dolby Vision is just such a kickass technology. And so I think what we'll seek to do is to make technologies available through io. And right now today, for example, you mentioned Vision, we don't currently have a video API available yet, but we have openly stated that it would be our intent to put a video-based API. And over time, some -- you think about some of the great properties and assets that we own because we invent to them, Dolby Atmos, Dolby Vision, Dolby Voice. These are the kinds of things that we feel like if we can offer these sorts of things through an API channel that's unique to us, and we can make a point out of that. And then beyond that, then you say, well, there's a lot of devices out there already in the world who are already set up to play back in Dolby, would there be some synergy there? Today, it's still too early to really make that claim, but I think over time, that is part of our strategic objective is to make that all work together smoothly.

Got you. And can you talk about Box so they publicly -- you guys publicly announce that relationship? How easy is it? Is it just a click of a button where an uploaded file? Can you just talk about the ease of use?

Yes. Box is kind of interesting because Box is a customer, but they also have customers because of the nature of their business. For those who don't know, Box is one of these cloud storage companies, a very prominent one, a very successful one. And so the relationship we have with Box is that the Dolby API, audio API has been now embedded into their features within Box so that if any of their enterprise customers want to turn that feature on, now as far as I understand it, I'll use the word at all, though it's not used the word all. Now the employees within that customer can use it. So if you are a customer -- if you're a company that's a customer of Box and your employees have media stored in Box files up in the cloud, and if your IT department has turned on that feature, you can now, like you said, with a click of a button on your mouse pad on your keypad, process that audio file in Dolby to the extent that everything I said is applicable to get improvement into audio quality. And I'm obviously trying to describe this not at an engineering level but at a user level. It is as frictionless as I just described. Now I've not done it myself, but I have watched someone in a video colleague has do it. They're like, "Oh, yes, I just did it. I just went on to Box, and I just did that." So it's pretty neat. It's a pretty neat arrangement because Box themselves is a very successful company, and it's our understanding that they happen to have, within their customer base, a number of customers who deal with media for a living. And so therefore, a lot of the media would be stored in their -- up in the cloud in their file. So therefore, this now potentially makes it a lot easier for them to test out the API and decide whether or not to use it as opposed to, let's say, the current motion would be that employee of that company would have to go to the Dolby.io website, download the API and do all like that.

Okay. That sounds pretty impressive. Just getting it because the friction is significantly reduced in your core business.

Yes.

You can accelerate the business quite dramatically. So let's switch gears a little bit, so Apple announcement of Atmos on Apple Music. Can you just talk about the catalyst behind Apple's decision there? I know you have a relationship with TIDAL, but this is kind of another extension. And will that kind of lead to other opportunities?

Yes. It's -- I mean, it's probably an understatement to say that was super cool, because it is one of the significant music services out there and it's very. What's the word I will use, just very rewarding, very encouraging for me to see a service of that significance in that magnitude launch music that has Dolby Atmos in it. We believe very strongly in Dolby Atmos for music. As you know, Paul, we only came out with that maybe 1.5 years ago, I'm probably rounding off. And during that time, we had Amazon HD adopted, then we had TIDAL adopted. And now with Apple Music adopting it, it really does create more momentum for us for -- excuse me, the Dolby Atmos for music initiative to become much more significant in its presence. Now why is that important? Well, first of all, even though I'm not a big person in music, my -- what I hear from people who are into music and knowledgeable about it is that Dolby Atmos for music experience is incredible. And in some cases, we've had prominent artists, say things like, while I've never heard that sound, sound as good as it does in Atmos. That's a pretty powerful thing. Now the reason why we are focused on Atmos for music is because music is a genre of content that before Atmos for music came along, we weren't addressing. And now that we are relevant to music, it makes us more relevant to things like, guess what, mobile phones, automotive market. And these are important markets for us to either drive more relevance or drive more penetration. And so that's why the Apple Music adopting Atmos is an important cog in that ecosystem we try to create where ultimately, a consumer can feel confident that when they go to listen to music in this format, they can find it on a device, they can find it on content and they can find it on the service that provides it. It's kind of a you need that whole, the all 3 pieces of those nodes for that ecosystem to work.

So that may ultimately lead to other adoption across other securing platforms, whether it be Spotify or some global players in your view as well?

That would be our hope. Yes. In fact, we do actually have some other international service providers that have adopted it, a couple of notable ones in India, are examples, Anghami and Hungama have both adopted it. And yes, I think as a statement of objective or desire, we would like to see more of the significant services adopted over time because that's ultimately one of the values we provide to the world is that we create this ecosystem where, like I said, the content is being created in Dolby, the devices can play back in Dolby and then in between, the services are doing in Dolby. Just like what you've seen with video. I mean when we first came out with Dolby Vision, we were at ground zero. But then over time, we started getting into more TVs, started getting into more movies. And then eventually, you started seeing all the streaming services like Amazon and Apple and Netflix adopted as well. And that's what makes that whole thing work. And that's what we're trying to do with music.

And how do users know that they're streaming in Atmos when they're experiencing it? I know with -- when you're watching Netflix or Disney+, it will show that Dolby Vision Atmos top-up right when you watch it, but how will users really understand that they're actually getting a better product?

Yes. I believe that there will be indications when you pull it up. Like I said, unfortunately, I'm not a big music person. So -- and I don't mind the whole world knowing that. I mean I love music, but I'm just not big into music. But I do believe that the Apple Music Service has that indicator on it. And also, the important thing about the Apple one other important thing about the Apple Music Service is that they've included the Atmos as part of their base offering that you don't "pay extra for it". I mean you get it as part of the Apple service. And so my understanding is that for the songs that are available in Atmos, there will be a way for you to see that.

Got you. So the way to really monetize this is the device on the playback, so the phone. And then it announced the AirPods for the first time publicly, should probably be incremental revenue from Apple, in my opinion. But is that the way we should think about Atmos Music is just really accelerating adoption across headsets and phones and whatever any device really?

Yes. I think that is a good way to think about it is, like you said, I'll just repeat your words, accelerating adoption across devices. Now one of the devices that you mentioned was headphones, and it's interesting because historically, Dolby has dabbled in technology for headphones. But just in recent times, I'd say, this last year, you've seen a couple of headphones come out from prominent players that feature our Atmos technology. And it's a good example of what I'm saying about this sort of broad network effect of our technology being adopted in these different nodes. And you can argue all you want. Well, it's on the phone, you don't need a headphone, that isn't the point. The point is we want to be broadly exposed in devices. And the one I'd like to point my finger at right now, Paul, is actually automotive, because, historically, we've talked about the automotive market when I do the conference calls. But that really is referring to DVD players there in the back seat. We have not been relevant to the main entertainment system, meaning the music system. But with Dolby Atmos for music and with this recent announcement from a company called the Lucid car company, the air, we are now clearly making an attempt to crack into that market. And I think that with things like the Apple announcement about Dolby Atmos for music helps our case that we will create this ecosystem where we'll be relevant for cars. So going back to your comment about accelerating adoption in devices, let's not overlook the very attractive automotive market, entertainment system for us because right now, we don't have revenue there. So for us, think about that market. That's, that's new revenue we could go after in an existing market. So we could have organic growth and penetration that doesn't rely necessarily upon unit growth in the market, which is great.

Why hasn't been difficult in the auto market to have kind of a base sound in there for the speed? I mean lots of people listen music in the car.

Yes. I think historically, it's been because we've not been relevant to the music itself. You're right. Somebody could have put Atmos into the head unit or to the speaker, but if you're not in the music, then it's harder to argue that this whole ecosystem works. But like I said, about 1.5 years ago when we first introduced Atmos for music, that was a big thing because up until then, Atmos was really for movies and TV shows, not for music. So really, Paul, you really have to trace it back to when we came out with Atmos for music, that's what answers your question. That's what now made us way more relevant potentially to something like the automotive market entertainment system. Because now as people are driving and listening to their music, they could actually listen to it in Dolby Atmos. Whereas just going back 2 years ago, not possible. One of the things we've done to help that along is that the team has created some cars that are demo vehicles that demonstrate the Atmos Music. And from what I've heard, pardon upon, although I don't really pardon it, what I've heard is that those are phenomenal demos. And I probably would have had a chance to have seen one of those or heard one of those now, but we're not for COVID. But those are examples of things that we've created to help with the selling process.

Let see that at CES or something, that would be cool. So moving on to Broadcast, kind of your largest licensing segment. Where is Vision penetration today? Where does that go? Where do you see kind of next-gen TVs over the next couple of years? Will technology keep improving to leverage the Dolby Vision technology to a certain extent?

Yes. There's quite a bit in that question, Paul. You were bordering on one of your long questions there, but it was good. It was a great question because today, I think Vision is just -- I mean, it's a kickass technology. If you watch Vision content on a Vision TV, it's spectacular. So our last public statement about our penetration in Vision TVs because it's easier to measure these things annually, right? It's always hard to try to track these things monthly accordingly was, at the end of FY '20, we reckon that we were probably 15% to 20% penetrated in 4K TVs. So that's both good and -- but there's opportunity because it's good because a lot of people would love to have that kind of share. But for us, we feel like historically, with something like Dolby Audio, our penetration ultimately got much higher than that. So we really see TVs is still a very core area of growth for us going forward. But beyond TVs, Vision is also applicable to set-top boxes, to PCs now, game modules, phones. So I think Dolby Vision still has quite a bit of room to grow going forward. And I think our view would be longer term that, that is -- that will continue to be a big driver. Now you mentioned the technology in TVs and it is true to say that from a scientific standpoint, when our engineers architected Dolby Vision as far as I understand it is, the architecture of Dolby Vision does allow it to keep supporting a better TV as TVs advance. And I'll say better in the context of how much brightness they can put out and how many colors. All the technical specs of the TV, Dolby Vision was architected to allow for -- if a current TV is sitting here today and say, tomorrow's TV is like that, Dolby Vision was designed to allow quite a bit of headroom there. So as TVs advance, so I am comfortable sitting here today that as TVs get better, the Dolby Vision technology will allow more of that capability to be taken advantage of.

Okay. Can you talk about 2 key partners, Roku and Sonos? Those were 2 partners that hadn't used your technology before. What was the catalyst there?

Yes. Well, certainly, we try never to imply that where we're going to get 100% share because that's always a tough argument to make. Although having said that, historically, it's amazing how much penetration Dolby has gone. But you're right. If you went back a couple of years ago, you might get someone say, "Well, Lewis if Dolby technology is so great, why doesn't Roku have it?" And I think one of the things you always have to acknowledge is that companies are going to make decisions based on a lot of their factors. And we don't waste a whole lot of time crying over our -- it's not spilt milk but crying about that. The reality is that if someone is not a customer today, we want them to be a customer tomorrow, and we'll dedicate the time and effort to keep that going. So it was very, very rewarding to see that Roku did adopt the Dolby technology in their latest -- one of their latest box. I don't know if we're across their whole line of one of their latest boxes. And also Sonos, last fall, adopted Dolby Atmos into their sound bar. And from what I can tell, that has been -- from what I can tell, it has been a successful sound bar because I went to go order some sound bars at the holiday time and the lead time on that was at least a couple of months out, I ordered them as gifts for my kids. And I think the delivery was scheduled for something like February. So yes, it's very, very cool when you see some of these names where maybe it's a period of time where people are wondering why they haven't adopted it, but eventually, they do. I don't know that I could point to anything specific, Paul, that says, "Oh, here's what got them over the edge and finally adopting it." But our philosophy is to let the technology benefit of it, be a large part of the selling exercise. And so I think we'd like to argue that this technology is going to help you be more successful, and it's really a matter of them deciding that, that is enough for them to adopt it. And you can see, too, from something like Dolby Vision that where Dolby Vision is adopted in 9 of the top 10 TV manufacturers globally and the only 1 who hasn't adopted so far is Samsung. So you look at trends like that and you see that what I'm saying is not a fluffy statement that eventually, we -- I think we do oftentimes, if not always get there.

Got you. Let's talk about Dolby Cinema because, obviously, it's been closed down during a pandemic, slowly coming back. Where do you see that in terms of number of screens? Is the CapEx going to ramp back up maybe next year? And then can you expand across other partners?

Yes. So Dolby Cinema is interesting because it was an example of something that was directly and swiftly impacted by COVID because in Dolby Cinema, as you know, and for the audience, we earn money based on getting a share of the ticket revenue. So if the Dolby Cinema theater is closed, which, by the way, we don't operate. It has all of our technology and our name on it, but don't mistake that for us operating. It's operated by a partner like AMC. So the theaters closed, we're not earning money on that theater. As of today, think of it as roughly 90% of those Dolby Cinema locations are now back open. But they're back open probably with some limitations on how many people can go in there, which again, is controlled by that operator. And then on top of that, let's not overlook the fact that the cinema industry is also heavily affected by content. So what movies are you playing in? And so just having the theater open is not the only thing that draws people back. It's the type of movies or content that you're playing in there. As I look out over the horizon, it would appear, Paul, like there are quite a number of large TIDALs that have sort of stacked up on the runway, getting ready for takeoff. So that could be encouraging. Like I said, we're -- we see right now about 90% of the locations open. Substantially, all of the locations that are AMC related are back open, which would be all in the U.S. And then in terms of going forward, the number of screens that we'll add this year, before the pandemic hit, we were probably adding 50 to 70 screens per year. I would say right now, that pace is still considerably slower than that because even though theaters are opening back up, it's not unreasonable to think that these operators will still be conservative about their cash and spending money international way. So I think we'll watch how that goes. We will see, like this last quarter, 4 new screens opened up I don't think we gave a projection for what it will open up going forward. So it's probably something we'll have to update you on quarter-by-quarter. I don't really have a projection right now for how many will open this next year. Other than saying, it's not unreasonable to think that, that would be a lower number than we were opening before pandemic because of the operators that we're dealing with, and it's gated to a large degree by them, not by us.

Got you. And I think we have run out of time, but I guess we'll leave it there. But thanks for your time today. It was very informative, and I appreciate it very much.

Awesome, Paul. Always great chatting with you, too.

Okay. See you.

Thanks.