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

Great. Good morning, good afternoon or good evening, depending on where you are. Thanks for attending our Annual Growth Stock Conference. I'm Ralph Schackart, Internet Analyst at William Blair. And today, we're very pleased to have Kevin Yeaman, CEO of Dolby, here to have a fireside chat with us. Before we get going, I request today from my compliance department to please consult our website for all disclosures. With that, Kevin, I'd like to say thank you for attending today.

Yes. Thanks for having me. Always look forward to it. I look forward to getting you back to Chicago next year at this time.

Well, I guess we have about 5 good days of weather in Chicago a year and usually run our conference. So hopefully, next year. Maybe for the benefit of the audience, Kevin, just kind of kick things up because there's always a generalist focus at our conference. Maybe if you could kind of give an overview of Dolby and how the business has evolved from a mandated standard sort of business to more so one of products that you're making for your OEMs that they're increasingly adopting.

Sure. So I guess I'd start by saying, Ralph, that everything we do starts with the belief that people want to have compelling and immersive experiences that creators care deeply about their ability to tell these stories and people want to have these shared experiences. And so what we do is we focus on the science and the engineering of sight and sound to make those experiences possible. And so you asked about the last 5 years. The 5 -- the last 5 years has really been what has stood out has been the rise of Dolby Atmos and Dolby Vision, our most -- our flagship experiences for audio and video, respectively. We continue to enjoy a robust business from our Dolby Audio technologies, the audio format, which is not all -- it's not always mandatory, to be very clear, but it is often the de facto standard because it's become so widely adopted. And on top of that, Dolby Atmos and Dolby Vision have gained an enormous amount of traction. As you know, there -- Apple has adopted Dolby Vision and Dolby Atmos across their -- most of their lineup. And in the TV space, where we're furthest along, we're -- we finished 2020 at high teens percent of 4K TVs with a long way to go. And we've got a lot of early wins in PC, Android mobile devices and other devices, but still a lot of room to grow.

Right. Maybe before getting to the products, whenever you have a change at the sort of ranks of a company, always get investor questions. So just in terms of Lewis' decision to retire and as you think of sort of succession plan or the candidate of a new CFO. Maybe, a, how is the search going? And then b, as you're looking at new candidates, are you looking for something different, something to augment Lewis' role and just sort of any impact you may see, sort of, run the strategic finance function?

Yes. Well, first of all, I have to thank Lewis, I don't know if he's listening in, but I would thank Lewis, we're fortunate to have had him for very close to 10 years. And obviously, it's been a time of a lot of transformation for Dolby. And he's been a great CFO. We're fortunate to have them through the transition. So we're in the early parts of the process, Ralph. I would love to clone Lewis, but I think the reality is at this level, you're always going to be getting sort of a different mix of things that people bring to the table. And whenever we have -- whenever we look at that, it's in the context of we're going to continue to be focused on growth and bringing more Vision and Atmos experiences to the world. We are focused, as you know, on new business models like Dolby.io. So somebody who can continue to do a great job keeping everything in order, but also helping us to pull together the information to make the right resource allocation and strategic decisions we need to keep doing what we've been doing.

Well, if you could find somebody as half is energetic and half is entertaining for calls, that'd be my one sort of wish there.

Yes, Lewis definitely has a sense of humor that comes along with all that talent.

So we've been kind of asking every company that we've been hosting fireside chats about sort of COVID and how it impacted the business and as we're starting to see some flat at the end of the tunnel here. But maybe just kind of along that line, is there a scenario that adoption of Dolby Technology is potentially stronger, given, sort of, the heightened streaming, gaming, mobile activity or COVID certainly has grown more awareness to it, just would love your thoughts on that.

Yes. Well, as it happens, we were -- well, streaming has been a focus of ours, of course, and we're a part of -- important part of Netflix, Disney+, Apple TV, Tencent, IG. So streaming has been a thing, and it's just become a bigger thing, and that has been good for continued adoption of Dolby Vision and Dolby Atmos and our entire suite across the devices through which people are enjoying streamed content. Now about the time we were going into the pandemic, we were also beginning to turn our attention to growing adoption and getting the ecosystems up and running around things like music, gaming and even user-generated content. And I would say that, yes, given how much time all of us had to spend time on those use cases, that's accelerated that trend. And it's -- and we've made a lot of progress in each of those areas, most notably, of course, with Apple's announcement that they will be supporting Dolby Atmos music within the Apple Music service.

Great. And then just in terms of the headlines and, I guess, reality of chip shortages and the concerns, maybe some perspective can growth potentially be constrained coming out of COVID, do chip supply? And how in contact are you with your licensee on this issue?

Yes. Well, of course, we're always in regular contact with our major partners. At the same time, as you know, we're not kind of the early indicator here because just the way our business works, we're getting our reports on what happened last quarter, kind of midway through this quarter. But obviously, coming into the quarter, we were aware of what -- how things were shaping up then, that was factored into our guidance. So I think the biggest impacts have been on gaming consoles and automotive. And that's not as big of a percentage of our business today, although certainly, we expect it to be -- those to be growth areas. And look, there are parts of our business that are largely tied to TAM volumes, Broadcast and PC and Mobile being our biggest businesses. And -- but we also, as it relates to Dolby Vision and Dolby Atmos, have a lot of room to increase the attach rate of the number of devices that are being shipped.

And sort of on that line, has COVID impacted, obviously, you can't say specific what licensee, but has it delayed potentially some other announcements or some initiatives that would have, although, otherwise been released and, let's say, absent a COVID environment, just curious if anybody's sort of holding out and waiting for the world to reopen before we'd see further announcements.

I -- over the course of the pandemic, we certainly had cases where somebody pushed back something 3 to 6 months, either because they -- for their business reasons, it didn't make sense to do their launch when they were going to do their launch. And -- but I would say we continue to have really strong engagement across all of our partners. Everybody is trying to position themselves to be more successful. While there was a -- certainly, a dip in a lot of categories around the kind of March to June, July time frame of last year, they -- there was also a nice rebound in TVs and PCs in the September quarter and moving into the rest of the year. So I would say that everybody -- I would say that it's been a strong environment for us in terms of people wanting to bring more engaging, streamed content, gaming, music, and OEMs that want to support those experiences.

Great. Maybe sort of shifting gear to some of the products. I'm unfortunately old enough to remember when you used to monetize music in the form of Dolby noise reduction with setbacks. But I think after that, there wasn't a lot of opportunities for you to monetize it. So obviously, you've started now with Atmos. You have some early adoption of consumers like title, smartphone speaker, OEMs, Tier 1 OEMs, like Amazon. And then obviously, you talked about Apple Music. So maybe if you could kind of frame the opportunity for investors knowing Dolby for a while, starts with every incremental licensee, but I would think that Apple Music is a fairly strong endorsement of that. And if you could frame the opportunity, that'd be great.

Yes, sure. And let me start by saying, Ralph, that it won't surprise you to know that we have a lot of amateur musicians at Dolby. So as long as I've been at Dolby, there has been a passion and a desire to do something that really improves the music experience. And Dolby Atmos really takes it to a next level. We -- it's a different way to experience music. And we consistently hear that from the musicians, the artists themselves, we hear it from consumers, it really is just a different way of experiencing it. The opportunity is that by bringing Dolby Atmos to a very broad audience with the coming launch of Apple Music with Dolby Atmos, it opens up a lot of new opportunities for us. So if you look at the mobile space and the PC space, where we have Atmos adoption at some of the high-end SKUs, largely driven by our presence in movies and TV content, music is a primary use case on a mobile device. So it really increases the value proposition for the units we're already selling to. But it really broadens the number of mobile devices and the number of PCs which could benefit from Dolby Atmos. And then significantly, we think it really opens up the automotive market for us. Whenever you're talking about music, whether you're talking about artists, labels, streaming services, they care deeply about the automotive experience. You saw last quarter that we announced our first partner, the Lucid Air will support Dolby Atmos. And unfortunately, words can't do a justice. I could just tell you that when people experience Dolby Atmos music in the car, they're truly blown away. So that opens up a whole new avenue for us.

So we have auto in terms of potentially incremental licensees to come. And then on the smart speaker opportunity, I would think that's a little bit more here and now. Is that sort of the right way to think about it, where since, I guess, you already have Amazon, you potentially have some more licensees on the smart speaker. And then I know the design cycles for OEMs historically is whatever, 5-plus years out. Is that sort of the right way to think about the phasing potentially in terms of the way it impacts the model?

Yes. If you're thinking about kind of lead times, I would say, smart speakers, and I would also say mobile devices and PCs, are kind of first up in terms of the lead times. Obviously, automobiles take a little bit longer, but not nearly as long as they used to, especially in the -- for the pure-play electronic vehicle manufacturers, those cycle times are much faster and the other players have sped up as well, too. So we're no longer talking 3 to 5 years, which used to be the time frame for automotive. From the time we get a win, for the fastest of providers, you could be talking 12 to 18 months, and probably that the -- up to, say, 3 years for the others.

Right. I apologize, I'm told there's some feedback on my end. So I moved my phone away from my PC. Hopefully, that helps that a little bit. Let's switch to vision. That was sort of at least the way I think about it, kind of your new flagship or your first flagship product to come out about 2015-, '16-ish, call it, 5-plus years ago. So you started in TVs, then you have top 14 to top 15 OEMs today and it sort of trickled it down to other devices, Apple, recent announcement, which I would think is important for the ecosystem, you can capture now envision. Maybe if you can, Kevin, kind of frame the market opportunities for investors by the varying end markets, how important is Vision to the growth strategy? And then now that there will be, obviously, a wave, I would think of content coming in from Apple, what does that do for Dolby and ecosystem?