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

Yes. I said we love to listen to music in the car, and we really do. We -- as we talk to some of the automakers, we're learning that people will sit in their cars at the end of their journey and keep listening and not go in the house, like decompress after the office before they go and deal with the chaos of the family, right? And that's such an amazing listening experience. But it's, by far, not the only place that we listen to music, mobile, PC are huge areas for listening to music. And our growth in music with Dolby Atmos is really important to us when we look at our mobile customers, when we look at our PC customers, a lot of people, both in enterprise, consumer PCs listening to music. The other is your home, listen to music in the home. A lot of that is in growth categories like smart speakers. So we just partnered with Sonos on the Era 300. That's the new wireless smart speaker, really, really interested in that and it's a great experience. And we look to work with those types of companies to really help them create these great in-home experiences. And so that's a real opportunity. A lot of that for it to work requires the service that you subscribe to, to obviously supply those devices. So like NetEase in China or Amazon are examples of companies that are continuing to expand how they serve that content into more and more device categories, so that if you subscribe, you can get the Dolby Atmos experience on all your devices. And that's a big part of like building that ecosystem that Robert touched on at the beginning. And the fuel under all of it is fundamentally content, right? You just want to find the song you love in the best it can be. And the way we think about that is you've got to enable a pretty broad catalog. We're really happy Apple just launched Apple Music Classical, for example, Dolby Atmos, like a particular genre that some people absolutely love so much so it's its own service. And we look at a lot of things like we track things like billboard, streaming charts and things like this to make sure that, that our outreach to our creative partners is driving the content that matters most to the industry. And that filters all the way down into those new categories like smart speakers in cars.

Got you. And then what's the opportunity for Atmos beyond music in your view?

Yes. We talked about movies and TV and sport and all that. But when you've got an immersive sound experience and something that's really detailed and clear, enhance the ability to connect sort of emotionally. What you find is creators come up with all sorts of cool things they can do with that. So Audible audiobooks, you can now get them in Dolby Atmos. Wonderful way of really engaging you in the story, obviously, a popular category. Wondery who do a lot of podcasts, they're in Dolby Atmos, a number of podcasts. Again, really trying to draw you into that engagement and part of rounding out that proposition, right, for the car, for the home and so forth.

Great. And then there's -- there's major shifts in the entertainment industry over time. There's one kind of catalyzed by the pandemic, but how do you navigate those changes, and -- yes?

Yes. Yes, there are a lot of shifts in entertainment, right? It's -- pandemic certainly accelerated some things, but the marketplace is always going through change. I mean we navigated as partners. I mean all of you probably navigated as investors. And that's probably a question you ask quite a lot. I mentioned some of those shifts way back. Just think about how far we've come in 25 years. But I think the first thing is those shifts are always happening somewhere. They're happening at different rates in different places, and there's sometimes some slightly different drivers, but there is always change. There are new players coming up, creating new types of content that rise up. There are new distribution methods. The things that really sort of catalyze big change, I think, in the marketplace are when a technology allows for a completely different way of getting the content you love. So discs to streaming, massive change, right? It completely can disrupt the industry and players who were strong can sometimes find it difficult and emerging can really grow, right? And those things happen, right, whether it's shifts in -- massive shifts in business model from I buy it to I subscribe it -- to it, similar kind of thing. The other is when the experience changes, right? Your TV might have been fine, but you went out and bought a new one because you want to go from HD to 4K, right? That's that experience change where the quality of what you are getting has jumped up. And those changes don't happen every day. But they do happen all the time. And there's a constant quest within the industry ultimately for better content, more engaging. They want to make it more of it and faster and cheaper, of course, and then they want to get it to more and more people. And so the technologies are always driving that. What do we do about that? Well, we have to navigate that change as Dolby. I think when -- the way we do that is we really just dig deep with our partners. The entertainment ecosystem is exactly what it says there, it's an ecosystem. Someone makes the show. Someone distributes the shows. Someone builds the TV, you watch it on. And those companies do have to all come together in some form for that experience to actually happen. And when you're engaged with all those companies, you understand where they're trying to take their businesses and what the challenges are, you can get an idea of who do I think is going to do well here, who do I think is going to find a little more difficult? And how can we ultimately, as a partner, help all of them transition their business. I think one of the things that we -- if we can do it and we have and we continue to do so, really puts us in a good position is when we can be right at the forefront of those changes. So Dolby Atmos music is an example where we are a key component to that change. It's something where the industry was in a one experience. We've enabled this completely different experience. And consequently, that becomes the underpinnings of that change. So that's one way to really navigate it is being like right in the center of it. Perhaps the other comment I'd make to sort of round it out is, from an entertainment business perspective, what I think about is, I want to make sure that people can get Dolby experiences wherever they want. And that has an inherent robustness to it from a business perspective. You mentioned the pandemic. In the pandemic, people couldn't go to the movie theater. So the revenues that my group received from the movie theater obviously went down. But everyone went and bought TVs to watch shows at home. And so that part of the business grew. And so by being diverse across the entertainment landscape, it puts us in a position to better navigate those shifts, too, whether they're industry driven or whether they're external forces.

Got you. And then how does Cinema -- Dolby Cinema kind of fit into the overall strategy?

Yes. So the movie theater is the pinnacle, right, of the experience. That's something where you get the very best, right? You carve out time, you get in the car. It's like this is an event, right? And it's a very powerful way to connect with content. For us, we want to obviously make that great for the cinemagoer, but there's 2 other parts of it that I think are important to explain. It's a way to engage creatives. Cinema is often the place where people have the biggest budgets, the most time and they can experiment and push the medium first. And so it's a place that we do that, place where we can engage with those people. They teach us a lot. We teach them a lot. And fundamentally, that creates a pipeline of content for the entire industry. So that's a big piece of how it -- how Cinema -- it serves a broader entertainment business for Dolby. Of course, it generates revenue. That's another good reason to be there. And then it's also a great way to engage the consumer. I've told you about our experiences. That's nothing compared to experiencing them. And if you go and sit in a movie theater and get a 2-hour Dolby experience, that's an incredibly powerful consumer connection opportunity, and it helps us tell our story that can then flow into other places that people buy equipment or get entertainment.

Yes. The Dolby Live experience was quite cool. Can you just touch on that and how that brings in creators as well?

Yes. So Dolby Live is a venue in Las Vegas. It's part of the Park MGM. It's a concert venue, it has residences. I believe Maroon 5 and Usher in there right now. It's Aerosmith and so forth. We worked to make that a Dolby Atmos live experience. And we did that for very similar reasons. I mean it's a remarkable experience if you're in Las Vegas. I absolutely recommend you check it out. And -- what it does is it allows the creatives to really engage with the technology. If they do something in the recording studio, they absolutely want to do it live, too, because their fans have heard the recording. So of course, they want an experience live. So they want the proposition rounded out, and we wanted to do that too. And again, it's a tremendous way to engage the consumer. Imagine that concept that you love in the best experience possible. That has a lifelong impact on you. And that's something that's so emotional and powerful. It's just a real strength.

And then can you guys touch on Dolby.io and the strategy there? And when can that become more material?

Yes. Dobly.io. Right now, we're focused on real-time streaming, live events and webinars. We believe that we'll democratize some of our technologies to a new set of users that didn't have access to our licensing technologies. These are developers. So we can get earlier in the process, in the creative process and also -- as well as the consumer experience process. So the goal for Dobly.io is to have access to some of our technologies in an easier way than our typical licensing structure.

Got you. So I'll open the floor up for questions, but I do have some financial questions. I'll go through with you now and put you through the ringer. So I guess in a very...

We have one.

It seems like the -- yes, that's a little loud. Dolby Atmos here.

Yes. I was going to say it's immersive.

It seems like your primary competitor to new adoption of these new technologies is good enough, right? The prior technologies are good enough. Can you talk about how you solve for that in the go to market? And how much of it is a push versus a pull like Dolby Live and things like educating consumers, but how does that actually work with getting OEMs to adopt these technologies?

Yes, it's a great question. So we do have competition. It's not just Dolby or hey, I'll just stay as is, which is definitely for some people a question when we're in the sales cycle. But we do have competition. There are different companies. In fact, some of our largest customers are very capable technology companies and look to also create technologies themselves, right? So we definitely have that environment. And to be honest, I think that's good because it all pushes us to create better outcomes. In terms of how we manage that, there's a cycle to adoption? And generally, what we find is that we can get strong adoption at the premium end, whether that's a premium piece of content, a premium device, for a couple of reasons. One is that it's the part of the market that cares the most about creating the best. So value proposition obviously fits quite quickly there. And the other is, it's the place that, to be honest, in premium, there's a little more money, right, available. And when we start with the technology, it's generally a little more complicated or expensive to actually do the integration. That might be true if you're making a TV show. Hey, the equipment is a little new, you've got to train your people takes longer. But it also might be true if you're making a television. Hey, the chip is brand new. It's a little bit more expensive, things like that. As we progress within the market, we have quite a lot of effort with our partners to actually reduce the friction and the cost of the solution, right? Because when you're building a device, a phone, a tablet, a PC, a car with Dolby, it's not just our software component, right? It's all the stuff that you need in order to make that experience strong. So if you look at -- I'll just give a simple example of a straight audio product, the sound bar, right? The first sound bars that came out had lots and lots of speakers in them, lots and lots of amplifiers. They were Dolby Atmos. They cost $1,000 and above. And then as we work with the ecosystem, okay, we simplified the algorithm. We found ways to reduce the number of speakers. We found ways to improve the sound performance on lower cost BOM structures. And now you can get sound bars under $200 with Dolby Atmos inside. And that's the system cost. And now we didn't change our economics, but we changed the economics for the entire marketplace in terms of working with them to make those solutions easier to integrate and broader to integrate. So that's one big factor, right? You've got to remove the friction in the marketplace in order to ultimately make it very easy for people to adopt. The other is you have to expand the base of content, right? You've got to create a situation where from the OEMs' perspective as they look to build their device, they have a choice to make, which is, can I sell my device with or without this feature, it might be Dolby, it might be all sorts of things? And how do I think it's going to go? And as you look in the marketplace and you're making that decision, you look as an OEM, what are other people doing. If I go to buy a television at the mainstream price point, so I go to Walmart or I go to Tesco in the U.K., I'll go to MediaMarkt in Germany. There is not a TV switched on in that store. There are boxes in rows, on shelves. And so you are selling at that point against web reviews and logos on the box. And you have a decision to make of, well, if I'm positioned up against all these other TVs and these have Dolby and this and that, and I don't. How is that going to play out for me? So there's a lot of dynamics for them as they're making the decision. Is the content they have the experience to be real? Is the technology easy enough for me to adopt? By the time you're getting to very low price points, the engineering available for the OEM is not particularly significant. If you're building a product for pennies, margin, you don't have big engineering teams finessing it. You can't afford that. So it's got to be turnkey, so it's the friction there. And then ultimately, how does it stack up in a competitive marketplace? And do I have a competitive product? And so we're trying to move all of those levers, make sure the experience is strong, make sure the content is strong. And the content is huge value to the consumer, but it's also a value to how the consumer understands. The show I watch has got the Dolby logo on it or we talked about the Indian cricket. They talk on air about this being in Dolby. And so you as a consumer, you understand what you're trying to get, and that's how you educate them. So all those -- so we -- I'm watching the club, we have gone for a long because you're literally at the heart of the business, right? You're at the heart of what are we doing here? We're trying to build these fantastic experiences, which at the start are always at the pinnacle. But at the end, you're trying to get them to everybody and not everybody can drive this car. They might have this. Everyone can buy this TV, they might be able to just afford that. And this subscription, maybe I have to -- I prefer to have this ad-supported channel, right? And so you've really got -- if your quest is to get it for everybody, and I think that is a laudable quest, we have markets where our penetration is very strong, then you have to move all those levers and evolve them as you're going through that process.

Okay. It looks like we have less than a minute left.

I'm sorry. You got me on the thing that I...

I can't -- thanks for that. But if you want to leave us what makes you excited -- you already sound excited. I guess you sound excited about the story, you guys want to leave us with that?

A couple of things. One, as John said, there's real momentum in the marketplace for these experiences. And it's never been an easier time for consumers to engage with Dolby Technologies. And as John just said, it's very obvious in the marketplace and the consumers that we can provide these great immersive experiences. And we're very excited about the reaction we're getting to it. And from a financial perspective, we're very happy with the start to the year given this uncertain environment, high cash flow. I know you're very happy with the cash flow in Q2. But it's still an uncertain environment, but we're continuing to execute on our growth areas despite the uncertainty in the market in terms of unit shipments. So continue to what John just talked about in gaining momentum and commercial success that will drive growth beyond just the choppiness of the unit volume.

Well, thank you, guys, appreciate it.

Thank you, all.