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

Good afternoon. I'm Steve Frankel, analyst here at Rosenblatt and it's my pleasure today to host a conversation with Dolby Laboratories. We're joined today by Robert Park, company's CFO. And along for the ride also is Peter Goldmacher, Head of IR. I'm going to try to make this interactive. So if you have any questions and you're in the audience, please use the link at the bottom of the screen.

Okay, Robert. To me, one of the most compelling parts of the Dolby story is this virtuous circle that drives the business that it begins with content creators and runs through consumers and device makers. Maybe start by telling us how did Dolby get here? And why does Dolby hold such a critical role in the entertainment ecosystem today on a global basis. It's not just a U.S. thing?

Yes. First, Steve, thanks for including us in your conference and it's great to meet everyone virtually. So I'll start off by saying for Dolby, I've been here 3 years, but it's been around since 1965. Dolby has founded on the belief that people want to have compelling and immersive experiences. That's our North Star for everything we do. We are the science behind unlocking the power of sight and sound. We create awe-inspiring experiences. And as you said, we've been on the forefront of multiple audio and now video revolutions over the last 6 decades, I know it's been a long time. Think about transitions from mono to stereo from surround to spatial audio; analog to multiple iterations of digital, traditional broadcasting to streaming and Dolby has come out stronger on the other end each time. And our strength and staying power really stems from our ability to combine our expertise in signal processing, that's the science behind it with our close relationships with artists and creators to continually bring the right technology to the creator community to help them tell their stories better. We tell their stories better. We've been involved with content creators since the beginning. We don't make movies, we make movies better. We don't make TV shows, we make TV shows better. And we definitely don't make music, I'm tone-deaf, I can't hold the tune. We make music a lot better. So what we want to do and we've done over time is take that experience of the music studio, bring that into your mobile phone, bring that into your car, take that theatrical experience you see watching Maverick or a number of these top movies that are done in Dolby Atmos and Dolby Vision, bring that to your living room, bring that to your PC, bring that to your devices. And finally, where we get paid is our technology solutions optimize the delivery and playback of this content, and that's where we get paid back -- paid for being able to play back in Dolby Atmos and Dolby Vision on the devices for that best immersive audio and video experience.

Okay. And a lot of the early success was driven by mandate where Dolby had to be in DVD players and PCs and TVs and well, that's true. That now is kind of the low single-digit plus or minus a couple of percent part of the business, we call, foundational audio. And the real exciting part of the story are these premium technologies, Atmos and Vision and your imaging patents. For the uninitiated, what's the value add with these solutions? And what's the competitive landscape look like for somebody that might want to do Atmos but wants to deliver a similar effect?

Great. First, by saying, I think all of our businesses are exciting. But what you said about Dolby Atmos and Dolby Vision, let me get into that in a little bit more detail why that really is pushing the edge in terms of immersive experiences. So the first thing we do is, we provide creative tools for artists to do unique things with their content. Now Dolby Atmos is an evolution of spatial audio that allows a precise placement and movement of sound in a 3-dimensional space. Think stereo as left and right, think surround as left, right, front and center and spatial and our 3-dimensional space is anywhere. We'll talk more about that in just a second. Dolby Vision is a visual technology that uses HDR, high dynamic range, to improve the quality in images and movies, TV shows and games. It makes the images appear more realistic, and that's what we really want. It enhances the details in both dark and bright areas. It amplifies color. I think it's got about 1 million:1 contrast ratio. And it also provides metadata to adjust the picture based on the display capabilities of the device and that's important in something like Dolby where we're in billions of devices. In order to play back that content recorded in Dolby Atmos and Dolby Vision, you need Dolby Atmos and Dolby Vision in the playback device. So the business model gives the tool to creators. We don't charge them for that. We want them to make it as easy as possible to tell those stories and create the best experience and then work with our device manufacturers to implement the playback technology. So think about Dolby Atmos and what does that mean left, right, upright, well, let's say, you're watching a movie and a car is coming off a bridge, starting the top left side of the screen and crashing on the bottom right on the screen. Well, that sound and directors have told us, they can actually want that sound to go from top left to bottom right without being tethered to channels or left, right, front and center. Music, you can have the lead singer music and sound coming right in front of you and the chorus above you and around you. That's the level of differentiation you can have with music and with movies and TV shows. There are alternatives out there. I'm not going to name them, but they're alternatives out there. But they are not Dolby Atmos and they are not Dolby Vision. We continue to believe that Dolby Atmos and Dolby Vision are the best solution for audio and video experiences. Our value proposition is strong and our value proposition is about the whole ecosystem, not technology for technology sake just on the playback device. So that's our, if you will, strength and staying power.

And I think to prove your point, while there are alternatives, Vision and Atmos continue to expand their reach. You talked about music. One you didn't bring up, but I think it's important to bring up is live sports. So NFL games, the Olympics just came through in Vision and Atmos, if you were a Comcast customer. And it does make a difference as a consumer, if you experience it that way.

Live sports is new for us, and it's a great use case for bringing that immersive -- not just premium content but live sports in high contrast, brightness as well as that sound, yes, if you watch the Olympics -- I'm glad the Olympics are over because I was -- after work, you go home and watch it on streaming and you could watch on Peacock any of the events, and I was staying up late at night because it is a great experience. And we're going to see more and more of that as we go forward.

Okay. And I know you are [indiscernible] to talk about unit economics, but maybe we could just get you to agree that taking a device like a TV from foundational or it has the Dolby Digital Plus codec to something that carries Atmos and Vision gets you significantly more revenue per unit, correct? So that's really the key to the growth story is driving higher penetration of Vision and Atmos.

So we can agree the licensing -- increasing the number of Dolby technologies on each device that ships is one of the factors that will drive growth faster than underlying market growth. So yes, increasing the ARPU with the more technologies that are on every device, the more we get paid on each of the devices. In terms of our philosophy for pricing and how we think about pricing, pricing is based on a couple of factors. One, the value we provide to the end market; and two, the volume of devices, the number of devices that are out there. For example, per unit royalty on mobile devices is going to be -- which has 1.3 billion units out there is going to be lower than it would be for TVs, which should be much lower than it would be for automobiles, if you think about that in terms of the number of units out there and the value we provide to each of those units.

Okay. And then maybe to set the stage a little bit, give us some hints of kind of where are Atmos and Vision in TVs and PCs and mobile, kind of where are you in penetration and what's the upside?

Yes. I'll say a few things and just to talk about the drivers and then you spoke to one of them, live sports. One of the most important factors driving growth in Dolby Atmos and Dolby Vision is the creation of content in Dolby Atmos and Dolby Vision. The more great content that gets created, the better the value proposition. Live TV shows, excuse me, live sports, premium content, all of that will drive more and more use cases for people to absorb and digest and entertain themselves with Dolby Atmos and Dolby Vision. In TVs, in particular, we have a very high attach rate at the high end, high end of 4K TVs. Our next leg of growth is in TVs that come in the mid-market to entry level going from a luxury premium to the entry-level and lower markets. And you've seen some of that in the last year or so in terms of manufacturers like TCL and Hisense pushing us through their lineup, not just on the high end and some smaller manufacturers that are more regional. And we believe live sports is a big push for that because that's more of an everyday use case in terms of experiencing Dolby Atmos and Dolby Vision, and we think that will drive more mid-market and lower end and big box retailer and regional brand TV. So over time, we believe that it will -- we believe Dolby Atmos and Dolby Vision will move from just a premium experience and the competition will make it such that sort of table stakes, if you will. And then the same thing is true for cars. We started with the high-end, luxury brands like Mercedes, Lotus, Volvo, et cetera. But over time, we believe that the Dolby Atmos experience will be a must-have technology for all cars similarly to when the rearview camera and side cameras were only done on high-end cars, you're starting to see that more and more proliferation in the entry-level and mid-level cars, we believe Dolby Atmos is the way to experience both music and podcasts and books in your car. This is, I mean, you live in Florida, I live in San Francisco, I spent a lot of time in my car. Once you've experienced Dolby Atmos and our OEMs and our partners would say the same thing. It's hard to go back to a non-Atmos experience. It falls kind of flat.

I definitely can echo that. And what kind of breaks the market up? Is it just time to get you from the high end of the market to more mass market platforms? Or do they need to do anything different in the car to enable this?

Yes so with Mercedes, we started with the Maybach and the S class. When you have 30-plus speakers, an amplifier, a subwoofer, speakers in the seat, speaker under the floorboards, it's a different implementation, a little easier probably to do Dolby Atmos with that level of hardware technology, the chips, the head units. To make that work in a 4-channel or 6-speaker car with a little less power takes technical work and that's part of what we do in R&D is to make that sound equivalent in a lower-end car. So that's what we work with our partners in terms of drivers, power, speaker location, chipsets to make sure that what we certify as Dolby Atmos experience can be pushed down to other cars, and that's what we're doing right now.

And you did demo right at CES last year that you had Atmos running on what a 4-, 6-speaker Toyota?

4-channel, 6-speaker car, that's correct. And if you heard it, hopefully, you heard it, it was pretty amazing. So you can't compare that to a Maybach where it may shake your body a little bit, but you can compare that to any 4-channel, 6-speaker car you've ever been in and played Rocket Man. It's a false equivalent, but it's the best Atmos experience you can have on a 4-channel car.

Okay. And now to kind of put a finer point on it, one of the things you did when you came in 3 years ago, was to help investors better understand these 2 revenue streams. So maybe update us on what's the split today between the foundational, unit-driven business and this Atmos, Vision piece? And what are the 2 growth dynamics right now? And kind of how do we expect that to change going forward?

Yes. Thanks, Steve. So in '21, so that -- we used to show kind of a monolithic licensing model by end market and if you looked at it that way, what you really didn't see or the dynamics or growth drivers because they had different dynamics running ASPs. This is not how we operate, but this is kind of the -- if you want to look at the business relative to external factors and other factors, the framework we did was to break this out. So for licensing revenue, what we did was we said, okay, the core of our business, which is the foundational audio technologies, which includes audio patents and our audio codecs like Dolby Digital, Digital Plus, AC-4, those technologies are widely adopted, high attach rates across a wide and deep set of consumer devices. And what we've said and what we've seen is that growth over time will generally reflect the growth of those consumer electronic devices that they're in. And it's more sensitive to the macroeconomic trends as shipments go up in '21, we saw our revenue go up. As shipments started coming down in '22 and beyond, we saw that impact with our foundational revenue. And in '23, that was about 2/3 of our licensing revenue. The other 1/3 of our licensing revenue is Dolby Atmos, Dolby Vision and our imaging patent portfolio, which are much earlier in the adoption or licensee penetration cycle. So we can grow faster than device growth as we sign new licensees and expand adoption within our existing licensees. So while it's less susceptible to macroeconomic conditions, it's not immune, but we can grow faster. And we've seen that grow faster than unit shipments in an area where unit shipments are coming down. Dolby Atmos, Dolby Vision, Imaging are still growing. And this year, we said we're on the low double digits. Again, it's about 2/3 and 1/3 at the end of fiscal '23 and '24 when all said and done, if obviously, Atmos and Vision and Imaging growing faster and foundation is still coming down, we expect it to be a larger portion as well.

And then in '22 and '23, what was the growth of Atmos and Vision. It was a higher growth rate, right? That was kind of the trend line, it's been higher than this.

Yes. Yes. In '22, Atmos, Vision and Imaging patents, it was roughly 30% of our revenue, roughly 30%; in '23, it was about just over 1/3 and growing at 20%.

Okay. And is the overall environment recovers, would we expect Atmos and Vision to kind of return to that 20%-ish growth rate?

Yes. The formula for us to get to that targeted double-digit growth rate is, we need a little help from the macroeconomic environment. We need consumer electronic devices to get back to low single-digit growth from the -- away from the negative growth that we've seen. And then we need to continue driving adoption of Dolby Atmos and Dolby Vision in those devices and get those device wins that we talk about every quarter that ultimately will push through in terms of unit shipments. It's hard to time exactly when that will push through from design win to actually shipping into the market. But we know that these are the right steps that get us there, and that's what we're going to continue doing is to continue getting these device wins, in particular, auto, mobile and, as we said, mid-market regional brands and entry-level TVs as well.

And you've made comments earlier in the fiscal year that slowdown in kind of that pipeline of Atmos and Vision, either decisions weren't being made or decisions were made and products weren't coming into the market as smoothly as they might have in past years. Any update on what's happening now in terms of that process?

Yes. I don't think I would say that the pipeline was shrinking. We have a very engaged pipeline. It's the fact that our customers -- we have a very sticky product. We have a very long-term reoccurring revenue stream with them. What does take time in this particular market is kind of time the when and the size of the deals that will be signed. Whether it'd be 1 model, 2 models, 10 models, that's part of the discussion because these partners and OEMs are also dealing with their own economic realities of their own businesses. And so whether we get to the top 5 and their top 3 priorities or #3 in the top 3 priorities is what we have to contend with and getting into that head unit in the car, working with the chip makers to make sure they have the chipsets available, working with the speaker and the other components to make sure they're ready to go and also getting the manufacturers to prioritize the new units with Dolby Atmos and Dolby Vision versus pushing out and they're still doing it, pushing out some of the legacy products that may not have it. So we always say, I can't time it exactly when, but we know we'll get it. The timing of when these deals come to fruition and we talk about the big ones every quarter, whether it'd be Cadillac; others, in terms of other brands for Mobile and TVs that we talk about every quarter that gives us that confidence that we're getting momentum. There's value proposition. It's just that timing or trying to predict the timing of when these deals -- some come in sooner, some have come in sooner than we thought like in auto and some may take a little longer. It's just hard to predict.

Okay. And going back to TVs for a minute, you really have, as I would portray it, 2 big opportunities. One is, as you said, to go down market with a lot of your existing partners. And then you have one TV maker, Samsung, who has sat out this party. Help us understand why you think Samsung has been so resistant to Dolby Vision and what do you think that -- what is that done to their business, if anything?

You can see in terms of market share, it's all public information out, you can see what's happened over the last few years in terms of market share from legacy and some challenger brands that are coming up. For Samsung, I can't speak for Samsung, and Samsung have their own priorities. They have things they need to focus in on. We said the same thing with Dolby Atmos a while back, but they've adopted Dolby Atmos across their lineup of TVs, sound bars and laptops and mobile phones. Vision might be a little different because they have their own proprietary technology, HDR10+, but it's not Dolby Vision. And what you're seeing is other TV brands adopting Dolby Vision and Dolby Atmos starting to grow faster. And we believe our value proposition is the fact that brand matters, experience matters. And at the low end, if you can have a Dolby Atmos and Vision experience at a lower price point, especially in this economic market, it just kind of makes sense. But I can't speak to their decisions and what specifically is going to make that leap, but we were anything but persistent.

Okay. And put this in perspective, there was a period of time before you got to the company where we, as investors, have the conversation with management about. Samsung loves your Dolby Digital Plus in their phones. Apple is not doing anything. Why the hell won't Apple do anything and lo and behold, today, Apple, I would say, is your poster child for the Dolby experience, right? You're in basically everything Apple makes today.

Apple is a terrific partner. We're innovation partners with them, not only just the things they make but the future of entertainment, the future of experience, spatial computing. We're working with them, as you know, we're in the Vision Pro hardware that they had, not just as a -- as millions and millions of units are those going to be sold, but it's pushing how we think about content, how we think about content delivery, how can the new experience of premium entertainment be, what is that future? And working with them as a technology partner just shows that we're trying to innovate with our partners to be one step ahead of them on where the puck is going relative to entertainment. And that's a perfect example.

Okay. Traditionally, Dolby hasn't made a lot of acquisitions, but you've made 2 interesting ones in the last few months. Maybe talk to us about what you bought and why and how that helps transform the business going forward.

So we did -- I'll talk about, we did a small acquisition THEO. It's complementary technology to our Dolby.io. Think of it as a front end to our back end. It's a small start-up, it's a small deal, but accelerates our time to market. They're primarily known to have a video player, it's used by top-tier live sports and video-on-demand services today, but they're more than just a player. They've got a number of ecosystems that support ad serving, translation, transcription, analytics, lots of opportunities for us to cross-sell. We could have built our own. It would have taken time. We've been in many deals where they would buy a player from THEO and use our ultra-low latency technology and put those 2 together, sort of like the peanut butter and chocolate. We feel that it's a much better offering. And some of our pipeline customers have said it makes complete sense to have it all from one vendor where you have the player as well as the ability to do sub-500 millisecond, ultra-low latency live streaming, particularly in the area of sports and sports entertainment. So it makes a lot of sense, increased our time to market, and we saw a lot of signals and demand from our pipeline of that makes a perfect fit, and it was available. So that was a smaller deal. The GE deal, which is a little bit bigger, is also in an area where it's our sweet spot. Our sweet spot is licensing IP and this unique opportunity to get over 5,000 patents, primarily in an area of video streaming. This strengthens, complements and expands our portfolio today in the imaging patent space, and it's both current and next-generation standardized technology, HEVC, VVC, VP9 and AV1. And so it's an important part of our strategy. We believe we can run it very efficiently. It's got very attractive financial profile, expected to be accretive. It's not a material impact to fiscal '24. It's not 0, but we don't believe it's material. But we do expect it to be accretive to both non-GAAP operating margins and EPS next year. And so more to come in November on what that looks like for '25, but really excited that this became available, and it again fits in our wheelhouse. It's not very often that you get an opportunity to pick up assets or a business like that at this scale.

Okay. Let's switch gears a little bit and talk about your 2 bets on the cinema business, the historical product business, and then the Dolby Cinema branded experience. Yes, it's only 10% of revenue. But it's an interesting way to make the Dolby experience come live and we're headed into 2025, which could be one of the best years that the box office ever given, all the movies that got pushed into '25. So kind of tell us where you are in that business and what you're seeing from customers?

Yes. So let's break this up a little bit. The 2 pieces are a little bit different. So our Dolby Cinema business, as you said, is what we believe is the best way to experience a movie. And that business model is, we provide the hardware, projector, speakers, all the other things to the exhibitor, and we get paid as a percentage of box office, and that sits in licensing revenue. They're essentially licensing this technology for the Dolby Cinema experience. What's been a challenge, we've got about 280 screens today. But the challenge with that, with our exhibitors over the last year or 2, when obviously, COVID is a piece of it, strike hurt and the box office of -- blockbuster names that have pushed out, as you said, to '25 and '26, is they have to do a lot -- there's a lot of capital to build a cinema to take a PLF and build it to our Dolby Cinema specs. We still believe sightlines, acumens, acoustic, baffling, all the things that have to happen to make it a great experience. Well, we believe next year, and they feel optimistic about the slate of lineup. So their financial condition to push out more of those Dolby Cinemas should accelerate again. So we want to be on more screens. And we've been told by directors and producers, we want more screens that have Dolby Cinema because we believe that's the best way to experience them. So the reason we have it, yes, it's in our licensing business. Yes, it's not a huge part of our business, but it's strategically super important for us because it helps us, help the creative community tell their story better on a big screen, on the PLF screen and then taking that experience and bringing as best you can into the living room that's -- and getting the awareness of the Dolby Atmos and Dolby Vision experience. That's what we have for the Dolby Cinema experience. We also have over 8,000 Dolby Atmos screens. So may not have the projector, may not be in Dolby Vision, but they have that Dolby Atmos sound in over 8,000 screens where they buy our equipment to help enable just at least the immersive sound and audio, you get when you go to a theater. So we want DC screens. We have Atmos screens and then finally, what we believe we have a third offering what we're pushing out next year, which is you can have the Dolby Atmos, which is projector and Dolby Vision, but you don't have to do all of the build-out that's required for Dolby Cinema. That's going to be more like a Dolby Atmos and Vision movie experience, and they can leverage their existing PLS they have today, which is much less capital outlay for them, much easier to deploy and then the velocity can be much faster. And that business model is also a percentage of box office. So not as much capital upfront for the exhibitors as well. So we're excited about that. We're excited about the slate for '25. I think the first one is in November, that I'm excited. It's Gladiator II or the remake, it's November, which is our next year fiscal year. And then as you know, the slate is pretty promising for fiscal '25.

Okay. And so people will understand that these 200-some -- 280 screens, you have roughly 100 in the U.S. with AMC, right? And the rest, China is your next biggest market.

Yes. We've got the U.S. with AMC, we've got China, and then we've got cinemas throughout Japan, South Korea and also Europe.

Okay. Great. Other question that always comes up with investors is capital allocation. Now conversations changes a little this week because you just spent $500 million on the GE acquisition of patents, but still, you have a business that's got no debt, generates $300 million a year in free cash flow, kind of in a steady eddy state. Yet your buybacks have been just enough to offset dilution for the most part. You haven't done anything more aggressive in terms of shrinking the cap. Kind of why do you take this posture and what needs to happen to maybe take a more aggressive posture towards buying back stock?

So I'll take the buyback and talk about that in the context of our overall allocation of capital like philosophy and how we think about this, and we discuss this every quarter with the Board and with ourselves is you just noticed we did spend $500 million this quarter on acquisition. So we have half of the capital that you talked about just on Monday. We think about it in kind of 3 areas. First and foremost, the best way to create long-term enterprise value is to take those resources and invest it in your business. How can we grow a sustainable, robust reoccurring revenue stream within our businesses today and look at our portfolio of opportunities that we can do internally, whether it'd be Dolby Atmos, Vision, Cinema, capital required to build that out, whether it'd be anything we might be doing in R&D and other opportunities we have in entertainment, we look at that. The second kind of way we look at that is inorganic. Where can we find attractive assets that are out there that will either accelerate time to market from a product perspective or strengthen our existing licensing business that we have today, and we've kind of done 2 of those this quarter. We did another one last year, but we don't do very many of these, but that's not to say that we don't look at an active pipeline all the time. And then the third is, how can we be friendly to shareholders. And a couple of things what I would say is we can do that through buyback and dividend. We've had a dividend program for, I think, a decade. We increased it every year except for one during COVID. And for buyback, what I would say is, yes, we've had a posture and policy to offset dilution, so there is no dilution on that. But if you look over the last several -- 10 years, we've done a number of accelerated or step-up buybacks. So in fiscal '22, as units were coming down, revenue is shrinking, we bought back 538 million shares -- $530 million worth of shares in fiscal '22. That's just 2 years ago. So when it makes sense, we will -- we can step up the buyback program. Over the last 10 years, I think we've returned about $4 billion or over $4 billion back in the form of buyback and dividends. And it's something we look at every quarter. And you can see we used half of it this 1 quarter.

One of the other hallmarks of your tenure at Dolby is fresh look at expenses. Dolby traditionally kind of spent money because they had that margins and they really weren't thinking about expense growth. And you have done a great job, and you have talked now about growing earnings faster than revenue going forward. In doing this, are we risking getting at a point where some of the pure innovation or the science projects that Dolby always had going on have to be limited? Or are there still other places to cut without kind of risking that you're missing the next new, new thing because you've limited your R&D scope?

So research is the lifeblood of our business, and we're always investing in innovation that will drive long-term growth. And I think that's what you meant science projects?

Yes.

The name of our company is Dolby Laboratories. It's not Dolby Save Money. We do that in the spirit of, yes, we're committed to growing earnings faster than revenue even in a declining revenue and flat revenue environment, and we've done that. I think you've seen over the last 3 years our expected fiscal '24 OpEx is lower than it was in fiscal '23 on a gross basis and lower than it was in '22. That's because we've really looked at focusing our energy on the most important areas and de-investing in places that don't need to be invested in, if you will. And we've taken that as a surgical approach. If you look at the last 8 quarters, 10 quarters, we've made changes, structural changes, I think, six over the last 10 quarters just because when we see an opportunity, we're going to do it. We're not going to just wait until it all bundles together and do one cut at a time. And I don't think we ever stop trying to be more streamlined or trying to be more effective. With respect to R&D, I think we spent about 18% to 19% on a non-GAAP basis of our revenue on R&D. And I don't think that's going to continue investing in. But what has changed is being more clear on the commercial value of what we're building, not building science projects, technology for technology's sake or that's pretty cool, it's in the lens of who will pay for it? What's the value to the customer? And what's the commercial value of that and ending the project when we don't see that it's not clear or obvious, but we are still pushing the envelope on how you think about entertainment, and we have ideas to do that. So I think about our R&D spend is there's a portion of that that's spent on today's product set and technology sets. So making Atmos and Vision more use cases for that, different sizes, smaller TVs, different cars, different speaker sets, different technologies that are out there because that investment has a long-term reoccurring revenue stream for us. Then you have, I think about Atmos and Vision today is not the same thing as Atmos and Vision was 10 years ago. Then you have sort of that horizon 2 how do you make Dolby Vision Better, Dolby Vision IQ, Dolby Atmos, Flex Connect, these are things that add small ARPUs, but also make the product more valuable, if you will, to the consumer. And then you've got a smaller portion that does pure research with engineers, with PhDs, they've got more degrees than a thermometer on solving hard math and science problems. And that's where we were born with it and that's sort of in our DNA. So that's not going to stop. And through all these adjustments and structural changes, you can kind of see R&D as a percentage of revenue is pretty healthy.

Okay. And then let's spend a couple of minutes talking about Dolby.io because that's a great example of you started something with a pretty broad brush and after a couple of years, decided to focus in on one area where you thought you could be successful. So what's going to make IO and Millicast a successful business? Kind of what have you discovered?

So let's start off with the premise of IO and how it came to be, is our business today, for the most part, is tethered to unit shipments. That's we get paid on devices, unit ships. So it's got a TAM that's identifiable. What Dolby.io does for us, it untethers us from device shipments and allows us to expand the TAM to get value and add value in the ecosystem on creating high-quality audio and video in a little latency environment. And that's what we have today. And now it's ultra-low latency with Millicast. And we believe that when we started, it was started as a developer platform, a self-serve product-led growth approach where developers would take our SDKs and embed them into their own code and we would get paid on the usage there. But what that was great is understanding the use cases, understanding how the product works at scale. What it didn't work as much is getting revenue at scale. It's mostly SMBs, very small developers. And we saw great use cases and that's a great way to test and push our product, but not in terms of a scale business. Over the last 9 months, we've kind to move towards more of an enterprise sales where we saw a signal from large companies who are interested in it, but just a couple of developers were using it. So we're working on deals at the enterprise level where we can implement these technologies at scale for live sports and sports entertainment. And we're starting to see that. But it's -- I would still say it's still nascent. It's still a start-up, and it's still sitting in our services revenue. And we believe longer term, this enables us to have revenue and reoccurring revenue streams outside of unit shipments.

And the killer app, probably in the next couple of years is in-game betting, live sports is probably...

Live sports, live sports betting, ultra-low latency when you're -- a couple of things that provides value is, if you're in a stadium, and you don't have the greatest seats, you can provide multiple views in the stadium on your mobile or device to see multiple views of the same activity. You cannot have latency and that it's a terrible experience to have even 1, 1.5, 2-second latency you got, the sound doesn't match what you're seeing. Same with it, racing in other ways where you only see 1 view, you can see multiple views and you need to have that ultra-low latency. In sports betting, keeping the window open for and most latencies 8 to 15 seconds, 15 seconds or plus longer, that's where the majority of the action comes in is within the last several seconds of when the window closes. And with the proliferation of in-game betting, not just betting on the game, but betting on points within the game or prop betting, which is betting on within the game, you need ultra-low latency to be able to bet on a serve, a game, an inning, a pitch, you can't have 15 seconds delay. It just doesn't work that way. So those are obvious use cases, but they are much larger, broad applications. And if you go to THEO's website, you can see the sports brands that are using.

That's great. Well, I really appreciate your time today, Robert, and looking forward to what the next year is going to bring.

Well, again, thank you very much, Steve, for hosting us and having us here and glad to meet everybody. And if anyone has any more questions, Steve knows everything. He can answer them or he'll refer them to me or Peter. Thanks.

Great. Thank you.