Yahoo Finance Dolby Laboratories, Inc. (NYSE:DLB) Q2 2024 Earnings Call Transcript
Dolby Laboratories, Inc. (NYSE:DLB) Q2 2024 Earnings Call Transcript May 2, 2024
Dolby Laboratories, Inc. beats earnings expectations. Reported EPS is $1.27, expectations were $1.17. Dolby Laboratories, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Dolby Laboratories Conference Call discussing Fiscal Second Quarter Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded Thursday, May 2nd, 2024. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead.
Peter Goldmacher: Good afternoon. Welcome to Dolby Laboratories' second quarter 2024 earnings conference call. Joining me on the call today are Dolby Laboratories' CEO Kevin Yeaman; and Dolby Laboratories' CFO, Robert Park. As a reminder, today's discussion will include forward-looking statements including our fiscal 2024 third quarter and full year outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including among other things, the impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending, and geopolitical instability on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned forward-looking statements as well as in the risk factors section of our most recent quarterly report on Form 10-Q.
Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the Interactive Analyst Center on the Investor Relations section of our website. With that, I'd like to turn the call over to Kevin.
Kevin Yeaman: Thank you, Peter and I want to thank everybody for joining us on the call today. Revenue for the quarter came in right about where we expected, earnings came in better than we expected, and our guidance for the full year remains unchanged. Robert is going to share a few of the details with you for the second quarter and he's also going to speak to third quarter guidance in just a few minutes. Today, I'd like to cover three topics. First, I'm going to make some comments on the macro environment; second, I'll share some insights into our business; and third, I'll wrap up my portion of the call with some brief closing thoughts. So, let me start with the macro. We haven't noticed any big changes, but it does remain a tough environment for many of our OEM partners.
Following strong growth in fiscal 2021 on the strength of pandemic purchasing, device sales have been down each year since and the resulting declines in foundational revenue have overshadowed strong growth in Dolby Atmos, Dolby Vision, and our imaging patents. Now, the upside of this dynamic is that when device sales recover and we do expect device sales to recover, it will have a noticeable positive impact on revenue and margins. Our foundational technologies make up about two-thirds of our highly profitable licensing revenue and about 60% of our total revenue. The macro isn't having the same impact on Dolby Atmos and Dolby Vision because growth is coming from getting our technology on more devices, which we are doing, especially in areas like auto.
Sales cycles haven't changed noticeably, engagement remains very strong, and the amount of content continues to grow, especially during sports this quarter. Industry adoption as measured by growth in content, created in Dolby Atmos and Dolby Vision, remains an important lean indicator of future device sales with Dolby Technology. So, even as the general economic environment remains somewhat underwhelming, we remain optimistic about our prospects over time. We continue to target foundational to return to low single-digit growth and Dolby Atmos, Dolby Vision, and imaging patents to grow in a three to five-year CAGR between 15% and 25%. So, let me turn to some comments on Dolby Atmos and Dolby Vision where the three most powerful growth drivers are mobile, TVs, and auto.
I'll give you a brief update on each of these opportunities. Starting with mobile. We have a compelling value proposition with Dolby Atmos and Dolby Vision for our mobile device providers and most of these providers are already users of our foundational technologies. We see a meaningful and a durable opportunity to continue to expand our relationships to include value-added offerings such as Dolby Atmos, Dolby Vision, and Dolby Vision Capture. We see the greatest adoption of Dolby Atmos and Dolby Vision at the high end. In the second quarter, we announced a number of partnerships. OPPO introduced five new phones with Dolby Vision Capture, Xiaomi announced new models with Dolby Atmos and Dolby Vision, and Honor also announced new models with Dolby Vision.
As it relates to the affordable end of the market, we had some nice wins. Lava Mobile in India and Chinese phone maker Transsion, both introduced more affordable phones with Dolby Atmos. So, let me turn to TVs. We are very excited about Max's announcement that it will be streaming all of its live sports in Dolby Atmos and Dolby Vision in the US. This is good for TV and soundbar adoption. In the same way that streaming movies in Dolby Atmos and Dolby Vision catalyze device sales like TVs and soundbars from viewers looking for the most immersive movie experience, we think streaming sports in Dolby Atmos and Dolby Vision will have a similar impact. Max is the first streamer to offer all of their live sports content including baseball, hockey, and basketball in Dolby Atmos and Dolby Vision and their introduction has led to interest for high-quality sports content from other partners.
And our sports content isn't limited to the US. The Indian Premier League will be broadcasting Cricket in Dolby Atmos and Dolby Vision for the first time this year. And there is an ever-growing slate of global sports content in the Atmos and Dolby Vision including tennis, rugby and soccer. The more high-quality content that's available in the market, the higher the likelihood that consumers will want to purchase devices that can deliver the best experience. We are particularly excited about the Olympics and the European Championship Soccer this summer. Moving on to automotive. The pipeline of new partners remains strong and our current partnerships continue to grow. We're seeing growth from new partners shipping new models. Xiaomi announced SU7 with Dolby Atmos in the second quarter and they're seeing much higher demand than expected.
Also a new partner Hyundai is shipping the Genesis, initially in Korea, with Dolby Atmos. We're also seeing momentum and revenue growth from existing partners, both in terms of the aggregate growth from current models and also an increase in new models, especially from partners like Mercedes, NIO and Lucid. So before I move on to my closing thoughts, I want to say that I'm proud of all the hard work and successes our teams are having driving content growth, innovating on the product front. These efforts are the backbone of our business and ensure that our partners continue to value and grow their relationship with us. Looking forward, foundational remains solid despite persistent softness in device sales. An improvement in the macro and a return to device sales growth will have a meaningful positive impact on our revenue and margins.
In Dolby Atmos and Dolby Vision, ongoing progress with our content and streaming partners, are creating an ever growing groundswell of support for our three main focus areas: TVs mobile and automotive. We continue to expect to deliver margin growth ahead of revenue growth. Our balance sheet is strong and I remain confident about our long-term prospects. And so with that, I'll turn it over to Robert, who will take you through the financials in a bit more detail.
Robert Park: Thanks Kevin, and thanks to everyone joining us on the call today. Before we review the quarter in some detail, I'd like to hit the highlights. First, revenues for Q2 were just above the midpoint of the range we laid out in the Q1 earnings call, and profitability also came in above the midpoint of the range. Second, while the environment remains uncertain and dynamic, our guidance for the year remains unchanged. And third, as I have said before, we feel good about our long-term growth prospects. Our value proposition remains strong and our financials are solid. Q2 revenue was $365 million, down 3% compared to the year ago quarter, but above the mid-quarter guidance we shared with you on the last earnings call. Licensing revenue of $338 million was down 4% year-over-year.
Products and services revenue was $26 million, up 8% year-over-year. Our end market outlook for the full year is unchanged from last quarter's call. Detailed licensing performance by end market is on our IR website, but I'd like to point out some noteworthy details. As a reminder, timing of recoveries, the minimum volume commitments and true-ups can drive volatility between quarters. Mobile is the biggest standout in the quarter, growing 151% sequentially, primarily due to timing. And although we saw a nice snapback from mobile in the quarter, we still expect mobile to be down slightly for the full year. Similarly, you may notice that broadcast is down 18% year-over-year this quarter. This again, is just about timing. As we have said before, we expect broadcast to be down slightly for the full year.
We continue to expect solid growth in auto and a slight increase in PC. This increase will be offset by slight declines in broadcast, consumer electronics, mobile and to a lesser extent gaming. While we see growth in Dolby Atmos and Dolby Vision in these markets this year, the overall revenue declines are primarily due to tough comps in terms of the timing and size of the deals. Moving to the bottom line. In Q2, we earned $1.27 per diluted share on a non-GAAP basis, above the midpoint of our guidance, primarily due to stronger revenue, higher non-operating income and lower taxes and we generated $181 million in operating cash flow. Moving on, we repurchased $25 million worth of common stock and have about $107 million remaining on our repurchase plan authorization.
We declared a $0.30 dividend, up 11% from our dividend a year ago and ended the quarter with cash and investments of just under $1 billion. Turning to guidance. There is still uncertainty in the market and our guidance assumes no material change in the macroeconomic environment. While we continue to see steady growth of content created and distributed in Dolby technology and strong engagement from our partners, device shipments remain soft and the timing of deals can vary. For Q3 fiscal year 2024, we expect revenue between $270 million and $300 million. Within that licensing revenue is estimated to range from $245 million to $275 million. Gross margin should be approximately 87% on a non-GAAP basis. We expect non-GAAP operating expenses to be between $180 million and $190 million.
Our effective tax rate for Q2 is projected to be around 21% on a non-GAAP basis. So as a result we estimate that non-GAAP EPS should be between $0.51 and $0.66 per diluted share. Moving on to full year guidance. Coming into the year, we said revenue would be weighted more towards the first half of the year than the second half of the year. And midway through the year that first half weighting is slightly more pronounced than we expected. First half revenue benefited from timing of deals that we expected in the second half of the year. For this reason, our full year guidance for fiscal year 2024 is unchanged at roughly flat revenue. In the second half, we are expecting a higher revenue weighting towards the fourth quarter due to the timing of deals.
Taking a step back our full year guidance consistent with what we've been saying all year reflects an assumption of a mid-single-digit decline in foundational audio licensing revenue, offset by a high single-digit growth in Dolby Atmos, Dolby Vision and imaging patent licensing revenue and roughly flat products and services revenue. Non-GAAP gross margin should be roughly 89%. Non-GAAP operating expenses for the full year should be in the $740 million to $750 million range, which will result in about a one to two percentage point improvement in operating margins on a full year basis. On the bottom line, we are expecting non-GAAP EPS of between $3.60 to $3.75. To wrap things up, the creation and distribution of Dolby-enabled content continues to grow nicely and our partners are still very engaged.
Our financials remain strong and we are well positioned for growth when economic conditions improve. With that, I'd like to turn it back to the operator to open the line for your questions. Operator?
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