Dolby Laboratories, Inc. Q3 FY2025 earnings call

• Strong engagement with ecosystem of content creators, distributors and device OEMs. In music, over 90% of billboard 100 artists record in Dolby Atmos; sports events like FIFA Club World Cup, Stanley Cup Finals, etc. in Dolby; HBO Max launching in new countries. In cinema, movies like Mission: Impossible - The Final Reckoning in Dolby Atmos and Vision. • Automotive: Added Audi as partner, partnerships with 2 of top 3 Indian auto manufacturers, over 30 OEMs with Dolby Atmos partnerships. • Mobile: Motorola rolled out first smartphone with Dolby Vision Capture, Xiaomi added phones with Dolby Atmos and Vision, OPPO partnered with RedNote for flagship smartphone with Dolby Vision Capture. • Other devices: Involved in new TV and speaker launches from partners like Samsung, Haier, etc., and world's first Chromebook with Dolby Atmos.

Q3 revenue was $316 million, up 9% year-over-year and licensing revenue of $290 million was also up 9% year-over-year. Product and services revenue was $26 million, up 18% year-over-year. Detailed licensing performance by end market: 17% year-over-year growth in Broadcast, 11% year-over-year decline in Mobile and 22% year-over-year growth in PC. For the full year, broadcast growth is flattish in Mobile and other end markets to grow mid-teens. PC growth is expected to be up mid-single digits and CE is now expected to be down low teens for the full year, mainly driven by lower device shipments and lower recoveries.

• Q4 revenue is expected to be between $288 million and $318 million. Licensing revenue ranges from $263 million to $293 million. Gross margins are expected to be approximately 88% on a non-GAAP basis. Non-GAAP operating expenses is between $190 million and $200 million. • Full year revenue expected to be between $1.33 billion and $1.36 billion and licensing revenue between $1.23 billion and $1.26 billion. Non-GAAP operating expenses between $765 million and $775 million and non-GAAP EPS between $3.88 and $4.03.

Impact of macroeconomic events, supply chain issues, tariffs and other trade barriers, inflation rates, changes in consumer spending and geopolitical instability on the business.

Q: I was just curious on the broadcast side. With the comment period open on like a transition to ATSC 3.0. I'm just curious how you view that potential transition impacting like the adoption on Atmos and Vision within broadcast and the range of devices?

A: We don't anticipate any impact of that. I mean our codecs are supported within the standards. Typically, the technologies like Dolby Atmos sit on top of the codec and that's really a value-based sale to the customer, and we continue to build on that ecosystem across music, sports, movies and TV, increasingly other forms of content across all device types, including the TV. So I wouldn't expect that to -- not a top factor in our mind as it relates to continuing to expand the presence of Dolby Atmos.

Q: And then just within the Q4 guidance, you mentioned shipment volume expectations on CE. I was just wondering if you could provide any more color just on like shipment volumes more broadly within the Q4 guidance?

A: Yes. Patrick, it's Robert here. As we said on our last call, we expect some slight headwinds for the year. And then in Q3, we saw some softness in unit shipments, particularly in set-top boxes and to a lesser extent, consumer electronics. And we had a negative true-up of $4 million for the quarter. And yes, that's what we anticipate the full year, but our guide for the full year is still within the range we talked about last quarter.

Q: Just on the macro, now that there appears to be some more trade agreement certainty that are being announced. I know it's fluid, but how much does this help with adoption of Atmos or Vision to the extent there may have been any hesitation when there was previous, I guess, more tariff uncertainty.

A: Yes. I think at the highest level, Ralph, I mean certainly, we've seen some more -- have seen a few more trade deals. And hopefully, that is a path to people having better certainty to plan around. I would say, as we sit here today, it doesn't feel very different than where we were last quarter. There's still uncertainty around some of the trade deals and those are in place around what impact they might have. But at the same time, I would also point out that we continue to see strong engagement for Dolby Atmos and Dolby Vision. So I haven't seen the uncertainty affecting the desire to have higher quality experiences. And so where the uncertainty is around how many of those devices will ship depending on how all this plays out. And as Robert said, we're maintaining our guidance keeping it the same, which allows for a few slight headwinds. But path to stability would be good and we still are focused on what we can control, which is bringing more Dolby experiences to more people around the world. That's what will drive growth in the long term.

Q: Kevin, maybe I want to revisit the statement you guys have made in the past about being able to return to double-digit growth, let's even recast it in the current environment of high single-digit growth. I mean, is that still something achievable with your current product set?

A: Yes. We believe it is. And leading up to the pandemic, we were in that high single digit. And as you know, we believe that Dolby Atmos, Dolby Vision and imaging patents has a great expansion opportunity. That category as a whole grew at a compounded annual growth rate of about 20% over the last 4 years. Our target going forward is 15% to 25%, and we're excited about the opportunities that we're pursuing right now. We're excited about our pipeline of innovation and our ability to continue to build on those experiences and extend into new ones. And then, of course, on the foundational side, that's where we've been far more sensitive to the -- what we've been seeing in the economic environment. But we do believe that once that stabilizes, and we see that settle into low single-digit growth, that's the formula for double-digit growth. And in the meantime, the part of the business that -- the part of the categories that are growing, Dolby Atmos, Dolby Vision and imaging patents has grown to 40% of the total. So we're getting a lot more contribution from those categories. And then, of course, we continue to look to create new growth drivers as well.

Q: And just to confirm that the trends you laid out in the beginning of the year in terms of the relative share of imaging patents, Vision and Atmos relative to foundational, has that played out pretty much how you predicted year-to-date or given the weakness in the foundational business, has this other piece done a little better than你thought year-to-date?

A: We're seeing it playing out more or less as we expected for the year so far.

Q: And then on that negative true-up, could you tell us what piece of the business accounted for most of that.

A: Yes. Steve, the negative $4 million true-up for the quarter was primarily a set-top box in [ broadcast ]