Dolby Laboratories Management Discusses Q3 2012 Results - Earnings Call Transcript

Dolby Laboratories (DLB)

Q3 2012 Earnings Call

August 02, 2012 5:00 pm ET

Executives

Alex Hughes

Lewis Chew - Chief Financial Officer and Executive Vice President

Kevin J. Yeaman - Chief Executive Officer, President, Director and Member of Stock Plan Committee

Ramzi Haidamus - Executive Vice President of Sales & Marketing

Analysts

Ralph Schackart - William Blair & Company L.L.C., Research Division

Steven B. Frankel - Dougherty & Company LLC, Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Perry Huang - Goldman Sachs Group Inc., Research Division

Corey Barrett

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories' Conference Call Discussing the Fiscal Third Quarter Financial Results. [Operator Instructions] As a reminder, this call is being recorded, Thursday, August 2, 2012. I would now like to turn the conference over to Mr. Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, Mr. Hughes.

Alex Hughes

Thank you, Sarah. Good afternoon, and welcome to Dolby Laboratories' Third Quarter Fiscal 2012 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO; Lewis Chew, Executive Vice President and Chief Financial Officer; and Ramzi Haidamus, Executive Vice President of Sales and Marketing.

On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 28, 2012; market trends and developments for the industries in which we compete, and in the PC, online and portable machines, in particular, and our expectations and beliefs concerning how those trends and developments will affect our operating result, the capabilities and market acceptance of our products and technologies, expectations relating to licensing arrangements and our strategic and operational plan and objective. These statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from those set forth in such statements. Important factors, such as general economic, PC, broadcast, consumer electronics or cinema market conditions, could cause actual results to differ materially from those in the forward-looking statements. These factors are addressed in the earnings press release that we issued today and under the section captioned Risk Factors and elsewhere in our most recent quarterly report on Form 10-Q available at www.sec.gov or on our website at www.dolby.com, under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in the Dolby Laboratories' Investor Relations data sheet on our Investor Relations section of our website.

Call participants are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. An archive of the call will be made available on our website for approximately 1 year and is the property of Dolby. As for the structure of this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2012 outlook, and Kevin will finish with a discussion of the business.

And with that introduction behind us, I will now turn the call over to Lewis.

Lewis Chew

Thanks, Alex. Good afternoon, everyone. During my section of the call today, I'll start by providing some details on the Q3 revenue in the various markets that we serve. Then I'll briefly go over the margins and operating expenses, and I'll finish with an update on our outlook for fiscal 2012.

Total revenue for the third quarter was $207.9 million, down 5% year-over-year and 20% sequentially. Within that total, Q3 licensing revenue was $178.4 million, down 2% year-over-year and 21% sequentially. The year-over-year decrease was primarily attributable to our Consumer Electronics and PC markets, and this was partially offset by growth we saw in broadcast. The sequential decline was mainly due to seasonality since the increased shipment activity during the holiday period are reflected in our fiscal Q2 revenues.

Looking at licensing revenue by market. Third quarter broadcast revenue grew 10% year-over-year on increased revenue from set-top box, as well as from TV. Our TV attach rate was higher, offset partially by lower TV unit shipments. Sequentially broadcast revenue declined 19%. Third quarter PC revenue declined 10% year-over-year, primarily on lower revenue from ISV and 11% down sequentially. Third quarter revenue from our Consumer Electronics market was down 19% year-over-year, driven by declines in regular DVD and Blu-ray, and sequentially, revenue from Consumer Electronics declined 32%. Third quarter revenue from our Other markets category, which includes mobile devices, Gaming, Automotive and Via, increased 14% year-over-year and declined 26% sequentially. The year-over-year increase was driven primarily by growth in mobile and the sequential decline was due to a combination of normal seasonality in Gaming and timing of royalty streams from a large licensee of mobile.

Third quarter product revenues were $22.1 million, down 22% year-over-year and 19% sequentially. The year-over-year decline was primarily due to lower shipments of our 3D systems. Revenue declined sequentially as our second quarter benefited from $5 million of Digital Cinema revenue related to achievement of DCI compliance which did not repeat in Q3. Third quarter Services revenue was $7.3 million, down from $7.7 million in the second quarter and from $8.8 million in Q3 of last year.

So let me move on to margins and the rest of the income statement. Gross margin on the GAAP basis in the third quarter was 89.9% and 90.8% on a non-GAAP basis. Within that, licensing gross margin was 98.4% in the third quarter on a GAAP basis, and 99.1% on a non-GAAP basis. GAAP product gross margin was 34.4% in the third quarter, down 80 basis points sequentially and non-GAAP product gross margin was 37.2%, down 40 basis points sequentially.

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