Dolby Laboratories 2026 Q3 Earnings Call

Welcome to Dolby Laboratories' third quarter fiscal year 2026 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' CEO, and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2026 fourth 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 annual 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.

Thanks, Peter, and thanks to everyone joining us on the call today. Revenue and earnings for the third quarter were within the range of guidance we provided on the last earnings call. We are narrowing the range of guidance for the full year and keeping the midpoint of revenue the same. We expect strong sequential growth in Q4, driven primarily by momentum in a number of our key growth areas. We have strong visibility into the pipeline of deals for the quarter, and many of them have closed early in Q4. Robert will share more details on this and on the financials overall in a few minutes. Dolby has maintained its leadership position for over 60 years by innovating and raising the bar on the entertainment experience.

We do this by working with creatives, content distributors, and device makers, giving us a unique perspective on the collective needs, challenges, and opportunities of the entertainment ecosystem. Which enables us to deliver experiences that come to life in the highest possible quality. This quarter, I would like to start with our focus on expanding our total addressable market beyond device licensing. We are working with a growing number of content partners that are looking to differentiate on experience and drive deeper engagement with their audiences. We are making good progress on our target for 10% of revenue from these partners by the end of FY 2028. Let's start with the Video Distribution Program, the patent pool that licenses imaging patents to content streamers. Meta, one of the world's largest streamers of video content, became a licensee of the program covering its Facebook, Instagram, and WhatsApp platforms.

Also, Alibaba became a licensee this quarter to cover its video operations, including e-commerce, entertainment, and digital media platforms. We are encouraged by the early traction and the quality of the participants joining the pool. In less than one year since inception, 45 licensors have already attracted some of the biggest names in streaming as licensees to the pool, including ByteDance, Kuaishou, Meta, Roku, Tencent, and Alibaba. We remain excited by the early momentum from this pool. We expect it to continue. Moving on to Dolby OptiView, we closed a number of key deals in the quarter, including a multi-year agreement with Roberts Communications Network, the largest provider of horse racing content in the U.S., for ultra-low latency video streaming. Also in the quarter, Google announced that Dolby OptiView Ads, our ad insertion engine, was the first product certified through their Ad Manager technology partner program.

This certification recognizes the performance and monetization improvements that Dolby OptiView Ads delivers when integrated with Google Ad Manager. While this partnership is early days, we are looking forward to working with Google to win new customers. Last quarter, I talked about how at the NAB show in Las Vegas, we showed new solutions for fan engagement in live sports. These solutions use AI to predict viewer behavior and to generate compelling stories for individual fans based on the action and their interests. Fan engagement is a top focus for the sports industry. We have seen strong interest in these new solutions, which will be shipping in the coming months. We believe that the Dolby OptiView platform, which brings together these capabilities with ad monetization, low latency streaming, and cross-platform playback, is a unique system that will lead the future of the live sports experience.

We are excited by the progress we are making in expanding our addressable market to include content platforms where we earn revenue based on usage. Moving on, Dolby Vision and Dolby Atmos continue to bring the most immersive experiences to life. Starting with the World Cup, viewers in all three World Cup host countries were able to enjoy the World Cup in Dolby through partners including Peacock and Comcast in the U.S., Bell in Canada, and TV Azteca in Mexico. Fans in some of the most passionate football countries like Brazil, Colombia, Germany, and Spain were also able to enjoy the World Cup in Dolby. On TVs, Dolby Vision 2 is now in market with some Hisense TVs. By the end of this calendar year, TCL and Philips will also be shipping televisions with Dolby Vision 2.

Moving on to auto, we have announced agreements with over 40 auto OEMs since the program started. A few of our new OEM wins this quarter include Volkswagen in China launching its first Dolby Atmos vehicle, Buick announcing pre-sales for the Electra E7, a plug-in hybrid SUV with Dolby Atmos, also in China. This quarter, Google announced support for Dolby Atmos through Android Auto with launch partners including BMW, Genesis, Mahindra, Mercedes-Benz, Renault, and Škoda. With Dolby Atmos supported across Apple CarPlay and now Android, it has never been easier for users to stream Dolby Atmos to their car. It also makes it easier for dealers to demo and sell the Dolby Atmos experience in the car. We're excited about the continued momentum in in-car entertainment, which continues to be a top focus for the industry. Moving on to user-generated content and social media.

High-quality user-generated content is an important factor in driving engagement. We have strong adoption of Dolby Vision on many of the world's largest social media platforms like Instagram, Facebook, and Douyin. In addition to driving demand for Dolby on mobile phones, we are starting to make our way into new device categories like smart glasses and video cameras. RayNeo, the leading provider of augmented reality glasses, launched the RayNeo GT Max, the world's first AR smart glasses equipped with Dolby Vision. Insta360, the market share leader in action and panoramic cameras, launched the Luna Ultra, which supports Dolby Vision capture. We are pleased by the momentum behind user-generated content in Dolby and expect it to continue to grow as a priority for device OEMs.

Wrapping up, we remain confident in our opportunity to drive growth beyond device licensing, with progress on both the video distribution program and Dolby OptiView. We continue to bring more Dolby experiences to more people around the world with the growing adoption of Dolby Atmos and Dolby Vision across a wide range of devices and use cases. All of this gives us confidence in our ability to drive long-term growth. With that, I'd like to turn the call over to Robert to cover the financials.

Thank you, Kevin. Thanks to everyone joining us on the call today. Revenue for the quarter came in at $305 million, which was within the guidance we shared last quarter. We saw better-than-expected revenue in Dolby Atmos, Dolby Vision, and imaging patents offset by deal timing and foundational audio revenue. Non-GAAP earnings per share was $0.69, just above the middle of the range of guidance, as lower-than-expected operating expenses offset lower-than-expected revenue and higher taxes. Licensing revenue was $282 million. Products and services revenue was $23 million. We generated approximately $167 million in operating cash flow and repurchased 1.2 million shares or $65 million of common stock. We recently received board approval to increase the existing share repurchase authorization by $350 million, bringing our total authorization to about $427 million.

We declared a $0.36 dividend, up 9% from our dividend a year ago, and ended the quarter with cash and investments of $756 million. Q3 GAAP operating expenses include a $4 million restructuring charge for organizational changes made as we align our resources to focus on the most impactful areas. Detailed licensing performance by end market can be found on our IR website. As a reminder, end market growth rates are typically smoother on an annual basis as the timing of recoveries, minimum volume commitments, and true-ups can drive quarterly volatility. End market performance for the quarter came in mostly as expected, with no significant outsized moves. Turning to guidance. For Q4 fiscal 2026, we expect revenue to be between $362 million and $392 million. Within that, we expect licensing revenue to be between $335 million and $365 million.

Gross margin should be approximately 90% on a non-GAAP basis, and we expect non-GAAP operating expenses to be between $195 million and $205 million. Non-GAAP earnings per share is expected to be between $1.13 to $1.28. Let me provide more context on Q4. Our Q4 revenue guidance at the midpoint represents a 23% year-over-year increase in revenue. This reflects momentum we are seeing in key growth areas we have been prioritizing. Namely, the video distribution patent program, including a large deal with Meta that signed early in Q4, higher units from Dolby Atmos in the car, and revenue from new device categories like wearables. Q4 is also benefiting from timing of deals like minimum volume commitments. For fiscal year 2026, we expect total revenue to range from $1.41 billion to $1.44 billion. Within that, licensing revenue is expected to be between $1.31 billion and $1.34 billion.