Prompt:
Human: This release is available on the company's website at dhigroupinc.com.
Lastly, during today's call, management will be referring to specific financial measures including adjusted EBITDA, adjusted EBITDA margin and net debt that are not prepared in accordance with U.S. GAAP.
As always, we appreciate your interest in DHI.
Let me first start with quick update on our operation status as it relates to the COVID-19 pandemic.
Our foremost concern at DHI is to ensure the health and safety of our DHI community.
As such, the majority of our employees continued to work from home during the quarter, using the best possible remote communication and collaboration tools.
And our team members, including sales and support, marketing and product development continued to be highly effective.
We currently have several offices open, though we have made the return to office optional for all our employees.
We are looking forward to having more of our employees back in the office when it's safe.
But rest assured, we are taking significant precautions to make sure we maintain the safety of our employees, whether they are in the office or working from home.
Now let's jump into a review of the quarter.
While the pandemic continues to challenge the way we all live and work, we actually saw job postings stabilize during the summer, although they were lower in total than the year before.
The sentiment is that many companies paused their hiring during this time as they reformulated their hiring plans based on their view of the economic recovery to come.
However, in September, we saw the sentiment change for the better, as evidenced by a notable uptick in job posting as well as an increase in our bookings.
Based on our Burning Glass feed, there are over 2,200 companies that have more than 20 open tech job postings right now.
Companies like Amazon, Microsoft and J.P. Morgan Chase have over 1,000 active tech jobs posted today.
Both the Staffing Industry Analysts and TechServe Alliance, industry research firms that focus on tech centric staffing and recruiting firms, are forecasting a bounce back in the IT staffing market in 2021 to almost pre-pandemic levels.
The SIA is forecasting year-over-year market growth of 7%, which would get the market back to 98% of 2019 IT staffing revenue levels, representing an almost complete rebound.
As I mentioned last quarter, a report released by Microsoft in July predicts that the worldwide digital jobs will grow from 41 million in 2020 to 190 million in 2025.
Of the 149 million new digital jobs to be created, 98 million are forecast to be in software development.
It's clear that our collective future will be more online and businesses will accelerate their efforts to digitize.
These efforts will, of course, require technologists.
As we continue to execute on our plan to create the best tech focused career marketplaces using our technology skills data model, we stand ready to capitalize on these trends.
Now let me provide some detail regarding our product development efforts during the quarter.
Our product development team continued to deliver its usual high pace of product innovation.
With the release of Dice IntelliSearch Based Job Alerts, job alerts are automatically generated based on the specific skillset and location found in the candidate's profile.
This creates a virtuous circle that encourages candidates to register and keep their profiles up-to-date.
Dice recruiter profile which we delivered last quarter, experienced the fastest adoption rate the company has ever seen from any of its product releases in the past two years.
During the third quarter, one-third of all Dice recruiters completed their new Dice Recruiter Profile.
Dice Recruiter Profile allows our clients to enrich their profiles with photos, personal information, details about corporate brand and culture, news and latest hires, upcoming events and future hiring needs, all of which create more transparency and personalize the recruiter behind the role.
Dice Recruiter Profile was the first major release in Dice's transformation from a job board to a full-scale career marketplace.
With Dice marketplace, we are creating a trusted environment where recruiters and candidates can learn much more about each other to facilitate more effective career discussions.
During the quarter, we also launched ClearanceJobs Client Team Dashboard, which allows clients to have a full view of their recruitment team activity on the site, linking activities to successful hiring patterns.
ClearanceJobs continues to be DHI's test bed for key market-leading features.
We also launched new features on eFinancialCareers called Follow, Voice and Video.
The Follow feature allows candidates to follow recruiters and get a news feed of their content on a weekly basis.
Voice and Video allow finance and tech professionals and recruiters to connect virtually with video and voice calling, as well as instant messaging through the eFC platform, all of which are highly relevant in the work from home environment.
These capabilities were delivered as we announced the completion of the first iteration of the fully functional eFC marketplace, a huge milestone for the company.
eFC follows CJ as the second brand to complete the transformation from job board to full-scale career marketplace.
We have many new product releases planned for the fourth quarter.
Dice is completing the design for its own messaging system with an expected launch at year-end.
Recruiters and candidates will be able the message each other within the platform in the same pattern as Facebook Messenger.
This is the second critical ingredient for full marketplace capability and creates in-platform engagement and stickiness.
Protecting our clients and candidate's information is incredibly important to us.
Therefore, in the fourth quarter, Dice has already released a new authentication and authorization system which move it to an industry-standard secure login protocol.
This feature is a stepping stone to multifactor authentication in early 2021.
We are also working on delivering calendar and schedule integration for ClearanceJobs, which will allow for recruiters and candidates to seamlessly schedule meetings and communicate in general from a system built into the platform and will connect to users' native email application.
Lastly, eFC has already release IntelliSearch based job alerts in the fourth quarter, similar to what I just described for Dice.
As I have said before, I believe we were experiencing a checkmark shaped recovery versus a V-shaped recovery.
As I mentioned earlier, we saw a notable uptick in sentiment in bookings in September.
We had several sales teams reach or exceed their pre-pandemic bookings production for the quarter as a result of the rebound, including both CJ's new business and account management teams, as well as Dice's staffing and recruiting new business team.
Renewal rates for all account management teams improved during the month.
Dice commercial accounts continues to be affected by the current environment due to the uncertainty around hiring plans.
As an example, we have worked with one very large enterprise that has dramatically changed their hiring plan four times in the past four months.
The good news is that our sales team's pipeline of deal activity has continued to grow despite sales cycles lengthening.
We continue to see increased engagement from candidates in the current work from home environment.
In addition, on the client side, we saw an increase in marketing qualified leads through the contract me form fills on our Dice site which is a leading indicator of pipeline growth.
The rebound in Dice's staffing and recruiting new business highlights that Dice is a necessity for staffing and recruiting firms focused on tech.
And as I mentioned before, the need for technologists is expected to grow strongly in the new post-pandemic economy.
Due to the success that we are seeing in CJ and Dice's staffing and recruiting new business teams, we have shifted several sales reps from Dice's commercial accounts team to these two teams with the mantra sell of those who are buying now.
ClearanceJobs has been relatively unaffected by the pandemic, as its performance is generally correlated to the U.S. Department of Defense budget, which remains relatively predictable.
We continue to work hard on expanding CJ's addressable market through direct sales to U.S. government agencies and expect ClearanceJobs to add more government customers as we close out the remainder of this year.
Finally, eFinancialCareers remains our most challenged brand.
It is still being affected by the protests in Hong Kong, uncertainty around the hard Brexit and its largest market, the U.K. and the expected longer recession for the global banking industry as credit quality remains uncertain and under continuous reassessment.
There is no question that the uncertainty in the banking industry has weighed down eFC's performance to-date and will continue to do so for the foreseeable future.
As I conclude my remarks, I want to reiterate that we are successfully executing on our plan to build career marketplaces for matching tech professionals with employers.
And we are doing so, while exceeding our adjusted EBITDA targets.
We believe we have created a better online platform than our competitors for matching companies with the highest quality tech professionals and believe we can capitalize on the millions of new technologist jobs expected over the next five years.
While this growth won't happen overnight and COVID-19 certainly presents uncertainty, we are confident in our business plan and the continued progress we are making toward achieving our goal of returning to growth.
I will start by going through the financial results, then add a few comments about the business.
For the third quarter, we reported total revenues of $33.3 million, which was down 2% from the second quarter and 11% year-over-year.
Dice revenue was $19.8 million in the third quarter, down 3% sequentially and 13% year-over-year.
We ended the third quarter with 5,300 Dice recruitment package customers, which is down 3% sequentially and 13% year-over-year.
Our average monthly revenue per Dice recruitment package customer was down 1% versus the year ago quarter to $1,122 or $13,464 on an annual basis.
Over 90% of our Dice revenue is recurring and comes from recruitment package customers.
Our Dice customer renewal rate was 63% for the third quarter, up from 57% last quarter, but down three percentage points year-over-year.
Our Dice revenue renewal rate was 66%, up five percentage points from last quarter, but down 10 percentage points when compared to the same period last year.
While we did see lower in-period renewal rates, that is customers renewing prior to or at contract termination, we are maintaining an ongoing dialog with these non-renewal customers with the expectation that they will resign when there is further recovery in the economy.
As we mentioned last quarter, we hired a new leader for our client success organization, who has implemented new processes around onboarding and ongoing touch points that we believe should have a positive impact on both customer and revenue renewal rates.
As we look at Dice, our strategy continues to be on larger customer relationships.
We believe this will put us in the best position for stability and growth.
Currently, approximately 13% of our customers generate 50% of our recruitment package revenue, though no one customer makes up 1% of revenue.
We think this is a good balance of a strong stable revenue base without having a significant customer concentration risk.
ClearanceJobs third quarter revenue was $7.3 million, an increase of 3% sequentially and 16% year-over-year.
This continued solid double-digit revenue growth year-over-year is reflective of ClearanceJobs' strong innovative products and competitive differentiation as well as the somewhat insulated market it serves.
Third quarter revenue for eFinancialCareers was $6.1 million, which was down 1% sequentially and down 25% year-over-year when excluding the impact of foreign exchange rates.
As expected, COVID negatively impacted our performance for eFC during the quarter.
In the U.K., which is our largest geography by revenue for eFC, we were impacted by the COVID shutdown as well as the U.K. furloughs which were extended through October of this year.
In the APAC region, eFC's second largest geography, we continued to experience difficulties primarily due to the impact of the Coronavirus pandemic.
Turning to operating expenses.
Third quarter operating expenses were $61.8 million, which includes non-cash impairment charges of both the Dice trade name of $8 million and goodwill of $23.6 million, both of which I will address in a moment.
Excluding the impairment charges, operating expenses were $30.2 million, representing a decrease of $1.7 million or 5% year-over-year.
This decrease in operating expenses was primarily the result of the comprehensive cost management exercise which began in late March and continues currently as well as more efficient third-party marketing spend.
Income tax benefit for the third quarter was $1.5 million, resulting in an effective tax rate of 5%, which includes the impact of the non-cash impairment charges.
This rate is lower than our expected statutory rate of 25% due to nondeductible impairment charges and the allocation of loss between jurisdictions.
As I mentioned, during the third quarter, we recorded a non-cash impairment charges related to the Dice trade name of $8 million and goodwill of $23.6 million.
The impairment charge for the trade name was primarily driven by a decline to the royalty rate used in valuing the Dice trade name, an assumption driven by the impact of COVID-19.
The $23.6 million goodwill impairment is the result of the impact of the pandemic and the expectation that a broader recovery will extend into 2021, whereas previously we expected the recovery toward the end of 2020.
Including these non-cash impairment charges, we recorded a net loss for the third quarter of $27.3 million, a loss of $0.57 per diluted share, compared to net income of $4.4 million or $0.08 per diluted share a year ago.
This quarter's net loss was negatively impacted by $29.3 million of charges substantially from the non-cash impairments of goodwill and intangible assets.
Last year's net income was positively impacted by $500,000 from discrete tax items.
Adjusted diluted earnings per share for the quarter was $0.04 versus $0.07 last year.
Adjusted EBITDA for the third quarter was $7.6 million, a margin of 23%, which was consistent with the second quarter of this year and the third quarter of last year.
As we stated on our last call, our goal is to manage the business to approximately 20% adjusted EBITDA margins.
We continue to focus on supporting our customers as well as investing in sales, marketing and product while also being equally mindful of the overall cost structure of the business.
With this, our current cost structure has become our new normal for how we think about headcount, marketing and other third-party spend.
We generated $4.4 million of operating cash flow in the third quarter, compared to $4.6 million in the prior year quarter.
From a liquidity perspective, at the end of the quarter, our total debt was $37 million.
We had $26.8 million of cash resulting in net debt of $10.2 million.
Even with the incremental borrowing we did in the first quarter, we still have significant borrowing capacity available to us under our credit facility.
We do expect to begin reducing our debt outstanding in the coming quarters as we have better visibility into cash flow, notably around customer payments.
Deferred revenue at the end of the quarter was $41.9 million, compared to $47.2 million in the second quarter and $51.1 million in the year ago quarter.
This is due to the impacts of COVID-19, more contracts having monthly or quarterly payment terms and the normal seasonality of bookings.
When we add the unbilled portion of our contracts to deferred revenue, our committed contract backlog at the end of the quarter was down 12% from the end of the third quarter last year.
During the quarter, we repurchased approximately 349,000 shares for $854,000 or $2.45 per share.
In total, we have used approximately $1.4 million of the current $5 million buyback program which runs through May of 2021.
We continue to believe that buyback is a recognition of the strength and the long term prospects of our business.
Consistent with our previous programs, we will continue to evaluate investment opportunities in the business against buying back shares.
As you know, we also use the buyback program as an opportunity to offset the impacts of our employee equity incentive plan.
As we look ahead, bookings are improving for the company as a whole.
As Art mentioned, for Dice we saw a notable uptick in job postings and bookings in September as companies increased their use of technology in this environment.
We are seeing strength in our staffing and recruiting business as these firms realize they need our technology to effectively do their job.
With regards to ClearanceJobs, we expect them to continue to grow because their success is correlated to the U.S. Department of Defense budget, which, relatively speaking, has been immune to the environment we find ourselves in.
For eFinancialCareers, we continue to expect significant headwinds as our two largest regions, the U.K. and APAC continue to be impacted by COVID, the ongoing geopolitical issues in Hong Kong as well as a potential impact to hiring in the banking sector.
Looking forward, we believe we have the right ongoing cost structure in place to operate the business and to support our customers while at the same time continuing to invest in our business to drive long term revenue growth.
While not providing specific guidance, we continue to manage the business to margins in the 20% range.
Let me sum up by saying that while we continue to find ourselves in very challenging times, we feel our business model provides us some protection and predictability and we are confident in the investments we have made in innovation and sales.
We remain focused on the continued execution of our business plan and look forward to reporting on our progress as we finish 2020 and enter into 2021.
It is a pleasure to be part of such a great team.
 Assistant:

Chosen response:
q3 adjusted earnings per share $0.04.
q3 revenue fell 11 percent to $33.3 million.
qtrly loss per share $0.57.


Prompt:
Human: In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time.
During today's call, we will discuss GAAP and non-GAAP financial measures.
As for the content of today's call, Kevin will start with a discussion of the business, and Lewis will follow with a recap of Dolby's financial results and provide our third quarter and second half fiscal 2021 outlook.
With another strong performance in licensing revenues this quarter, we are off to a solid start to our fiscal year.
Our first half fiscal 2021 revenues have grown about 10% compared to the first half of fiscal 2020, and earnings have grown at an even higher rate.
Our financial results reflect the strength of Dolby's business model and the broad adoption of Dolby Technologies across the devices and services that consumers are seeking to enjoy their content.
Before Lewis takes you through the numbers, I wanted to highlight some of the areas of our progress and the recent examples of how Dolby is enabling a broader range of content.
With a growing number of content experiences becoming Dolby experiences, we add to our value proposition for deeper adoption in existing device categories, and we address the use cases for adoption in new device categories, which together drive our opportunities for growth.
With Dolby Atmos for music, we are enabling a significant step forward in how people can enjoy their favorite songs, which is creating new opportunities to expand the adoption of Dolby Atmos to a broader range of devices and services.
Lucid Motors announced that they will be bringing the first automobile to market that will include Dolby Atmos.
The Lucid Air will enable the Dolby Atmos for music experience for the car and is the first example of a significant opportunity to address the primary entertainment use case within automotive.
Lucid is just one example of how we are creating more ways for consumers to enjoy a growing library of music in Dolby Atmos.
We have strong engagement with top artists around the world as more songs and albums are being made available in Dolby Atmos, including many recent Grammy-nominated artists like Taylor Swift, Lady Gaga and Megan Thee Stallion.
This quarter, Hungama, a top music streaming service in India began supporting Dolby Atmos.
They joined TIDAL, Amazon Music and Anghami who are currently streaming music in Dolby Atmos.
As we continue to build on the momentum for Dolby Atmos for music, we see opportunities for more services to adopt Dolby Atmos, and to deepen our adoption across mobile, PCs, automotive and headphones.
Gaming is another area where we see much of the opportunity ahead of us, to bring Dolby Vision and Dolby Atmos to a growing number of experiences.
Microsoft Xbox will be the first gaming console to support the combined Dolby experience for games.
Xbox gamers will have more ways to enjoy the Dolby experience with new gaming headsets released this quarter from Microsoft and Bang and Olufsen that highlight support for Dolby Atmos.
Lenovo recently launched a new mobile phone designed to support gaming content, the Legion Phone Duel two that highlights support for Dolby Atmos.
We also saw the first eSports event in Dolby Vision and Dolby Atmos this quarter.
As part of Blizzard Entertainment's BlizzConline, we enabled an event that showcased Overwatch matches to be viewed in the combined Dolby experience through PCs and gaming consoles.
eSports gives us unique opportunities to engage gamers by bringing Dolby Vision and Dolby Atmos to the experiences that they are passionate about.
As we grow the number of Dolby experiences within games, we add to our existing value proposition and drive more reasons for adoption on gaming consoles, PCs and mobile phones.
By expanding our presence in music and gaming, we addressed two of the primary use cases on a mobile device.
At the same time, we see more ways for Dolby to enable the highest quality experiences across more of the content enjoyed on mobile devices.
Over the past few quarters, we've highlighted how we are enabling new experiences in mobile, like being able to record in Dolby Vision with the iPhone 12 or being able to enjoy live sports content in Dolby Atmos through a mobile app.
This quarter, Earshot, a leading podcast service in India became the first podcast app to support Dolby Atmos.
They will be making Dolby Atmos content available across different genres of podcasts and in multiple languages.
As we continue to expand the relevance of Dolby Vision and Dolby Atmos across a broader range of content, we address more of the use cases for mobile devices, driving the reasons for deeper adoption with our partners.
This quarter, Xiaomi launched their first mobile phones that support Dolby Vision and Dolby Atmos.
This adds to the growing number of partners that support the Dolby experience within mobile, which is highlighted by the Apple iPhone 12 lineup that features the combined Dolby Vision and Dolby Atmos experience.
In addition, Samsung, OPPO and Sony continue to highlight Dolby Atmos with the recent launch of their latest flagship models.
All of this progress adds to our strong position within movie and TV content, which continues to drive more device adoption within the living room.
This quarter, Samsung released their Q7 sound bar, highlighting support for Dolby Atmos.
Within TVs, our partners around the world, including Xiaomi, Changhong and Skyworth, released new models that support the combined experience.
In addition to supporting Dolby Atmos, TCL and Hisense also highlighted support for Dolby Vision IQ within their recent TV launches.
With this momentum, we still see a significant opportunity ahead to reach higher levels of adoption with Dolby Vision and Dolby Atmos in the living room, similar to the broad presence of our core audio technologies.
The adoption of Dolby Vision and Dolby Atmos on devices is driven by a consistent flow of new titles that are being enabled in the combined Dolby experience.
Our streaming partners, like Netflix, Disney+, Apple TV+ and HBO Max, continue to make a broad range of titles available in Dolby, and the combined experience is consistently highlighted with the release of their latest tentpole titles.
Let me shift to cinema.
As consumers begin to return to the movies, they are seeking out premium experiences and Dolby Cinema is the best way to enjoy a movie.
We now have about 90% of our Dolby Cinemas opened globally to certain capacity restrictions.
Our engagement with exhibitor partners remain strong as we recently added a new Dolby Cinema partner in China, and we also had four new Dolby Cinema locations open during the quarter.
We also see initial signs of strong box office performance from titles like Godzilla vs.
Kong and successful local content in China, including Detective Chinatown three and Hi, Mom that were all available in Dolby Cinema.
We look ahead to anticipated titles later this year, including Top Gun: Maverick, A Quiet Place II and Black Widow that will all be available in Dolby Cinema.
During the last year, we have started to bring the Dolby magic that powers the best movie, TV and music experiences to a much broader range of content and interactions with Dolby.io, our developer platform.
Our focus is on deepening our engagement with the developer community, growing the number of developers on the platform and building their engagement with our APIs.
Just last week, we completed an integration with Box.com and Dolby.io.
Companies that use Box can now enable their users to easily improve the quality of their audio directly from where their files are stored within Box, powered by Dolby Media APIs.
We are excited to bring unique solutions to Box's broad range of customers and the opportunity to drive more people to engage with Dolby.io.
Our interactivity APIs are supporting a wide range of use cases, and we see new customers across multiple industries from online learning to enabling influencers to connect with fans, or even in one case, supporting an application that enables live streaming for medical teams.
As we look ahead, we also see opportunities where real-time interactions come together with recorded media and we can uniquely provide comprehensive solutions by embedding both our interactivity and media APIs.
With a growing number of new experiences being enabled by Dolby.io, we are learning from our engagement with developers and evolving our offerings to best support the use cases where we see significant opportunities to bring higher quality media and best-in-class real-time interactions.
So to wrap up, we have growing momentum in enabling Dolby Vision and Dolby Atmos experiences in more forms of content like music and gaming.
As we enable our technologies to address a broader range of content, we build upon our strong position within movies and TV and create more reasons for adoption across devices and services.
With Dolby.io, our technologies are beginning to address a much larger world of content experiences and interactions.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
And with that, I'm going to hand it over to Lewis to take us through the financials.
And of course, May the fourth be with you.
As Kevin said, our financial results were very solid this quarter.
Revenue and earnings both coming in higher than we previously guided.
So let me go through a few details for everyone.
Second quarter revenue of $320 million was above our guidance range of $280 million to $310 million, as the volumes that we had were higher-than-expected in several of our end markets.
And then we also benefited from a true-up of about $15 million in the quarter for Q1 shipments reported that were above our estimate.
On a year-over-year basis, second quarter revenue was down from last year's $352 million due to lower recoveries and lower revenue from cinema-related business partially offset by higher adoption of Dolby Technologies and higher market volume in areas like PC and TV.
On a sequential basis, total revenue was down from Q1 due to lower recoveries and lower seasonality, and both of these were anticipated when we gave our guidance at the beginning of the quarter.
So the Q2 revenue was comprised of $304 million in licensing and $16 million in products and services.
So let's go through the trends in licensing revenue by end market, starting with broadcast.
Broadcast represented about 35% of total licensing in the second quarter.
Broadcast revenues decreased by about 19% year-over-year, and that was driven by lower recoveries offset partially by higher market volume along with higher adoption of Dolby.
On a sequential basis, broadcast decreased by about 25%, due primarily to lower seasonality along with lower recoveries.
Mobile represented approximately 22% of total licensing in Q2.
Mobile decreased by about 12% from last year, that was due to a shift in timing of certain contracts, and that was offset partially by higher adoption of our technologies.
On a sequential basis, mobile was down about 38%, due primarily to lower recoveries and timing of revenue under contracts.
PC represented about 17% of total licensing in the second quarter.
PC was higher than last year by about 12% due to higher market volume, along with increased adoption of Dolby Vision and Dolby Atmos.
And that was offset partially by declining ASP because of mix of our disc versus non-disc units.
Sequentially, PC was up by about 56%, driven by timing of revenue under contracts, along with seasonally higher activity from patent programs.
Consumer electronics represented about 16% of total licensing in Q2.
On a year-over-year basis, consumer electronics was lower by about 2% due to a shift in timing of certain contracts offset partially by higher volume in devices like sound bars and DMAs, as well as higher adoption of Dolby Vision and Dolby Atmos.
On a sequential basis, CE decreased by about 7% due mainly to lower seasonality and timing of revenue under contracts.
Other markets represented about 10% of total licensing in the second quarter.
They were up about 14% year-over-year, driven by higher revenue from gaming and automotive, and that was offset partially by lower Dolby cinema revenues.
On a sequential basis, other markets decreased by about 22%, driven by lower seasonality in gaming and lower admin fees from Via.
Beyond licensing, our products and services revenue was $16 million in Q2 compared to $16.9 million in Q1 and $23 million in last year's Q2.
And the year-over-year decrease was attributable to lower demand in the cinema industry because of the pandemic.
So now I'd like to discuss Q2 margins and operating expenses.
Total gross margin in the second quarter was 89.9% on a GAAP basis and 90.5% on a non-GAAP basis.
Products and services gross margin -- products and services gross margin on a GAAP basis was minus $345,000 in Q2 compared to minus $5.5 million in the first quarter.
Products and services gross margin on a non-GAAP basis was a positive $1.1 million in Q2 compared to a negative $3.9 million in the first quarter.
As I mentioned when I gave guidance, we took steps to reduce the cost structure in manufacturing, and that's helping our product gross margins return to positive territory.
Operating expenses in the second quarter on a GAAP basis were $204 million compared to $189.8 million in Q1.
The annual salary increases for our employee base went into effect at the beginning of Q2.
And also, Q1 operating expenses benefited from a gain on sale of our facility in Brisbane.
Operating expenses in the second quarter on a non-GAAP basis were $178.4 million compared to $167.1 million in the first quarter.
Non-GAAP operating expenses were pretty much in line with the guidance that we gave.
Operating income in the second quarter was $83.2 million on a GAAP basis or 26% of revenue compared to $105.9 million or 30.1% of revenue in Q2 of last year.
Operating income in the second quarter on a non-GAAP basis was $110.9 million or 34.7% of revenue compared to $129 million or 36.7% of revenue in Q2 of last year.
Income tax in Q2 was 10.6% on a GAAP basis and 16% on a non-GAAP basis.
Net income on a GAAP basis in the second quarter was $76.2 million or $0.73 per diluted share, and that compares to $88.5 million or $0.86 per diluted share in last year's Q2.
And net income on a non-GAAP basis in the second quarter was $94.8 million or $0.91 per diluted share, that compares to $106.6 million or $1.04 per diluted share in Q2 of last year.
For both GAAP and non-GAAP, net income in the second quarter was above the guidance that we gave and that was due to the revenue coming in higher than what we had expected.
During the second quarter, we generated about $83 million in cash from operations which compares to the $66 million generated in last year's second quarter, and we ended the second quarter this year with about $1.2 billion in cash and investments.
During the second quarter, we bought back about 760,000 shares of our common stock and ended the quarter with about $76 million of stock repurchase authorization still available.
We also announced today a cash dividend of $0.22 per share.
The dividend will be payable on May 25, 2021, to shareholders of record on May 17, 2021.
So now let's talk about the forward outlook.
three months ago, when I went through the outlook for Q2, I said then based on a variety of factors and assumptions, that we could see a scenario for second half revenues in the mid- to high 500s.
Now with Q2 behind us, our updated scenario is for second half revenue ranging from $560 million to $600 million.
And if I focus more specifically on Q3, we anticipate that third quarter total revenue could range from $260 million to $290 million.
Within that, licensing could range from $250 million to $275 million, while products and services revenue could range from $13 million to $18 million.
In terms of the assumptions we've made about market conditions, industry analyst reports indicate that PC TAMs in the second half could be higher on a year-over-year basis.
However, for TVs and other consumer devices, industry reports continue to indicate that TAMs could be down in the second half because of an uptick in demand that happened last year in the middle of the pandemic, but might not repeat this year.
At the same time, we are expecting organic growth in the second half, and that's on a year-over-year basis.
Driven by broader adoption of our Dolby technologies broadly across various markets.
And we also anticipate higher revenue from our cinema-related businesses in the second half as that industry starts to recover compared to where it was last year.
So let me move on to the rest of the P&L outlook for Q3.
Q3 gross margin on a GAAP basis is estimated to range from 88% to 89%, and the non-GAAP gross margin is estimated to range from 89% to 90%.
Within that, products and services gross margin is estimated to range from about breakeven to $1 million positive on a GAAP basis and from $1 million to $2 million positive on a non-GAAP basis.
Operating expenses in Q3 on a GAAP basis are estimated to range from $210 million to $220 million; and operating expenses in Q3 on a non-GAAP basis, are estimated to range from $185 million to $195 million.
Now the increase in operating expenses from Q2 to Q3 is being driven mainly by our marketing programs that from a timing standpoint, have more of their activities taking place in the second half this year, which also means that at this point, Q4 expenses could be at least as much as what we spend in Q3.
But I'd like to point out that for the year as a whole, the marketing expenses at the high end of our opex range would be similar to what they were last year, just timed differently.
We'll give you an update on this when we report our Q3 results.
So let's finish up the Q3 outlook.
Other income is projected to range from $1 million to $2 million for the third quarter, and that's $1 million to $2 million for the third quarter.
And our effective tax rate for Q3 is projected to range from 20% to 21% on both a GAAP and non-GAAP basis.
Based on a combination of the factors I just covered, we estimate that Q3 diluted earnings per share could range from $0.15 to $0.30 on a GAAP basis and from $0.37 to $0.52 on a non-GAAP basis.
So with that, I'll kick it back over to Mr. Yeaman.
As I'm sure most of you or all of you saw, we also announced today that Lewis has made a decision to retire later this year.
Over the last nine years, Lewis has played an integral role in building our strong financial position, navigating new business models, and just overall supporting the expansion of Dolby experiences.
He's built a very strong team.
He's mentored countless employees, both within and beyond the finance organization.
And Lewis is going to be working closely with me to ensure a smooth transition as we work to identify our next Chief Financial Officer.
So we've still got Lewis.
We're going to enjoy that for now.
And then we'll be happy to -- that Lewis will have more time to focus on his family.
So Kevin, is it true that when I first told you, you said good riddance?
I think you might have misinterpreted that.
I can't believe now that they actually have books out there called Dad Jokes because I think all my jokes probably fit into that category, but it has definitely been a privilege to serve as the company's Chief Financial Officer and lot of great memories.
And since we're all about the experience, I can definitely say that I've had my own unique Dolby experience here.
So I look forward to a smooth transition as we move on to the next phase.
Company is in great shape.
Great shape, great promise ahead.
So I will happily watch from sidelines.
Well, Lewis, I haven't heard anyone disagree with you yet when you talk about the quality of your humor.
And we are going to make sure and get the most out of your remaining transition time.
And with that, I'm sure our audience is eager to get to questions.
We've covered a lot of ground.
 Assistant:

Chosen response:
q2 non-gaap earnings per share $0.91.
q2 gaap earnings per share $0.73.
sees q3 gaap earnings per share $0.15 to $0.30.
sees q3 revenue $260 million to $290 million.
sees q3 2021 non-gaap earnings per share $0.37 to $0.52.


Prompt:
Human: In particular, we are currently in the midst of the COVID-19 pandemic.
The extent of its continued impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic.
All of which continue to evolve and remain uncertain at this time.
As for the content of today's call Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2020 outlook and Kevin will finish with a discussion of the business.
And I hope you're all staying safe out there.
I'm glad to report that Q3 revenues came in at the high-end of the scenario that we provided three months ago and our earnings were above the range as we had a large tax benefit in the quarter to go along with some lower than projected operating expenses.
While we did do better than Q3 outlook, its worth noting that the numbers were lower than the original forecast from the start of the year before COVID-19 came into the picture.
So here the numbers.
Third quarter revenue was $247 million, compared to $352 million in Q2, and $302 million in Q3 of last year.
Our Q3 revenue guidance coming into the quarter was a range of $225 million to $250 million.
Now if I compare that to what we assumed in our guidance, revenues from TVs, PC and mobile were at the higher end, while consumer electronics and set-top boxes were at the lower end of our scenario.
Products and services were at the high-end of the range, but remember that we had lowered our expectations by 70% to 80%, because of the significant impact of COVID-19 shutdowns on the cinema industry.
Now looking at total company quarter-over-quarter, revenue was down by about $105 million from Q2, roughly half of that was driven by timing of revenue under contracts, as well as lower recoveries, and roughly the other half of that was attributable to the impact from COVID-19, which includes lower royalties from unit shipments across a variety of devices, lower sales of cinema products and services and lower revenue from box office share at Dolby Cinemas.
Now looking at total company year-over-year, revenue was down by about $55 million versus last year's Q3, and that was predominantly attributable to COVID-19, and similar to what I said a minute ago, lower unit shipments, lower products and services and lower Dolby Cinema revenue.
The composition of Q3 revenue was $235 million in licensing; and $12 million in products and services.
So, let's go through a breakdown of licensing revenue by end market, starting with Broadcast.
Broadcast represented about 38% of total licensing in the third quarter.
Broadcast revenues were down about 34% year-over-year, and that was driven by lower recoveries and lower unit volume due to the pandemic, despite the fact that adoption of Dolby Vision and Dolby Atmos into TVs and set-top boxes is higher than last year.
On a sequential basis, Broadcast was down by about 31% due to lower recoveries and lower unit volume.
Mobile represented approximately 33% of total licensing in Q3.
Mobile was up by about 65% over last year, due to higher recoveries and revenues from our patent programs, offset partially by unit volume impact from the pandemic.
On a sequential basis, Mobile was up by about 3%, driven by recoveries offset partially by unit volume impact from the pandemic.
PC represented about 10% of total licensing in the third quarter.
PC was down by about 4% year-over-year, due to lower recoveries and lower unit volume, although, its worth noting that adoption of Dolby Vision and Dolby Atmos of the PCs has increased since last year.
And sequentially PC was down nearly 50%, due to timing of revenue under contracts and also lower recoveries.
Consumer electronics represented about 9% of total licensing in the third quarter and on a year-over-year basis CE licensing was down by about 29%, driven by lower volume and lower recoveries.
On a sequential basis, CE was down by nearly 60%, due to timing of revenue under contracts, as well as lower unit volume.
Other markets represented about 10% of total licensing in the third quarter.
They were down by about 34% year-over-year due to significantly lower revenues from Dolby Cinema, because nearly all of those screens were closed for the quarter and lower revenues from gaming due to console life cycles.
On a sequential basis, Other Markets was down by about 16% driven by lower revenue from Dolby Cinema and from via admin fees and those are the fees in the patent pool program that we administer.
And this was offset partially by higher recoveries in automotive and gaming.
Beyond licensing our products and services revenue was $11.8 million in Q3, compared to $23 million in Q2, and $30.3 million in last year's Q3.
We had anticipated a big drop-off in sales in this category, as most of this revenue comes from equipment that we sell to cinema exhibitors.
And these customers in general, continue to be negatively affected by the pandemic.
Now let's cover margins and operating expenses for Q3.
Total gross margin in the third quarter was 87.9% on a GAAP basis, and 89% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $5.5 million in the third quarter, due to fixed cost not fully covered by the lower volume that we ran.
And as a reminder, the guidance I gave at the beginning of the quarter was for GAAP gross product margin to range from minus $6 million to minus $9 million.
Products and services gross margin on a non-GAAP basis was minus $3.5 million in the third quarter for the same reasons as I just went over in the GAAP discussion, and there as a reminder, our guidance for non-GAAP product gross margin was minus $5 million to minus $8 million.
Operating expenses in the third quarter on a GAAP basis were $182.9 million, compared to $209 million in Q2.
Operating expenses in Q3 were about $8 million less than the low end of the range we've guided, mostly driven by timing of certain marketing programs that were pushed into Q4, lower legal expenses and lower travel and outside services.
Operating expenses in the third quarter on a non-GAAP basis were $159.2 million, compared to $188.4 million in the second quarter.
And the Q3 non-GAAP total was also below the range we projected and for the same reasons that I discussed in the GAAP expenses.
Operating income in the third quarter was $34.1 million on a GAAP basis, or 13.8% of revenue, compared to $34.3 million or 11.3% of revenue in Q3 of last year.
And last year's Q3 included a $30 million charge for restructuring mostly associated with an early exit from a leased facility.
Operating income in the third quarter on a non-GAAP basis was $60.5 million, or 24.5% of revenue, compared to $85.9 million or 28.4% of revenue in Q3 of last year.
Income tax was a $27.4 million benefit in Q3 on a GAAP basis, and a $21.2 million benefit on the non-GAAP basis.
The Q3 income tax amounts include approximately $36 million of discrete benefits for a specific item that were resolved during the quarter.
Net income on a GAAP basis in the third quarter was $67.3 million, or $0.66 per diluted share, compared to $39.6 million or $0.38 per diluted share in last year's Q3.
Net income on a non-GAAP basis in the third quarter was $87.5 million or $0.86 per diluted share, compared to $79.3 million, or $0.76 per diluted share in Q3 of last year.
For both GAAP and non-GAAP net income in Q3 was above our original guidance, due to revenue being at the higher end of our range, operating expenses at the lower range and the favorable income tax that I discussed.
During the third quarter, we generated about $134 million in cash from operations, which compares to about $91 million generated in last year's third quarter, and we ended the third quarter with a little over $1.1 billion in cash and investments.
During Q3, we bought back about 500,000 shares of our common stock and ended the quarter with about $230 million of stock repurchase authorization still available.
We also announced today a cash dividend of $0.22 per share, which will be payable on August 26, 2020 to shareholders of record on August 17th, 2020.
Now let's cover the outlook for Q4.
Three months ago, when I went over the guidance for Q3, I highlighted the challenges that we are facing in the environment.
Consumer demand was dropping, visibility was much more limited than usual, and industry data reports were not consistent or current.
Fast forward to now, we have updated TAM data for some of our end markets, but not all of them.
Customer visibility is still very limited and remember we won't have actual shipment data for the June quarter until all our customers send us the reports over the next few months and the economy is still pretty uncertain.
So with that as a backdrop, here's our current scenario for Q4, along with some key assumptions that we've embedded into the outlook.
Let's start with products and services revenue, most of which goes into the cinema industry.
The screens are opening more slowly than we thought last quarter, so we are assuming that there will not be any significant uptick in equipment, purchasing activity from exhibitors in Q4.
We estimate that products and services revenue in Q4 could range from $10 million to $15 million.
Let's talk about licensing.
We estimate that licensing revenue in Q4 could range from $215 million to $240 million, that's in comparison to the $235 million that we had in Q3.
As I look at the transition from Q3 actual to the Q4 outlook scenario, there is downward movement from timing of revenue under customer contracts.
This is not unusual, and I think of it as Dolby seasonality.
In other words, within the course of our fiscal year, we tend to have higher revenue in our Q2 and our Q3, and lower amount in our Q1 and Q4, and a lot of this is because of timing of revenue under various contracts.
Partially offsetting it this year is an assumption that total unit shipments could increase modestly in Q4 over Q3 as consumer spending starts to improve.
Our Q4 scenario assumes that there will roughly be a 5% improvement in unit shipments plus or minus blended across all device categories.
For Q4, we're also assuming very little revenue from Dolby Cinema box office share.
So to summarize, our scenario for total revenue in Q4 is a range of $225 million to $255 million.
If I compare that to last year's Q4 actual revenue of $299 million, the majority of the potential decline would be attributable to the economic ripple effect of the pandemic, and the remainder would largely be due to lower recoveries.
Gross margin for Q4 on a GAAP basis is estimated to range from 85% to 86%; and non-GAAP gross margin is estimated to be about 1 percentage point higher than the GAAP number.
Products and services gross margin will remain a negative territory in Q4, mainly because of fixed costs that are not fully covered at the lower revenue levels.
At the revenue range in the outlook I provided, products and services gross margin on a GAAP basis could range from minus $6 million to minus $9 million in Q4; and on a non-GAAP basis, it could range from minus $5 million to minus $8 million.
Operating expenses in Q4 are estimated to range from $187 million to $197 million on a GAAP basis; and from $167 million to $177 million on a non-GAAP basis.
Other income is projected to range from $2 million to $3 million for the quarter; and our income tax rate for the fourth quarter is projected to range from 19% to 21% on both the GAAP and non-GAAP basis.
Based on a combination of the factors I just reviewed, we estimate the Q4 diluted earnings per share on the GAAP basis could range from five -- from about $0.05 to about $0.20; and then on a non-GAAP basis, we estimate, it would range from about $0.22 to $0.37.
And as for the full-year, if you do the math, that would mean that our FY '20 revenue for the full-year could range from $1,115 million to $1,145 million; GAAP diluted earnings per share could range from $2.04 to $2.19; and non-GAAP diluted earnings per share could range from $2.76 to $2.91.
With the strength of our financial model, balance sheet and value proposition, Dolby continues to be well positioned to navigate through these challenging times.
Our people continue to bring their creativity and passion to enable more Dolby experiences to more people around the world.
While our Q3 revenues came in at the high-end of our scenarios, there is still a lot of uncertainty across many of the markets in which we operate.
In addition to lower consumer spending the pandemic has resulted in some shifts in the timing of new customer wins and revenues.
At the same time, our partners remain deeply engaged with enabling new Dolby Vision and Dolby Atmos experiences.
As consumer spending does return, we are confident that with our strong positioning across a broad range of devices and services, we will return to our path of driving revenue and earnings growth.
Our formula for growth has always started with increasing the amount of compelling content available at Dolby.
The Dolby Vision and Dolby Atmos experience in movie and TV content has led to growing adoption across a broad range of devices.
We are also expanding the Dolby experience in areas such as gaming and music that broaden our value proposition and create more opportunities in device categories like mobile, PC and automotive.
In addition, we are beginning to address a growing population of content beyond premium entertainment, most recently with the launch of our development platform Dolby.io.
All of these gives us confidence in our ability to drive long-term growth.
Let's turn to some of the highlights this quarter.
As people are watching a growing amount of streamed content, Dolby Vision and Dolby Atmos continues to be highlighted within the content that matters most to people.
The highly anticipated releases of Hamilton on Disney Plus and Greyhound on Apple TV Plus are both available in Dolby.
This quarter, we began to see the first titles in Dolby Vision on Google Play.
And Hotstar, the largest streaming service in India, began to support Dolby Vision for Disney Plus content.
This quarter, we saw several partners adopt Dolby Vision and Dolby Atmos within their products.
Apple, which supports Dolby Vision and Dolby Atmos across most of their devices, announced that AirPods Pro will support Dolby Atmos with the release of iOS 14.
Sonos launched the Sonos Arc, their first soundbar that supports Dolby Atmos.
Free, one of the largest Internet service providers in France, launched their first set-top box to support Dolby Vision and Dolby Atmos.
And last month, Xiaomi launched their first TV supporting the combined experience.
Adoption of both Dolby Vision and Dolby Atmos within TV is continuing to expand globally, most notably in India.
This quarter TCL, Sony, OnePlus and Nokia all announced new TV models in India supporting the combined experience.
Also, Panasonic expanded their adoption of Dolby Vision IQ to additional models in this quarter.
In FY '19, Dolby Vision was included on about 10% of 4K TV shipments, and we are on track to materially increase that adoption rate for fiscal '20 with a significant growth opportunity still ahead of us.
Our strong presence in movie and TV content has enabled the initial option of Dolby Vision and Dolby Atmos within PC and mobile devices.
Beyond that, we see a significant opportunity to accelerate the adoption by enabling more experiences on these devices, including gaming and music.
Recently, title significantly expanded the number of devices that support Dolby Atmos music to include Dolby Atmos enabled sound bars and home theater equipment.
We are also seeing examples of how Dolby Atmos can create unique experiences across a wide range of music genres.
This quarter, we saw examples of classical music from John Williams, and recordings from the London Philharmonic Orchestra mixed in Dolby Atmos.
Empire, an independent label, began releasing music in Dolby Atmos from artists like Fat Joe and Remy Ma.
The music in Dolby experience elevates our engagement with partners and strengthen the value proposition for Dolby Atmos in existing device categories; such as mobile phones and creates new opportunities for us in areas such as automotive and smart speakers.
Let me shift to Cinema.
During the quarter, most cinemas remained closed with a few regions slowly beginning to reopen.
The closure of cinemas around the world has significantly reduced demand for our cinema products.
We believe that when Cinemas do begin to reopen, exhibitors will look to highlight their premium offerings and consumers will seek out the best experience.
And there is none better than Dolby Cinema.
Last month, the first Dolby Cinema in South Korea was opened with our partner Megabox.
We have also added our second partner that will bring Dolby Cinemas to Saudi Arabia, where we saw our first site opened just last week.
As we look ahead, we are excited by the unique opportunity to significantly broaden the content experience we addressed with Dolby technologies.
During the quarter, we launched our developer platform Dolby.io.
Dolby.io enables developers to access Dolby technology to raise the bar on the quality of the media and communications experiences within their apps and services using our APIs.
Among our initial customers, we have seen the application across a wide range of use cases, including podcast, e-learning and telehealth.
Beginning a few weeks ago, artists can optimize the quality of their music recordings with mastering on SoundCloud powered by Dolby's platform.
We are excited by the initial reception of Dolby.io, and by the potential to bring Dolby to the growing amount of media and communications content, it is part of our daily lives.
To wrap up, Dolby has a solid foundation with a strong business model and more than ever, people want immersive entertainment and communications experiences.
The quality of these experiences matter.
We continue to focus on growing the number of devices that support Dolby Vision and Atmos.
We will accelerate adoption and broaden the device categories that support the Dolby experience by enabling new forms of content like music and gaming.
And we are excited by the opportunity to enable an even broader range of Dolby experiences most recently with the launch of Dolby.io.
All of these reinforces our belief in the opportunities that are still ahead of us and give us confidence in our ability to drive revenue and earnings growth.
 Assistant:

Chosen response:
dolby laboratories q3 non-gaap earnings per share $0.86.
q3 non-gaap earnings per share $0.86.
q3 gaap earnings per share $0.66.
sees q4 2020 revenue $225 million to $255 million.
sees q4 2020 gaap earnings per share about $0.05 to $0.20.
q4 diluted earnings per share is anticipated to range from about $0.22 to $0.37 on a non-gaap basis.
fy diluted earnings per share is anticipated to range from $2.76 to $2.91 on a non-gaap basis.


Prompt:
Human: I'm Pankaj Gupta, Dow investor relations vice president.
And joining me on the call today are Jim Fitterling, Dow's chairman and chief executive officer; and Howard Ungerleider, president and chief financial officer.
Dow's Forms 10-Q and 10-K include detailed discussions of principal risks and uncertainties which may cause such differences.
Unless otherwise specified, all financials, where applicable, exclude significant items.
We will also refer to non-GAAP measures.
On Slide 2, you will see our agenda for the call.
Jim will begin by reviewing our third-quarter highlights and operating segment performance.
Howard will share our modeling guidance and outlook, and then Jim will recap our strategy for disciplined value growth that we outlined at our investor day earlier this month and why Dow continues to be a compelling investment opportunity.
Starting on Slide 3.
In the third quarter, Dow achieved top and bottom-line growth, both year over year and sequentially.
Our proactive storm preparations enabled us to maintain the safety of our team and community and recover quickly.
We delivered a 53% sales increase year over year with double-digit gains in every segment, business, and region.
We also recorded a 7% increase in sales over the prior quarter.
We captured strong price momentum, driven by tight supply demand balances across our key value chains, and we achieved volume growth of 2% both year over year and sequentially, supported by continued strong end-market demand despite supply and logistics constraints.
We increased operating EBIT by more than $2.1 billion year over year with improvements in all segments and businesses and $58 million higher sequentially.
Key contributors included year-over-year margin expansion of 1,170 basis points, driven by price momentum and demand growth, and increased equity earnings, up $189 million, for margin expansion at our Sadara and Kuwait joint ventures.
Our continued focus on cash generation and our balanced disciplined capital allocation enabled us to deliver cash flow from operations of $2.7 billion, up $958 million year over year, driven by margin expansion from price momentum in key value chains.
We returned a total of $918 million to shareholders through our industry-leading dividend of $518 million, plus $400 million in share repurchases.
And we also reduced gross debt by more than $1.1 billion in the quarter.
Our proactive liability management actions to tender existing notes have resulted in no long-term debt maturities due until 2026, and we've reduced annual interest expense by more than $60 million.
Overall, Dow continues to deliver on its priorities, and we see further strength ahead as we benefit from a favorable macro backdrop and execute our disciplined strategy to decarbonize our footprint and grow earnings, driving significant value for all stakeholders.
Moving to our segment performance on Slide 4.
In the packaging and specialty plastics segment, operating EBIT was $2 billion, compared to $647 million in the year-ago period.
Sequentially, operating EBIT was down $60 million.
Price gains in both businesses and in all regions led to margin improvement in the core business and increased equity earnings.
On a sequential basis, operating EBIT margins declined by 300 basis points on higher feedstock and energy costs.
The packaging and specialty plastics business reported a net sales increase year over year, led by local price gains in industrial and consumer packaging and flexible food and beverage packaging applications.
Volumes declined year over year due to lower polyethylene supply as a result of planned maintenance turnarounds and weather-related outages in the quarter.
Compared to the prior quarter, the business delivered price and volume gains on strong demand in industrial and consumer packaging applications, which were partly offset by hurricane-related outages.
Moving to the industrial intermediates and infrastructure segment.
Operating EBIT was $713 million, up $609 million year over year, primarily due to continued tight supply and demand in both businesses.
Sequentially, operating EBIT was up $65 million, and operating EBIT margins expanded by 50 basis points on volume and price gains in both businesses.
The polyurethanes and construction chemicals business increased net sales compared to the year-ago period with price gains in all regions on tight supply demand balances.
Volume declines year over year primarily reflected the planned transition of a low-margin coproducer contract, as well as weather-related outages and third-party supply constraints.
Sequentially, the business delivered sales growth due to increased local price and volume from additional supply availability to meet resilient demand.
The industrial solutions business delivered a net sales improvement compared to the year-ago period with local price gains in all regions.
Volume increased year over year on strong demand for materials in industrial manufacturing and energy applications.
Net sales also increased sequentially, driven by volume growth, primarily in coatings and industrial applications from increased supply and local price gains in all regions.
And finally, the performance materials and coatings segment reported operating EBIT of $284 million, up $209 million versus the same quarter last year as margins increased 750 basis points due to strong price momentum and robust demand recovery for silicones and industrial coatings offerings.
Sequentially, operating EBIT was up $59 million on price gains, leading to margin expansion of 210 basis points.
The consumer solutions business achieved higher net sales year over year with price gains in all regions.
Volume increased over the prior year on stronger consumer demand for personal care, mobility and electronics offerings.
Sequentially, sales were down as price increases in all regions were more than offset by volume declines as a result of planned maintenance and third-party supply and logistics constraints.
The coatings and performance monomers business delivered increased net sales year over year as higher raw material costs and tight supply/demand balances led to price gains in all regions.
Volumes were down year over year as demand recovery for industrial coatings was more than offset by weather-related outages and third-party supply and logistics constraints.
Sequentially, the business delivered local price gains in all regions, supported by increased volume due to continued strong demand for acrylic monomers and architectural coatings and increased supply availability.
Turning to Slide 5.
In the fourth quarter, we see a continuation of robust demand growth across our packaging infrastructure, consumer, and mobility end markets.
Brand owner inventory levels remain low.
And as a result, we anticipate higher seasonal demand continuing into the holiday season this year.
In packaging and specialty plastics, we continue to see resilient demand for packaging applications and for our differentiated functional polymers.
Global polyethylene supply remains constrained as the industry completes higher turnaround activity and supply chains recover from weather events on the U.S. Gulf Coast.
We exited the third quarter experiencing higher raw material and energy costs which we anticipate will likely persist through the fourth quarter.
We expect these costs to be an approximately $350 million headwind sequentially.
Dow will continue to utilize our broad geographic footprint and best-in-class feedstock flexibility to help mitigate these impacts.
We also anticipate a $175 million tailwind from turnarounds in the quarter as we completed our planned maintenance at our cracker in Canada.
In industrial intermediates and infrastructure, continued consumer demand for furniture and bedding, appliances, pharma, and home care are expected to keep supply tight in our key value chains.
Due to the weather-related outages in the third quarter, some of our planned turnaround activity was moved to the fourth quarter.
Sadara will also start a turnaround at its isocyanate facility in the fourth quarter as well.
Altogether, we anticipate $100 million in this segment from turnaround impacts.
Short-term increased energy costs in the U.S. Gulf Coast and Europe are expected to be an additional $100 million headwind in the quarter.
We continue to see sequential recovery in industrial activity, particularly for energy applications.
We anticipate this recovery will continue at least through the fourth quarter as industrial production continues to ramp up from very low inventory levels to meet demand.
In performance materials and coatings, demand for electronics, mobility, building, and construction continues to outpace supply.
Demand for architectural coatings is also expected to remain elevated due to persistently low inventory levels across the value chain.
Global production for silicones has been impacted by the recent dual control policy enforcement actions in China, with silicone metal prices almost three times their previous highs.
We intend to pull forward a scheduled turnaround at a siloxane facility in Zhangjiagang in China to coincide with government actions to curtail power usage.
Our current estimate for the quarter includes $125 million from increased raw material costs and turnaround impacts.
We'll continue to work on mitigating the impacts of rising raw material costs through our integrated position in both businesses.
Despite higher raw material and energy costs in the fourth quarter, Dow will continue to leverage its advantaged global footprint, structural cost, and feedstock advantages, as well as our broad suite of differentiated products, to meet growing demand.
On Slide 6, as we look ahead, we expect robust economic growth to continue.
With the Delta variant slowing the reopening of economies around the world, there remains significant pent-up demand globally, particularly across our industrial and consumer end markets.
Many industries continue to see elevated order backlogs, coupled with low inventory levels, as supply chain struggled to keep up with robust demand.
These supply chain disruptions are expected to persist, which will certainly prolong the ability to restock inventories across most value chains.
As a result, we expect tighter-than-forecasted market conditions to continue, a view strengthened by China's recent dual control policy that has impacted both cold olefins and methanol to olefins-based capacity, which represent more than 30% of China's total polyethylene production.
2022 GDP growth forecasts are well above historical averages in most areas of the world as industries ramp up to match the robust consumer demand with further upside as global chip shortages continue to extend the recovery in manufacturing.
Collectively, G7 countries have not yet fully recovered to pre-pandemic GDP.
This points to additional upside as economies return to more normalized consumption levels with degree of vaccination increasing, particularly in Asia, where levels remain low relative to the rest of the world.
Moving to Slide 7.
At our investor day earlier this month, we outlined how our differentiated portfolio and our focus on sustainability-driven innovation will enable more than $3 billion in underlying EBITDA improvement across the cycle.
Our restructuring program and digital investments will yield $600 million in increased EBITDA.
Both are in progress, and our restructuring program is on track to achieve its $300 million run rate by year end.
We also have a suite of higher return, lower risk, and faster payback capital and operating investments that will enable an additional $2 billion in EBITDA in the near term.
And our investments to decarbonize and grow at our Fort Saskatchewan site in Alberta, Canada are also expected to deliver approximately $1 billion in increased EBITDA.
And as we've already shared, we're executing against a favorable macro backdrop that we expect will continue to support constructive market fundamentals for our key value chains.
Turning to Slide 8.
You'll see the detailed list of these low-risk growth investments.
Our capital investments are expected to generate $1 billion in EBITDA through incremental capacity expansions, debottlenecking, and enhanced feedstock flexibility across our operating segments.
We're already making good progress.
For example, in packaging and specialty plastics, our Fort Saskatchewan expansion to add ethylene capacity of 65,000 metric tons per year to support growing polyethylene demand is now complete and will ramp by the end of the fourth quarter.
Our FCDH pilot plant in Louisiana will start up in 2022, featuring 20% to 40% lower capex and 5% to 7% lower opex while reducing CO2 emissions by up to 20% compared to other PDH technologies.
In industrial intermediates and infrastructure, our debottlenecking project to add 60,000 metric tons per year of aniline will be fully online by year end.
And earlier this year, we signed an MOU for a new South China hub to advance local supply and formulating capabilities to serve the fast-growing Asia-Pacific market.
In performance materials and coatings, we recently completed a capacity expansion at one of our silicone polymer plants.
And by year end, we will complete a new silicone sealant compounding unit to enable sustainable solutions for high-performance building and infrastructure applications.
And we are progressing our 50 kt methacrylate investment on the U.S. Gulf Coast to support global end markets, such as inks, resins, and packaging materials, which is scheduled to come online in the first half of next year.
In addition, our operating investments are also expected to generate another $1 billion in EBITDA as we improve our production capabilities and shift our product mix to higher growth and higher value markets.
For example, in industrial intermediates and infrastructure, we're increasing capabilities and shifting our mix toward higher-margin polyurethane systems for mobility and consumer applications.
Our industrial solutions business is increasing capabilities to supply differentiated materials into the textile market.
Our ECOFAST collaboration with Ralph Lauren lowers energy usage by 40% and water usage by 50% in the fabric dying process.
And by 2025, the brand aims to incorporate this technology in more than 80% of its solid cotton products.
In performance materials and coatings, we're expanding our ability to formulate differentiated silicones for a number of attractive markets, including silicone adhesives for foldable displays in consumer electronics, thermal conducted silicone solutions for electric vehicles, and silicone solutions for 5G where the market is expected to more than double over the next 10 years.
And we recently partnered with customers on high-value innovations like paper barrier coating applications that use our award-winning Rhobarr polyolefin dispersion technology and Callaway's Supersoft golf balls, which feature a new hybrid cover made with Dow's paraloid-impact modifier.
In packaging and specialty plastics, we're enhancing our extensive conversion and testing capabilities to commercialize residents through packaging design, speeding the innovation process, and expanding the addressable market for higher margin and more sustainable products.
For example, we're already benefiting from the nine-layer blown film extrusion line project completed this year.
We're also making investments to improve asset reliability, which will increase output and expand margins.
And we're using digital technology for customer trials and process automation to accelerate catalyst development for new resins and processes like FCDH where we can typically be 100x more efficient than conventional experimentation.
Collectively, our slate of near-term investments will generate an increase of approximately $2 billion in underlying EBITDA, and we intend to deliver this growth with a disciplined and balanced approach, maintaining our top quartile performance in cash flow, cost structure, debt reduction, and shareholder remuneration.
Turning to Slide 9.
The strategy we outlined at our investor day builds on our long history of industry leadership.
Our plan enables us to capture demand from sustainability drivers, achieve zero Scope 1 and 2 carbon emissions, and deliver meaningful underlying earnings and cash flow growth for years to come.
Our path to decarbonize our footprint and grow earnings is a phased site-by-site approach that both retrofits and replaces end-of-life assets with low-carbon-emission facilities while also expanding our capacity.
This plan will deliver a 30% reduction in our CO2 emissions between 2005 and 2030 through a disciplined approach that manages timing based on affordability, macro and regulatory drivers around the world.
Our Texas 9 cracker proves that we can do this and do it well.
Texas-9 is 60% lower-carbon intensity than any asset in our fleet, and that's without any specific design for carbon capture or hydrogen.
The project was delivered with 20% better capital efficiency and 12 months faster than any other crackers built in that wave.
Overall, the project has a 65% lower conversion cost, is running consistently at more than 110% of nameplate capacity, and has delivered greater than 15% return on invested capital since start-up.
We will leverage key learnings from Texas-9 as we plan to build the world's first-ever net-zero carbon emissions ethylene cracker and derivatives complex in Fort Saskatchewan, Alberta, delivering approximately $1 billion in EBITDA, as Howard outlined earlier.
This project will more than triple our ethylene and downstream derivative capacity at the site while decarbonizing emissions for 20% of our global ethylene capacity.
We selected this site due to the availability of carbon capture, infrastructure, advantaged feedstocks, and supportive government policies and incentives.
On Slide 10, as we capture these attractive growth opportunities, we will maintain our balanced and disciplined financial approach since spin.
We are committed to keeping capex at or below D&A, well below pre-spin levels while targeting return on invested capital above 13% across the economic cycle.
We will continue to align our capital spend to the macroeconomic environment, our affordability, and return targets.
Our investments align to three categories: First, we'll maintain our foundation and maximize the return of our existing assets while ensuring safe and reliable operations.
Second, we'll execute our pipeline of faster payback, lower-risk incremental growth projects for downstream and sustainability-driven applications growing faster than GDP.
And we'll invest approximately $1 billion per year to decarbonize our footprint and grow earnings.
These investments enable us to capture increasing demand for low carbon footprint products while derisking the enterprise with lower emissions assets.
In closing, on Slide 11, Dow is well-positioned to deliver significant long-term value for shareholders.
We have actions in place to both decarbonize our footprint and grow the enterprise as we achieve an additional $3 billion in underlying EBITDA, maintain industry-leading cash flow generation, and drive toward zero Scope 1 and 2 carbon emissions.
Our balanced capital allocation approach targets more than 13% return on invested capital, keeps capex within D&A, and return 65% of net income to shareholders across the economic cycle.
All of this is underpinned by our industry-leading portfolio, cost position, and strong track record of innovation that enables us to deliver differentiated products and solutions for our customers and a more sustainable world.
Operator, please provide the Q&A instructions.
 Assistant:

Chosen response: continue to see robust end-market demand that is expected to extend into 2022.


Prompt:
Human: As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.
The third quarter was a strong one for DiamondRock.
Hotel profits hit their highest levels since the inception of the pandemic.
In fact, hotel RevPAR was within 20% of the comparable quarter in 2019 with 12 of our 31 hotels actually exceeding the comparable quarter results in 2019, and five hotels setting all-time highs.
The strength of these results exceeded our internal expectations.
Our portfolio benefited from its geographic footprint and a concerted effort by our team to maximize the benefits from the resurgence in travel demand.
Our portfolio took nearly 1,300 basis points of RevPAR index from our competitors in the third quarter.
Moreover, having the industry's highest percentage of full service hotels, with short-term management agreements, also play to our advantage in managing cost and driving profit flow-through.
In total, this powerful combination enabled DiamondRock to generate a healthy $38.9 million of adjusted EBITDA and $0.10 of positive adjusted FFO per share.
In the quarter, we saw travel demand increase in all travel segments with leisure leading the way.
Additionally, group and business transient also showed meaningful acceleration.
There were some real positives for business travel trends in the quarter.
We saw BT revenue jumped to 84% of the comparable 2019 levels with occupancy up 26 percentage points over the second quarter.
Encouragingly, business transient ADR was just 1% below Q3 2019 levels.
The outlook for group is equally encouraging.
Lead generation in the third quarter grew to over 12,400 leads, representing over 2.1 million future room nights.
July was the best month for lead volume with over 750,000 room nights.
Wile the Delta variant that emerged late summer led to a drop off in activity in August, meeting plans appear to have shrugged off the headlines as production snapped back close to July pace by September.
In addition to strong operating trends, which Jeff will discuss in a moment, DiamondRock continues to make tremendous progress on internal and external growth initiatives to drive outsized cash flow growth in 2022.
Let me highlight a few of the bigger ROI projects.
Our Vail Resort accessioned $40 million repositioning.
By the end of this month, the resort will be relaunched as The Hythe Vail Resort and Spa, a Luxury Collection Hotel.
The repositioned resort is expected to generate several million dollars of incremental EBITDA.
Our Barbary Beach Key West Resort will also complete its conversion in November.
It will be relaunched as the only Margaritaville Resort in the Florida Keys.
We expect the repositioning to allow us to push average rate by $15 and to generate several million dollars of incremental retail and bar sales.
The last ROI project I'll highlight is in Denver, where we are underway with the upbranding of the JW Marriott to a Luxury Collection Hotel to be named The Clio.
This one should be completed in the first quarter of 2022.
These ROI repositionings are expected to deliver IRRs north of 30%.
As you might have guessed, we are big believers in these type of projects, and our past success gives us great confidence.
As a testament to DiamondRock's track record, I'm proud to announce that The Gwen was named in Conde Nast Travelers 2021 Readers Choice Awards as the number 1 hotel in Chicago, and number 8 in the world.
The highest ranking of any REIT owned hotel.
In addition to The Gwen, Conde Nast also recognized several of our other outstanding hotels, including Cavallo Point in Sausalito, both of our hotels in Key West and L'Auberge's Resort in Sedona, Arizona.
As a final comment on ROI repositionings, I'll just mention that we are working on several other upbranding opportunities within the portfolio.
We hope to share those with you in coming months.
Let's turn to acquisitions and dispositions.
We have been active in upgrading and focusing the portfolio.
In the third quarter, we successfully recycled proceeds from our second quarter dispositions.
Our two new acquisitions are the Bourbon Hotel in the French Quarter of New Orleans and the Henderson Park Inn, a beach front resort in Destin, Florida.
These acquisitions align with our strategy to focus on hotels that resonate with today's traveler as they are experiential and leisure-oriented lifestyle hotels.
I am pleased to announce that both hotels are forecasted to exceed our underwriting for 2021.
In fact, the Destin Beach Resort, that deal is now tracking to be an 8.8% cap rate on 2021 NOI.
While this is great, we are not resting on our success.
We are actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets.
I'll start by highlighting DiamondRock's excellent liquidity, we finished the quarter with $538 million of total liquidity, comprised of $67 million of corporate cash, $71 million of hotel-level cash and $400 million of capacity on our revolver.
Leverage is conservative with only $1 billion of total debt outstanding against roughly $3.5 billion in hotels and resorts.
Overall, the balance sheet remains very strong.
As Mark mentioned, we expect to remain an active but disciplined acquirer of on-strategy properties.
We have over $300 million of investment capacity today while operating within our long-term leverage targets.
Let me share a few success stories in our portfolio this quarter.
Midweek occupancy at our urban hotels was up 26 percentage points over the second quarter.
The upbranding of The Lodge at Sonoma to the Autograph Collection has been very well received.
Since completion early in the third quarter, total RevPAR is nearly $460 a night with ADR up over $100 a night from the second quarter.
Third quarter ADR is 22% higher than 2019, whereas prior to renovation, ADR was 4% below 2019.
Performance has exceeded our expectation and The Lodge is expected to meaningfully exceed our budget for 2021.
The Hilton Burlington generated one of the three biggest upsides to budget during the quarter on strong RevPAR and margin gains.
Average daily rate was over $300 per night and among the 10 best in the portfolio.
For those who have never been, Burlington is a terrific college town that has quietly evolved into a foody destination anchored by some of the highest-rated craft breweries in the United States.
Our pair hotels in Key West continued to deliver strong performance with third quarter EBITDA margins 3,000 basis points above 2019 levels.
I must recognize the Henderson Park Inn, our newest acquisition for beating our underwriting with the third highest total RevPAR in the quarter, $777 a night, $777s.
Third quarter would have been even better, if not for the impact of wildfires in Northern California, which forced a six-week closure at The Landing at Lake Tahoe and resulted in $1.8 million of lost profit.
The resort is fine and back open now.
We filed an insurance claim and hope to collect lost profits in coming months.
As for our Bourbon Hotel, I should note that while Hurricane Ida did impact New Orleans, we were fortunate not to have any material damage.
In fact, our team quickly restored power to the Bourbon Hotel, one of the first hotels back online in New Orleans, allowing us to opportunistically book first responders.
We expect to beat original underwriting here for 2021.
Let's talk about profit flow-through and labor costs.
Third quarter wages and benefits were 30.4% of revenue, just 50 basis points higher than 2019 owing to a 2% improvement in man hours per occupied room.
Despite slightly higher overall labor costs, our asset management team and operators were able to develop several creative offsets to maximize overall profitability by optimizing revenue management for the labor environment.
This is how we held gross operating profit flow-through at a constant 45% in the third quarter versus the second quarter and why comparable third quarter hotel EBITDA margins were up over 300 basis points from the second quarter.
We think this is a great result in this environment.
Turning to Group, our geographic footprint is a real advantage for Group trends in 2022 and beyond.
Group revenue on the books for 2022 increased 14% from the second quarter, an acceleration from 8% in Q2.
Group revenue on the books for 2022 is now nearly 50% above the forecast for 2021.
Group rates for 2022 are $50 a night higher than 2021 year-to-date, owing to the fact many of DiamondRock's key group markets like Boston, Chicago, San Diego and Phoenix have strong convention calendars next year.
Across the entire portfolio, citywide room nights for 2022 increased 7% from the second quarter.
And compared to 2019, citywide room nights for Boston, Chicago and San Diego collectively are up 3% in 2022 and up 5% in 2023.
With that, let me turn the floor back to Mark for concluding remarks.
Recently, DiamondRock was again named the hotel sector leader by GRESB and number one among all lodging repeers.
Being a good corporate citizen and aligning these objectives with our business is a high priority for DiamondRock.
Let's turn to DiamondRock's setup for 2022 and beyond.
We think DiamondRock has four major competitive advantages over many of the peers.
First, our portfolio market exposure is uniquely favorable in three ways.
We have numerous resorts, benefiting from the boom in leisure travel, our well-located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in, and our Group recovery should be above industry average because of our geographic footprint with the convention calendars in our most important group markets all very strong through 2023.
The second advantage we have is the multiyear benefit from our hotels that have recently completed repositionings, such as The Lodge at Sonoma, The Hythe Vail, Margaritaville Key West and The Clio, Denver.
The third advantage is our industry-leading percentage of third-party terminable operating agreements.
This gives us more control and ability to manage costs in many of our peers.
This benefit is amplified by last year's conversion of nearly 20% of our portfolio from Marriott brand management, which should add over 50 basis points of portfolio margin expansion alone.
The last advantage I'll point out is our best-in-class asset management team's ability to implement strategies to gain market share.
There is no better evidence than stealing nearly 1300 basis points of share last quarter.
 Assistant:

Chosen response:
compname reports q3 adj ffo per share of $0.10.
q3 adjusted ffo per share $0.10.