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DTS, Inc. (NASDAQ:DTSI)

Q3 2008 Earnings Call

November 10, 2008 4:30 p.m. ET

Executives

Ann McGuinness – Investor Relations

Jon Kirchner – President, Chief Executive Officer

Melvin Flanigan – Chief Financial Officer

Analysts

Ralph Schackart – William Blair & Company

Alan Davis – D.A. Davidson & Company

Paul Coster – JPMorgan Chase & Company

Barbara Coffey – Kaufman Brothers, L.P.

Brian Thackray – Deutsche Bank

Mike Olson – Piper Jaffray & Company

Sanjay Puri – Walker Smith Capital

Jill Mastoloni – Catapult Capital Management

Stefan Mykytiuk – Pike Place Capital

Brad Hendrickson – Nokomis Capital

Operator

Welcome to the Q3 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Ann McGuinness of DTS Investor Relations. Please go ahead

Ann McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report third quarter 2008 financial results for DTS. Joining me on the call today are Jon Kirchner, President and CEO, and Mel Flanigan, CFO of DTS.

Before we begin, let me remind you that during this conference call management may make forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause DTS' actual results to differ materially from those expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including statements containing the words planned, expect, believe, anticipate and similar expressions that look to future events and performance. These statements may include, among others, plans, strategies and objectives of management for future operations, any statements regarding proposed new products, services or developments, any statements regarding future financial results or operating performance or economic conditions, statements of belief and any statements of assumptions underlying any of the foregoing.

Factors that could cause our actual results to differ materially from the forward-looking statements made during this call are more fully described in our most recent filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2008, which are available at www.sec.gov. Any forward-looking statements made during this conference call are based on current expectations and projections. The company does not intend to update these forward-looking statements to reflect events or circumstances arising after this call.

Again, this quarter the company is reporting the results of its Consumer Business as continuing operations and reporting the activities of the digital cinema and digital images businesses it sold during the second quarter of 2008 as discontinued operations. Income or loss from discontinued operations, net of tax, will appear as a single line item below Income from Continuing Operations on the company’s Statement of Operations. All financial results discussed in this call will reflect continuing operations unless otherwise noted.

Now, I will turn the call over to Jon. Please go ahead, Jon.

Jon Kirchner

Thanks, Ann, and thanks to all of you for joining us today as we report third quarter 2008 financial results. We are pleased with our operating results for the quarter, reporting revenue of $13.9 million and earnings per diluted share of $0.11. Our high margin licensing model continue to generate cash, which amounted to more than $4.7 million during the quarter, which we feel is particularly important in light of today’s challenging economy and a pull-back in consumer spending.

With our performance in the third quarter and confidence in our long-term prospects, we repurchased 700,000 shares at an average price of $20.49 per share over the past three months. Blu-ray products accounted for 11% of our revenue in the third quarter, essentially flat from the prior quarter and up from 9% in the third quarter of 2007. In dollar terms, Blu-ray-related revenues were up nearly 67% for the three months ended September 30, 2008, compared to the same period in 2007.

Sales of stand-alone Blu-ray players and Blu-ray-enabled PCs are now supplementing revenues from game consoles which previously constituted the majority of Blu-ray product shipments. Price points for stand-alone Blu-ray players are quickly dipping below the $200 mark as we head into the holiday season and we may see some units sold on promotion at a price around $150. In addition, we are seeing several retailers get aggressive about bundling Blu-ray players with televisions, significantly lowering the effective cost of the player and seeing the first televisions with integrated Blu-ray playback from Sharp.

Turning to the PC space, manufacturers increasingly are offering products that will support the BD (ph 00:07:26) format. However, significant increases in unit volumes are likely dependent upon a further decrease in the cost of Blu-ray components, which is unlikely to occur until the latter half of 2009. The potential for Blu-ray in the PC segment remains large and third-party estimates suggest that as many as 20 million PCs could ship with Blu-ray drives in 2009, up from just a few million projected in 2008.

Supporting Blu-ray hardware growth is the significant increase in the number of titles which are now approaching 900, and declining price points. So,me new releases are available at prices as low as $15.99 and certain older titles as low as $9.99. Importantly, retail support for the format is also increasing, with greater shelf space and promotional activities slated for Blu-ray in the upcoming weeks. According to recent reports, more than 100 Blu-ray playback devices are expected to be in the market by the end of the year, including players, game consoles and PCs, dramatically improving the range of choice, pricing and availability of products for consumers ready to enhance their home entertainment experience.

Taken in conjunction with important signs of growing industry support for Blu-ray, we believe that the foundation is being laid for a significant future growth in the format. However, in the short run, we are operating in a highly uncertain near-term (ph 00:08:45) environment. We are keenly interested in seeing retail sales results for the holiday season and how that impacts producer behavior in the next quarter or two.

Early information indicates that CE and PC production levels are declining in anticipation of weak consumer demand which would adversely impact our outlook for at least the first half of 2009. Regardless of any near-term uncertainties, we believe that DTS is well positioned to benefit as the economy stabilizes and demand for CE products, especially Blu-ray, accelerates over time.

Let me now turn the call over to Mel for a financial review.

Melvin Flanigan

Thanks, Jon and good afternoon everyone. Revenue for the third quarter was solid at $13.9 million and income from continuing operations was $2 million or $0.11 per diluted share. This compares to revenue of $10.7 million and income from continuing operations of 840,000 or $0.05 per diluted share, reported for the third quarter of 2007.

Revenue in the third quarter of 2008 included $1.6 million in royalty recovery payments, compared to zero in the same period of 2007. Stock-based compensation expense was $1 million in the third quarter of 2008 or $0.03 per diluted share net of tax, compared to 748,000 or $0.02 per diluted share net of tax in the third quarter last year.

Excluding the impact of royalty recoveries, year-over-year revenue growth was 15% for the quarter, driven primarily by strong growth in Blu-ray-related revenues and by continuing growth in our care business. Blu-ray revenues increased an impressive 67% in the third quarter of 2008, compared to the same period in 2007. With stand-alone Blu-ray players and PCs combined growing nearly 150% from last year’s third quarter, plug-in console revenues as expected grew a modest 13%.

Revenue from the car market was $2.7 million, up 38% year-over-year. As a reminder, this revenue stream is almost entirely from standard definition in-dash players, typically in higher-end car models. For the 9-month period total revenue was $42 million and income from continuing operations was 6.6 million or $0.36 per diluted share. This compares to revenue of $36.2 million and income of 5.2 million or $0.28 per diluted share reported in the first nine months of 2007.

Included in 2008 results was approximately $3.4 million in royalty recoveries, compared to 2.7 million in the same period of 2007. Also included in 2008 results was $3.2 million or $0.10 per diluted share net of tax in stock-based compensation, compared to $2.3 million or $0.07 per diluted share in the same period last year.

Gross margin in the third quarter of 2008 was about 98%, up slightly from the same period last year. SG&A expenses for the quarter were $8.9 million, and R&D expenses were 1.7, in line with our guidance of $10 to $12 million in total per quarter.

Operating profit for the third quarter of 2008 was $3 million, up 85% from 1.6 million a year ago. Our operating margin improved approximately six points to 22%, essentially in line with our expectations. Operating profit for the first nine months of 2008 was $9.3 million or 22% of revenue, up from 7.2 million or 20% of revenue a year ago, an increase of 29% in dollar terms.

Our tax rate for the third quarter of 2008 was approximately 43%, slightly above our expectations. This was due primarily to the effects of geographic revenue mix and to certain discreet tax accruals taken during the quarter. Looking forward, we expect our effective tax rate for 2008 to be approximately 39% and to see the rate trend slightly downward over the next several years.

Turning to the balance sheet. We closed the quarter with overall cash, cash equivalents, short and long-term investments of $106 million. Through September 30th we generated approximately 12.9 million in cash flow from operations during 2008. As of September 30th we continued to hold about $16 million in auction rate securities. As many of you know, as part of the SEC’s settlement, the bank has now agreed to repurchase at par any unsold instruments no later than January 4, 2011. In fact, last week the bank repurchased nearly $11 million of these securities, leaving our balance at just over $5 million today.

In summary, we’re pleased with our performance in the third quarter. As we look to the fourth quarter we are obviously cautious about the impact of the economy, on consumer buying patters, and will be watching closely as the holiday season progresses. As a result, we are now expecting revenues for the full year to land in the middle of the $55 to $59 million range we’ve been discussing throughout the year and EPS to be toward the low end of the range of $0.52 to $0.58 per diluted share on 18.3 million shares outstanding.

With that, I’ll turn the call back over to Jon for his closing remarks.

Jon Kirchner

Thanks for the detail, Mel. In summary, we are encouraged by our solid performance in the first nine months of 2008, where we’ve seen important progress in our efforts to develop and market a range of DTS technologies for the virtual, PC and broadcast markets. These technologies should provide an important source of long-term revenue growth. Overall, we believe that the long-term market for Blu-ray and other value-added CE products will remain attractive to consumers as they look for ways to enhance their entertainment experiences and leverage their investments in high definition displays.

I’d like to thank our partners, customers and employees for their continued support and commitment to DTS. That concludes our prepared remarks. I’ll now turn the call over to the operator so we can take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from the line of Ralph Schackart with William Blair & Company. Please go ahead.

Ralph Schackart - William Blair & Company

Good afternoon. The first one’s for Mel today. Mel, can you talk about the tax rate, I’m not sure if I got it from the prepared remarks for Q4. Is there anything happening sort of one-time nature or higher than perhaps expected in Q4 that’s causing the EPS to get the lower end of the range versus revs (ph 00:15:41) sort of in the middle of the range for the guidance (ph 00:15:42)?

Melvin Flanigan

No, not really Ralph. The tax rate for Q4 should be in that same 39% kind of range. The only thing that we’re aware of that’s going to be a discreet item in Q4 would be the fact that the R&D credit was passed in October so we’ll get actually a little bit of a benefit in the fourth quarter for that as a discreet item, but that’s not going to materially move the needle.

Ralph Schackart - William Blair & Company

Okay, and then Jon, you said in the prepared remarks that there’s some slowing in production for the first half of ’09. Was that specific to any end market or to the cycle or was it just sort of a macro CE comment?

Jon Kirchner

It’s a macro CE comment, Ralph. To be honest, we’re getting mixed signals from various places around the world as to what people are doing and so I think our feeling is that just being cautious given our revenue recognition kind of on a quarter lag method, relative to production, if in fact it it’s true that people are beginning to reduce production, then that will clearly affect Q1 and then there’s some question about how fast things bounce back because typically Q1 production which is our Q2 revenue tends to be the lowest of the year. So, I think we’re just overall cautious and we’ll see how it goes here over the next eight weeks.

Ralph Schackart - William Blair & Company

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Alan Davis with D.A. Davidson. Please go ahead.

Alan Davis – D.A. Davidson & Company

Hey Mel, I may have missed this. Did you give the Blu-ray as a percentage of overall sales for the quarter?

Melvin Flanigan

I don’t recall if I did or not, actually Allan. It was, give me one second, I want to say 11%.

Alan Davis – D.A. Davidson & Company

And then secondly, I wonder if you could give us your near-term outlook over the next couple of quarters for three markets: the automotive, and then kind of the new incremental products you guys have in terms of virtual on the PC side of things and then also the broadcast market.

Melvin Flanigan

In general, with respect to automotive thus far we haven’t seen any pull-back, although you look around and it’s clear that the automotive industry is clearly being impacted. So, I think we would expect a moderate decline and relative growth rates. We may still be up but we don’t expect to be up 38 plus percent looking forward here over the next couple of quarters.

With respect to virtual and the PC space, we’ve had some very good traction on some of the work that we’ve been doing with PC partners. I think we originally had said earlier this year that we expected virtual to grow in to be meaningful in the 2010 and 2011 range. We may have some positive surprise in ’09 but that remains to be seen, based on unit volumes and program updates.

So, clearly we’ll begin to see more and more revenue from those programs, just in terms of how meaningful it is in the context of potential Blu-ray growth and automotive I think is something we’re still taking a look at and we’ll advise more in February when we’re giving our annual guidance. And then with respect to broadcast, the Norwegian system has turned on DTS and so we’ve begun to see revenue flow from that opportunity and we are continuing to work a number of others in Europe and Asia, such that we certainly think broadcast revenues year-over-year will increase on a percentage basis pretty meaningfully, although keep in mind that this year we essentially said that it was going to be basically less than 5% of our revenue and I don’t think next year it changes that much, although looking into 2010 and 2011 if some of the things we’re working on come to fruition, it very well could begin to be meaningful for our business.

Alan Davis – D.A. Davidson & Company

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Please go ahead.

Paul Coster – JPMorgan Chase & Company

Thanks very much. A couple of quick questions. Can you comment on the licensing dispute with Zoran and whether we should be allocating any legal expenses to that? And then I have another question.

Jon Kirchner

Paul, at this point we obviously are spending some money on legal expenses with Zoran. In short it is a fairly simple dispute about a breach of our prior license and our desire to protect our intellectual property as it relates to any go-forward licenses. We put out a statement in the 8-K that I draw your attention to for more specifics.

At the current time, the legal expense run rates have not spiked to the point of full-blown litigation around this, but obviously to the extent that we get there, we naturally are planning an aggressive defense, so we will advise you as we know more with respect to the timing and the amount of the expenses.

Paul Coster – JPMorgan Chase & Company

Okay. And then the other question I have, Jon, is as we shift to Blu-ray and different product categories, is it changing the visibility you have into future revenues?

Jon Kirchner

I'm sorry, Paul, I missed the first part of that, say again.

Paul Coster – JPMorgan Chase & Company

As we move into new product categories and Blu-ray, is it changing the visibility you have, increasing or deteriorating?

Jon Kirchner

No, I think it probably isn't that different. Obviously, we continue to see new classes of products through the certification process as appropriate, so in the same reporting cycle, so I think if you take something like an integrated television set, we're clearly working with our partners to understand what that may be, but I don't think it is really any different, pretty much just the same customer set in the same divisions of these companies to a large extent, so–

Paul Coster – JPMorgan Chase & Company

Okay. Thanks. I'll hop back on the queue.

Jon Kirchner

Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Barbara Coffey with Kaufman Brothers. Please go ahead.

Barbara Coffey – Kaufman Brothers, L.P.

Yes. When you're taking a look at the PC market, how aggressive in talking to the OEM do you believe that this will get out there and what price points do you perceive that these are going to go out at relative to where standard def (ph 00:22:13) DVD players and PCs are going out?

Jon Kirchner

Well, (inaudible 00:22:16) I think the premium is around $200 and I think this becomes a much more mass product as you get into the upper double digits, somewhere in the, call it the $80 to $100 range, this I think gets deployed on a much more mass scale. And there's recently been some press in fact around some of the PC companies basically stating that they would like to see the components suppliers reduce their prices and make Blu-ray more competitive.

So, I think our forecast or our outlook towards Blu-ray and the PC business is that it's going to do extremely well over time and we should see significant acceleration in '09 relative to where we were in '08 shipping just a few million units. The question is how big does it get and how fast and we've seen projections from anywhere in the 20 million range to as much as 40+ million in that market.

So, we're working the channel and working with our channel partners pretty actively to make sure that our solutions are readily available and are software supported. So, in general, I'm very optimistic about where it goes. I think we're just a little cautious about the exact timing.

Barbara Coffey – Kaufman Brothers, L.P.

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Thackray with Deutsche Bank. Please go ahead.

Brian Thackray – Deutsche Bank

Hi, guys.

Jon Kirchner

Hey, Brian.

Brian Thackray – Deutsche Bank

Can you indicate what you expect Blu-ray to be as a percent of revenue in the fourth quarter here?

Melvin Flanigan

Brian, it's Mel. It's probably going to improve relative to Q3. I'm expecting we'll see higher numbers for example out of the game console portion of the market. My guess is it'll be in the 15, maybe as much as 20%, probably closer to 15 though.

Brian Thackray – Deutsche Bank

I guess just conceptually speaking the buildup for the holidays, you typically would see in Q4 and Q1 of your results. Do you expect more that to be in Q1 versus Q4? Or how should we think about the business (ph 00:24:26) mix between Q4 and Q1 on that front?

Melvin Flanigan

That's a really tough question. It's a much tougher question this year than it ever has been before I suppose. Right now we've seen some of the early reports coming in for Q3 production, which is our Q4 revenue and haven't seen anything that concerns us too much. But we haven't seen it all yet, right. So, we're only seeing a portion of it and we're hearing the same rumors as you're hearing about production caution on the part of the manufacturers. So, in general, we'd expect Q1 to be a little bit stronger for us than Q4 was and we'll have to wait and see whether that holds up again this year given everything going on in the economy.

Brian Thackray – Deutsche Bank

Okay. And second question on the balance sheet. You guys have $150 million cash. Just updates with regards to your thoughts there in terms of deployment of that capital.

Melvin Flanigan

Sure. Well, as we mentioned we bought back 700,000 shares since over the last couple of months, that's September, October and a little bit in November. We have recently, well, Friday in fact closed the purchase on a building for about $17 million of the cash. So, that's sort of the near-term change that we see. Beyond that I think we, like a lot of other companies that are holding on to cash, are looking at a number of different ways to deploy, obviously further buyback activity is certainly possible and of course M&A activity is a possibility, particularly given where valuations are going right now.

Brian Thackray – Deutsche Bank

Okay, guys. Thanks.

Operator

Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please go ahead.

Mike Olson – Piper Jaffray & Company

Guys, thanks. Sorry about the background noise here. Two quick questions, one is can you just repeat what you said about the full year guidance. I think you said you're coming in expectantly (ph 00:26:30) at the midpoint of the range of 55 to 59, can you confirm that?

Melvin Flanigan

Yes, revenue in the midpoint of the $55 to $59 million range and EPS towards the lower end of our guidance.

Mike Olson – Piper Jaffray & Company

Okay. And then the second question is just on a couple of these kind of peripheral mark (ph 00:26:49) virtual surround and then volume consistency, how hard of a push are you guys making on either of those and I guess when you look at from a competitive standpoint, who are you seeing most competitively if you are making much of a push there? Is it Dolby or SRS or somebody else or a combination of the two? Thank you.

Jon Kirchner

Sure, Mike. It's a combination of the two. Obviously, they're very active in most of the virtual space. There's a few other smaller players that are active, but we are pushing it pretty hard and in fact we've seen relative to our own internal expectations about how fast we could sell into some of these markets that we're seeing pretty good results. I think though as you know given the product cycle development time, things that we may have concluded or what not, say this year, we'll begin to see next year and so on and so forth. So, in general I think it's an important opportunity for us simply because we can offer a complete suite of solutions to potential customers and obviously our goal is to work to improve the value added content and therefore the price that we can charge for the range of technologies for any given product. So, in general, I feel pretty good about the work the team has done.

Mike Olson – Piper Jaffray & Company

Okay, thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Sanjay Puri with Walker Smith Capital. Please go ahead.

Sanjay Puri – Walker Smith Capital

Hi. Thanks. I believe you've kind of been good about helping us with the breakdown of the business in the past. I'm wondering did you talk about what HTiB was or what percent of revenue that is?

Jon Kirchner

No, we didn't specifically, but I can tell you in general the home AV segment was up for us in the neighborhood of 5 to10% in aggregate so–

Sanjay Puri – Walker Smith Capital

Okay.

Jon Kirchner

–and that is blend of a couple of end markets, HDi being one and DVD players obviously going negative for us in terms of our standard trademark licensing program.

Sanjay Puri – Walker Smith Capital

You said DVDs went negative?

Jon Kirchner

Meaning there were declines in DVD-related revenue. I think the best way to think about it is just in totality. We were slightly up in the home AV segment.

Sanjay Puri – Walker Smith Capital

Okay. And then I believe I've got this right, but I think SRS Labs, it said something about you guys having interest in acquiring them, correct me if I am wrong, can you just talk a little bit about the thought there? Is that an area you want to be acquisitive, how high of a priority is that for you and just what are your thoughts around making acquisitions in the near term?

Jon Kirchner

In general, our goal is to do acquisitions that we believe can be accretive and essentially leverage some of our core strengths. So, in the case of SRS, we did express an interest. That interest was in fact rejected and it has gone no further. But I think where we sit, anything that will help us build scale and manage if you will a series of solutions at different quality and performance levels, and that which will leverage our infrastructure around the world and our enforcement and a lot of our expertise in commercializing brand of entertainment technology we think is of interest, specifically if it is in the audio or video space. So, I think you'll continue to see us looking and explore possible deals that make good financial sense particularly given today's valuations as well as deals that we think we can leverage to significant profitability.

Sanjay Puri – Walker Smith Capital

And just finally, is your sense that Blu-ray will grow in '09 over '08, i.e., do you think that versus your original assumptions around Blu-ray DVDs, PCs and game consoles that we're going to see a similar level or growth or do you think that has ratcheted down substantially, and if so, by how much?

Jon Kirchner

On a year-over-year basis, Blu-ray will grow quite a bit. I think the only question that we've been running through our minds is how much is a lot and we won't know more until we get better data.

Sanjay Puri – Walker Smith Capital

Okay. All right. Great. Thanks for your help.

Operator

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Please go ahead.

Paul Coster – JPMorgan Chase & Company

Yes, hi. Thanks, gentlemen. A follow-up question, where is your R&D kind of focused at the moment?

Jon Kirchner

Paul, we are working on a range of things, some related to the mobile and what I'll call the lower bit rate space. We are working on things that would enhance the home AV as well as the car experience and certainly working in the broadcast domain in a number of areas. And of course in the past we've touched on the video space in some of our R&D efforts as well. So, I think broadly speaking, we've laid out that we see that beyond home AV as we get into the internet and the mobile space being increasingly important ways to enjoy entertainment, we expect to be there. We've got work going on and we'll continue to invest in these areas to make sure that we have solutions that are value added from a consumer as well as a partner perspective. And generally speaking, we won't say much more until we get to the point that we've got products ready to go.

Paul Coster – JPMorgan Chase & Company

My last question is for a given geography, am I correct in assuming that the surround sound codex that are used are essentially of a monopoly that it only makes sense to have one per broadcast region or is it conceivable that certain countries might adopt more than one?

Jon Kirchner

I think Paul you need to take a look at the way the broadcast business breaks down in each country. So, there may be a terrestrial standard. There may be private satellite broadcasters as well as cable broadcasters and you may see IP based broadcasting as well, so across all of those different markets, it's very possible that we will see multiple solutions employed. And we've actually had discussions in at least in one of those markets in a particular country where Party A who competes with Party B said, you know what, we want to do something different and so let's use DTS for high quality broadcast. So, I think you will see it play out in a more fragmented way than to simply assume that whatever the national terrestrial choice is that that decision has to follow through throughout all other means.

Paul Coster – JPMorgan Chase & Company

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Jill Mastoloni with Catapult Capital Management. Please go ahead.

Jill Mastoloni – Catapult Capital Management

Hi guys. Thanks for taking my call. A couple of questions, regarding Blu-ray, I was just wondering why the growth is somewhat muted if you break it out in Q1 it was I think 3 million, Q2 1.4 and Q3 is sort of flattish. I'm just sort of intrigued on why there isn't much growth in Blu-ray over the last couple of quarters.

Melvin Flanigan

Yes, I think we mentioned on the script that historically the gaming business has been the bulk of the Blu-ray revenues, starting the PC and stand-alone Blu-ray players contributing this quarter where we didn't necessarily see much contribution historically. I think the sequential change from Q1 to 2 to 3 had a lot to do with some flatness on the gaming console side, but I think that all turns around as we move forward, we should see strong growth in all three categories in Q4 and going into 2009.

Jill Mastoloni – Catapult Capital Management

And did you guys break out the percentage of revenue that was gaming?

Melvin Flanigan

No, we haven't.

Jill Mastoloni – Catapult Capital Management

Okay. And as you look into the first half, I know I mean clearly no one has any visibility, but if perchance the manufacturers were to start to cut, I mean when you refer to meaningful decline, what do you think the possibilities could be, down year-over-year in the first half or flattish or I guess no one really knows, right now.

Melvin Flanigan

Yes, I think– go ahead Jon.

Jon Kirchner

I am sorry, I think nobody really knows. I mean I think historically when you look at the CE and the entertainment business, they tend to do pretty well during recessions and I think when you look at the end of the year, my guess is you're going to see some categories in the CE business that did okay and that there was growth. So, I think it's just we all don't have a crystal ball. We think the value proposition for Blu-ray is growing all the time with industry partner content support and declining prices in terms of hardware and content and certainly retail presence and promotion and, therefore, we believe that Blu-ray is going to be among the things consumers choose to do as their budgets may be constrained and they may be staying home more. We just don't know what that equates to and won't for another quarter to until we get some better data.

Joan Mastelloni – Catapult Capital Management

Okay. Thanks guys and good luck.

Jon Kirchner

Thank you.

Operator

Thank you. Our next question comes from the line of Stefan Mykytiuk with Pike Place Capital. Please go ahead.

Stefan Mykytiuk – Pike Place Capital

Yes, hi. Good evening. Just a couple of questions, I missed, Jon what you said about the average price on the buyback over the last few months.

Jon Kirchner

$20.49.

Stefan Mykytiuk – Pike Place Capital

Okay. And you saw 300,000 shares authorized?

Jon Kirchner

Correct.

Stefan Mykytiuk – Pike Place Capital

Okay. And just in terms of the auction rate securities, you're down to $5 million, I think you said. Did you have to take some sort of deal as to the bank committing to buy it back in 2010 or 11? Did you do that on the rest of it or–

Melvin Flanigan

Yes, so we signed an agreement with the bank that basically requires them to purchase all of our auction rates back at par effectively between now and I think it's January 4th of 2011.

Stefan Mykytiuk – Pike Place Capital

Okay.

Melvin Flanigan

But in the meantime, there's also liquidity provisions. We can take loans, no cost loans against the balance if we really wanted to or needed to. So, we didn't give up anything effectively by signing the agreement. It was just sort of part of the deal that the SEC worked out with the banks.

Stefan Mykytiuk – Pike Place Capital

And you still get the coupon on the securities, isn't that right?

Melvin Flanigan

Sure, for whatever, for the 5 million that we have left, yes.

Stefan Mykytiuk – Pike Place Capital

Okay. Right. And just in terms of the guidance for the year, I'm kind of trying to do the math here quickly, but why the middle of the range for the revenues and at the low-end for the EPS, is there something on the cost side that's going to impact you or mix?

Melvin Flanigan

Well, I think Q4 is typically our higher cost quarter for us, hiring kicks in throughout the year and it's sort of in full swing in Q4, plus there is a fair amount of travel and such that we do in the quarter. I think it's just sort of the way the numbers fall out as we– marginal revenue either drops at the bottom line or if it does not materialize that hole (ph 00:39:10) drops to the bottom line as well and as we look forward to Q4 to the end of the year, that's just sort of the way the numbers fall out.

Stefan Mykytiuk – Pike Place Capital

Okay. And then lastly, because of the buyback, when we think about Q4 numbers, are the shares going to be something less than 18 million on a diluted basis then?

Melvin Flanigan

Yes, I don't have the specific number at my fingertips of course, but it's probably going to be in the high 17s, between 17.5, 17.8 kind of range.

Stefan Mykytiuk – Pike Place Capital

Okay. All right. Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Brad Hendrickson with Nokomis Capital. Please go ahead.

Brad Hendrickson – Nokomis Capital

Hey, good afternoon. Thanks for taking my question. I'm a little new to this story. Just wanted to make sure I heard you right. The 17 million, is that for a new headquarters and was that closed here after (ph 00:40:01) the quarter?

Jon Kirchner

It is. It's a Los Angeles based headquarters building that we purchased we believe at a very attractive price.

Brad Hendrickson – Nokomis Capital

And then you'll be vacating your existing I think Agoura Hills–

Jon Kirchner

Correct, correct, probably the third quarter or next year.

Brad Hendrickson – Nokomis Capital

Okay. Thanks.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. (Operator Instructions) Ladies and gentlemen, thank you again for your participation. You may now disconnect.

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