Sonic Solutions. F2Q09 (Qtr End 9/30/08) Earnings Call Transcript

Sonic Solutions (SNIC)

F2Q09 Earnings Call

November 5, 2008 4:30 pm ET

Executives

Nils Erdmann – Vice President, Investor Relations

Dave Habiger – President and Chief Executive Officer

Paul Norris – Interim CFO, EVP and General Counsel

Analysts

Alan Davis – D.A. Davidson & Co.

Chris Barney for Ralph Schackart – William Blair

Paul Koster – JP Morgan

Barbara Coffey – Kaufmann Brothers

Presentation

Operator

Welcome everyone to the Sonic Solutions second quarter fiscal year 2009 earnings release conference call. Today’s call is being recorded and will last approximately 60 minutes. Now at this time for opening remarks and introductions, I would like to turn the program over to Nils Erdmann, Vice President of Investor Relations. Mr. Erdmann, you may begin.

Nils Erdmann

Good afternoon and thank you for joining Sonic Solutions earnings conference call for the fiscal 2009 second quarter ended September 30, 2008. I would like to inform all participants that this call is being recorded. With me on today’s call are Dave Habiger, President and Chief Executive Officer, Paul Norris, EVP, acting Chief Financial Officer and General Counsel, and Bob Doris, Chairman. Before I hand the call over to Dave, I’ll review our Safe Harbor statement.

During the course of this call, we may make forward-looking statements within the meaning of the federal securities laws. All statements other than those of historical fact are forward-looking statements, including but not limited to, guidance for the third and fourth fiscal quarters and full fiscal year 2009. All forward-looking statements are based on current information and expectations and are inherently subject to change. We ask that you review these cautionary statements in today’s press release and refer to Sonic’s recent filings on Forms 10-K and 10-Q for more detailed discussions of the relevant risks and uncertainties that would cause actual results to differ from those forward-looking statements. Sonic Solutions undertakes no obligation to review or update any forward-looking statements. Actual results may differ materially and adversely to those in our forward-looking statements due to various factors.

In addition, unless otherwise noted, we will present financial information on a non-GAAP basis. These non-GAAP measures should be considered a supplemental to and substitute for or superior to the corresponding measure calculated in accordance with GAAP. While we believe that the non-GAAP measures provide information that is useful to investors, we recommend a careful review of the reconciliation between GAAP and non-GAAP measure provided in today’s press release as well as the detailed disclosures related to the purpose of and limitations on non-GAAP disclosures.

Today’s press release, as well as a replay of this conference call, can be found on our website at www.sonic.com under About Sonic/Investor Relations.

With that, I would now like to introduce Dave Habiger.

Dave Habiger

Welcome everyone and thank you for joining us. For Sonic’s second fiscal quarter we generated revenues of $31.1 million and a net loss on a non-GAAP basis of $1.2 million, or $0.05 per share. These results were slightly ahead of our previous guidance of $30.0 million or more in revenue and a net loss of $1.3 million, or $0.05 per share. Paul will lead us through a more detailed discussion on the numbers in a few minutes.

First, I would like to discuss some of the most important things that have taken place since last quarter’s call. In September we released a new version of our flagship consumer software product, Creator 2009, delivering it to consumers throughout our Web store and at over 15,000 retail storefronts throughout North America, Europe, and Asia.

Our Roxio line of software continues to enjoy market share dominance in North America retail. From January through September 2008 our products held the number one position in our category of retail with our market share more than four times that of our nearest competitor in terms of unit shipment.

Our products now account for 50% of retail revenues in our category. As part of the Creator 2009 roll out we built an exclusive wholesale club product which is achieving record sales for Roxio.

Our strong market position has translated into distinct placement in major retailers. In fact, we have category exclusivity with Creator 2009 at Cosco, Sam’s, Walmart, and Target. During the quarter we continued to deepen our relationships with key OEMs. We are incorporating more online touch points into our application, something that is apparent in Creator 2009.

Our software is being bundled with an increasing number of connected devices, such as mobile phones, including the Blackberry Bold that launched in October.

Finally, we continue to invest in personal and premium digital media services that touch more areas of people’s digital lives.

Since our last conference call there have been a number of important developments regarding Qflix. Our initiative to enable the creation of CFS in terms of premium content DVDs on recordable media. Most importantly, in September our long-time OEM partner, Dell, became the first PC manufacturer to ship Qflix-enabled external DVD drives. This has been followed by an announcement from both Pioneer and FlexStor who have also released Qflix-enabled recorders.

Just last week Dell and CinemaNow partnered to provide pre-loaded movie bundles on flex’s new system purchased on Dell.com. These hit movies are also Qflix-ready. And CinemaNow continues to broaden its flexion with downloadable titles available for Qflix.

Another important Qflix partner, amazon.com, recently expanded its offerings of Qflix titles to include content from buy accounts. Popular shows from MTV, Nickelodeon, Comedy Central, and VH1 are now available as on-demand DVDs on amazon.com.

Over the next few months you should expect the other studios enlisting Amazon, CinemaNow and taking advantage of the superior economics of managing content digitally and delivering it through DVD-on-demand.

There is no doubt that Qflix is off to a good start and while we don’t know yet how large a success it will be, we are increasingly optimistic about Qflix’s place in our industry and Sonic strategy.

In early September our professional products group exhibited at the IBC conference in Amsterdam introducing a number of products and initiatives with sys-content publishers in preparing Blu-Ray discs for market.

At IBC we introduced a new product configuration, BD Studio Workgroup, designed for corporate video users who are beginning to adopt Blu-Ray as Blu-Ray recorders and media become widely available.

For Scenarist, our high-end studio offering tool, we introduced important extensions to better support BD-Live offerings. VD Live is the name given the title to take advantage of flood-connected Blu-Ray players and it has clearly captured the imagination of Hollywood. Extensive BD-Live features were included in many recent Blu-Ray releases, including Disney’s Sleeping Beauty, Paramount’s Iron Man, and Sony’s Sixth Day.

Finally, last week we announced that we had embarked on a restructuring of our organization. This move was designed to improve Sonic’s near-term profitability and most importantly, to position Sonic to take full advantage of our key growth initiatives. I would like to spend a few minutes discussing these with you, but before I do, Paul will discuss the company’s financial results and prospects.

Paul Norris

As Nils mentioned, for purposes of my discussion of our financial results and outlook, unless otherwise indicated, the numbers I am providing are on a non-app basis and exclude equity compensation charges, the amortization of acquired intangibles, restructuring charges, and costs associated with our voluntary stock option review. A reconciliation of our GAAP and non-GAAP financials can be found in today’s earnings press release.

As Dave briefly touched upon earlier, our net revenue for the second quarter was $31.1 million. This was down 4% from the $32.3 million in the September quarter of last year but consistent with our previous guidance.

Fiscal year-to-date revenue for the six months ended September 30, 2008, was $61.2 million, down less than 2% from $62.4 million in the prior-year period.

Revenues for the September quarter, by business segment, were comprised of consumer revenue of $27.8 million and professional products group revenue of $3.3 million. Consumer revenues were essentially flat over the prior period, benefitting from the roll out of Creator 2009 in the retail channel and being offset by monthly revenue in our licensing group as adapted.

Professional revenues were up significantly, reflecting the strength of the Blu-Ray format.

Our pro forma cost of revenue, which excludes approximately $1.3 million in amortization of acquired intangibles, was approximately $8.0 million. This represents a gross margin of 74%, which was down from 77% in the September quarter a year ago. This decrease was primarily due to costs associated with the Creator 2009 roll out, as well as certain extra licensing costs.

Pro forma operating expenses totaled $24.7 million for the quarter, below our guidance of approximately $25.5 million. We benefitted from increasing operational efficiencies and anticipate that our pro forma operating expenses will continue to decrease throughout the remainder of the fiscal year due to our recent restructuring.

Our second quarter GAAP operating expenses break down as follows. Sales and marketing expenses totaled $9.6 million, down 2% from the prior quarter and up 4% for the prior-year period.

R&D costs totaled $10.6 million, down 9% from the prior quarter and 9% over the prior-year period.

General and administrative costs totaled $5.2 million, down 23% from the prior quarter and 21% over the prior-year period.

These numbers include $603,000 in depreciation, $43,000 of related stock option review project, and $706,000 in share-based compensation. We also recognized $267,000 in restructuring charges related to the headcount reduction we announced at the end of June. Other expenses for the quarter, consisting primarily of net interest expense on our outstanding debt, were roughly $409,000.

At the end of the quarter we had approximately 26.6 million basic shares outstanding.

On a pro forma basis and assuming a 46% effective tax rate, we had a net loss of $1.2 million, or $0.05 per share, which was slightly ahead of our guidance. For the six months ended September 30, 2008, we experienced a net loss of $3.9 million, or $0.15 a share.

Turning now to our balance sheet, cash, restricted cash, cash equivalents and investments ended the quarter at $31.6 million, down from $54.3 million at the end of the prior quarter. The decrease is primarily due to the retirement of our bank debt of $20.0 million and as of September 29, 2008, we have zero debt outstanding.

Our net cash decrease of $2.7 million reflected expenses related to the June headcount reduction and our operating loss.

We ended the quarter with accounts receivable of $14.4 million, up slightly from $14.0 million at the end of June. DSOs at the end of September were 42 days, unchanged relative to the prior quarter.

Turning now to guidance, for our third quarter ending December 31, 2008, we forecast revenue of at least $32.0 million. Revenues in the third quarter are expected to benefit from the continued roll out of Creator 2009 in our retail and direct channel as well as seasonally stronger OEM sales.

Given the financial environment we are cautious in projecting our pro group revenue. While Blu-Ray adoption continues a pace, many of our professional customers utilize debt financing in acquiring new tools. We estimate that cost of goods sold, excluding the amortization of intangibles, will be down sequentially, which will increase our gross margin to approximately 77%.

Operating expenses should also be down from the second quarter, due largely to cost savings recognized from our restructuring.

We anticipate total non-GAAP operating expense will be no more than $24.0 million, resulting in a net profit for the quarter of approximately $900,000, or $0.03 per share. We expect, based on these projections, that our EBITDA for the December quarter should be approximately $2.0 million.

For the fourth quarter we forecast revenue of around $35.0 million, bringing our total fiscal 2009 revenue to approximately $128.0 million. Our operating expenses should continue to decrease as a result of the restructuring, which should enable Sonic to generate EBITDA of at least $5.0 million or more if revenues are higher.

This is in vision of our earlier forecast of at least $7.0 million and takes into account our more conservative revenue assumptions for the remainder of the year.

Now I will turn the call back over to Dave who will give you his perspective on our business and an overview of our strategic objective.

Dave Habiger

Since our last call we have spent a lot of time analyzing our various growth initiatives. We believe that the restructuring that we announced last week will help us better match those initiatives and will accomplish two main things.

First, it will help to ensure that Sonic remains profitable and generates cash. Second and more importantly, it will better align our organization as our company embarks on what we believe will be a period of exceptional growth.

Let me elaborate on this statement. In our restructuring, it combined what used to be our advanced technology group with the Roxio division. Combining ATG and Roxio into one business unit will eliminate organizational redundancies, but more importantly, will unify our OEM licensing efforts and allow us to target a large range of OEM partners.

Sonic’s business model has been to deliver our unique technology through our OEM partners’ offerings and to participate in their success, thereby establishing grand relationships with hundreds of millions of customers.

Our ability to market solutions to our OEM partners has been degraded at times of major digital format transition. For example, in the early 1990s the wholesale adoption of the compact disc format of the music industry created the condition for our first highly successful business. The late 90s and early 2000s the arrival of DVDs and then the rapid development of DVD-recordable formats created a very favorable backdrop for our company.

Between 2002 and 2006 Sonic grew revenues through a combination of internal growth and selective acquisitions at a compound rate of over 60% per year.

As we enter our 2010 fiscal year there are two major format transitions underway that are powering Sonic’s growth. One, the move to high-definition video, and two, the move to Web-based digital media. All of our growth initiatives, Blu-Ray, Qflix, and Roxio Web services are designed to profit from these transitions.

We believe that Blu-Ray adoption will accelerate throughout this year and next until it eventually eclipses the standard definition DVD. Blu-Ray is one of the most rapidly growing parts of the home video landscape. Only nine months after the format unification, Blu-Ray titles are now 10% of packaged media sales in the U.S. Stand alone player prices are in the sub-$200 range and there are over 1,000 Blu-Ray titles available for purchase at retail.

Compared to DVD, which you may recall enjoyed the quickest adoption of any consumer electronics format in history, Blu-ray is doing even better and it is important to note that while we anticipate profiting directly from Blu-Ray in our pro and licensing business, our largest growth opportunity is with our consumer software business and Blu-Ray software players become [viquidous] and Blu-Ray recording becomes mainstream.

Second, as I mentioned earlier, Qflix is beginning to see a significant adoption among our OEM partners and significant support among our content and delivery partners. We believe that by this time next year Qflix will be a “must have” feature of DVD and Blu-Ray devices, particularly with recorders sold with PCs.

This adoption should create a large and growing growth stream for Sonic and give us an important role to play in defining a new distribution model for premium content.

Third, it is clear to us that consumers want easy, instantaneous, and universal access to their personal premium content on connected devices. We see a tremendous opportunity to combine platform-enhancing software with our online Web services and Sonic is one of the few companies that can offer PC and device manufacturers the digital media services and functionality to accomplish this.

Sonic’s strength lies in its ability to see emerging trends in digital media and to adapt to capitalize on these issues and trends. The rapid adoption of high-definition video and increasing involvement of the Web and personal premium digital media content bode well for our initiatives Blu-Ray, Qflix, and web services.

And we believe that our organization, revised and refreshed, is eminently up to the task.

I would like to thank our stakeholders, our shareholders, employees, and customers, and partners for their ongoing commitment and at this point we will open the line to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alan Davis – D.A. Davidson & Co.

Alan Davis – D.A. Davidson & Co.

Could you break out consumer and professional revenues?

Paul Norris

The consumer revenue was $27.8 million and the pro revenue was $3.3 million.

Alan Davis – D.A. Davidson & Co.

And how about Dell as a percentage of revenues in the quarter?

Paul Norris

Dell was about 15%.

Alan Davis – D.A. Davidson & Co.

And in regards to that, are they back to where you expect them to be in terms of a run rate or maybe you could give us an update on how business with Dell is going.

Dave Habiger

Business is going well. We’ve got a bunch of new initiatives that we have launched with them. The most notable is the Qflix drive bundles. And you will also not the website is much more populated with programs and upsell activity with the Creator products.

There is also a new Dell store that basically is selling our software. It’s a store that downloads the application directly to the consumer rather than fulfilling a boxed application or a third party.

So all in all we are happy with the current business and some of the new programs we are beginning to launch with them.

Alan Davis – D.A. Davidson & Co.

Just in terms of growth, can you give us a break out, brick and mortar, consumer sales versus Web, year-over-year?

Paul Norris

We are seeing both doing pretty well, considering especially the retail segment is a bit challenged these days in general, but we have seen our, in particular with the Creator product, we have seen sales up year-over-year on that, which if you can imagine relates to a significant increase in market share.

And we aren’t really breaking out specifically the detailed numbers, especially as we have started rolling the online services piece, but that is moving well, too.

Alan Davis – D.A. Davidson & Co.

I thought you paid down the line of credit. Is that something you might think of financing again when the credit markets become more favorable, or what is your position with the line of credit going forward?

Paul Norris

Absolutely. It’s depending on how the credit markets shape up over the next little bit. We certainly would revisit that. I’m sure you are aware this is kind of a tight credit time.

Alan Davis – D.A. Davidson & Co.

Do you have a free cash flow estimate if you hit your revenue targets for the second half of 2009?

Paul Norris

I don’t think we’re giving detail out.

Alan Davis – D.A. Davidson & Co.

But capex would be consistent with where it has been? Is that fair?

Paul Norris

I think the capex would be relatively consistent.

Operator

Your next question comes from Chris Barney for Ralph Schackart – William Blair.

Chris Barney for Ralph Schackart – William Blair

We have seen the retail kiosk for the Download-and-Burn. They’re starting to see some arkidata that they are also thinking about going to SD card. Do you see this as more of a longer-term market shift or is this kind of an experimentation by retailers?

Dave Habiger

We expect that retailers will move to Download-and-Burn and kiosks. As it relates to SD cards, [I think] people will find that to be a reasonable way to consume content and we certainly hope they will. We actually will play in that ecosystem as well. The more the distribution of content evolves and changes, we intend to do well in those kinds of markets as we identified the prepared remarks. So time will tell but right now it certainly looks encouraging.

Chris Barney for Ralph Schackart – William Blair

Since the last call, have you seen any major shifts in the roll out Download-and-Burn in any channel, be it consumer, PC, retailer, or MLD companies?

Dave Habiger

Yes. We have absolutely seen the kind of traction that we were hoping for. As I mentioned in my prepared remarks, we have got multiple drive manufacturers launching and shifting product. PC OEM is starting to ramp up and studios behind it with working product that has taken several years to bring to market, but again, we are very confident that Download-and-Burn will be successful and continue to ramp at the rates we are seeing.

Paul Norris

We are feeling very much like it’s all gelling there.

Operator

Your next question comes from Paul Koster – JP Morgan.

Paul Koster – JP Morgan

Let me just clear up, for me, a conceptual misunderstanding. I thought that the Qflix roll out required Qflix to be available. Am I wrong in that? You can use any DVD rewritable disc?

Dave Habiger

Yes, the drives are all backward compatible so you can burn the same thing that you would normally burn in the Qflix drive. If you want to download premium content movies you need Qflix media and that comes via a set of keys and things we have talked about in the past. But ultimately for a Qflix movie and download of premium content you need a Qflix disc and if you are using it for everything from burning CDs and DVDs that are non-premium content, studio release content, it’s a standard disc and a standard experience that you would see with a normal drive.

Paul Koster – JP Morgan

I’ve been checking retail for these Qflix-enabled discs and I haven’t seen any yet. Where are they currently available and how will they be branded once they are available?

Dave Habiger

You can get them on the Dell website, our website, pretty much anyone who is selling the drives. If you go to Best Buy or Cosco or Circuit City, I doubt you will see them at this point unless they are starting to sell the drives and I don’t think you will see a boxed retail drive at any of the major retailers for at least another month. Most of the supply right has gone to the PC manufacturers.

Paul Koster – JP Morgan

And as to the Download-and-Burn kiosks, how many retail points of presence do you have there at the moment?

Dave Habiger

We have not announced any retail kiosks for Download-and-Burn. The only ones that you have seen that look anything like that are the Amazon kiosks and that’s what we refer to as MOD, manufacturing on demand.

Paul Koster – JP Morgan

Can you talk about capex and tax rate going into 2009?

Paul Norris

Well, since what are projecting here is a year that will end up being fairly close to being very even. You are going to see our tax rate fluctuate a little bit during the interim months, before we get toward the end of the year and have the actual final tax calculations for the year.

Paul Koster – JP Morgan

And capex, do you see that as a fairly steady state expense for the firm?

Paul Norris

Yes. We do see that as being a steady state.

Paul Koster – JP Morgan

In your guidance you talked to EBITDA and I think it was $5.0 million. Was that for the fourth quarter in isolation or for the full year?

Paul Norris

That’s for the fourth quarter.

Paul Koster – JP Morgan

The guidance calls for an uptick in revenues in the March quarter. What is it that you are seeing there? Given what everyone else is seeing it’s kind of a surprise but it’s a welcome surprise. What is it that will drive up the sequential growth in that first quarter of the calendar year?

Dave Habiger

That is typically our best quarter so part of what you are seeing there is just the traditional seasonality of PC OEM shipments and software launch, our next refresh for software. So if you look back historically you will find that those are strong quarters for us. Frankly, they are not as strong as they would be if the economy were doing better but we think, given what we know about the existing market and our install base and product offering, that we are obviously going to take the trend line that we have seen over the last month or two and assume that that is what the market is going to look like for our products.

Paul Koster – JP Morgan

And that takes into consideration what seems to be a trade down in the PC/Laptop space to notebooks for instance.

Dave Habiger

Yes, we are playing fine by notebooks. We said in the last call, our expectation is those are going to be, I would go so far as to say, they are going to be quite successful. We will play a role in those notebooks and deliver software the same way we do for existing PC manufacturers. And we anticipate those will be a successful part of the landscape going forward.

Operator

Your next question comes from Barbara Coffey – Kaufmann Brothers.

Barbara Coffey – Kaufmann Brothers

There are a lot of different ways now to get video, whether or not it’s on demand or burn on the Qflix model. Can you tell me what you see the ecosystem looking like in about a year, whether the movies are being downloaded, what are you seeing on a going forward basis of where you think this is going to shake out to look like.

Dave Habiger

We have been in this space for a long time and have been waiting anxiously for a shakeout and a change in distribution and I will say that I am highly confident that over the next year this will play out. I think the market is ready, the infrastructure is ready, people are going to consume video on their phones in ways they have never done before, on streaming to devices connected to their PCs, the televisions that have services built in. and we play a significant role in all those.

We deliver software for iPhone that streams TV. Qflix, from what we’re seeing in the current data, in many cases people are streaming movies and just watching them in real time content that they couldn’t get under normal Windows under Video on Demand but they can get through the DV window and within 30 seconds of buying the movie you can stream it and play it back on your PC and when you are done you just so happen to have a DVD.

The DVD, frankly, looks like a consumer electronics device in that world so it is one of the many ways that people will consume content. Some will go on PCs, some will end up on phones, cars, but if you look at our business, at a chip level and embedded software, we are a part of that ecosystem or a part of the tools, the professional level to deliver that content with big customers like Deluxe and Technicolor. And we’re part of the consumer consumption side of that equation in a way that no other company, maybe outside of Apple, is.

So that is the fuel that we need to grow our business and we are, the people in this room and the executive team, highly certain that over the next year and a half we are actually going to finally see that vision come to fruition.

Barbara Coffey – Kaufmann Brothers

Can you also speak a bit about the changes you are seeing, I know historically you were part of Dell and a lot more PCs were sold online and now this has moved in, back to a sort of bricks and mortar channel, and sort of attach rates and issues, like other things we should be looking for to track those kinds of sales.

Dave Habiger

We are part of the Dell’s bricks and mortar business so we certainly are encouraged by the bricks and mortar side of the business, to give us some opportunity to cross-selling to those same retailers where our boxes are sold on shelves. We anticipate that Dell will increasingly need software and services that we supply. I’m not sure if I understand your question exactly.

Barbara Coffey – Kaufmann Brothers

I know historically when more PCs were bought on the Dell website there was a fairly good attach rate to some of your other software, whether or not it digital video editing or some of the other. And I’m wondering how you are encouraging that kind of attach rate now when machines are being sold in a more retail fashion rather than an online fashion.

Dave Habiger

The way we will modify to that, it will look a little different. You will see that when a Dell product is sold at retail, we get a per unit price. So they paid us money upfront as opposed to a transaction where we make money on the upsale. But at retail you will tend to see another revenue stream come out of that two or three or four months later where when consumers buy that Dell product, they use the software, they are then using our products and we have online business that starts to generate more revenue through that customer that bought originally through a bricks and mortar retail offering.

So I think you will see it manifest itself from less Dell revenue but more direct revenue.

Operator

Your next question is a follow-up from Paul Koster – JP Morgan.

Paul Koster – JP Morgan

Just on the restructuring, are there any downside trade-offs from having to do this? And perhaps why wasn’t it done earlier? What’s the reasoning behind the timing now?

Dave Habiger

Why we restructured was to align for, you know there’s cost components and also we wanted to realign our ATG and Roxio group. It was done with the belief there shouldn’t be any effect on our short-term revenue and really not any negative effect to it.

And this is the right time to do it. If you look at what we are trying to accomplish, we are putting together two teams that are focused on segments that are coming together, our OEM business and our licensing business are really starting to overlap and in a very interesting way.

That is an environment today that didn’t exist a year ago. I think we will see some significant benefits from those two teams working more directly inside of our organization to build out underlying software and services for the PC OEMs and the device manufacturers.

Another way to look at it, think of the PC manufacturers are starting to look a lot more like CE companies and the CE companies are starting to look a lot more like computer companies. The Blu-Ray player is essentially a web-connected set top box with a very powerful chip in it. It’s DV. And that ties quite nicely to the pro business which is developing the tools to make it a fit.

So there is clearly an overlap that didn’t exist a year ago. This makes sense now where from a timing perspective I’m not sure it made as much sense a year ago.

Paul Koster – JP Morgan

What percentage of revenue was HP?

Paul Norris

HP was around 12%.

Operator

Your next question is a follow-up from Alan Davis – D.A. Davidson & Co.

Alan Davis – D.A. Davidson & Co.

On the Qflix, looking at the price of the media, at least on the Dell website it looks like it’s running a little lower than $2 a disc for the blank media. I was just wondering if you believe near term that is cost prohibitive in terms of uptick and where you see that pricing going and how important is that to get that down, maybe closer to $1?

And the second question relates to the in-store kiosks, is there you can tell us in terms of planned roll out in calendar 2009 for that model?

Dave Habiger

The pricing, we expect that will drop quickly and I would go so far to say dramatically. Dell is doing quite well with the sales at the moment they are the first to market and they are taking advantage of first to market pricing and there are plenty of customers buying products and those discs. So I think in the short term they made an economic decision.

But we absolutely would agree that $2 in the long term would not make sense and we don’t anticipate that you will see them priced at $2.

Your question regarding kiosk roll out in 2009. I don’t think we have a whole lot of commentary on that because again, that’s one where we don’t control when and how manufacturers roll out kiosks. I think, unfortunately, you are just going to have to wait until they are in the market and companies have announced their plans and intentions.

Operator

There are no further questions in the queue.

Dave Habiger

Thank you everyone for joining us. We look forward to speaking to you next quarter.

Operator

This concludes today’s conference call.

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