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Executives

Ramzi Haidamus - Executive Vice President of Sales & Marketing

Murray Demo - Chief Financial Officer and Executive Vice President

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

Alex Hughes - IR

Analysts

James Goss - Barrington Research Associates, Inc.

Steven Frankel - Dougherty & Company LLC

Barbara Coffey - Brigantine Advisors LLC

Andy Hargreaves - Pacific Crest Securities, Inc.

John Vinh - Collins Stewart LLC

John Bright - Avondale Partners, LLC

Dolby Laboratories (DLB) Q3 2011 Earnings Call August 4, 2011 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing third quarter fiscal 2011 financial results. [Operator Instructions] As a reminder, this call is being recorded Thursday, August 4, 2011. I would now like to turn the conference over to Alex Hughes, Senior Director, Investor Relations for Dolby Laboratories. Please go ahead Mr. Hughes.

Alex Hughes

Thank you. Good afternoon, and welcome to Dolby Laboratories Third Quarter Fiscal 2011 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories President and CEO; Murray Demo, Executive Vice President and Chief Financial Officer; and Ramzi Haidamus, Executive Vice President of Sales and Marketing.

On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 30, 2011; market trends and developments for the industries in which we compete; and our expectations and beliefs concerning how these trends and developments will affect our operating results; the capabilities and market acceptance of our products and technologies; and our strategic and operational plans and objectives. These statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from those set forth in such statements. Important factors, such as general economic, PC or cinema market conditions could cause actual results to differ materially from those in the forward-looking statements.

These factors are addressed in the earnings press release that we issued today and under the section captioned Risk Factors and elsewhere in our most recent quarterly report on Form 10-Q available at www.sec.gov or on our website at www.dolby.com, under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is available in our earnings release and in the Dolby Laboratories Investor Relations data sheet on our Investor Relations section of our website. Call participants are advised that the audio of this conference call is being broadcast live over the Internet. It is also being recorded for playback purposes. An archive of the call will be made available on our website for approximately one year and is the property of Dolby. As for the structure of this call, Murray will begin with a recap of Dolby's financial results and provide an updated outlook, and Kevin will finish with the discussion of the business.

So with that introduction behind us, I will now turn the call over to Murray.

Murray Demo

Thanks, Alex. Good afternoon, and thank you for joining the call. I'd like to discuss Dolby's fiscal third quarter financial performance and our outlook for fiscal 2011.

Revenue for the third quarter was $219 million, down 5% year-over-year and 12% sequentially. Licensing revenue for the third quarter was $181.8 million, up 7% year-over-year and down 15% sequentially. Revenue increased year-over-year due to our broadcast in other markets category led by mobile, and declined sequentially primarily due to typical seasonality.

Looking at licensing revenue by market for the third quarter of fiscal 2011, PC revenue declined 11% year-over-year primarily due to lower revenue from ISVs. Sequentially, PC revenue declined 9% led by lower revenue from Windows 7 primarily due to seasonality.

Broadcast revenue increased 26% year-over-year and declined 14% sequentially. The year-over-year growth resulted from increased revenue from set-top box and TV, and the sequential decline was led by typical seasonality in TV. Revenue from our consumer electronics market increased 5% year-over-year, as increases in certain product categories including audio/video receivers, home-theater-in-a-box and camcorder more than offset declines in DVD.

Sequentially, CE revenue declined 15% primarily due to typical seasonality. Revenue from our other markets category, which includes mobile, gaming, automotive and Via increased 26% year-over-year primarily on growth from mobile; and 29% sequentially primarily due to typical seasonality.

Third quarter product revenues were $28.4 million, down 46% year-over-year and up 8% sequentially. The year-over-year decline was primarily driven by lower prices for our 3D and Digital Cinema products. In addition, last year, benefited from the recognition of approximately $5 million in deferred revenue from prior period. The sequential increase primarily resulted from higher revenue from 3D. Third quarter Services revenue was $8.8 million, up 21% year-over-year and down 3% sequentially.

Turning to margins. GAAP gross margin was 87.2% in the third quarter and 88.2% on a non-GAAP basis. Our licensing gross margin was 97.7% in the third quarter on a GAAP basis and 98.5% on a non-GAAP basis. GAAP product gross margin was 28.4% in the third quarter and 30.7% on a non-GAAP basis. On a year-over-year basis, product gross margins declined primarily due to lower prices for our 3D and Digital Cinema products. GAAP Services gross margin was 60.1% and non-GAAP Services gross margin was 60.6% in the third quarter.

The third quarter GAAP operating expenses were $103.2 million and non-GAAP operating expenses were $89.2 million. Total employee headcount was 1,330, an increase of 39 employees from the previous quarter. The increase was primarily in R&D and sales and marketing.

Third quarter operating income was $87.9 million on a GAAP basis or 40.1% of revenue, and $104 million on a non-GAAP basis or 47.5% of revenue. Third quarter other income was $2.5 million on both a GAAP and a non-GAAP basis.

Turning to tax. Our effective tax rate for the third quarter was 31.4% on both a GAAP and a non-GAAP basis. Third quarter GAAP net income was $61.7 million or $0.55 per diluted share compared to $63.5 million or $0.55 per diluted share for the third quarter of 2010.

Third quarter non-GAAP net income was $72.8 million or $0.65 per diluted share compared to $71.1 million or $0.62 per diluted share for the third quarter of 2010.

Moving over to the balance sheet. Dolby finished the third quarter with $1,184,000,000 in cash, cash equivalents and marketable securities. Cash flow from operations was $122.6 million in the third quarter. In the third quarter, we repurchased approximately 1,465,000 shares at a total cost of approximately $67.4 million or an average price of $45.97 per share.

Now we'll turn to our fiscal 2011 outlook. For total revenue, we are now targeting a range of $930 million to $955 million. Specifically for licensing, we are now targeting revenue of $775 million to $790 million. This includes approximately $15 million in Q4 revenue from back royalties related to a license agreement signed between Via Licensing and Research In Motion.

Our outlook for licensing revenue is based on the following fiscal 2011 assumptions. In our PC market, we are now assuming PC unit shipments will be up approximately 3% year-over-year compared to our previous assumption of flat to up 5%. And we are now assuming that ISV revenue declines approximately $20 million in fiscal 2011 compared to our previous assumption of a decline of approximately $25 million to $30 million.

In our broadcast market, we are now assuming worldwide TV unit growth of approximately 5% compared to our previous assumption of between 3% and 7%.

In our consumer electronics market, we are now assuming low single-digit year-over-year revenue growth compared to our previous assumption of flat to mid-single-digit growth, and that we receive royalties on approximately 27 million Blu-ray units.

Turning to Products and Services. We continue to target revenue of $155 million to $165 million. For gross margins, we continue to target approximately 88% on a GAAP basis and 89% on a non-GAAP basis. For Product margins, on a GAAP basis, we are now targeting a range of 37% to 38% compared to our previous range of 38% to 39%. And on a non-GAAP basis, we are now targeting a range of 39% to 40% compared to our previous range of 40% to 41%.

Turning to operating expenses. We are now targeting approximately $410 million to $417 million on a GAAP basis compared to our previous range of $401 million to $413 million. On a non-GAAP basis, we are now targeting approximately $360 million to $365 million compared to a previous range of $350 million to $360 million.

For other income, we are now targeting approximately $9 million to $10 million for fiscal 2011 compared to our previous range of $6 million to $7 million. Approximately $2 million of this increase is due to estimated Q4 interest income on back royalties related to Via's license agreement with Research In Motion.

For tax, we expect the tax rate for our fiscal fourth quarter to be approximately 33% on both a GAAP and a non-GAAP basis.

For diluted earnings per share, we are now targeting a range of $2.61 to $2.70 on a GAAP basis and $2.87 to $2.96 on a non-GAAP basis. We continue to target approximately 113 million diluted shares outstanding for fiscal 2011.

Finally, our Board of Directors has authorized the company to repurchase an additional $250 million in Class A Common Stock. This new repurchase authorization continues our ongoing program targeted at offsetting dilution from our employee stock compensation programs.

And with that, I'll turn the call over to Kevin.

Kevin Yeaman

Thanks, Murray. Good afternoon, everyone. As we look across the entertainment and consumer electronics landscape, we see a continued proliferation in both the way we receive our content and play it back.

Today, consumers can receive content through broadcast, optical disc, online, and mobile, as well as cinema. They can also play back their content on a wider range of devices, including tablets and handsets. Yet the audio experience across these devices and through some of these channels, such as online and mobile, is often inconsistent and degraded. This creates the opportunity to leverage our portfolio of technologies and expertise to deliver a more immersive and consistent audio experience across all of these channels and devices.

This will ensure that consumers get the best experience regardless of how they choose to receive their contents. On today's call, I would like to highlight the developments and changes taking place across the different channels of content distribution and discuss how we are positioning Dolby's formats and technologies in each.

Starting with the broadcast channel distribution, we continue to see the transition to digital television and high-definition TV taking place globally. In the Asia Pacific region, China finalized its national digital TV standard, which includes Dolby Digital Plus as an optional format. We believe this helps set the stage for the transition to digital television and the adoption of our technologies in China.

As with the case in North America and Europe, our inclusion in the Chinese digital TV standard was due in part to our ability to get our format into local content. In China, we've also seen a high percentage of the country's high-definition channels on air using our technologies.

In preparation for the transition to digital broadcast, we recently signed agreements with 2 Chinese TV OEMs, TCL and Skyworth. We are taking a similar approach in India with early success as Dolby's technologies have been adopted by Tata Sky, Airtel digital TV and Star TV.

And in Eastern Europe, Poland's national public broadcaster, TVP, began transmitting in Dolby Digital Plus across the country's most popular terrestrial broadcast channel. We have been providing increased support to broadcasters and geographies where digital TV standards are in development and where commercial high-definition channels are being deployed.

Getting in local broadcast standards and content eventually leads to the inclusion of our technologies in TV and set-top box units where we generate the majority of our broadcast revenue. Today, we estimate that our fiscal 2011 global TV attach rate is on track to reach approximately 60%, up approximately 7 points from last fiscal year.

In addition, our global set-top box attach rate is on track to be just under 40% in fiscal 2011. As we support the global transition to digital broadcast, we are delivering an integrated solution, including Dolby Digital Plus and Dolby Pulse, which makes it easier for television and set-top box manufacturers around the world to support broadcast and file-based content with the highest quality audio experience.

Now let me turn to the distribution platform of optical disc, where our technologies are a standard in both DVD and Blu-ray. We continue to see Blu-ray perform fairly well in the market for stand-alone players, which is on track to show approximately 60% year-on-year unit growth this fiscal year. This is being driven by falling price points from Blu-ray players, increased Blu-ray content and improved online feature sets in players. However, Blu-ray is largely growing at the expense of traditional DVD, and we continue to see traditional stand-alone DVD units decline year-over-year.

In the PC market, the broad adoption of optical drives has driven the inclusion of Dolby technologies on many of the world's PC shipments.

We work with operating system providers, ISVs and OEMs to support DVD on the PC. In recent years, our mix of PC licensing revenue has increasingly shifted towards the operating system as our technologies are included in 4 editions of Windows 7. However, we have recently learned that our technologies are not currently included in the Windows 8 operating system under development. If our technologies are not included in the commercial version of Windows 8, we expect to support DVD playback functionality by increasingly licensing our technologies directly to OEMs and ISVs, and we will seek to extend our technologies to further support online content playback.

It's important to note that DVD playback remains a fundamental component to most PC shipments worldwide. While we work with the industry to support DVD playback in its PC shipments, it is equally important that we continue to extend our formats to channels of delivery beyond DVD. This will help ensure the relevance of our technologies to the PC long term. By doing this, we believe we can help consumers receive a high-quality consistent playback experience on their PC regardless of which platform they consume their content from.

In addition, we believe by improving the quality and consistency of audio playback on entertainment devices that primarily receive content via online and mobile distribution, our total addressable market is growing. We estimate that the market for handsets and tablets is over 1.4 billion units. We are working across the entire ecosystem, including content providers and distributors, technology platform providers and portable device makers to grow the adoption of our technologies.

To date, mobile is our fastest growing market in percentage terms. Our technologies have now been incorporated into over 130 handset models, including 26 models with Dolby Digital Plus. In addition, our technologies are now in 23 tablet models.

To date, we have made good progress with leading online providers of contents. In the area of content providers and distributors, Dolby's audio formats have been adopted by Netflix, VUDU, Amazon, Apple and CinemaNow. We have also been adopted by leading music services such as Rhapsody and Omnifone in order to provide a richer music experience.

In the area of technology platform providers, we are working with IC suppliers to the mobile industry to support our technologies. To date, significant IC suppliers, including Texas Instruments, Analog Devices and Qualcomm have rolled out chips supporting our formats. Our technologies are also included in the DLNA standard and supported by user-generated formats such as DivX and AVCHD. Our inclusion in broadcast standards is also relevant in some portable devices.

Finally turning to Cinema, we continue to work with the exhibitor community to support the transition to digital cinema and 3D. We offer a portfolio of audio and imaging technologies designed to bring the most immersive experience possible to the moviegoers.

To date, we have shipped approximately 9,900 Dolby Digital Cinema systems and 8,300 Dolby 3D systems worldwide, giving us roughly 20% market share in each.

In summary, we continue our commitment to raising the entertainment experience as consumers enjoy their favorite content anytime, anywhere. Whether in the cinema, in the home or on the go, Dolby provides audio solutions that ensure the best quality experience. We see significant opportunities ahead, as we continue to extend this experience across more service providers and devices ,and we will continue to introduce new audio and video solutions to improve the entertainment experience.

And with that, I'll turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to John Vinh with Collins Stewart.

John Vinh - Collins Stewart LLC

I guess, my first question is on Windows 8. Can you clarify -- do you expect as you transition to Windows 8 is that most of your revenues with Microsoft are going to be at risk? Are there other revenues that you get paid currently by Microsoft that you still would expect to persist through Windows 8?

Kevin Yeaman

Well, we work with Microsoft in a number of fronts including the Xbox 360, and we're engaged with them across a number of divisions with a number of technologies. As it relates to Microsoft 8, if the commercial release doesn't include our technologies, then we're going to continue to work with OEMs and ISVs to make sure that we're supporting the consumer use case for DVD playback, which we believe is still a very important one. And we're also going to be looking at that as an opportunity to work with them to expand our technologies to be really improving the online content delivery. And so that's how we see it going forward.

John Vinh - Collins Stewart LLC

Okay. And then as a follow-up to that, at this point then, if Windows 8 does not use your codecs within it, would you expect that your third-party revenues would increase as I would imagine if the OEMs would obviously have to start ramping third-party attach rates higher? And then I was just wondering if you could maybe comment or are you able to handicap in terms of whether you think that could make up for your loss revenues on Windows 8?

Kevin Yeaman

Well, I think that, first of all, we don't think this has a significant discernible impact on 2012 when we're still going to be on a Windows 7 year. We see Windows 8 coming into play during 2013. Once we are at Windows 8 adoption, if Windows 8 does not include our technologies, then we would expect the world to migrate to a place where there is one Dolby Digital decoder per PC, which is, of course, something the world had begun migrating to, but we still have certain revenue that is related to the second decoder on a PC. That's probably best represented today by the ISV revenue, which we've told you is about $80 million to $90 million. Most of that is second decoder revenue. But we think that the primary market for decoding Dolby Digital Plus is still an important one, both for DVD playback. We think that it really improves the online content experience as well. But the mix of that revenue will shift toward OEMs and ISVs to the extent that Windows 8 continue to go down this path.

Operator

We'll go next to Steven Frankel with Dougherty.

Steven Frankel - Dougherty & Company LLC

Just following up on the Windows 8 situation. Describe what you would do to improve that online experience? Are these new products or functions that you sell -- package or sell differently today? What are you imagining?

Kevin Yeaman

We're imagining a combination of new and existing products. We -- as you know, we have a number of online service providers that have their content available in Dolby Digital Plus. We are providing solutions such as the PC entertainment experience in Dolby Mobile, which make for a significantly improved experience for any type of content. And I think the primary use case for those technologies today is in fact online and mobile content. By combining those technologies, we can do a much better job. The better audio quality we get, the more channels, the more metadata, we can make the experience much better. We can also ensure compatibility across all forms of playback, particularly in cases where people are downloading as opposed to streaming. And we actually think that our presence in broadcast does have some spillover effect into online and connected devices. In fact, as MSOs and others in the broadcast industry mature their plans and have introduced offerings into online distribution, we've seen some of them who are currently standardized on a single audio stream around Dolby Digital that want to continue that and would like to see our technologies supported on these devices, and we're going to work with them to do that.

Steven Frankel - Dougherty & Company LLC

Okay, and could you just give us an update on PCEE, what your attach rates look like currently in the market?

Murray Demo

Yes, we currently have about 30% attached for 2011. We announced 32 SKUs with the newest version of PCEE 4, that is the latest technology, which stands above and beyond PCEE 3 from a performance perspective. So to date, we have a total of about 311 SKUs, including all PCEE versions.

Steven Frankel - Dougherty & Company LLC

And roughly, what kind of price cuts did you institute in the server and 3D market?

Murray Demo

So Steve, we introduced some promotions around our 3D systems with our kids and glasses and also on the server side as we go through this cinema cycle. They were focused in the quarter, and that's what led to our lower gross margins. We're not providing specific percentages around that, but it was a part of our program in the recent quarter.

Ramzi Haidamus

This is Ramzi. I just want to confirm, clarify, that the 30% attached is to consumer notebooks.

Steven Frankel - Dougherty & Company LLC

Great. And do think you've seen the bulk of the enterprise upgrade to 7. Is that now behind you?

Murray Demo

Yes, we believe that's accurate.

Operator

[Operator Instructions] We'll go next to John Bright with Avondale Partners.

John Bright - Avondale Partners, LLC

Can you put Windows 7 in an order of magnitude for us for FY '11?

Kevin Yeaman

Well, I think -- so I can start by pointing out that our PC revenue for FY '11 is about $240 million. That's a combination of decoding for Dolby Digital Plus for optical drives and online content as well as our post-processing PCEE technologies. So I think the thing to focus on is the second decoder revenue because we think that's what stands to decline if -- as this rolls out. And the best indicator of that right now is our current ISV revenue that's about $80 million to $90 million, which we think is primarily driven by second decoders. We don't have perfect information on that, but we do believe most of that represents second decoder revenue. The remaining revenue would be what we think is the primary decoder as well as our other technologies.

John Bright - Avondale Partners, LLC

And then secondly, on the Chinese market. Is there a mandated standard there and kind of tell us what that means by an optional standard?

Kevin Yeaman

There is -- they have a mandated standard for a local Chinese technology company as well as -- and then one optional technology, that's Dolby. This is the position we were looking to be in because we have been working with the broadcast community for many years. That's why 11 out of 13 terrestrial high-definition channels in China are on-air with our technologies. It's why we're now getting engagement with the local TV OEMs that do have the dominant market share in China. And so we signed up 2 of those in the most recent quarter. And so we think this puts us in a good position, and we're -- we think that this is the -- this puts the pieces in place for the digital broadcast transition in China. And when that unfolds, we think this puts us in a great position to build on the relationships we've built on in China. And we think that eventually, that's going to represent a high-growth portion of the market as that market does in fact go to digital.

John Bright - Avondale Partners, LLC

Another question, as we peek into FY '12 around the corner, the TV market seems to be showing quite a bit of weaknesses. Are you getting any signs about that market from some of your customers?

Kevin Yeaman

Well, I think in terms of TV volumes, we see the same information that you see, and our guidance is around 5% for this year. And the markets that we're spending the most time in right now are markets that we do think stand to grow. We're spending a lot of time in those markets that are at the early stages digital broadcast and digital television adoption, in particular, China, which we've just discussed, India, where we're making very good progress, Star TV, the largest content producer in India that's been working with us for some time now to move their -- to put in place the infrastructure, the workflow, the skill sets to be able to upgrade their content from mono to surround sound. And they're advertising that quite significantly, so our India is going very well. And we're also spending quite a bit of time in Russia and South America. Those markets we think is where the growth is going to happen, and developed markets, I think, is what's -- is where you're seeing concerns.

Operator

Next, we'll go to Andy Hargreaves with Pacific Crest.

Andy Hargreaves - Pacific Crest Securities, Inc.

Just I want to ask a question about R&D investments at this point and how you guys are thinking about that. You obviously spend quite a bit there and are investing in some new markets. But it also seems like there's some stuff that you guys have been investing in over the last several years that we haven't seen a whole lot from. So I just want to get a sense for if there's room to cut in some areas, or if you're just going to continue to raise the investment?

Kevin Yeaman

Well, as we look at the opportunities in front of us, we're excited about our portfolio of investments. We think that it’s an important time for us to be investing in those growth areas. And the areas that we see are continued investment in making for the best possible audio experience over online and mobile distributive content, we think that we've established a value case there, and we think that we can grow on that and grow our adoption, and that is going to take the form of investment in regional coverage and support. We also continue to invest in technology development to make for the best possible experience. We also do see opportunities in the areas of imaging where we have brought products to market in the professional space. We continue to see opportunities on the horizon in the consumer space.

Andy Hargreaves - Pacific Crest Securities, Inc.

Okay. And just on the increase to the buyback. I guess, seems like the mandate was kept the same. So my question, I guess, is why not change the mandate and be a little bit more aggressive and/or institute a dividend or do something different?

Kevin Yeaman

You're right. The mandate is the same, and that's to offset employee stock compensation dilution from employee stock compensation. As we pursue the growth opportunity that we just talked about, we do think there may be opportunities to acquire to accelerate or expand the opportunities we're pursuing. But we're going to continue to be measured about that. Historically, those have taken the form of tuck-in acquisitions. And we're going to continue to evaluate our cash position as we go forward.

Operator

We'll take our next question from Jim Goss with Barrington Research.

James Goss - Barrington Research Associates, Inc.

A couple of things. First, you had a comment in the report that said fiscal third quarter licensing growth was led by broadcast and mobile. And I know you've talked about each of these a little bit, but I was wondering if you could talk about the -- how that broke down between broadcast and mobile in terms of share and where those were, which of those 2 is more important? I don't think you've talked about mobile at that level before. And which formats are being used on those devices?

Kevin Yeaman

Well, broadcast is looking to be about 30% of our licensing revenue this year. Mobile is still a component of our -- of what we disclosed as our other markets, and so still has not quite broken the 10% barrier but is our fastest growing market in percentage terms -- mobile, that is. In broadcast, it's being led by Dolby Digital Plus, also HE AAC and some of our post-processing technologies such as Dolby Volume are our technologies that we're driving into the market. In mobile, it's a combination of HE AAC, Dolby Digital Plus and our post-processing technologies, which take the form of Dolby Mobile. Increasingly, we are looking to deliver the complete package of technologies. That's how we can make the biggest difference, and it’s how we can ensure the best compatibility. And so in each of these cases, we're looking to deliver a comprehensive suite of solutions that just takes care of every audio need.

James Goss - Barrington Research Associates, Inc.

Okay. And one other sort of unrelated thing. In the -- your product sales number was more in line with or even above the first quarter where it had dipped in the second quarter, and the explanation at that time was that 3D was an issue and seemed to drive it lower. But you said -- you seem to say that 3D is still a bit of a problem, but the -- that product number jumped back up. Could you tell me how that happened?

Murray Demo

Well, we had a strong first quarter in product and then in the second quarter is where we had the drop and then we've marginally improved in the third quarter in 3D. The second quarter, we were challenged with 3D, but we did see an improvement in the third quarter. So second and third quarters were pretty similar. It was the first quarter that was much larger. It was after that, that we ran into the challenges in the second quarter.

Kevin Yeaman

I think stepping back, if you look at our products business, which is the largest product category today, our Digital Cinema products, the industry is, of course, in the middle of the transition to Digital Cinema. We think they're probably halfway through the digital screen transition, probably a little further into the 3D transition. This is an investment cycle, and it is a cyclical business. We think there are -- there's a few more years to run on this, but we're going to -- we've probably passed the halfway mark in terms of this adoption cycle, and so these are the kind of levels we expect to see it settling from here. At the same time, I think as we -- as people can see their way through the Digital Cinema cycle, there's a lot of excitement about the industry, about what the next cycle might look like, what the next things are going to be that really bring moviegoers into the cinema. And this is an area where we're really excited about. Some of our new areas of investment, some of the technologies we have in the pipeline, and we view it as an opportunity to take leadership in that next generation.

James Goss - Barrington Research Associates, Inc.

So some of that category might be digital servers that may or may not have anything to do with 3D as well as the 3D-capable ones also?

Kevin Yeaman

Yes, we sell digital audio processors. We sell digital cinema video servers, and we sell 3D systems. As you might expect, often times, we're selling all 3 into a new screen, but sometimes, people might just buy the server from us. Sometimes they might just buy the 3D system from us. In each case, we've been maintaining our market share at about 20% in each of the server and 3D categories, and we continue to have the leading market share in audio processing.

Operator

[Operator Instructions] We'll go next to Barbara Coffey with Brigantine.

Barbara Coffey - Brigantine Advisors LLC

I actually have 2 questions. It sounded like you weren't exactly sure if you were or were not going to be in Windows 8. Has a definite decision been made on that?

Kevin Yeaman

Well, that's ultimately Microsoft's decision to make. What we know today is that we're not in the current build of the software. And so we are planning for a scenario where we're not in Windows 8. And that would mean for us working more extensively with OEMs and ISVs, each of whom we work with today, but working with them more extensively not only to support DVD playback but to really make for the best online experience.

Barbara Coffey - Brigantine Advisors LLC

I understand. And then you spoke with working with a number of streaming media partners. How many of these mandate that they stream in your coders and decoders?

Kevin Yeaman

The online streaming market is not one that is generally driven by mandates, unlike some of our markets. Broadcast is mixed in that regard. We have some where we're mandated. We have many where we haven't been mandated at all, but we work to articulate the value with people who want to bring the highest quality audio experience. That's how the online world works. We're working with people who care about the audio quality experience and help them to bring the best quality experience. But there are no mandates. There are consortiums that come together and set some recommended standards. Some of them have their own brand associated with them, so that if you want to support the DLNA standard or PCEE and UltraViolet, these all have specifications that if you want to meet that specification, which is designed to make for compatibility and other valuable features of online playback, then -- and we are -- we're in a good position with each of those. But to be clear, there are no mandates for online streaming.

Barbara Coffey - Brigantine Advisors LLC

Then perhaps I should have phrased this differently. Is there a way to track out of Netflix or out Roxi -- whatever, Rovi or out of any of these services, what percent of movies are streamed with the Dolby track?

Murray Demo

The online streaming companies do track such usage. It's not always available to us or to the public. We do know that in the case of Netflix, if it's a stream coming into the home on enabled platforms, it's being streamed in our format. And we do know, working with Netflix, that is their preferred way to stream into the home given that it provides the users with a rich surround sound experience. As that data becomes available to us, to the extent that it becomes more public, we'll be more than happy to share it. But we -- I can tell you with high confidence that whether it's VUDU or Netflix or Apple, it is very clear from just the availability of content itself, the default into the home has been Dolby format. Almost the entire library of Apple high-def content and movies is in Dolby format. Almost the entire VUDU library is in Dolby format and Netflix into the home, as I mentioned previously, when it comes to high def, it is also in Dolby. So we're very encouraged about the progress we're making in that area.

Operator

And at this time, we have no further questions from the phone audience. I'll turn the conference back over to Mr. Kevin Yeaman for closing comments.

Kevin Yeaman

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

Operator

Ladies and gentlemen, that does concludes today's conference call. We'd like to thank you all for your participation.

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