Dolby Laboratories' CEO Discusses F4Q 2011 Results - Earnings Call Transcript

| About: Dolby Laboratories, (DLB)

Dobly Laboratories (NYSE:DLB)

F4Q 2011 Earnings Call

November 17, 2011 5:00 p.m. ET


Alex Hughes - IR

Murray Demo - Chief Financial Officer and Executive Vice President

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

Ramzi Haidamus – Executive Vice President, Sales and Marketing


Ralph Schackart – William Blair

John Bright(Jeremy) - Avondale Partners, LLC

Paul Coster - JPMorgan

Steven Frankel - Dougherty & Company LLC

Andy Hargreaves - Pacific Crest Securities, Inc.

James Goss - Barrington Research Associates, Inc.


Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing Fourth quarter and fiscal 2011 financial results. During the presentation all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. [Operator Instructions]

As a reminder, this call is being recorded Thursday, November 17, 2011. I would now like to turn the conference over to Alex Hughes, Senior Director, of Investor Relations for Dolby Laboratories. Please go ahead Mr. Hughes.

Alex Hughes

Thanks, Lisa. Good afternoon, and welcome to Dolby Laboratories fourth quarter and year-end 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 or on our website at, 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 two 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 fiscal 2012 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 Q4 and full-year fiscal 2011 financial performance and our outlook for fiscal 2012.

Revenue for the fourth quarter was 243 million, up 7% year-over-year and 11% sequentially. Licensing revenue for the fourth quarter was 205.7 million, up 15% year-over-year and 13% sequentially. The year-over-year increase was driven by growth in our other markets category, led by mobile and by our broadcast market.

Looking at licensing revenue by market. Fourth quarter PC revenue decreased 11% year-over-year on lower ISV revenue, and declined 5% sequentially on lower ISV and PCEE revenue. For the full-year, our PC market made up 30% of licensing revenue in fiscal 2011, compared to 36% in fiscal 2010.

Fourth quarter broadcast revenue grew 29% year-over-year and 18% sequentially. The year-over-year and sequential increases were driven primarily by higher TV attach rate. Full-year revenue from our broadcast market made up 31% of licensing in fiscal 2011, compared to 27% in fiscal 2010.

Fourth quarter revenue from our consumer electronics market was up 1% year-over-year, as increases in Blu-ray and other CE products offset declines in DVD. Sequentially, revenue declined 7% as an increase in Blu-ray was more than offset by a decline in other CE products.

Full-year revenue from consumer electronics market made up 21% of licensing revenue in fiscal 2011, compared to 22% in fiscal 2010.

Fourth quarter revenue from our other markets category, which includes mobile, gaming, automotive and Via increased 69% year-over-year and sequentially, primarily on increased revenue from mobile and via, due to the RIM litigation.

Fourth quarter product revenues were 30.8 million, down 23% year-over-year and up 9% sequentially. The year-over-year decline was driven primarily by lower shipments of our 3D systems. The sequential increase was driven by increased sales of both our audio and digital cinema systems. Fourth quarter revenue was 7.2 million, down 21% year-over-year and 19% sequentially.

Turning to margins. GAAP gross margin in the fourth quarter was 89.5% and 90.3% on a non-GAAP basis. Our licensing gross margin was 98.2% in the fourth quarter on a GAAP basis and 98.8% on a non-GAAP basis. GAAP product gross margin was 39.1% in the fourth quarter and 41.1% on a non-GAAP basis. GAAP Services gross margin was 57.2% and non-GAAP Services gross margin was 58% in the fourth quarter.

Fourth quarter GAAP operating expenses were 106 million, up 2.8 million sequentially. Non-GAAP operating expenses were 92 million, up 2.8 million from the previous quarter. In the fourth quarter, we received 4.9 million in settlements from implementation licensees that were accounted for as contra expense. Without these settlements, our fourth quarter operating expenses would have been approximately 111 million for GAAP and 97 million for non-GAAP.

Total employee headcount was 1,369, an increase of 39 employees from the previous quarter. The increase was in R&D, and sales and marketing, and G&A. Fourth quarter operating income was 112.2 million on a GAAP basis or 46% of revenue, and 128.2 million on a non-GAAP basis or 52.6% of revenue.

Turning to tax. Our effective tax rate for the fourth quarter was 32% on both a GAAP and 32.1% non-GAAP basis. Fourth quarter GAAP net income was 79.1 million or $0.71 per diluted share compared to 65 million or $0.57 per diluted share for the fourth quarter of 2010.

Fourth quarter non-GAAP net income was 89.9 million or $0.81 per diluted share compared to 74.9 million or $0.66 per diluted share for the fourth quarter of 2010. For the full-year, GAAP net income was 309.3 million or $2.75 per diluted share, compared to 283.4 million or $2.46 per diluted share for fiscal 2010. For the full-year, non-GAAP net income was 339.9 million or $3.02 per diluted share, compared to 313.5 million or $2.72 per diluted share for fiscal 2010.

Moving over to the balance sheet. Dolby finished the fourth quarter with 1 billion, 216 million in cash, cash equivalents and marketable securities. Cash flow from operations was 110 million in the fourth quarter. In the fourth quarter, we repurchased approximately 1 million, 390, 000 shares at a total cost of approximately 49.9 million or an average price of $35.89 per share.

Now we'll turn to our fiscal 2012 outlook. For total revenue, we are now targeting 910 million to 970 million. Specifically for licensing, we are targeting revenue of 790 million to 830 million. Please keep in mind that in Q4 fiscal 2011, we recognized 11.3 million in royalties from RIM, related to periods prior to fiscal 2011. This target assumes growth from our broadcast and our other markets category led by mobile.

Our licensing target range is based on the following fiscal 2012 assumptions. In our broadcast market, we are assuming an increase in global TV attract rates of 4 to 5 points, and worldwide TV unit shipments of flat to slightly down for the fiscal year.

In our PC market, we are assuming a PC unit shipment range of plus 3% to minus 3%. We finished fiscal 2011 with approximately 80 million in ISV revenue, and expect to finish 2012 with approximately 60 to 65 million.

In our consumer electronics market, we are targeting flat to slightly down on year-over-year revenue primarily due to the decline in DVD. Based on typical seasonality and other factors, we anticipate that Q1 and Q3 licensing revenue, will be lower than Q2 and Q4.

Turning to Products and Services. We are targeting revenue of 120 million to 140 million. For gross margins, we are targeting approximately 90% on a GAAP basis and 91% on a non-GAAP basis. For Product gross margins, we are targeting approximately 37 to 39% on a GAAP basis, and 40 to 42% on a non-GAAP basis.

Turning to operating expenses. We are targeting approximately 465 to 475 million on a GAAP basis and 410 million to 420 million on a non-GAAP basis. As you consider our fiscal 2012 operating expense targets, please keep in mind that our fourth quarter, 2011 operating expense exit run rate was approximately 115 million for GAAP, and 101 million for non-GAAP, after adjusting for settlements and other items.

For other income, we are targeting approximately 5 million. Fiscal 2011 included 2.2 million in interest income on back royalties, related to the RIM license agreement.

For tax, we are targeting a tax rate of approximately 29 to 30% on both a GAAP and a non-GAAP basis, this assumes lower state and international tax rates compared to fiscal 2011. For share count, we are targeting approximately 110 million shares.

For diluted earnings per share, we are targeting a range of $2.31 to $2.61 on a GAAP basis and $2.71 to $3.02 on a non-GAAP basis.

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

Kevin Yeaman

Thanks, Murray. Good afternoon. Today I would like to discuss the changes taking place in our industry, and the opportunities they present for Dolby. Dolby’s role in the entertainment industry is to provide the products, services, tools and technologies that capture, deliver and render the highest quality experience for the artist and consumer.

We have a 45 year track record of delivering technologies and helping to define the standards in leading entertainment channels, including Cinema, Optical Disk, and Digital Broadcast. Today, the industry we serve is an inflection point. We have moved from a world of 100s of millions of playback devices shipped annually, to that of billions of devices.

From PCs and televisions, to Smartphones and Tablets, vertically all of these devices are connected, and many can capture and publish content as well. And if content can be captured from many more endpoints, and then distributed and played back across a greater number of devices, consumers have the ability to access and consume content vertically anywhere, anytime.

These trends present Dolby with increasing opportunities to enable the optimal quality and consistency of audio and video content streams.

Let me start by discussing our core audio business and the opportunities we have ahead. Today we are seeing a shift in our core audio business from optical disk playback to digital broadcast in the media content. We have already seen this reflected in the composition of our licensing revenue.

In fiscal 2011, we estimate that 52% of licensing came from non-optical disk base revenue, compared to 45% in fiscal 2010. This includes revenue from products such as TVs, set-top boxes, mobile phones, as well as our post processing technologies on a wide range of devices.

Disk revenue grew 22% in fiscal 2010, and 27% year-over-year in fiscal 2011. We continue to see growth opportunities in areas such broadcast and emedia, even as overall optical disk matures.

The remaining 48% of licensing revenue comes mainly from Windows7, ISV, DVD, and Blu-ray, and is primarily driven by the support of optical disk. However, most of these products received content over mobile and online networks, in addition to optical disk, and we are increasingly extending our technologies in to this [inaudible].

It is also worth noting that we expect the industry decline of optical disk to be gradual, given that Blu-rays growing and DVDs still remain a popular PC platform for many around the world. We believe that the trends in digital broadcast and emedia will enable us to grow our core audio business, and I would like to spend a moment talking about each.

In digital broadcast, the world continues to transition to digital and HD, and we see the adoption of our technologies increasing globally with this trend. Through our products, services and technologies, we help the broadcast industry deliver a high quality and consistent surround sound experience. As a result, our broadcast solutions continue to be adopted by leading cable, satellite and IPTD providers around the world.

With well over 200 million TVs and 200 million set-top boxes shipped each year, this remains a significant opportunity for Dolby. In fiscal 2011, approximately 60% of worldwide GB shipments, and 40% of worldwide set-top box shipments contained our technologies, indicating a significant opportunity still ahead.

The trend towards emedia is also a significant opportunity. In other media platforms, such as optical disk or broadcast, there’s been a degree of top down control that content creators and distributors have had over the consumer experience. These channels have been a case of one to many, where the format is established upstream and the devices are built to a uniform standard. This has enabled the industry to send one reel, one file or one signal to a fairly uniformed playback eco system.

The result has been a fairly consistent quality experience within each platform. In emedia, the industry is now dealing with one-to-one delivery. Where the content creator and service provider see their content delivered to an increasingly heterogeneous ecosystem of devices, few of which have the same profiles or capabilities.

As people increasingly consume content from a variety of portable devices, content creators and service providers are seeking to differentiate by offering the best quality audio consistently across many devices. This means providing them the infrastructure that captures their vision, and the technologies that enable the optimal playback experience, wherever and however consumers interact with their content.

To achieve this, we are focused on two objectives. First we are working with content creators and service providers to adopt our tools and formats for the encoding and delivery of emedia content in efficient multichannel sound.

We believe this enables them to offer an optimized audio experience across an increasingly complex array of portable devices. We have made excellent progress in this area. With our formats now adopted in the Apple, Amazon, Netflix, Zoodoo, and [inaudible] platforms.

In the last quarter, Dolby Digital Plus achieved support for HD movies and best buy cinema [inaudible] service. Across these services, we estimate that there are tens of thousands of pieces of content formatted in Dolby multichannel.

Second, we are focused on growing the adoption of our technologies by leading manufacturers of connected portable devices and are making progress. We have recently entered into a licensing agreement with Samsung, enabling them to use Dolby Mulitichannel technologies in their handsets and tablets. We expect this agreement to contribute to the growth of our mobile in fiscal 2012.

We estimate that we recognize royalties for our Dolby MultiChannel technologies on about 4% of industry Smartphone shipments in fiscal 2011, and we expect this to increase too low to mid-teens in fiscal 2012.

By 2015, it is estimated that there will be 1.5 billion portable connected devices. Our goal is to extend our technology throughout this ecosystem, deliver the highest quality experience, consistency across all portable devices for each playback environment.

To achieve this, we are investing in our core audio portfolio to develop the technologies and tools the industry requires to deliver the best possible experience, whether it is through broadcast, emedia, or cinema. In emedia, this means investing in our core audio technologies to meet the demands of a dynamic and evolving industry. Our customers are increasingly having to support a more complex ecosystem, with multiple operating systems in chip sets, multiple content streams in distribution formats, and a variety of user applications and playback capabilities.

To meet these needs, we are investing in the content tools and playback platforms. We also continue to evolve our offerings and introduce new features that provide for the best possible experience across each [inaudible] case.

In cinema, the advent of 3D is generating strong interest from the industry for the next generation audio experience. We are excited to be working with the industry, and our early demostratrations are receiving a enthusiastic response.

I would now like to turn to discussing our investments in the area of video and voice, which we believe represent attractive new growth opportunities. We believe we can draw on our expertise and signal processing, compression technology and the capture and render process to improve the video experience.

Over the last few years, we have assembled a leading video team with expertise in the capture and display of video content. We believe that there are significant gaps in the technology used to deliver premium video to today’s displays, and our team has identified solutions to some of these problems.

One area of focus has been improving the dynamic range and color gamit of video. To achieve this, we launched the Dolby Professional Reference Monitor, which recently won the Hollywood Post Alliance Engineering Excellence Award. There have been a number of motion pictures using the Dolby Pro Monitor in post-production, including the social network, the art of flight, and the upcoming feature, the Girl With The Dragon Tattoo, as well as the restoration of Raiders Of The Lost Ark, Apocalypse Now, and 101 Dalmatians.

We continue to focus on the delivery of full resolution consumer 3D over bandwidth constraint platforms, such as broadcast and online. To date, the delivery of full resolution 3D over these platforms has been a challenge for the industry.

As a result, content creators who have spent a lot of money developing high quality 3D content, must see it delivered in low resolution over broadcast and online. We believe we have developed a solution to this problem, and are making progress towards its adoption. More broadly, we are focused on delivering the products, tools and technologies needed for video professionals to capture and deliver more rich and vivid video, and licensing our technologies to manufacturers, so that their displays can take full advantage of this content.

Finally, we have also identified opportunities to improve voice communications. By leveraging our expertise in sound captures, signal processing, delivery and playback. Business communications is becoming more important as companies strive to support remote collaboration and working efficiency.

However, in many of these high value use cases, the audio performance does not support natural productive meetings. It is now possible to deliver audio quality that is much better than current voice services. We are investing and developing the next generation of communications technologies that deliver more effective collaboration, and we are working closely with initial potential customers on solutions.

In summary, we believe our core audio business is strong. We continue to see growth opportunities as the world transition to digital broadcast, and as emedia leads to a world of billions of connected playback devices. Building on the foundation of our strong core business, we also have exciting opportunities in the areas of video and voice that we believe can contribute additional long-term growth.

Finally, before I turn the call over to Q&A, let me just briefly comment on the news of Murray’s anticipated retirement in calendar year 2012. Murray has begun discussing his plans with me, and there will of course be a time and a place to thank Murray for his contribution to Dolby. But for now, I look forward to Murray’s continued work with us in 2012, and I appreciate his commitment to being actively involved in the transition sometime over the coming year.

And with that, operator, I will turn it over to questions.

Question-and-Answer Session


(Operator instructions). Our first question is Ralph Schackart, William Blair

Ralph Schackart – William Blair

Good afternoon. Two questions if I could. First, Kevin, could you just remind me, I think you’d said 60% worldwide TV attach rates. Was that for full fiscal 2011 or was that an exit rate for the year?

Kevin Yeaman

That was full fiscal 2011.

Ralph Schackart – William Blair

Great. And then also too, can you give us an update on Windows 8? You gave us an update last call, kind of where we stand there. And then also, too, how should we think about the PC market – I’m sorry, the PC revenue stream for Dolby for fiscal 2013?

Kevin Yeaman

We don’t have a significant update from last quarter. We continue to believe that DVD is an important use case in the BC Ecosystem in that BC Ecosystem is not going to stand for a broken consumer experience until we’re – continue to be actively engaged, working to license our technologies directly to the PC OEMs to ensure the best experience.

More importantly, I would point out that as, of course, where people are getting increasing content on the PC is over on one networks, even mobile and broadcast networks. We’re really focused on extending out technologies into those use cases.

Ralph Schackart – William Blair

Okay, great. Thank you.


And next, we’ll hear from John Bright with Avondale Partners.

John Bright(Jeremy) - Avondale Partners, LLC

Hi. This is Jeremy [Inaudible] in for John Bright. Thanks for taking my question. I just wanted to ask, on the broadcast side, could you provide a little more color on your progress over in Brazil, Russia, India and China?

Kevin Yeaman

Sure. Overall, we’re pretty happy with the progress starting with China where recently we’ve announced the adoption of our technology as an option in the standard. We’re happen to report that as of today, 19 of the 38 distinct HD channel services deliver to consumers through terrestrial provential cable and IP TV services use Dolby technology in the combination of either Dolby Digital Plus, Dolby Digital or both. They, you know, the progress, I’m pretty pleased with. Obviously, we’re also working with a consume electronic company, TV manufacturers, both inside and outside China on making sure all the proper licenses and technologies are in place to take advantage of the opportunity.

The opportunities in India continue to grow for us. We – as we’ve announced before, the satellite and cable opportunities are the primary eminent opportunities, either on air right now, or making significant progress.

What we’re focused on over the next 12 months in India is the terrestrial broadcast, which is in the process of being developed, so we’re working with key players in Dolby along those lines.

In Brazil, as you now, the technology of choice for broadcast is the AAC standard, which Dolby partakes in in the form of pool revenue. However, in terms of television, the attach rate in those products is a [inaudible] technology from Dolby, which is a combination of Dolby Digital Plus and AAC. Therefore, the revenue from those televisions is similar to revenues that you might see elsewhere in the world and that’s Dolby Digital Plus revenue.

So overall, I’d say we’re pretty pleased with our progress moving forward and we’ll continue to keep you updated.

John Bright(Jeremy) - Avondale Partners, LLC

Okay. Thank you. And last one on the mobile side. Could you talk a little about your plans for Dolby Digital Plus versus Dolby Mobile and what kind of wins have you had in each and how do you see that progressing?

Kevin Yeaman

So first of all, I guess I’d like to just – before turning it over to Ramzi for some specific updates, I do want to emphasize that we, you know, we didn’t have any measurable attach on Dolby Digital Plus in the year 2010. So in 2011, we’re on 4% of Smartphones with our multichannel audio codec. Based on the wins we have today and the devices we see coming into the market, we feel good about that going up to low-to-mid teens in 2012. And this is significant because as we look at all the problems to be solved in the form of audio quality and consistency across the complex ecosystem, there are number of problems and it can range from, depending on the piece of content and the device, it could range from not having enough volume, it could be having volume but not really being able to determine dialog, it could just be that it’s over compressed.

And then there’s the whole issue of being able to share that content across multiple devices and there’s a lot of ways to do that; DLNA, which we’re an important part of, HDMI, which we’re an important part of. There are number of proprietary solutions, which we think we provide an elegant solution for. When we look at all those problems, what we found is that having the multichannel audio codec in place is a critical component to solving some of those problems. There’re the post processing solves a lot of problems and the best possible solution is a combination of those things.

We’re highlighting our progress in multichannel codec and I think the progress we’ve made is significant. But we’ve also – we also continued to make progress with Dolby Mobile and ultimately to bring it together as a holistic solution.

Please, Ramzi, why don’t you give us a little bit of progress status on Dolby Mobile.

Ramzi Haidamus

So a little bit more color on what Kevin just said. We are in over 140 SKUs worldwide, scheduled shipping or scheduled to be shipping in the next two months. We are in over 30 models with Dolby Digital Plus including models from LG, Nokia and Pantec. That is a significant increase from the previous call.

Our specific design wins, LG devices with Dolby Digital Plus being shipped with multiple carries; Verizon, AT&T, Sprint, U.S. Cellular and Metro BCS. PDT is primarily shipping in China and now we’re shipping Smartphones with Dolby in the UK and Europe.

We’re also working on the upstream in the things such as with Nokia Music Service in China using the Dolby Media Generator to generate Dolby encoded content to make sure that that content is being generated to play back on all these different devices.

So overall, we’re approaching the entire ecosystem end to end, not only from the attach rate on the devices but on the upstream to make sure the – it’s a holistic experience as Kevin alluded to.

John Bright(Jeremy) - Avondale Partners, LLC

Okay, great. Thank you verymuch.


JPMorgan’s Paul Coster has the next question.

Paul Coster - JPMorgan

Yeah. Thanks very much. Do you – can you talk us through, please, the margin decline in the licensing segment, not just for the year ahead, but your long-term expectations around that and what the reasons for it declining is. I have a follow up.

Kevin Yeaman

Sure, Paul. Can I just clarify, are you referring – you’re not referring to the gross margin, right?

Paul Coster - JPMorgan

Gross margin for the licensing business. I thought I heard it was declining in 2012.

Kevin Yeaman

No, Paul, the licensing gross margin continues in the same range that we’ve been at historically. So again, it continues to be a very high gross margin business.

Paul Coster - JPMorgan

Okay. My apologies. And you expect it to remain for the indefinite future? That’s not withstanding the patent portfolio kind of aging in time?

Kevin Yeaman

Right now, we’re just providing a 2012 guidance on that. And so we look for the high margins. You know, beyond that, we can update you at that time. But we continue to believe that licensing will be a very high gross margin.

Paul Coster - JPMorgan

Okay. My follow up. Kevin, I thought the – you outlined your growth strategy pretty well there. I think it’s very helpful. And yet, this year, of course, you know, you’re not going to be experiencing growth. Can you just kind of reconcile that? And then, you know, what needs to happen for the topline to reaccelerate?

Kevin Yeaman

Well, as I look at the year in front of us, you know, one of the things that we highlighted today is the amount of revenue we have coming from non-optical, meaning that these are – this is licensing revenue, which is not engaged in any way in optical disc payback. And that’s been growing quite well, 22% in ’10, 27% in ’11. The biggest drivers there, of course, are broadcast and mobile. And we do see growth in those area in 2012. I think beyond 2012, still in front of 2012 is the bigger adoption of broadcast in markets like China, India, Russia, the markets that Ramzi talked about earlier. This is where we expect a lot of television growth to come from in the future. We don’t see that kicking in – I mean, it will contribute to growth next year, but we don’t see a reflection point in those markets in terms of consumer adoption in 2012. So beyond that, we see continued growth.

In mobile, again, we highlighted our progress with getting our multichannel codec on phones and expecting low-to-mid teens in 2012. That’s going to contribute to growth and we feel like we’re just getting started there, both in terms of attach rate and in terms of the growth rate for that device category.

Other things to consider this year, of course, is that we, you know, there are some headwinds in BC, just in terms of growth rate expected – expectations. We have digested into our guidance, the most recent information we can get our hands on in terms of the Thailand floods and the impact on [inaudible] and have factored that into the range of outcomes. And we continue to expect the ISV revenue to come down this year as Murray Talked about in his comments.

So you know, in a tough and uncertain economic environment, I guess I’ll call it, which is effecting in particular the D. C. Market, we feel like the year where we can make a lot of progress in these growth opportunities in that we’re really just getting started in some of these markets in terms of the growth.

Paul Coster - JPMorgan

Thank you.


Up next, we’ll hear from Steven Frankel, Dougherty.

Steven Frankel - Dougherty & Company LLC

Good afternoon. Could we spend a couple of minutes talking about PTD and kind of where are you from a market share perspective and what are your strategies to grow that market share, especially if you tried to fill the hole created by the [inaudible] transition.

Kevin Yeaman

I’m sorry, what transition?

Steven Frankel - Dougherty & Company LLC


Ramzi Haidmaus

All right. So our PTD strategy covers both the playback of optical and media, electronic media content as well as the increase in the experience itself, right, the emersenous of that experience, which goes a long way are [inaudible] in technology.

Moving forward, our strategy is to provide that combined suite of technologies as much as possible to maximize that experience. Starting with the playback strategy, as Kevin alluded to earlier, we are going to be approaching all of the OEMs directly to license our technologies directly to the OEMs. The advantage of this approach will provide full flexibility to the OEMs to play back not only optical content, whether it be DVD or Blu-Ray, but to start – give the ability to play back the rich content in multichannel and render it in multichannel whether it be coming from any of the online services, which were alluded to earlier, as we see demand for playback of rich content, even on platforms such as PCs and tablets. So our focus right now is to get all of the OMs equipped with our – both technologies, the Dolby Codec feedback and that’s going to be delivered over the next few months supporting them to come up online and start launching that program as Windows 8 comes up for launch in the next year or so.

And parallel to this, we continue to push forward with the [inaudible] program and we’re very happy with the attach rate along that program. We have multiple companies shipping what we call the PTD4 in the marketplace. To date, we have about 90 million units that shipped in the PCE space so we’re pretty happy. This is all generations, including the latest. I’m pretty happy with the upticks so far and we’ll continue to push that technology.

Just in summary, we’re pretty confident about out playback solution for online content, emedia content, optical content, we’re working directly with the OEMs as well as continue to provide a rich gross profiting experience either separately or along with this solution to the OEM.

Steven Frankel - Dougherty & Company LLC

And where do you think your attach rate is with PCEE today in the notebook market?

Kevin Yeaman

I don’t believe we’ve mentioned that before, but we’re roughly about 26%.

Steven Frankel - Dougherty & Company LLC

Okay, thank you.


Our next question today will come from Andy Hargreaves, Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities, Inc.

Thanks. Can you just detail a little bit more about operating expenses next year and where they increase is coming from exactly? And then Just more broadly, how you’re thinking about scaling operating expenses relative to revenue going forward?

Kevin Yeaman

Yeah, sure. So we do this is as the year of investment and we recognize the significance of having a year of investment when our immediate term growth projections aren’t what we’ve experienced in the past.

We, of course, are doing that because we’re confident that we have a portfolio of initiatives here, which is going to contribute to long-term growth. And so when we look at the operating expense investments, you know, still, you know, by [inaudible] these to assist those broadcasters, getting them on air because of the revenue opportunity that we have in front of us, they adopt digital broadcast.

In emedia, part of it is supporting the increasing complexity of this environment or maybe I should just say complexity relative to some of our other markets. So for any – to solve any one of these problems across the ecosystem, just cording our technologies to a variety of operating system, the variety of chip sets, making sure that they work across devices that have a very wide range of capabilities depending on the hardware choices or even hardware design choices that each OEM is making. And even thinking about the external environments behind which people are listening to these things, we continue to invest in both Dolby Digital [inaudible]


Speakers, are you still on the line? Mr. Hughes, can you still hear me? We cannot hear you anymore. (Operator Instructions). Once again, speakers, this is the Operator. We have lost connection We can’t hear you anymore, but we do show your line established. Can you check your mute function? Ladies and gentlemen, please hold while we try to isolate the issue and get the speakers back on the line. Thank you.

Kevin Yeaman

Are we live, Operator?


Yes. Speakers, you have rejoined.

Kevin Yeaman

Okay. It appears that we were cut off. I was just getting to the investments we’re making in improving the business communications experience when I was told that we were no longer on the line. So I understand that you can didn’t get the opportunity to hear much of it, so I apologize if I repeat myself. But as it relates to operating expenses, we do see this as the year of investment and we do appreciate the significance of making these investments in a year where our media term growth guidance is not what we’ve had in prior years and we’re doing that because of our confidence in the opportunities we have in front of us.

And I think it’s important to keep in context that by far, the majority of our investment is in the area of our core audio business and in fact, as we sit here today, we see the vast majority of increased investment over the rest of this year going into those audio investments. And that takes the form of things like, you know, Ramzi earlier today was, just a moment ago, was talking about the work we’re doing in Brazil and China, and India to get on air and that – those are your places where we’ve been establishing and increasing our presence in terms of – I’m sorry, I’m just getting one more note. I want to make sure I’m still on. What’s your note? Webcast is live, the call isn’t. What does that mean?

Okay, so I understand that we may still be having technical difficulties, but I will keep going. So we’re investing in the local presence in the supporting of rollout of broadcast. We’re developing – providing the tools and support to make sure that these countries and broadcasters can get on air in an efficient way. And that’s important because that’s where we see a lot of growth opportunities in the future. That’s where we see increased adoption in these emerging markets.

In emedia, it’s really supporting what is a very complex ecosystem and particularly related to other ones you’ve seen in the past. In order to really truly support an entire ecosystem, we need to support multiple operating systems, multiple chip sets. We need to support devices that have a wide variety of capabilities, whether we’re talking about the audio hardware components or the actual design of the device as it’s related to those components.

And we’re also looking to solve issues surrounding the external environment, the people are enjoying these devices in.

So I'm getting technical as I go along here. I understand we’re live. So that’s – so our investment in the emedia is going into continuing to invest in Dolby Digital Plus, investing in the post processing technologies to provide optimal experience across every one of these devices and that includes issues like efficiency, adaptability and the features that solve the problems with audio here today.

As it relates to video, we, of course, have an investment in the video market. Some of those investments are in support of currently – products that are currently generating revenue, particularly in the cinema on our professional monitor program. We have also, over the last couple of years, been investing in developing a portfolio innovations in IP, which we believe are relevant to solving a number of problems or opportunities I should say, that we see in improving the video experience.

IT is moving into a new phase. It is moving into a phase of being focused on commercialization of these technologies. We’re very much focused on where the most attractive opportunities are. We’re engaging with the market with early demonstrations of these technologies. We’re very pleased with the feedback we’re getting and look forward to evolving these solutions to what’s the most relevant in the marketplace.

Lastly, relates to business communication, which seem particularly appropriate as I say this. This is a different approach than what we’ve done in video. As it relates to business communications, it’s a small investment, targeted at a very specific opportunity, targeted with very specific initial potential customers. And so we expect to get very real-time feedback as to how we’re progressing as it relates to our investment in our initiative.

And so that’s how we’re – that’s some color on where the operating sense is going.

Operator, I’m hoping we’re live and that we can take more questions.


Absolutely. (Operator Instructions). Next is Jim Gross, Barrington Research.

Jim Gross – Barrington Research Associates

Thank you. Just a couple of areas. Ultraviolet, I wonder if you can talk about the opportunities you see there, what specific codec might be involved from Dolby’s standpoint and what sort of timeframe you might think of in that rollout. And then I do have one other thing.

Kevin Yeaman

The ultraviolet standard is being rolled out as we speak. We reported previously the – there are multiple codecs that are being recommended in the standard. Dolby owns three of these codecs which are – will be used one way or another in the standard and that includes AAC, it includes Dolby Digital as well as Dolby Digital Plus. How they get used and by whom will be depending completely on the different companies rolling it out. So there’s some optional codecs in there and there will be dependent on the service, the preference of the company rolling out the service as well as the hardware devices playing back. So we’re still in the early days of ultraviolet rollout. We have very strong involvement in the standard, which continues to contribute and we continue to monitor the progress as it gets launched.

Jim Gross – Barrington Research Associates

Okay, and the other things is 3D. Should I interpret the numbers as looking at it being somewhat stable but not really improving over the last couple of quarters?

Kevin Yeaman

That’s a fair interpretation. We continue to have approximately 30% market share outside of North America and you know, which – of course, you know, [inaudible] IP rollout, which does not include Dolby. If you include that, the market share is about 20% globally.

Jim Gross – Barrington Research Associates

Okay. But no significant progress then?

Kevin Yeaman

It’s steady market share and holding.

Jim Gross – Barrington Research Associates

All right. That’s it. Thanks.


And we’ll take our next question from Ralph Schackart, William Blair

Ralph Schackart – William Blair

Yes, one more. Kevin, just curious with the stock, where it is sort of trough valuation. Just give us a reminder if you could where you are in the buyback and how you’re thinking about your opportunities for cash going forward and have they changed much?

Kevin Yeaman

Well, we’re going to continue to evaluate our use of cash on a regular basis. We are doing that. We still have in place the buyback program to offset any dilution from compensation programs. Murray gave the stats on that in the call and if you need the, he can repeat them. But that’s where we stand.

Ralph Schackart – William Blair

Okay, any change in strategic thinking with cash on a go-forward basis, vis-à-vis, maybe where Dolby sat 6, 12 months ago?

Murray Demo

I wouldn’t describe it a change in strategic thinking, but I would say that as the growth opportunities that we’ve talked about throughout the day, as we get further along into each of them, we continue to look very closely for any potential acquisition opportunities that could accelerate our progress in one of those markets, broaden our opportunities in one of those markets, and – but of course, we’ll continue to be very disciplined in our approach as we look at that.

Ralph Schackart – William Blair

Okay, thank you.


And gentlemen, at this time there are no further questions. I’ll turn the conference back to Mr. Yeaman for any additional or closing remarks

Kevin Yeaman

Great. Well, thank you all for joining us to day. We look forward to keeping you apprised of our progress as we go through the quarter and on the next call. Thank you.


Ladies and gentlemen, that does conclude today’s conference. Thank you all for your participation and have a great day.

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