Dolby Labs' CEO Discusses F1Q12 Results - Earnings Call Transcript

| About: Dolby Laboratories, (DLB)

Dolby Laboratories, Inc. (NYSE:DLB)

F1Q12 Earnings Call

January 31, 2011 5:00 p.m. EST

Executives

Alex Hughes – IR Senior Director

Murray Demo – CFO, EVP

Kevin Yeaman – President and CEO

Ramsey Heidemann – EVP, Sales and Marketing

Analysts

Steve Frankel – Dougherty & Co.

Ralph Schackart – William Blair & Co.

Paul Coster – J.P. Morgan

John Vinh – Collins Stewart

Andy Hargreaves – Pacific Crest Securities

Daniel Ernst – Hudson Square Research

Jim Goss – Barrington Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fourth -- I'm sorry, first quarter fiscal year 2012 financial results.

(Operator Instructions). As a reminder, this call is being recorded Tuesday, January 31, 2012.

I would now like to turn the conference over to Mr. Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, Mr. Hughes.

Alex Hughes

Thank you, [Tom]. Good afternoon and welcome to Dolby Laboratories first quarter fiscal 2012 earnings conference call.

Joining me today are Kevin Yeaman, Dolby Laboratories President and Chief Executive Officer; Murray Demo, Executive Vice President and Chief Financial Officer; and Ramsey Heidemann, 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 28, 2012; 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 economy, PC, broadcast, consumer electronics or cinema market conditions could cause actual results to differ materially from those set forth in our forward-looking statements.

These factors are addressed in the earnings press release that we issued today under the section captioned Risk Factors and elsewhere in our most recent annual report on Form 10-K 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 containing 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 on our earnings release and 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 our fiscal 2012 outlook. Kevin will finish with a 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 Q1 financial performance and our outlook for fiscal 2012.

Total revenue for the first quarter was $233.4 million, down 4% year over year and sequentially. Licensing revenue for the first quarter was $199.6 million, up 6% year over year and down 3% sequentially. The year-over-year increase was driven by our Broadcast market and our Other Markets category. The sequential decline was driven by our Other Markets category and Broadcast.

Looking at licensing revenue by market. First quarter PC revenue was flat year over year as growth from Windows 7 and other PC-related revenue offset a decline from ISV. Sequentially, PC revenue increased 4%, primarily on growth from Windows 7. First quarter Broadcast revenue grew 20% year over year and declined 7% sequential. The year-over-year increase was driven primarily by higher revenue from set-top box and TV. The sequential decline was driven primarily from lower revenue from TV and set-top box.

First quarter revenue from our Consumer Electronics market declined 15% year over year, primarily from lower DVD revenue. Sequentially, revenue increased 13%, driven by a number of Consumer Electronics categories. First quarter revenue from our Other Markets category, which includes Mobile, Gaming, Automotive and Via increased 26% year over year and declined 18% sequentially. The year-over-year increase was led by growth in Mobile. The sequential decline resulted from the Q4 fiscal 2011 settlement with Research In Motion discussed last quarter.

First quarter product revenues were $26.4 million, down 43% year over year and 14% sequentially. The year-over-year and sequential declines were driven primarily by lower shipments of our 3D and Digital Cinema systems. First quarter Services revenue was $7.4 million, down 14% year over year and up 2% sequentially.

Turning to margins, GAAP gross margin in the first quarter was 91.3% and 92.1% on a non-GAAP basis. Our Licensing gross margin was 98.3% in the first quarter on a GAAP basis and 99% on a non-GAAP basis. GAAP product gross margin was 47.4% in the first quarter and 49.8% on a non-GAAP basis. GAAP Services gross margin was 56.6% and non-GAAP Services gross margin was 57.3% in the first quarter.

First quarter GAAP operating expenses were $111.7 million, up $5.7 million sequentially. Non-GAAP operating expenses were $99.3 million, up $7.3 million from the previous quarter. As a reminder, in the fiscal fourth quarter we received $4.9 million in settlements from implementation licensees that were accounted for as contra expense.

Total employee headcount was 1,353, a decrease of 16 employees from the previous quarter. Decreased headcount in manufacturing was partially offset by increases in R&D and sales and marketing.

First quarter operating income was $101.3 million on a GAAP basis or 43.4% of revenue and $115.8 million on a non-GAAP basis or 49.6% of revenue.

Turning to tax, our effective tax rate for the first quarter was 28.9% on a GAAP basis and 29.2% on a non-GAAP basis. First quarter GAAP net income was $73.2 million or $0.67 per diluted share compared to $86.4 million or $0.76 per diluted share for the first quarter of 2011. First quarter non-GAAP income was $83.1 million or $0.76 per diluted share compared to $85 million or $0.75 per diluted share for the first quarter of 2011.

Moving over to the balance sheet, Dolby finished the first quarter with $1.269 billion in cash, cash equivalents and marketable securities. Cash flow from operations was $96 million in the first quarter. In the first quarter we repurchased $886,000 shares at a total cost of $26.1 million or an average price of $29.41 per share.

Now I'd like to turn to our fiscal 2012 outlook. Before I review each of the outlook categories, please note we are not making any changes to our fiscal 2012 guidance ranges communicated last quarter. For total revenue, we continue to target $910 million to $970 million. Specifically for licensing, we continue to target revenue of $790 million to $830 million. This target continues to assume growth from Broadcast and the Other Markets category led by Mobile.

Our licensing target range is based on the following fiscal 2012 assumptions. In our broadcast market, we continue to assume an increase in global TV attach rates of four to five points and worldwide TV unit shipments of flat to slightly down for the fiscal year. In our PC market, we continue to assume a PC unit shipment range of plus 3% to minus 3%. We finished fiscal 2011 with approximately $80 million in ISV revenue and continue to expect to finish fiscal 2012 with approximately $60 million to $65 million. In our consumer electronics market, we continue to target flat to slightly down year-over-year revenue primarily due to the decline in DVD.

Turning to products and services, we continue to target revenue of $120 million to $140 million. For gross margins we continue to target approximately 90% on a GAAP basis and 91% on a non-GAAP basis. For product gross margins, we continue to target approximately 37% to 39% on a GAAP basis and 40% to 42% on a non-GAAP basis.

Turning to operating expenses, we continue to target approximately $465 million to $475 million on a GAAP basis and $410 million to $420 million on a non-GAAP basis. For other income we continue to target approximately $5 million. For tax, we continue to target a rate of approximately 29% to 30% on both the GAAP and a non-GAAP basis. For share count, we continue to target approximately 110 million shares. For diluted earnings per share, we continue to target 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

Thank you, Murray. Good afternoon.

Last quarter I talked about the changes taking place at our industry and the opportunities that they present. In particular, we have moved to a world of billions of devices shipped annually that play back and often capture entertainment content. Consumers have more means than ever before to access and experience content including digital broadcast, online and mobile distribution. This larger universe of playback devices is growing our addressable market. As people increasingly consume content on a variety of portable devices, content creators and service providers are seeking to differentiate by offering the best quality audio experience consistently across many devices.

Dolby's role has always been to provide the products, services, tools and technologies that capture, deliver and render the highest quality experience possible for the artist and the consumer. Given the industry changes taking place, we see a greater need for our role than ever and an opportunity to significantly improve the entertainment experience.

We are focused on providing content creators the infrastructure that captures their vision, the tools and solutions to content distributors that allows them to deliver the vision as the artist intended across today's wider range of platforms and devices, and the technologies to device makers that ensure an optimum playback experience for consumers. Working with content creators, distributors and device makers has always been at the heart of our strategy. It has allowed us to be a partner with the entertainment industry, becoming the de facto audio standard in cinema, optical disk, much of broadcast, and increasingly in online content. Today I would like to highlight the progress we continue to make across these groups.

Starting with content creators, we continue to see studios around the world releasing new content in Dolby 7.1, which allows artists to create a more immersive audio experience. In the first quarter, studios released 12 new films in Dolby 7.1 including major releases Hugo and Mission Impossible: Ghost Protocol. In broadcast content we made international progress with our formats adopted in content in both China and India.

In China, we saw the first Chinese TV drama series, [Legend of Zeshi] produced in Dolby 5.1. In India, we have recently seen a transition from mono to surround sound. For example, the leading producer of television content, Star TV, is now producing 100% of its HD content in Dolby Digital Plus. In addition, Network 18 and Movies Now are producing HD content in Dolby surround sound. This indicates that local content creators in these important new geographies are embracing Dolby formats. Finally, in the area of Blu-ray, we are seeing a number of studios adopting our new TrueHD encoding tool for new titles.

Turning to the area of content distributors, we continue to see broadcast operators and leading online service providers around the world supporting our multi-channel formats. In Broadcast, we are building on our established success in the US and Europe by gaining new wins with operators in emerging markets. In China, 23 of 40 HD channels are now broadcasting on our multi-channel formats. In India, Tata Sky, Airtel Digital TV, and Sun Direct are broadcasting in Dolby surround sound.

Parallel to our work with broadcasters, we are making progress towards becoming a de facto standard across online service providers. Most recently, HBO Go announced that it will adopt Dolby Digital Plus in its HBO Go service for content delivered to connected TVs and Blu-ray players. In addition, Samsung announced it will use Dolby Digital Plus to support the 8-tracks application on Smart Blu-ray players, TVs and home theater systems in Europe. HBO Go and 8-tracks join online service providers Netflix, Voodoo, Amazon, Apple and Best Buy’s CinemaNow service in supporting Dolby surround sound formats. We estimate that over 100,000 pieces of content across these online services are encoded in our multi-channel format.

Turning to device makers, we continue to grow the adoption of our technologies across a broader range of devices. We estimate that Dolby Digital Plus is now in more than 600 million products, including high-definition televisions, smartphones, tablets, PCs, game consoles, home theater systems and Blu-ray players. With our technologies established in most entertainment devices in the home, we are focused on expanding our footprint in digital broadcast and supportable devices like smartphones and tablets.

In China, we have signed license agreements with four major TV OEMs following the inclusion of Dolby Digital Plus as an option in the Chinese digital TV standard. In the smartphone market, our multi-channel formats are now included in models by Samsung, Nokia, LG, Motorola and Pantech. We remain on track to finish the fiscal year with our multi-channel formats on smartphone shipments in the low to mid-teens.

We are also making progress in tablets, with Dolby technologies on approximately 40 models and with more than 20 using Dolby Digital Plus. In addition, leading IC maker Qualcomm recently announced it would support Dolby Digital Plus in its new Snapdragon chipset, allowing OEMs to choose to deliver Dolby 7.1 Surround sound at the chipset level. Recently, NXP launched the CineXPlayer which enables the playback of Dolby Digital Plus on Apple iOS products.

In the area of cinema, we continue to work with the industry and its adoption of digital cinema and 3D. We estimate that roughly half of the worldwide screens have been converted to digital, and the industry is turning its attention to the next wave of innovation. In particular, there is demand for the next-generation audio experience. We are excited to be working with the industry, and our early demonstrations are receiving enthusiastic response. We look forward to sharing more at CinemaCon in April.

As we seek to improve the audio experience through next-generation solutions in the many ways in which consumers now receive their entertainment content, we see parallel opportunities in the areas of video and voice. We are investing in the tools and technologies aimed at elevating the video and voice experiences, as we believe these opportunities draw on much of the expertise we have developed in audio, such as signal processing, compression technology, and the capture and render process. We look forward to keeping you updated on our progress in these areas.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

We'll take our first question from Steve Frankel with Dougherty.

Steve Frankel – Dougherty & Co.

Good afternoon. Kevin, I wonder if you might start by telling us what you think your attach rate in China is today, and where you think that might go over the next 12 months.

Kevin Yeaman

So, as I said earlier, we've now signed agreements with four of the six top manufacturers. They are just preparing for the compliance with the new digital standards. I think most of the 23 channels we have on air today were done advanced of the finalization of that standard and are being implemented through the set-top box. So we're still early days in terms of the attach rate to the local OEM televisions with broadcast tuners, but we expect that to start rolling out now that we've finalized the licensing agreements and digital broadcast is adopted more broadly. I think we're probably around -- we're still under 20% attach.

Steve Frankel – Dougherty & Co.

Okay. And traditionally there's been worries about piracy in China. Given that you've already got four of the top six, are you less concerned of that taking a material bite out of your revenue potential in China?

Kevin Yeaman

Look, our strategy has been to work locally with these OEMs, show them the value of working with us. I think we started demonstrating that value by getting the 23 channels on air. And I think the fact that they've entered into these agreements with us show that we're partnering together to bring this value proposition to the market in China. In addition, a common theme with each of these companies is that they do have global aspirations and they recognize the importance of the solution we offer if you're going to be shipping this globally.

Steve Frankel – Dougherty & Co.

Great. Thank you.

Operator

We'll take our next question from Ralph Schackart with William Blair.

Ralph Schackart – William Blair & Co.

Good afternoon. Kevin, we’ve started on Snapdragon. Is that only Dolby Digital Plus or does that also include post-processing? And when you sort of previously, I think initially gave a 4% mobile penetration rate now are talking about low to mid teens, how much of a factor is Snapdragon in that ramp to mobile?

Kevin Yeaman

Well, the inclusion in Snapdragon is a significant development in the sense that it makes it easier for those OEMs that want to work with us to choose to implement our technologies by having it at the chipset level; it just reduces the amount of work to port and incorporate our technologies. And so we remain on track for low to mid teens for this year in terms of Dolby Digital Plus adoption in smartphones. You’ll remember that in 2010 we weren't really on the board yet with Dolby Digital Plus, so going to low to mid teens is significant progress, and I think Qualcomm support is just more evidence of the value that's being recognized in the marketplace for this proposition.

Ralph Schackart – William Blair & Co.

Great. And then just in terms of the cash and the balance sheet and the fact that you bought 26 million back in stock in the quarter, has anything materially changed in sort of capital allocation strategy?

Kevin Yeaman

No, there's been no change. We continue to execute on our buy back plan as it relates to offsetting stock-based compensation dilution and in the meantime we haven't made any changes to our plan and we’ll continue to revisit it on a regular basis.

Ralph Schackart – William Blair & Co.

Thank you.

Operator

We’ll go next to Paul Coster with J.P. Morgan.

Paul Coster – J.P. Morgan

Yes, thank you. Kevin, I wonder if you can just provide us a little bit of color on the transition to post-optical disc and post-Windows 7 world on the PC front. I came away from CES with the impression that the solutions orientation might be gaining some traction with OEMs in particular, but it sounds like even ISPs are going to stay with you. What’s the latest on Windows 8? And can you talk about how well this strategy is being received?

Kevin Yeaman

Sure. So I don’t have any updates to give today on the Microsoft Windows 8 relationship, but certainly we continue to be very focused on bringing this value proposition directly to OEMs. And we continue to believe that while over time it will move away from optical discs, we’re at something like over 70% of consumer laptops today have optical discs, and while that will decline, it’s not going away any time soon. And we think the PC ecosystem wants to ensure that the consumer does not have a broken experience.

But over and beyond that, we’re focused on demonstrating the value proposition for every way in which these PCs get their content, just as we’re doing with smartphones, with tablets, the device through which you’re receiving your entertainment content, we think we’re the ones that can help you ensure the integrity of that audio experience all the way through from artist to consumer. And so, like smartphone, like tablets, we’re focused on the PC in the same regard, and we’re really focused on bringing that to the world in the Windows 8 cycle by focusing our discussions with the OEMS.

Paul Coster – J.P. Morgan

And is there an SG&A expense associated with this effort to present a new value proposition, the marketing expense in particular that we should anticipate?

Kevin Yeaman

Well, I wouldn’t point to any kind of one-time or non-recurring expenses, it’s just that clearly there are people working on it both in sales and marketing and technical and it’s part of that number. But there’s nothing I’d call out specifically as unusual.

Paul Coster – J.P. Morgan

Okay. Thank you.

Operator

And we’ll go next to John Vinh with Collins Stewart.

John Vinh – Collins Stewart

Hi. Thanks for taking my question. Just a follow-up on PCs. If you look at some of the most recent PCs trends, it seems to be tracking -- shipments seem to be tracking at the lower end of your guidance and some of the licensing shipments seem to be lagging down a little bit. If you look at your full-year guidance, you haven’t changed that. Should we be thinking about maybe modeling at the lower end of your guidance, or are there some offsets that are maybe doing better than your PC segments that’s offsetting that?

Murray Demo

So, John, in terms of our PC TAM guidance, so we’ve given a broader range this year than we have in past years. We have plus 3% to minus 3% because of the uncertainty around the hard disk drive and the flooding in Thailand. If you look at the most recent information that we’ve seen from some of the major third parties, they’re coming out around zero percent, which is right in the midpoint of our range. So we continue to think that the plus 3% to minus 3% range is appropriate, broader than the past given the uncertainty, but we think it’s the appropriate range, and that’s factored into our revenue targets for the year.

Kevin Yeaman

The other point, John, we do, as you know, operate in many markets, PC as well as many other markets. And each of those markets we have a range of variables which factors into our guidance. And when we put it all together, we still think this is the right range.

John Vinh – Collins Stewart

Great. Thank you. And my follow-up is, if you look at your broadcast outlook for this year, you talked about an increase of four to five in attach points this year. Where geographically would we expect most of that growth to occur? Is it India, China, or other regions?

Kevin Yeaman

Most of it is Asia-Pacific region, and that’s mostly being driven by China and India. And that’s reflecting really the early stages of the adoption in China and India.

John Vinh – Collins Stewart

Great. Thank you.

Operator

And we’ll go next to Andy Hargreaves with Pacific Crest.

Andy Hargreaves – Pacific Crest Securities

Hi. Just wanting to see if you could [give] the detail a little bit more of the optical revs [in the K]. Can you give us any updates on what optical revs were in the quarter? And then maybe even more specifically, with DVD declining, any sense for how big DVD is in the CE segment?

Murray Demo

In terms of the non-optical to optical relationship, we did provide some color on that in our last call. We can provide some information this quarter that we continue to see it progressing towards the non-optical. It will bounce around from quarter to quarter, but in the most recent quarter, it continued to progress in the direction of non-optical.

Andy Hargreaves – Pacific Crest Securities

Okay. And then, can you give us any sense for what kind of growth you guys are expecting out of Via? It seems like they’re covering some license bases that should be growing pretty good at this point.

Kevin Yeaman

We’re not providing specific guidance. Our portion of the -- the administrative fees that Via earns are included in our other markets. Our portion of the royalties are included in the markets that they relate to, be that mobile, broadcast, et cetera.

Yes, you're right, HAAC continues to enjoy broad adoption in the market both in broadcast and in mobile. And so they’ve been contributing to the growth in that Other Markets category.

Andy Hargreaves – Pacific Crest Securities

Okay. Thank you.

Operator

And we’ll take our next question from Daniel Ernst with Hudson Square Research.

Daniel Ernst – Hudson Square Research

Yes, Kevin, thanks for taking the call. More to drill down a bit on the mobile. Mobile and Other has been a growth area for a while, quite strong growth this quarter. Are we getting to the point where mobile by itself is a reportable category? Can you give us some sort a scale of what portion mobile contributes to that Other category today?

And then as we look at the forecast of the 14% to 15% I think you said attach on smartphones for Dolby Digital Plus, what are the kind of the puts and takes in that? Is that dependent on how well the models that you're in do in terms of market share and growth, or is it also that you have some wins you're expecting that are baked into that guidance? If you could sort of frame what are the drivers for whether you achieve, beat or miss that target. Thanks.

Kevin Yeaman

Sure. So, on your first question, Other Markets has done well. Mobile has been the fastest-growing category. We typically break these categories out when they become 10% of revenue. So we're still a little shy of that. But we of course believe that mobile has every potential to be broken out as a separate category in the future, and step one is to get that low to mid-teens attach rate this year.

In terms of what it takes to get that done, we gave that guidance based on the wins we know we have in the pipeline and in the market. So we feel good about that. There's always an element of how well particular SKUs or lines do. Our focus really is on getting broader adoption within each of the providers we have. From the script you might have recognized that we have relationships now with four of the top five handset manufacturers. And so the focus is on getting broader within their line of handsets and also broadening the value proposition to the fullest experience.

Murray Demo

Just to add some color to that, today we're approximately about 150 handset SKUs worldwide now shipping with Dolby technologies. Over 30 of these deployed Dolby Digital Plus.

In terms of highlight, we have products like the LG Spectrum, which is a video-centric device which launched with Verizon at CES. Pantech launched their five-inch tablet which we consider as part of the mobile initiative in Korea with Dolby Digital Plus. And China Motorola RAZR launched also with Dolby Digital Plus.

As Kevin said, not all SKUs are equal. So at some point, the numbers of SKUs as they grow become less relevant as the few SKUS that tend to be very strategic and broadly adopted by critical companies. We tend to focus on the important strategic SKUs. And we're also focusing on connecting the dots between content providers and handset manufacturers to make sure that ecosystem grows with the Dolby content over time.

Daniel Ernst – Hudson Square Research

Great. Great color. And then just to follow up on the PC segment, on your initiatives to enter those sort of non-optical or post-Windows 7 devices. Do you have -- if you look at sort of the Ultrabook lineup from CES, are -- the ones without optical, are you positioned inside of those, outside of the Win 7 royalty (inaudible) anyhow?

Ramsey Heidemann

We are focusing on the Ultrabook as much as we're focusing on the traditional portable computers. In Q1, HP rolled out the Folio 13 notebook which features Dolby Advanced Audio. This is the first enterprise-focused Ultrabook with Dolby entertainment technologies to ship to market. This is just one example of what's yet to come, because we do believe that the same use case which Kevin outlined for the disk capable notebooks applies also to Ultrabooks. And that is there's multiple use case that exists in the marketplace whether it be side-loaded, downloaded, streamed or externally drive attached, that all speak to consumers wanting to play back high-quality content. So we believe the high-quality media experience applies equally to Ultrabooks as well as to disk-capable notebooks, and therefore it continues to be our primary focus this year.

Daniel Ernst – Hudson Square Research

Understood. Thank you.

Operator

(Operator Instructions). We'll go next to Jim Goss with Barrington Research.

Jim Goss – Barrington Research

Thanks. As you've talked about the smartphone issue, if you're on four of the top five manufacturers and it's a matter of increasing the penetration within those, does that presume then it's very new product introduction driven in that it's -- as they roll over the SKUs to items that can either be used to either view the videos or as a conduit for other usage, that's really what would need to take place? And how long do you think that process would tend to take? Would that be a couple of years, three to five years, longer than that?

Ramsey Heidemann

I think part of what you said is indeed the case, about penetrating deeper into these accounts. And that's going to be driven mostly by content creation in two parts. First, you have consumer-created content. As you know, a lot of these phones are now capable of capturing content. Laptops are capturing content. And we do believe that consumer-type created content that comes in the form of [AVGHD] or side-loaded content will want to -- consumers are going to want to play back this content on these handsets, as evidenced by some of the behavior we've seen.

The other set of drivers is going to be content that comes through content providers globally. We do see initiatives by companies such as the ones that are online today, whether they're from Netflix to Voodoo, Amazon, Apple, Best Buy, HBO Go, [8-Tracks]. These are companies that are not just going to be restricted to the home theater anymore. The starting place is the home theater, but as consumers start to enjoy this high-quality experience, and if you take a look at where some of these companies are going in their strategies, clearly they want to go into laptops, mobile handsets and tablets. And we're going to be working with them, both the content providers as well as the handset manufacturers to make sure that these dots are connected.

Whether it takes one, two, three or four years, it's really up to the industry, and we're going to be doing our best to make sure it's supported every step of the way. So that's really where we're focused today.

Jim Goss – Barrington Research

Okay.

Kevin Yeaman

You also referenced some timeframes in your question. I just want to be clear. We're focused on getting this value into the market now. We had -- we were paid on something like 4% of smartphone shipments for Dolby Digital Plus last year. We didn't have any the year before that. And we're looking at low to mid teens this year. And we think this is the time where there's an opportunity to really differentiate with the quality of the experience. We don't think that the world is going to settle for good enough or the lowest common denominator. We think the world migrates to quality.

I think if you look at what's going on in the content that is available today, the world has been very much focused on the quantity of content and getting it available to people, and consumers have been focused on convenience. People have been focused on the business models and how they're going to make money from this. As each of those things matures, the focus is turning to how you draw attention -- or as an artist, how you draw attention to your content.

Personalization, social media are really big tools to be able to approach that. Quality and immersiveness of the experience is an important tool to be able to do that. And so we think the time for addressing this and standing out is now.

Jim Goss – Barrington Research

Okay. And the other area I wondered about was tablets. It seems like you're getting on an increasing number. But the one that really matters so far has been the iPad, and I think you said it was HAACs here, your royalty is a lot smaller in that area. Is there any possibility of changing that? And do you really see that market evolving to where it's less iPad-centric than it has been for the most part?

KY

Well, as we said, we have our technologies on about 40 tablets, 20 of which include Dolby Digital Plus. So we think that demonstrates the value we can provide to tablets. Now obviously we want to be broadly adopted across a wide range of tablets. The iPad is clearly the leader.

Apple is a good customer of ours on the PC side. We continue to work with them to show value on all fronts, and we're going to continue to work with them. In the meantime, we did announce the CineXPlayer which gives consumer the ability to get the Dolby Digital Plus functionality through the CineXPlayer app. And we're going to continue to work broadly with all the tablets in the market.

Jim Goss – Barrington Research

All right. Well thanks very much.

Operator

And that is the final question we have in our queue today. Mr. Yeaman, I`m going to turn the call back to you for any closing remarks.

Kevin Yeaman

Well, thank you for joining us today, and we look forward to keeping you apprised of our progress.

Operator

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!