Dolby Laboratories Inc (DLB) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fourth quarter and year-end fiscal 2007 financial results.

During the presentation, all participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Kevin Yeaman, Chief Financial Officer for Dolby Laboratories. Please go ahead Mr. Yeaman.

Thank you, good afternoon everyone and welcome to Dolby Laboratories fourth quarter fiscal 2007 earnings conference call. Joining me today is Bill Jasper, Dolby Laboratories' President and CEO. In addition, Tim Partridge, Executive Vice President of Products and Technology, and Ramzi Haidamus, Executive Vice President, Sales and Marketing, are here to participate in today's Q&A.

On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 26, 2008. Market trends for the industry in which we compete and our expectations concerning how those trends will effect our operating results; the capabilities and market acceptance of our products and technologies and our strategic and operational plans, as well as our expectations regarding the anticipated benefits of the planned acquisition of Coding Technologies.

Important factors could cause actual results to differ materially from those in the forward-looking statements. These factors are detailed under the section captioned risk factors and elsewhere in our most recent quarterly report on Form 10Q, 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. As for the structure of this call, Bill will begin with an overview of the business and our recently-announced agreement to acquire Coding Technologies, and I will follow with a rundown of Dolby's financial results.

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

Thank you, Kevin. Good afternoon, everybody. I'm pleased to report a strong fourth quarter and fiscal year. Throughout the year and period, we continued to benefit from Dolby's strong position across a range of entertainment markets, including cinema, DVD, personal computer, broadcast gaming, and automotive. With this strong base, we remain well positioned for a number of upgrade cycles, including digital. cinema and 3D, digital broadcast, next-generation DVD, and next-generation gaming. Each of these markets, Dolby's technologies help make entertainment more real and immersive and the Dolby brand has come to symbolize a superior entertainment experience.

Through our strong brand and industry-wide presence, we are well positioned at a time when digital content is proliferating, and the demand for entertainment is growing. Our fundamental opportunity is to extend our brand and technologies to the many new markets arising from this digital proliferation. We believe our planned acquisition of Coding Technologies is an important step towards addressing this opportunity.

On today's call, I would like to provide an overview of Coding Technologies, also known as CT, and discuss how we believe it positions us better for longer-term opportunities emerging in a digital world; and finally elaborate on the progress we are making with new initiatives in mobile, digital cinema, and video.

I'm very excited to announce that Dolby has entered into a definitive agreement to acquire Coding Technologies for a purchase price of approximately $250 million net of cash. We expect the transaction to close very soon, and the closing mechanics are already in process. I'd like to spend the next few minutes discussing CT's business and technologies and articulating why we are very excited about this transaction.

First, a little bit about Coding Technologies; CT is a licensing company founded in 1997. For the past ten years, it has been focused on developing and providing innovative audio compression technologies for limited Bandwidth platforms, such as mobile and digital broadcast. The company has approximately 70 employees and is headquartered in Stockholm, Sweden with additional offices in Germany, China, and The United States. CT is best known for developing audio compression techniques that enrich industry standards, most notably spectral bank replication, which enhances the MPEG4 audio standard.

Today, CT's audio technologies are widely used in mobile handsets, and are increasingly being adopted by next-generation platforms, such as Broadband TV, mobile TV, video-on-demand, and next-generation HD broadcast. We are very excited about CT for a number of reasons. We believe that the acquisition will expand our business into the mobile market, add to and complement our existing broadcast business, and help us penetrate some new markets, such as digital radio, where we believe CT's high-compression audio technologies could provide significant value, and have already been adopted in several digital radio standards.

In the mobile market, CT's success at developing MPEG4 audio enhancement technologies enables a more efficient delivery of media. CT has traction in mobile handsets where its spectral bank replication and parametric stereo technologies are part of the high efficiency, or HEAAC standard. HEAAC has been selected by mobile music service providers, including 02, Sprint, and Telenor. Handset manufacturers that offer HEAAC enabled phones include Nokia, Motorola, Samsung, and Sony Ericsson. In fact, more than 100 different phone models support HEAAC.

In the broadcast market, the efficiency of CT's audio technologies will help us address specific challenges, facing some international television broadcasters and operators. In markets such as Norway and Brazil, for instance, industry groups have selected Coding Technologies to address very low Bandwidth issues, and the selection of HEAAC will enable multi-channel audio delivery at these lower bit rates.

In addition, by delivering both Dolby Digital Plus and HEAAC, we can offer a variety of multi-channel solutions to our existing broadcast customers who have a wider range of requirements pertaining to Bandwidth constraints and compatibility with playback devices.

Longer term, we believe CT's technologies and expertise will help us address some of the opportunity stemming from greater media affordability and convergence. Consumers increasingly expect content to port across multiple playback environments, such as PC to mobile, and mobile to audio, and consumers want to experience high-quality entertainment at each playback point. By combining Dolby's extensive suite of audio close processing technologies with CT's technologies, we believe we will be better positioned to help these customers optimize the portable entertainment experience in various playback environments.

Finally, Coding Technologies and Dolby share similar cultures. Like Dolby, Coding Technologies has a strong engineering team, a passion for technology in entertainment, and a record of successful innovation that is made up of a group of exceptionally skilled audio and software engineers focused on emerging industry demands. We believe that this similar culture, passion, and innovation focus will complement and add to Dolby's existing organization and strategy.

In a minute, Kevin will comment more on the financial profile of Coding Technologies and its impact on the business.

With that, let me turn to some of the initiatives we are focused on in 2008, starting with mobile. We're making significant progress with our mobile initiative, and expect Coding Technologies to complement our existing efforts. In November, we announced the release of the Dolby Mobile suite of technologies. Currently, Dolby Mobile integrates and optimizes a number of technologies for the playback of entertainment on mobile phones, improving the experience.

NTT DoCoMo and Sharp announced that they have licensed and plan to incorporate Dolby Mobile into two handset models to be sold in Japan. NTT DoCoMo is widely regarded as the leader and premier innovator in the mobile industry, so we are pleased to have earned their trust and support with Dolby Mobile. The first Sharp handset model with Dolby Mobile is expected to be available in Japan at the end of this month, followed by a second model expected to be available in Japan in the January to February 2008 timeframe.

By combining CT's technologies and relationships with Dolby Mobile and the Dolby brand, we believe that our time to market in the mobile industry can be improved.

Turning to our initiatives in the cinema industry, we continue to work closely with studios and exhibitors in their transition to digital cinema and digital 3D. Last month, we began shipping Dolby's 3D digital system. The Dolby 3D technology utilizes standard white screens already in auditoriums so exhibitors don't have the added costs nor the image quality compromises associate with the use of silver screens required by competitors.

Additionally, Dolby's 3D digital supports both 3D and 2D presentations without the need for dedicated 3D auditoriums by adding a retractable color filter wheel accessory to the digital projector. Exhibitors can move a 3D movie to additional auditoriums equipped with Dolby 3D digital cinema system's link later in the run using the standard screens. This was an important benefit since exhibitors need to migrate a feature film to a smaller screen as it matures, and as new features are prioritized for the main theater.

In the fourth quarter, Dolby announced the sale of 3D systems to Kanopolis Group for 17 screens throughout Europe. In additional to Kanopolis, a number of key exhibitors announced they will be installing Dolby 3D systems in time for next year's release of Beowulf in 3D. These exhibitors include Carousel Cinemas, Cinema City, Cinetopia, Cobb Theaters, Cheers, Malco, Marcus Theaters, Maya Cinemas, Megaplex, Starlight, Sundance, Warren, and Super Cinnies.

At the same time, we continue to make progress in our rollout of digital cinema. Last month, Dolby Digital Cinema received the industry's first U.S. Government FIPS Level-3 Certification, with is the highest level of security required by DCI. We believe this is an important milestone, as it assures studios and exhibitors that Dolby's Digital Cinema System is designed to maximize the security of their content.

Dolby Digital Cinema and Dolby 3D represent our first push into imaging, but we don't plan on stopping there. We are equally focused on improving the next-generation LCD displays. At this year's fall Japanese conference on Advanced Technologies, we demonstrated two new video technologies we plan to license, Dolby Contrast and Dolby Vision. Both are aimed at the emerging market for LCD displays with LED backlighting and local dimming. While a nascent market, these next-generation LCDs are expected to gain momentum as the price for LEDs declines.

Dolby Contrast and Dolby Vision are HDR high dynamic range imaging technologies aimed at enabling the capture, distribution, and display of more vibrant video on LED backlit LCD television sets. Dolby Contrast provides enhanced contrast while Dolby Vision combines enhanced contrast with extended brightness and dynamic range for LCD televisions with LED backlighting technology, resulting in truer blacks, brighter whites and a vivid image.

In summary, we remain well positioned for TF-grade cycles on our DVD, broadcast, and gaming markets. We're focused on extending our brand and technology into newer market opportunities, including mobile, digital cinema and video, and we say the planned acquisition of Coding Technologies is an important element to our overall strategy.

With that, I'll turn it over to Kevin.

Thank you, Bill. I'd like to start by discussing Dolby's overall financial performance, follow by highlighting some of the major drivers of our P&L in the fourth quarter of 2007 and fiscal 2008, and finish by providing our guidance for fiscal 2008.

We had a strong fourth quarter and fiscal year, driven by strong revenue growth, a significant increase to our licensing margins, and a decline in our tax rate, each of which I will cover.

Revenue for the fourth quarter was $129 million, up 26% year-over-year. On a full year basis, Dolby's revenue was $182 million, up 23% from fiscal 2006. Fourth quarter licensing revenue was $103 million, an increase of 29% year-over-year, and 9% sequentially. Growth was primarily driven by strong results from our PC, consumer electronics and broadcast markets.

In the fourth quarter, our CE market experienced growth year-over-year and strong sequential growth on higher reported shipments on DVD, home theater to box, and AVR products, due in part to our compliance effort. The CE market made up over 35% of our licensing revenues in fiscal 2007 compared to approximately 45% in fiscal 2006, as strong growth from our PC and broadcast markets further diversified our revenue.

Our PC market experienced strong year-over-year growth in the fourth quarter as many consumer PCs continue to ship with Microsoft Vista, Home Premium, or Ultimate Edition, as well as with third-party DVD playback software, each containing Dolby technologies. Our PC market also experienced sequential growth, which we attribute to increased PC shipments and the continued strength of Microsoft Vista. The PC market represented approximately 35% of our licensing revenue in fiscal 2007 compared to just over 30% in fiscal 2006.

Our broadcast market experienced strong growth year-over-year in the fourth quarter on continued demand for digital televisions in North America and was slightly down sequentially. The broadcast market comprised over 15% of our licensing revenue in fiscal 2007, up from just over 10% in fiscal 2006.

In our other markets category, which includes gaming, automotive, and Via, we experienced year-over-year growth across each market, but a sequential decline led by softness in our gaming market ahead of the holiday season. In fiscal 2008, we will include revenues from the mobile market in our other category, which is where the majority of Coding Technologies revenue will fall.

Fourth quarter product sales were $19.6 million, up 32% year-over-year and 14% sequentially. Strong demand for our broadcast and cinema audio products drove sequential growth, while year-over-year growth resulted partly from last year's price increase for traditional cinema-related products. You may recall that in the third quarter of last fiscal year, exhibitors accelerated purchase orders ahead of anticipated price increases, which have the effect of reducing orders in the fourth quarter of fiscal 2006.

Fourth quarter services revenue declined 13% year-over-year and 21% sequentially. The sequential decline resulted largely from seasonality, as the fourth quarter is typically a slow one for film releases. The year-over-year decline resulted from differences in timing.

Turning to margins, our licensing gross margins improved significantly in the fourth quarter of fiscal 2007. As you may recall, over the past several quarters, we have been accruing royalty expense related to an ongoing dispute with an unrelated patent licensor. In the fourth quarter of fiscal 2007, we determined that it appropriate to cease accruing additional royalty expense related to this dispute. As a result, our licensing margin increased to 98% in the fourth quarter of fiscal 2007. We expect our licensing margins to be approximately 96% in fiscal 2008, as we do not expect to recognize additional expense related to this dispute going forward. The difference between the 98% gross margin in the fourth quarter compared to 96% in fiscal 2008 is due to the estimated amortization of intangibles from acquisitions.

Moving to products; our products gross margin was 49% in the fourth quarter of fiscal 2007, a decline of 4 points sequentially. As you recall, we have deferred approximately $7 million in revenue to day for Dolby Digital Cinema servers until certain CDI specifications are clarified and met. Since gross margins on initial digital cinema systems are significantly lower than our traditional cinema products, we expect product gross margin to be substantially impacted in the quarter that we recognize this revenue. We now expect to recognize this revenue in the second half off fiscal 2008. Services gross margin was 53%, down 8 points sequentially resulting from lower revenue in the fourth quarter.

Turning to tax, our fourth quarter fiscal 2007 tax rate was 21%, which was substantially lower largely due the cumulative benefit of a change in estimate covering prior periods to reflect a greater deduction for domestic production and export sales incentives. This resulted in tax rate of 31% for fiscal 2007. Going forward, we expect our tax rate to be approximately 35%.

Strong revenue growth, improved licensing margins, and a reduced tax rate resulted in fourth quarter net income of $44.2, or $0.39 per diluted share, compared with $25.2 million , or $0.22 per diluted share for the fourth quarter of fiscal 2006. For the full year, net income was $142.8 million, or $1.26 per diluted share compared to $89.5 million, or $0.80 per diluted share for 2006.

Net income includes stock-based compensation charges of $5.1 million for the fourth quarter of 2007, and $4.2 million for the fourth quarter a year ago. For the full fiscal year, net income includes stock-based compensation charges of $19.8 million, compared to $19.1 million in fiscal 2006.

Turning to the balance sheet, Dolby finished the year with approximately $673 million in cash, cash equivalents, and marketable securities. From operations, we had an approximately $55 million of cash and cash equivalents during the fourth quarter. As Bill discussed earlier, today we announced a definitive agreement to acquire Coding Technologies for a purchase price of approximately $250 million net of cash.

Let me share a few more financial data points. We expect Coding Technologies to add about $20 million of revenue in fiscal 2008. Roughly 80% of CT's revenue is related to the mobile market, with the remainder mostly related to the broadcast market. CT's margin structure is similar to Dolby's license business since it too is a licensing company. While we have not completed our purchase price valuation work, we currently approximate that the acquisition will result in an increase in amortization of intangibles of approximately $8 million per year, with approximately $4 million in cost of licensing, and $4 million in operating expense.

Let me turn to outlining our expectations for fiscal 2008. For licensing, we anticipate revenue of between $455 million $480 million in fiscal 2008, including approximately $20 million from the acquisition of Coding Technologies. Organic growth is expected to be driven primarily from our PC and broadcast markets, while products and services, we anticipate revenue of between $105 and $120 million. The anticipated shift in the market toward digital cinema makes this a difficult category to predict. We believe we are well positioned for sales growth in digital cinema and 3D product, but the rate of adoption remains uncertain.

We are basing our guidance on the assumption that we will have increased sales of digital cinema and 3D products, and that we begin recognizing revenue for digital cinema sales in the second half of fiscal 2008. If the digital cinema market develops as anticipated, we also anticipate increased competition for our cinema audio processors.

Turning to margins, we expect overall gross margins to approximate 85% to 86% for fiscal 2008. There are a number of key factors that we expect to affect our gross margins in fiscal 2008. Licensing margins were 98% in Q4 and will settle in at approximately 96% in Q in '08 and for the remainder of 2008. The drop from 98% to 96% is the result of the estimated amortization of intangibles from acquisitions.

The product margins were 49% in 2007. We expect them to be between 35% and 40% for fiscal 2008. The decrease is largely due to growth in digital cinema servers and 3D glasses, which have lower margins that our traditional product sales. Product margins could fall as low as 25% in the quarter we recognize the deferred digital cinema revenue.

Turning to operating expenses, we anticipate fiscal 2008 operating expenses to be approximately 45% to 47% of revenues, as we continue to invest in new initiatives such as mobile and video. Our tax rate is expected to be approximately 35%.

In summary, we expect fiscal 2008 revenue to be approximately $560 to $600 million, including approximately $20 million in revenue from Coding Technologies. We expect net income for fiscal 2008 to be approximately $148 to $160 million, which would result in earnings per diluted share of approximate $1.27 to $1.37. We expect stock-based compensation expense for the full year to be approximately $18 to $20 million. We are currently in the process of completing our purchase price valuation as it relates to our acquisition of Coding Technologies, and these numbers could change, and we are currently basing our guidance on an estimated $13 million of amortization of intangibles in fiscal 2008 compared to approximately $3 million in fiscal 2007.

We are currently assuming that there are no in-process R&D charges as a result of the acquisition of Coding Technologies. To the extent that we determine there is, it will be charged to the P&L in our first quarter of fiscal 2008.

This concludes our prepared remarks. I would now like to turn it over to the Operator for questions. Please go ahead.

Thank you. (OPERATOR INSTRUCTIONS).

Ralph Schackart, William Blair.

Good afternoon; another great set of results guys, and Kevin I appreciate the color for '08. A couple of questions; sort of at a high level Bill, I was just curious, could you help us understand how this technology is complementary, I'm sorry the Coding in complementary to what you're currently doing with DoCoMo?

Well DoCoMo is Dolby technology, we licensed Dolby technologies, which we've been putting into what we're calling the Dolby Mobile program here going ahead. I assume when you say this technology, you're referring the Coding Technologies; is that correct Ralph?

That's right Bill.

Yes they have slightly different technologies, which is very useful and very, very low [bend] with applications, but in this particular case, with NTT and DoCoMo, Dolby Digital makes a lot of sense, so we're actually, it's not actually pure Dolby Digital, it's a suite or products we've developed around Dolby Digital and other technologies that we think will enhance the mobile experience. Ramzi, would you like to add to that?

Yes just to add some color to what Bill said, the Dolby Mobile Technology is a processing order technology meant to make the phone sound better in playback of media, and the Coding Technology also known as spectral band replication, it's really, think of it as a turbo charger you attach to a codec such as AAC. So in the case of the Dolby Mobil with NTT, we're really talking about a post-process technology. In the case of CT technology, it's a codec which is going to be operating at a lower bandwidth than high quality.

In terms of the complementary nature of the businesses in addition to the technology aspects, I would just add that given CT's presence in the handset market, the relationships they've built up and their expertise, we do think that it potentially accelerates our strategy of driving Dolby Mobile across additional handset models.

Great, that was really helpful, and then Kevin, I was wondering if I missed it, but could you sort of help us think about the earnings impact from the acquisition? I know you gave us the data points and the revenue, and amortization; just curious if you could help us think about their earnings impact and/or the [outback] of Coding.

Yes, at the highest level Ralph, Coding Technologies is a licensing business and has very, a very similar margin structure to Dolby's licensing business. So you can think of it as adding about $20 million in licensing revenue and a similar margin structure.

Now of course, there is as I mentioned about $8 million of amortization for intangibles, which we've included in our GAAP guidance, roughly half of it in cost of licensing, half of it in outbacks. At the outset, we will have some integration costs and there are some purchasing accounting adjustments which affect us early on and that's included in our GAAP guidance.

Okay, great one last one and I'll turn it over. When you looked at this acquisition in terms of the internal ROI metrics compared to some other deals that you've done, can you sort of help us think about the order of magnitude of what made this deal relevant today and help us think about that? Thank you.

Well I think what makes this relevant for today Ralph, is we've always said we'd be focused on companies with strong IP portfolios, which we could combine with our expertise and realize complementary benefits. And in this case, as we discussed earlier, it's very complementary to our mobile strategy. We think it potentially accelerates the mobile strategy that we already had in place. And it also is very complementary to our Broadcast business. We think that as more and more digital media is available and broadcasters look to come up with new applications to get that digital media out there, we think that adding this technology to our portfolio allows us to meet even more of the needs of our customers.

And we think the addition of the Dolby brand in this situation will allow for further expansion of that business.

Great, seems like a powerful combination. Thanks guys.

Ingrid Chung, Goldman Sachs.

Good afternoon; congratulations on your results. My question is just about the three buckets that you talked about previously and what do those buckets look like for '08? And then also it sounds like you're just starting to recognize some revenue for mobile, does that go up kind of several times fold? Like how much of I guess CT's revenue do you think will be for the mobile market?

And then lastly in terms of the Internet market, who would you license technology to? Would it be a third party vendor or an OEM; who would it be?

Why don't I start off with the guidance question, and I'll turn the Internet question over to Ramzi when I'm done.

So assuming that you're referring to how we're thinking about each of our licensing markets?

Correct, yes.

So as you know, we separately report on CE which is where the majority of DVD players are reported for us, PC and Broadcast then our other category includes gaming, automotive, Via, and now mobile. So if I focus for the moment on organic growth since I told you that $20 of the revenue is a result, is what we're expecting from the acquisition, the guidance range came out to roughly to 12 to just under 20% growth from licensing. We're expecting CE to be slightly up; that's what we're hearing from industry analysts are expecting for that market. And do we therefore expect most of our growth to come in percentage terms from PC, Broadcast, and the other markets.

So we're expecting close to 20% growth at least from each of those markets, and we're actually expecting a little more than that out of our broadcast market. Now when we layer in the mobile market in particular, the combination with Coding Technologies the other market category does grow faster because that $20 million drops right into the other, well most of the $20 million drops into that category.

Okay great, thanks.

On the Internet applications, there's several applications we believe will benefit from the efficiency of spectral band replications that apply in HGAC, starting with streaming application such as radio on the Internet, TV on the Internet, IT TV, even video on demand on the Internet as well as of course, the large market of music delivery, can all benefit from a lower Bandwidth high-quality technology such as CT's.

Target companies, as was mentioned earlier, could be such as Apple, Real Networks, and the type of companies which provide music players, radio players, all can benefit from technologies which CT offers.

Okay thank you.

Steven Frankel, Canaccord Adams.

Good afternoon, and again obviously, very impressive results. Just to dig into digital cinema for a little bit, how many servers do you have installed in the field today, and is there a ramp between now and Beowulf on the server side as well as the 3D equipment side?

Hi Steven, this is Tim. Yes server today we're in commercial theaters about 550 and another 50 in the studios and their special screening rooms. So that's where we are today.

In terms of Beowulf, it opens next week actually, although we are installing as we speak, we're expecting to do between 75 and 80 3D screens for Beowulf by the time it opens, and yes a certain number of those have gone is with new servers as well as obviously putting 3D into existing ones.

So that's the kind of ramping we're expecting, but it is all happening within the next week.

Does that answer your questions?

It does, and the 550 place you number two in the server market? What do you think your market share is?

Obviously, the access I see roll out over the past couple of years has placed a large number of servers out there, so we're clearly behind on market share. But as Kevin mentioned, we do believe that this will be a transitional year for digital cinema, which on the one hand makes it very hard to predict, but we do believe we're well positioned if it does happen, which we expect it to, with our server and obviously, we've got a number of products that are in this market; we've got he server as you know; we announced in the last trade show, and we'll shortly be introducing an audio processor, a digital cinema only version of our flagship, CP650.

We also have a couple of integration products and the cinema and, of course, the 3D as well. So with that whole suite of products, and the expectation that the cinema starts ramping this year, we do feel we're well positioned.

Okay and then looking at the format war in Blue Laser DVDs do you think the logjam is getting worse or better in the last 90 days?

Could you just add some more color what you mean by logjam?

In other words, we have a format war and is it getting any closer to getting resolved, or do you think that the situation is getting more clouded given what's going on in the HD DVD camp lately?

Well every time it seems that something is going to let up, somebody drops their price and the market becomes even more competitive and we are in a situation where we're seeing very aggressive pricing from both sides, continual generation of content for both formats. And of course, as you know, we're in both formats, so we're just kind of sitting back and watching, but at this point we really don't see any letup.

Okay, and then on the PC market as you probably now get a little bit of view of which customers are gong to do post-Christmas, do you think the dual installs that's being in Vista and in the third-party software DVD players is going to continue post-Christmas season?

That is our feel as well. It is really difficult to predict what that trend is going to look like, but at least pf the first half of FY '08 we agree that there doesn't seem to be a letup of that trend. Past first half of FY '08, it's difficult to predict so we're just gong to wait and see how that market plays out.

Thank you very much.

Brian Thackray, Deutsche Bank.

Thanks guys, good quarter. On the Broadcast market, you talk about growth next year being north of 20%; can you talk within that a little bit about your expectations around government subsidies around set-top box, kind of what you're expecting there?

We think the big drivers for us next year will be continue the option of digital television is probably the highest growth areas within our broadcast licensing; set-top box is another category for us. We expect to do well there. I think you're referring to probably the potential for converter boxes as we get closer to FCC mandate. We are not expecting that to be a big driver for us in the 2008 timeframe; we think that's a dynamitic that will probably come very close to the mandate in 2009.

Don't forget we have the 3-month lag.

In the PC market, can you guys maybe a little and give a little more insight into what you saw from Vista in terms of the incremental contribution in this quarter, where you expect that to go over the next few quarters?

And then also for Acer and Toshiba deals in terms of how much momentum or contribution you're seeing for those deals from the past summer?

So in terms of Vista, the sequential growth that we saw was driven primarily by increased PC sales and a continued strong attach rate of the Vista Premium Editions, in which we're included.

As Ramzi said earlier, we do see that continuing at least through the holiday season. Our guidance actually assumes that there is some lesser incidents of third-party DVD attachments when Premium Vista is sold, so we're assuming, we're leaving a little bit of room there in the second half in our guidance, although as Ramzi said, we don't have any specific evidence of that one way or the other.

In terms of your question about Acer and other manufacturers that have adopted some of our premium PC entertainment experience. We garnered a number of design wins last year, as you know. There was not much revenue actually, it was mostly design win stage, but we do believe that that program will begin contributing revenue in 2008.

Okay and last question in regards to CT, can you talk about the revenue run rate, what it's doing today or in the last 12 months?

It's been growing at about, as I told you we're expecting about $20 million in our fiscal year; they're on a calendar year. Their last full reported period was calendar '06, which was about $16 million. It's been growing since then at about 20% a year, and of course, as we give our guidance, we factor in purchasing, accounting adjustments, and those sorts of things which affect you in the early stages.

I got it, thanks, good quarter.

Paul Coster, JP Morgan.

Thank you; Kevin I may not have completely understood your statement about licensing, the upward adjustments to the gross margin expectations. Does that mean that the licensing dispute is resolved, or does it mean that it just confidently will be?

Well, what we said is that we determined that there was no need to continue accruing any additional expense, and that to the -- that was what we said. Is that clear?

So there's no residual conflict with the third party then?

Well you know we've been accruing some expenses over the last year. There's -- so we have an accrual on the books, and we think that's sufficient to cover any outcome of the matter.

Okay got it; in terms of the cinema business, what is the, what should we be thinking about in terms of long-terms gross margin targets?

Sorry, I missed the beginning; did you say cinema in particular?

Yes.

Obviously, it's the early stage of the product cycle, and we've been focused on the quality of the product and customizing it to what we think the market needs. So the early sales are relatively low margins. I said we expect our overall product margins this year will probably be in the range of 35 to 40%.

And longer term, what should we be thinking about?

Over the longer term, once we're talking about at volume, and if we're fully considered I would expect them to get back into the 40s again.

Okay and on the -- we were looking forward to do some acquisitions this year, and you started off in a corrective manner, but I guess I was expecting it to be video-related; it's really still strategic drop for the Company on a go-forward basis.

Yes Paul, video is extremely strategic. We just could not pass up the opportunity to bring Coding Technologies on board because it complements everything we're doing, especially giving some additional inroads into the broadcast market, as well as supporting the mobile market. But we continue to focus on video; we're investing the infrastructure to bring products to the market, to take those technologies out to license, and video is a very key strategy for the future.

And as we think about fiscal year '08, should we expect something that positions or something more transformational in nature?

In terms of, you mean transformational in term of products or technologies or -- ?

That plus scale of the acquisition.

Well we're just starting to, we think take advantage of the acquisition of Bright Side last spring, working very closely to bring their technologies to market and complement with some other technologies we've been developing for the last couple of years at our Imaging Group. And we fully expect to start seeing some technologies and products out in the marketplace, as well as some license products in FY '08.

You haven't bought your way into video codec technology, so is that likely to figure in your strategy going forward?

Well, as you probably know, there's video codecs which are out there; H.264 is pretty much one of the standards being used. We have technologies which we wrap around that which we think will enhance the experience, so that is the approach we're following. You said, butt into the video technologies; I'm not sure what you mean there, but our approach is to take the standardized options which are available and [inaudible].

Okay got it, thanks very much.

Andy Hargreaves, Pacific Crest Securities.

Hey guys, another question about new products. On Dolby Volume, have you had any traction there, and does that contribute to your CE, your broadcast growth in '08?

We've had very positive response to our licensees in terms of demand for the technology. The continue to be excite about it; they demand it there. We do foresee having some product, some prototype product on display at the upcoming CES. In terms of revenue growth, we haven't really built much for FY '08. Do you want to add answer that Kevin?

Okay and then on broadcast in the quarter, you pointed out TV growth as being primary drivers. Did I hear you right there, or was set-top box really strong as well? And can you give us any sense of what the mix within that broadcast business is of U.S. versus international?

So as to your first question, I was commenting earlier on reflecting on fiscal 2007 growth, the drivers being digital TV growth, as well as set-top box growth; those the two main drivers. But we haven't provided any geographic information by segment and typically we're getting reported to by our licensees and we don't always have perfect information on end user.

Okay, and then lastly, you mentioned - I think I heard you right -- that there's a potential for increased competition in digital cinema on the audio side if it gains traction. Did I -- can you just explain the dynamics there?

Yes that's correct, to the extent the industry does transition to digital cinema and away from traditional film products than our current CP650 of course has technology in it and that takes us to the traditional film, 35mm film so to the extent that we're transitioned to digital cinema, there could be a decrease in demand for traditional film products, which is why I mentioned we have recently shown and will soon introduce a digital cinema only version of our CP650, but of course, with that not having the Dolby digital proprietary technology in there we do anticipate increased competition for that product.

I got you; thanks.

Hunter DuBose, Morgan Stanley.

Thanks guys; I just have a couple of questions for you, the first of which is could you tell us what the economics of the 3D deployments for Beowulf look like in terms of revenue and gross margin?

And second of all, just coming back to the gross margins on the licensing business, I wanted to clarify whether the 96% gross margins you're guiding towards for 2008 are representative of the gross margins beyond that period or simply for 2008?

The beyond that period, could you give us just a bit more color why they stepped up quite meaningfully from the sort of low-90% level they've been at since 2002 on a pro forma basis? Thank you.

Yes Hunter; the 3D deployment, the equipment that we supply for 3D is some hardware, some software and the color wheels that Bill referred to in his opening remarks. That whole package is approximately $15,000 -- fifteen, 1-5 -- and of course, we also supply many pairs of glasses for each screen and they are a little bit under $50.

Margin-wise, the margins on the 3D products, which go into the projector are typically of our regular product margins. However, on the glasses, Kevin referred to in his remarks, that's clearly almost a consumable item and therefore much lower margins on that.

In terms of the licensing gross margins, I'm sure you remember that over the past several quarters, we had been accruing royalty expense related to an ongoing dispute with an unrelated patent licensor, and so our licensing margins have stayed at their historic levels of about 91%. This quarter, or the fiscal fourth quarter of 2007, we determined that it was appropriate to cease accruing those additional royalty expenses. That's what resulted in the 98% licensing margins for the quarter.

As we look to 2008, the change from 98 to 96 is really due to amortization of intangibles for acquisitions, so that was our guidance for 2008 and we don't have any guidance beyond that.

Is there any reason to believe that it would stay at the higher level versus reverting to the historic lower level of around 90%?

All else held equal, it would stay at the 96% level. The only changes would be if we entered into any sort of additional licensing agreements as we introduce new technologies, new products, so all else held equal, [inaudible] would stay exactly the same. That's why we're guiding for 96% in 2008.

Okay great, thanks guys.

Mike Olson, Piper Jaffray.

Hey well done in the quarter; all my questions have pretty much been answered, but I'll just throw one more in there on the CDI spec. I know this is somewhat out of your hands but is there a risk that this looks beyond second half '08 and what could cause that to be delayed or lead to it getting completed on time, and I guess the root of my question is what really needs to be done here to get that done, and do you feel that the timing of when you've assumed you'll be able to recognize digital cinema revenues conservative or more aggressive? Thanks.

As you said Mike, it is a little out of our hands. And specifically what needs to be done is we need the industry standards bodies to agree upon a standard or some elements that are written into the DCI spec. So specifically we're waiting for the SMPCE body to publish a spec, and as soon as they do so, we'll start writing the code to implement that spec.

So we have an anticipated publish date, and standard bodies and publishing standards sometimes takes longer than you require. But we're expecting to be able to do all the work that's necessary and be able to recognize in the second half of the year.

Okay understood; thank you very much.

Alan Davis, DA Davidson.

Just a couple here guys; nice quarter. Kevin are you willing to share for the impact of CT next year, the bottom line and net impact excluding the amortization of intangible increase?

Well, like I said, it's about $20 million of revenue. If you exclude the amortization of intangibles, and against here are some early effects of integration costs and purchase accounting. It basically looks like the same type of margin structure as Dolby's licensing business.

Okay, all right, and then on just curious, do you underline assumptions for the number of digital cinema screens getting rolled out globally in your fiscal '08?

Alan we're looking to the deployment agencies that are talking about deploying this year, and a number of them are talking about deploying in the March timeframe. And as we've seen in the past, not everything that is anticipated comes to pass, so and there are many issues, the DCI one that we just mentioned being one of them. That could slow that down, but we do anticipate that people will start moving this year and the, as for the actual numbers, it's very dependent on whether these things come to pass or not.

Fair to say you're taking a conservative approach with your assumptions?

I think we're taking a realistic approach, yes.

Okay, and then on the M&A side, jus curious how you might characterize your activity there? I know you just obviously acquired CT but looking forward, I mean could you characterize kind of the size of future deals, how big are you willing to go, depending on the technology you're acquiring and is there a minimum cash balance that you would like to have on the balance sheet that you wouldn't go below? Maybe just trying to get a characterization of maybe the size of the deals in the pipeline.

Well, any potential acquisitions obviously we have to fit into what we're dong from a technology standpoint whether they be in the audio field or video field or other. Coding Technologies was obviously our biggest acquisition to date, but we did acquire a bright side earlier this year, as you well know, which was much smaller. We don't have any specific parameters in terms of acquisitions and don't comment upon anything we may be looking at. But suffice it to say we will go after any acquisition which we believe we can absorb financially. We don't have any set fixed number for cash on the balance sheet, but we obviously believe that cash is an important asset, and we will make sure that if and when we find any proposed acquisitions which fit from a technological standpoint that we would make certain that transaction fits in with our overall financials.

Okay fair enough; an d one last one here Kevin, I missed for fiscal '08, what's the projected amortization on intangibles and then the total D&A?

The projected amortization of intangibles is about $13 million, and that's the estimate as it relates to the Coding Technologies acquisition is preliminary at this stage, but our current estimate is $13 million.

I haven't given a total D&A estimate yet, but we expect that to be in the neighborhood of just over $25 million, just over $25 million.

Great thank you.

And we have no further questions at this time. Mr. Jasper, I would like to turn the conference back over to you for closing remarks.

Great, well we feel we've had an excellent year, and we look forward to talking to you next quarter at the end of our December quarter, first quarter fiscal year 2008. We appreciate your interest, and again thank you very much. Good day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect at this time.