Dolby Laboratories Inc (DLB) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fiscal second quarter 2008 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, May 1, 2008. I would now like to turn the conference over to Kevin Yeaman, Chief Financial Officer of Dolby Laboratories. Please go ahead, Mr. Yeaman.

Thank you, operator, and good afternoon, everyone. Welcome to Dolby Laboratories second quarter fiscal 2008 earnings conference call. Joining me today is Bill Jasper, Dolby Laboratories President and CEO. In addition, Tim Partridge, Executive Vice President of Products and Technologies; Ramzi Haidamus, Executive Vice President of Sales and; and Marty Jaffe, Vice President of Business Affairs, 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 industries in which we compete and our expectations concerning how those trends will affect our operating results; the capabilities and market acceptance of our products and technologies and our strategic and operational plans.

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 and any subsequently filed quarterly reports on Form 10-Q available at www.sec.gov or on our website at www.Dolby.com under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise.

As for the structure of this call, Bill will begin with an overview of the business 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. Thank you for joining us today. I'm happy to report strong financial results with fiscal second quarter year-over-year growth of 34% in revenue and 44% in earnings per share. During the quarter, we continued to benefit from the inclusion of Dolby technologies in a wide array of entertainment platforms.

On today's call, I will like to discuss how we continue to position Dolby for a number of near-term opportunities, including PC-based entertainment, digital broadcasts and next-generation DVD and gaming, as well as for longer term opportunities with Dolby Volume, Dolby Mobile and Digital Cinema.

In our PC market, we are benefiting from the inclusion of Dolby technologies in widely used software while we continue to position Dolby for the trend towards media-centric PCs. Today, consumers are increasingly using notebook PCs as portable media centers for the playback of music and video. We are continuing to work with PC OEMs to incorporate additional Dolby technologies that enhance the audio experience from their PC regardless of the input source.

To address this trend we released our second-generation PC entertainment experience program in March. PCEE enables PC makers to integrate the same audio features, performance and flexibility found in many of the most popular consumer electronic devices. In addition to offering more audio technologies, it supports surround sound and includes a PC control center offering and user-friendly graphic interface that makes it easier to configure and control the listening experience.

Moreover, our PC market remains strong as many PCs shipped with Microsoft Vista Home Premium or Ultimate editions, as well as with third-party DVD playback software, all containing Dolby technology.

In our broadcast market, we continue to position Dolby for the worldwide growth of digital television. In North America, we remain well positioned with Dolby Digital as the mandated audio standard for digital terrestrial broadcasts, the standard for the U.S. cable industry, and the de facto multi-channel standard for satellite providers. As a result, we benefit from digital television and digital set-top box shipments in the United States that contain a digital tuner.

Dolby Digital is also included in the U.S. digital converter box specification, which is aimed at households who don't plan to upgrade their analog televisions. The government is offering up two $40.00 coupons per household to put towards converter boxes. Already, some have begun to arrive on store shelves and are priced in the $50.00 to $70.00 range. In the digital converter box category, we expect to receive the majority of our licensing revenue in fiscal 2009.

In the EMEA region, we are well positioned for HD television in Europe with a number of broadcasters, including Dolby Digital in their HD set-top box shipments. A number of manufacturers are including Dolby Digital Plus in their European digital TV shipments.

In the Asia/Pacific region, we are benefiting in a number of geographic areas, and South Korea has adopted the APSC standard. Dolby Digital is included in South Korean TV shipments containing a digital tuner.

In Japan, the government has adopted AAC as its audio format for digital television, and as one of the licensors of AAC, Dolby receives a portion of the AAC royalties.

Finally, the addition of AAC Plus to our technology portfolio enables us to provide international broadcasters with a wider range of multi-channel solutions that meet their specific requirements. Given AAC Plus' efficient compression, we believe it is well suited for broadcasters looking to improve bandwidth efficiency.

Turning to high definition DVD and gaming, we remain well positioned for an upgrade cycle in each. In the DVD category, Dolby technology is mandated in the Blue Ray format. Now that Toshiba has announced it will no longer develop, manufacture and market HD DVD players, there will no longer be competing formats, and as a result a major obstacle to consumer adoption has been removed. This increases the potential for improved progress in the number of Blue Ray titles released by studios and in the number of Blue Ray players shipped by manufacturers at better price points. We believe these developments should help the adoption rate of Blue Ray over time.

On the gaming side, Dolby remains well positioned with technologies incorporated in the PS3 and Xbox 360. The second fiscal quarter marked a strong period for gaming, as we saw robust licensing growth from the sale of PS3 and Xbox 360 platforms.

Beyond these near-term opportunities we continue to make progress in new audio and imaging initiatives. On the audio side, we remain focused on delivering Dolby Volume to the television and AVR markets and Dolby Mobile to the handset market. Toshiba has incorporated Dolby Volume into two new models of HD televisions expected to launch in Japan this month. Dolby Volume allows consumer electronics' products to deliver consistent volume levels from various audio sources while enhancing dialog intelligibility and improving overall clarity of the audio content at lower volume levels.

In November, Sharp incorporated Dolby Mobile into two handset models shipping in Japan. In addition to working with Sharp, we are demonstrating Dolby Mobile to carriers, handset manufacturers and software providers across the mobile ecosystem.

In our imaging initiatives, we are focused on positioning ourselves for the transition to Digital Cinema and digital 3D, as well as on the development of our HDR technology for next-generation LCD displays.

We were encouraged by our meetings with major providers of Digital Cinema while at the Show West Conference in March, and we believe that our Digital Cinema server is well positioned for this market. We also believe that we provide a compelling 3D solution which delivers an extremely clear 3D image and offers increased flexibility to exhibitors by utilizing the standard white screen in auditoriums today.

Beyond cinema, we remain focused on developing our high-dynamic range technologies for next-generation LCD displays. Dolby's high-dynamic range technologies provide dramatically enhanced contrast with extended brightness and dynamic range for LCD televisions with LED backlighting technology. This results in truer blacks, brighter whites and a vivid image.

In summary, we continue to pursue additional opportunities while we benefit from the inclusion of Dolby technologies in a wide range of entertainment products. As we pursue these opportunities, Dolby's dedicated and passionate employees, global brand and industry-wide position will be key assets. With that, I'll turn it over to Kevin.

Thank you, Bill. I'd like to discuss Dolby's overall financial performance and highlight some of the major drivers for the quarter.

Revenue for the second quarter was $172.6 million, up 34% year-over-year and 15% sequentially. Second quarter licensing revenue was $149.6 million, an increase of 40% year-over-year and 22% sequentially. Growth was primarily driven by strong results from our PC market as well as from our gaming and broadcast markets. After excluding $7.7 million of prior-period PC royalties recorded in the second quarter of fiscal 2007, licensing revenue from our PC market doubled year-over-year this quarter.

The year-over-year performance was primarily driven by shipments of PCs with Microsoft Vista Home Premium or Ultimate editions and/or third-party DVD playback software, each containing Dolby technologies. Licensing revenue from our PC market experienced strong sequential growth in the second quarter of fiscal 2008, which we attribute to increased PC shipments and the continued strength of Microsoft Vista.

Our broadcast market grew over 20% year-over-year on demand for digital televisions containing our technologies. Sequentially, broadcast grew on increased revenue from digital television and set-top box shipments.

Our CE market experienced mid-single digit growth year-over-year and sequentially on higher-reported revenue from standard definition DVD and home theater in a box.

Our Other markets category had very strong sequential growth and nearly doubled year-over-year led by revenue from gaming and from the addition of our Mobile market with the acquisition of Coding Technologies in the first quarter of fiscal 2008.

Second quarter product sales were $15.6 million, up 1% year-over-year and down 22% sequentially. Product sales declined sequentially due to a reduction in shipments of our Cinema audio processors, and because we sold more of our digital 3D systems in the first quarter driven by the release of Beowulf.

Second quarter services revenue was $7.3 million, an increase of 6% year-over-year and a decline of 6% sequentially.

Turning to margins, our licensing gross margin was 96% in the second quarter. Our product margin was 45% in the second quarter of fiscal 2008, an increase of 3 points sequentially. Product margins increased as a result of higher 3D-related revenue in the first quarter of fiscal 2008 as compared to the second quarter. Our 3D products carry a lower margin than our traditional Cinema products.

At the end of the second fiscal quarter, we had approximately $20 million in deferred revenue related to Digital Cinema. As you may recall, we had been expecting to recognize this revenue in the second half of fiscal 2008. However, we now expect to recognize this revenue in the first half of fiscal 2009. To recognize this revenue certain engineering work needs to be completed in order to meet the recently agreed-upon DCI specs. Following that, we need to get the third-party certification process completed. We believe we are on track to meet our internal engineering targets to be fully DCI-compliant in fiscal 2008. However, the third-party certification process is not yet in place and it is unlikely that we can obtain this certification in time to recognize this revenue in the second half of fiscal 2008.

Turning to Services, Services gross margin was 57%, down 4 points sequentially resulting from lower revenue.

Operating expenses were $70.8 million in the second quarter of fiscal 2008, up 9% from the prior quarter. SG&A was $55.3 million, an increase of $4.3 million sequentially, while R&D was $15.7 million, an increase of $1.8 million sequentially. Both SG&A and R&D rose as a result of higher personnel expenses due to increased employee bonuses, annual merit increases and increased headcount.

Other Income was down primarily because of the decrease in interest income from the lower cash balance following the acquisition of Coding Technologies, and other expenses of approximately $1 million. We expect Other income to approximate interest income and for interest income to run at just under $4 million per quarter in the rest of fiscal 2008.

Turning to tax, our tax rate for the second quarter of fiscal 2008 was 34% and we continue to expect our tax rate for the year to be approximately 35%. Fiscal second quarter net income was $57 million or $0.49 per diluted share compared to $39 million or $0.34 per diluted share for the second quarter of fiscal 2007.

Net income reflects stock-based compensation charges of $6.1 million for the second quarter of fiscal 2008 and $4.8 million for the second quarter of fiscal 2007. Net income also reflects charges related to the amortization of intangibles of $4.1 million for the second quarter of fiscal 2008 compared to $550,000 for the second quarter of fiscal 2007.

Turning to the balance sheet, Dolby finished the quarter with approximately $540 million in cash equivalents and marketable securities. We added approximately $35 million in cash flows from Operations in the second quarter. In the second quarter, cash flow from Operations trailed Net Income by approximately $20 million due to a timing change in our quarterly tax payments, which resulted in both tax payments for the first half of fiscal 2008 falling in our second quarter, and as a result of the payout of the Company's annual employee bonus.

On a year-to-date basis, cash flow from Operations was approximately $110 million, which is slightly above Net Income for the same period. We have approximately $80 million in auction rate certificate securities. We believe our auction rate portfolio is of high-credit quality, as 100% carry a AAA or AA credit rating and have minimal history of default, and 85% of securities are collateralized by the Federal Financial Education Lending Program. However, given the current lack of liquidity in the auction rate market, we concluded that the fair value is no longer equal to the par value for these securities and recorded an unrealized loss of $3.5 million on the Consolidated Balance Sheet.

Additionally, we reclassified these securities from short-term investments to long-term investments due to the lack of short-term liquidity available for these securities. We deem this decline in fair value to be temporary based partly on our ability and intent to hold these investments until liquidity returns to the market.

Let me turn to outlining our expectations for fiscal 2008. For licensing, we now anticipate revenue of between $495 million and $515 million in fiscal 2008 as we have increased our expectations for the PC market. For products and services, we now anticipate revenue of between $90 and $100 million. Gross margin for product-related revenue is now expected to be around 45%. Product margins are higher than we previously guided for because lower margin deferred revenue related to our Digital Cinema systems is no longer included in our 2008 outlook.

In summary, we now expect fiscal 2008 revenue to be approximately $585 to $615 million. We now expect Net Income for fiscal 2008 to be approximately $170 million to $182 million, and earnings per diluted share to be approximately $1.47 to $1.57. We now expect stock-based compensation expense for the full year to be approximately $22 million and for amortization of intangibles to be approximately $13 million.

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

Thank you. (Operator Instructions) We'll take our first question from Ingrid Chung with Goldman Sachs.

All right, good afternoon. Thanks and a great quarter. So, if I'm doing my math right, it looks like at the midpoint of revenue guidance that you have to do about a 11% growth in terms of revenue in the second half. I was just wondering if that is -- if your reluctance to raise revenue guidance is something you're seeing in the macro environment, or is it the lagging of Vista sales or something else that you've been seeing? And then secondly, on PCEE, I was wondering with the new version that you launched in March whether you've seen some increased penetration with Acer, Lenovo and Toshiba?

Sure, so and Ingrid you're focused on total revenue, right?

Yes-yes.

So, if you break that down into licensing versus products and services, you'll see that the licensing range of guidance for the second half equates to about 13% to 23%. Whereas, products and services is down to slightly up but on the low side down double digits. On the products and services, that's because of our pushing the Digital Cinema revenue into the beginning of '09.

On the licensing side, the 13% to 23% revenue growth, our outlook has been raised because of our view of the PC market. We entered the year, I think, with what we thought were reasonable estimates for PC market growth and, as you know, an element of caution around whether the ISV attach rate would continue along with the shipments of Vista Premium.

As the year has gone on, we have continued to see that attach rate hold firm. We're half way through the year so we're increasingly confident that will continue. But even though we do see Vista lagging in the third and fourth quarters, in other words comparing Vista quarters to Vista quarters, we do see a number of elements that will drive higher revenue growth than the overall PC unit growth rate. We see we still have good year-over-year comps in the second half on PCEE. We still have good year-over-year comps on the percentage of PC units that are shipping with Microsoft Vista Premium or Ultimate. And we still see the notebooks' part of the market driving most of the growth as opposed to desktops, which of course works in our favor.

So, why don't I turn it over to Ramzi for color on how we're progressing on the PCEE?

The PCEE program has shown continued growth. We're pretty excited. The three companies you named; Acer, Lenovo and Toshiba are the leaders in terms of SKU'd option. They have grown from last year to this year. Also, we're looking at positive adoption for the second-generation of PCEE for these three companies and beyond, which the PCEE service includes surround sound, Dolby headphone. And we've seen similar market acceptance to that, so overall the trend looks fairly encouraging.

Okay, great. Thanks.

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

Good afternoon, another great set of results, guys. Bill, I was wondering if you could help us sort of frame this PC market opportunity that you have that continues to be pretty robust; maybe in a pretty high-level sense? The question I get all the time is, what's the penetration rate with Dolby? What's the sustainability of this growth rate? Maybe you could give it to us in a baseball analogy. What inning are you in, in this sort of growth trajectory with the PC business today?

I like your framing of the question, Ralph.

Making it easy for you, Bill.

We still see a lot of growth. Obviously, the whole industry is moving much more towards the use of notebooks as media-centric PCs and we're well positioned there. We still see growth coming from Microsoft going forward. We think there's continued, as Kevin pointed out, continued attach rates for second ISPs, Dolby Digital decoders on PCs. So we remain fairly-well optimistic. We've factored in greater confidence that many PCs will ship through fiscal 2008 with the DVD playback software. Overall, we're comfortable with our unit growth assumptions. We expect +/-10% unit growth worldwide; again, mainly on notebook computers. So, we think we're very positive for the future.

Kevin, you want to add anything?

I guess the only thing I would add is that, and actually Ramzi has commented as well, but we're just beginning to see PC units ship with Blue Ray players. So while that's very early days for us and probably not a factor in '08, it is over the longer term another reason to believe that there's strength in the ISV market for DVD players.

Great, that was helpful. And one more for Kevin if I could? Kevin, I have to ask the consumer question here; and your new set of results obviously don't show it, but are you seeing any other consumer headwind start to work their way into the business? And I think last quarter you said you had visibility into about half of the yearly numbers, and so far no consumer rolling in the business. I was just wondering if you could give us an update there? Thanks.

Yes, so far we haven't seen any tangible signs of it and, you know, at this point we obviously with half our year done we're one quarter in arrears, obviously, in terms of the reports we receive. But we do look to industry analyst data. We look to the results of other companies in ecosystems that are relevant to our markets. We speak to our customers and we triangulate all of that when we come up with a market growth assumption for the unit categories that are particularly important to our revenue growth rates. And we think we take a conservative view of those data points, but we haven't seen any tangible signs of slowdown.

And I guess the other thing that I would emphasize that we emphasized last quarter but still holds true for the rest of year, and that's for two of our largest growth markets, PC and broadcast, the growth is being driven largely by increased attach rates relative to the prior-years quarters. We're on -- we have more technologies in PCs this year than we did a year ago because of the increasing attach rate of Vista Premium, the continued strength of ISVs, the PCEE initiative.

We are on more televisions and set-top boxes around the world because of the fact that in North America any TV shipping with a tuner has to have a digital tuner due to the fact that in Europe you're now seeing televisions shipping with Dolby Digital to take advantage of the HD services, which are also driving set-top box growth in Europe. So, those are the primary drivers, and as for the consumer, we read everything eagerly as you do but haven't seen anything specific yet.

And I think one thing to remember, Ralph, is the fact that we are global. We're out there not just in North America but many, many countries around the world. So I think to the extent that the U.S. does slide slightly, we're well positioned in the rest of the world.

Great. Thanks, guys.

We'll take our next question from Mike Olson with Piper Jaffray.

Thanks. Good afternoon, a couple of quick questions. As far as the gross margin for the year, I guess with the change in revenue mix for the year what do you think gross margin could be for the remainder of the year given it was 90% this quarter? Can it stay at that level?

So yes, it can stay at about that level, because we're going to see -- we're going to continue to see a similar mix until we start recognizing the Digital Cinema revenue in the beginning of next year, and then we'll start to see a shift back toward more balance on the product side.

And then as far as Dolby Volume, that seems like that could be a pretty huge opportunity, and can you just talk about the kinds of royalty rates we're looking at? I would guess it's less than the $1.00 average royalty for the Company, but is it significantly lower?

Much with like the other technologies we have not announced publicly the royalty ASBs on specific technologies. But to your earlier comment, it continues to look like a good opportunity for us. Right now, we're at the phase where a series of integrated circuits and implementation chips are getting tested and certified. Our goal is to have several of those be in the marketplace as we speak and as we edge toward the end of the fiscal year. And the next phase, of course, is the product update by televisions and receivers, and we saw the Toshiba announcement with the first two televisions tested/certified and we'll be shipping in Japan. So, we're on the right track. It's the track that we expected to be on, so it's looking fairly good.

Okay and then just one last quick one. I understand that Dolby is becoming more of a de facto standard in Europe on the digital TV side. Is there any chance European countries adopt HAAC for digital TV and you've become mandatory?

The switch to HAAC in Europe is pretty unlikely. The European community is very comfortable with the performance of their DVD standard. And in other areas where it's not DVD, such as satellite and broadcast, of course, those are their own standards. So, we do not see that shift. Nevertheless, we're very happy with the uptake of Dolby Digital Plus and HAAC in those regions.

Okay, thanks a lot.

We'll take our next question from Paul Coster with J.P. Morgan.

Thank you. Is there any way in which you can quantify the importance of the increased attach rate as a revenue driver by product category?

Well, I guess I would say that we have been in the first half of the year, as we said, each of those quarters we've doubled the revenue from the PC category. So, the increased attach rate in the form of Vista Premium and Ultimate and the increased attach rate of PCEE is the primary driver of that revenue growth over and above PC unit growth and the shift toward notebooks. So, it's the largest driver.

What about in the Other categories?

And in broadcast, again, we've been growing at a healthy clip. It was just over 15% of revenue in 2007, and it'll be between 15% and 20% in 2008. And it's been, again, the largest driver. I mean we're planning for growth in the mid-single digits for worldwide TV shipments. So really where a lot of the growth is coming from is the increased attach rate both in North America and Europe.

In the consumer electronics' market, that's where for the largest product category in that market for our standard DVD, the attach rate is not particularly a driver there. So it is very much a matter of unit growth. We're expecting a decline in unit growth around the world in standard DVD players. What's offsetting that is our COLA increases, but also increased attach rates and inclusion of technologies in some of these smaller, but in some cases growing categories such as digital camcorders, home theater-in-a-box systems, etc.

How long will we have to wait before Mobile becomes a sort of material subset of your licensing?

Well, it's a meaningful part of our Other category with the addition of Coding Technologies. The revenues from the inclusion of HAAC on many multi-media handsets around the world is part of the Other category. I wouldn't venture a guess yet as to when we might be breaking that out as a separate category from Other.

Okay, great. Thank you.

We'll take your next question from Brian Thackray with Deutsche Bank.

Thanks, guys, good quarter. If we look at Europe and the television and broadcast markets, can you give us a sense if your penetration has increased significantly at all in the last three months, and where you expect that to go over say the next six months?

I'm sorry I missed the very beginning of your question.

If you look at your penetration of Europe in the television and broadcast markets, where do you think that can go in the next six months, and has it changed at all materially in the last three?

Well, first of all, the data which we get on this ourselves gives us a pretty good ability to get measurements on that on an annual basis, but in increments of a quarter or two it's more difficult for us to address. What I can tell you is that there's been a significant increase in the attach rate in '08 over '07, and we think there is considerable growth available to us over the next couple of years as digital television continues to adopt Dolby Digital and HAAC.

Okay and I may have missed this, but on the second-gen PCEE, is there a royalty change at all with that technology? And can you also talk about other potential OEMs adopting PCEE in addition to the three major ones you have now?

Let me answer your second question first. The PCEE continues to see new adoption. We're continually seeing, certainly over last year an increased adoption both in terms of SKUs and company, number of companies adopting it; and we will be looking over the next 12 months at adding more companies and SKUs to take on the PCEE second-generation. So overall, it is on a growth trajectory, both from the perspective of SKUs as well as the number of companies adopting the technology.

In terms of the ASP question, we're not going to get into breaking out the ASPs by technology, put I would say that the greater significance of pointing out the next-generation of PCEE continues to be a stage where we're out getting lots of design wins, getting on my SKUs, and that's really -- that should be the primary focus in terms of revenue drivers at this stage in the cycle.

Thanks.

It's not cheaper than the first version.

Okay. And then, Kevin, I think you mentioned that the gaming vertical is particularly strong this quarter. How much of that was seasonal do you think and how much of that is sustainable while moving into the back half of your year here?

Well, we're assuming that in our guidance that it's largely seasonal. We think we saw a very -- well, we did see a very strong increase in the fiscal second quarter. We are assuming that that trails off in the second half due to seasonality.

Okay. Thanks, guys, good quarter.

We'll take our next question from Andy Hargreaves with Pacific Crest.

Hey, guys. First of all, I didn't realize you got COLA increases. It must be nice to get 90% margins and COLA increases. But I'm wondering if we can narrow down, again back on the PCs, you went through kind of all the reasons it's so strong. But I wonder if you can help us, I guess break down how much of the increase that you're referring to in the license guidance increase that's coming from out-performance in Q2 versus higher expectations for Q3 and Q4?

So, in total we raised licensing guidance by about $25 million and, as you can see we -- we guide on an annual basis, but relative to consensus of expectations we can see that it was approximately $15 million over the second quarter. We do look at it on an annual basis, and on that annual basis it was predominantly PC, and then to a much lesser extent gaming because of that really strong seasonal performance in Q2.

And so, it is spread throughout the year. It's not concentrated in just Q2, and it's partly because we had a very strong performance in Q2, and it's partly because we're that much closer Q3 and Q4 now, that we at least have some data points on how others in the ecosystem has done and we also have greater confidence about the continued success of the ISV providers of getting imbedded into units in cases where there -- in some cases when there's also Vista Premium and, of course, in other cases where they're the only DVD player. And then as we look beyond this year, I think they stand to benefit from the Blue Ray upgrade cycle.

Okay. And then on the product side, is most of the delay in the products sales or weakness in the product sales, however you want to refer to it, related specifically to like continued lagging from the DCIP. There was a fairly famous movie producer that's been complaining about that fairly publicly recently, or is it broader than the DCIP?

Well, let me first clarify it and then turn it over to Tim. Let me first clarify that we were not referring to a lag in product sales. If anything, our product sales in the Digital Cinema space are doing a little better than what we had thought when we first came into the year and provided guidance. But what has changed is our revenue guidance, because we don't plan on recognizing the revenue from those sales until the first half of 2009. We're used to be expecting it in the second half of 2008. But in terms of your question on where the market stands?

We have said in the past that as Digital Cinema takes off it could negatively impact our traditional Cinema products and we continue to see a little bit of that. But as Kevin said, it's mostly about the Digital Cinema servers which are selling a little bit now, but we're waiting for this ramp up. As you know, the whole industry is talking about a major rollout and the other exhibitors are talking about that happening in the second half of this year. So, that's what we're gearing up for. We think we're well positioned for it and because of the delay in the DCI selecting agencies around the world to provide certification that a particular server is DCI-compliant, that's why we're having to delay our own revenue recognition. But we do think we're well positioned for the rollout when it happens and we still believe that it will happen in the second half of this calendar year.

Thanks.

We'll go next to Daniel Ernst with Hudson Square Research.

Yes, good evening. Thanks for taking my call. Two question, if I may? Imbedded on the mid-single digit growth in the traditional electronics, was DVD still positive? And then, if not, do you think you're sort of 12 to 18-month forecast would Blue Ray start to make up for that and make the categories of DVD players and Blue Ray combined a positive trend again?

We've continued to see single digit -- we continue to see slight revenue growth from the DVD category in the first half. As we look to the second half, we continue to base our guidance on declines in DVD volumes, and that's just for standard DVD. We see -- we factored in very little contribution from Blue Ray standalone DVD players in this fiscal year. Obviously, they have to ship by June 30 to hit this fiscal year and not prepared to give any guidance on 2009, but I'm sure Ramzi could add some color on our thoughts around Blue Ray generally.

Blue Ray, as I mentioned earlier, since Toshiba stopped making and manufacturing and promoting HD, it did clear up the way for almost all CE manufacturers to rally around the Blue Ray format. So instead of having competition between two formats, of course, now we have competition on one format but on price, which is ideally what we really would like to see. So, in this new world, we're looking at the latest prices of Blue Ray disks hovering around 299 price points; 399 price points is the general. Sony has their 399 price point on the Web. So, it's not at the magical 199 that you'd like to see for mass adoption, but I'd say the trend is going in the right place and I think 2009 will be the year that we'll see Blue Ray take off as we also look at the PC side of it and we start to look at the high-end PC laptop starting to ship for a premium price with Blue Ray, such as HP, Dell, Acer and Lenovo, all for $200.00 to $300.00 will add a Blue Ray disk player and drive. So the trend overall looks to be fairly positive and I'd say '09 will be the right year where it'll take off.

Great. That's very helpful. And then as a follow-up question, you've mentioned a lot of positive trends on your exposure on international broadcasts, either as a standard or as an obvious upgrade imbedded in the standard. How about on the IPTV side which is a pretty varied group; everything from Deutsche Telecom to Apple TV and maybe Apple TV because it's a little more relevant as of today with their ability to get day and date released as a digital at the same time as DVD. So can you can you comment on your positioning in IPTV world?

IPTV is a very compelling application. The ones that we have seen and whether you look at NAB or the (inaudible) it is quite a compelling offering. But frankly, I would say the entire industry has not seen the uptake that we hoped and thought would happen, so we're -- I'd say it's not at the critical mass of adoption at this point and we're still waiting to see it take off to see what kind of content and technology will be end up used in these types of solutions. So, I'd say other than a few large companies trying to push it, it's still not at that critical mass where we can really make large observation about the trend and (inaudible) with DVD or large releases.

But we think we're well positioned with AAC Plus in that area.

Dolby Digital Plus is another technology that Dolby has been pushing. So between HAAC as well as Dolby Digital Plus from a technology perspective Dolby is certainly working with all the key players on making sure that our technologies are being used for stereo and multi-channel use.

Great. Thanks for the update.

We'll take your next question from Hunter DuBose with Morgan Stanley.

Thank you. My first question is, can you give us some idea of the proportional contribution to total PC revenue, license revenue from PCEE this quarter, and some indication of how that's ramped over the last few quarters?

And my next question is, obviously you've made clear you are reluctant to discuss specifics of ASPs for technology. But it would be useful for helping to size up the opportunity and quantified opportunity from some of your newer technologies just to get a sense of relative proportionality. For example, if a new market internationally were to select AAC Plus versus Dolby Digital for the broadcast technology there, is Dolby agnostic to that from an ASP point of view or would one represent a better opportunity than the other? Thank you.

So, on PCEE, I'm not prepared to break out the PC market by product category. I would just say that it was, as we said before, there was very little revenue in 2007. It's been growing through '08 and it's a meaningful contributor to the growth in the second half as a percentage of absolute dollar growth, so it's doing well. And on ASPs, it really varies by new technology.

I don't know, Ramzi, if you have any perspective on that?

So, to your PCEE question, we have -- I can add a little bit more texture to what I've said earlier. The PC opportunity tends to find itself -- the perforation seems to be in three areas; notebooks, desktops and motherboards, in that order. So the largest prevalent uptake is on the notebook which we like to see because that's where we have the least compliance issues. Desktops is the second, and a motherboard from Intel is a distant third in terms of volume. As I mentioned earlier, we have seen significant uptakes in the number of SKUs adopting them and we're looking at more companies looking forward. We have not broken out the ASP on PCEE.

But to your second question on how agnostic we are on the technologies out there, Dolby Digital and Dolby Digital Plus are somewhat of a different beast from a licensing perspective than HAAC. Prior to Dolby acquiring Coding Technologies, Dolby Digital and Dolby Digital Plus were a full-licensing package which included trademark know-how and patents, which commanded a royalty commensurate with previous historical royalties that the Company has collected from manufacturers. HAAC prior to the acquisition of CT was strictly a patent licensing program, and by its nature it does command a lower royalty because you do not have the trademark or the know-how that comes along with it.

As Bill and Kevin have mentioned on previous calls, the synergies between the CT acquisition and Dolby should they play out the way we planned, will hopefully command an additional stream from branding and from know-how. But we haven't realized those at the time given that the acquisition didn't happen that long ago. So looking forward, we would like to be at the point where we could say we are agnostic between the two.

Okay, thank you.

We'll take your next question from Alan Davis with DA Davidson.

Yes, thanks, just a couple of questions here, guys. Following up on that last question on the perhaps increased revenue stream you can create from Coding Technologies, do you care to comment on what kind of premium over what they were getting that you could possibly command as a premium?

It's a bit too early to comment on that. The product roadmaps are all being completed and communicated under NBAs who are potential licensees. Suffice it to say that we're looking at compatibility. We're looking at creating a product line which will prove to be compatible with existing receivers, so we're looking at the use of HAAC plus Dolby Digital and/or Dolby Digital Plus.

To make sure that while we take advantage of a efficient transition line using HAAC, the compatibility at the receiver and player side is preserved and that offers us the opportunity to take advantage of both technologies with branding opportunity on top of that. So clearly, there's value-add here for the broadcasters in terms of efficient use of their pipelines and bandwidth. And for the consumer vis-à-vis compatibility with existing consumer electronic gear that they've purchased. The delta in the ASP has not finalized yet since we're still in the heart of finalizing the product roadmap.

Okay and then just one point of clarification here. You know given Microsoft's 5% growth in client unit volumes last quarter, in the March quarter, and increased outlook in the PC space, it sounds like the biggest delta from your prior guidance has increased, and your view on premium mix of Vista.

Well, it's also -- remember, that coming into the year we had some caution built in around whether the ISV attach rate would continue to be strong given all of the shipments of Microsoft Vista, and we've continued to see that hold firm. Now that we're further through the year, our guidance represents more confidence in that.

Okay and you mentioned your expectation for a decline in the standard definition DVD market royalties in the second half. Are those constant or have you changed your outlook there in the second half at all?

We have not. We haven't changed it significantly. We came in, I think, with a pretty conservative view of DVD growth, or I should say DVD declines. We did probably a little better in the first half than we were assuming coming into the year, but that hasn't changed our view on the second half which is to expect declines in that category.

Okay and then early days, but update on traction you're getting with True HD and Blue Ray players?

The content with True HD is not as prevalent as Dolby Digital Plus and Dolby Digital. It is something that is high on our priority in terms of marketing encouraging its uptake. What we have seen in Blue Ray players is that you will see True HD in all high-end Blue Ray players, so the Sony players and other players which would be considered high end; i.e. $500.00-plus. You're going to Dolby Digital Plus and True HD multi-channel decoder.

On the lower-end players, you're going to see a bare-bone player, and not just from a Dolby perspective, from all technology, all premium technology perspective. So today, the way I would categorize it is, True HD has been shipping in high-end players as the price for these players do go down, we do foresee, and content becomes more prevalent, from a True HD we do foresee a higher penetration of True HD over time.

Okay and, therefore, some premium over which you're getting on the standard players?

That is correct.

Okay and then lastly, I was just wondering if you were willing to share -- I may have missed this -- your expectations in terms of percentage of licensing revenues for each of the four categories, product categories you talk about?

Yes. I walked through our assumptions for each category, but I haven't yet punctuated it with our expectations for composition. It nets out to expecting PC to rise from around what was just about 35% in '07, we see that rising to probably approaching 40% for the full year '08, with the offset primarily being the CE market. Again, it's grown slightly, but we'll probably fall from around 35% to around 30% of the market with broadcast and other markets holding their own with good strong growth, and being broadcast probably between 15% and 20%. And other markets which are comprised of gaming, automotive, mobile and our via licensing services making up the other markets making up the difference. That's what we've seen so far.

Great, okay.

(Operator Instructions) We do have a follow up from Andy Hargreaves with Pacific Crest.

Okay, just to follow up on the Digital Cinema side. So am I thinking about this right? The deferred balance was up just specific to Digital Cinema nearly $10 million in the quarter, so you could say like Digital Cinema bookings were more like $25 million? Is that thinking about it right?

I'm not sure I follow on how you get to the Digital Cinema bookings of $25 million.

Revenue plus the change in deferred is what I'm thinking.

So there's no Digital Cinema revenue in the quarter. The revenue from products is in the traditional Cinema category; our light/sound products, our broadcast products.

Okay.

We've not been recognizing Digital Cinema revenue. So, we said there's $20 million of deferred revenue as of the end of the second quarter. That's cumulative over time. And then, we'll continue through the remainder of the year to ship Digital Cinema server and 3D products so that deferred balance will grow up until when we recognize the revenue which we're expecting to happen in the first half of 2009.

And that deferred balance was that about $10 million at the end of the first quarter, so stated with Digital Cinema?

You know, I need to double check that.

Okay, thanks.

And there are no further questions at this time. Mr. Jasper, I'll turn the call back over to you.

Okay, thank you very much. Thank you all for participating today. Thank you for your excellent questions. Thank you to everybody in Dolby for another very, very good quarter and we look forward to speaking with you all next quarter. Thank you very much.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.