Dolby Laboratories Inc (DLB) 2008 Q3 法說會逐字稿

Welcome to the Dolby Laboratories Conference Call discussing Fiscal Third Quarter 2008 Results. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded Thursday, July 31, 2008.

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

Thank you, Operator. Good afternoon and welcome to Dolby Laboratories Third 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, and Ramzi Haidamus, Executive Vice President of 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 industries in which we compete and our expectations concerning how those trends will affect our operating results, the capabilities and market acceptance of our product 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, they will begin with an overview of the business and I will follow with a run down of Dolby's financial results. So with that introduction behind us, I'll now turn the call over to Bill.

Thank you, Kevin. Good afternoon everybody. Thanks for joining us today.

I am please to report solid results for Dolby's fiscal third quarter with year-over-year revenue and net income growing 29% and 56% respectively. During the quarter we benefited from strong licensing growth in many of our markets and we believe that we continue to make progress on our long-term initiatives.

On today's call I would like to highlight the progress we are making in our markets and discuss the near-term and long-term opportunities we are focused on in an effort to drive additional growth.

Starting with our PC market, we continued to make progress with our PC Entertainment Experience initiative while seeing solid year-over-year growth in licensing from Vista and third party ISVs. Through our PC Entertainment Experience program we are enabling PC makers to integrate the same audio features, performance and flexibility found in many of the most popular consumer electronics devices while offering a user-friendly graphic interface that makes it easier to configure and control the listening experience.

A number of notebook and motherboard manufacturers are incorporating PCEE into new notebook models including - Lenovo, Acer, Toshiba and MSI. In addition, HP announced that its new line of high performance notebooks the Voodoo Envy 133 will incorporate PCEE. We continue to build on this relationship and look forward to working more closely with HP.

In addition to making progress in PCEE, we continue to benefit from strong global demand for consumer notebooks. Many of these notebooks contain DVD playback software through the inclusion of Microsoft Home Premium or Ultimate Editions and/or third party ISV software, all of which contain Dolby technologies.

Turning to our broadcast market, we continue to benefit from the transition to digital television. In North America, Dolby Digital is the mandated audio standard for digital terrestrial broadcast and the de facto standard for US cable and satellite providers.

In February 2009 over the air broadcast in the US is required by federal law to switch to a digital signal. This means TVs will need to either have or be connected to an ATSC digital tuner which contains our technologies in order to receive the signal.

The government estimates that 15% of US households still rely on over-the-air broadcast. Currently the government is subsidizing the cost of digital converter boxes which contain our technology and are aimed at televisions relying on over-the-air broadcast.

This quarter we began seeing initial revenue from sales of digital converter boxes and expect this market to continue to ramp into and beyond the February 2009 switchover date as consumers adopt this technology.

In South America, HEACC is the audio standard for digital terrestrial and mobile television broadcast in Brazil. In the EMEA region we believe we are well positioned to grow the adoption of Dolby technologies in digital television in set top boxes.

Currently, Dolby digital is a recommended standard for multi-channel audio in European HD broadcast and many providers are including Dolby Digital in their HD set top boxes.

In addition, with the growing amount of on-air content being broadcast in Dolby Digital, many television manufacturers are now incorporating Dolby Digital in their mid- and high-end European television shipments.

In the Asia Pacific region we are benefiting from activities in a number of countries. South Korea has adopted the ATSC standards and, as a result, Dolby Digital is included in the South Korean TV shipments containing a digital tuner.

Japan has adopted AAC as its audio format for digital television. As one of the licensors of AAC, Dolby receives a portion of the AAC royalties. And we are excited that CCTB in China will broadcast the 2008 Olympic Games in 5.1.

Finally, the addition of HEAAC to our technology portfolio enables us to provide broadcasters worldwide as well as digital radio and IPTV providers with a broader range of multi-channel solutions that meet their specific requirements. Given HEAACs efficient compression we believe it is well suited for these providers looking to improve bandwidth efficiency.

Turning to next-generation DVD and gaming, we remain well positioned for potential upgrade cycles in each. In the DVD category, Dolby Digital is mandated in the Blu-ray format. We are beginning to see certain Blu-ray models offered by different retailers for below $300 and recently Wal-Mart offered a $100 rebate for an in store purchase bringing the price below $200.

In addition, as new manufacturers enter the Blu-ray market, prices may come down over time.

Similarly in gaming, Microsoft reduced the price of the Xbox 360 to $299. With Dolby technologies incorporated in the Xbox 360 as well as the PS3 Gaming Consoles, we are well positioned if price cuts lead to volume growth.

Turning to our near-term and long-term initiatives, we are making progress with Dolby Mobile, Dolby Volume and Dolby Digital Cinema. In the third quarter we continued to make progress in our Dolby Mobile initiative.

Earlier this week LG announced that it plans to introduce high-end multi-media handsets with Dolby Mobile to ship worldwide by the end of this calendar year. We are excited to build on our relationship with LG which is a global technology and design leader in mobile communications.

In addition, our relationship with NTT DoCoMo and Sharp is progressing well. In May, Sharp announced that it plans to expand to four the number of handset models shipping in Japan with Dolby Mobile.

We are pleased with the reception Dolby Mobile is receiving at various carriers and handset manufacturers and will keep you posted on our progress as we remain focused on this market.

In our Dolby Volume initiative, we continue to act actively with manufacturers in the consumer electronics and broadcast markets. In June, Toshiba started shipping two HD television models in Japan with Dolby Volume. Dolby Volume allows consumer electronics products to deliver consistent volume levels from various audio sources while enhancing dialogue intelligibility and improving overall clarity of the audio content at lower volume levels.

Turning to our Cinema initiative, we continue to believe the transition to Digital Cinema will be an opportunity for our Digital Cinema and Digital 3D products. Exhibitors are still committed to Digital Cinema, especially with complementary Digital 3D technology helping to increase traffic and ticket prices.

Yet some industry challenges still remain including the ongoing negotiations between integrators and studios and the potential difficulty for system integrators to obtain financing in the current financial environment. It's still unclear how this will play out but as the industry works through these challenges, we believe we are well positioned to participate in the transition to Digital Cinema.

In addition to our Digital Cinema server we offer a 3D solution based on reusable glasses. We believe our 3D technology provides exhibitors a higher quality 3D experience, lower average operating costs and a more environmentally friendly design.

While we have faced significant competition in the US from alternative 3D technology solutions based on a disposable glasses model, we believe the value proposition of our 3D solution is well received by a number of exhibitors worldwide. Outside North America many exhibitors have embraced Dolby Digital 3D. We remain focused on this market and look forward to keeping you abreast of our progress.

In summary, we continue to benefit from many of our traditional markets and are investing in near-term and long-term opportunities to drive additional growth. With our established presence and global brand, we believe we are well positioned to capitalize on many of these opportunities.

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 third quarter was $154.3 million, up 29% year-over-year and down 11% sequentially due to seasonality.

Third quarter licensing revenue was $127.6 million, an increase of 35% year-over-year and a decrease of 15% sequentially.

PC licensing revenue was strong year-over-year while down sequentially. The sequential decline was the result of our fiscal second quarter benefiting from holiday season shipments.

The strong year-over-year performance was largely driven by continued demand for consumer notebooks globally many of which shipped with Microsoft Vista Home Premium or Ultimate Editions and/or third party DVD playback software each containing Dolby technologies.

In addition, growth from PCEE was strong year-over-year.

Broadcast licensing revenue experienced strong year-over-year growth on demand for set top boxes and digital television containing our technologies.

Sequentially, broadcast revenue was flat as the effects of seasonality were offset by set top box strength.

CE licensing revenue was slightly up year-over-year and down significantly from the second quarter but in line with typical seasonality. Within CE, licensing revenue from the DVD category was roughly flat year-over-year.

Licensing revenue from our "Other Markets" category nearly doubled year-over-year. The addition of our mobile market and increased royalties related to our AAC and HEAAC patent pool were the primary reasons for year-over-year growth.

Contributing to the growth in these patent pools was a couple of reports that included shipments from the December quarter which benefited the mobile and gaming markets.

Sequentially, revenue from our "Other Markets" category was slightly up as increased royalty and administrative fees from the AAC and HEAAC patent pools made up for decreased gaming revenue following the seasonally strong second quarter for gaming.

Third quarter product sales were $18.1 million, up 5% year-over-year and 16% sequentially. The year-over-year increase was the result of the addition of our 3D products which were not available in the third quarter of last year as well as increased broadcast product sales. The sequential growth was the result of increased traditional cinema audio processor sales to international exhibitors.

Third quarter services revenue was $8.7 million, an increase of 14% year-over-year and 19% sequentially. Revenue growth was primarily driven by services price increase that began in April and by mastering services for an increased number of foreign titles.

Turning to margins, our licensing gross margin was 97% in the third quarter. We expect licensing margins to be approximately 97% for the full fiscal year 2008.

Our products margin was 48% in the third quarter of fiscal 2008, an increase of 3 points sequentially.

In the fourth quarter we expect product margins to decline due to lower factory utilization since the ramp to Digital Cinema is slower than planned. As a result, we expect fiscal fourth quarter 2008 product margins to be approximately 40% and to be slightly under 45% for the full fiscal year.

At the end of the third fiscal quarter we had $24 million in deferred revenue related to Digital Cinema and 3D products and services compared to $17 million in the second quarter. We continue to expect to recognize this revenue in the first half of fiscal 2009 once the third party certification process is completed.

Turning to services gross margins, it was 63%, up 6 points sequentially, resulting from the price increase beginning in April.

Operating expenses were $70.1 million in the third quarter of fiscal 2008, down 1% from the prior quarter.

In the fourth quarter of fiscal 2008 we expect operating expenses to grow about 5% sequentially as a result of Sarbanes-Oxley and audit fees which tend to be seasonally highest in our fiscal fourth and first quarters as well as increased fees related to corporate initiatives, sales and marketing programs and increased payroll costs as we continue to invest in multiple growth initiatives.

Turning to tax, our tax rate for the third quarter of fiscal 2008 was 34% and we expect our tax rate for the fourth quarter of fiscal 2008 to be 35%. Fiscal third quarter net income was $46.4 million or $0.40 per diluted share compared to $29.7 million or $0.26 per diluted share for the third quarter of fiscal 2007.

Net income reflects stock-based compensation charges of $5.6 million for the third quarter of fiscal 2008 and $5.1 million for the third quarter of fiscal 2007. Net income also reflects charges related to the amortization of intangibles of $3 million for the third quarter of fiscal 2008 compared to $1 million for the third quarter of fiscal 2007.

Turning to the balance sheet, Dolby finished the quarter with approximately $600 million in cash, cash equivalents and marketable securities. We added approximately $51 million in cash flows from operations in the third quarter.

Let me turn to outlining our expectations for fiscal 2008.

For licensing, we now anticipate revenue of between $510 million and $525 million in fiscal 2008. For products and services, we now anticipate revenue of between $95 million and $100 million.

In summary, we now expect fiscal 2008 revenue to be approximately $605 million to $625 million. We now expect net income for fiscal 2008 to be approximately $181 million to $190 million and earnings per diluted share to be approximately $1.57 to $1.65 per share.

We now expect stock based compensation expense for the full year to be approximately $23 million and we continue to expect 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, ladies and gentlemen. (OPERATOR INSTRUCTIONS) Ingrid Chung, Goldman Sachs.

So my first question before the follow-up is about your SG&A line. Obviously you have had very good revenue growth on the order of 35% or so this fiscal year. But your SG&A line has also grown at a pretty healthy rate, also, around 30%.

Given your fairly leverageable business model, I was just wondering what's driving that and if you do face a deceleration of revenue at some point, let's say in fiscal '09, would this line also grow more slowly? And do you --?

You're comparing year-over-year SG&A?

Year-over-year.

Well, there's a couple things to keep in mind. First of all, remember that we did acquire coding technology towards the end of last year so all of those expenses are falling into 2008. Keep in mind that associated with both our Coding Technologies and our BrightSide acquisitions are some amortization of intangibles which are hitting in '08 and not 2007.

And then, finally, we have been investing in operating expenses because we have a number of growth initiatives that we have talked about and articulated here including our Mobile initiative, our Dolby Volume initiative, our Digital Cinema and 3D efforts. And that is really the reason for the increases and I'm sure you'll have noticed that excluding those increases in amortization of intangibles we had a substantial increase in operating margins year-over-year and that operating expense as a percentage of revenue has come down year-over-year.

Absolutely. And then my next question is on Dolby Mobile. I was just wondering if you could give us an idea of the magnitude of Dolby Mobile licensing. Is that kind of more on the order of PCEE rather than Vista or the third party ISV payment?

Well, it's early days. As you know, we've said that our mobile revenue in 2008 is comprised of primarily HEAAC revenue as a result of our acquisition of Coding Technologies and their strong position in the multi-media handset market.

We've just announced our second win for Dolby Mobile with LG. We think this validates that it's a significant opportunity going forward for us. They've announced that they expect to have handsets in the market by the end of this calendar year so the revenue opportunity for Dolby Mobile is set to begin in 2009.

Thank you.

Ralph Schackart, William Blair.

Congrats on another great quarter. A couple questions, first on the PC side of the business, can you talk a little bit more granular, please, on the attachment rates? Are you seeing any changes there? It seems like the business continues to hum along, but specifically to Vista, the ISVs and the EE experience?

Sure. So as it relates first of all to DVD playback, we continued to see strength in the attach of Vista Premium as a percent of total Vista units, or I should say Microsoft continued to see strength in that area, and they reported again just a few weeks ago a strong premium attach rate on the consumer side which was what we looked to.

So we continued to see strength there and we also continued to see strength on the ISV attach rate of DVD players due in part because notebooks do continue to grow faster than desktops which tend to have higher attach rate of those products.

On PCEE we continued to add new lines so the one that we talked about on the call is the Voodoo line from HP. So we continued to look at growing PCEE as a part of that PC market.

Great. And then on the CE side of the business, it said DVD was flat year-over-year and you had said it was down significantly sequentially. Is there seasonality there or is there anything else sort of going on on a sequential basis?

It's seasonality. We tend to see -- our second fiscal quarter, of course, reflects the December holiday quarter shipments and so we typically would see that in that portion of our licensing revenues. And we did see, as I said in the remarks, pretty flat revenues from DVD playback; and, as we look forward, we continue to plan on lower DVD shipments going forward. And that's what we continue to base our guidance on.

Great. One more and I'll turn it over. In terms of the outlook for the balance of the year, obviously the US more specifically has benefited from the tax rebates and the CE industry has sort of been defiantly strong. As you talk to your customers, end markets and retailers, can you give us some color what they are sort of bracing for on a go-forward basis after the tax rebates have worked their way through the system?

Well, I think in terms of how we're basing our guidance, you'll see that we had a 35% year-over-year licensing growth rate in Q3 and our guidance worked out to about 11% to 21% in Q4 so I think that's a reflection of partly that we will have fully lapped Vista but partly because we are reflecting in our guidance kind of what the collective thoughts of our customers, industry analysts, etc., are -- what their expectations are for unit growth.

I wouldn't say that I've heard anything that's inconsistent with what you probably tend to read in the papers and the headlines each day. I don't know, Ramzi, do you have any particular thoughts on that? No?

Does that answer your question, Ralph?

It does. Thanks, Kevin.

Mike Olson, Piper Jaffray.

You guys have done a pretty good job of communicating that gross margins are going to be impacted next year by beginning of recognition of Digital Cinema and it sounds like you expect it to start in the first half of the fiscal year. Can you just give us any sort of ballpark for what gross margin you are thinking for next year?

Yes. We're not going to, of course, be giving full guidance on '09 but we've said in the past that if we were to recognize all the deferred revenue in one quarter that the margins could dip below 30% in that quarter. And then we're going to work to get back to a steady state of somewhere around 40% is what we're targeting but, of course, we'll update that when we give 2009 guidance on the next call.

And as far as Dolby Volume, on the competitive front, I know SRS has been working out some stuff on volume consistency and just wondering, are there any other TVs that you know of currently shipping out there with volume consistency technology other than the Toshiba TVs in Japan?

Not at this time. We continue to go after the high-end type solutions whether it's televisions or AVRs. We are working on an increase in efficiency of the code itself thereby allowing us to go into the mid- to lower-end markets. That's more on the longer-term, however.

And then just one last one. As far as Europe, any flavor you can give us or what percent of TVs in Europe are shipping with Dolby?

So we've been projecting what we think it will be for the full year and we previously said we thought about a third of TVs would ship. We're actually seeing it come in this year less than that, probably in the 20s.

But having said that we are in a number of manufacturers, we're in a number of models and so we're extremely encouraged by the number of models we're in and we still think it's just as significant a growth opportunity. It's just that more of that growth is in front of us.

I think the growth in broadcast was driven both by set top box growth and by increasing attach rates on both TVs and set top boxes in Europe. And then, of course, in North America we're seeing the continued adoption of digital television and we began to see some converter box shipments but it's still primarily a 2009 event, we think.

Thanks a lot.

Brian Thackray, Deutsche Bank.

Good quarter. As you take a look at the Blu-ray market, can you maybe share some insight in terms of what you're seeing in the marketplace, how significant a factor you think that can be in the first half of next year for you?

The Blu-ray market is an interesting one because there's several factors that are playing out, as we speak. Obviously there is the fact that the consumer hasn't had a lot of exposure yet to the experience, itself.

So in order to really appreciate what Blu-ray has to offer, a consumer needs to see a Blu-ray disc playing on a Blu-ray player, as well as an HDTV television to appreciate the experience. So what we are observing is a slow ramp-up as consumers get more exposed to that experience and when they do, they do tend to acknowledge the difference.

We also are seeing a lower than usual number of skews in the marketplace than we would have liked to see and we're hoping that as the consumer benefits this proposition does increase, that that number will go up over time.

Overall, we continue to stay encouraged that this format will take off. The fact that HD-DVD is no longer on the scene has helped significantly. The pricing has come down to under $300, in some cases around $200, along with some rebates. So the long-term trend is very encouraging but I cannot say that the up-take has been as fast as standard definition DVD.

That's helpful. And, Kevin, on the operating leverage side you guys for the last year have gone through a pretty significant investment phase. You were flat sequentially on OpEx. Does this signify maybe a slower growth on the OpEx side compared to maybe the last 12 months on an organic basis?

I'm not going to get into '09 guidance yet. For the fourth quarter we did say we saw it increasing by 5%. Part of that is just because of things like audit and SOX fees which do occur in the fourth and first quarters for us and part of it is investment in growth initiatives but we're in the middle of our '09 budgeting and resourcing cycle so I think we'll just give you an update on the next call.

Thanks, guys. Good quarter.

Paul Coster, JPMorgan.

We're seeing a little bit of evidence in US retail of trade-downs happening, people buying smaller DTV screens and, although they are buying up-linked DVDs, maybe de-featured a bit. So a few models without even (inaudible) on them recently.

If that happens, you see trade-downs, what does that do to your licensing? Does it matter or is it merely a function of unit volumes or is it also a function of the value of the products?

Our ASV on the licensing side is really unrelated to the selling price of the unit so as long as the television itself has our technology whether it be Dolby Digital or Dolby Digital Plus, then we do command the same royalty irrespective of the size or the ASP of the product, itself. So we don't see that as affecting us.

Video was sort of mentioned as a potential growth avenue a couple of years ago and it's not really sort of figured very prominently since, I think you had some dynamic range technology that was going through some Japanese TVs, but is it still a growth opportunity? What's happening with it?

We're very excited about our HDR or high-dynamic-range technology opportunity. We have demonstrated it in several venues. The feedback continues to show that there is market demand and this is a long-term play for us. Whether it's an end-to-end play or just a single-ended play, we will be pushing our technology over the next year working with implementers of HDR. So we are still very excited about it but we do see it as a long-term play for the Company.

And just explain how it is an end-to-end because obviously most of us see it as just an end technology.

High-dynamic-range is a delivery format and not just a single ended play. And we've mentioned in the past that this is something that's very much in line with the ecosystems that the Company has played in the past. So the delivery of high-dynamic range content is something that we see as an exciting opportunity. But again, this is more of a longer term play.

Thank you.

Steven Frankel, Canaccord Adams.

Congratulations, again, on a great quarter. Just to go over the Digital Cinema deferred revenue one more time, what has to happen and have you made -- has the industry or [Envision] made enough progress in the last three months to give you confidence in that H1 deadline for recognizing this revenue?

In terms of the recognition of revenue, one of the primary milestones for us is to get formal DCI certification from a certification body to be appointed by DCI. And for color behind that, I'll turn it over to Tim.

That's right. You'll remember in the past we were working to complete our system so that it did meet the DCI spec. The DCI spec has certainly settled down in recent months so we believe that we have completed the engineering work to get there but we still need to get through this step of having a third party verify that and certify it.

It is something that the industry is working closely on and we do believe that they are close enough that they should be able to get this done relatively soon which is why we are saying that we believe that we will be able to recognize it in the first half. But it is something that's out of our hands at the moment.

And you have had good traction internationally in 3D. Do you think there's still a US market opportunity or are you really positioning this as much more of an international play for you?

Yes. We think it's a worldwide play. 3D certainly is still very attractive to exhibitors in terms of driving traffic and increased ticket prices. And it's a very small portion of the market that has converted so far.

As we said on the call, we're having more success internationally but we think this is a worldwide phenomenon and that's where we'll continue to target our technology.

Thank you.

(OPERATOR INSTRUCTIONS) Andy Hargreaves, Pacific Crest Securities.

Can you give us any detail on international standard desk DVD trends and I'm thinking specifically about --

Can you speak up, please? We can't hear you.

Yes. Sorry, can you hear me now?

That's better.

Can you guys talk about international standard desk DVD trends, especially in emerging markets? It seems like it must be fairly strong to offset some of the weakness here in the US and in Europe.

So the up-take in BRIC has been healthy. We have seen an increase in DVD outside the developed countries. As we mentioned in the past, there's been and continues to be a compliance issue when it comes to collections around standard desk DVDs or general products when we start looking at those geos.

So, yes, there's been an increase in up-take in several countries, but some of these countries do build locally by very small manufacturers which sometimes are not even licensed and, therefore, we enter a challenge of collections. So it does not correspond to a one-to-one revenue had it been, for example, a shipment coming into the US or DVD sold in the US or in Europe, for example.

Have your collections been improving there, though?

I think it's the type of thing that is going to be a constant part of our lives. We continue to devote resources to it both in terms of internal resources to be on the ground in these markets and learn what the ecosystem is like and then also conducting activities like royalty audits, working with customs officials, etc.

So I think that we're doing well. We always think we can do better and we'll keep on top of it.

And then just a real quickie. Can you give us revenue for any 10% customers in the quarter?

Sorry, we couldn't understand any of that.

Can you give us revenue numbers for any 10% customers in the quarter?

We had one, I believe it's -- I'll double check but I believe it's one 10% customer in the quarter.

Thanks.

Hunter DuBose, Morgan Stanley.

Thanks for taking the questions. My first is, I believe that you previously indicated that you had visibility into the sustainability of the inclusion of the third party ISVs in addition to Vista on PCs through, I believe you said, the first or second fiscal of quarter '09. Can you give us any update on whether you have further visibility beyond that point?

We haven't really seen any changes in market dynamics. Our last update on this market is that we continue to see strong attach rates, that the ISV attach rate hasn't let up and we continue to see the same dynamics moving forward.

So as of now, we are encouraged in the sense that we, one, don't see a drop in the mix between the Vista Home Premium and Basic. Therefore, we see that first attach rate and the second part of it is the ISV which seems to be -- continued to be strong there for the double players and the product moving forward.

So overall, still same update as last into next year.

Great. And as far as cutting technologies is concerned, I believe that you previously guided to the time of the acquisition that we should be expecting around $20 million of revenue from that acquisition during the year. Can you comment on whether you're on track for that?

It's pretty much on pace with what we were expecting and so, yes.

And can you comment on the --

(Inaudible - multiple speakers) come back and confirm (inaudible). But we did have one 10% customer in the quarter with 12% of revenue and that's in our 10-Q which was filed earlier today.

Can you comment on the contribution to licensing revenue by the various categories?

Sure. So we walked through, in the prepared remarks, market by market how they performed. The growth in the quarter was driven by -- PC was one of the big growth drivers again in absolute dollars. That was the largest growth driver.

Can you comment specifically on the percent contribution revenues?

Sure. So for 2008 we don't generally go -- the composition by quarter. For 2008 we think that PC -- we continue to expect that PC will rise for 2008 to about 40% of revenue from about 35% in '07. We think CE is going to fall probably to just under 30% from just over 35% in '07 and Broadcast will rise to somewhere between 15% and 20% and "Other" makes up the balance but is increasing year-over-year.

And follow-up question, I think you said in your prepared remarks that there were some catch-up licensing revenues in this quarter from the December period. Can you comment on the magnitude of that?

Yes. That was in the "Other Markets" category. I mentioned that we had a couple of reports that related to the AAC and HEAAC patent pools in the December quarter. One of those was late so that you could call that a catch-up royalty. The other is there's a few customers that report biannually so it was normal in that sense.

But, in any event, you should be thinking in terms -- the magnitude of that in Q3 is just over $5 million, so that's the way to think about it.

Thank you very much.

But we should point out that since they do report every six months that we're going to see potentially this going forward, not the whole amount, but we'll have some lumpiness from quarter-to-quarter as a result.

Great. Thank you.

That's true to the extent they are late. Generally they are not all on the same schedule.

(OPERATOR INSTRUCTIONS) And there appear to be no further questions at this time. I will turn the conference back over to our speakers for any additional or closing comments.

Well, once again, we appreciate everybody joining us for the earnings call and look forward to speaking with you next quarter. Signing off, thank you.

And that does conclude today's conference. We thank you all for your participation and you may now disconnect.