Dolby Laboratories Inc (DLB) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call, discussing first-quarter fiscal 2009 financial results.

During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded Wednesday, February 4th, 2009.

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' first-quarter fiscal 2009 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 25th, 2009, market trends for the industries in which we compete, and our expectations and beliefs 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 and objectives.

Important factors such as macroeconomic conditions 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 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.

I'm pleased to report strong financial results for our fiscal first quarter. Revenue increased 20% year over year and 10% sequentially as we benefited from the incorporation of our technologies in a wide range of entertainment products shipping globally.

While we are pleased with our first-quarter results, recent news makes it clear that the economy has continued to slow. Credit markets remain very constricted and job cuts are rising sharply. In the face of this, retailers are reporting significantly lower sales and one consumer electronics chain recently filed bankruptcy. Moreover, the slowdown appears to be global, affecting all geographies.

This has reduced visibility significantly for most companies across our industry. In fact, two technology bellwethers have recently reduced their outlook sharply and suspended guidance.

These are challenging times for the global economy and Dolby isn't immune. Consequently, we have reduced our fiscal 2009 outlook and Kevin will speak on this in more detail later.

Beyond the present economic environment, we are encouraged by some of the long-term trends we are seeing throughout the entertainment industry. Those who attended this year's consumer electronics show in January, for example, saw a continued push towards increasingly immersive and far more pervasive entertainment.

Consumers not only want a more realistic and compelling entertainment experience, but they also want to get it everywhere and anywhere any time. We believe both of these trends are positive for Dolby, since our reputation and focus are on delivering technologies that make entertainment more immersive and since more pervasive entertainment potentially increases our addressable market. We are focused on positioning Dolby for these long-term trends.

On today's call, I would like to discuss Dolby's long-term growth strategy and the progress we are making to achieve it. To drive long-term growth, we are focused on increasing the adoption of multichannel audio across more products, markets and geographies, delivering additional audio technologies across each of our markets, and leveraging our brand and expertise to expand beyond audio and into imaging.

With respect to our initiatives around expanding multichannel audio, we are making solid progress increasing the global adoption of Dolby Digital, Dolby Digital Plus, and HEAAC in new products, markets and geographies. In our consumer electronics and gaming markets, we have expanded the adoption of Dolby Digital and Dolby Digital Plus.

In addition to Dolby Digital being mandated in standard definition DVD, Dolby Digital and Dolby Digital Plus are mandated in the Blu-Ray disk. Furthermore, Dolby Digital is included in PlayStation 3 and Xbox 360 gaming consoles.

Finally, a growing percentage of camcorders enables consumers to encode home movies in surround sound. So, whether your movie comes from Hollywood, the gaming industry or you, Dolby multichannel audio is becoming an essential element to the experience.

Similarly, in our broadcast market, we are building on Dolby Digital's status as the mandated audio standard for digital terrestrial broadcast in North America by expanding its penetration internationally. In Europe, manufacturers are including our technologies on a growing number of TVs.

We exited fiscal 2008 with just under 20% of European TV shipments containing Dolby Digital, up from single digits the year before.

Last quarter, France launched Europe's first HD terrestrial service, TNT HD and shows our technologies for its multichannel audio formats. Starting in December 2008, French HD forum specifications require that all HDTVs sold in France include Dolby Digital Plus and HEAAC.

In addition, Dolby Digital Plus and HEAAC have been written into the specifications for Italy for terrestrial TV. Over the next few years, we expect this to transition to the point where all HDTVs and HD settop boxes on sale in Italy will be required to include Dolby Digital Plus and HEAAC decoding.

In the Asia-Pacific region, South Korea has adopted the ATSC standard for digital television, which includes Dolby Digital. And Japan has adopted AAC as its audio format for digital television.

Finally, we announced Dolby Pulse for broadcasters who operate under significant bandwidth constraints. Dolby Pulse combines the efficiency of HEAAC with Dolby metadata capability to provide broadcasters with the ability to broadcast stereo and 5.1 channel audio at low bandwidth rates while maintaining high audio quality.

In our PC market, leading software providers are incorporating Dolby Digital into certain software SKUs to support multichannel audio for DVD and broadcast playback. With consumers now using their personal computers for the playback of entertainment, Microsoft includes Dolby Digital in Vista Home Premium and Vista Ultimate, while independent software vendors, such as Corel and CyberLink, also include our technology for DVD and Blu-Ray playback.

In addition, we are pleased to announce that Microsoft plans to include our technology in Windows 7. We expect our position in Windows 7 to be at least as good, if not better than, in Vista, but we are not in all SKUs and don't expect this to impact our fiscal 2009. While we are pleased to be included in more SKUs in Windows 7, given the uncertainties around volume levels and mix, it is too early to quantify the long-term impact of this announcement.

The second element of our growth strategy is to increase the adoption of additional audio technologies throughout our markets. These offerings include Dolby Home Theater and Dolby Sound Room, Dolby Mobile, and Dolby Volume.

Dolby Home Theater and Dolby Sound Room enhance the entertainment on PCs, making content, including streaming media and downloadable files, sound much more immersive. Dolby Home Theater and Dolby Sound Room have become popular features on many consumer notebooks, including sub $1,000 lines from Acer, Toshiba and Lenovo.

HP has also begun incorporating Dolby Home Theater into its Pavilion HDX series, as well as Dolby Sound Room in its Voodoo Envy 133 Line of ultrathin notebooks. Through Dolby Mobile, we are now bringing a similar experience to the mobile market. With Dolby Mobile, users can play back entertainment files on their handsets with rich and immersive audio.

In January, Sharp expanded the number of handsets with Dolby Mobile shipping in Japan to nine and is planning to further increase that number. In addition, LG, the world's third largest handset maker, initially began shipping its Renoir Multimedia Phone with Dolby Mobile in Europe and then to other global markets, and has plans to introduce a second model.

We are excited about the mobile opportunity longer term. And in fiscal 2009, we remain focused on increasing our design wins with carriers and handset manufacturers.

We are also focused on increasing the adoption of Dolby Volume in many of our core markets. Dolby Volume is a sound leveling technology that maintains audio levels across channels without comprising the integrity of the listening experience.

Toshiba recently started shipping the regular series of LCD TVs for the European, Japanese and US markets with Dolby Volume, while certain ABR models from Harman Kardon in RCAM now include Dolby Volume. Initially, we are focused on targeting the broadcast and consumer electronics markets and gaining design wins in TVs and AVRs, as well as set-top boxes.

In addition to these technologies, we recently announced other innovations for our gaming and consumer electronics markets, such as Dolby Axon and Dolby Pro Logic 2Z. Each is designed to deliver a much more immersive and compelling audio experience from non-encoded content.

Finally in our focus on driving long-term growth, we are expanding beyond audio and into imaging. In the cinema market, we have built on our position as the leading provider of digital audio processors to exhibitors by offering imaging technologies, including the Dolby Digital Cinema System and the Dolby 3D Digital Cinema System.

Dolby's Digital Cinema Systems are currently used by exhibitors worldwide. While a broad rollout of digit cinema appears to have been delayed by the current economic climate, we believe that we're well-positioned to participate in the industry's transition to digital cinema as industry financing becomes available.

We also offer exhibitors a digital 3D solution based on precision color filtered technology. We believe our 3D technology has been well-received worldwide as it provides exhibitors a higher quality 3D experience, lower average operating cost in a more environmentally friendly design. For these reasons, many international exhibitors have embraced Dolby Digital 3D.

We are also focused on creating a more immersive imaging experience in the home through our high dynamic range technologies for next-generation LCD displays with LED backlighting. At this year's Consumer Electronics Show in January, TV manufacturers enthusiastically demonstrated prototype models of their next-generation LCDs with LED backlighting. We view this as an opportunity as we believe that our HDR technologies can help provide dramatically enhanced contrast with extended brightness and dynamic range for this emerging category of TVs, which results in truer blacks, brighter whites, and a vivid image.

In summary, while the economy presents challenges for everyone, we are focused on driving long-term growth through key initiatives. These include increasing the adoption of our multichannel audio technologies across new products, markets and geographies; rolling the adoption of additional technologies throughout our markets; and expanding into professional and consumer imaging. As we pursue these growth opportunities, we believe our industry-wide presence, global brand, and strong business model will be significant assets.

With that, I'll turn the call over to Kevin.

Thank you, Bill. I would like to discuss Dolby's overall financial performance, highlight some of the major drivers for the quarter, and finish with an update to our fiscal 2009 outlook.

Revenue for the first quarter was $180.3 million, up 20% year over year. First-quarter licensing revenue was $154.1 million, an increase of 26% year over year and 12% sequentially. Year-over-year growth was primarily driven by our broadcast, PEC and gaming markets, while sequential growth was driven by the gaming, CE and broadcast markets.

In the first quarter, our PC market experienced solid year-over-year growth, but a sequential decline in the mid-single digits. Year-over-year growth resulted from strong notebook shipments through the September quarter, while the sequential decline was due to lower revenue from Vista Home Premium shipments compared to the fourth quarter of fiscal 2008.

In the first quarter, our broadcast market experienced strong growth year over year and solid growth sequentially. In the US, we benefited from strong shipments of NTIA converter boxes, while globally we benefited from increased digital TV shipments and a rising attach rate in Europe.

In the first quarter, our consumer electronics market was roughly flat year over year, and experienced strong growth sequentially. Performance benefited from royalty payments related to DVD products shipped in prior quarters. We typically receive a certain percentage of royalties in any given quarter from prior periods.

While the percentage received in the first quarter did not exceed usual levels for total licensing revenue, it did impact the CE trend. When normalizing for back royalties, the CE market was down over 10% year over year.

In the first quarter, our other markets category, which includes mobile, gaming, automotive and VIA, experienced strong year-over-year and sequential growth. Year-over-year performance was driven by strong growth from gaming, as well as the mobile and VIA categories, driven primarily by strong reported shipments of gaming consoles and mobile handsets.

Sequential performance was driven by strength in our gaming market, as well as increased revenue from VIA. First-quarter product sales were $18 million, down 10% year over year and down 3% sequentially. The year-over-year and sequential declines were due primarily to lower orders for our traditional cinema products. During the quarter, we continued to defer sales of our digital cinema systems.

First-quarter services revenue was $8.3 million, up 6% year over year and 22% sequentially. Year-over-year growth was the result of a price increase initiated in the second quarter of fiscal 2008. The sequential increase was the result of seasonality, as the fourth quarter is typically slower for film mastering.

Turning to margins, total gross margin was 102%. However, this includes a one-time gain of approximately $20 million, or approximately 11 percentage points of total gross margin resulting from an amendment to a license agreement with an unrelated patent licensor. We have reflected this gain as a separate line item within cost of revenue on our income statement.

Our licensing gross margin was 98% in the first quarter. Products gross margin was 48% in the first quarter of fiscal 2009. At the end of the first quarter of fiscal 2009, we had approximately $33 million in deferred revenue related to Digital Cinema and 3D products and services, compared to just under $30 million at the end of fiscal 2008. We expect to recognize about $20 million of this in the second or third quarter of fiscal 2009 and to recognize the remaining balance ratably over time.

In the quarter we recognized deferred revenue. We expect product margins to be in the low 30s.

Services gross margin was 61% in the first quarter, a 7-point increase sequentially. The sequential increase in services margins resulted from higher revenue levels in the first quarter compared to the seasonally weak fourth quarter for services.

Operating expenses were $70 million in the first quarter of fiscal 2009, a decrease of 12% sequentially. Operating expenses declined sequentially, due to lower accruals for bonus and stock compensation in the first quarter, as well as the impact of a one-time impairment in occupancy charges totaling just over $2 million in the fourth quarter of fiscal 2008. We believe our run rate entering our fiscal second quarter is approximately $74 million.

Turning to tax, our tax rate for the first quarter of fiscal 2009 was 33%, up 2 points sequentially. In the fourth quarter, the tax rate benefited from amendments to our tax returns for prior periods.

The first quarter did benefit from the reinstatement of the federal R&D credit. We expect our tax rate for the remainder of fiscal 2009 to range from 34 to 35%.

First-quarter net income was $78.1 million, or $0.68 per diluted share compared to $47.7 million, or $0.42 per diluted share for the first quarter of fiscal 2008. This includes a one-time gain of approximately $20 million, which resulted in approximately $13 million of additional net income, or $0.12 per diluted share.

Net income reflects stock-based compensation charges of $4.6 million for the first quarter of 2009 and $5.5 million for the first quarter a year ago. Net income also reflects charges relating to the amortization of intangibles of $3.3 million for the first quarter of fiscal 2009 compared to $2.3 million for the first quarter a year ago.

Turning to the balance sheet, Dolby finished the first quarter with approximately $780 million in cash, cash equivalents and marketable securities. From operations, we added almost $100 million of cash and cash equivalents during the quarter.

With that, let me turn to discussing our outlook. As Bill said, while we believe we remain well-positioned for the long term, the economy in the near term appears increasingly challenging. External data suggests the economy worsened through December.

While we have not seen an impact on our business, we are not immune, particularly since we generally receive our royalty statements and recognize licensing revenue in the quarter following shipments. As a result, we are reducing our outlook to reflect these changes.

Let me take a moment to walk you through some of our assumptions.

Starting with licensing, we now anticipate revenue of between $520 million and $570 million in fiscal 2009, with growth coming primarily from our broadcast and mobile markets. The decrease in our licensing guidance is primarily due to a reduced outlook for our PC market, driven mainly by a lower-than-anticipated attach rate for ISV players to notebooks, is also due to a lower PC unit growth assumption and a potential mix shift away from Vista Premium products as reported by Microsoft.

For products and services, we now anticipate revenue of between $110 million and $130 million. We expect to recognize approximately $20 million of the deferred revenue related to digital cinema systems in the second or third quarter.

Turning to margins, we expect licensing margins to be approximately 97% for fiscal 2009. We expect product margins for fiscal 2009 to be in the high 30s, and we expect services margins for fiscal 2009 to be approximately 60%. We expect overall gross margins for the fiscal year to range from 90 to 91%, which includes a 3 percentage point benefit due to the $20 million one-time gain.

Turning to operating expense, we anticipate fiscal 2009 operating expense to be about $295 million and $305 million, including approximately $5 million in restructuring charges to be taken in fiscal 2009.

In summary, we now expect fiscal 2009 revenue to be approximately $630 million to $700 million. We now expect net income for fiscal 2009 to be approximately $193 million to $222 million and earnings per diluted share to be approximately $1.66 to $1.91.

Included in Dolby's fiscal 2009 earnings guidance is the $20 million gain in the first quarter resulting from an amendment to the license agreement with an unrelated patent licensor, and $5 million in estimated restructuring charges for the consolidation of manufacturing operations expected in fiscal 2009. The combined net impact of the gain and restructuring charge on net income is approximately $10 million, or $0.09 per diluted share.

In addition, we expect stock-based compensation expense for the full year to be approximately $25 million and for amortization of intangibles to be approximately $15 million.

With that, I will turn it back to the operator for questions.

(Operator Instructions) We'll take our first question from Ralph Schackart with William Blair.

Good afternoon. Couple of questions if I could. First, Kevin, as it relates to the PC market, you were going kind of fast. I apologize, but wanted to follow up on what you said about the ISV.,Have you seen any significant shifts in the attach rates for the Corel or CyberLink part of the business?

What I referred to, Ralph, was as it relates to our reduction in guidance, one of the factors is that you may recall that, on our last call, we said that we expected the ISV attach rate to netbooks to approach the attach rate we see on notebooks by the end of the fiscal year. While we still think that ISV players will increasingly attach to netbooks, we've lowered our expectations for what that rate will climb to by the end of this fiscal year. And to further answer your question, no, we have not seen a deterioration in the attach rate to notebooks.

Great, and then as it relates to just the broader PC markets with the ISV overall, have you seen any big shifts there, aside from any netbook implication?

No. As it relates to the ISVs, our assumptions outside of the attach rate to netbooks are largely unchanged. The -- or they are unchanged. And the other factors that affected our guidance in the PC market were, are the PC TAM, where you might remember we were initially assuming unit growth of just under 5% for the year. We're now including in our guidance a range of anywhere from a +2% to -6%.

Keep in mind, of course, that those are fiscal year numbers. So you need to do the math when comparing them to your -- if you're looking at calendar year numbers. It includes a pretty strong Q1.

And the other factor was that, you may have noticed that Microsoft reported a decline in its premium mix of products. Now, a large reason for that that they cited was the netbooks. We, of course, had already factored that out, so we have not -- we didn't in our original guidance assume that we would get paid on any Vista with netbooks, nor do we assume it going forward.

But they also said that part of the premium mix was due to product and geography mix which could affect us. And so, we factored that into our guidance, particularly on the low end of PC because of that uncertainty, especially since Microsoft didn't give any guidance.

And as it relates sort of big picture to guidance, obviously the economy's changed quite a bit since you gave the prior outlook. I don't know how you could sort of frame this for us, but could you sort of give us a sense of how you thought about guidance giving everything that's going on and sort of raise the degree of conservatism or the outlook that you provided today?

Yes, I mean I would say, in the first instance, we approach our forecasting and guidance process the way we always do, gathering as many data points we can and coming up with the best assumptions we can. And that resulted in the lower assumptions we just discussed on PC.

We did also move some of the assumptions in the other areas. In particular, we're now expecting that the total standard Def DVD units that we get paid on is a 25% decline at the high end of our range and over a 35% decline at the low end of our range, offset, of course, by Blu-Ray units and higher ASPs because it's Dolby Digital Plus and true HD.

The other thing I would say, Ralph, is that particularly at the low end of our guidance, we did apply a degree of conservatism because of a couple of factors. One, just that the environment has deteriorated since we last gave guidance and it seems to have continued to deteriorate over many months.

And the other factor is just lower visibility. Many of the sources that we would normally look to for information to formulate our guidance, many of them have discontinued guidance or in the case of analysts, some -- not all of their reports are as up to date as would be useful for us. So that's how I would characterize it.

And then one last one, if I could. So if we net all of this out as it relates to EPS, you trim the top line of revenues, probably not a shock to most investors. But on the bottom line, it appears -- at least the way I see it, you kept the bottom end the same, if you include the $0.09, essentially raise the upper end of EPS. Is that a fair read?

That's right. It's about unchanged from the previous guidance, if you exclude the $20 million gain, and a little higher because, well, we did bring down the operating expense guidance, as you pointed out, and of course we did have a strong Q1.

Actually I lied. One more for Bill just because I want to ask him a question even though I know he won't answer it.

Bill, as it relates to Windows 7, you sort of snuck one in there that you might have some opportunities to increase your position, sort of over Vista. Would there be an opportunity potentially on the business end, or would you still be sort of playing in the consumer end at the rollout of Microsoft 7?

Well, Microsoft has not announced specific SKUs. We look forward to their announcement later this year. All we're saying at this point in time is just we think we're in at least as good a position with 7 as we have been with Vista.

All right. I thought I would try. Thanks, guys.

Never hurts.

And we'll move on to Ingrid Chung with Goldman Sachs.

Good afternoon, thanks. So Kevin, I think you've updated us on your assumptions for PC and CE. I was wondering if there's been any change to your broadcast, I think you were talking about flat TV growth for the year.

And then secondly, I know Ramzi said before that you get paid zero once or twice per netbook. I was wondering what your experience has been so far in terms of average payments per netbook.

Sure. So in terms of the broadcast assumptions, we did bring down our worldwide TV assumption to -5% from flat. Keep in mind that in our broadcast base, our results are much less sensitive in that area to unit growth and much more sensitive to attach rate and as you know, the attach rate has been increasing in Europe. As for netbooks, I'll go ahead and turn that over to Ramzi.

The attach rate continues to stay the same. We see some netbooks shipping without any multimedia playback and that is the zero reference that you make. We have seen some netbooks ship with some of the simple ISV players to play back [global distal] encoded content from the net or some recorded broadcast.

And additionally to the ISV playback, we've also seen some netbooks equipped with the Dolby PCE and that's where the second revenue stream comes in. That's where the zero, 1,2 all comes in. We have not really spoken to any ISP around netbooks alone so far.

Okay and if I could have one follow-up. I was just wondering, Kevin, if you could go into a little more detail about the SG&A savings? It seemed like as a percentage of revenue, it was down quite a bit and I was just wondering if this is a trend that you can hold the line on going forward?

Sure, and I think in particular, are you referring to the movement from Q4 to Q1?

I was talking more on a year-over-year basis in terms of as a percentage of revenue, SG&A had declined almost 300 basis points.

Yes, so we were holding the line on expenses in Q1 and, in particular, on non-headcount-related spend. So we've been cautious with spending.

We do see, as I said, we see a higher run rate going into Q2. Our merit increases and stock-based compensation starts affecting us in this, in this fiscal Q2. So you will see a bump there.

So that's, that's what drove I think the change year-over-year. We also from a, on a sequential quarter basis, it was largely driven by the bonus program as well as stock-based comp and a few one-time charges that affected Q4.

And Ingrid, we are selectively continuing to add people in the products and technology area as we want to invest for future initiatives. So we will not shy away from that, but we are being very conscious of the overall expense situation.

Okay, and I remember on past calls you've talked about growing your sales and marketing. Has that -- is that changing, given the environment? Or are you kind of staying status quo?

We have over the last couple years really beefed up our whole sales and marketing group to where we think we have a world-class organization. As I indicated, the bulk of our new additions this year will be in the products and technology area.

Okay. All right, great. Thanks.

And next we'll take Mike Olson with Piper Jaffray.

All right, thanks. Good afternoon. I just would like to try to put some parameters around expectations for Dolby Volume and based on typical TV introduction cycles. If you had a deal in place, what's the earliest we could expect new TVs shipping with Dolby Volume beyond the existing Toshiba deal?

We believe there will be additional televisions from Toshiba, as well as other companies shipping. We do not see a very high volume uptick at this point in terms of models and SKUs until we launch our low complexity version of Dolby Volume, which we alluded to.

It will essentially be the same technology. It will fit on a smaller footprint and it will perform very comparably to what's out there. So, I'd say we're about a year out before you see a significant uptick in the number of SKUs that will incorporate this lower footprint of Dolby Volume.

Okay. And then secondly, in France, you said all HDTVs had to ship with Dolby starting in December. When will Italy start to have to ship every HDTV with Dolby and what is your expectation regarding other European countries?

Well, we had a date for France. Frankly we do not have a hard date for Italy. We do know that the spec is final. We should start seeing televisions ship into the areas. It's only logical that you think the same televisions that are shipping into France would also ship into Italy. So it's not a stretch to think that it's a very easy barrier to cross over.

We are making some good progress across other countries in terms of getting our technologies mandated or written as optional in the standards.

Those standards are in draft positions. I hesitate to name the countries just because we don't know which one will ratify those standards. But so far we have seen some good progress within Western Europe as well as countries going to cable and satellite on a one-off basis, which usually happens without a standard being written.

Overall, we're very pleased with the momentum so far in both Eastern and Western Europe.

Okay. Thanks very much.

Next we'll take Paul Koster with JPMorgan.

Yes, thank you. The DTV delay act that's just been passed is pushing it back to June 12th. What does that do to your revenues from the DTV, in the DTV side in the US? Is it good or bad for you in aggregate?

I think it's -- well, it's neutral in the sense that TVs that can't receive a signal, you know, need to receive one. I think if anything, it's an indication there's more room left for more [NTIA] boxes and I think it's safe to say that, however many we're going to sell before the deadline have pretty much sold before this delay came into place. So, I think it just means we have some more NTIA boxes throughout the rest of the year.

And then, Kevin, can you help us a little bit in shaping the seasonality? Normally March is your strongest quarter. Then you see a slump.

It feels like the slowdown's hit your seasonally strongest quarter. So maybe there's not such big ramp this year. Is that a safe assumption?

Well, I think it's -- yes, it's safe to assume that when comparing our Q1 to Q2, you have to take into consideration that our Q1 was the September quarter. And obviously, it was the December quarter when the economy started deteriorating significantly.

So I think it's fair to say that that will very much affect the, what -- to the extent we have normal seasonal trends, which is, which is somewhat debatable. But I think to the extent we do, it certainly is affected by the economy and whether people were -- there's always an issue of when people ship things into the channels as well. Some years, people tend to ship more earlier and some of the shipments for the Christmas season come out in the September quarter. And other quarters they are concentrating in the December quarter.

Last question, you did mention that Blu-Ray's offsetting the weakness in standard definition a bit. Is it material yet? When will it be?

It's -- it's not material in absolute dollars, but it's enough to offset the percentage of decline we saw in standard def, it's putting a good dent in offsetting that. So -- and they are higher ASPs and we're not seeing higher ASPs just in the Blu-Ray players. We're also seeing them in home theater in a box systems and AVRs that are adopting Dolby Digital Plus and true HD as well.

Okay, thank you.

And we'll take Bryan Zachary from Deutsche Bank.

Hi, guys. Question from a higher level perspective. As you sit here today and have insight into your business, do you think the environment we're in today represents in your mind the low point, if you look forward, nine to 12 months? Or do you think things are going to continue to get worse from here?

I don't -- well, I don't think we're going to try today to predict where the economy is going or where it might level out. I think all we can say is that we think we're focused on the right things to grow our business whenever the economy finds a level point, and whatever point that is.

And I think in the PC market, as Bill mentioned, we're pleased that we're in Windows 7 and we think in at least a good of a position as we are in Vista. We continue to get traction with PCEE. We think there's demand for PCEE in the netbook market. Mobile is still early days, so we still have opportunity for attach rate growth in Mobile.

And the broadcast market is still seeing growth and we think that, particularly in Europe and Asia, there's still room for growth there as those markets move to digital and high-definition. But as for when the economy levels out and at what level it levels, I don't think we have any insight into that.

We don't want to try to predict that.

Fair enough. And the $20 million benefit, it looks like that was a non-cash benefit this quarter. Can you just shed some insight in terms of the cash impact of that?

Yes, so you might remember that up until about a year and a half ago, we were accruing some amount to cost of goods sold in relation to an unrelated patent licensor. So there was an accrual on our balance sheet. We agreed on the final settlement and so the difference was released as a gain and that's why it wasn't cash.

Okay. Thanks, guys.

Next we'll move to Andy Hargreaves with Pacific Crest Securities.

Can you provide any more detail on the converter boxes in terms of how many units you guys recognized revenue from in the quarter or maybe how far you think we are through this?

On the NTIA converter boxes in particular?

Yes. Yes

I don't know if I have the exact numbers of how many we've recognized so far this quarter. We're expecting somewhere around 20 million units roughly for fiscal '09 in total. And I would say we're, you know, two-thirds to 75 -- probably 75% of the way through that.

Thank you, and then on mobile -- I'm assuming most of the revenues that you guys are referring to as mobile is HEAAC now, is that correct?

That is correct. Dolby Mobile is still at very early stages.

Okay. So as we're looking forward and thinking about the longer term, is there a bigger opportunity for growth with continued expansion of HEAAC? Or do you think there's a bigger opportunity with the actual Dolby Mobile product?

Both, actually. We do believe that there's plenty of opportunity to take Dolby Mobile in its current form, sign up some additional Tier 1 company, sign up some additional SKUs within the current licensees, such as the NTT Docomo umbrella and Japan or LG.

Obviously we plan on introducing new SKUs of Dolby Mobile. Dolby Mobile is really an umbrella of multiple technologies. And our goal is to continue to add technologies, therefore differentiating ourselves further from any competition.

In parallel to that, we would like to aggressively push our end-to-end player that we refer to at the time we acquired Coding Technologies and that is the branding of our HEAAC technology with Dolby Pulse, adding metadata and additional features to Dolby Pulse and selling it either in combination or separately from Dolby Mobile.

Those two offerings and future SKUs, we believe, there's plenty of opportunities for us in this space. So we are very excited moving forward.

Okay, great. Thanks. And then just last, was there any change to monetization or pricing with the new, I think it was the new AAC license that included HEAAC?

Could -- I'm sorry. You meant -- what do you mean by AAC, new AAC license?

Well, wasn't there new licensing terms that were put up on the VIA site that included -- ?

Oh, I see.

Yes. Was there any change material to monetization --?

Not to Dolby, no.

Okay, perfect. Thank you.

Next we'll take Jon Fine with Colin Stewart.

Hi, just a follow-up question on Blu-Ray. You talked about your unit assumptions for red laser declines this year. Can you give us a sense of what your unit assumptions or expectations for growth on Blu-Ray this year are?

We're expecting units for the full year to be around the 4 million unit mark.

Okay, and on the mobile side, I just had a follow-up question there. If you talk about a little bit more about your opportunities going forward in '09, can you give us a sense of the types of kind of SKUs or handsets that you believe that you'll likely get traction in? Are you looking at smart phones or are they for mainstream feature phones that you're looking to get traction? Give us a sense of what the sweet spot is for Dolby Mobile going forward.

The sweet spot tends to be the multimedia phone, not necessarily the smart phones. For example, we started with Sharp where their models (inaudible) et cetera are multimedia phones with the television and the music playback, but not necessarily a business phone. And that showed very smart and very good success.

We've had excellent feedback on the LG front. Again, not necessarily a business phone, but a phone that is very similar to the iPhone that's used for multimedia playback. And the results and the feedback we got on it was very positive. The future generation from LG, which will be launched at GSMA, is a similar phone.

I don't want to get ahead of our announcing our customers' product, but it is again another multimedia phone. So that essentially is the sweet spot, irrespective whether it's viewed as a smart phone, i.e., with all the business functionality. If it plays video and high-quality audio, that's essentially what we try to go after.

So as you can tell, since over 50% of phones worldwide tend to be multimedia phones, we have quite a large stand to go after. In terms of new, additional companies go after, clearly, we're going after the top Tier 1 companies. We have one signed up and we're aggressively going after the other four.

So you have design wins locked up with another handset OEM at this point?

Not, not -- well, we have Sharp and we have LG. We are working with those two companies on additional SKUs. We are already successful at adding SKUs, which will be launched and announced either at GSMA or in Japan when it comes to Sharp. And we are working on signing up additional Tier 1 companies. We have not announced any of those announcements yet.

Okay, and last question is a follow-up. Can you give us a sense of how we should be thinking about mobile revenues this year, either in terms of growth rates or as a percentage of mix?

Well, it's part of our other categories, so we don't break it out separately. I'll tell you that we do see the mobile category for us on an annual basis growing over 30%.

Great, thank you.

(Operation Instructions).

If there are no more, operator, I'll go ahead and close. I would like to thank everybody for listening to the first-quarter fiscal year 2009 conference call. I look forward to speaking with you again in three months. Good day.

That does conclude our conference call for today. Thank you, everyone, for your participation.