Dolby Laboratories Inc (DLB) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Dolby Laboratories conference call discussing second 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 today, Thursday, April 30, 2009.

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

Good afternoon, everybody, and welcome to Dolby Laboratories second quarter fiscal 2009 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories President and CEO, and Mike Novelly, Interim Chief Financial Officer. In addition, Ramzi Haidamus, Executive Vice President of Sales and Marketing is 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 25, 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 and our website www.dolby.com 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, Kevin will begin with an overview of the business and Mike will a rundown of Dolby's financial results. With that introduction behind us, I will now turn the call over to Kevin.

Thank you, Alex. Good afternoon, everybody. I'm pleased to report strong second quarter results with revenue of $204 million and net income of $69.5 million. Looking at the second quarter overall, we continue to see improved revenue diversification and to benefit from our presence in a wide range of entertainment devices. We also showed good progress with new customer wins and achievements. On today's call, I would like to review these accomplishments and discuss how they fit in to our long-term growth objective to increase the adoption of our multi-channel audio formats globally and to pursue new technologies and markets.

Let me start by briefly covering some highlights from the second quarter. In our broadcast market, we saw more European countries adopt Dolby Digital Plus and HEAAC as they establish their digital TV and high definition TV standards. The digital TV group of the UK, the European Broadcast Union and Slovenia, our first country in Eastern Europe, all announced specifications that call for Dolby Digital Plus and HEAAC in HD devices. This comes on top of recent and similar decisions by France, Italy and Spain.

We are pleased to see countries adopt both Dolby Digital Plus and the HEAAC audio formats into their standards. We believe that each of these technologies offers a unique value proposition. Broadcasters find Dolby Digital Plus attractive for delivering a high quality home theater experience while HEAAC enables them to also maximize bandwidth efficiency. We also offer tools that enable broadcasters to switch smoothly between both formats.

At this month's National Association of Broadcasters Conference, we announced that we will offer Dolby Pulse, the Dolby certified implementation of HEAAC, which provides enhanced functionality and a consistent multi-channel user experience in the broadcast market. This will also be attractive in other markets, such as mobile.

In our gaming market, Kingsoft, a provider of online gaming based in China, incorporated Dolby Axon in its recently released Mission Against Terror. Dolby Axon is a voice technology that enables gamers to perceive where others are in the game so that their voices move with their characters all in surround sound making online gaming more real and immersive.

In our mobile market, both Sharp and LG introduced new handset models incorporating Dolby Mobile with Sharp now up to 10 handset models on the NTT DoCoMo network and LG with two handsets shipping internationally.

In our cinema market, we have shipped more than 2,500 Dolby Digital Cinema Servers and 1,000 Dolby 3D systems across 41 countries to date, and in the second quarter we delivered on our obligation to make these systems compliant with DCI specifications. As a result, we recognized approximately $24 million in deferred revenue related to Digital Cinema in the second quarter.

Moreover, on the operations side, we are improving our efficiency and flexibility in manufacturing by consolidating facilities and moving to a hybrid model. This reduces our cost structure while maintaining our focus on high quality products backed by our strong and trusted brand.

With that, let me turn to discussing how these accomplishments fit into our long-term growth objectives. Our wins in the European broadcast market are examples of how we can continue to drive the adoption of Dolby's multi-channel audio formats globally. These wins are important to Dolby for two reasons. First, it is increasing the attach rate of our technologies to global digital TV and set-top box shipments.

While we currently benefit from a very high penetration of the TV and set-top box market in the United States, given Dolby Digital's adoption in the US digital TV standard, we are focused on increasing our penetration of these devices in Europe. We exited last fiscal year with just under 20% of European television shipments containing our technologies. To the extent that we see more countries standardize on Dolby Digital Plus and HEAAC for terrestrial television standards, we would expect this attach rate rise over time.

Second, with countries standardizing on Dolby Digital Plus and HEAAC, we are increasing the amount of our technologies in devices, such as TVs and set-top boxes. As we continue to grow our adoption in the European market, we are also focused on extending these technologies into the Asian broadcast markets and into new delivery platforms, such as IPTV, the Internet and mobile.

Beyond the adoption of our multi-channel audio formats, we are also delivering new technologies to new and existing markets. Dolby Axon is an exciting example of our ability to leverage expertise and brand to bring new technologies to market. With over 300 million players in the online gaming market globally and increasing every year, we are excited about this market. In addition, Dolby Axon represents our first usage-based licensing model.

Similarly in our mobile market, we are pleased with our progress at NTT DoCoMo, Sharp and LG and we believe the desire of each to increase the number of handsets incorporating Dolby Mobile is a continued validation of our technology and brand. As we look forward, we are focused on our objective of gaining future Dolby Mobile wins with additional Tier 1 handset makers.

We believe that Dolby Mobile compliments the strong position of our HEAAC format in the mobile market. Today, HEAAC is being used by carriers and mobile services, such as Vodafone, KDDI, Sprint, Omnifone, and Orange to deliver audio for multimedia files at substantially reduced bit rates. Enabling the delivery of mobile media files at reduced bit rates is a critical value proposition because it translates into reduced network costs for carriers and faster file delivery for consumers.

As I said earlier, we plan to offer our certified implementation of HEAAC Dolby Pulse. Dolby Pulse will enable operators to deliver media files more efficiently, Dolby Mobile enables users to experience more immersive entertainment from their mobile handsets.

Finally, we are focused on leveraging our brand, expertise and industry position to deliver other technologies, such as PCEE, Dolby Volume, and High Dynamic Range across new and existing markets.

These accomplishments and activities demonstrate Dolby's position across a wide range of markets. Looking forward, we expect to face end market headwinds in the second half of our fiscal year given the economic slowdown and the fact that we typically receive royalties on a quarter lag. It is difficult to say how long this economic slowdown will last or how severe it could ultimately be, but we remain focused on what we can control, and that is leveraging our industry position, brand and relationships to drive the adoption of our multi-channel formats and new technologies globally.

Finally, before I hand the call over to Mike Novelly, I would like to thank him for stepping up and serving as Dolby's interim CFO while we conducted our search for my replacement. He has done a terrific job.

As you know, last week we announced that Murray Demo will join us as Dolby's new CFO. Murray brings a strong track record of accomplishments and leadership in the software industry as an executive and CFO. His experience and background will be invaluable as we focus on continuing to pursue the opportunities I have outlined today.

With that, I'll turn it over to Mike who will walk you through the financial results for the second quarter.

Thanks, Kevin. I'd like to discuss Dolby's overall financial performance, highlight some of the major drivers for the quarter and finish with a recap of our fiscal 2009 outlook.

Revenue for the second quarter was $204 million, up 18% year-over-year. Second quarter licensing revenue was $160 million, an increase of 7% year-over-year and 4% sequentially. Year-over-year growth was primarily driven by our broadcast market and to a lesser extent our mobile and PC markets, partially offset by a decline in our CE market. Sequential growth was primarily driven by our PC and broadcast markets, partially offset by a decline in our CE market.

In the second quarter, our broadcast market experienced strong growth both year-over-year and sequentially. We continued to benefit from our technologies being included in a larger percentage of European TVs and set-top boxes. In the US, we benefited from strong shipments of NTIA converter boxes and the initial shipments of Digital Transport Adaptors or DTA devices, as certain cable operators migrate analog customers to digital TV. Television stations nationwide will begin broadcasting solely in the digital format by June 12. We believe that we have already recognized most of the revenue from the NTIA coupon program and accordingly we expect that revenue from NTIA converter boxes will significantly decline during the second half of the year.

In the second quarter, our PC market experienced slight year-over-year growth and a strong sequential increase. Year-over-year growth resulted from increased reported shipments of third-party DVD playback software, while the sequential increase was driven by higher third-party DVD playback software shipments, as well as increased revenues from Microsoft Vista.

In the second quarter, our consumer electronics market declined both year-over-year and sequentially. Year-over-year and sequential declines were primarily due to lower revenue from standard definition DVD. In the second quarter, our other markets category, which includes mobile, gaming, automotive and Via, experienced solid year-over-year growth and slight sequential growth. Both year-over-year and sequential growth were led by growth in the mobile market.

Second quarter product sales revenues were $36 million, up 130% year-over-year and 101% sequentially. Year-over-year and sequential increases were driven primarily by the recognition of approximately $22 million of deferred revenue related to our Digital Cinema systems as we delivered on our obligation to make these systems compliant with DCI specification.

Second quarter services revenue was $8.2 million, up 13% year-over-year and flat sequentially. Services revenue increased year-over-year primarily due to the recognition of deferred virtual print fee revenue of approximately $1 million related to the aforementioned completion of the DCI specifications.

Turning to margins, total gross margin was 84%. Our licensing gross margin was 97% in the second quarter. Products gross margin was just under 33% in the second quarter of fiscal 2009. As expected, margins were down sequentially from Q1, primarily due to the recognition of approximately $22 million of lower margin Digital Cinema product revenue and associated cost of sales during the quarter. Services gross margin was 62% in the second quarter, up just over 1% sequentially.

Operating expenses were approximately $67 million in the second quarter of fiscal 2009. This was significantly lower than we expected primarily due to a gain on settlement from an implementation licensee of approximately $5 million in Q2 '09. In addition, stock-based compensation was lower than anticipated due to increased forfeitures as a result of the management changes announced during the quarter. We believe our run rate entering our fiscal third quarter is approximately $74 million.

So, while we have achieved cost savings in many areas during the first half of the year, we expect our R&D expenses to increase in the second half of the year. In addition, some G&A expenses we had planned to incur during the first half of the year have shifted to the second half.

Total restructuring charges in Q2 '09 were $1.9 million primarily related to the consolidation of our manufacturing operations. Year-to-date restructuring charge total $2.7 million and include approximately $1.8 million related to the consolidation of our manufacturing operations. We expect total restructuring charges to be approximately $6 million for fiscal 2009, which includes approximately $5 million related to the consolidation of our manufacturing operations.

Turning to tax, our tax rate for the second quarter of fiscal 2009 was 35.5%, up 2.5 points sequentially as the first quarter tax rate benefited from the reinstatement of the federal R&D credit. We continue to expect our tax rate of the remainder of fiscal 2009 to range from 34% to 35%.

Second quarter net income was $69.5 million or $0.60 per diluted share compared to $56.8 million or $0.49 per diluted share for the second quarter of fiscal 2008. Net income reflects stock-based compensation charges of $4.8 million for the second quarter of fiscal 2009 compared to $6.1 million for the second quarter a year ago. Net income also reflects charges related to the amortization of intangibles of $4.7 million for the second quarter of fiscal 2009 compared to $4.1 million for the second quarter a year ago.

Turning to the balance sheet, Dolby finished the second quarter with approximately $810 million in cash, cash equivalents and marketable securities. From operations, we added approximately $33 million of cash and cash equivalents during the second quarter and $130 million for the fiscal year-to-date. Year-to-date cash flow from operations trailed year-to-date net income of approximately $148 million largely due to $20 million non-cash gain from an amendment to a licensing agreement in the quarter.

With that, let me turn to discussing our outlook. While we're pleased with our financial performance in the first half of fiscal 2009, we expect our revenue to decline in the second half of the year. As you know, the majority of our licensing revenue is recognized one quarter after licensees ship product to their customers, which means our second half licensing revenue should reflect customer shipments primarily taking place after December 2008, which is when retail sales further declined following the weak holiday season. In addition, as previously discussed, the first half of our fiscal year benefited from the recognition of deferred Digital Cinema revenue, as well as strength in NTIA converter boxes, which we expect will decline during the second half of fiscal 2009.

That being said, we're reaffirming our previous revenue, net income and earnings per share guidance on the high end, while increasing our guidance on the low end to reflect the strength we experienced during the first half of our fiscal year. Starting with licensing, we anticipate revenue of between $530 and $570 million in fiscal 2009 with growth coming primarily from our broadcast and other markets, primarily mobile. For products and services, we now anticipate revenue of between $120 and $130 million.

Turning to margins, we continue to expect licensing margins to be approximately 97% for fiscal 2009. We continue to expect product margins for fiscal 2009 to be in the high 30's. We continue to expect services margins for fiscal 2009 to be approximately 60%. We continue to expect overall gross margins for the fiscal year to range from 90% to 91%, which reflects a three percentage point benefit due to a $20 million one-time gain, which we recognized in Q1.

Turning to operating expenses, we now anticipate fiscal 2009 operating expense to be between $285 and $300 million, including approximately $6 million in restructuring charges to be taken in fiscal 2009.

In summary, we now expect fiscal 2009 revenue to be approximately $650 to $700 million. We now expect net income for fiscal 2009 to be approximately $204 million to $222 million and earnings per diluted share to be approximately $1.76 to $1.91. Reflected in Dolby's fiscal 2009 earnings guidance is a $20 million gain in the first quarter resulting from an amendment to a licensing agreement with an unrelated patented licensor and $6 million in estimated restructuring charges, primarily related to the consolidation of our manufacturing operations.

The $20 million gain results in a $13 million impact to net income or $0.11 per diluted share. The $6 million of restructuring results in about a $4 million impact to net income or $0.03 per diluted share. In addition, we now expect stock-based compensation expense for the full year to be approximately $23 million and amortization of intangibles to be approximately $16 million.

And with that, I'll turn the call over to the operator for questions.

Thank you, sir. (Operator Instructions) We'll go first to John Vinh with Collins Stewart.

Good afternoon. Thanks for taking my question. First question I had was relative to your full year guidance. How do we think about kind of seasonality in the back half of the year? Can you maybe just talk about, you know, June quarter seasonality and are you potentially seeing a little bit more seasonality so could revenues for the second half be a little bit more back-end loaded? Thank you.

Well, first of all the first thing I would say when we look at our second half of the year is that the predominant dynamic in our thinking in formulating the second half guidance is the effects of the economy. The second half of the year will reflect spending after the holiday quarter, so it'll be our March and June quarters that will be reflected in the second half of our year, and those were the quarters that we think have been affected most by the economy.

As it relates to seasonality, it really depends on the market. There are markets like the consumer electronics market, which tends to be very influenced by seasonality. There are markets like broadcast where the primary driver for us is the increasing attach rate to televisions and the increasing amount of technologies in the televisions in Europe with Dolby Digital Plus and HEAAC being adopted. And so seasonality doesn't tend to be as much of a factor because we're more driven by that attach rate than the unit shipments.

So, when you net it all out we see for the second half, we see gaming and PC being down on lower unit volumes. We see CE being down year-over-year on lower shipments of standard def DVD. It'll be partially offset by Blu-ray shipments, especially because we have some delays in reporting that'll benefit us in the second half. And then we still expect to see growth in broadcast and mobile and that's all about higher attach rates.

Great, and then just a follow-up question on broadcast. You talked about kind of the opportunities in Europe. A couple questions are related to that. One is on Dolby Digital Plus and HEAAC, can you talk about kind of how we should be thinking about the ASPs on Dolby Digital Plus versus Dolby Digital, are you getting your premium there. And in situations where you have markets where you're adopting both HEAAC and Dolby Digital Plus, are you getting essentially close to kind of to the ASPs there and maybe just help us think about that?

And then an add-on to that is, how do we think about kind of the adoption curve in Europe of Dolby Digital Plus and HEAAC? You talked about kind of less than a 20% attach rate exiting last year. You know, do we think about that going to kind of 50% by the end of fiscal '09? Thank you.

As far as ASP is concerned, the ASP for HEAAC is actually listed publicly on the Via licensing website, so I encourage you to take a look at vialicensing.com for the official list and they can appropriately list there for the -- you can match the pricing with the volume.

As far as Dolby Digital Plus, the ASP -- I can only share with you that we have essentially the same pricing as Dolby Digital so whatever you have modeled for Dolby Digital should work for Dolby Digital Plus, other than that we have not really spoken publicly about Dolby Digital Plus.

As far as the way to look at Europe and the broader adoption, we are seeing a parallel adoption of both HEAAC and Dolby Digital Plus in several countries. As we've announced before, we're seeing that countries, such as Spain, in some country Italy, France, Eastern Europe, such as Slovenia, and now probably broader adoption looking at adopting both technologies. So we should continue to see an increase in attach rate on television, but more importantly an attach rate of both technologies, which generate two independent streams. So that's how we look at Europe.

We also foresee some additional countries adopting and announcing the HEAAC Dolby Digital Plus codecs moving forward, both in the Eastern European region, such as Poland, as well as in Western Europe.

Okay. And the adoption curve over the course of the rest of the year is that more gradual or is that more expediential? At this point it sounds like you're starting to get some critical mass there.

We said that we came into the year attached to about 20% of televisions in Europe and we expect we'll exit the year probably at around 33%. So I would call that gradual and we expect that we can continue to increase that attach rate into the future.

We'll go next to Ralph Schackart with William Blair.

Hi, good afternoon. A couple questions if I could. First on the PC market side, just curious how the attachment rates for third party playback have held up since last quarter, and are you seeing any material changes with respect to this license stream?

So, what was the second question?

It was just one question, Ramzi, is the ISV attach rate still holding up since the last quarter and have you seen any changes?

Well, we continue to see strong reported shipments of ISV players. It was one of the things that grew the revenue sequentially and the slight growth we saw year-over-year. So we did not particularly see the effect of the slowdown in this quarter. Having said that, we are cautious on PC shipments going forward. We haven't seen any signs of a lower attach rate of ISD players at this point. Ramzi, do you have anything else to say there?

That's correct.

Great, and then I'm not sure if this is Ramzi or Kevin. Can you just give us a rundown if you could please of the Europe markets that you have currently? I think you had mentioned UK and I'm not sure if that would include, you know, all the countries there or not.

Sure, so like I said earlier, mostly it's Dolby Digital Plus and HEAAC in tandem. We are right now officially included in France, Italy, Spain and the UK. The first country to officially adopt us is in Eastern Europe is Slovenia. We are making great -- so that ends in terms of the official approved specifications. In terms of outlook, we're looking at Poland, Russia, and some other countries that we're working with closely.

Great, that's helpful. And one last, Kevin, I know you've only been at the helm for roughly a month now and you've got, what, 27 years to go or so here, but any observations you could share on any changes you're making now at Dolby be it on business def side, licensing opportunity, cost side, etc.?

Well, I guess the first thing I would say is I've, of course, been at Dolby for about four years and I've been involved across the board in areas of operations and strategy and so the biggest difference is I'm spending all of my time on that now and I don't have any major changes to report.

I'm very pleased that, you know, we have a great team in place. We have a great group of employees. I think this quarter, not just the results, but the wins that put us in good stead for the future show that the team just kept executing and I'm very pleased with that. So I'm really just focused on making sure we're striking the right balance of future opportunities, that we're investing in the right ones, and that we continue to look to leverage our IP, our brand, and our relationships to keep driving technologies into the market.

Thanks, guys.

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

Thanks. I don't want to get ahead of ourselves, but would it make sense that we just start to see TV makers incorporating Dolby for all TVs in Europe to just simplify their distribution? I would imagine it could be painful for some of them to ship one version into Slovenia and another version to Poland or whatever the case may be.

That's a fair assumption just taking the pragmatic approach. It's much more difficult and of a headache to keep different stocks for different countries where in reality there is a benefit from adding our technologies to all SKUs given that you end up with benefiting from volume discounts, whether it's HEAAC or Dolby Digital Plus. So there is actually an upside in having higher volume.

So, as to your comment about Slovenia, a country such as Slovenia where they're surrounded by multiple countries that receive the same terrestrial broadcast, it turns out that these folks listen to each others broadcasts and there's an assumption there that this is just a first in many countries to adopt the same technologies so that you have compatibility across border.

I would just add that that's, of course, not baked into our forecast. We haven't seen that yet and we aren't taking anything for granted. The team continues to work on a country by country basis to work with broadcasters to make sure that we understand their needs and that we're meeting those needs.

Okay, and then is there any changes to your unit assumptions that go into your guidance that you've given us on the last couple of calls?

On the PC side, we did bring down our unit assumptions from where we last reported to you, so we now see a fiscal year unit decline of about 5% to 7%. Our CE and TV assumptions are relatively unchanged and offsetting the PC unit assumptions that was generally offset by gains in other areas, such as broadcast, and the broadcast gains were largely because of European attach rate, but also strong set-top box shipments both NTIA and the DTA boxes for the cable operators.

Okay. Thanks a lot.

We'll go next to Andy Hargreaves with Pacific Crest Securities.

Just wondering on the DTA converter boxes if you recognize revenue from all of the boxes that you thought you were going to or if it was more or less?

We recognized revenue on all those that were reported to us in the quarter. There were more DTA boxes reported to us in the quarter than we had expected. We had been cautious in our guidance on that area. We thought that perhaps caution around capital spending would suppress DTA shipments, but in fact it was pretty robust in the second quarter.

Okay. And then kind of a conceptual question, I guess, but does the move to lower end PCs, notebooks, and netbooks -- does that limit the opportunity for PC?

Not necessarily. It depends on the type of netbook. It depends on the capabilities and most of these netbooks that we've seen have multimedia capabilities, so where they are we tend to be fairly aggressive with our sales force and increasing the attach rate on PCEE. So, really the short answer is depends on the multimedia type netbook and ultra thin or is it just for productivity and that's really what determines if we qualify to be in there or not.

And just last thing -- do you know if a few of those core license holders for Blu-ray have formed a single licensing body? Does that impact you guys royalties at all?

No, it doesn't. We're not part of that licensing body. We continue, as with DVD, we continue to license our technology separately and independently and we do not -- we're not affiliated with that licensing body at all.

Okay, thanks.

Next to Steven Frankel with Brigantine Advisors.

Good afternoon. There's been some chatter about Chinese manufacturers being aggressive around Blu-ray for Christmas and talk of a $99 player coming to the US. What are you hearing along those lines? What do you see in your pipeline?

What we see on the market is essentially what other consumers see and that is up $200 players right now, so the aggressive pricing has been under $200. Under $100 it sounds fairly aggressive. We haven't seen that, obviously, we welcome it since our ASPs do not change related to the price of a player. But, frankly, we haven't really heard that kind of aggressive pricing, yet.

And could you give us an update on the entertainment experience? Do you have any material new wins in the PC space?

We continue to make design wins within the companies that we operate, so we have more SKUs and so on, but to say that we have a significant uptick from last quarter I would not say that. I would say we're happy with the results as they are in terms of the linear growth in our design wins.

And how about an update on volume? Dolby Volume, sorry.

Dolby Volume is still -- the plan is still as we mentioned last quarter and that is we continue to see product shipping, such as the Toshiba Reza, the LCD TV, ABR models such as the Harman Kardon and RCAM. And as far as the higher -- a more ubiquitous approach, we already mentioned that we're launching the low complexity version or a lower mix version of Dolby Volume towards the end of the calendar year and that's where we might see a wider adoption.

Thank you so much.

We'll go next to Paul Coster with JP Morgan.

Thanks. Kevin, essentially 107 more quarterly conference calls you got to do.

Is that all?

Yes. Can you just kind of give us your latest thoughts regarding Blu-ray and Windows 7 product cycles, and when -- and the degree of materiality you expect from those two product cycles?

Well, I think on Blu-ray it's still early days for Blu-ray and I think that it's an exciting category for us. Our ASPs are substantially higher than they are on the standard def players. And so I think that could be a good category for us as we move into 2010 across both standalone devices, obviously, gaming devices and PC playback.

In terms of Windows 7, we're pleased that we have put ourselves in a position where we're in more SKUs in Windows 7 than we were in Vista Premium. It's still early for us to try to product what that means for 2010, but except to say that that could be a growth driver for us. It's really going to depend on a lot of factors. We don't know what the rate of business adoption will be yet. We don't know what affect having this in the operating system will have on ISV attach to the business adopters, but we're very pleased to be in the position we're in.

Can you confirm that the deferred revenue recognition associated to DCI compliance is now done or is there more to come in this fiscal third quarter?

There is some more to come. We are still recognizing the units now ratably over the course of a year, so our deferred revenue dropped a lot for having recognized $22 million in product revenue, but we also added some from shipments during the quarter. So we have about $18 million still in deferred revenue, much of which will be recognized by the end of the year.

And lastly, the manufacturing consolidation that you've talked of, how is it going to yield benefit? Is it in gross margins or what is it we should expect?

Primarily it's in gross margins and it's also the fact that we're coming out with what we think is a very competitive product on a cost basis and that combined with the fact that we think we have the high quality product on the market and the fact that we have a strong and trusted brand puts us in a position we think to do well in the market, as well.

Great, thank you.

We'll go next to Brian Thackray with Deutsche Bank.

Hi, guys. Thanks for taking my question. I guess first, can you quantify or help us understand, you know, what the revenue from the first half of the year from the NTIA and the DTA boxes. Can you put some numbers softly around that for us?

I don't have the detail in front of me on the DTA boxes. You know, obviously all of our assumptions are baked into our guidance for the rest of the year. As it relates to NTIA, we believe that about three-quarters of the revenue we're going to get has already come in and the rest of it will be through the remainder of this fiscal year.

The thing to remember about DTA is that is not over. We don't know the pace at which Comcast and any other cable operators will roll them out, but we do expect that they'll continue to roll them out over, not just the rest of this year, but well into next year.

Thanks. And then Ramzi, there seems to be an effort within some of the PC industry move the audio processing down at a chipset layer permanently? Can you just talk about kind of what you foresee there and how that impacts Dolby longer term.

Well, there's a couple of solutions that we see right now that are needed to increase the immersive experience on the laptop. One is the DVD playback and Blu-ray playback. For those, clearly, you need the Dolby Solution whether that comes on a chip or not is really a subsequent point and immaterial as far as we're concerned.

As far as the post processing solution, it's the PCEE solution and obviously whether you decide to buy it via software from Dolby or to incur a few dollars to buy it from a chip manufacturer, that comes down to the purchaser's decision and, of course, we believe that we're the higher quality lower cost solution in this case, so we're very happy with our offering.

Fair enough. And then last question, you guys seemed to mention Dolby Mobile and the mobile opportunity a little bit more this quarter than you have in the past quarters. Is there anything new there in terms of momentum in this quarter versus last quarter?

The momentum I would say is associated with volumes. We have revenue coming in from Via, Sharp and LG. LG's phones are being received quite well in the areas that are launching. We have very good uptick with Sharp and, of course, we have the piece of revenue coming in from Via and that's the HEAAC revenue. When you combine it all, mobile as a category has been quite a nice uptick for us, but we still look forward to announcing new models from LG and Sharp and the NTT DoCoMo network and that's yet to come in the future quarters.

Thanks, guys.

We'll go next to John Bright with Avondale Partners.

Thank you. Any change in the direction of Blu-ray ASPs that Dolby is receiving?

There is no change in compared to what we've been getting for Blu-ray but we do get a higher ASP for Blu-ray than for standard def players.

Okay. And then, Kevin, just to follow up, anything that you can draw from the quarter? How did the quarter perform? What's the linearity look like in this quarter recognizing licenses recognized a quarter late, a month late, but particularly in the PC and the CE licensing side of the equation? A lot of people think that the market may have dropped and some retailers may be stocking inventory -- about to stock inventory again. Any signs that you're pulling from the market at this juncture?

No. What we're going to be getting this quarter are reporting on the March quarter shipments and we, of course, expect that that was the quarter that was very much affected by the slowdown in units and that's what we factored into our guidance. So, I don't think we're seeing anything yet that we could try to extrapolate, you know, beyond into the back half of calendar '09 and beyond.

Okay, and then lastly on the Digital Cinema revenues, any additional deferred revenue that we should expect?

Yes, so we came into the quarter with just over $30 million. We recognized about $22 million, which would leave you at just under $10 million, but we added another $9 million to deferred revenue because we're recognizing the revenue ratably over a year. So, we have $18 million of deferred revenue; most of that revenue is going to be recognized in the second half of this fiscal year.

Thank you.

Our next question comes from Mike Liddell with Goldman Sachs.

Hey, good afternoon. Just a quick follow up on Digital Cinema. Have you seen a pickup in interest for the 3D products given the success of the recent films, and also if so are customers moving ahead or are they holding off for the second generation products?

We do see an uptick in the 3D mostly around the launch of upcoming movies, such as Up and of course, Monsters versus Aliens, and more upcoming next year, so that's a natural progression that we saw. But, as always, the 3D conversion is very much attached to the Digital Cinema conversion and as the funding continues to be slow, albeit it is coming, but slower than anyone has expected, I wouldn't say it's significantly large, so we continue to wait for the Digital Cinema conversion and the funding to come in before we see a significant uptick either on the next generation server or the 3D installation.

The good news is, and to reiterate a point I made earlier, is that we've used this relatively slow time in the Digital Cinema Server rollout to consolidate our manufacturing operations to use a hybrid internal and external manufacturing model to get our cost down. So, we feel like as spending begins to flow in that area, we're in a much better position than we entered this phase.

Great, thank you.

(Operator Instructions) We'll go next to Daniel Ernst with Hudson Square Research.

Yes, thanks good evening. Thanks for taking the call. Two questions, if I might. On the licensing side, revenue up 7% year-over-year in the quarter but this quarter last year that number was a 40% annual growth rate. So, as we move past the current economic headwinds, as you noted in your prepared remarks, do you think that you have the technology impact on your other product cycles outside of standard definition DVD to go down that you could return back to a double-digit growth rate? So if we normalize for the economy, you know, our product cycles continue to head back up in that double-digit range. And then secondly, in the quarter were there any either notable catch-ups or the reverse where you think you're owed some additional royalties?

So, to your first question, I guess I would start with our existing technologies and point out that we think there is still room for growth in our existing technology portfolio. We're still at the early stages of high definition and digital television adoption outside of North America. We talked a lot about Europe. We're also focused on getting wins in Asia and we're focused on making sure that we're a part of however it is the consumers are going to consume media in the future, we want to be part of that delivery format.

I was just at NAB last week, the team set me up with a number of customer meetings and I was really pleased to see the level of engagement we had with the people who are getting ready to distribute all this content and confident that we can help to meet their needs.

Beyond that, I do believe that we're investing in a number of technologies that we can drive into the market and I'm pleased that we had some good data points this quarter with wins in areas like Dolby Axon that show that we can take we can innovate new technologies, bring them to market using our existing set of relationships and our brand. So, I feel very good about the balance in our portfolio.

On the other hand, you know, we can't be complacent. We have a very good business model but it's essential that we're not complacent. We absolutely have to stay focused. We have to keep executing and we're really focused, the entire team and I are really focused on speed of execution. So that's what we've been thinking about.

In terms of your second question, there were no notable catch-ups. I guess the notable items to be aware of we did mention that one is the NTIA boxes were stronger in the first half and we think that those will be weaker in the second half and then tail off. And of course on the product side, there was a large piece of deferred revenue. And while we have some going into the future, this was a very large chunk here in the second quarter.

Understood, thanks.

And at this time, there appear to be no further questions. I'd like to turn things back over to Mr. Kevin Yeaman for any additional or closing comments.

Well, thank you, everybody, for joining today. We very much look forward to keeping you apprised of our progress in the future and we will talk to you then. Thank you.

Again, that does conclude today's conference call. Thank you for your participation.