Dolby Laboratories Inc (DLB) 2010 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 2010 financial results.

(Operator Instructions).

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

Good afternoon, welcome to Dolby Laboratories first quarter fiscal 2010 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO, and Murray Demo, Executive Vice President and Chief Financial Officer. In addition, [Ramsey Heidemann], Executive Vice President of Sales and Marketing is here to participate in today's Q&A. On this conference call, we will make forward-looking statements that include projections of future operating results for our fiscal year ended September 24, 2010, market trends within market industries we compete, and our expectations and beliefs of how those trends will affect our operating results, capabilities and market acceptance of our products and technologies, and our strategic and operational plans and objectives.

These statements are based on management's current expectations and assumptions. They are subject to risks and uncertainties. Actual results may differ materially from those set forth in such statements, and important factors such as macroeconomic conditions, could cause actual results to differ materially from those in the forward-looking statements. These factors are addressed in the earnings press release we issued today, and under the section captioned Risk Factors and in our quarterly report on Form 10-Q available at www.SEC.gov or at 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.

During this call we will discuss GAAP and non-GAAP financial measures. Reconciliation between the two are available on our earnings release, and in the Dolby Laboratories Investor Relations data sheet on our Investor Relations section of the website. All participants are advised the audio of this conference call is being broadcast live over the internet. It is also being recorded for playback purposes. An archive will be made available on our website for approximately one year and is the property of Dolby. Audio and archive may not be recorded or otherwise reproduced or distributed without prior written permission of Dolby. As for the structure of this call, Murray will begin with recap of Dolby's financial results, and will provide an updated outlook, and Kevin will finish with a discussion of the business. So with that introduction behind us, I will now turn the call over to Murray.

Thanks, Alex. Good afternoon, and thank you for joining the call. I'd like to discuss Dolby's fiscal first quarter 2010 financial performance and our outlook for the fiscal year. Revenue for the first quarter was $221.2 million, up 23% year-over-year. Licensing revenue for the first quarter was $165.8 million, up 8% year-over-year, and up 20% sequentially. The year-over-year increase was due to growth in our broadcast and mobile markets, while the sequential increase was due to growth in all markets led by broadcast and PC.

Looking at licensing revenue by market for the first quarter, revenue from our PC market was flat year-over-year, and up 13% sequentially. The sequential increase was due to higher PC shipments compared to last quarter. In the quarter, we received revenue for initial shipments of Windows 7, and higher revenue from Vista. Our broadcast market grew 35% year-over-year, and 19% sequentially on higher revenue from televisions and set-top boxes. Our attach rate to European televisions continued to improve.

Our consumer electronics market was up 1% year-over-year, as revenue from Blu-ray, Home-Theater-in-a-Box., and other products offset lower revenue from DVD. Sequentially, consumer electronics revenue increased 11% on strength primarily from Blu-ray and Home-Theater-in-a-Box. Our other markets category, which includes mobile, gaming, automotive and Via, was down 3% year-over-year, with a strength in mobile being more than offset by declines in other categories. Sequentially, revenue increased 61% led by gaming and mobile. The sequential increase was due to seasonality in gaming, and revenue from HE AAC payment in mobile. First quarter product revenues were $47.7 million, up 166% year-over-year, and 136% sequentially. In the first quarter, we early adopted ASU 2009-13 which permitted Dolby to recognize nearly all product revenue upon shipment.

In the first quarter we recognized approximately #33.7 million in revenue from product shipments, which is $17.6 million higher than we would have recognized under the previous accounting, as we experienced increased demand for digital cinema and 3D products. In addition, we recognized $14 million of deferred revenue. At the end of the first quarter, approximately $20 million of deferred product revenue remained on the balance sheet, and is expected to be recognized over the next four quarters. First quarter services revenue was $7.8 million, down 6% year-over-year and up 55% sequentially. The sequential increase was due to a cinema sales promotion last quarter in support of our 3D initiatives, where certain expenditures of approximately $1.8 million were recorded as an offset to service revenue.

Turning to margins. GAAP gross margin was 83 .8% for the first quarter and 84.6% on a non-GAAP business basis. Total gross margins were down sequentially, due to a higher mix of lower margin product revenue in the quarter. Our licensing GAAP gross margin was 97.6% in the first quarter, and 98.4% on a non-GAAP basis. GAAP product gross margin was 41.1% in the first quarter, and 41.4% on a non-GAAP basis. Product gross margin was down sequentially, due to a higher mix of lower margin digital cinema and 3D products. Services gross margin was 52.7% on a GAAP basis, and 53% on a non-GAAP basis in the first quarter. The services gross margin was up 17 percentage points sequentially, due to the accounting for the cinema sales promotion in the fourth quarter of 2009 described earlier.

First quarter GAAP operating expenses were $81.3 million or flat sequentially, and $74.3 million on a non-GAAP basis up slightly from the previous quarter. First quarter operating income was $104.2 million on a GAAP basis or 47.1% of revenue, and $112.7 million on a non-GAAP basis or 51% of revenue. Total employee head count was 1,152, an increase of 17 employees from the previous quarter. The increases were in R&D, and sales and marketing. Turning to tax, our GAAP effective tax rate for the first quarter was 34.7%, and 35% on a non-GAAP basis. First quarter GAAP net income was $69.1 million or $0.59 per diluted share, compared to $78.1 million or $0.68 per diluted share for the first quarter of 2009. As a reminder our first quarter of 2009 GAAP results included a one-time gain of approximately $20 million from an amendment to a license agreement with an unrelated patent licensor, which resulted in approximately $13 million of additional net income or $0.12 diluted share. First quarter non-GAAP income was $74.3 million or $0.64 per diluted share, compared to $70.3 million or $0.61 per diluted share for the first quarter of 2009.

Moving over to the balance sheet, Dolby finished the first quarter with $1.025 billion in cash, cash equivalents, and marketable securities. Cash flow from operations was $98.5 million in the first quarter. In the first quarter, we commenced our ongoing stock repurchase program. We purchased approximately 345,000 shares at a total cost of $15.7 million, or at an average price of $45.33 per share. With that, I would like to turn over -- turn it to our 2010 outlook. For total revenue we are targeting $780 to $810 million. Specifically for licensing, we are targeting revenue of $630 million to $650 million, due to anticipated growth in our broadcast, PC, and other markets categories primarily mobile.

Our outlook for licensing revenue is based on the following 2010 assumptions. In our PC market, we are now assuming PC shipments increase approximately 9% during the fiscal year, compared to our previous estimate of 3%. Please keep in mind the combination of our fiscal year ending in September ,and our recording of PC shipment-related revenue in arrears, doesn't equal 2010 in the various PC unit shipment growth rate forecasted by many firms. We also continued to assume that the decline in ISV related revenue in 2010 will be approximately $20 million. In our broadcast market, we are targeting worldwide TV unit growth in the mid-single-digits, compared to our previous estimate of low single-digits.

We expect European TV attach rates of about 80% in 2010 as manufacturers standardize Dolby technologies into general European TV shipments. In consumer electronics market,we continue to expect revenue decline in 2010 versus 2009, due to the large amount of back royalties received in the third quarter of 2009. We continue to assume that growth in Blu-ray revenue in 2010 will be largely offset by declines in DVD revenue. Turning to products and services, we are targeting revenue of $150 million to $160 million. For overall gross margins we are targeting approximately 87% on a GAAP basis, and 88% on a non-GAAP basis.

Excluding the impact of the $20 million gain in our first quarter of 2009, we do not anticipate any major changes in the various gross margins for licensing, product or services when compared to 2009. Turning to operating expenses, we are targeting approximately $330 million to $342 million on a GAAP basis, and $295 million to $305 million on a non-GAAP basis. For tax, we are targeting a tax rate of approximately 35% on both a GAAP and non-GAAP basis. Our tax rate does not assume a renewal of the R&D tax credit in fiscal 2010. For diluted earnings per share, we are targeting $1.96 and $2.08 on GAAP basis, and to $2.21 to $2.32 on a non-GAAP basis. And with that, I will turn the call over to Kevin.

Thanks, Murray. Good afternoon, everyone. We are off to a strong start to fiscal 2010. In addition to experiencing growth across many of our markets, we continue to grow the global adoption of our audio formats, and bring additional technologies to market. This is an exciting time for Dolby, as we are seeing the continued proliferation of multimedia content and consumer devices. Consumers are increasingly receiving their entertainment content through multiple channel of distribution, whether through cinema, Blu-ray, digital broadcast, online or mobile. And this is resulting in a larger ecosystem of entertainment devices. These trends are giving us the opportunity to extend Dolby technologies to a greater number of devices.

We are focused on enabling consumers to receive the highest quality entertainment experience, from whatever device or service they choose. We have a number of exciting opportunities in front of us, and we're making strong progress with each. Starting with broadcast, we continue to benefit from the global transition to digital television, and continue to position ourselves for further global adoption. Today, most digital TV shipments world wide contain one or more of our formats. We continue to make progress in Europe, and now expect to finish fiscal 2010 with at least 80% of TV shipments containing our technologies. In addition, most Samsung televisions at the Consumer Electronics Show featured both Dolby Digital Plus, and Dolby Pulse our optimized version of HE AAC.

Looking forward, we have an exciting opportunity ahead. More than half of television households globally, are located in countries that have yet to transition to digital TV. Most of these households are located in emerging markets where the transition to digital television is in the early stages. It is only a matter of time before these countries also transition, and we continue to invest accordingly. As we have done in the US and Europe, we are focused on working with individual broadcasters in their effort to deliver premium audio to customers, while also working with standards bodies looking to set a local audio standard.

Turning to our PC market, we are well positioned with our next generation audio format, Dolby Digital Plus which is included in four of six editions of Windows 7. As Windows 7 ramps across business and consumer PCs, we'll continue to see increasing adoption of Dolby Digital Plus in the worldwide PC market. In addition, we continue to deliver new functionality optimized for PC-based devices by our PCEE platform. This provides OEMs the ability to differentiate their products with optimized suite of technologies that enhance the audio experience from any source, whether streaming, download or DVD.

Turning to the mobile market, consumers are increasingly using mobile devices for multimedia content. We believe we are well positioned to bring a premium audio experience to the mobile market. Through Dolby Mobile, we offer carriers and handset manufacturers, an optimized and evolving set of audio technologies for the mobile platform. Today Dolby mobile is available on more than 15 LG handsets with some shipping globally, and on 20 handsets through the NTT DoCoMo network in Japan. We are confident that we will continue to grow our our mobile business, with both new and existing customers.convenience.

Turning to online distribution, we are engaged throughout the online ecosystem, so the consumers can enjoy both quality and convenience. Online distribution is an increasingly important platform for content delivery, across many of our markets including broadcast, PC and consumer electronics. We have some early signs of success. In our broadcast market, Dolby Digital Plus, is included in the Voodoo HD streaming platform. At CES, a number of television manufacturers announced 2010 HD televisions that will be shipping with Voodoo and Dolby Digital Plus, including Samsung, LG, Vizio, Toshiba, Sanyo and Sharp.

Dolby Digital is the audio format in the Digital Living Network Alliance, or DLNA for home network devices. DLNA is gaining traction in Japan, where the digital broadcast standard is AAC. As a result, Dolby digital is being included in an increasing number of television shipments in Japan. Online delivery is bringing new class of entertainment devices such as netbooks and tablet PCs. We believe over the long term, this has the potential to increase our addressable market, as we have opportunity to improve the entertainment experience on these devices. In addition, as communications and entertainment continue to emerge in certain platforms, such as in online gaming, or mobile phones, we believe we can provide complimentary technologies in the area of voice. Dolby Axon is a good example of new technology that enhances voice communication in the entertainment environment.

We also made progress this quarter with Dolby Volume, our volume leveling technology. Motorola announced it will incorporate Dolby Volume in it's DCX line of set top boxes, which is slated for deployment in North and South America. In addition, we continue to garner additional design wins in AVRs and televisions. And, finally, in our cinema business, we experienced strong demand for our systems in the first quarter, shipping over 900 digital cinema servers, and over 800 3D systems. Through the first quarter, this brings the total of Dolby Digital Cinema Servers shipped to over 4200, and the total number of Dolby 3D systems to over 2800.

In summary, we are off to a strong start in fiscal 2010, posting solid financial results, and continuing to drive the global adoption of our audio formats and the delivery of new technologies. We continue to benefit from a number of trends, including the transition to digital television, the growth in online and mobile content, and the proliferation of entertainment devices, all of which are growing our total addressable market. And with that, I'll turn it over to questions

(Operator Instructions).

And we'll take our first question from Ralph Schackart with William Blair.

Good afternoon, and appreciate the increased level of disclosures on the numbers this quarter. First one for Murray, Murray last quarter you were kind you have enough to give us a number on ISD revenue, a $100 million going $80, and you talked about that still being forecast in FY 2010 guidance. Just curious, can you give us a sense of how those attach rates are going, are they trending, what you anticipate in November, just kind of give us a sense of how you feeling about that $80 million number right now?

Yes, Ralph, so the $20 million that we -- that we forecasted at the outset of the year. We're again looking at $20 million as the number after the first quarter. And as we look out for the rest of the year our expectations of seeing the detached happening over the course of the year, nothing is really changed from what we saw at the beginning of the year. So right now, it still continues to look like $20 million. So no real change from last quarter.

Great. And in your prepared remarks today you seemed to be focusing on mobile a little bit more than we heard you in the past. Can you just give us a sense of how the mobile business is trending, perhaps when can we expect to see additional handset providers added to the mix? A quick update on that end market.

Yes, so the growth this quarter, Ralph, is driven by two things. One is, of course, we have our HE AAC Kodak which is broadly deployed across a wide range of mobile phones. A lot of the growth rate was driven by that format revenue -- that audio format revenue. On the Dolby mobile front, we've been very focused to continue to execute with our existing customers on getting the technology deployed across more devices. We seen them invest heavily in this initiative. We've seen everything from national advertising campaigns to great marketing brochures. So they're highly engaged. And we are very confident that we'll going forward we'll be able to extend this business, both within our existing customers and also to new customers.

Great. Last one and I'll turn it over. You touched on 3D today, as well. Can you give us a sense and sort of the share mix, both domestic and international, and just kind of an update on your thoughts on the rollout of 3D going forward?

Well, it was a big quarter for 3D, and obviously we have to give a lot of credit to Avatar. So there was a big push in front of Avatar. It is still the case that 3D deployment is pulling digital cinema deployment, not the other way around. And we saw, this is our best quarter yet for 3D, I think it shows that people do appreciate the quality of our system. There are people that do prefer the reusable model. I think the key for us is to continue to drive down the cost of the glasses. We've made a lot of progress on that front, and we're going to stay focussed on it but we're pretty pleased with our progress. I don't know off the top of my head, I don't have the mix between North America and international. And it doesn't look like -- I am looking at Ramsey, he doesn't have it either right now. So we will have to get back to you on that.

No problem, thank you very much.

And we'll go next to Mike Olson with Piper Jaffray..

Thanks, congratulations on a strong quarter. Just digging one level deeper on the whole ISV attach rate on consumer PCs, would you be willing to share kind of what assumption you're using for average ISV, DVD software attach rate on consumer PC throughout fiscal 2010?

We haven't gotten into the sharing the specific attach rates. I guess what we would say is, that we've seen about what we expected which is what we have seen -- while it is not the majority of models to be sure, we have seen some consumer models that previously were shipping with the second multi-media software applications, shipping with just the operating system. So we've seen some early signs of it, which is about what we expected. It is consistent with our guidance.

Okay. And then you mentioned attach rate on TVs was up in the quarter as far as Europe. Any detail you can give on what was the actual TV attach rate in the quarter?

We were over 80% this quarter.

And then one last one, just regarding Windows, can you share what the split was just approximately between Windows 7 versus Vista revenue and the overall pie of Windows revenue? The Vista revenue made up the far majority of the Microsoft revenue. We just saw some initial shipments on some of the -- the beginnings of the deployment. So, but when you look at this quarter, it was the far majority was Vista. Okay--

We would expect to see more Windows 7 revenue from Q2 on now.

Okay. Thanks very much.

We'll take our next question from Ingrid Chung with Goldman Sachs.

Good afternoon, thank you. My first question is around 3D TV. Do you see yourselves as having a leg up over your traditional 3D cinema competition? And do you think OEMs are more incentivized to work with you, or do you see them creating their own 3D technology? And then secondly, you announced some pretty good recent design wins for Dolby Volume. I was wondering when you expect to see it as material source of revenue?

Sure, as it relates to consumer 3D, obviously that was a very prominent topic at CES this year. And we're pretty excited about the promise of the 3D consumer experience into the home. Obviously we saw a lot of early adopters announce their plans for 3D. The consumer electronics industry is geared up to deliver their 3D enabled devices. At the first level this is great news for us because upgrade cycles are a very important part of our business.

As it relates to future opportunities in the 3D market, where we're more focussed is on technologies that enable the efficient post-production and distribution of the high quality content to those devices. We're very engaged right now in the 3D ecosystem. Our take on the market right now, is that you're going to see these first services probably for the next couple of years being offered in standard resolution. And for the most part, there aren't a lot of significant technical challenges to making this happen. And as a result we don't see it as a big revenue opportunity to help people get to standard resolution 3D.

Now having said that, we're in the very early innings of this trend. And we do believe that consumers are going to want the full quality 1080p experience. To do that, there are significant challenges. We believe as 3D begins to take hold, as the industry wants to move to 1080p and improve the experience in other ways, we see this as a good opportunity for us over the long term. And it's something we are very focused on and very engaged with the entire ecosystem on.

Dolby Volume? Sorry.

As far as Dolby Volume is concerned, as you mentioned, we have some significant design wins this year with our current version of Dolby Volume. Toshiba Regza will go from having eight models in the marketplace, to their full line of Regza to having Dolby Volume. We have several AVR receivers being launched with Dolby Volume from Onkyo, Integra, Sherwood, et cetera. And as we mentioned earlier, Motorola set-top boxes series will be launching with either the capability to upgrade on line via a cable download, or they will be preshipping with the Dolby Volume. So pretty excited about the opportunity. By the end of this quarter we'll be having general availability of our version -- the second version of Dolby Volume, which we foresee a wide adoption for over the next few years. And to answer your last question on significant revenue from Dolby Volume, we don't see that really taking off until 2011, 2012, time frame.

Okay. Great, just one last question if I could. I was wondering about digital TV attach rates in Asia, and whether you seen some SKU consolidation there?

There is some SKU consolidation from a few manufacturers. By and large, what Kevin mentioned earlier is what is driving the revenue growth. Either DLNA adoption in certain countries, like Japan. Some sales of products like TVs in Australia and Korea because of the standards there. But we're not seeing a large uptick in -- in television consolidation SKUs yet.

Okay. Great. Thank you.

And we'll go next to Paul Coster with JPMorgan.

Kevin, you talked a little bit about online video being an opportunity. We're seeing some of a land grab for sort of OTT video and web TV. Is that something that Dolby will be participating in over and above the audio codecs?

Well, we have a number of technologies under development within our video initiative. And I think that ultimately we view, again, all devices as a potential opportunity for those technologies. Those are -- we're still talking about early stages of a market opportunity for us. But, yes, we look across our broadcast, our PC, our mobile markets, all as areas that we can potentially improve with video technologies over the long term.

Okay. The other thing is you have got a lot of cash, and generating cash, can you prioritize your intentions on the use of that cash?

Right, so, of course last quarter we announced our share buy-back program to offset shareholder dilution from employee compensation. And Murray gave you an update on that. So that's one use of cash. Apart from that we'll continue to look at it from time to time, but we haven't announced any other specific plans. We do continue to evaluate M&A opportunities from time to time, so that is one potential use of the cash.

Okay. Thank you.

We'll take our next question from Steven Frankel with Brigantine Advisors.

Afternoon, Kevin, you mentioned Samsung was putting Dolby digital pulse on sets, in which geographies are they doing that.

It is our belief it is going to be world wide over time. So we are starting to see the initial announcements come up, the German website just announced the launch of the Samsung line of TVs that we saw at CES. So this is going to happen in waves. Ultimately it is our belief from earlier discussions with Samsung that this could be world wide. This is early days, it just happened at CES, and the launch will happen over the course of 2010.

Okay. And would you care to share with us your forecast for the Blu-ray market in 2010 in term of players?

We're shuffling papers. Just about 15 to 20 million units.

Okay. And then going back on the -- the ISV attach, going at this from a different angle. What's going on with your optional technologies in the PC and netbook market? Where are you relative to your thoughts entering the year -- in that space.

Currently we have two versions of PCEE technology, PCEE1 and PCEE2, combined they are in over 110 SKUs. PCEE2, which is our latest technology launched not too long ago is up to 43 SKUs, and sits in the four of the top four OEMs world wide. PCEE3 added additional 85 SKUs, this is the latest technology that we just showcased at CES. It has our largest penetration ever. And we're pretty excited about. We believe it will be continue to be adopted broadly. So we're pretty optimistic about all three SKUs of this technology.

So again, in total, you have how many SKUs today and where was that a year ago?

I don't have the year-over-year with me right now, but currently PCE3, the latest one is at 85 SKUs.

And two is in 110?

Yes, one and two combined were in over 110. PCEE2 was in 43 SKUs.

Okay. Great. Thank you.

And we'll take our neck question from John Vinh with Collins Stewart.

Good afternoon. First question on broadcast. You said that the attach rate in Europe was over 80% this past quarter, but you also said for fiscal 2010 it is also going to be 80%. Can you help me understand by the attach rates don't continue to go up in Europe and why we flatline there?

John, what we stated there it was going to be at least 80%. We weren't specific about what that could be directionally above 80, but we're saying at least 80%.

Okay. So really thinking you would expect that if you were to expect that as adoption continues, you would expect the attach rates to continue to go up.

That would be our expectation.

Okay. Also I'll follow up on the Samsung question. You said that you expect Samsung to deploy worldwide. My understanding is that when you have multiple Dolby company codecs, you get a slight ASP premium on that. Why is Samsung looking to roll that model out worldwide, when they're paying a premium ASP on those multiple codecs.

Well, taking a look at the mandated technologies throughout the countries where you've already had the country go to digital, most of these countries will have combination of either Dolby digital, Dolby Digital Plus or HD AAC codec. It is much more convenient for a high volume manufacturer to consolidate into one SKU, and absorb that cost in volume, discount from us, as opposed to having multiple SKUs, and have to worry about selling different products to different channels. The overhead there, from our understanding is not worth the different SKUs. And I just want to qualify a little bit what I mean by worldwide. Clearly there are countries that are still analog, or they're for example digital, but transmitting in MPEG-1 audio. So let us just that, they will be shipping into countries where they have been shipping with one of Dolby's technologies. And in those countries, for example, Europe, US, Australia, et cetera, that's where we'll be seeing the adoption of these TVs.

Okay. And have you had any conversations with any other OEMs that expressed similar lines of thinking in terms simplifying their SKU planning? Is that something that we could possibly see down the line, other OEMS simplifying there SKUs and also deploying similar strategy as Samsung?

It is a possibility but there hasn't been any announcement right now, so we cannot really comment on it right now.

Turning to PCs, just a couple of questions there. Can you update us in terms of what assumptions you have for fiscal 2010 of any sort of enterprise recovery, and what is your current expectations of how that starts to come back?

So, John, what we stated last quarter is that we expected to see the enterprise to be more in the back portion of the -- fiscal 2010, more of a 2011 activity. And our view of that has not changed in the last quarter. We continue to see enterprises really getting started in summertime of 2010, and into 2011.

Great. Thank you.

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

Hi, guys, good quarter. Following up a little bit on that last question. As I think about the economic recovery, and think about Windows adoption. Can you help me understand the linearity first half of revenue versus second half revenue? Is there a possibility the second half this year is seasonally stronger than it normally is for you guys, and how much stronger do you think that can be? As we think about that.

At this point we're not providing any real specifics between first half and second half, we're just providing a full-year targets. Obviously if Win 7, the adoption enterprises came sooner, or PC unit growth rate accelerated from what we have in our current targets, then that could be beneficial to us. But beyond that we're not really providing any specific targets. Also bear in mind that, our second quarter we have a seasonal strength because it really relates to the holiday shipping period. And so that also has to be considered when we look at a first half or second half.

Okay. And then within the broadcast market, you guys have done a nice job in penetration as well as more functionality. Is there a way to parse the 35% year-over-year from that segment, how much is incremental units, and how much is higher ASP per unit that's shipping out the door?

The -- being attached to more units has been the primary growth driver for broadcast of late.

Just primarily -- you think about units it's 30% in that range?

I don't have the specific percentage, but the majority of the growth has been driven by the fact that we're shipping on more televisions. I think the growth opportunity for additional technologies like Dolby Volume, is still very much in front of us.

Thanks guys. Very good quarter.

We'll take our next question from Jim Goss with Barrington Research.

Thank you. I got on a little bit late, and I apologize if I'm asking anything that might have been covered, and we can do it later. With regard to Blu-ray uptake as it affects the PC business, last year it was soft because of lower priced computers, and higher priced Blu-ray players, and read/write drives. Do you see that changing during the course of the year, and at what stage do you think it changes and how fast?

The market data says the potential growth rate for this year is between 5% to 10% with growing past that. We, as a Company believe that Blu-ray still offers the highest quality experience, whether it's on the PC or in the home. We are very optimistic about the uptick on Blu-ray as more consumers get exposed to it. So even though it seems like a moderate growth rate this year, we believe with more consumers getting exposed to it, much like they got exposed to high definition over the last several years, they will see the benefit and consumer demand will grow in the PC area.

Okay. And you had a pretty impressive display of your mobile opportunities, mobile device opportunities at the Consumer Electronics Show. I'm wondering is that a very early stage or at what pace do you think the economics there will become more meaningful?

We do believe it is early stage. It is an ecosystem, that it takes a while for a Company to penetrate in. As we mentioned earlier on previous calls, our strategy has been to introduce a single ended technology which improves the quality of any handset, irrespective of the source of the content. Our next phase of the strategy is to improve the content all the way from encoding, and working with the content aggregators, and operators, all the way down to playback of that content. So we'll be rolling out in phases, starting with handset manufacturers, and then working with operators. And overall we'll continue to invest in this very exciting category.

Okay. And then a couple of numbers' questions. The accounting change, I think the press release mentioned generated something like $17.6 million of revenues, and $0.04 per share in the first quarter. Do you have some guidance as to how that impacts the other quarters of the year?

So couple things. One is just as a reminder on the 10-Q on page 7, we have a little table there that provides some more details around this. But the way to think about is, the change in accounting was the benefit of $17.6 million in the quarter. The way to look at it going forward, we generated $33.7 million of revenue in the first quarter from shipments in the first quarter. And we'll continue to recognize revenue when we ship and we go into the outer quarters. In the quarter, we got $14 million of revenue that came off the balance sheet that was recognized as revenue.

There was just about $20 million of product revenue on the balance sheets that's left and that is going to work itself down over the next four quarters. So the way to look at this is, what are we going to ship in the quarter that's going to drive revenue, and then how much of that $20 million is going to come off in each quarter over the next four quarters. And that's how you would want to look at your model going forward. The majority of this accounting change if you would call it that, as far as overall benefit, it is Q1 that is going to drive from an overall standpoint. But the key is, again, to tie back to the units the in the quarter, and what that revenue would be, and seeing the diminished amount of revenue coming off of the balance sheet.

Okay. And the last thing the guidance increases you provided, seem to incorporate -- be mostly incorporated by the increments you had over -- over at least what I was expecting in the first quarter. Now, I'm just wondering if there are certain things -- certain areas where the trends might be slower in the future quarters? Or for some reason that that momentum wouldn't carry through more significantly later in the year?

A couple of things. First of all, when we look at the PC segment, we expected our first quarter, to see basically a negative unit growth in advance of Windows 7. And it turned out the quarter was stronger than we had anticipated. So we did see some real strength in the first quarter in PC. We assume good growth rates after Windows 7 was going to ship in the other three quarters. So there was a little bit of a timing around this first quarter. When you look at licensing, and we were probably up about $15 million over consensus in licensing in the first quarter, PC was a big part of that. And as you look at the rest of the year, we obviously are looking at, when you look at the guidance, that we would still see some -- some strength over our original guidance. So we are factoring in the higher TAM unit growth rates in PC, and some continued momentum in broadcast. So it is more than just the first quarter that's going into the guidance.

All right. Well, thanks very much.

We will now take a follow-up from Mike Olson with Piper Jaffray.

Hey, just a quick clarification here. So any revenue from the accounting change or deferred recognition, or any other one-time things were in the product sales segment, and not in the license segment? In other words, there were no oddities this quarter in license revenue. Is that correct?

Yes, the accounting change impacted only the product revenue and not licensing.

All right. Thank you very much.

(Operator Instructions).

And we'll take a follow-up question from Brian Thackray with Deutsche Bank.

Yes, just one quick follow up on the PC side. When we look at Microsoft results in terms of their September to December 30, and premium mix going from 36 to 44 on the consumer side, and PC unit growth being like 16% versus flat, this last quarter. Is there any reason you guys would not see a similar benefit sequentially?

We were expecting -- we're expecting to have a good -- good revenue from PC going forward. I couldn't give any reason why Q2 wouldn't reflect those results.

Yes, we should see a benefit sequentially.

Okay. Thanks.

And it's factored into our guidance.

We'll take our next question from Adam Hoff with Holden Capital.

Thanks, guys. Great quarter. I want to make sure I understand the impact of the revenue recognition change. I guess I am following up on the other gentlemen's question. But you had $17.6 million in benefit this quarter, and are you suggesting the maximum for the other three quarters would be $3 million in total.

No, what we're saying is, there is -- you have to break this apart. So we recognize revenue in the quarter on shipments, and that generated $33.7 million. We had, as we mentioned earlier, we saw very strong demand in Digital Cinema in our 3D sales, so that drove $33.7 million. And if we had strong unit growth, our unit sales again in the second and third and fourth quarters. Then again we would be looking at those kind of numbers. Now, what's changing though is, since we recognize revenue in the first quarter, there is less now, nothing is going to the balance sheet in building up that deferred revenue, it is only going to come off in subsequent quarters. So we've got about $20 million in product revenue that is deferred on the balance sheet. And that is going to wind down to a very low number. And there will be nothing more coming off the balance sheet after that point. It will be on just what we sold and shipped in the quarter. So it just so happens that in the first quarter, we kind of had a regular worth of deferred revenue coming off the balance sheet, because in the previous quarter we deferred revenue. So this is the one quarter, we sort of get that plus the revenue up front.

So how much of it this quarter was not coming off the balance sheet, but actually a function of shipments?

$33.7 million.

Okay. Thank you very much.

Yes , and, again, if you go to page 7 in the Q, we try to explain that and we also got a table there so you can see these pieces to help your

Okay. Thank you very much.

We'll now take a follow-up question from Paul Coster from JPMorgan.

Yes, thanks. Just going back to 3D for a moment, and for that matter just Digital Cinema in general. To what extent do you think Dolby will benefit from the DCI initiative, and the virtual print fee program that's being rolled out now?

Well, like as we said, certainly as implied in your question, so far 3D isn't pulling digital cinema server, and not the other way around. And so to the extent DCID and that other integrators as well have plans, and are optimistic about getting their funding soon, it eases the whole system. Once digital cinema servers start rolling out, there's -- it's going to be easy for people to figure out how to deploy 3D on top of that.

You're second place in North America, or thereabouts, do you have a feeling that you can come back at those theaters that already deployed your competitor's solution, and if so, what is the catalyst, what is time frame for that?

Right now what I would say is we're focused, we're completely focused right now on new deployments and people who have not deployed, yet.

And my last question is, in the consumer electronics context, and broadcast context for 3D. So, ESPN I think, and BSkyB are going to transmitting in 3D this year. Sounds like it would be standard definition. Are you involved in either of those initiatives?

We don't have any involvement in any -- in those initiatives. As I said earlier, we are engaged in that ecosystem. And while we don't think there are a lot of technical challenges to delivering standard res, and therefore it's not -- we don't view it as a significant opportunity, in the first phase of a rollup from a revenue perspective. We are involved in it. We will -- we will look to provide whatever technical assistance and support we can to that industry because, A, we're very vested in the success of consumer 3D. And, B, we think it puts news a better position to solve the technical challenges we see or the horizon as the overall 3D and video experience continues to improve.

I got it. Thank you.

And we'll go next to Andy Hargreaves with Pacific Crest.

Just to follow up a bit on Microsoft question, this 44% of consumer SKUs were premium. What is baked into your guidance from that perspective? Was that ahead of what you guys were expecting coming into the quarter, and is it ahead of what you assumed going forward?

No, we have taken all the relevant information that is out there. We looked at our own internal plans and the guidance we've put out there, assumes all of this information. There's really nothing more to communicate other than what our overall targets are.

Okay. Well, is it fair to say -- was that higher than what you were expecting it to be coming into the quarter?

What we saw was, is that the PC TAM, the overall unit growth, is higher than what we said than at the outset of the year. So we're quite pleased by that unit growth. And that's in part related to us increasing our financial targets for the full-year. So it's, yes, it is PC unit sales are stronger, which obviously Win 7 has something to do with.

Okay, and then just a couple of clarification questions. One was the Blu-ray expectation of 15 to 20 million units, was that for calendar, 2010 or fiscal? And, two, Ramsey, you said you don't expect significant volume revs until fiscal 2011 or 2012. I wonder if you can quantify what significant means?

The 15 to 20 million is for our fiscal year. On the Blu-ray units.

On Dolby Volume as you know we have been focused on coming out with a more streamlined version of our technology which is just starting to get delivered to our licensees this month. So we're very optimistic. What I mean by significant revenue is the main driver for us tends to be products such as televisions and set-top boxes. The AVR receiver market is interesting, but it is 5 to 7 million units a year. So it's a great showcase for the technology, but wider option when we go outside AVR to the more ubiquitous high volume products, as I mentioned such as TVs and set-top boxes. And you already are familiar with the types of volume, when we report our other products. While we're not forecasting over the course of more than one year, that's the type of adoption we're looking at, before we can move the needle on the revenue side to move the volume.

Okay. Thanks.

We'll take our next question from Tom Kucera with Avondale Partners.

Good afternoon. Two questions I wanted to touch on. First on OpEx guidance, it looks like you raised that some, and also there is a big uptick in R&D sequentially. I wonder if you can talk about where you guys are making investments and where you expect that to trend?

So, we're making investments in a few areas. First of all we talked a lot today about our efforts in making sure that we are improving the experience in the mobile and online channels of distribution. As Ramsey explained , that means being engaged with not just being the device providers but also the people who are creating content, distributing content. So we are investing in domain expertise, and field resources, technical resources, to make that happen.

We're also investing in additional resources in our emerging markets. A lot of opportunities we're talking about today are taking place in those markets. That includes broadcast, mobile and online distribution. That that is an area of investment. To your point on R&D we are continuing to invest in technical resources, both in term of supporting technically the specific needs of these online and mobile distribution ecosystems, for our core audio formats, but also in new areas of investment, such as video and

And which of those do you think is the biggest delta driven your expectations versus last quarter. In terms of having increased the guidance.

Oh, in terms of having increased the guidance? I'll let Murray comment on that because that will give you some more color.

Yes, in addition to the investments in the business that Kevin just discussed, we're also seeing a higher incentive compensation expenses, that the dollar has weakened relative to what we were expecting for the year, so some higher FX expenses as well. So all of that has factored into the targets we set for the year.

The majority of the increased guidance in OpEx is attributed to the factors that Murray just discussed. So what I'm discussing is our more generally why our operating expenses are increasing generally over time.

Got it. In terms of TV s you talked about attach rates in Europe, but I don't know if you know your attach rate is, either as a percentage of total TVs world wide, either where it is now and where you expect it to be by year-end.

Well, we believe that right now we are attached to the majority of digital TV shipments around the world. And so the growth opportunity as we think about it, is making sure that we're in a position to -- to provide best audio experience as additional markets continue to evolve from analog to digital television. We are (inaudible) digital shipments.

From a growth perspective, the other half of the world that Kevin referred to is an opportunity for us. And we are investing both on a technology side, business development side, on sales side, in these regions to work with the governments standard bodies, with the private satellite and cable operators, and make sure we're positioned in the same place we were in Europe and the US several years ago. So we continue to invest in this area, and we'll keep you posted as we get more on the attach rate outside of the traditional areas we have reported to in the past.

All right. Thank you.

This concludes today's question-and-answer session. This also concludes today's conference. We thank you for your participation.