Dolby Laboratories Inc (DLB) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Dolby Laboratories conference call discussing the second quarter fiscal 2010 financial results. During this presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question and answer session. (Operator Instructions). As a reminder, this call is being recorded Thursday, April 29th, 2010. I would now like to turn the conference call over to Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, sir.

Thank you, Peter. Good afternoon. Welcome to Dolby Laboratories second quarter fiscal 2010 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories President and CEO, Murray Demo, Executive Vice President, and Chief Financial Officer, and Ramzi Haidamus, Executive Vice President of Sales and Marketing.

On this conference call we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 24, 2010, 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. These statements are based on management's current expectations and assumptions that are subject to risks and uncertainties, actual results may differ materially from those set forth in such statements. 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 our earnings release that we issued today, and under the section captioned Risk Factors and elsewhere in the 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 containing 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 in our earnings release, and at Dolby Laboratories Investor Relations data sheet on our Investor Relations section of our website. Call participants are advised that the audio of this conference call is being broadcast live over the internet, and is also being recorded for playback purposes. An archive of the call will be made available on our website for approximately one year, and is the property of Dolby. The audio and archive may not be recorded or otherwise reproduced or distributed without prior written permission from Dolby. As for the structure of this call, Murray will begin with a recap of Dolby's financial performance and provide an outlook, and Kevin will finish with a discussion of the business. 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 would like to discuss Dolby's fiscal second quarter 2010 financial performance, and our outlook for the fiscal year. Revenue for the second quarter was $243.4 million, up 19% year-over-year, and up 10% sequentially. Licensing revenue for the second quarter was $195.9 million, up 23% year-over-year, and up 18% sequentially. The year-over-year and sequential increases were primarily due to growth in our consumer electronics, PC and broadcast markets. Looking at licensing revenue by market for the second quarter, revenue from our PC market grew 14% year-over-year, and 31% sequentially, primarily on stronger PC unit growth, and the ramp of Windows 7. Revenue from third-party ISV software declined year-over-year and increased sequentially.

Our broadcast market grew 18% year-over-year on increased revenue from digital TVs, due to our rising attach rate in Europe and worldwide unit growth. Sequentially our broadcast market grew 4%, primarily due to increased TV unit growth. As a reminder, we received $4 million NTIA converter box revenue in the second quarter of 2009. Our consumer electronics market grew 51% year-over-year, and 14% sequentially, primarily on strength in Blu-ray. Our other markets category, which includes mobile, gaming, automotive and VIA grew 17% year-over-year, with strength in mobile and automotive offsetting a decline in gaming. Sequentially revenue was up 23%, led by mobile, gaming and automotive. Second quarter product revenues were $39.8 million, up 11% year-over-year due to strong shipments of 3D systems. Second quarter product revenue declined 16% sequentially, primarily due to component supply constraints. Second quarter services revenue was $7.6 million, down 7% year-over-year, and down 2% sequentially.

Turning to margins. GAAP gross margin was 87.8% for the second quarter, and 89.2% on a non-GAAP basis. Gross margins were up sequentially, due to a higher mix of licensing revenue and improved product margin. Our licensing gross margin was 97.2% in the second quarter on a GAAP basis, and 98.7% on a non-GAAP basis. GAAP product gross margin was 48.2% in the second quarter, and 48.7% on a non-GAAP basis. Product gross margins were up 7 percentage points sequentially, primarily due to lower warranty expense, and improved manufacturing utilization. GAAP services gross margin was 54.6%, and non-GAAP services gross margin was 55.1% in the second quarter. Second quarter GAAP operating expenses were $81.7 million, up $0.5 million sequentially. Non-GAAP operating expenses were $73.5 million, down $0.9 million from the previous quarter.

In the second quarter, we recorded compliant settlements of $7.2 million from licensees, compared to $4.9 million in the same period last year, which lowered our sales and marketing expense on a GAAP and non-GAAP basis by this amount. Second quarter operating income was $132.1 million on a GAAP basis, or 54.3% of revenue, and $143.5 million on a non-GAAP basis, or 59% of revenue. Total employee headcount was 1,170, an increase of 18 employees from the previous quarter. The majority of the increase was in R&D.

Turning to tax. Our effective tax rate for the second quarter was 35.5% on a GAAP basis, and 35.7% on a non-GAAP basis. Second quarter GAAP net income was $85.9 million, or $0.74 per diluted share, compared to $69.5 million, or $0.60 per diluted share for the second quarter of 2009. Second quarter non-GAAP net income was $93.1 million, or $0.80 per diluted share, compared to $76.1 million, or $0.66 per diluted share for the second quarter of 2009.

Moving over to the balance sheet. Dolby finished the second quarter with $1.049 billion in cash, cash equivalents, and marketable securities. Cash flow from operations was $86 million in the second quarter. In the second quarter, we repurchased 1,262,000 shares, at a total cost of $67.5 million, or an average price of $53.45 per share. With that, I would like to turn to our fiscal 2010 outlook. For total revenue we are targeting $865 million to $895 million. Specifically for licensing, we are targeting revenue of $675 million to $690 million, due to anticipated growth in our broadcast, PC, and other market categories, primarily mobile. Our outlook for licensing revenue is based on the following 2010 assumptions. In our PC market, we are assuming PC shipments increase between 15% and 17% for the fiscal year compared to our previous estimate of 9%.

Please keep in mind that the combination of our fiscal year ending in September, and our recording of PC shipment-related revenue one quarter in arrears, does not equal calendar year 2010 and the various PC unit shipment growth rates forecasted by many firms. We now expect ISV revenue to decline by approximately $10 million to $15 million in fiscal 2010. In our broadcast market, we are assuming worldwide TV unit growth between 11% and 13%, compared to our previous estimate of mid-single digits. We continue to expect European TV attach rates of at least 80% in fiscal 2010.

In our consumer electronics market, we expect revenue to be essentially flat compared to fiscal 2009, due to the large amount of back royalties received in the third quarter of 2009. We are now assuming that growth in Blu-ray revenue in fiscal 2010 will more than offset declines in DVD revenue. Turning to products and services. We are targeting revenue of $190 million to $205 million. For gross margins, we are targeting approximately 86% on a GAAP basis, and 87% on a non-GAAP basis. Excluding the impact of the $20 million gain in the first quarter of fiscal 2009, we do not anticipate any major changes in fiscal 2010 licensing and services gross margins when compared to fiscal 2009.

For product gross margins, we expect a slight improvement year-over-year. Turning to operating expenses. We are targeting approximately $350 million to $362 million on a GAAP basis, and $315 million to $325 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. For diluted earnings per share, we are targeting a range of $2.23 to $2.32 on a GAAP basis, and $2.47 to $2.57 on a non-GAAP basis. And with that, I will turn the call over to Kevin.

Thanks, Murray. Good afternoon, everyone. In addition to our strong second quarter financial results, we have a number of significant highlights to share with you. In our mobile market, we announced that we have begun a collaboration with Nokia to bring Dolby Digital Plus to select handset models.

In our broadcast market, two leading television manufacturers, including Samsung are adopting Dolby Digital Plus and Dolby Pulse into TV shipments. In our cinema market, demand for our 3D system continued on the strength of Avatar and Alice in Wonderland. And in our work with the professional content and exhibitor community, we introduced two innovations, Dolby Surround Sound 7.1 for the cinema, and the Dolby Professional Reference Monitor. On today's call, I will expand on each of these highlights, and discuss how they fit into our objective to provide the most real and immersive entertainment experience possible, from whatever device or service consumers choose.

Starting with mobile, consumers are seeking a higher quality entertainment experience from their handsets, as well as greater compatibility with their existing entertainment ecosystem. One of our areas of focus is to extend Dolby Digital Plus to mobile devices, so that a handset is compatible with the existing ecosystem of premium entertainment, and with the consumer's home theatre environment. This week's announcement that we have begun a collaboration with Nokia, the world's largest handset provider, is a significant milestone. Nokia has adopted Dolby Digital Plus in its N8 handset, helping the N8 to serve as a portable media center.

The adoption of Dolby Digital Plus into the N8 enables consumers to enjoy HD content in full Surround Sound, by plugging it into their home theater system. We are excited about this collaboration and look forward to continue our work with Nokia, to bring a real and immersive audio experience to mobile handsets. In addition to Dolby Digital Plus, we are focused on Dolby Mobile, our post-processing technology that creates an immersive audio experience from any audio format. Through our collaboration with LG, we continue to improve the quality of audio from multimedia handsets, and are in over 20 LG handset models with Dolby Mobile to date. In addition, Dolby Mobile is in over 20 handsets on the NTT DoCoMo network in Japan. In February, we released Dolby Media Generator, a set of encoding tools designed to help content creators improve the quality of their service. Dolby Media Generator encodes mobile files with valuable metadata for which Dolby Mobile is optimized.

This means a content provider can encode its files with metadata to further improve the experience. In the second quarter, two leading mobile music providers began using this technology. Rhapsody will encode over 9 million music tracks using Dolby Media Generator, and Omnifone over 6 million. In addition, two mobile TV providers in Japan have began encoding content using Dolby Media Generator. Turning to our broadcast market, we experienced new wins for Dolby Digital Plus and Dolby Pulse from leading TV manufacturers. Samsung began incorporating Dolby Digital Plus and Dolby Pulse, our optimized version of HAAC, into all of its global TV shipments. In addition, we have learned a second TV manufacturer will begin adopting both of these technologies in several large markets. Television manufacturers are adopting both Dolby Digital Plus and Dolby Pulse for two reasons.

The combined offering enables them to offer a single SKU worldwide that supports premium audio, regardless of the audio format selected by an individual country, and it supports online content which is consistent with the trend of connected TVs. In addition to these highlights in mobile and broadcast, we continued to see the growth of Dolby Digital Plus in the PC and CE markets through the ramp of Windows 7, and the growth of Blu-ray. Turning to cinema, we continued to experience strong demand for our 3D system. The interest in 3D by studios and exhibitors remain strong, following the huge successes of Avatar and Alice in Wonderland. These successes have shown that studios and artists can create a more powerful and immersive cinematic experience with 3D, and that movie goers are willing to pay for more this experience. We believe Dolby's 3D system delivers a superior image, and we continue to see strong demand for our systems. In the second quarter we shipped 580 Dolby 3D systems, bringing the total number of our 3D systems shipped worldwide to 3,400.

Finally, in our work with the professional content community, we continue to make progress on several fronts. To make the 3D experience even more immersive, we introduced Dolby Surround Sound 7.1 at this year's Show West Conference to an enthusiastic reception. Dolby 7.1 enables content creators to immerse the movie audience even further, by combining more dimensional Surround Sound with the visual elements of 3D. For the larger professional content community, we also introduced the Dolby Professional Reference Monitor to industry-wide acclaim. The Pro Monitor is a new flat panel video display that enables content makers to view the full details and true colors of their images with greater accuracy.

In summary, we had a great second quarter. In addition to our strong financial results, we made solid progress in our mobile, broadcast, and cinema markets, while introducing new innovations aimed at delivering the most real and immersive entertainment experience, to whatever device or service consumers choose. With that, I will turn it over to questions.

Thank you. (Operator Instructions). We will take our first question from Ralph Schackart with William Blair.

Two questions, if I could. First on the mobile opportunity, Kevin, can you give us a little bit more color on the nature of the Nokia rollout, just looking at last quarter from memory you are on about 15 models of LG, and today you are sort of on 20-plus. Is that a good trend line, unique with Nokia or LG? How should we think about the rollout?

The first distinction I want to make. You are correct, we have 20 models on LG now, and 20 on the NTT DoCoMo network. What Nokia will be including in their phones is Dolby Digital Plus, and they are doing that to increase the compatibility of the mobile handset with existing entertainment content, as well as with the home theater environment. We are working with them now on their release of the N8, which is scheduled for later this calendar year, and we look forward to a long-term relationship with Nokia, and working with them going forward to bring the best entertainment experience possible.

Can you maybe give us a little more color on why this is a Dolby Digital Plus rollout, or maybe not necessarily a Mobile rollout that the point?

I am sorry Ralph, you are cutting in and out a little bit. I think you asked me to talk about the difference between why Dolby Digital Plus versus Dolby Mobile, was that the question?

Correct.

So Dolby Mobile is a set of post-processing technologies, which means it improves the entertainment quality regardless of the audio format in which the content is delivered. It could be HAAC, it could be AEC, it could be MP3, it will take that content and create a much higher quality sound experience. We also sell a set of encoding tools, Dolby Media Generator, which when paired with Dolby Mobile makes for an even greater experience, and we saw some adoption of that solution. Dolby Digital Plus is being adopted by Nokia, because they want compatibility with the wide array of Dolby Digital Plus content in the market, and they want to be able to have compatibility with the premium experience in the living room.

Great. One more if I could, Kevin. In terms of Blu-ray, it seems like it is starting to get some adoption. Can you give us a sense on how your outlook for Blu-ray is for FY 2010 today, versus last call, or however you want to quantify it, or give us an objective outlook, and then are you starting to see Blu-ray get greater adoption in PCs?

Ralph, it is Murray. In the past quarter, we talked about a TAM of 15 million to 20 million units, and we are seeing that now as more as 17 million to 20 million, so we are increasing the low end of the range. That is for fiscal 2010.

And as far as the adoption of Blu-ray, Ralph, we are really happy with the adoption of the settop Blu-ray device, it essentially confirms what we been saying all along, is that as the consumer gets exposed to the High Definition experience via High Definition television they will update the old DVD player with a Blu-ray player to become commensurate with the same experience. That upgrade cycle has dramatically decreased the bomb price of Blu-ray, and accordingly the ASP that we have seen in the major stores at least in the US, and we believe that drop in bomb will open the way for adoption in the PC, but your question we have not seen uptick in the PC just yet. We think that is more of a longer term play.

Thanks Ramzi.

Our next question comes from John Vinh with Collins Stewart.

Good afternoon. Thanks for taking my questions. First congratulations on the strong results. First question I had was on just a housekeeping question, Murray. I missed the year-over-year growth numbers for broadcast. I was wondering if you could repeat that?

Yes, so broadcast grew 18% year-over-year.

Great. Okay. Thank you. My question is on the PC front, obviously it sounds like this is the first quarter obviously that you are going to start recognizing Windows 7 licensing revenues. Can you talk about what sort of uptick you saw in corporate demand, and maybe talk about the Windows 7 licensing what was roughly the mix between corporate versus consumer?

That is correct. This was the first quarter we really saw the Win 7 revenue kicking in. We had a very small amount in the first quarter but this was the first quarter we saw a significant amount of revenue. We see it being driven primarily from the consumer. We have not seen a significant amount on the business ramp, and continue to anticipate that it is more of a back half of calendar 2010 is when the enterprise ramp would really start in earnest. And as you know because we report one quarter in arrears, it is really more of a sort of Q4 fiscal 2010 opportunity for us, and then into 2011 and beyond.

Great. And then obviously you gave an update on terms of the third-party ISV. Looks like the impact is maybe a little bit lower than you expected. Can you maybe just give us color, in terms of what you are seeing there in terms of why the impact may be coming in a little bit lower than you originally forecasted?

First of all, as I said earlier, for ISV revenue it is down year-over-year, but we have seen that as you said as you noted there that instead of the $20 million number that we had seen at the outset of the year as potential lost revenue, we are now moving now to $10 million to $15 million. What allowed to us improve that is the fact that the PC TAM has increased, the number of PC units, and that part of it is actually lifting the revenue. We are seeing some detach as we anticipated, but it is the PC TAM that has come up, that allowed us to reduce the number from $20 million, to a range of $10 million to 15 million.

Last question for me, and then I will jump back into the queue. On the TV front the second customer that you talked about. Can you comment on whether it is a Tier 1 customer, and what is the timing of the ramp of those multicoded Dolby Codec SKUs?

It is a Tier 1 customer and the timing will be done geographically and serially starting in calendar 2010. We don't have a lot more detail on when those SKUs will start reaching the marketplace, but as Kevin said, they will be both Dolby Plus and Dolby Digital Plus, much like the Samsung footprint.

Great, thank you.

Let's go to Steven Frankel with Brigantine Advisors.

Could you give us detail on the supply constraints you have seen in 3D, whether those have been resolved, or whether those will impact this quarter as well?

Steve, as we said we have seen strong demand for 3D. There are just some parts that we are finding difficult to get, I think there are supply shortages across much of the tech manufacturing industry, and we rely on some of those that are in high demand. We believe that we will work through most of it this quarter, and work through all of it by the end of the year.

Okay.

Steve, this is Murray. Just also, the targets we provided for the year assume that we will work through it as Kevin said. That is factored into our targets for the full year. Now we will always have some form of frictional backlog at the end of each quarter. Not to say there wouldn't be some backlog at the end of the year, but it will be more of a sort of normal level of backlog, as opposed to what we experienced at the end of the second quarter.

And could you give us an update on Dolby Volume, especially the settop box relationship with Motorola?

Dolby Volume, we are essentially on target to the plan that we have been speaking to the new version of Dolby Volume which has a lower footprint on the chip and lower MIPS requirement has been released, both through the implementation license meaning the IT manufacturers, as well as to the product licensees, and right now we are in the cycle of manufacturing and we will start seeing these products being rolled out both this year, as well as over the next year. As far as Motorola, the plan has not changed. We still are looking to see the settop box being rolled out in North and South America with Dolby Volume.

Great, thank you.

Let's go to Paul Coster, JPMorgan.

Murray, in passing if you would just restate with the guidance is for product revenues in 2010, that would be helpful. But my main question really is, regarding the product sales, can you give us the proportion of revenues that originate in 3D, and perhaps a little bit of color around the 3D deployment, the 524 units that were deployed in the quarter, what was the breakout, domestic versus international, and are you seeing any benefit from DCIP domestically?

Paul, this is Murray. Let me just state that we are looking for $190 million to $205 million, that is our targets for both products and services. We don't have a specific product number. We just have the combination of those two.

And what proportion comes from 3D possibly?

We don't provide a specific number on 3D other than again it has been as I said earlier, that we saw strong results in the quarter.

Okay. And of the deployments that took place, domestic versus international, can you give us some sense of how that breaks out, and what if any, benefit you are seeing from DCIP domestically, not just for 3D but for audio processes?

As it relates to 3D first, most of our, we don't break it down, I don't have the units to hand how much was North America and how much is international, but suffice to say that the bulk of the track objection is internationally, so most of those units would be international, and we are not providing units as part of the DCIP rollout for 3D.

Okay. Got it. And then finally, what is your attach rate in China for DTVs? I mean it sounds like you had some kind of backdoor success there. Can you tell us how it is going?

Right now we have about 11 stations in China broadcasting in Dolby format including CCTV, so we are really happy with our footprint working both with the different regions that are broadcasting, and obviously we continue to work with the standards bodies both in China, as well as in the region, to collaborate on making sure that our technologies get adopted. So we are pretty happy with the process so far.

Excellent. Thanks.

A question now from Andy Hargreaves with Pacific Crest.

Thanks. I wonder if actually you could just take kind of a step back from a high level, as you are obviously in the midst of a pretty strong PC cycle and pretty strong Digital Plus TV cycle. Beyond that, can you talk about what you think are your best growth opportunities? Post processing, mobile? And maybe when those might start to be really noticeable in the P&L?

Well, I think as we look forward to the future, some of our growth drivers are going to be the continued adoption around the world of Digital broadcast. We are on about half of the world TV shipments today, and that is because about half of the world's TV shipments are Digital. So as the world continues to go Digital we continue to see broadcast as a significant growth opportunity for us. We see mobile as a significant growth opportunity. Both with Dolby Mobile and Dolby Digital Plus, and I think it is important to note that the Dolby Digital Plus win with Nokia, really validates the mobile opportunity for us. Dolby Digital Plus represents a different but complementary value proposition to Dolby Mobile. It is representing the need for the mobile device to be on par with the living room, in terms of its entertainment functionality.

And on top of that with Dolby Mobile, you can then improve content from any format, whether or not it is in the highest quality multichannel Dolby formats. PC is still an opportunity for us. We have, with the enterprise adoption it is still ahead of us, and then on top of that you mentioned post processing. We are excited about our suite of post processing technologies. PC, CE, we are excited about our next release of PC, EE. Dolby Volume we still think is early days, and then of course, we continue to make progress on some of our initiatives outside of audio.

Okay. And then getting back to just a previous question really quick, are you guys seeing the anticipated decline in cinema audio?

Sorry, a little bit of feedback there. Right now what we are seeing is that a lot of the conversions to Digital we are seeing there is two ways you can go. You can either by a new Digital Plus audio processor, or you can buy equipment from us to upgrade your traditional audio processor to be compatible with your Digital environment. We are seeing a lot more conversions than we are new builds, and so our new audio processing business has declined somewhat.

Okay, thank you.

Next we go to Deutsche Bank, Brian Thackray.

Hi, guys. Good quarter. Can you talk a little bit more about Nokia, specifically about the opportunity beyond just the N8, have you been in discussions about units or handsets beyond that? And if so, how should we be thinking about penetrating Nokia beyond just this one win?

Well, look, with all of our Tier 1 wins, our goal is to provide value in as many ways as we can. Right now we are both focused on the release of the N8, but we view this as a long-term partnership, and a sign that Nokia is committed to providing the best possible entertainment experience.

Fair enough. I just want to make sure I understand on the compliance settlements, and just how that, it sounds like it is contract to sales and marketing, and how that differs from royalty recoveries. Or is that one and the same?

The way it works is that when there is a compliance settlement with a system licensee, so that is someone that is selling a unit to a consumer, that would flow through revenue. And when it is in the supply chain, an implementation licensee, it comes in the form of a reduction to expense. And so that is what happened this quarter, in total we had $7.2 million in the second quarter that came out as a reduction to operating expense. We had $4.9 million the year before in that same fashion. So we will have, over time we will have some that flows through revenue, system licensee, and we will have some that will go through as a reduction to OpEx to implementation licensee.

Can you just give us a sense for on an annual basis is that between 4 and 7 normal for a per quarter basis?

It really bounces around, it really bounces around. What we said earlier in the year is any time there was $0.25 million or more that we would disclose that, and we made no disclosure in the first quarter, and we have made a disclosure in the second quarter, but in terms of any kind of a forecast on a go-forward basis, we don't have anything to provide at this time.

Helpful, thank you.

Let's no next to Tom Kucera with Avondale Partners.

Thank you. Good afternoon. I wanted to start by touching on the profitability of the cinema product segment. Strong gross margin there this quarter. I am wondering what are the barriers to really sort of maintain that gross margin for the remainder of the year, and also maybe if we can take a step back, and update us on where you expect gross margins in that segment to trend as the Digital rollout continues?

Well, as I mentioned earlier, there were a couple of things that drove the improved gross margin. One was lower warranty expenses, and also we had higher manufacturing utilization. We have had some good progress in the manufacturing capabilities. We commented that for the full year that we expected it to be a slight improvement in fiscal 2010 over fiscal 2009, and so that is what we are providing there. As you know, a year ago we consolidated our manufacturing operations from two to one, and we are seeing some benefit from those activities in this quarter.

Would say a 48% kind of gross margin be sustainable for the rest of the year, or is there something constraining that in the later quarters?

We are not providing specific quarter to quarter. All we are saying is that for the full year we expect a slight improvement over the fiscal 2009. So I mean obviously it has to do with some product mix, and those kinds of things, but essentially a similar trendline than what we had today.

If I could touch on the Nokia question. In terms of pricing I am putting Dolby Digital Plus on handsets, maybe you could compare that both to putting HE AAC on handsets, and to putting Dolby Digital Plus on other devices, in terms of pricing?

We aren't going to get into the pricing details for the Nokia arrangement. It is consistent with our Dolby, with our mobile business model, but other than that can't really get into any detail.

All right. Thank you.

Let's move on to Hudson Square Research, Daniel Ernst.

Good evening. Thanks for taking the call. Three questions, if I might. First could you comment on what the opportunity is or is not perhaps in the tablet market, with things like the iPad which are certainly being used as video players, and where Dolby Digital or Digital Plus might or might not play in the tablet market. Second again touching on the mobile opportunity, as you have a lot of the Tier 1 wins, LG and Nokia, it is on a handset basis, is there an opportunity to place your technology in the same way that you have done in the DVD specs, or in certainly with XP or with Vista and with Win 7, where you are at the operating system level, and now with the in Android or in the Symbion or in Web OS, there is an opportunity to place the technology at that top level.

And then last question, touching on another one about future ops. Some of the investments you have made in the last couple of years have been in video technologies, things like the high dynamic range for LED back lights, the Cinea video security, is there an update on the progress and monetizing some of those investments you made, outside of audio but in video tech? Thanks.

Sure. On the tablet types of products, we do believe that this provides yet another in opportunity for us to give the consumer an immersive experience, whether it be a Surround Sound type experience such as the one we just described with Nokia, or whether it be a post processing opportunity, where you plug in headphones and are listening to a much more immersive sound than you would have otherwise, irrespective of the audio source. Absolutely we are gearing up to address that market. It is in early days and we, are looking at how it is going to be accepted, but we do see this as an opportunity in the long-term.

As far as getting speced and broader opportunity in the mobile space, when it comes to multimedia, obviously you probably are aware that the 3GPP standard, which is a 3G standard has already selected HE AAC as the audio codec of choice, and we have built up on top of that opportunity, to make sure that Dolby Pulse is compatible with HE AAC, and Dolby Pulse enjoys all of the benefits that come with the Dolby Media Generator, which Kevin described earlier. But above and beyond that as Kevin mentioned Dolby Digital Plus provides a whole new chapter for Dolby in the mobile space. Dolby Digital Plus is really the convergence chapter in the mobile space, where you have content that is either being broadcast or sideloaded or coming from the internet, which is coming in high quality Surround Sound, that is now being able to play back on the mobile device, and not just a Blu-ray player or a connected TV.

So now we are moving that, with the N8 we are moving the High Definition Surround Sound experience from the mobile space to be commensurate with the home theater, and that is happening as a defacto standard. That is happening in a way that is bottoms up, and not so much through the standards bodies that you are describing, and we don't believe that is a necessity for us to become a de facto standard in the mobile space. As far as the video opportunity and the future investment I am going turn it over back to Kevin.

I guess first as it relates to video, I would like to highlight something I said in the script, which is we did release the Dolby Professional Reference Monitor. We are excited about that product. It does leverage our HDR technologies, as well as some of the best things that have come out of our research and engineering efforts over the last couple of years. And meets an immediate need in the content creation community. And so it is going enable them to produce an image with the dynamic range and color gambit and full accuracy, that we think that serving that community has always served us well, and puts us in a good position as we look to drive innovations to the market in the future.

Okay. Thank you.

(Operator Instructions). Let's now go to Wedbush Securities, Kerry Rice.

Thanks a lot. Most of my questions have been answered. A quick question about kind of Digital content coming through the internet like streaming videos. I know that you guys generally try to seed or partner with the content providers. Is that opportunity really where you guys would monetize that is through Digital televisions and through game consoles, or is there other opportunities that we should think about, in the kind of streaming or internet video convergence market?

We think we have an opportunity to improve the experience on any device that is going to receive this type of content. And that is one of the things that we are most optimistic about as we look into the future, is that there continues to be a high expectation for being able to get your content any time, anywhere, on a proliferation of devices. As a result we remain very focused on working with the online content community, to enable them to stream their content in multichannel sound.

For example if you take the Wal-Mart acquisition of Voodoo and you take a look at where the Voodoo client is becoming prevalent, it essentially has become one of the de facto standards that you get when you buy any connected television. Whether it is LG or Samsung or any of these connected televisions that are reaching the marketplace, you get these clients which playback Dolby Digital Plus High Definition content, and by working with similar aggregators and service providers, such as either Wal-Mart or Voodoo or both, we do see our content reaching out not only to connected television, but into mobile devices that are connected, or the slates, or the ,PC et cetera.

Okay. Thank you.

And at this point, we have no further questions. I would like to turn the presentation back over to Kevin Yeaman for any closing remarks.

Thanks everybody for joining us today, and we look forward to updating you again on our progress next quarter.

At this time, we now conclude Dolby Laboratories quarterly earnings call. Thank you again for your participation. Have a great day.