Dolby Laboratories Inc (DLB) 2011 Q4 法說會逐字稿

Please stand by for realtime transcript. Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing fourth quarter and fiscal year 2011 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 Thursday, November 17, 2011. I would now like to turn the conference call over to Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, Mr Hughes.

Thanks, Lisa. Good afternoon. Welcome to Dolby Laboratories fourth quarter and year end fiscal 2011 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 ended September 30, 2011. Market trends and developments for the industries in which we compete, and our expectations and beliefs concerning how those trends and developments will affect our operating result, 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 general economic, PC or cinema market conditions could cause actual results to differ materially from those in the forward-looking statements.

These factors are addressed in the earnings press release that we issued today, and under the section captioned risk factors and elsewhere in our most recent quarterly report on Form 10-Q available at www.sec.gov or on our website at www.dolby.com under the investor relations section. Dolby disclaims any obligation to update information contained in these forward looking statements, whether as a result of new information, future events or otherwise. During this call we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in the Dolby Laboratories investor relations data sheet on our investor relations section of our website.

All 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. As for the structure of this call, Murray will begin with a recap of Dolby's financial results and provide a fiscal 2012 outlook and Kevin will finish with a discussion of the business. So, with that introduction behind us, I would now like to turn the call over to Murray.

Thanks, Alex. Good afternoon and thank you for joining the call. I'd like to discuss Dolby's Q4 and full-year fiscal 2011 financial performance and our outlook for fiscal 2012. Revenue for the fourth quarter was $243.8 million, up 7%, year-over-year, and 11% sequentially. Licensing revenue for the fourth quarter was $205.7 million, up 15%, year-over-year, and 13% sequentially. The year-over-year increase was driven by growth in our other markets category, led by mobile, and by our broadcast market.

Looking at licensing revenue by market, fourth-quarter PC revenue decreased 11% year-over-year, on lower ISV revenue and declined 5% sequentially on lower ISV and PCEE revenue. For the full year, our PC market made up 30% of licensing revenue in fiscal 2011, compared to 36% in fiscal 2010. Fourth-quarter broadcast revenue grew 29% year-over-year, and 18% sequentially. The year-over-year and sequential increases were driven primarily by higher TV attach rate. Full-year revenue from our broadcast market made up 31% of licensing in fiscal 2011, compared to 27% in fiscal 2010.

Fourth-quarter revenue from our consumer electronics market was up 1% year-over-year, as increases in Blu-Ray and other CE products offset declines in DVD. Sequentially, revenue declined 7% as an increase in Blu-Ray was more than offset by a decline in other CE products. Full-year revenue from our consumer electronics market made up 21% of licensing revenue in fiscal 2011, compared to 22% in fiscal 2010. Fourth-quarter revenue from our other markets category, which includes mobile, gaming, automotive and via, increased 69% year-over-year and sequentially, primarily on increased revenue from mobile and via due to the RIM litigation. Fourth quarter product revenues were $30.8 million, down 23% year-over-year and up 9% sequentially. The year-over-year decline was driven primarily by lower shipments of our 3D systems. The sequential increase was driven by increased sales of both our audio and digital cinema systems. Fourth quarter services revenue was $7.2 million, down 21% year-over-year, and 19% sequentially.

Turning to margins, GAAP gross margin in the fourth quarter was 89.5%, and 90.3% on a non-GAAP basis. Our licensing gross margin was 98.2% in the fourth quarter on a GAAP basis, and 98.8% on a non-GAAP basis. GAAP product gross margin was 39.1% in the fourth quarter, and 41.1% on a non-GAAP basis. GAAP services gross margin was 57.2%, and non-GAAP services gross margin was 58% in the fourth quarter. Fourth quarter GAAP operating expenses were $106 million, up $2.8 million sequentially. Non-GAAP operating expenses were $92 million, up $2.8 million from the previous quarter.

In the fourth quarter, we received $4.9 million in settlements from implementation licensees that were accounted for as contra expense. Without these settlements, our fourth-quarter operating expenses would have been approximately $111 million for GAAP, and $97 million for non-GAAP. Total employee headcount was 1,369, an increase of 39 employees from the previous quarter. The increase was in R&D, sales and marketing and G&A. Fourth-quarter operating income was $112.2 million on a GAAP basis, or 46% of revenue, and $128.2 million on a non-GAAP basis, or 52.6% of revenue.

Turning to tax, our effective tax rate for the fourth quarter was 32% on a GAAP basis, and 32.1% on a non-GAAP basis. Fourth quarter GAAP net income was $79.1 million, or $0.71 per diluted share, compared to $65 million, or $0.57 per diluted share for the fourth quarter of 2010. Fourth quarter non-GAAP net income was $89.9 million, or $0.81 per diluted share, compared to $74.9 million, or $0.66 per diluted share for the fourth quarter of 2010. For the full year, GAAP net income was $309.3 million, or $2.75 per diluted share, compared to $283.4 million, or $2.46 per diluted share for fiscal 2010. For the full year, non-GAAP net income was $339.9 million, or $3.02 per diluted share, compared to $313.5 million, or $2.72 per diluted share for fiscal 2010.

Moving over to the balance sheet, Dolby finished the fourth quarter with $1.216 billion in cash, cash equivalents and marketable securities. Cash flow from operations was $110 million in the fourth quarter. In the fourth quarter, we repurchased 1.390 million shares, at a total cost of $49.9 million, or an average price of $35.89 per share. Now, I would like to turn to our fiscal 2012 outlook.

For total revenue, we are targeting $910 million to $970 million. Specifically for licensing, we are targeting revenue of $790 million to $830 million. Please keep in mind that in Q4 fiscal 2011, we recognized $11.3 million in royalties from RIM related to periods prior to fiscal 2011. This target assumes growth from our broadcast and our other markets category, led by mobile. Our licensing target range is based on the following fiscal 2012 assumptions. In our broadcast market, we are assuming an increase in global TV attach rates of 4 to 5 points and worldwide TV unit shipment of flat to slightly down for the fiscal year. In our PC market, we are assuming a PC unit shipment range of plus 3% to minus 3%. We finished fiscal 2011 with approximately $80 million in ISV revenue and expect to finish fiscal 2012 with approximately $60 million to $65 million. In our consumer electronics market, we are targeting flat to slightly down year-over-year revenue, primarily due to the decline in DVD. Based on typical seasonality and other factors, we anticipate that Q1 and Q3 licensing revenue will be lower than Q2 and Q4.

Turning to products and services, we are targeting revenue of $120 million to $140 million. For gross margin, we are targeting approximately 90% on a GAAP basis, and 91% on a non-GAAP basis. For product gross margins, we are targeting approximately 37% to 39% on a GAAP basis, and 40% to 42% on a non-GAAP basis.

Turning to operating expenses, we are targeting approximately $465 million to $475 million on a GAAP basis and $410 million to $420 million on a non-GAAP basis. As you consider our fiscal 2012 operating expense targets, please keep in mind that our fourth quarter 2011 operating expense exit run rate was approximately $115 million for GAAP and $101 million for non-GAAP, after adjusting for settlements and other items. For other income, we are targeting approximately $5 million. Fiscal 2011 included $2.2 million in interest income on back royalties related to the RIM license agreement.

For tax, we are targeting a tax rate of approximately 29% to 30% on both a GAAP and non-GAAP basis. This assumes lower state and international tax rates compared to fiscal 2011. For share count, we are targeting approximately 110 million shares. For diluted earnings-per-share, we are targeting a range of $2.31 to $2.61 on a GAAP basis, and $2.71 to $3.02 on a non-GAAP basis. And with that, I will turn the call over to Kevin.

Thanks, Murray. Good afternoon. Today, I would like to discuss the changes taking place in our industry, and the opportunities they present for Dolby. Dolby's role in the entertainment industry is to provide the products, services, tools and technologies that capture, deliver and render the highest quality experience possible for the artist and consumer. We have a 45 year track record of delivering technologies and helping to define the standards in meeting entertainment channels including cinema, optical disk and digital broadcast.

Today, the industry we serve is at an inflection point. We've moved from a world of hundreds of millions of playback devices shipped annually, to that of billions of devices. From PCs and televisions, to SmartPhones and tablets, virtually all of these devices are connected and many can capture and publish content as well. And as content can be captured for many more endpoints and then distributed and played back across a greater number of devices, consumers have the ability to access and consume content virtually anywhere, anytime. These trends present Dolby with increasing opportunities to enable the optimal quality and consistency of audio and video content streams.

Let me start by discussing our core audio business and the opportunities we have ahead. Today we are seeing a shift in our core audio business from optical disk playback to digital broadcast and e-media content. We have already seen this reflected in the composition of our licensing revenue. In fiscal 2011, we estimate that 52% of licensing came from non-optical disk based revenue, compared to 45% in fiscal 2010. This includes revenue from products such as TVs, set-top boxes, mobile phones, as well as our post processing technologies on a wide range of devices. This revenue grew 22% in fiscal 2010, and 27% year-over-year in fiscal 2011. We continue to see growth opportunities in areas such as broadcast and e-media, even as overall optical disk matures.

The remaining 48% of licensing revenue comes mainly from Windows 7, ISV, DVD and Blu-Ray and is primarily driven by the support of optical disk. However, most of these products receive content over mobile and online networks, in addition to optical disk, and we are increasingly extending our technologies into this use case. It is also worth noting that we expect the industry decline of optical disk to be gradual given that Blu-Ray is growing and DVD still remains a popular PC platform for many around the world. We believe that the trends in digital broadcast and e-media will enable us to grow our core audio business, and I would like to spend a moment talking about each.

In digital broadcast, the world continues to transition to digital and HD, and we see the adoption of our technologies increasing globally with this trend. Through our products, services and technologies, we help the broadcast industry deliver a high-quality and consistent surround sound experience. As a result, our broadcast solutions continue to be adopted by leading cable, satellite and IP TV providers around the world. With well over 200 million TVs and 200 million set-top boxes shipped each year, this remains a significant opportunity for Dolby. In fiscal 2011, approximately 60% of worldwide TV shipments and 40% of worldwide set top box shipments contained our technologies, indicating a significant opportunity still ahead.

The trend towards e-media is also a significant opportunity. In other media platforms, such as optical disk or broadcast, there has been a degree of top-down control the content creators and distributors have had over the consumer experience. These channels have been a case of one too many, where the format is established upstream and the devices are built to a uniform standard. This has enabled the industry to send one reel, one file or one signal to a fairly uniform playback ecosystem. The result has been a fairly consistent quality experience within each platform. In e-media, the industry is now dealing with one-to-one delivery where the content creator and service provider see their content delivered to an increasingly heterogeneous ecosystem of devices, few of which have the same profiles or capabilities.

As people increasingly consume content from a variety of portable devices, content creators and service providers are seeking to differentiate by offering the best quality audio, consistently across many devices. This means providing them the infrastructure that captures their vision and the technologies that enable the optimal playback experience, wherever and however consumers interact with their content. To achieve this we are focused on two objectives.

First, we are working with content creators and service providers to adopt our tools and formats for the encoding and delivery of e-media content and efficient multi-channel sound. We believe this enables them to offer an optimized audio experience across an increasingly complex array of portable devices. We have made excellent progress in this area, with our format now adopted in the Apple, Amazon, Netflix, Vudu, and Roxio Now platforms. In the last quarter, Dolby Digital Plus achieved support for HD movies and Best Buy's CinemaNow service. Across these service, we estimate that there are tens of thousands of pieces of content formatted in Dolby multi-channel.

Second, we're focused on growing the adoption of our technologies by leading manufacturers of connected portable devices and are making progress. We have recently entered into a licensing agreement with Samsung, enabling them to use Dolby multi-channel technologies in their handsets and tablets. We expect this agreement to contribute to the growth of our mobile market in fiscal 2012. We estimate that we recognize royalties for our Dolby multi-channel technologies on about 4% of industry SmartPhone shipments in fiscal 2011. And, we expect this to increase to low to mid teens in fiscal 2012. By 2015, it is estimated that there will be 1.5 billion portable connected devices, our goal is to extend our technologies throughout this ecosystem, deliver the highest quality experience consistently across all portable devices, for each playback environment.

To achieve this, we are investing in our core audio portfolio to develop the technologies and tools the industry requires to deliver the best possible experience. Whether it is through broadcast, e-media or cinema. In e-media, Disney is investing in our core audio technologies to meet the demands of a dynamic and evolving industry. Our customers are increasingly having to support a more complex ecosystem with multiple operating systems and chip sets, multiple content streams and distribution formats, and a variety of user applications and playback capabilities. To meet these needs we're investing in the content tools and playback platforms. We also continue to evolve our offerings and introduce new features to provide for the best possible experience across each use case.

In cinema, the advent of 3D is generating strong interest from the industry for the next-generation audio experience. We are excited to be working with the industry and our early demonstrations are receiving an enthusiastic response. I would now like to turn to discussing our investments in the areas of video and voice, which we believe represent attractive new growth opportunities.

We believe we can draw on our expertise in signal processing, compression technology and the capture and render process to improve the video experience. Over the last few years, we have assembled a leading video team with expertise in the capture and display of video content. We believe that there are significant gaps in the technology used to deliver premium video to today's displays, and our team has identified solutions to some of these problems. One area of focus has been improving the dynamic range and color gamut of video. To achieve this, we launched the Dolby professional reference monitor which recently won the Hollywood post alliance engineering excellence award. There have been a number of motion pictures using the Dolby Pro monitor in post production, including The Social Network, The Art of Flight, and the upcoming feature, The Girl with the Dragon Tattoo, as well as the restoration of Raiders of the Lost Ark, Apocalypse Now, and 101 Dalmatians.

We continue to focus on the delivery of full resolution consumer 3D over bandwidth constrained platforms, such as broadcast and online. To date, the delivery of full resolution 3D over these platforms has been a challenge for the industry. As a result, content creators who have spent a lot of money developing high-quality 3D content, must see it delivered in low resolution over broadcast and online. We believe we have developed a solution to this problem and are making progress toward its adoption. More broadly, we are focused on delivering the products, tools and technologies needed for video professionals to capture and deliver more rich and vivid video, and licensing our technologies to manufacturers so that their displays can take full advantage of this content.

Finally, we've also identified opportunities to improve voice communications by leveraging our expertise in sound capture, signal processing, delivery and playback. Business communications is becoming more important as companies strive to support remote collaboration and working efficiency. However, in many of these high-value use cases, the audio performance does not support natural, productive meetings. It is now possible to deliver audio quality that is much better than current voice services. We are investing in developing a next-generation of communications technologies that deliver more effective collaboration and we are working closely with initial, potential customers on solutions.

In summary, we believe our core audio business is strong. We continue to see growth opportunities as the world transitions to digital broadcast, and as e-media leads to a world of billions of connected playback devices. Building on the foundation of our strong core business, we also have exciting opportunities in the areas of video and voice, that we believe can contribute additional, long-term growth. Finally, before I turn the call over to Q&A, let me just briefly comment on the news of Murray's anticipated retirement in calendar year 2012.

Murray has begun discussing his plans with me, and there will, of course, be a time and a place to thank Murray for his contributions to Dolby, but for now, I look forward to Murray's continued work with us in 2012 and I appreciate his commitment to being actively involved in the transition, sometime over the coming year. With that, operator, I will turn it over to questions. Thank you

Thank you. (Operator Instructions) Ralph Schackart, William Blair.

Good afternoon. Two questions if I could. First, Kevin, could you just remind me, I think you had said 60% worldwide TV attach rates, was that for full fiscal 2011? Or, was that an exit rate for the year?

That was full fiscal 2011.

Great. And, then also, too, can you give us an update on Windows 8? You gave us an update last call, kind of where we stand there and then also, too, how should we think about the PC market -- or I'm sorry, the PC revenue stream for Dolby for fiscal 2013?

We don't have a significant update from last quarter. We continue to believe that DVD is an important use case in the PC ecosystem and that the PC ecosystem is not going to stand for a broken consumer experience, and so we're - continue to be actively engaged working to license our technologies directly to the PC OEMs to ensure the best experience. More importantly, I would point out that as of course where people are getting increasing content on the PC is over online networks, even mobile and broadcast networks, we're really focused on extending our technologies into those use cases.

Okay, great. Thank you.

John Bright with Avondale Partners.

Hi, this is Jeremy Henrard in for John Bright. Thanks for taking my question. I just wanted to ask on the broadcast side, could you provide a little more color on your progress over in Brazil, Russia, India and China?

Sure. Overall, we're pretty happy with the progress. Starting with China, where recently we've announced the adoption of our technology as an option in the standard, we're happy to report that as of today, 19 of the 38 distinct HD channel services delivered to consumers through terrestrial, provincial cable and IP TV services use Dolby technology as a combination of either Dolby Digital Plus or Dolby Digital or both. This is a progress that we're pretty pleased with. Obviously, we are also working with consumer electronic companies, TV manufacturers, both inside and outside of China, on making sure all the proper licenses and technologies are in place to take advantage of this opportunity.

The opportunities in India continue to grow for us. We -- as we have announced before, the satellite and cable opportunities are the primary [imminent] opportunities either on air right now or making significant progress. What we're focused on, over the next 12 months, in India, is the terrestrial broadcast, which is in the process of being developed. So, we're working with key players in Delhi, along those lines.

In Brazil, as you know the technology of choice for broadcast is the AAC standard, which Dolby partakes in the form of (inaudible) revenue. However, in terms of television, the attach rate in those products is a -- [MS] series technology from Dolby, which is a combination of Dolby Digital Plus and AAC, therefore the revenue from those televisions is similar to revenues that you might see elsewhere in the world. And, that's Dolby Digital type revenue.

So, overall, I'd say we are pretty pleased with our progress moving forward. And, will continue to keep you updated.

Okay, thank you. And, last one on the mobile side, could you talk a little bit about your plans for Dolby Digital Plus versus Dolby Mobile and what kind of wins have you had in each? And how do you see that progressing?

So, first of all, I guess I would just like add before turning it over to Ramzi for some specific updates, I do want to emphasize that we didn't have any measurable attach on Dolby Digital Plus in the year 2010. So, in 2011, we are on 4% of SmartPhones with our multi-channel audio codec. Based on the wins we have today and the devices we see coming into the market, we feel good about that going up to low to mid teens in 2012.

And, this is significant because as we look at all the problems to be solved in the form of audio quality and consistency across this complex ecosystem, there are a number of problems and it can range from, depending on the piece of content and the device, it could range from not having enough volume, it could be having volume but not really being able to discern the dialogue. It could just be that it is over compressed and then there's the whole issue of being able to share that content across multiple devices. And, there's a lot of ways to do that.

DLNA, which we are an important part of, HDMI, which we are important part of. There are number proprietary solutions which we think we provide an elegant solution for. When we look at all those problems, what we found is that having the multi-channel audio codec in place is a critical component to solving some of those problems. The post processing solves a lot of the problems, the best possible solution is the combination of those things.

We are highlighting our progress in multi-channel codecs today because I think the progress we have made is significant. But, we've also, we also continue to make progress at Dolby Mobile and ultimately to bring it together as a holistic solution. Please, Ramzi, why don't you give us a little bit of progress status on Dolby Mobile?

So, a little bit more color on what Kevin just said, we are in over 140 SKUs worldwide, scheduled shipping or scheduled to be shipping in the next two months. We are in over 30 models with Dolby Digital Plus, including models from LG, Nokia and Pantech, that is a significant increase from previous attach of course. Specific design wins, LG devices with Dolby Digital Plus are being shipped with multiple US carriers, Verizon, AT&T, Sprint, US Cellular and Metro PCS. VTE is primarily shipping in China and now it is shipping SmartPhones with Dolby technologies in the UK and Europe.

We're also working on the upstream end of things, such as with the Nokia music service in China using Adobe Media generator to generate Dolby encoded contents to make sure that content is being generated to playback on all these devices. So, overall, we are approaching the entire ecosystem end-to-end, not only from the attach rate on the devices, but on the upstream to make sure the holistic experience, as Kevin alluded to.

Okay, great. Thank you very much.

JPMorgan's Paul Coster has the next question.

Yes, thanks very much. Do you -- can you talk us through, please, the margin decline in the licensing segment? Not just for the year ahead, but your long-term expectations around that and what the reason for it declining is? I have a follow-up.

Sure, Paul. Can I just clarify, are you referring -- you are not referring to the gross margin, right?

Gross margin for the licensing business. I though I heard it was declining in 2012.

No, Paul, the licensing gross margin continues in the same range that we have been at historically. So, again, it continues to be a very high gross margin business.

Okay, my apologies. And you expect it to remain so for the indefinite future? That's not withstanding the patent portfolio kind of aging in time?

Right now we are just providing the 2012 guidance on that. And so, we look for the high margins, beyond that we can -- we will update you at that time, but we continue to believe that licensing will be a very high gross margin business.

Okay, my follow-up, Kevin, I thought that you outlined your growth strategy pretty well, I think it's very hopeful. And, yet, this year, of course, you're not going to be expert to growth. Can you just sort of reconcile that? And, then, what needs to happen for the top line to reaccelerate?

Well, as I look at the year in front of us, one of the things that we highlighted today is the amount of revenue we have coming from non-optical, meaning that these are -- this is licensing revenue which is not engaged in any way in optical disc playback. And that's been growing quite well, 22% in '10, 27% '11. The biggest drivers there, of course, are broadcast and mobile. And, we do see growth in those areas in 2012.

I think beyond 2012, still in front of 2012, is the bigger adoption of broadcast in markets like China, India, Russia, the markets that Ramzi talked about earlier, this is where we expect a lot of television growth to come from in the future. We don't see that necessarily kicking in -- that would contribute to growth next year, but we don't see an inflection point in those markets in terms of consumer adoption in 2012. So, beyond that we see continued growth.

In mobile, again, we highlighted our progress with getting our multi-channel codecs on phones and expecting low to mid teens in 2012. That's going to contribute to growth and we feel like we are just getting started there, both in terms of attach rate and in terms of the growth rate for that device category.

Other things to consider, this year of course, is that we -- there are some headwinds in PC, just in terms of growth rate expectations. We have digested into our guidance, the most recent information we can get our hands on in terms of the Thailand floods and the impact on drives and have factored that into the range of outcomes, and we continue to expect the ISV revenue to come down this year, as Murray talked about in his comments. So, in a tough -- an uncertain economic environment, I guess, I will call it, which is affecting in particular the PC market, we feel like this is a year where we can make a lot of progress in these growth opportunities and that we're really just getting started in some of these markets in terms of the growth available to us beyond that.

Thank you.

Steven Frankel, Dougherty.

Good afternoon. Could we spend a couple of minutes talking about PCEE, kind of where are you from a market share perspective and what are your strategies to grow that market share, especially if you try to fill the hole created by the Windows 8 transition?

I'm sorry, by what transition?

The Windows 8 transition.

All right. So, our PC strategy covers both the playback of optical and media, electronic media content, as well as the increase in the experience itself, right. The immersiveness of that experience which goes along with our post processing technology.

Moving forward, our strategy is to provide that combined suite of technologies as much as possible to maximize that experience. Starting with the playback strategy, as Kevin alluded to earlier, we are going to be approaching all of the OEMs directly to license our technologies directly to the OEMs. The advantage of this approach, it will provide full flexibility to the OEM to playback, not only optical content, whether it be DVD or Blu-Ray, but to start - give the ability to playback the rich content in multi-channel and render it in multi-channel, whether it be coming from any of the online services, which were alluded to earlier, as we see demand for playback of rich content even on platforms such as PCs and tablets.

So, our focus right now is to get all of the OEMs equipped with our Dolby Technology, what we are calling the Dolback - the Dolby codec pack. That is going to be delivered over the next few months, supporting to come up online and start launching that program as Windows 8 comes up for launch in the next year or so.

In parallel to this, we continue to push forward with the PCEE post processing program and we're very happy with the attach rate along that program. We have multiple companies shipping what we call the PCEE4 in the marketplace. To date, we have about 90 million units shipped in the PCEE space, so we are pretty happy -- this all generations, including the latest, so we are pretty happy with the uptick so far and will continue to push that technology to augment.

In summary, we are pretty confident about our playback solution for online content, e-media content, optical content, working directly with the OEMs, as well as continuing to provide a rich post processing, either separately or along with the solution to the OEM.

And where do you think your attach rate is with PCEE today in the notebook market?

I don't believe we've mentioned that before, but we are roughly, about 26%.

Okay, thank you.

Andy Hargreaves, Pacific Crest Securities.

Thanks. Can you just detail a little bit more about operating expenses next year? Where the increase is coming from exactly? And then just more broadly, how you're thinking about scaling, operating expenses relative to revenue going forward?

Yes, sure. So, we do see this as a year of investment and we recognize the significance of having a year of investment when our immediate term growth projections aren't what we've experienced in the past. We - of course, doing that because we are confident that we have a portfolio of initiatives here which is going to contribute to long-term growth. And so, when we look at the operating expense investments, still -- by far, the majority of our spend is still in the area of audio and in fact, from where we sit here today where I see us increasing resources over the rest of this year is in the area of audio and it is right to the heart of many of the things we just talked about.

All the engagement Ramzi talked about in broadcast in Brazil, China, India, Russia, those are all offices that we have invested in recently that are people on the ground making this happen. We are also investing in the tools and technologies to assist those broadcasters, getting them on air, because of the revenue opportunity we know we have in front of us as they adopt digital broadcast.

In e-media, part of it is supporting the increasing complexity of this environment or maybe I should just the complexity relative to some of our other markets. So, for any -- to solve anyone one these problems across the ecosystem, just porting our technologies to the variety of operating systems, the variety of chip sets, making sure that they work across devices that have very wide range of capabilities, depending on the hardware choices or even the hardware design choices that each OEM is making. And, even thinking about the external environment behind which people are listening to these things, we continue to invest in both Dolby Digital Plus and our post -

Hello?

Speakers, are you still on the line? Mr Hughes, can you still hear me? We cannot hear you anymore. Everyone on the phone lines, please standby.

And we're out. Really? You can hear me?

Once again, speakers, this is the operator, we have lost connection. We can't hear you anymore, but we do show your line established. (Operator Instructions)

Are we live, operator?

Yes, speakers you have rejoined.

Okay, it appears that we were cut off. I was just getting to the investments we are making in improving the business communications experience when I was told that we were no longer on the line. So, I understand that you didn't get the opportunity to hear much of it, so I apologize if I repeat myself. But, as it relates to operating expenses, we do see this as a year of investment and we do appreciate the significance of making these investments in a year where our immediate term growth guidance is not what we have had in prior years, and we are doing that because of our confidence in the opportunities we have in front of us.

And, I think it's important to keep in context that by far the majority of our investment is in the area of our core audio business and in fact, as we sit here today, we see the vast majority of increased investment over the rest of this year going into those audio investments and, that takes the form of things like Ramzi, earlier today was just a moment ago, was talking about the work we're doing in Brazil and China and India to get on air. And that - those are your places where we have been establishing and increasing our presence. In terms of putting -- I'm sorry I'm just getting one more note, I want to make sure I am still on. What is your note? Webcast is live, but call isn't? What is that?

Okay, so, I understand that we still may be having technical difficulties, but I will keep going. So, we are investing in the local presence in supporting the rollout of broadcast, we are developing -- providing the tools and support to make sure that these countries and broadcasters can get on air in an efficient way, and that's important because that's where we see a lot of growth opportunities in the future, that's where we see increased adoption in these emerging markets.

In e-media, it's really supporting what is a very complex ecosystem and particularly related to other ones we've seen in the past. In order to really, truly support an entire ecosystem we need to support multiple operating systems, multiple chip sets. We need to support devices that have a wide variety of capabilities, whether we're talking about the audio hardware components, or the actual design of the device as it relates to those components. And, we are also looking to solve issues surrounding the external environment that people are enjoying these devices in.

So, sorry, I'm getting technical updates as we go along here, I understand we are live. So, that's where - so, our investment in e-media is going into to continuing to invest in Dolby Digital Plus, investing in the post processing technologies, to provide the optimal experience across every one of these devices and that includes issues like efficiency, adaptability, and the features that solve the problems with audio there today.

As it relates to video, we, of course, have an investment in the video market. Some of those investments are in support of currently -- products that are currently generating revenue, particularly in the cinema and our professional monitor program. We have also, over the last couple of years, been investing and developing a portfolio of innovations and IP, which we believe are relevant to solving a number of problems or opportunities, I should say, that we see improving the video experience.

IT is moving into a new phase. I see it's moving into a phase of being focused on commercialization of these technologies, we're very much focused on where the most attractive opportunities are, we're engaging with the market with early demonstrations of these technologies, we're very pleased with the feedback we are getting and look forward to evolving these solutions to what's most relevant in the marketplace.

Lastly, as it relates to business communications, which seems particularly appropriate, as I say this, this is a different approach than what we've done in video. As it relates to business communications, it's a small investment, targeted at a very specific opportunity, targeted with very specific, initial, potential customers, and so we expect to get very real-time feedback as to how we are progressing as it relates to our investment in our voice initiative. And, so, that's how we are -- that is some color on where the operating expense is going. Operator, I am hoping we are live and that we can take more questions.

Absolutely. (Operator Instructions) Jim Goss, Barrington Research.

Thank you. A couple of areas. Ultraviolet, I wonder if you can talk about the opportunity you see there, what specific codecs might be involved from Dolby's standpoint and what sort of time frame you might think of in that rollout? And then I do have one other thing.

The ultraviolet standard is being rolled out as we speak. As we reported previously, there are multiple codecs that are - been recommended and the standards. Dolby owns three of the codecs which are -- will be used one way or another in the standard that includes AAC, that includes Dolby Digital, as well as Dolby Digital Plus. How they get used and by whom will be dependent completely on the different companies rolling it out. So, there's some optional codecs in there and it will be dependent on the service, the preference of the Company rolling out the service, as well as the hardware devices playing back.

So, we are still in the early days of ultraviolet rollout. We have very strong involvement in the standard, we continue to contribute and we continue to monitor the progress as it gets launched.

Okay and the other thing is 3D. Should I interpret the numbers as looking at it being somewhat stable, but not really improving over the last couple of quarters?

That's a fair interpretation. We continue to have approximately 30% market share outside of North America and -- which of course in North America there's a [VCIT] rollout, which does not include Dolby. If you include the [VCIT] rollout, the market share is about 20% globally.

Okay, but no significant progress then at front, though?

It is a steady market share and holding.

All right, that's it. Thanks.

Ralph Schackart, William Blair.

Yes, one more. Kevin, just curious with the stock where it is at sort of the trough valuations. Just give us a reminder if you could, where you are on the buyback and how you're thinking about your opportunities for cash going forward, and have they changed much?

Well, we're going to continue to evaluate our use of cash on a regular basis, we are doing that. We still have in place the buyback program to offset any dilution from compensation programs. Murray gave the stats on that in the call and if you need them, he can repeat them. But, that's where we stand.

Okay any change in strategic thinking with the use of cash on a go forward basis, vis a vis maybe where Dolby sat six,12 months ago?

I wouldn't describe it as a change in strategic thinking, but I would say that as the growth opportunities that we've talked about throughout the day, as we get further along into each of them, we continue to look very closely for any potential acquisition opportunities that could accelerate our progress and one of those markets, broaden our opportunities in one of those markets, and -- but, of course, we will continue to be very disciplined in our approach as we look at that.

Okay, thank you.

And gentleman, at this time there are no further questions. I will turn the conference back to Mr Yeaman for any additional or closing remarks.

Great, well thank you all for joining today and we look forward to keeping you apprised of our progress as we go through the quarter and on the next call. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation and have a great day.