Kevin Yeaman - Chief Financial Officer Bill Jasper - President and CEO Ramzi Haidamus - GM of Consumer Division Tim Partridge - GM of Professional Division

Ralph Schackart - William Blair Steven Frankel - Canaccord Adams Ingrid Chung - Goldman Sachs Paul Coster - J.P Morgan Daniel Ernst - Hudson Square Research Alan Davis - D.A. Davidson Paul Coster - J.P. Morgan Eric Mentz - Eagle Assets Erik Rasmussen - Montgomery & Co.

Welcome to the Dolby Laboratories conference call discussing Fiscal Second Quarter 2007 Results. (Operator Instructions). As a reminder this call is being recorded on Wednesday, May 2, 2007. I would now like to turn the conference over to Mr. Kevin Yeaman, Chief Financial Officer for Dolby Laboratories. Please go ahead, Mr. Yeaman.

Thank you. Good afternoon. Welcome to Dolby Laboratories second quarter fiscal 2007 Earnings Call. Joining me today is Bill Jasper, Dolby Laboratories President and CEO. In addition, Tim Partridge, General Manager of Dolby's Professional Division; Ramzi Haidamus, General Manager of Dolby's Consumer Division and Marty Jaffe, Executive Vice President of Business Affairs are here to participate in today's Q&A. On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 28, 2007, market trends for the industries in which we compete, and our expectations concerning how those trends will affect our operating results; our ability to expand our presence in existing markets and to penetrate new markets; the capabilities and market acceptance of our products and technologies; and our strategic and operational plan. Important factors that could cause the actual results to differ materially from those in the forward-looking statements, these factors are detailed under the section captioned Risk Factors in our most recent quarterly report on Form 10-Q available at www.sec.gov or on our website at www.dolby.com under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. As for the structure of this call, Bill will begin with an overview of the quarter and I will follow with a rundown on Dolby's financial results. And so, with that introduction behind us, I will now turn the call over to Bill.

Thank you, Kevin. Good afternoon, everybody. I am pleased to report to report a very strong second quarter with revenue of $129 million and net income of $39 million. We continue to benefit from the increased penetration of Dolby technologies throughout our markets, resulting in improved diversification of our licensing revenue. In today's call I would like to update on our progress towards Dolby's long-term objective of being an essential element in the best digital entertainment technologies. As well as the initiatives we have focused on to further capitalize on the expansion of digital entertainment. In the next-generation DVD and gaming markets, we believe that we are well positioned. In next-generation DVD, Dolby Digital Plus and Dolby TrueHD are audio standards in the HD DVD format, while Dolby Digital is an audio standard in the Blue-Ray format. In next-generation gaming, the Sony PS3 contains Dolby Digital Live for gaming, Dolby Digital 5.1 for DVD playback and Dolby TrueHD for decoding of up to 7.1 channels in Blue-Ray, while the Xbox 360 includes Dolby Digital for game play and movie playback. Additionally, we continued to benefit from the transition to digital television by broadcasters around the world. The number of stations adopting Dolby Digital as their multi-channel audio format is expanding and we are focused on increasing the penetration of Dolby Digital in growing digital TV and set-top box markets. In North America, we are benefiting from increased penetration of Dolby Digital and integrated televisions shipped throughout United States. The FCC has mandated that as of March of this year all integrated televisions to must contained ATSC digital tuner. Dolby Digital is the adopted standard in the ATSC tuner. We are equally pleased with our progress of the European and Middle Eastern region. In our second quarter, 158 channels in this…

Thank you, Bill. Moving to our financial results, revenue for the second quarter was $129 million, up 23% year-over-year and was comprised of 83% licensing revenue, and 17% product sales and service revenue. In the technology licensing segment, revenue increased 28% year-over-year and 29% sequentially. This is due in part to $7.7 million in revenues relating to PC products shipped over the prior ten quarters by an existing licensee. This revenue resulted from the resolution of certain contractual matters with this licensee in the second quarter as we anticipated on last quarter’s call. Year-over-year in sequential technology licensing growth was driven primarily by growth from our broadcast and personal computer market. Very strong year-over-year and sequential growth in the broadcast portion of our licensing business came from strong demand for digital television and Set-top boxes with Dolby Digital. We experienced strong year-over-year in sequential licensing growth to our PC market even excluding the $7.7 million in royalties relating to products shipped in prior quarters. This growth was driven by sustained demand for notebook computers which commonly included DVD playback software with Dolby Digital. Our largest market, consumer electronics was up sequentially but flat year-over-year. Our other markets were roughly flat year-over-year and were up modestly sequentially with gaming experiencing strong sequential growth. In the products and services segment, revenue for the second quarter was roughly flat year-over-year and sequentially. Within our products revenue, we experienced strong year-over-year and sequential demand for broadcast related products while experiencing year-over-year weakness per traditional motion picture related products. Services revenue was up 18% year-over-year and roughly flat sequentially. Let me turn to the details of the P&L for the second quarter. Licensing gross margin was 90% or down one point sequentially. Product gross margin was 50%, up seven points sequentially, while services gross margin…

Thank you, sir. (Operator Instructions). And for our first question we go to Ralph Schackart with William Blair.

Good afternoon, and congrats on another strong quarter. There has been some speculation that Wal-Mart might be putting in a large HD DVD potential order in the market within agent manufacturing. I am just curious, if you could provide some color on this discussion, and additionally do you think that Wal-Mart being the largest they could potentially break the log exam for the format work?

Frankly -- this is Ramzi, we don't have the detailed information which you seem to have are often -- and frankly if we did we wouldn't be able to discuss that about any specific purchase license by Wal-Mart.

Okay. Thanks, and then as you look out over the next sort of 12 to 18 months, can you size up for the market that if you could please your three biggest opportunities particularly in the licensing and that could really drive the EPS power in your wealth base model.

Well, I think, well I said consistent with our guidance for the rest of this year, if we can stand that out for the 12 to 18 months timeframe, the biggest growth that we are seeing right now continues to be from the broadcast portion of our licensing revenue and from the BT portion of our licensing revenue. On the broadcast side, we have seen -- we have being seeing growth that to our belief as being up to. It could be as much as 15% of our licensing revenue next -- this year up from just over 10% last year. So we are seeing very strong growth. And on the PC side obviously we continue to closely watch what the impact of this there will be -- we don't how many roles to report to you at. We'll get our first report this quarter. But early indications are that on the consumer side that the adoption of the Premier Edition has been quite strong and that on the enterprise business side adopting of this in general has been slower than expected, and all of that’s all positive indicators for us.

Okay, great. And just sort of a follow up point for Kevin, your second half '07 being lower than your first half of '07, does that incorporate sort of a conservative stance essentially on the PC market with the rollout of Digital?

So, first of all we have the $7.7 million of prior period royalties this quarter, which we don't expect to recur in the second half of the year, so that's part of it. The other part of it is, in our consumer electronics market we would typically see lower revenues in the second half of the year than the first half. So, PC did not play heavily in our thinking as far as that trend goes. Does that answer your question?

It does. Thank you.

And for our next question we go to Steven Frankel with Canaccord Adams.

Wonder if you might give us some detail on what's holding up revenue recognition on the digital cinema side?

Yeah I'll give a brief explanation and let Tim answer any further detailed questions. But, it's essentially as we discussed on the last conference call, we are committing to making each of these servers PCI compliant, which is a set of specs in the industry. And while we've delivered the features that we think are most important today to exhibitors and studios, as evidence by content being played on our machine. There are some updates to do, which we don’t expect to happen until probably late in the fourth quarter, which would not give us much opportunity to get those units upgraded.

Okay. And what's happening with the transition at Dolby Digital Plus in Europe. Do you have a number of stations or systems that have done that so far?

We're making progress on both ends. We've demonstrated our first professional encoder at NAB this year. That's a good progress relative to where we were before last year. On the licensing side of it, we have several licensees signed up for Dolby Digital plus. We are not on air yet or online, if you will, but I would say all the indicators are in place to get us going in the market.

Great. Thank you.

Sure.

And for our next question we go to Ingrid Chung with Goldman Sachs.

Good afternoon and thanks. I just wanted to ask a question about DVD player sales. We keep track of CEA data on a monthly basis and it looks like it's been up double-digits for the last year or so. And so, I was just wondering why we didn't see that in you know CE licensing this quarter? I mean, you said domestic international mix or something like that?

Yeah. Well, I would first point out where a number of financial analyst have quoted some industry reports in their reports. Many have quoted the some worldwide and the three analyst data that showed that year-over-year worldwide DVD shipments were down in the fourth quarter, and a number of you who cited CEA data which shows a very strong first quarter. The CEA data of course represents a portion of the US. And so we are hesitant to extrapolate that to the rest of the US and the rest of the world. But, clearly it seems to be a positive indicator and would be more reflective of the coming quarter than the previous quarter.

Okay, got you. And then my second question is why do we see a material pick up in accounts receivables from the last quarter to this quarter, it doesn't seem to follow a pattern from the year ago?

Well part of it is just the, Ingrid it's following the increase in revenue generally.

Okay. All right. Great, thank you.

And for our next question we got to Paul Coster with J.P Morgan.

Thank you. Kevin, what percentage of revenue came from international origin since, what if any affected currency movement has on revenues already?

Currency movements still would affect our revenues in a meaningful way because substantially all of our revenues are denominated in dollars. So the primary impact is that we do have offices that operate at local currencies, and that will affect our expenses. But something that I would point to a significant, it was about 75% of our revenues that were international.

Okay. When you came out as the public company did that harm the seasonality was kind of obscured by very elastic recognition of licensing revenues. Things have changed a lot. You know, manifesting much more seasonality, much more predictable I guess. What changed that?

I would hesitate to call it predictable on events that -- there are still are a number of factors that can affect any given quarter's revenue. We feel - there are sales could be shipment recurring before the Christmas season for instance. So we maybe we don’t know which quarter people are going to ship in, and while we see some seasonality we decided seasonality on our consumer electronics markets specifically we are not necessarily seeing the same seasonality in all of our markets.

Okay, and last question then, catch-up payments do you feel that there many in the pipeline or we starting to normalize the recognition of the licensing business out of Asia?

Well, the two specific cases that we saw it is one this quarter and one in the fourth quarter of last year were unusual instances and that's why we highlighted them. In general, in any given quarter there are payments that relate to prior periods, and if there is anything out of the ordinary, we would highlight it. So there is nothing I would call out at this time.

Okay. Thank you.

(Operator Instruction) We will go next to Daniel Ernst with Hudson Square Research.

Yes. Hi. Kevin. Thanks for taking the call. Two questions if I might, first can you just walk it over to the cash flow here doesn’t seem to be quite as strong as earnings just reconcile that for me, and then on the adoption of the Dolby and ATSC tuners in the U.S. now on all TVs, is there an opportunity your guidance excluded for non-seasonal point out to in that line as TV is now shipped into the U.S. market, specially all TV will have that cine mandate? Thanks.

So, on your first question the primary difference between net income and our operating cash flow is the increase in receivable that we have discussed earlier.

Yes.

There was also an increase in tax receivables. So, those were the primary drivers. And could you repeat the second question--

So, now that the March deadline has passed off TV sold into the U.S. market always that enabled that TV as plus your monitor have to have an ATSC digital tuner and perhaps and therefore have Dolby. So, now it's 100% TVs or new 100% TVs in the March after period. So, if you have an opportunity to drive the non-seasonal pump in just uptick in MTVs that could be (inaudible) had not that Tuner?

Well, there is a ripple effect due to the March guidelines coming into effect. Obviously, not all the consumers rushed out to get the TV. So, we do expect that to continue and that's reflected in Bill and Kevin's comments about the continued strong growth in broadcast. So, I don't think it's really over in terms of the effect of that rule getting into place. I am not commenting your question.

Yeah. It's just that we would not expect the March and June quarters to be seasonally strong for televisions. But, for you it's not just the sales themselves, but also now you see adoption of that mandate within all TVs. So, is it just a [pie] for you just have a stair step up in that non-seasonal period?

We really don't know. I mean, we obviously had a strong quarter in broadcast for sales around the Christmas season, which came in March quarter. But, as to how that carried over in to actual March sales, which we reported in June is really too early to tell. There are some analysts' reports out there that are saying that perhaps in certain side segments perhaps the growth wasn't as much as people thought for certain companies. But, we really have no insight into that yet.

Okay. Fair enough. Thanks a lot.

(Operator Instructions). We go next to Alan Davis with D.A. Davidson.

Yeah, just couple of questions here. Wondering if you can give us little more detail on your consumer part of business for DVD player royalties for this year. What kind of growth goes into those assumptions?

Well, for our consumer electronics market which includes consumer DVD players, we came into the year guiding to flat. We saw some growth in the first half. So, we see it flat to slightly up for the year. So, that's reflected in our increased licensing revenue guidance.

Okay, great. And I wonder if it's possible to breakout in some sense the, if not precisely, the percent of revenues now coming from in the broadcast and the consumer side, digital TVs and set-top boxes?

Last year we said that it was just over 10%. Based on the strong growth we are seeing this year we think it could make up 15% in '07.

Okay. Both of those combined.

Our broadcast market, which include digital TVs and set-top boxes.

Okay. But, not you want to break it out beyond that?

No.

Okay. All right. Well, thank you.

And with a follow up question we will return to Ralph Schackart with William Blair.

Hi, two quick follow ups. First, can you give us an update on the traction in the mobile handset market sort of in the design wins or products you have in the market? And can you give us an update on the traction with Dolby Volume on the market. Thanks.

Well, I'll go to your second question. Dolby Volume has been well received in both the receiver marketplace, as well as in the television. In fact, we have been pleasantly surprised by the strong interest on the receiver side. It remains to be seen which products are going to come to market first, is it the TV or the receivers. I think it's just a matter of regional manufacturers churning out the product. We do still expect some products towards the end of this calendar year or very early '08 as we discussed at CES. Overall, we are pretty pleased with the progress. We are holding off announcement at this time until the products are tested and certified. To your question on mobile, our mobile strategy continues to be developed. As you know, we have showcased some early technologies at CES. We do have a pull phenomenon, we do have interests. We are still evaluating the overall strategy on mobile before we get into specifics. So, at this time we don't have an announcement to make on a company basis.

I’ll take that.

And with another follow-up question, we return to Paul Coster with J.P. Morgan.

Thank you. Should we assume that acquisition's going forward will be more focused on the studio video segment or is it inappropriate to make that conclusion at this stage?

I think it's inappropriate to make that conclusion, Paul. We obviously are looking at all segments of the businesses. Obviously, our first major acquisition since going public was in the imaging video area with BrightSide as we are looking towards ourselves getting into this area. We recognize there are some other possibilities, so we are taking a look at that. But we wouldn't want to limit ourselves strictly to the video side of the business, if we see technologies which are going to compliment what we're doing in other areas.

Okay. Thank you.

We will next go to Eric Mentz with Eagle Assets.

Congrats on another strong quarter guys. Hey, I just wondered if you could kind of refresh the strategy, the go to market strategy for Digital Cinema and what you are thinking right now in terms of how you want to provide products and services into that market? Is it just going to be a service sale or if it's more a soup-to-nuts offering?

Sure, Eric. This is Tim Partridge. So, as they were mentioned in the opening remarks, we are very pleased with some traction that we've seen on the service side in this last quarter, having taken orders from Technicolor for 190 systems, and also some orders into Japan. So, clearly we're making progress on the service side alone. And we've also announced previously that we are doing the kind of soup-to-nuts as you put it with Malco or Megaplex, two relatively small change here in the US, and we have expanded that deployment a little bit this last quarter as well. And, so primarily it’s those two approaches that we are certainly pursuing more aggressively this direct sale of our technologies are either services in this market right now.

And, you know, obviously with the open standards you guys have communicated that pricing pressures will be prevalent, is there any update on that? Do you feel like you are differentiated now with the 3D technology that you have or is there any update on what prices for these services are going to go for?

Yeah, while we think we are differentiated in a number of ways, not only with proprietary things like 3D, but in the announcement with the FIPS, because we are the only company to have announced that we've been recommended for FIPS Certification which is a clear requirement of the studios. So, on the services itself we expect to be able to command the premium because of our relationships and our name and standing in the industry. But as you say, additional technologies such as 3D will also be differentiating features for us as we showed our 3D systems to over 500 people at ShowEast during the quarter, and had very strong interest from the industry. They were very happy with what they saw on the, both from a quality point of view, as well as, just giving them an alternative to present 3D which is clearly a very hot technology right now within Hollywood.

Great. Thanks a lot guys.

We go next to Robert Adams with Montgomery & Co. Erik Rasmussen - Montgomery & Co.: Hi. This is Erik Rasmussen for Rob. Thanks for taking the questions. I think we exhausted a lot of my questions, but you talked about a lot of end markets that you guys are selling into and targeting and penetrating, but not sure if I heard anything about the in-car entertainment systems. Can you just kind of refresh us or give us an update on that?

Our automotive strategy has changed a little bit. We have been concentrating on the Tier I manufacturers of products and we have had better success than in the past in penetrating that market. The things are going directly to the car manufacturers a bit slower and the leverage is lower, therefore our strategy of going after Tier I seems to be paying off. But, again, even with the successful strategy on the table the time in this market, as you know, is very slow from design win to car on the road could take up to five years. So, we are going to be waiting patiently as usual for our long-term strategy to pay off in the market. Erik Rasmussen - Montgomery & Co.: Great. So, I guess we can just continue to look for updates from you guys and not really expect much in the near term.

Correct. That's a fair assessment, yes. Erik Rasmussen - Montgomery & Co.: Great, thank you.

And with that ladies and gentlemen we have no further question on our roster. Therefore Mr. Jasper I will turn the conference back over to you for any closing remarks.

Thank you, operator and thank you all for participating. We thought we had a very good quarter. We look forward to talking to you again in about three month’s time. Thank you.

And ladies and gentlemen this does conclude today's conference call. We do appreciate your participation and you may disconnect at this time.