Welcome to the Dolby Laboratories Conference Call discussing fiscal third quarter 2008 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 July 31st, 2008. I would now like to turn the conference call over to Kevin Yeaman, Chief Financial Officer for Dolby Laboratories. Please go ahead, Mr. Yeaman.

Thank you, operator. Good afternoon and welcome to Dolby Laboratories' third quarter fiscal 2008 earnings conference call. Joining me today is Bill Jasper, Dolby Laboratories' President and CEO. In addition, Tim Partridge, Executive Vice President of Products and Technologies and Ramzi Haidamus, Executive Vice President of Sales and Marketing 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 26th, 2008, market trends for the industries in which we compete, and our expectations 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. Important factors could cause actual results to differ materially from those in the forward-looking statements. These factors are detailed under the section captioned "Risk Factors" and elsewhere in our most recent and any subsequently filed Quarterly Reports 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 business and I will follow with a run-down of Dolby's financial results. So, with that introduction behind us, I'll now turn the call over to Bill. N.W. (Bill) Jasper, Jr.: Thank you, Kevin. Good afternoon everybody. Thanks for joining us today. I'm pleased to report solid results for Dolby's fiscal third quarter with year-over-year revenue and net income growing 29% and 56% respectively. During the quarter, we benefited from strong licensing growth in many of our markets and we believe that we continue to make progress on our long-term initiatives.…

Thank you, Bill. I'd like to discuss Dolby's overall financial performance and highlight some of the major drivers for the quarter. Revenue for the third quarter was $154.3 million, up 29% year-over-year and down 11% sequentially due to seasonality. Third quarter licensing revenue was $127.6 million, an increase of 35% year-over-year and a decrease of 15% sequentially. PC licensing revenue was strong year-over-year while down sequentially. The sequential decline was the result of our fiscal second quarter benefiting from holiday season shipments. The strong year-over-year performance was largely driven by continued demand for consumer notebooks globally, many of which ship with Microsoft Vista Home Premium or Ultimate editions and/or third-party DVD playback software, each containing Dolby technologies. In addition, growth from PCEE was strong year-over-year. Broadcast licensing revenue experienced strong year-over-year growth, on demand for set-top boxes and digital television containing our technologies. Sequentially, broadcast revenue was flat as the effects of seasonality were offset by set-top box strengths. CE licensing revenue was slightly up year-over-year and down significantly from the second quarter, but in line with typical seasonality. Within CE, licensing revenue from the DVD category was roughly flat year-over-year. Licensing revenue from our other markets category nearly doubled year-over-year. The addition of our mobile market and increased royalties related to our AAC and HAAC patent pool were the primary reasons for year-over-year growth. Contributing to the growth in these patent pools was a couple of reports that included shipments from the December quarter, which benefited the mobile and gaming markets. Sequentially, revenue from our other markets category was slightly up, as increased royalty and administrative fees from the AAC and HAAC patent pools made up for decreased gaming revenue following the seasonally strong second quarter for gaming. Third quarter product sales were $18.1 million, up 5% year-over-year and…

Thank you, ladies and gentlemen. [Operator Instructions]. Our first question comes from Ingrid Chung with Goldman Sachs.

Thanks, good afternoon. So, my first question before the follow-up is about your SG&A line, obviously you've had very good revenue growth on the order of 35% or so this fiscal year, but your SG&A line has also grown at a pretty healthy rate also around 30%. Given your fairly leveragable business model, I was just wondering what's driving that, and if you do face a deceleration in revenue at some point, let's say in fiscal '09, would this line also grow more slowly?

And just because you are comparing year-over-year SG&A?

Year-over-year.

Yes. So, well there is a couple of things to keep in mind. First of all, remember that we did acquire Coding Technologies towards the end of last year. So, all of those expenses are falling into 2008. Keep in mind that associated with both our Coding Technologies and our BrightSide acquisitions are some amortization of intangibles, which are hitting in '08 and not 2007. And then finally, we have been investing in operating expenses because we have a number of growth initiatives that we have talked about and articulated here, including our Mobile initiative, our Dolby Volume initiative, our digital cinema and 3D efforts, and that is really the reason for the increases and I'm sure you will have noticed that, excluding those increases in amortization of intangibles we had a substantial increase in operating margins year-over-year and that operating expense as a percentage of revenue has come down year-over-year.

Absolutely. Okay. And then my next question is on Dolby Mobile, I was just wondering if you could give us an idea of the magnitude of Dolby Mobile licensing and how does... is that kind of more on the order of PCEE rather than just the third-party ISV payments?

Well, early days. As you know, we've said that our mobile revenue in 2008 is comprised of primarily HAAC revenue as a result of our acquisition of Coding Technologies and their strong position in the multimedia handset market. We've just announced our second win for Dolby Mobile with LG. We think this validates that it's a significant opportunity going forward for us. They've announced that they expect to have handsets in the market by the end of this calendar year. So, the revenue opportunity for Dolby Mobile is set to begin in 2009.

Okay, great. Thank you.

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

Hi, good afternoon. Congrats on another great quarter. A couple of questions, first on the PC side of the business, can you talk a little bit more granular, please, on the attachment rates? Are you seeing any changes there? It seems like the business continues to hummer along, but specifically to Vista, the ISVs, and the EE [ph] experience? N.W. (Bill) Jasper, Jr.: Sure. So, as it relates first of all to DVD playback, we continue to see strength in the attach of Vista Premium as a percentage of total Vista units or I should say Microsoft continued to see strength in that area and they reported again just a few weeks ago a strong premium attach rate on the consumer side, which was what we look to. So, we continued to see strength there and we also continued to see strength on the ISV attach rate of DVD players due in part because notebooks do continue to grow faster than desktops, which tend to have higher attach rate of those products. On PCEE, we continued to add new lines of the... one that we talked about on the call is the Voodoo line from HP. So, we continue to look at growing PCEE as a part of that PC market.

Great. And then on the CE side of the business, is that DVD was flat year-over-year and it was down significantly sequentially, is there seasonality there or is there anything else sort of going on, on a sequential basis? N.W. (Bill) Jasper, Jr.: It's seasonality, we tend to see. Our second fiscal quarter, of course, reflects the December holiday quarter shipments. And so we typically would see that in that portion of our licensing revenues. And we did see, as I said in the remarks, pretty flat revenues from DVD playback. And as we look forward, we continue to plan on lower DVD shipments going forward. And that's what we continue to base our guidance on.

Great. One more and I will turn it over. In terms of the outlook for the balance of the year, obviously the U.S. more specifically had benefited from the tax rebates and the CE industry has sort of been defiantly strong. As you talk to your customers and end markets and retailers, can you give us some color what they are sort of bracing for on a go-forward basis after the tax rebates have worked their way through the system?

Well, I think in terms of how we are basing our guidance, you'll see that we had a 35% year-over-year licensing growth rate in Q3 and our guidance works out to about 11% to 21% in Q4. So, I think that's a reflection of partly that... we fully lapped Vista, but partly because we are reflecting in our guidance kind of what the collective thoughts of our customers, industry analysts, etcetera are, what their expectations are for unit growth. I wouldn't say that I've heard anything that's inconsistent with what you probably tend to read in the papers in the headlines each day. I don't know, Ramzi, if you have any particular thoughts on that, no. Does that answer your question, Ralph?

It does. Thanks, Kevin. Thanks, Kev.

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

All right, thanks. Good afternoon. You guys have done a pretty good job of communicating that gross margins are going to be impacted next year by beginning of recognition of digital cinema. It sounds like you expect to start in the first half of the fiscal year, can you just give us any sort of ballpark for what gross margin you're thinking for next year?

Yes, we're not going to, of course, be giving full guidance on '09, but we've said in the past that if we were to recognize all the deferred revenue in one quarter that the margins could dip below 30% in that quarter. And then we are going to work to get back to a steady state of somewhere around 40% is what we are targeting. But of course we'll update that when we give 2009 guidance on the next call.

And as far as Dolby Volume on the competitive front, I know SRS has been working on some stuff on volume consistency, and just wondering are there any other TVs that you know of currently shipping out there with volume consistency technology other than the Toshiba TVs in Japan? N.W. (Bill) Jasper, Jr.: Not at this time, we continue to go after the high-end type solutions, whether it's televisions or AVRs. We are working on an increase in efficiency of the code itself, thereby allowing us to go out into the mid to lower end markets, that's more on the longer term, however.

Okay. And then just one last one, as far as Europe, any flavor you can give us or what percent of TVs in Europe are shipping with Dolby?

So, we've been projecting what we think it will be for the full year and we previously said, we thought about a third of TVs, which shipped. We are actually seeing it come in this year less than that probably in the 20s, but having said that we are in a number of manufacturers or in a number of models and so we are extremely encouraged by the number of models we're in and we still think it's just a significant growth opportunity, it's just that more of that growth is in front of us. I think the growth in broadcast was driven both by set-top box growth and by increasing attach rates on both TVs and set-top boxes in Europe, and then of course in North America we are seeing the continued adoption of digital television and we began to see some converter box shipments, but it still is primarily a 2009 event, we think.

Okay, thanks a lot.

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

Hi. Thanks, guys. Good quarter. As you take a look at the Blu-ray market, can you maybe share some insight in terms of with what you are seeing in the marketplace, how significant a factor do you think that can be in the first half of next year for you? N.W. (Bill) Jasper, Jr.: The Blu-ray market is an interesting one, because there are several factors that are playing out as we speak. Obviously there is the fact that the consumer hasn't had a lot of exposure yet to the experience itself, so in order to really appreciate what Blu-ray has to offer, a consumer needs to see a Blu-ray disc playing on a Blu-ray player along with an HDTV television to appreciate the experience. So, what we are observing is a slow ramp up, as consumers get more exposed to that experience and when they do, they do... and to acknowledge they are different. We also are seeing a lower than usual number of SKUs in the marketplace than would have liked to see. And we are hoping that, as the consumer benefit and proposition does increase that that number will... that will go up over time. Overall, we continue to stay encouraged that this format will take off, the fact that HD-DVDs no longer on the scene has helped significantly, the pricing has come down to under $300, in some cases around $200 along with some rebates. So, the long-term trend is very encouraging, but I cannot say that the uptick has been as fast as standard definition DVD.

That's helpful. And Kevin on the operating leverage side, you guys for the last year have gone through a pretty significant investment phase, you are flat sequentially on OpEx. Could this signify maybe a slower growth on the OpEx side compared to maybe the last 12 moths on an organic basis?

I'm not going to get into '09 guidance yet. For the fourth quarter we did say we saw it increasing by 5%, part of that is just because of things like audit and SOX fees, which do occur in the fourth and first quarters for us, and part of it's investment in growth initiatives. But we are in the middle of our '09 budgeting and resourcing cycle, so I think we'll just... we'll give you an update on the next call.

Okay. Thanks, guys. Good quarter.

We'll take our next question from Paul Coster with J.P. Morgan.

Thank you. We are seeing a little bit of evidence in U.S. retail of trade downs happening, people buying smaller DTV screens and although they are buying uplink DVDs, maybe the feature set or a few models of that, even [inaudible] recently, if that happens you see trade downs, what does that do to your licensing? Does it matter or is it just... is it mainly a function of unit volumes or is it also a function of the value of the product?

Our ASP on the licensing side, as we unrelated to the selling price of the unit, so long as the television itself has our technology, whether it be Dolby Digital or Dolby Digital Plus, then we do commend the same royalty irrespective of its size or the ASP of the product itself, so we don't see that as affecting us.

Okay. Video was sort of mentioned as the potential growth avenues a couple of years ago and it has not really saw a figure very prominently since... I think and some dynamic range technology is going through some Japanese TVs, but is it still a growth opportunity, what's happening with it? N.W. (Bill) Jasper, Jr.: We are very excited about our HDR or high-dynamic range technology opportunity. We have demonstrated in several venues the feedback continues to show that there is market demand and this is a long-term play for us, whether it's an end-to-end play or just a single-ended play, we will be pushing our technology over the next year working with implementers of HDR, so we are still excited about it, but we do see it as a long-term play for the company.

Can you just explain how it is an end-to-end because obviously most of it's just an end technology? N.W. (Bill) Jasper, Jr.: High-dynamic range is a delivery format and not just a single-ended play and we've mentioned in the past that this is something that's very much in line with the ecosystems that the company has played in the past. So, the delivery of high-dynamic range content is something that we see as an exciting opportunity, but again this is more of a longer-term play.

Okay, thank you.

We'll take our next question from Steven Frankel with Canaccord Adams.

Good afternoon and again congratulations on a great quarter. Just to go over the digital cinema deferred revenue one more time. What has to happen and have you made... has the industry organization made enough progress in the last three months to give you confidence in that H1 deadline for recognizing this revenue?

In terms of the recognition of revenue, one of the primary milestones for us is to get formal DCI certification from a certification body to be appointed by DCI and for color behind that, I'll turn it over to Tim.

Yes, that's right. You will remember in the past that we were working to complete our system, but it didn't meet the DCI spec. The DCI spec has certainly settled down in recent months. So, we believe that we have completed the engineering work to get there, but we still need to get through this step of having a third party, verify that, and certify it. It is something that the industry is working closely on and we do believe that they are close enough that they should be able to get this done relatively soon, which is why we are saying that we believe we'll be able to recognize it in the first half. But it is something that's out of our hands at the moment.

And you have had good traction internationally in 3D, do you think there is still a U.S. market opportunity or are you really positioning as much more of an international play for you? N.W. (Bill) Jasper, Jr.: Yes, we think it's a worldwide play. 3D certainly is still very attractive to exhibitors in terms of driving traffic and increase ticket prices. And it's a very small portion of the market that has converted so far. As we said on the call, we are having more subsets [ph] internationally, but we think this is a worldwide phenomenon and that's where we'll continue to target our technology.

Okay. Great. Thank you.

[Operator Instructions]. We'll take our next question from Andy Hargreaves from Pacific Crest Securities.

Hi, guys. Can you give us any detail on international standard def DVD trends and I am thinking specifically about emerging markets? N.W. (Bill) Jasper, Jr.: Can you speak up please? We can't hear you.

Yes, sorry, can you hear me now?

It's better.

Okay. Can you just talk about international standard def DVD trends, especially in emerging markets? It seems like it must be fairly strong offset some of the weakness here in U.S. and Europe? N.W. (Bill) Jasper, Jr.: So, the uptick in BRIC has been healthy, we have seen an increase in DVD outside the developed countries. As we mentioned in the past has been and continues to be a compliance issue when it comes to collections around standard def DVDs or general products when we start looking at those geos. So, yes, there's been an increase in uptick in third-world countries, but some of these countries do build locally by very small manufacturers, which sometimes are not even licensed and therefore we run into a challenge of collections, so it does not correspond to a one-to-one revenue had it been, for example, a shipment coming into the U.S. or a DVD sold in the U.S. or in Europe, for example.

Have your collections been improving there though or...? N.W. (Bill) Jasper, Jr.: I think that we.... it's the type of thing that is going to be a concept, part of our lives. We continue to develop resources to it both in terms of internal resources to be on the ground in these markets and learn what the ecosystem is like. And then also conducting activities like royalty audits, working with customs officials, etcetera. So, I think that we're doing well, we always think we can do better and we'll keep on top of it.

Okay. And then just a real quickie. Can you give us revenue for any 10% customers in the quarter? N.W. (Bill) Jasper, Jr.: Well, sorry. We couldn't understand it either.

Can you give us revenue numbers for any 10% customers in the quarter?

We had, one... I believe, it's... I'll double check, I believe it's one 10% customer in the quarter.

Okay, thanks.

We'll take our next question from Hunter DuBose with Morgan Stanley.

Hi, guys. Thanks for taking the questions. My first is, I believe that you've previously indicated that you had visibility into the sustainability of the inclusion of the third-party ISVs in addition to Vista on PCs through, I believe you had said either the first or second fiscal quarter '09. Can you give us any update on whether you have further visibility beyond that point? N.W. (Bill) Jasper, Jr.: We haven't really seen any changes in market dynamics. Our last update on this market is that we continue to see strong attach rate that the ISV attach rate hasn't led up. And we continue to see the same dynamics moving forward. So, as of now, we are encouraged in the sense that we are one, don't see a drop in the mix between Home... the Vista Home Premium and Basic. Therefore we see that first attach rate and the second part of it is the ISV, which seems to be... continue to be strong, therefore the double, the double players in the product moving forward. So, overall still same update as last into next year.

Right. Okay. And as far as Coding Technologies is concerned, I believe that you've previously guided at the time of the acquisition that we should be expecting around $20 million of revenue from that acquisition during the year. Can you comment on whether you're on track for that?

It's pretty much about on pace with what we were expecting and so, yes.

Okay. And can you comment on the...

To an earlier comment that I was going to come back and confirm [inaudible], but we did have one 10% customer in the quarter with 12% of revenue and that's in our 10-Q, which was filed earlier today.

Okay. Can you comment on the contribution to licensing revenue by the various categories?

Sure. So, we walked through in the prepared remarks market-by-market, how they performed, the growth in the quarter was driven by... PC was one of the big growth drivers again, in absolute dollars that was the largest growth driver.

Can you comment specifically on the percent contribution to revenues?

Sure. So for 2008, we don't generally go the composition by quarter. For 2008, we think that PC will…we continue to expect that PC will rise for 2008 to about 40% of revenue from about 35% in '07. We think CE is going to fall probably to just under 30% from just over 35% in '07, and broadcast will rise to somewhere between 15% and 20%, and other makes up the balance, but is increasing year-over-year.

Great. Okay. And final question, I think you've said in your prepared remarks that there were some catch-up licensing revenues in this quarter from the December period. Can you comment on the magnitude of that?

Yes. So, I was…that was in the other markets category, I mentioned that we had a couple of reports that related to the AAC and HAC patent pools related to December quarter. One of those was late, so that you could call that a catch-up royalty. The other is there is a few customers that report biannually, so it was normal in that sense. But in any event and you should be thinking of the term, the magnitude of that in Q3 is just over $5 million. [inaudible].

Great. Thank you very much. N.W. (Bill) Jasper, Jr.: But we should point out that since they give report every six months and we are going to see potentially this... going forward not the whole amount, but we'll have some lumpiness from quarter-to-quarter as a result.

Great, thank you. N.W. (Bill) Jasper, Jr.: [Inaudible] generally there are…they are not all on the same schedule.

[Operator Instructions]. And there appear to be no further questions at this time. I would turn the conference back over to our speakers for any additional or closing comments. N.W. (Bill) Jasper, Jr.: Okay. Once again we appreciate everybody joining us for the earnings call and look forward to speaking with you next quarter. Signing off, thank you.

And that does conclude today's conference. We thank you all for your participation and you may now disconnect.