Welcome to the Dolby Laboratories Conference Call discussing First Quarter Fiscal 2009 Financial Results. (Operator Instructions). As a reminder, this call is being recorded Wednesday, February 04, 2009. 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 first quarter fiscal 2009 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 25, 2009, 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. Important factors such as macroeconomic conditions 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 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 business and I will follow with a rundown of Dolby's financial results. 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 strong financial results for our fiscal first quarter. Revenue increased 20% year-over-year and 10%, sequentially, as we benefited from the incorporation of our technologies in a wide range of entertainment products shipping globally. Well we are pleased with our first quarter results, recent news makes it clear that the economy has continued to slow, credit markets remain very constricted and job cuts are rising sharply. In the face of this, retailers are reporting significantly lower sales and one consumer electronics chain recently filed bankruptcy. Moreover, the slowdown appears to be global affecting all geographies. This has reduced visibility significantly for most companies across our industry, in fact, two technology Bellwether have recently reduced their outlook sharply and suspended guidance. These are challenging times as for the global economy and Dolby isn't immune. Consequently we have reduced our fiscal 2009 outlook and Kevin will speak on this in more detail later. We are on the present economic environment, we are encouraged by some of the long-terms trends we are seeing throughout the entertainment industry. Those who attended this years Consumer Electronic Show in January, for example, saw a continued push towards increasingly immersive and far more pervasive entertainment. Consumers not only want a more realistic and compelling entertainment experience, but they also want to get it everywhere and anywhere anytime. We believe both of these trends are positive for Dolby since our reputation and focus on delivering technologies and making entertainment more immersive. Since, more pervasive entertainment potentially increases our addressable market. We are focused on positioning Dolby for these long-term trends. On today's call I would like to discuss Dolby’s long-term growth strategy and the progress we are making to achieve it. To drive long-term growth we are focused…

Thank you, Bill. I would like to discuss Dolby's overall financial performance, highlight some of the major drivers for the quarter and finish with an update to our fiscal 2009 outlook. Revenue for the first quarter was $180.3 million, up 20% year-over-year. First quarter licensing revenue was $154.1 million, an increase of 26% year-over-year and 12%, sequentially. Year-over-year growth was primarily driven by our Broadcast, PC and gaming market, while sequential growth was driven by the gaming, CE and Broadcast markets. In the first quarter, our PC market experienced solid year-over-year growth but a sequential decline in the mid-single digits. Year-over-year growth resulted from strong notebook shipments through the September quarter while the sequential decline was due to lower revenue from Vista Home Premium shipments compared to the fourth quarter of fiscal 2008. In the first quarter, our Broadcast market experienced strong growth year-over-year and solid growth, sequentially. In the US, we benefited from strong shipments of NTIA converter boxes while globally we benefited from increased digital TV shipments and a rising attached rate in Europe. In the first quarter, our consumer electronics market was roughly flat year-over-year and experience strong growth sequentially. Performance benefited from royalty payments related to DVD product shipped in prior quarters. We typically received a certain percentage of royalties in any given quarter from prior periods while the percentage received in the first quarter did not exceed usual levels for total licensing revenue, it did impact to CE trend. While normalizing for back royalties the CE market was down over 10% year-over-year. In the first quarter, our other markets category which includes mobile, gaming, automotive and [VIA] experienced strong year-over-year and sequentially growth. Year-over-year performance was driven by strong growth from gaming as well the Mobile and VIA categories driven primarily by strong reported shipments…

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

Hi, good afternoon. A couple of questions if I could? First Kevin as it relates to the PC market you are going kind of fast, I apologize, but one of the follow-up on what you said about the ISP’s, have you seen any significant shift in the attach rates or the Guerilla and CyberLink part of the business.

What I referred to Ralph was as it relates to our reduction in guidance, one of the factors is that you may recall that on our last call we said that we expected ISP attach rate to notebooks to approach the attach rates we see on notebooks by the end of this fiscal year. While we still take that ISP players will increasingly attach to notebooks. We lowered our expectations for what that rate will climb to by the end this fiscal year, and to further answer your question, no we have not seen a deterioration in the attach rate to notebooks.

Great and than as it relates to just the broader PC markets of the ISV overall. Have you seen any big shifts there aside from any notebook implications?

No. As it relates to the ISV’s our assumptions outside of the attach rate to netbook are largely unchanged or where they are unchanged. And the other factor that effected our guidance in the PC market were are the PC time where we, you might remember we were initially assuming unit growth of just [10% or 5%] for the year, we are now including in our guidance range of anywhere from a positive 2% to minus 6%. Keep in mind of course that those are fiscal year numbers, so you need to do the math when comparing them if you are looking at calendar year numbers this includes a pretty strong Q1. And the other factor was that you may have noticed that Microsoft reported a decline in its premium mix of products. Now a large reason for that they cited was the netbook, we of course had already factored that out, so our original guidance assumed that we get paid on any Vista with netbook nor do we assume it going forward. But they also said that part of the premium mix was due to product and geography mix, which could affect us. And so we factored that into our guidance particularly on the low end of DC because of that uncertainty specially since Microsoft didn’t give any guidance.

Right and just as it relates sort of big picture to guidance, obviously the economy has changed quite a bit since you gave the prior outlook. I don’t know how you can sort of frame this for us. But can you sort of give us a sense of how you thought about guidance given everything was going on, sort of rate the degree of conservatism or the outlook that you provided today?

Yeah I would say, when the first instance we approached our forecasting and guidance process the way we always do gathering as many data points we can and coming up with the best assumptions we can. And that resulted in the lower assumptions we just discussed on PC. We did also move some of the assumptions in the other areas. In particular, we are now expecting that the total standard def-DVD units that we get paid on is 25% decline at the high-end of our range and over 35% decline at the low end of our range. Offset of course, by Blu-ray units and higher ASPs because of Dolby Digital Plus and through HD. The other thing I would say, Ralph, is that particularly the low-end of our guidance we did apply a degree of conservatism because of a couple factors. One, just that the environment has deteriorated since we last gave guidance and it seem to continue deteriorate over many months. And the other factor is just lower visibility. Many of the sources that we would normally look to for information to formulate our guidance, many of them have discontinued guidance, or in the case of analysts some that all of their reports are as up-to-date as would be useful for us, so that's how I would characterize it.

Great, and then one last if I could. So we net all this out as it relates to EPS, they trim the top line of revenues by another shock to most investors, but on the bottom line it appears that at least the way I see it, you kept the bottom end the same if you include the $0.09 potentially raise the upper end of EPS, is that fair read?

That’s right. It's about unchanged from the previous guidance if you exclude the $20 million gain, and a little higher, because what we did bring down the operating expense guidance as you pointed out and of course we did have strong Q1.

Great, actually I will add one more for Bill, because want to ask him a question, anyone answer it. Bill it's relates to Windows 7, so it's not one end that there you might have some opportunities to sort of increase your position, sort of over Vista. Would there be an opportunity potentially on the business end, or would you still be sort of playing in consumer end of rollout of Microsoft 7?

Well, Microsoft has not announced specific SKUs. We look forward to their announcement later this year, but it always saying at this point in time is just we think we are in at least as good position with 7 as we have been with Vista.

Alright, I thought I'll try. Thanks, guys.

Never hurts.

And we will move on to Ingrid Chung with Goldman Sachs.

Good afternoon and thanks. So Kevin, I think you have updated us on your assumptions for PC and CE, I was just wondering if there is been any change to your broadcast. And I think you were talking about flat TVs, the flat TV growth for the year. And then secondly, I know Ramzi said before that you get paid zero, once or twice for net-book, I was just wondering what your experience has been so far in terms of average payments for net-book?

So in terms of the broadcast assumptions, we did bring down our worldwide TV assumption to minus 5% from flat. Keep in mind within our broadcast base, our results are much less sensitive in that area to unit growth and much more sensitive to attach rate. And as you know the attach rate has been increasing in Europe. As for net-books, I will go ahead and turn that over to Ramzi.

The attach rate continues to stay the same, we see some net-book shipping without any multimedia playback and that is the zero reference that you make. We have seen some net-book shipped with some of the simple ISV players to playback Dolby Digital, and coded content from the net, or some recorded broadcast. And additionally to the ISV playback, we have also seen some net-books equipped with the Dolby PCEE, and that's where the second revenue stream comes in that's where the 012 all comes and we have not really spoken to an ASP around net-books along so far.

Okay, and if I could just have one follow-up, I was just wondering, Kevin if you could go into a more detail about the SG&A savings. It seems like as percentage of revenue is down quite a bit. And I was just wondering, if this is a trend that you can hold the line on going forward?

Sure. And I think in particular are you referring to the movement from Q4 to Q1

I was talking more on a year-over-year basis in terms of as a percentage of revenue. SG&A had declined almost 300 basis points.

Yeah. So we were holding the line on expenses in Q1, and in particular our non-headcount related spend. So, we have been cautious with spending. We do see as I said, we see a higher run rate going into Q2. Our merit increases and stock-based compensation starts affecting us in this fiscal Q2, so you will see a bump there. So that's what drove the change year-over-year. On a sequential quarter basis, it was largely driven by the bonus program, as well stock-based comp, and a few one-time charges that affected Q4.

And Ingrid, we're selectively continuing to add people in the products and technology area as we want to invest for future initiatives. So, we will not too shy away from that, but we are being very conscious of the overall expense situation.

Okay. I kind of remember on past calls, you have talked about growing yourself and marketing, is that changing given the environment or are you staying status quo?

We have over the last couple of years really beefed up our whole sales in marketing group to where we think we have a world-class organization. As I indicated that the bulk of our new additions this year will be in the products and technology area.

Okay, all right. Great, thanks.

And next, we will take Mike Olson with Piper Jaffray.

Hi. Thanks. Good afternoon. I would like to try to put some parameters around expectations for Dolby Volume. And based on this typical TV introduction cycle, if you had a deal in place, what's kind of the earliest we could expect new TVs shipping with Dolby Volume behind the existing Toshiba deal?

We believe that there will be additional television from Toshiba as well as other companies shipping. We do not see a very high volume uptake at this point in terms of model and SKUs until we launch our low-complexity version of Dolby Volume which alluded to. It essentially will be the same technology just it will fit on a smaller footprint and will perform very comfortably to what's out there. So, I would say about a year before we see a significant uptake in the numbers of SKUs that will incorporate just lower footprint of Dolby Volume.

Okay, and then secondly in France you said all HDTV had to ship with Dolby starting in December, when we will Italy start to have to ship every HDTV with Dolby and what is your expectation regarding other European countries?

We had a date for France, frankly, we do not have hard date for Italy. We do know that that is final, we should start seeing television shipping to the areas is only logical that you think same televisions that are shipping in France, is also shipping to Italy, so it's not a stretch to think that it's a very, very easy barrier to crossover. We are making some good progress across other countries in term of getting our technologies mandated or written as optional, and the standards. Those standards are in draft positions. I had to the take the name of the countries is, because we don’t know which one will buy those standard. But so far we have seen some progress within Western Europe as well as countries going to cable and satellite on a one-off basis, which usually happens without that is being written. So overall, very pleased with the momentum so far in the, both Eastern and Western Europe.

Okay. Thanks very much.

Next we will take Paul Coster with JPMorgan.

Yeah, thank you. With DTV July access has been off, just pushing it back to June 12th. What does that do to your revenues in a DTV side in the US is it good or badyou’re you in aggregate?

I think it's, both neutral in the sense that TV that can't receive the signal. You don’t need to receive one. I think that if any thing is an indication that there is more room left for more MCIA boxes, then I think it's probably safe to say that however many we are going to sell before the deadline. It's pretty much sold before this delay came into play. So I think it just means that we have some more MCAI boxes throughout the rest of the year.

Okay. And than Kevin, can you help us a little bit in shaping the seasonality normally March is your strongest quarter then you see it's lumpy. It feels like the slowdown is your seasonally strongest quarter, so may be if there is not such a big ramp this year, is that safe assumption?

Well, I think it's, yes. It's safe to assume that when comparing our Q1 to Q2, you have to take in the consideration that our Q1 was the September quarter, and obviously it was the December quarter when the economy started deteriorating significantly, so I think it's fair to say that that will very much affect to the extent we have normal seasonal trends, which is somewhat debatable thing I think to the extent we do it. Certainly is affected by the economy, and there is always an issue when people shifting in the channel as well. Some years people tend to ship more earlier, and some of the shipments for the Christmas season come out in the September quarter and other quarters they are concentrating on the December quarter.

Okay, and a last question. You did mention that Guerilla is offsetting the weaknesses, is that a definition of it? Is it material yet? When will it be?

It's some material in absolute dollars buts its enough to offset, the percentage decline we saw on standard def its putting a good dent in offsetting that. And there are higher ASPs and we are not seeing higher ASPs just in the Blu-ray players we are also seeing them in home theatre and box systems in AVR’s that are adopting Dolby Digital Plus and to HD as well.

Alright, thank you.

And we will take Brian Thackray with Deutsche Bank.

Hi guys. Question for you is from a higher level perspective. As you kind of sit here today and have insight into your business, do you think the environment we are in today represents in your mind kind of the low point, if you look forward 9 to 12 months or do you think things are going to continue to get worse from here?

I don’t think we are going to try today to predict where the economy is going or where it might level out. I think all we can say is that we think we are focused on the right thing to grow our business. Whenever the economy finds a level point, and whenever that point that is. And I think here on the PC market as Bill mentioned we are pleased that we are in Windows 7 and we think at least a greater position as we are in Vista, we continue to get traction with PCW we think that there is demand for PCW in the notebook market. Mobile is still early days, so we still have opportunity for attached rate growth in Mobile. And the Broadcast market is still seeing growth. And we think that particularly in Europe and Asia there is still room for growth there as those markets move to Digital and high definition. But as for when the economy levels out and at what level it levels I don’t think we have any insight into that.

We don’t want to try to predict that.

Fair enough. And the $20 million benefit. It looks like that was a non-cash benefit this quarter. Can you shed some insight in terms of cash impact of that?

Yes, so you might remember that up until about year and half ago we were accruing some amount to cost of good sold in relation to an unrelated patent licensor. So, there was an accrual on our balance sheet, we agreed on the final settlement and so the difference was released to the gain that’s why it wasn’t cash.

Okay. Thanks, guys.

Next we move to Andy Hargreaves with Pacific Crest Securities.

Can you give any more detail on the converter boxes in terms of how many units you guys from financial revenue from in the quarter or maybe how far do you think we are through this?

On the MTIA converted boxes in particular?

Yes.

I don’t have the exact numbers of how many we have recognized so far this quarter. We are expecting somewhere around 20 million units roughly for fiscal '09 in total and you know I would say we are two-thirds of 75% through that.

And then on Mobile, I am assuming most of the revenues that you guys are referring to us Mobile as HE-AAC now is that correct?

That is correct. Dolby Mobile is still at very early stages.

Okay, as we are looking forward and thinking about the longer-term, is there a bigger opportunity for growth with continued expansion of HE-AAC or do you think there is a bigger opportunity for the actual Dolby Mobile product?

Both actually. We do believe that there is plenty of opportunity to take Dolby Mobile in it's current form signing up some additional Tier 1 company, and have some additional SKU's within the current licensees such as the NTT DoCoMo and $1 NTT DoCoMo umbrella and Japan or LG, obviously we plan on introducing new SKU's of Dolby Mobile, Dolby Mobile is really an umbrella of multiple technologies and our goal is to continue to add technologies, therefore, differentiating our self further from any competition. In parallel to that we would like to aggressively push on n2N player, that we refer to at the time we acquired coding technologies and that is the branding of our ATAC technology, where Dolby Pulse adding metadata and additional futures to Dolby Pulse and selling it either in combination or separately from Dolby Mobile. Those two offerings and future SKU's we believe has plenty of opportunities for us in this space. So we are very excited moving forward.

Okay, great. And then just last, is there any change to monetization or pricing was the new, I think it was a new AAC license, is that include ATAC?

I am sorry, what do you mean by new AAC license?

Well, wasn’t there a new licensing terms that we are put up on the buyer side that included.

I see.

Was there any change in material to monetization.

Not to Dolby, no.

Okay. Perfect. Thank you.

Next we will take John Vinh with Collins Stewart.

Hi, just a follow-up question on Blu-ray, you talked about kind of your unit assumptions for kind of red laser decline this year, can you give us a sense of what your unit assumptions or expectations for growth of Blu-ray this year are?

We are expecting units for the full-year to be around the four million unit, Mark.

Okay. And on the Mobile side, I just had a follow-up question there, if you talk about, is that more about your opportunities going forward in '09, can you give us a sense of the types of SKU's or handsets that you believe that you likely to get traction in? Are you looking at smart phones or [full modern] mainstream feature phones that you are looking to get traction, it gives a sense of what the sweetspot is for Dolby Mobile going forward?

The sweetspot tends to be the multimedia phone, not necessarily smart phones, for example, we started out with Sharp, where they modeled the [nano 5], etcetera. Our multimedia phones or the television, and the music playback was not necessarily a business phone. And that showed very good success. We have had excellent feedback on the LG phone. Again not necessarily, a business phone but a phone that is very similar to the iPhone that’s used for multimedia playback and the results and the feedback we got on this front was a very positive. The future generation from LG which will be launched at GSMA is a similar phone. I don’t want to get ahead of announcing our customer's product, but it is again another multimedia phone. So, that's essentially is the sweetspot irrespective of whether its viewed as a smart phone, i.e., with all the business functionality. If it plays video, and high quality audio, that’s essentially what we try to go after so as you can tell, over 50% of phones worldwide tend to be multimedia phones. We have a quite a large time to go after. In terms of new additional companies go after clearly, we are going after the top Tier 1 companies, we have one signed up and we are aggressively going after the other four.

Okay, so you have design wins lined up with another handset OEM at this point?

Well we have Sharp, and we have LG. We are working with those two companies on additional SKU's. We are already successful at adding SKU's which will be launched and announced either at GSMA or in Japan when it comes to Sharp. And we are working on signing up additional Tier 1 companies we have not announced any of those announcements yet.

Okay. And then last question as a follow-up. Can you give us a sense of how we should be thinking about Mobile revenue this year either in terms of growth rates or as a percentage of mix?

Other categories, we don’t break it out separately. I will tell you we do see the Mobile category for us on an annual basis growing over 30%.

Great. Thank you.

(:

If there are no more operator, I will go ahead and close. I would like to thank everybody for listening to the first quarter fiscal year 2009 conference call. We look forward to speaking with you again in the three months. Good day.

That does conclude our conference call for today. Thank you everyone for your participation.