Welcome to the Dolby Laboratories Conference Call discussing Fourth Quarter and Year End Fiscal 2008 Results. [Operator Instructions] As a reminder, this call is being recorded Thursday, November 6, 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, everyone. Welcome to Dolby Laboratories Fourth 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 25th, 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. N.W. (Bill) Jasper, Jr. - President, Director, and Chief Executive Officer: Thank you, Kevin. Good afternoon everybody. Dolby's long-term objective is to be an essential element in the best entertainment technologies used by professionals and consumers. We have always pursued this objective by aiming to develop innovations that improve the entertainment experience and that are adopted through our work…

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 fourth quarter was $163.1 million, up 26% year-over-year. On a full year basis, Dolby's revenue was $640.2 million, up 33% from fiscal 2007. Fourth quarter licensing revenue was $137.8 million, an increase of 33% year-over-year and 8% sequentially. Growth was primarily driven by our PC and Broadcast markets. In the fourth quarter, our PC market experienced strong year-over-year growth on continued demand for consumer notebooks, many of which ship with Microsoft Vista Home Premium or Ultimate Edition and/or third party DVD playback software, each containing Dolby technologies. In addition, year-over-year growth benefited from the contribution of revenue related to the ramp in our PCEE initiatives. Sequentially, PC revenue experienced strong growth on higher revenue from third party ISVs and from an increased attach rate for Vista Home Premium. Revenue from our PC markets made up just over 40% of licensing revenue in fiscal 2008 compared to approximately 35% in fiscal 2007. In the fourth quarter, our broadcast market experienced strong growth year-over-year and sequentially as a result of the contribution of revenue from digital converter boxes now on the market as well as from increased shipments of set top boxes globally and digital televisions in North America. The broadcast market increased to just under 20% in fiscal 2008. In the fourth quarter, our consumer electronics market declined year-over-year and was up sequentially. The year-over-year decline resulted from lower revenue from component DVD players partially offset by revenue from camcorders and Blu-ray. The sequential increase was the result of normal seasonality. The consumer electronics market comprised just over 25% of licensing revenue in fiscal 2008 compared to just over 35% in fiscal 2007. In our Other Markets…

Thank you. [Operator Instructions]. And our first question comes from Ralph Schackart with William Blair. Ralph Schackart - William Blair & Co: Hi. Good afternoon. Kevin, you talked about the largest range of guidance that you gave today given the macro outlook. But even considering you're still projecting revenues to grow roughly 8% at midpoint and potentially down EPS, roughly flat sort of at best, and obviously got a little bit better appreciation of the mix shift in here. But it seems even in the current economic environment, given the highly scalable model that you have, that there's just a large, large degree of conservatism in here. I just want to get some extra color if we're missing anything or there's some real end markets that are really suffering right now that we may not be able to appreciate that with the numbers that you gave today.

Sure, I can take you though some of our primary assumptions and guidance for you to calibrate your assumptions against. If you look at our major markets, in the PC market, we're assuming total PC unit growth of about just under 5%, is what's baked into our guidance. That also includes about 20 million net-books in that number and that's significant to us because that does not... the net-books do not include Microsoft Vista. On the CE side, we are factoring in about a 15% decline on the component DVD players, partially offset by Blu-ray sales and increased sales of devices like camcorders. And in the broadcast space we're looking at pretty much flat TV growth worldwide with increasing attach rates in Europe. And we're looking at pretty strong growth still in the set top box space largely driven by the converter boxes in North America and the continued adoption of high definition services in Europe. So when we look at the year, those are our assumptions. And I think that we're very pleased with our position in each of those markets and I think that in particular in broadcast and mobile which of course falls into our other markets category, those are both areas where we see... continue to see increasing attach rates and expect to see that throughout 2009. Ralph Schackart - William Blair & Co: Okay, great. When Microsoft moves to the new operating system sometime in 2010, can you give us sort of a sense, does that have any significant changes in your terms with your current Vista royalties? Is it fair to assume that you'd sort of have the same royalty structure with the new OS?

Yes, the agreement with Microsoft currently is under Vista and as such, we cannot comment as to a new agreement that we put into place regarding a new operating system. So unfortunately we can't really go into the detail. Needless to say, from our perspective we do see the need for DVD playback on the new operating system as essential as it has been on Vista, so that's where we stand. But unfortunately we cannot really discuss the details of the agreements of new operating systems at this time. Ralph Schackart - William Blair & Co: Great. One more and I'll turn it over. Can you maybe give some commentary on recent sales trends? I know that you record in arrears, but maybe after some discussions with your end markets, just in terms of the sales trends that you saw in October or some of your customers saw in October and how that might have compared to September?

Well, I'll comment on that a little bit and then turn it over to Kevin. Basically just having just come from Japan, overall we see that there is strong interest in the combination of products that combine Blu-ray, disc players, MPVRs. We did not get a whole lot of color on a sequential month-over-month trends with our visit, but there has been certainly some signs of softening. As you saw maybe from the LG panel manufacturers, that has dropped about 25% in panel manufacturing which might have a downward trend towards TVs and that's where we come in. But to your question, we haven't really gotten any data on the sales side of a sequentially month-to-month. Kevin?

Well I think in terms of what we've seen, obviously this quarter's results reflect June shipments. To the extent we've been able to speak with our customers or receive reports as it relates to September quarter shipments, we're not expecting that the September quarter was significantly impacted by the recent events. But obviously it's the December quarters and the March quarters that everybody has their eye on and I took you through our assumptions in each of the primary device categories.

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

Great, thanks. Good afternoon. Sounds like you had some traction in international Broadcast and do you guys have an estimate that you can share with us for Dolby penetration in Europe for TVs right now?

Our estimate is that we exited the fiscal year with just under a 20% attach rate European TVs. We are of course very pleased that high definition televisions will now be all shipping with Dolby Digital Plus and HEAAC and we're focused on continued adoption throughout Europe and the world. So we think that's a good growth opportunity for us as the world continues to go digital and high definition.

Okay. And then on Dolby Volume, what would be the next logical point to see Dolby Volume integrated into TVs beyond the Toshiba TVs that you talked about? Is it CES when maybe some of the '09 TV models are announced that we could see that? Or what's kind of the next logical step there?

For Dolby Volume overall, we have a couple of strategies. The first one is to diversify across multiple markets. So at CES you can look forward to Dolby Volume being a new category such as set top boxes, AVRs, and TVs. So that's always been our strategy to diversify from one category which is inline with our belief that Dolby Volume applies to anything with volume output. Even a set top box without a volume control could benefit from leveling the audio. So that's something to look forward and see. As far as getting into more vertical lines, towards the lower end TVs or otherwise, we've already commented that we are working on a low mix version of Dolby Volume that should help us get to that point and that's something that's in progress today.

Okay. And then just one last clarification here. Can you just repeat what you said about Digital Cinema deferred revenue and the expected timing of recognition?

Yes, we said that total deferred revenue is approaching $30 million, that we expect most of the revenue to be recognized in the second quarter of 2009. One of the primary factors there is getting through the third party certification process on the DCI specification.

We will move on to Brian Thackray from Deutsche Bank.

Hi, thank you. Kevin, can you provide a little bit of color in terms of the Mobile market in terms of what you're expecting for '09? Obviously you guys have had some increased traction there. How much of your revenue guidance for '09 does Mobile represent?

So, we haven't broken out Mobile separately. It's part of our other category which makes up about 15% of revenue. It is the fastest growing market in that category this year according to our guidance. And that's mostly driven by the continued adoption of audio codec in multimedia handsets. But we do see the beginnings of revenue in 2009 from some of the great announcements, great wins we've been having over the last year and in particular the Sharp handsets in Japan and LG beginning to roll out handsets around the world during this fiscal year for us. So it's still a small amount of the revenue from Dolby Mobile, but it's a good start.

Okay and a follow up. I look at your guidance for '09, obviously EPS is flat to down year-over-year. If the outlook... if revenue comes in at the low end of your expectations because of the macro environment, how much flexibility do you have in your cash structure to reign in costs within kind of that guidance range of OpEx up 10% next year?

So first of all, let me point out that when you look at the EPS growth range compared to the revenue growth range, that of course does include the restructuring charges, an increase in stock based compensation, and so that's part of the reason for the different EPS growth rate. In fact, at the high end of our guidance, operating expenses are staying about, are growing at about the same rate as revenue. And at the low end, we do plan to continue investing in the business. As you know we've been investing in sales and marketing and research and development over the last couple of years. And we've been building out our sales and marketing footprint. I think much of the success we're enjoying in Broadcast is one of the results. That doesn't come without work. And we have invested quite a lot in being able to introduce [inaudible] technologies optimized for particular platforms such as PCEE and Dolby Mobile. And we think that in a world with relatively long design cycles we have designed into these devices, we have some very good signs of success. And we have some good growth opportunities that we're investing in as well. So we are clearly pulling back on the level at which we've been increasing operating expenses relative to prior years. And frankly relative to what we probably would have expected initially coming into this year. But we do plan to keep investing. So at the low end of the guidance, I don't know that we would bring OpEx all the way down to necessarily the rate of revenue growth.

That's helpful. Thanks guys.

We will move on to Paul Coster with JPMorgan.

Yes. Thank you. Kevin, it sounds like seasonality might be slightly unusual next year on deferred revenues on the D Cinema side that come through in the second quarter and the digital converter box sales. Is that correct? Can you kind of give us some sense of how you think seasonality might play out next year?

Yes, it's always difficult to characterize our total revenue and as it relates to seasonality because as you point out, there always tends to be something else going on in each of our segments that may or may not be a larger factor than seasonality. CE is the one that tends to be most closely correlated to seasonality. Digital Cinema clearly this year the biggest factor will be the recognition of the deferred revenue. In Broadcast, there is of course underlying seasonality in TV sales, but the bigger, I think the more dominant factor in our results is the adoption of high definition services and the purchase of high definition products in Europe. As well as the digital converter boxes, which we would expect to be pretty healthy up through he switchover from analog to digital in the first calendar quarter of 2009. PC tends to... probably would follow overall industry trends.

Okay. And then you have a fortress balance sheet and you've had, you've made a number of acquisitions. What's the latest thinking there? It seems as if you're going to make them, now's the time to do it. N.W. (Bill) Jasper, Jr. - President, Director, and Chief Executive Officer: Well we obviously have a lot of cash. We are fiscally conservative. We think we're well positioned to take advantage of any synergistic opportunities that may come along. But going into the next year or so with the current economic conditions, we believe we just need to be very prudent and be very flexible.

What though is the area that you feel, whether its internal investment or acquisitions, that is most... that has the best payback at this time? N.W. (Bill) Jasper, Jr. - President, Director, and Chief Executive Officer: Well I won't deal with a specific area, Paul. Kevin has already mentioned a number of areas that we're working on. We've always, at least we've announced in the past they we are branching out in digital audio, getting into imaging and other areas. And we're going to continue to focus on those but there's still a lot of growth left in our traditional audio areas as well.

Okay, got it. Thanks very much.

This is Kevin. If I could just introduce a clarification to one of my earlier remarks, when I was talking about attach rate in Europe, I said that we're excited about Dolby Digital Plus and HEAAC being included in every high definition television. That should be in France. So in France, we're going to be included in each television that ships. And we look forward to getting - to increasing our penetration throughout other countries in Europe and around the world.

And Ingrid Chung with Goldman Sachs has our next question.

Good afternoon. Thanks. I just wanted to get some clarification around the product sales gross margins of 25% in the quarter that you recognized the deferred revenue. Just wanted to be clear, so that's 25% across all product sales in the quarter, not just on the deferred revenue? And then the second question following that is when do you see margins actually improving for the Digital Cinema business?

Right, so the lower margins in Q2 are a factor of (a) the much larger mix of the Digital Cinema products, but also because the deferred units are necessarily the first units, the ones that have been upgraded more and have lower margins. So the run rate for the year, we're looking at mid-30s. Now as Bill mentioned, we are undergoing, we're in the process of planning a consolidation of our manufacturing operations and supplementing that with contract manufacturing. So while we're not factoring in a big benefit from that this year, we do think that by the following fiscal year, that will get us back into the 40s.

Okay, great. And in terms of your outperformance I guess internationally versus real D in terms of Digital Cinema adoption, I was just wondering what's driving that. N.W. (Bill) Jasper, Jr. - President, Director, and Chief Executive Officer: Well we think that overseas people are very environmentally conscious and so when people look at the business model, they like the fact that our total operating costs are lower than the competition. And they have no problems using disposable glasses. Plus you throw in the fact that we believe we have a higher quality system we think those three factors lead people to use us.

Okay, great. And then finally, I just wanted to ask a question about the Dolby Mobile product. I think earlier on the call you said that's in two high-end handsets for LG and I think you mentioned six handsets for Sharp. I was just wondering if you could give us an idea of what percentage penetration of their overall handsets that is.

We haven't really shared the percent of penetration on a manufacturing, by manufacturer basis. Right now we're in the Renoir model with LG. We do know that both companies, Sharp and LG, are under plans to introduce more models. That's something that they have already shared and look for those at both CES as well as the GSMA show in Spain in February. And also we will continue to work with other tier one manufacturers to adopt the same technology.

Okay, great. Thank you.

[Operator Instructions]. Next we go to Hunter DuBose with Morgan Stanley.

Good afternoon. And thank you for taking my questions. My first one is, if you wouldn't mind clarifying the circumstances of the French digital TVs. I understand that historically it's been common practice for European digital TVs to actually not ship with a tuner at all. And in those cases, there would be actually no Dolby Digital on a non-tunerless, on a tunerless digital TV. Is it now the case that 100% of digital TVs will all have tuners and therefore will all have Dolby Digital? Or is it just the percentage of digital TVs that have a tuner that will actually have Dolby Digital?

So the new mandate from the French government dictates that all high definition televisions will have both HEAAC as well as Dolby Digital Plus. Dolby Digital Plus is backward compatible to Dolby Digital. So, to the extent that we do have broadcasters that have been broadcasting with Dolby Digital, that will automatically play back on a Dolby Digital Plus unit. As we move forward in time and all televisions become digital televisions, we do foresee that not only high definition television will have both codec, but all digital televisions.

Okay. And can you comment on what the ASPs would look like for a digital TV set that carries both Dolby Digital Plus and HEAAC versus some of your legacy Broadcast products which only had Dolby Digital?

In Europe?

Yes.

This... for France, this is a new phenomenon for us to have Dolby Digital Plus and HEAAC. I don't have the breakout of Dolby Digital televisions in France. Let me however go back and answer your question a bit more directly in terms of tuners. This is a new phenomenon, again, because of the mandate from France to have HDTVs be backward compatible with these two codec. We will see more tuners in the TV as opposed to we have seen in the past.

Okay, and just to clarify, will there be... will there still be some HDTVs that are sold in France without tuners that therefore do not have Dolby Digital Plus or HEAAC?

It is our understanding that all HDTVs in France will have both codec and a tuner.

Okay, and my next question is that in the UK, FreeView has recently announced the plan to add HDTV service in the next couple of years. Can you comment on whether they plan to use any Dolby Digital technology in their Broadcast streams?

I can't really comment on that.

Right. Okay. And just to clarify one of your responses to an earlier question regarding the potential inclusion of Dolby technology in Windows System 7, were you making the point that you can't comment on whether or not Dolby Digital will be included in System 7? Or you can't comment on what terms there might be for the economics of how that might work?

Actually it's both. Basically to the extent that this is a... that to the extent that we will have any of our technologies in a new operating system that is not Vista, this would require a new agreement with Microsoft and as such I cannot comment on such an agreement.

Okay, and to the extent that there were a new agreement with Microsoft, does your existing price sheet for Dolby Digital allow you to offer different pricing for Microsoft for inclusion in either Vista or the new Windows System 7? Or does your price sheet really require you to offer the same pricing to Microsoft that you would to your other licensees?

The pricing overall, our pricing structure for DVD which is why... which is the majority of which is used on Vista, i.e., the Vista use of Dolby Digital is mostly for playback of DVD. And such pricing is offered on a fair and non-discriminatory basis to all licensees. So if Microsoft chooses to include that product for DVD playback in 7, the same pricing that we offer to all licensees would be offered to Microsoft.

I see. Thank you very much.

We will move on to Andrew Abrams with Avian Securities.

Just two quick questions. First, the BrightSide acquisition, if I remember correctly, you guys should be getting fairly close to actually putting out the LED backlight product and if you could give a little color on when that's actually going to come out? And also, if you could just talk a little bit about what your perception is on Blu-ray and how it's been developing? What some of the difficulties have been from your perspective as opposed to the general macro?

Sure. On the HDR side, we sill continue to be excited about the potential of the product. The product, just to be clear how we define the product, the product from Dolby when shipped will be the development kit. That is scheduled to ship in Q2 of '09 to our licensees, all licensees, so made available on a general basis. We do plan to... as you know, we are already working with some very high-end manufacturers of LED backlit devices and we plan to show some models at CES. But in terms of general launch, that will be Q2 of fiscal '09. To your question on the Blu-ray, the proposition behind Blu-ray is, it reminds me a little bit of the proposition behind Surround Sound way back when we introduced Dolby Digital. And it's one of those things that until you try it you can't really know what it's like. And so it's taking a while to get the consumers exposed to it. To that point and to the point that you heard Bill and Kevin comment earlier on in the script earlier today, people are getting exposed. The consumers are getting exposed to high definition through Broadcast. As that exposure increases, we do believe that Blu-ray will pick up as a replacement unit for the standard definition DVD. So bar... if we were to put economic conditions to the side, we do believe it will happen and it's a matter of time.

Thank you.

And we will move on to Trey Lam [ph] with Integral Capital Partners.

Hi, guys. I just wanted to get a sense of where you play in IPTV. I know that Orange had said that they're not going to increase or invest further in IPTV. I just wanted to get your sense of how you play in IPTV and are you seeing that slow as well, or if you can give us some color on that that would be great.

I apologize, I do need you to repeat your question. We couldn't really pick it up here.

I apologize. My question is regarding IPTV. You had said that that's an area of growth. Can you give us a sense of how much? And I know that Orange announced that they would either cut back CapEx or not really pursue IPTV. Are you seeing some slowdown in CapEx in that space as well?

Well the significant rollout that we are watching carefully, obviously are companies like AT&T which are working with using the Microsoft software and Middleware to launch in the marketplace. It is our understanding that that rollout continues to happen. And overall, again, economic conditions to the side, we have not seen a slowdown with the notion of bringing IPTV to the home using the phone line. So we believe that continues to stay as an attractive proposition for Dolby and for the consumers that are not using cable television today.

Okay, great. Thanks.

And next we have a follow-on question. We will hear from Ralph Schackart with William Blair with a follow-up. Ralph Schackart - William Blair & Co: Hi, one quick one as a follow-up. Kevin, you talked about excluding the net-books from the PC guidance for next year. Just curious, do you have any sense what percentage if any of the net-books are actually going out with drives? And then also, too, would the net-books be a candidate for the PCEE product?

Sure. So you said the 5% PC growth estimate, or just under 5% that we're assuming in our guidance, that is inclusive of the net-books of which our estimate is about 20 million. And we don't think it's a market for Vista. But we do think they are a market for ISV media players. In fact we think that in relatively short order, most of them will have media players, is what we're hearing. Some of them are ramping up to that now because the ISVs are working to get players available that have the right footprint in terms of bits and so forth. And yes, they are a potential market for PCEE. I don't know, Ramzi, if you want to comment on that.

We have seen some that definitely have two speakers and it will continue to stay surprised with the quality that comes out of those tiny speakers. As such they do qualify for PCEE as well as a huge majority of them do have a headphone output which therefore qualifies for Dolby headphone which is part of the PC experience. So yes, we do see it as a good target for us and our sales force are working on that area right now. Ralph Schackart - William Blair & Co: Well thanks for the clarification.

And it appears we have no other questions at this time. Mr. Jasper, I'll turn the conference back to you. N.W. (Bill) Jasper, Jr. - President, Director, and Chief Executive Officer: Thank you. Thank you, everybody, for listening in. In spite of the turbulent economy that's out there and the conditions in the marketplace, we believe we are well-positioned for the future and we look forward to speaking with you in three months time. Thank you for joining us.

Again, that does conclude our conference. We do thank you for joining us. .