Ladies and gentlemen, thank you for standing by, and welcome to the Dolby Laboratories Conference Call discussing Fiscal Second Quarter Financial Results. [Operator Instructions] As a reminder, today's conference is being recorded, Tuesday, May 3, 2012. I would now like to turn the conference call over to Mr. Alex Hughes, Senior Director of Investor Relations for Dolby Laboratories. Please go ahead, Mr. Hughes.

Thank you, Kelsey. Good afternoon. Welcome to Dolby Laboratories' second quarter fiscal 2012 earnings conference call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO; Murray Demo, Executive Vice President and Chief Financial Officer; and Ramzi Haidamus, Executive Vice President of Sales and Marketing. On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 28, 2012; market trends and developments for the industries in which we compete; and in the PC, online, portable industries, in particular; and our expectations and beliefs concerning how those trends and developments will affect our operating results, the capabilities and market acceptance of our products and technologies, expectations related to the licensing arrangements and our strategic and operational plans and objectives. These statements are based on management's current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially from those set forth in such statements. Important factors, such as general economic, PC, broadcast, consumer electronics or cinema market conditions, could cause actual results to differ materially from those in the forward-looking statements. These factors are addressed in the earnings press release that we issued today and under the section captioned Risk Factors and elsewhere in our most recent quarterly report on Form 10-Q available at www.sec.gov or on our website at www.dolby.com under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in the Dolby Laboratories' Investor Relations data sheet on our IR website. Call participants are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. An archive of the call will be made available on our website for approximately 1 year and is the property of Dolby. As for the structure of this call, Murray will begin with a recap of Dolby's financial results and provide our fiscal 2012 outlook, and Kevin will finish with a discussion of the business. And with that introduction behind us, I will now turn the call over to Murray.

Thanks, Alex. Good afternoon, and thank you for joining the call. I'd like to discuss Dolby's fiscal Q2 financial performance and our outlook for fiscal 2012. Total revenue for the second quarter was $260.3 million, up 4% year-over-year and 12% sequentially. Licensing revenue for the second quarter was $225.3 million, up 5% year-over-year and 13% sequentially. The year-over-year increase was driven by our broadcast market and our other markets category led by mobile. A sequential growth was driven primarily by typical seasonality with increases in all categories led by broadcast and CE. Looking at licensing revenue by market. Second quarter broadcast revenue grew 18% year-over-year and 24% sequentially. The year-over-year increase was driven primarily by higher TV and set-top box attach rates. Sequential increase was primarily due to higher TV unit shipments and a higher set-top box attach rate. Second quarter PC revenue declined 6% year-over-year due to lower revenue from Windows 7 and ISV. Sequentially, PC revenue grew 4% on higher revenue from ISV. Second quarter revenue from our consumer electronics market was essentially flat year-over-year and up 13% sequentially. The sequential increase is primarily due to higher revenue from DVD and Blu-ray. Second quarter revenue from our other markets category, which includes mobile, Gaming, Automotive and Via increased 6% year-over-year and 8% sequentially. The year-over-year increase was driven by growth in mobile. The sequential increase was led by mobile, Gaming and Via. Second quarter product revenues were $27.2 million, up 3% both year-over-year and sequentially, as higher revenue from our Digital Cinema products more than offset declines in 3D and traditional cinema. The revenues from our Digital Cinema products in the second quarter benefited from the release of $5 million of deferred revenue related to DCI compliance. The second quarter Services revenue was $7.7 million, down 15% year-over-year…

Thank you, Murray. Good afternoon, everyone. On today's call, I would like to highlight our significant progress in bringing premium audio experiences to the cloud. Most recently, we announced today that Dolby Digital Plus will be incorporated in Windows 8. This is a significant step towards delivering a premium audio experience to online content and portable devices. I'd also like to highlight some of the compelling new technologies we're introducing to further improve the audio and video experiences and Dolby's exciting new branding opportunity. The entertainment industry we serve is at an inflection point, creating new opportunities for Dolby. With the rapid rise in online delivery and the growth of portable playback devices, consumers can now receive content anytime, anywhere. This is leading to a world of billions of playback devices. As more content becomes available online, consumers are increasingly seeking premium media experiences. However, the industry is challenged to deliver this given the complex ecosystem of operating systems, content platforms, chipset makers and device manufacturers. We believe this creates an opportunity for Dolby to ensure a consistent premium audio experience just as we've done in the cinema, in optical disc and in broadcast. In order to achieve this vision, we are focused on delivering value from content creation to content consumption. This includes providing tools and services for content creators, encoding tools for online service providers and decoders and post-processing technologies for chipset makers, operating system providers and device manufacturers. By focusing on these critical elements across the chain, the industry and the consumer can be assured a high-quality and differentiated experience just as we have done in other channels. During the quarter, we have made significant progress working across this ecosystem. Today, we announced that Microsoft will incorporate Dolby decoding and encoding technologies for online and file-based content…

[Operator Instructions] We'll go first to Ralph Schackart with William Blair. Ralph Schackart - William Blair & Company L.L.C., Research Division: Kevin, would you mind sort of walking us through the agreements again, just so we're clear. Has there been any major change with the way that you're going to collect licenses then stay on market be it from Windows, the PC OEMs or the ISVs?

So the short answer is yes, there's a change in the way that the royalty collections work, so let me step you through it. Every copy of Windows 8 across PCs and tablets is going to include Dolby technologies for online playback. That's at a base royalty rate that's more consistent with our mobile pricing structure than our historical DVD pricing structure. But where there is also an upgrade package to a more -- a fuller value proposition at the -- even at the non-optical use case. So that base fee covers online and forms of playback. That fee will be paid by the OEM to Dolby. In addition, the OEM can choose to -- As you know, our premise has been that OEMs are going to want to continue to support DVD playback wherever there's an optical disc. This gives them a very clear path to be able to do that. The pricing is established via this agreement. The OEM will pay it directly to us, They will get the additional capability from the ISV. Our technologies are covered under the OEMs payment. And so that's really the outline of how it works. And just to reiterate, we are really excited that we achieved our #1 objective, which is getting the technology available to online content. This opens up the ability for application services, application providers to deliver content and online formats to these devices. We've seen demand for that and now we have a great platform for them to do it. Ralph Schackart - William Blair & Company L.L.C., Research Division: Okay. Just to make sure I'm clear on this then, the Windows 8 agreement enables online mobility and then the DVD playback is paid directly to Dolby from the OEM should they choose for the DVD playback. Is that correct?

The price established for online playback will in fact be paid by the OEMs. So that's part of their -- that will be part of their agreement with Microsoft. So every copy of Windows 8 will include the online playback. The OEM will be required to pay the agreed-upon royalty rate for that directly to us. The OEM then has the options to upgrade to the full use case including DVD, Digital TV tuning. That price is also established by this agreement, but the OEM will pay it to us directly. And they'll get additional functionality on top of what's included in every copy of Windows 8. That will come from an ISV.

Moving on to Steven Frankel with Dougherty & Company. Steven B. Frankel - Dougherty & Company LLC, Research Division: Just to touch on the Galaxy 3 comment that you made, Kevin. What Dolby technologies are in that handset?

The Dolby Digital Plus technologies are in that handset. The -- just to give you maybe a little bit more color, currently all penetration is in the mid- and higher-end Galaxy lines. So you're going to find this in the S Series. That's the Super Smart Series; the R Series, the Royal/Refined Series; and the W Series, the Wonder Series. Steven B. Frankel - Dougherty & Company LLC, Research Division: Okay, and then just to go back to the Microsoft agreement one more time. Should we still -- Given the price reduction, we should still think about that pot of ISV revenue shrinking, where a shrink in total PC-related revenue on a year-over-year basis as this new agreement kicks in?

Here's how you should think about it. So first of all, there will certainly be a shift in the mix of revenue because most of the revenue will now come directly from OEMs, whereas in the past, most of the royalties came from Microsoft and ISVs. Now the way to think about it in total is, over the last several months, what we've been telling you to expect is that last year we had about $240 million of total PC revenue. We estimated that about $80 million of that came from second decoding. And we're communicating that we expected therefore that at full deployment of Windows 8, the target number is about $160 million based on our belief that OEMs are going to want to support DVD playback in the PC-based ecosystem. What the announcement today means is that we are -- well, first of all, we have a clear path now to OEMs supporting DVD playback wherever there's an optical disc. And beyond that, we now have a clear path to being on every PC for online playback. So we think the at full deployment of Windows 8, our opportunity is now -- goes -- is higher than that $160 million. Now keep in mind that 2013 is, of course, going to be a transitional year. There's going to be a mix of Windows 7, Windows 8, especially in enterprise. Scott H. Kessler - S&P Equity Research: And what, if anything, does this do to your post-processing strategy for PCs under Windows 8?

We'll continue to provide value-added technologies above the basic package which will shift from Microsoft. This package, which will be supplied to the OEMs, will be around device optimization or post-processing, if you will. It will add Dolby Headphone. It will add several functionality, which will really enrich the experience. And that's something that we're going to launch simultaneously with Windows 8. Steven B. Frankel - Dougherty & Company LLC, Research Division: Again, to make sure I heard you correctly, the base functionality will include Dolby Headphone and some optimization technologies?

No, no, no. The base functionality is what Kevin mentioned will be, will be Dolby Digital Plus 2-channel encoding -- sorry, Dolby Digital 2-channel encoding, Dolby Digital Plus multichannel decoding. That's the basic package for online and immediate playback. We will offer a value proposition above and beyond this at an increased royalty rate, which will provide a customized experience for devices, and that will be along the lines of headphone and enriched media environment. And this is where we're really going to continue to invest in post-processing. Both of these package are technically designed to work together as one entire suite. And so you're going to still benefit from that single proposition we talked about in the last 2 quarters, that when you provide it as one technical package, you get the benefit as opposed to two separate packages. But from a licensing point of view, they'll be offered separately.

[Operator Instructions] We'll now hear from John Bright with Avondale Partners.

John Bright, Avondale Partners. Kevin, can you talk or characterize the DNA, if you will, of this agreement and how it came about?

Well, I think this is a win-win for everybody. I think that as I said, I can't emphasize enough how, from a long-term strategy point of view, how focused we were on supporting online playback and opening up the ability of content and service providers who wants to provide content in this formats to now be able to do that. I think that ultimately the consumers are going to have the best environment because they're going to be able to receive content over every source in the highest-quality format. And so, I think it's just a great -- I think it's a great win for everybody concerned.

The follow-up question is regarding the potential revenue impact. I think you laid out very carefully what the PC revenues were, as well as what they were for FY'11 and what the '12 and '13 discussion is about. So those are going to be up. Can be characterize it this way? That ISV is going to be going down meaningfully, that you're still going to get paid for legacy Windows versions at the old rate, and then you'll have a rate for Windows 8 that's closer to your mobile rate.

So let me answer that. So first of all, I don't think I would focus too much in the first sense -- So let me answer it in two ways. In the first sense, I don't think I'd focus too much on the mix of who's paying what. I would focus on the fact that in 2011, we had about $240 million of PC revenue. We estimate about $80 million of that to be the second decoder, which left for a base of $160 million, all else held equal, that we were getting paid from one source or another for these technologies. And what we're saying is that not only do we have a clear path now to securing that revenue around optimal disc playback, but we also have a path to -- in fact we will be included ubiquitously across Windows 8 for online playback. As Randy said, we still have upgrade options on top of that. And so, all else held equal, and as you know, there's a whole lot of assumptions that go into this from PC TAM to collection rates and compliance rates and all those things, but all else held equal, whereas we were saying that we have some work to do directly with the OEMs and change the way to think about things, to get to collect on that $160 million, they now have a very clear path, and we have more opportunity than that. So in terms of the mix of revenue, yes, what you should expect is that on full deployment, most of the revenue is going to come directly from OEMs, and that there will be smaller revenue streams from any of the other parties.

Our next question will come from Andy Hargreaves with Pacific Crest.

The dead horse is going to be really dead at the end of this. So just to clarify, the second decoder in your assumption goes to 0 when you get revenue from single DVD decoder where there's a drive and then all of Windows 8?

So yes, let me try to playback that in a different way and see if it helps. The base online functionality for the base rate established by this agreement, that will be included across every copy of Windows 8, will be available to all sources of online content. So that's -- You have everything you need to decode any source of online content. The OEM will then decide and pay for the DVD functionality, and we're assuming that they do that once and they get it from the ISV.

Okay. And then on ISV revenues in this quarter, was that just seasonality? Or is there something else going on there that drove the sequential increase?

Yes, we just had one particular customer that was a little stronger this quarter, and that led to the sequential increase.

Okay. And are expectations -- Maybe I missed this, but are expectations for mobile penetration still the same as what they were last quarter?

Yes, low to mid-teens.

We'll now hear from Daniel Ernst with Hudson Square Research.

To repeat, Andy said, dead horse commentary, and I'll apologized, but on the question of the -- If we have a Windows 8 machine, where you get the base rate and we have an optical disc. They put an ISV in there and you get the additional DVD functionality royalty rate. In that machine, there is an unlikely case for having a second ISV decoder there. So the instances we've had in the past where you get two DVD decoding fees, that is the unlikely scenario in a Windows 8 optical-enabled machine?

Yes, that's correct.

The $0.25 covers the online. The OEM with the optical disc pays the increment and that functionality is provided by the ISV. And beyond that, it's -- beyond that you could imagine scenarios, but remember the main reason that people included ISV software, even though it was in Microsoft, was because they wanted to embed it, brand it themselves. And they probably -- they're going to be able to do that under this base agreement.

Understood. And then looking more broadly at sort of where I'll call the mobile computing landscape dominated by tablets. You now have the secure position in Windows 8. You know you get paid in every Windows 8 tablet. But you're also well-integrated in a lot of services like Netflix, which is where the consumer chooses the service and theoretically, would like -- Are we getting close to a point where you can make the case to the other platforms, Android and IOS, that you've become the de facto standard for audio decode, given that all the services that are in the cloud have a version of their audio tracks that are encoded in Dolby and they would like to deliver that same experience to all their customers. Are we getting close to being able to convince the rest of the mobile compute landscape of that value?

The answer is yes. We're all getting close to that point. And to even amplify on what you just said, that list is Netflix, VUDU, Amazon, Apple, HBO Go, Best Buy, CinemaNow amongst others. So we've got this services piece covered. We've got the encoding and content creation element covered. We've got the IC-integrated circuit elements covered by the announcements that were already made. Mid-to-low teens penetration in mobile. Now we have ubiquitous -- we will have ubiquitous adoption Windows 8 to playback any form of content coming online, streaming, downloading, broadcasting, DVD, Blu-ray. And so we are reaching that tipping point, which you can put in front of customers that have not adopted us yet to make a very strong case to head towards total ubiquity and a de facto standard with our technology.

Perfect. Then my last question on mobile. If we take your mobile assumptions and we get the design wins and the units are there that are in, say the midrange of your forecast, is mobile for the full year at that point for fiscal '12 a reportable segment? Or are we at sort of 10% of licensing revenues by that point?

Our guidance this year does not assume that. But we'll provide an update on that when we get to that point.

[Operator Instructions] And we'll now hear from Barbara Coffey with Brigantine.

Two quick questions. Just confirming that the OEMs historically, will be paying on the same quarter-end arrears model that you've always had, as well as just wanted a quick update on digital TV adoption in China. How's it going? Are there other stations you need to sign up? Sort of a little bit more color around reduction in expectations on that piece of the business.

Sure. We're pretty pleased with our China progress. Currently, 24 of the 40 distinct high-definition channels are transmitted on-air through a terrestrial, provincial cable and IPTV services use Dolby technologies. So from a content production and transition, we're really happy with the progress. On the playback side, we have 61 Dolby Digital Plus system licensees, 8 MSN and 4 MS11 licensees. And as you recall, MSN and MS11 are those suites of technology which combine our decoding and post-processing. And these are for set-top boxes and televisions in China and Hong Kong. Different cut is the 22 television manufacturers and 58 set-top box manufacturers in that region are already licensed. So in taking into account the entire ecosystem, transmission along the multiple channels of delivery as well as playback and as well as ICs, we're in a good position to start growing the franchise in China and greater China.

And you were saying that the shipments of television this -- in this set of expectations is a little lower than last. What's driving that range?

We just take third-party data in terms of TV unit shipments. And the data that we've received indicates that instead of being sort of flat to slightly down, it now looks like it's slightly down. So it has softened for our fiscal 2012 target.

Your next question will come from Sean Leahy with Barrington Research.

I'm standing in for Jim Goss today. My first question deals with your 3D cinema projector business. We haven't heard too much from that area lately, and I was interested in some color on how that business is doing? And how market share is holding up internationally?

Currently, the 3D cumulative market share is approximately 20%, so really no significant change from prior quarter. And if you are look at it outside North America, the market share is approximately 25% or so. We have shipped about almost 10,000 3D kits to date in the market. And so right now, it looks like we're steady and holding.

Okay. And then also in terms of Dolby's inclusion and mobile apps such as CineXPlayer,I was wondering what is the relationship that you have in that case with an XP software? And what sort of economics arise in those deals?

Currently, as it pertains to the Apple iOS platform, all applications and companies providing these applications are licensed on an individual basis. So a company like NXP would take an individual license, incorporate our technology and deliver it to users, then we get paid on the terms and conditions that we have agreed to with such companies. Sometimes, it'll be on a per-use or per-download. Sometimes, it'll be Rapshare. We're not really disclosing any one specific season fees, but we have created a fairly flexible business model as it comes to the application space in the iOS area just to be as flexible as the applications themselves entity.

[Operator Instructions] We'll move on to Mike Olson with Piper Jaffray.

I got on a bit late, so maybe you mentioned this. But I just wanted to see if I could get you to talk about any specific pricing on PC based on the new deal? And are we essentially going from two royalties of around $0.75 or so before, so $1.50 total to something like $0.25 for the new Win 8 royalty plus an additional $0.75 for optical. So maybe the historical double royalty totaling $1.50 goes to $1? Is that in the ballpark or totally in the wrong zip code?

For the percentage of PCs that are -- that don't of optical drives, which if you follow current estimates, is maybe 20%, 25%. You're going to be just at the base royalty rate for online playback, and we've got an upgrade option for them for additional functionality. That will be at the base rate. For the 75% of PCs today that are shipping with optical disks, you're going to be at a high -- the OEM has an option to pay a rate that's consistent with our historical DVD pricing to get full DVD playback, as well as broadcast playback. They will receive that functionality from the ISV. The ISV's provision of that technology is covered by the OEM payment. So you have two rates. We don't assume that there will be significant -- any second decoders in this environment because the OEM is getting what they need. They can brand it their way from the ISV as they've always wanted to do for this rate.

Okay. And then just another one on international broadcast. I guess, outside of China, is there anything you can say about traction international broadcast in kind of newer deals outside of China? Are there potential for you to be mandatory in additional countries? And I guess, what does the timing of some of those decisions look like?

Sure. Well, so we're focused right now on the areas such as India, Russia and some of the countries that have not mandated or finalized their terrestrial broadcast. And as you know, our approach there is not only just to work with the authorities, which mandates but start with the private entity of the cable companies and the satellite companies. So case in point, India, for example, has not finalized at this point the mandate of terrestrial broadcast. However, we have just added one new HD channel in India. Sun TV added Dolby Digital audio to its new Sun TV HD channel. Sun TV is the largest and most influential television network in South India. Over 1 million subscribers of high-definition service on DH -- Digital TH with Dolby Digital Plus or Dolby Digital are experiencing Dolby. And to summarize, right now we are in 11 HD channels in India using Dolby technologies. And that's -- companies such as Star Plus, Star Gold, and MTunes and Discovery and so on. We believe activities like this influence heavily the mandate of our technologies in standards, and we feel fairly good about our activities in Delhi currently. There are similar activities going on in Russia, as well as other countries where we haven't been mandated. So overall, we're pleased with the progress. We'll continue to report as more channels come on air and as more standards about us.

We have no further questions. I'll turn the conference back to Mr. Kevin Yeaman for closing remarks.

Well, thank you for joining us today. Again, we're pleased that we've been able to take a major step forward in making our transition to the online and mobile ecosystem. We're really happy to have a great new marketing platform with the Dolby Theatre in Hollywood. And we're very excited about the product releases we've had over the last several months, most recently Dolby Atmos, which we think is set to transform the way you're going to experience sound in the cinema. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.