Elena Carr - Lewis Chew - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Kevin J. Yeaman - Chief Executive Officer, President, Director and Member of Stock Plan Committee

Ladies and gentlemen, please stand by. Welcome to the Dolby Laboratories Conference Call Discussing Fiscal Second -- Third Quarter Results. [Operator Instructions] As a reminder, this call is being recorded. The date is Thursday, July 24, 2014. I would now like to turn the conference over to Ms. Elena Carr, Director of Corporate Finance and Investor Relations for Dolby Laboratories. Please go ahead, Elena.

Good afternoon. Welcome to Dolby Laboratories Third Quarter 2014 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories' President and CEO; and Lewis Chew, Executive Vice President and Chief Financial Officer. As a reminder, today's discussion will include forward-looking statements. These statements are subject to risks and uncertainties and may cause actual results to differ materially from the statements made today. As a discussion -- a discussion of some of these risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Risk Factors, as well as in our most recent report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is available in our earnings press release and in the Dolby Laboratories Investor Relations data sheet on the Investor Relations section of our website. As for the content of this call, Lewis will begin with a recap of Dolby's financial results and provide our fiscal 2014 outlook, and Kevin will finish with the discussion of the business. So with that introduction behind us, I will now turn the call over to Lewis.

Thanks, Elena. Good afternoon, everyone. Let's start by discussing the revenue for the quarter. In Q3, total company revenue was $223.4 million, of which $205.6 million came from licensing and $17.8 million came from products and services. Our total company revenues were higher than we originally projected, and all of this was driven by licensing, which was $20.9 million higher than last year and down $53 million from Q2, mainly due to seasonality, as well as a $24.7 million back payment that we received in Q2 that did not repeat in Q3. So let me take you through some details of third quarter licensing revenue by our end markets. Broadcast represented about 43% of total licensing in the third quarter. Revenues in this market were down sequentially by 26%, due to the effect of the $24.7 million item I just mentioned, as well as seasonally lower TV units. Year-over-year, Q3 broadcast licensing grew about 25% due to a combination of higher attach rates in TVs, back payments and higher units in set-top boxes. PC revenues represented about 19% of total licensing in the third quarter. They were down about 4% sequentially and down about 2% compared to last year's third quarter. Both of these movements are now in the same ballpark as market movement, with some differences mainly due to mix in timing between quarters. Consumer electronic revenues in Q3 were about 14% of total licensing, which is similar to the 14% they were in Q2 and the 15% in Q3 of last year. They were down about 19% sequentially due to seasonality and up slightly over last year as declines in DVD and Blu-ray were offset by improvements in other areas. Mobile device revenues were down 20% sequentially and represented about 13% of total licensing in Q3. This was…

Thank you, Lewis, and thanks to everyone for joining us today. We had strong third quarter results, and we continued to have success in developing and maintaining ecosystems around our products and technology, from content creation to distribution and ultimately, to consumer device. Today, I want to update you on our progress and take you through some of our key growth areas. Let's start with mobile. Revenue was 13% of licensing, which was above the expectation of 10% discussed in the last call. At this time, we do not have an update on Samsung mobile devices. But during the quarter, there were a number of indicators that show that sound and our technology in particular can be a differentiating factor in the mobile ecosystem. As you know from past updates, we have partnered with Amazon to enhance the audio experience in a number of their devices, specifically their full line of Kindle Fire tablets and recently, the Fire TV. During the quarter, Amazon announced the Fire Phone, which will also feature Dolby Audio. Within the Amazon content ecosystem, we are seeing more TV and movie content in Dolby formats and also an increasing number of applications being developed that leverage Dolby technologies to enhance their gameplay and user experience. This demonstrates the value that Dolby can bring to the user experience in broader applications beyond video consumption. One of the most popular Dolby-enhanced applications this quarter was Angry Birds Star Wars II by Rovio. Dolby sound is a differentiating feature across the Amazon platform, and we continue to focus on creating similar value in the other mobile ecosystems. Now let me move on to broadcast, which, again, showed steady growth this quarter. We have built a strong position in North America and Europe, and continue to focus on extending our…

[Operator Instructions] And we will take our first question from Mark Gilbert [ph] with Voya.

I'm just looking at the cash balance and the free cash flow that you are generating with a relatively good stability quarter-over-quarter. And it looks like even with the acquisition from Doremi and even with the $29 million in repurchases, you're generating cash a lot faster than you're returning it back to shareholders. Do you have any intent or are you looking at considering any other options of cash return? Because the company is starting to look a little bit over-capitalized.

Mark, this is Lewis Chew. Would it shock you if I said that that's the first time I ever heard that question?

Yes, it would.

Yes. No, I'm just kidding. Yes, this is one of the things that the management team pays attention to and has done a lot about. As you mentioned, we have an upcoming acquisition. We've announced that the acquisition is expected to be in the $100 million range, so I wouldn't call that a small sum of money. But yes, I think if I look back over a longer period than just -- and by the way, this quarter, we did buy back stock. But over a longer period of time, let's say, over the last 3 years, we've generated, during that time window, just over $1 billion in cash from operations and we've actually returned about $950 million in cash back to shareholders over that period of time. So I think that alone suggests that we did -- do not ignore that topic. I think there's always a day -- a debate about what is the right level of cash, and all I can say is we continue to pay attention to that and find ways to return cash to shareholders.

[Operator Instructions]

All right. Well, I want to thank everyone for joining us today. Again, we're pleased that we had a strong quarter, continued to make some really good progress on our new initiatives, like Dolby Vision and Dolby Voice. And it gives us confidence that we're on track to generate long-term growth. And so thank you for joining and look forward to speaking with you soon.

And ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.