Dolby Laboratories (DLB)

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Dolby Laboratories (DLB)

Q3 2011 Earnings Call

August 04, 2011 5:00 pm ET

Executives

Ramzi Haidamus - Executive Vice President of Sales & Marketing

Murray Demo - Chief Financial Officer and Executive Vice President

Kevin Yeaman - Chief Executive Officer, President and Member of Stock Plan Committee

Alex Hughes - IR

Analysts

James Goss - Barrington Research Associates, Inc.

Steven Frankel - Dougherty & Company LLC

Barbara Coffey - Brigantine Advisors LLC

Andy Hargreaves - Pacific Crest Securities, Inc.

John Vinh - Collins Stewart LLC

John Bright - Avondale Partners, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories Conference Call discussing third quarter fiscal 2011 financial results. [Operator Instructions] As a reminder, this call is being recorded Thursday, August 4, 2011. I would now like to turn the conference over to Alex Hughes, Senior Director, Investor Relations for Dolby Laboratories. Please go ahead Mr. Hughes.

Alex Hughes

Thank you. Good afternoon, and welcome to Dolby Laboratories Third Quarter Fiscal 2011 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 30, 2011; market trends and developments for the industries in which we compete; and our expectations and beliefs concerning how these trends and developments will affect our operating results; the capabilities and market acceptance of our products and technologies; 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 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 2 is available in our earnings release and in the Dolby Laboratories Investor Relations data sheet on our Investor Relations section of our website. Call participants are advised that the audio of this conference call is being broadcast live over the Internet. It is also being recorded for playback purposes. An archive of the call will be made available on our website for approximately one 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 an updated 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 Murray.

Murray Demo

Thanks, Alex. Good afternoon, and thank you for joining the call. I'd like to discuss Dolby's fiscal third quarter financial performance and our outlook for fiscal 2011.

Revenue for the third quarter was $219 million, down 5% year-over-year and 12% sequentially. Licensing revenue for the third quarter was $181.8 million, up 7% year-over-year and down 15% sequentially. Revenue increased year-over-year due to our broadcast in Other Markets category led by Mobile, and declined sequentially primarily due to typical seasonality.

Looking at Licensing revenue by market for the third quarter of fiscal 2011, PC revenue declined 11% year-over-year primarily due to lower revenue from ISVs. Sequentially, PC revenue declined 9% led by lower revenue from Windows 7 primarily due to seasonality.

Broadcast revenue increased 26% year-over-year and declined 14% sequentially. The year-over-year growth resulted from increased revenue from set-top box and TV, and the sequential decline was led by typical seasonality in TV. Revenue from our Consumer Electronics market increased 5% year-over-year, as increases in certain product categories including audio/video receivers, home-theater-in-a-box and camcorder more than offset declines in DVD.

Sequentially, CE revenue declined 15% primarily due to typical seasonality. Revenue from our Other Markets category, which includes Mobile, Gaming, Automotive and Via increased 26% year-over-year primarily on growth from Mobile; and 29% sequentially primarily due to typical seasonality.

Third quarter product revenues were $28.4 million, down 46% year-over-year and up 8% sequentially. The year-over-year decline was primarily driven by lower prices for our 3D and Digital Cinema products. In addition, last year, benefited from the recognition of approximately $5 million in deferred revenue from prior period. The sequential increase primarily resulted from higher revenue from 3D. Third quarter Services revenue was $8.8 million, up 21% year-over-year and down 3% sequentially.

Turning to margins. GAAP gross margin was 87.2% in the third quarter and 88.2% on a non-GAAP basis. Our Licensing gross margin was 97.7% in the third quarter on a GAAP basis and 98.5% on a non-GAAP basis. GAAP product gross margin was 28.4% in the third quarter and 30.7% on a non-GAAP basis. On a year-over-year basis, product gross margins declined primarily due to lower prices for our 3D and Digital Cinema products. GAAP Services gross margin was 60.1% and non-GAAP Services gross margin was 60.6% in the third quarter.

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