Dolby Laboratories Earnings Call Nuggets: The Marketing Pull and Catch-Up Royalty Payments

Dolby Laboratories, Inc. (NYSE:DLB) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

The Marketing Pull

Ralph Schackart – William Blair & Company: First question is for Lewis. Lewis I was wondering if you could quantify the marketing pull through in Q1. And then I know you talked about sort of the step down in OpEx in Q3 or the back half of the year, but as we looked in our model last year, seasonally the second half is a step up in OpEx. I’m just trying to understand the visibility we have on the cost structure?

Lewis Chew – EVP and CFO: Sure. I’d say there is probably a few, I’d characterize it as a few million dollars of pull through related to as you can probably imagine some of our bigger programs like Atmos and some branding initiatives. Also one of the things that’s hitting us seasonally in Q2 is that, that’s when we typically incur the expenses as far as some of our bigger tradeshow that we attend. And we would expect that to subside in Q3, and Kevin and I are very committed to meeting our budgeted commitment to everyone for the year and so that’s why effectively we are making that fit into the whole year.

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Ralph Schackart – William Blair & Company: And maybe one for Kevin. I think last call you talked about a 5 point step-up in sort of mobile penetration with the new Dolby products that you have. Going out in the market just curious if you are still sort of marketing towards that 5% increase for the year?

Kevin Yeaman – President and CEO: Yeah, that’s still our goal for the year and we’re pleased with the progress we’re making across each of the major mobile ecosystems. And you’ll notice that we’ve now – for the first quarter where we’ve broken out our mobile revenue in the segment, 11% of revenue for the quarter and grew 35% year-over-year and that’s driven by both increased adoption and our goal increasing by 5 percentage points this year as well as the fact, of course, that the underlying market is growing very strong with well over 20% year-over-year growth in units.

Catch-Up Royalty Payments

Steven Frankel – Dougherty & Company: Could you start Lewis with some clarity on the catch-up royalty payments that occurred in Q1? How much was that and what category did that come from?

Lewis Chew – EVP and CFO: First of all, I’d say that this is really a subset of all those items, so that going forward now, starting with this quarter, all of our catch-up, whether they settlements or back royalties, will all be classified in revenues. So that will get rid of any remaining – I know in the past we’ve talked about some of these that were recorded as credits to expense. The impact both year-over-year and quarter-over-quarter was about plus 5 and in terms of market categories, in any given quarter they are spread across and this quarter was the same. They happened in several of our different buckets, the normal buckets we talk about – set-top box, PC, TV, et cetera, but that’s the impact is about plus 5 both year-over-year and quarter-over-quarter.

Steven Frankel – Dougherty & Company: For Kevin, could you kind of sketch at a high level what the business model for Atmos might look like?

Kevin Yeaman – President and CEO: Sure. So, first of all, we will be – we’re up to as I said 40 exhibitors of installed system with the goal of enhancing audio experience and ultimately getting more consumers into the cinema. We are currently expecting to begin shipping our generally available product and therefore recognizing revenue in the second half of the year. And we are working with exhibitors right now for the models work best for them. It could go along the lines of our traditional product sales model, but we’re also open to exploring other models that you’ve commonly seen in with vendors to exhibitors.