Dolby's shares jumped 19 percent to $44.60 in after-market trade. The stock closed at $37.63 on Thursday on the New York Stock Exchange.

Microsoft will include Dolby Digital Plus 5.1-channel decoding and two-channel encoding in Windows 8 and original equipment manufacturers (OEMs) will pay a base royalty rate to Dolby for using its products, the company said in a statement.

However, Dolby does not expect this agreement to affect its fiscal 2012 outlook as Windows 8 is not expected to ship until Dolby's fiscal 2013.

Microsoft has not said when its Windows 8 system will be released, but most in the industry expect it on devices from around October.

"It was a question hanging over the stock for a while after Dolby had indicated they were not going to be mandatory (in Windows 8) last fall," said Barrington Research analyst James Goss.

"So I think it is a very big plus for Dolby."

Dolby Digital is an audio encoder and decoder designed to deliver 5.1 channels of audio to many popular forms of entertainment including DVDs, blu-ray discs, cable, broadcast, satellite TV programming, PCs and video games.

Every copy of Windows 8 will include the function to play all online content that uses Dolby encoding but OEMs will have to pay for optical disc playback functionality, Chief Executive Officer Kevin Yeaman said in a conference call.

Dolby, which counts Netflix, Amazon, Apple TV and Samsung Electronics as customers, will get only one royalty payment per device containing these technologies.

"There will certainly be a shift in the mix of revenue because most of the revenue will now come directly from OEMs where as in the past most of the royalties came from Microsoft and the independent software vendors," Yeaman said.

SOLID NUMBERS

Dolby raised its full-year earnings outlook to $2.38 to $2.62 per share from its earlier view of $2.31 to $2.61 per share. However, it trimmed its full-year revenue expectations to between $910 million and $960 million from $910 million and $970 million.

Analysts were expecting full-year earnings of $2.57 per share, on revenue of $942.4 million, according to Thomson Reuters I/B/E/S.

Second-quarter net income attributable to the company rose to $88.1 million, or 81 cents per share, from $82.1 million, or 72 cents per share, a year ago.

Dolby, which got the rights on Tuesday to rename Kodak Theatre -- home of the Academy Awards -- as Dolby Theatre, said licensing revenue grew 5 percent in the quarter.

Excluding items, the company earned 91 cents per share.

Revenue for the quarter rose 4 percent to $260.3 million.

Analysts expected second-quarter adjusted earnings of 75 cents per share on revenue of $253.5 million.

(Reporting by Supantha Mukherjee and Siddharth Cavale in Bangalore; Editing by Maju Samuel, Saumyadeb Chakrabarty)

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