DOLBY LABORATORIES, INC.
The following discussion and analysis should be read in conjunction with our
unaudited interim condensed consolidated financial statements and the related
notes that appear elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements reflecting our current
expectations which are subject to risks and uncertainties, including, but not
limited to statements regarding: operating results and underlying measures;
demand
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and acceptance for our technologies and products; the effect of the novel
coronavirus pandemic ("COVID-19") on our business; market growth opportunities
and trends; our plans, strategies and expected opportunities; future
competition; our stock repurchase plan; and our dividend policy. Use of words
such as "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" or similar expressions indicates
a forward-looking statement. Actual results may differ materially from those
discussed in these forward-looking statements due to a number of factors,
including the risks set forth in Part II, Item 1A, "Risk Factors." Such
forward-looking statements are based on management's reasonable current
assumptions and expectations. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report on Form 10-Q to conform our prior statements to new
developments or actual results.
Investors and others should note that we disseminate information to the public
about our company, our products, services and other matters through various
channels, including our website (www.dolby.com), our investor relations website
(http://investor.dolby.com), SEC filings, press releases, public conference
calls, and webcasts, in order to achieve broad, non-exclusionary distribution of
information to the public. We encourage investors and others to review the
information we make public through these channels, as such information could be
deemed to be material information.
OVERVIEW
Dolby Laboratories creates audio and imaging technologies that transform
entertainment and communications at the cinema, at home, at work, and on mobile
devices. Founded in 1965, our strengths stem from expertise in analog and
digital signal processing and digital compression technologies that have
transformed the ability of artists to convey entertainment experiences to their
audiences through recorded media. Such technologies led to the development of
our noise-reduction systems for analog tape recordings, and have since evolved
into multiple offerings that enable more immersive sound for cinema, digital
television transmissions and devices, mobile devices, OTT video and music
services, DVD and Blu-ray Discs, speaker products, PCs, and gaming consoles.
Today, we derive the majority of our revenue from licensing our audio
technologies. We also derive revenue from licensing our consumer imaging and
communication technologies, as well as audio and imaging technologies for
premium cinema offerings in collaboration with exhibitors. Finally, we provide
products and services for a variety of applications in the cinema, broadcast,
communications, and home entertainment markets.
COVID-19
Please refer to the Executive Summary section of this Item for information
concerning the continuing effect of COVID-19 on our business.
OUR STRATEGY
Key elements of our strategy include:
Advancing the Science of Sight and Sound. We apply our understanding of the
human senses, audio, and imaging engineering to develop technologies aimed at
improving how people experience and interact with their entertainment and
communications content.
Providing Creative Solutions. We promote the use of our solutions as creative
tools, and provide our products, services, and technologies to filmmakers,
musical artists, sound mixers, and other content creators and providers. Our
tools help showcase the quality and impact of their efforts and intent, which in
turn may generate market demand.
Delivering Superior Experiences. Our technologies and solutions optimize
playback and communications so that users may enjoy richer, clearer, and more
immersive sound and sight experiences.
REVENUE GENERATION
We have active licensing arrangements with over 500 electronics product OEMs and
software developers. As of June 26, 2020 , we had approximately 12,700 issued
patents relating to technologies from which we derive a significant portion of
our licensing revenue. We have approximately 1,200 trademark registrations
throughout the world for a variety of wordmarks, logos, and slogans. These
trademarks are an integral part of our technology licensing program as licensees
typically place them on their products which incorporate our technologies to
inform consumers that they have met our quality specifications.
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Licensing
We license our technologies to a range of customerswho incorporate them into their products for enhanced audio and imaging functionality whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies are summarized in the table below. As it relates to AAC, HE-AAC, AVC, and HEVC, we jointly participate in patent licensing programs with other patent owners. Technology Description AAC & HE-AAC An advanced digital audio codec solution with
higher bandwidth efficiency used
for a wide range of media applications.
AVC A digital video codec with high bandwidth efficiency used in a wide range of
media devices.
A next-generation digital audio coding technology that increases transmission
Dolby® AC-4 efficiency while delivering new audio experiences, including Dolby Atmos, to a
wide range of playback devices.
An object-oriented audio technology for cinema and a wide range of media
devices that allows sound to be precisely placed and moved anywhere in the
Dolby Atmos® listening environment including the overhead dimension. Dolby Atmos is an
immersive experience that can be provided via
multiple
technologies.
Dolby Digital® A digital audio coding technology that provides multichannel sound to a variety
of media applications.
Dolby Digital Plus™ An advanced digital audio coding technology that offers more efficient audio
transmission for a wide range of media applications and devices.
Dolby® TrueHD A digital audio coding technology providing lossless encoding for premium
quality media applications.
An imaging technology combining high dynamic range and dynamic metadata to
Dolby Vision® deliver higher color contrast, brighter contrast, and improved details for
cinema and a wide range of media devices.
An audio conferencing technology with superior spatial perception, voice
Dolby Voice® clarity, and background noise reduction that emulates the in-person meeting
experience.
HEVC A next-generation digital video codec with high bandwidth efficiency to support
ultra-high definition experiences for a wide range of media devices.
The following table presents the composition of our licensing business and revenues for all periods presented:
Fiscal Quarter Ended Fiscal Year-To-Date Ended
June 26, June 28, June 26, June 28,
Market 2020 2019 2020 2019 Main Offerings Incorporating Our Technologies
Broadcast 38% 49% 39% 42% Televisions & STBs
Mobile 33% 17% 23% 18% Smartphones & Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 9% 11% 14% 14% DVDs, & HTIBs
PC 10% 9% 12% 11% Windows and macOS operating systems
Gaming consoles, Auto DVD, Dolby Cinema, &
Other 10% 14% 12% 15% Dolby Voice
Total 100% 100% 100% 100%
We have various licensing models: a two-tier model, an integrated licensing
model, a patent licensing model, and collaboration arrangements.
Two-Tier Licensing Model. Most of our consumer entertainment licensing business
consists of a two-tier licensing model whereby our decoding technologies,
included in reference software and firmware code, are first provided under
license to semiconductor manufacturers whom we refer to as "implementation
licensees." Implementation licensees incorporate our technologies in ICs which
they sell to OEMs of consumer entertainment products, whom we refer to as
"system licensees." System licensees separately obtain licenses from us that
allow them to make and sell end-user products using ICs that incorporate our
technologies.
Implementation licensees incorporate our technologies into their chipsets that,
once approved by Dolby , are available for purchase from implementation licensees
by OEMs for use in end-user products. Implementation licensees only pay us a
nominal initial fee on contract execution as consideration for the ongoing
services that we provide to assist in their implementation process. Revenues
from these initial fees are recognized ratably over the contractual term as a
component of licensing revenue.
System licensees provide us with prototypes of products, or self-test results of
products that incorporate our technologies. Upon our confirmation that our
technologies are optimally and consistently incorporated, the system licensee
may buy ICs under a license for the same Dolby technology from our network of
implementation licensees, and may further sell approved products to retailers,
distributors, and consumers. For the use of our technologies, our system
licensees pay an initial licensing fee as well as royalties, which represent the
majority of the revenue recognized from these arrangements. The amount of
royalties we collect on a particular product depends on several
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factors including the nature of the implementations, the mix ofDolby technologies used, and the volume of products using our technologies that are shipped by the system licensee. Integrated Licensing Model. We also license our technologies to software operating system vendors and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix ofDolby technologies used, the nature of the implementations, and the volume of products using our technologies that are shipped, and is subject to the same quality control evaluation process. Patent Licensing Model. We license our patents through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. We also license our patents directly to manufacturers that use our IP in their products. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary,Via Licensing Corporation . By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees.The Via Licensing patent pools enable product manufacturers to efficiently and transparently secure patent licenses for audio coding, interactive television, digital radio, and wireless technologies. We offer our patents related to AAC, AVC, HE-AAC, HEVC, and other IP through a combination of patent pools and licensing directly to OEMs. Recoveries. Licensing revenue recognized in any given quarter may include previous quarters' revenue from licensees and/or settlements with third parties. Within the Results of Operations section of Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," previous quarters' revenue and settlements are collectively referred to as "recoveries." Such recoveries have become a recurring element of our business and are particularly subject to fluctuation and unpredictability. Collaboration Arrangements. Dolby Cinema: We partner with exhibitors to deliver a premium cinema offering with Dolby Vision and Dolby Atmos at new and pre-existing venues. We receive a share of revenue at Dolby Cinema sites through box office receipts at the installed theaters, which is recognized as licensing revenue. Dolby Voice: We enter into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earn revenue based on access to our technology and services. Products and Services We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in over 90 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. We also sell and/or lease hardware that facilitates theDolby conferencing experience, including the Dolby Conference Phone for audio use only, and theDolby Voice Room , our integrated solution that provides a video camera and a control hub integrated with the Dolby Conference Phone. Additionally, some of ourDolby Cinema arrangements involve fixed or minimum amounts, which are typically included in products sales. Key products from which we generate products revenue are summarized in the table below: Product Description Digital Cinema Servers used to load,
store, decrypt, decode,
Cinema Imaging Products watermark, and playback digital film files for presentation on
digital cinema projectors and software used to encrypt,
encode, and package digital media files for distribution.
Cinema
Processors,
amplifiers, and
loudspeakers
Cinema used to decode,
render, and
Cinema Audio Products optimally
playback
digital cinema
soundtracks
including those
using Dolby
Atmos.
An integral hardware component of theDolby Voice conferencing
Dolby Conference Phone solution that enhances full-room voice capture, spatial voice
separation, and playback.
Video
conferencing
solution for
huddle rooms
and conference
rooms that
Dolby Voice Room combines a
camera product
with the Dolby
Conference
Phone and Dolby
Voice
technology.
Other 3-D glasses and
kits, broadcast
hardware and
software used
to encode,
transmit, and
decode multiple
channels of
high quality
Other Products audio for DTV
and HDTV
distribution,
monitors, and
accessibility
solutions for
hearing and
visually
impaired
consumers.
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In addition, we offer various services to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. We also provide PCS for products
sold and equipment installed at Dolby Cinema theaters operated by exhibitor
partners and support the implementation of our technologies into products
manufactured by our licensees.
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EXECUTIVE SUMMARY
COVID-19
In December 2019 , a novel coronavirus disease was reported and in January 2020 ,
the World Health Organization ("WHO") declared it a Public Health Emergency of
International Concern. On March 11, 2020 , the WHO characterized COVID-19 as a
pandemic.
COVID-19 has triggered worldwide shutdowns, job losses, and other disruptions
which in turn have negatively affected the global economy, including consumer
purchasing activity. Because Dolby technologies are featured in a wide array of
electronic products that are primarily purchased by consumers, our revenues have
been negatively affected by COVID-19. The issues and circumstances relating to
COVID-19 continue to change rapidly and are difficult to predict. We continue to
monitor the evolving situation and the impact on our business.
The outbreak of COVID-19 has affected many of our partners, resulting in the
disruption of consumer products' supply chains, delays in shipments, product
development, and product launches. Consumer demand for products that include our
technologies may continue to be negatively impacted due to economic uncertainty
resulting from COVID-19. These factors have resulted in decreased revenue
pertaining to customer-shipment royalties, and may cause delays in the adoption
of our technologies by partners. The overall cinema market has been adversely
impacted by COVID-19 shelter-in-place and social distancing mandates. Our
exhibition partners and customers continue to have either partially or fully
discontinued operations. This has resulted in the temporary closure of a
substantial majority of Dolby Cinema sites, reducing revenues recognized from
box office receipts, and reducing demand for our cinema products and services.
As COVID-19 shelter-in-place mandates are lifted, it is uncertain how quickly
cinema locations will be permitted to resume operations, or whether cinemas will
be able to operate at full capacity. In addition, when cinemas reopen, exhibitor
partners may operate fewer screens in response to social-distancing restrictions
or decreased audience levels.
At Dolby , we implemented work-from home policies within all our affected office
locations and put in place additional safety measures and global travel
restrictions to ensure the well-being of our employees. We have enabled our
employees with the tools and infrastructure they need to carry on our critical
operations and progress the business forward in this remote working environment.
We expect the impact of COVID-19 will extend into fiscal 2021. The degree of
impact on our business will depend on several factors, such as the full duration
and the extent of the pandemic, as well as actions taken by governments,
businesses and consumers in response to the pandemic, all of which continue to
evolve and remain uncertain at this time.
Further discussion of the potential impacts of COVID-19 on our business can be
found in Part II, Item 1A "Risk Factors."
EXPANDING OUR LEADERSHIP IN AUDIO AND IMAGING ENTERTAINMENT EXPERIENCES
We are focused on expanding our leadership in audio solutions for entertainment
content and delivering dynamic new audio and imaging technologies. This will
broaden the number of Dolby experiences that people can enjoy which in turn will
help drive our revenue growth. Following is a discussion of the key markets that
we address and the various Dolby technologies and solutions that serve these
markets.
Licensing
The majority of our licensing revenue is derived from the licensing of audio and
imaging technologies for premium entertainment playback. Our audio technologies
are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC
technologies and related patent licensing programs. Our imaging technologies are
primarily comprised of Dolby Vision and our AVC and HEVC technologies and
related patent licensing programs. The following are certain highlights of our
third quarter of fiscal 2020 and key challenges related to audio and imaging
licensing, by market.
Broadcast
Highlights: We have an established global presence with respect to our DD+ and
HE-AAC audio technologies in broadcast services and devices. In recent years, we
have expanded our offerings in the broadcast market through the introduction of
newer technologies, including our Dolby Atmos and AC-4 audio technologies, Dolby
Vision, as well as AVC and HEVC imaging technologies which we license through
patent pools.
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We continue to see increased adoption of Dolby Vision and Dolby Atmos in the global broadcast market. Our growing list of TV partners continue to expand their support of the combined Dolby Vision and Dolby Atmos experience, by releasing more models supporting our technologies beyond their premium device lineups. In the third quarter of fiscal 2020, Xiaomi launched their first TV model that supports Dolby Vision and Dolby Atmos. A number of existing partners also launched TV models enabled with Dolby Vision and Dolby Atmos inIndia this quarter such as TCL, One Plus, Sony, and Nokia. Panasonic expanded support of Dolby Vision IQ in more TV models. Dolby Vision IQ, which was launched at CES inJanuary 2020 , automatically adjusts the TV picture according to the surrounding light and the type of content being viewed, creating an enhanced viewing experience. In addition, we continue to see engagement with partners supporting our newer technologies in STBs. In the third quarter of fiscal 2020, Free, one of the largest internet service providers inFrance , launched their first STB supporting Dolby Vision and Dolby Atmos. Key Challenges: Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors. In some emerging growth countries, such asChina , we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies. We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, in the broadcast market, as well as other markets, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, COVID-19 is causing uncertainty about consumer demand for devices and services in the broadcast market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Mobile Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems such as Apple, Android, and Amazon. HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices, respectively. We offer these technologies through our patent licensing programs. We also continue to focus on the expansion of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market. The breadth of mobile devices supportingDolby technologies continues to increase globally. A majority of Apple's current iOS product offerings support the combined experience of Dolby Vision and Dolby Atmos. In the third quarter of fiscal 2020, Apple announced that AirPods Pro will support Dolby Atmos with the release of iOS 14. Additional Dolby-Atmos enabled mobile devices are available in the market from partners such as Samsung, Amazon, Lenovo, Sony, Sharp, and Oppo. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. Additionally, we must continue to support the development and distribution ofDolby enabled content via various ecosystems. We rely on a small number of partnerships with key participants in the mobile market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, COVID-19 is causing uncertainty about consumer demand for devices in the mobile market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Consumer Electronics Highlights: We have an established presence in the home theater market across devices such as AVRs, soundbars, Blu-Ray players, and DMAs, through the inclusion of our DD+ technology, and increasingly through the inclusion of our Dolby Atmos technology, as well as our AAC and HE-AAC technologies and related patent licensing programs. These hardware offerings can be paired with a growing array ofDolby enabled content via OTT services and Blu-ray discs. 42
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In the third quarter of fiscal 2020, Sonos launched a new soundbar that supports Dolby Atmos. Dolby Vision enabled content was added toIndia . Additionally, Amazon released their first Indian film in Dolby Atmos, andSky Germany released their first original series in Dolby Atmos. We continue to focus on expanding the availability ofDolby technologies to new devices and new forms of content such as music, bringing newDolby experiences to the market. Currently, Dolby Atmos enabled music content is available in the market through Amazon Music HD and TIDAL HiFi streaming services. In the third quarter of fiscal 2020, TIDAL began enabling Dolby Atmos for music to a growing number of TVs, soundbars, and AVR devices through their streaming app. In addition, Dolby Atmos music is available through theAmazon Echo Studio smart speaker. Key Challenges: We must continue to present compelling reasons for consumers to demand our technologies wherever they enjoy entertainment content, while promoting creation and broad availability of content in our formats. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, COVID-19 is causing uncertainty about consumer demand for devices in the home theater market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Personal Computers Highlights: DD+ continues to enhance playback in both Mac and Windows operating systems, including native support in their respective Safari and Microsoft Edge browsers.Dolby's presence in these browsers enables us to reach more users through new types of content, including streaming video entertainment. A number of PCs are available in the market supporting Dolby Vision and Dolby Atmos from partners such as Apple, Lenovo,Dell , ASUS, and Samsung. Key Challenges: PC revenues have been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue. If declining conditions and trends persist, and OEMs do not incorporate our technologies in current and future products, our PC revenues will face continuing downward pressure. We must continuously collaborate and maintain our key partnership relationships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution ofDolby content via various ecosystems. Further, COVID-19 is causing uncertainty about consumer demand for devices in the PC market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Other Markets Highlights: DD+ is incorporated in both the Xbox and PlayStation gaming consoles and platforms. The Xbox gaming console also supports the combined experience of Dolby Vision and Dolby Atmos. Customers can purchase an OEM gaming headset bundled with Dolby Atmos for Headphones, or an app on the Microsoft app store to enable Dolby Atmos on their headphones. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system. Key Challenges: Consumer demand for devices in the gaming industry may decline in anticipation of console refresh cycles. In addition, the gaming console market has competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. These factors may impact our future revenues. If OEMs do not incorporate our technologies in current and future products, our revenues will face downward pressure. Further, COVID-19 is causing uncertainty about consumer demand for devices in the gaming industry, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. 43
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In addition to licensing revenue derived from the licensing of audio and imaging technologies from the markets discussed above, we leverage our audio and imaging technologies to createDolby experiences through Dolby Cinema. Dolby Cinema Highlights: We continued to expand our global presence for Dolby Cinema. In the third quarter of fiscal 2020, the first Dolby Cinema inSouth Korea was announced with exhibitor partnerMegabox . At the end of the fiscal quarter, we had over 250 Dolby Cinema locations operable across 12 countries. The breadth of motion pictures for Dolby Cinema continues to grow with over 300 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all the major studios. Key Challenges: Although the premium large format market for the cinema industry has been growing, Dolby Cinema competes with other existing offerings. Our success depends on our partners and our partners' success, our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience. In addition, the success of our Dolby Cinema offering will be tied to global box office performance generally. COVID-19 has had, and is likely to continue to have, a significant effect on theatrical exhibition as exhibitors, including some of our partners, have temporarily suspended some or all operations due to government-imposed restrictions on social gatherings. Further, studios have delayed the release of a number of new movie titles and temporarily suspended the production of future releases. The effects of COVID-19 such as the closure of cinemas and shelter-in-place mandates have had, and are likely to continue to have, a negative impact on our cinema-related revenues and consumer demand. To the extent cinemas reopen, government-imposed social-distancing restrictions and sanitation requirements may impact the number of customerswho can attend cinemas, and it is uncertain whether consumer demand for the cinema and other forms of indoor recreation will return to previous levels. In addition, when cinemas reopen, exhibitor partners may operate fewer screens in response to social-distancing restrictions or decreased audience levels. Products & Services A majority of our products and services revenues are derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries. Revenues from the sale of Dolby Conference Phones,Dolby Voice Room , as well as our recently launched interactivity and media processing APIs are included in products and services sales. Cinema Products & Services Highlights: To help enable the playback of content inDolby formats, we offer a range of servers and audio processors to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors, and the number of Dolby Atmos enabled screens installed or committed is over 5,500. As of the end of the third quarter of fiscal 2020, there were over 1,800 Dolby Atmos theatrical titles announced or released. We also offer a variety of cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel Amplifier, and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than what was previously available to them. Key Challenges: Demand for our cinema products is dependent upon our partners and our partners' success in the market, and generally dependent upon industry and economic cycles and box office performance. In addition, it is dependent upon our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such asChina , which are subject to economic risks as well as geo-political risks. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, the effects of COVID-19 such as the closure of cinemas, and shelter-in-place mandates have had, and are likely to continue to have, a negative impact on demand for cinema products and services, which can have a negative impact on the financial health of our cinema customers and partners. If cinemas permanently close, our equipment may be available for resale on the secondary market, and erode the demand for new products. These conditions are likely to continue after the end of government-imposed restrictions. 44
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Dolby Voice Highlights: We continue to focus on expanding Dolby Voice's availability to the global market for audio and video conferencing solutions. This includes our "Room as a Service" offering, which enables access to our partner's conferencing solutions with ourDolby Voice Room solution for a monthly subscription fee. Key Challenges: Our success in this market will depend on the number of service providers and enterprise customers we are able to attract, the volume of products that we are able to sell, and the volume of usage of the service. Disruptions from COVID-19 could negatively affect our customers' ability to install our conferencing solutions in the office, which could result in reduced demand. Additionally, any disruption to our manufacturing operations from external factors including natural disasters or public health issues, such as COVID-19, could impact our ability to meet the demand of our products. Other Services Highlights: We are focused on bringing our expertise in media and communications to elevating a broad range of digital experiences. In the third quarter of fiscal 2020, we launched Dolby.io, our developer platform, that enables developers to access our technologies through the form of APIs. The initial offerings include media processing APIs for analyzing and improving the sound of an existing audio file, and interactivity APIs for enabling developers to embed enhanced interactive experiences within their applications. Key Challenges: Our success in this market will depend on the number of developers we are able to attract, the volume of usage of the service, and our ability to monetize our services. Although the market for online experiences has been growing,Dolby's interactivity API technologies compete with other existing offerings. In addition, our pursuit of growth and further adoption depends on our ability to continue to innovate and add additional value to our services. 45
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The global outbreak of COVID-19 continues to evolve, creating significant uncertainties in global financial markets. Our estimates of royalty-based revenue take into consideration the macroeconomic effect of global events, such as COVID-19 or other natural disasters which may impact supply chain activities as well as demand for shipments. Generally, our estimates are adjusted in the subsequent quarter by recording a favorable or unfavorable adjustment based on the difference between estimated and actual sales when we receive royalty statements from licensees. For additional information on our accounting policies related to revenue recognition, refer to Footnote 3, "Revenue Recognition" within our unaudited interim condensed consolidated financial statements. There have been no additional material changes, other than the aforementioned updates resulting from COVID-19, to the critical accounting policies from those included in our fiscal 2019 Annual Report on Form 10-K as per Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates included therein. RESULTS OF OPERATIONS For each line item included on our interim condensed consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order of their impact on the overall change (from an absolute value perspective). Note that adjustments related to previously under-reported sales-based royalties as well as unlicensed settlement activity, are collectively referred to as "recoveries." Amounts displayed, except percentages, are in thousands. Revenue and Gross Margin Licensing Licensing revenue consists of fees earned from licensing our technologies to customerswho incorporate them into their products and services to enable and enhance audio, imaging, and voice capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. A significant portion of our licensing revenue pertains to customer-shipment royalties that we recognize based on estimates of our licensees' shipments in the current period. Within the current period, to the extent that shipment data reported by licensees differs from estimates we made and recorded in the prior quarter, we recognize an adjustment to revenue for such difference. Our cost of licensing consists mainly of amortization of certain purchased intangible assets and intangible assets acquired in business combinations, depreciation, third party royalty obligations, and associated fees. Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change June 26, June 28, June 26, June 28, Licensing 2020 2019 $ % 2020 2019 $ % Revenue$235,125 $271,897 $(36,772) (14)%$821,673 $842,484 $(20,811) (2)% Percentage of total revenue 95% 90% 92% 89% Cost of licensing 12,572 13,290 (718) (5)% 38,157 40,761 (2,604) (6)% Gross margin 222,553 258,607 (36,054) (14)% 783,516 801,723 (18,207) (2)% Gross margin percentage 95% 95% 95% 95% Current Quarter: Q3 2020 vs. Q3 2019 Factor Revenue Gross Margin Higher revenues from increased adoption of our patent Mobile á licensing technologies and timing of revenue under contracts, partially offset by lower unit shipments of mobile devices attributable to COVID-19 Lower revenues from Dolby Cinema resulting from the closure Other â of cinemas due to COVID-19, and lower gaming revenue, partially offset by higher automotive recoveries Lower revenues from recoveries and lower unit
shipments of Broadcast â STBs and TVs attributable to COVID-19, partially offset by ßà No significant fluctuations
higher adoption of Dolby technologies
Lower revenues from decreased unit shipments attributable to
CE â COVID-19, lower revenues from recoveries, partially offset
by higher revenues from increased adoption of our patent
licensing technologies
Lower revenues from decreased unit shipments attributable to
PC â COVID-19, lower revenues from recoveries, partially offset
by higher revenues from increased adoption of our patent
licensing technologies
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Year-To-Date: Q3 2020 vs. Q3 2019
Factor Revenue Gross Margin
Lower automotive recoveries, lower revenues from Dolby Cinema
Other â due to COVID-19, and gaming, partially offset by higher patent
administration fees from Via Licensing
Higher revenues from increased adoption of our patent
Mobile á licensing technologies, partially offset by lower unit
shipments attributable to COVID-19
Higher revenues from recoveries and higher adoption of our
PC á newer technologies in more PC models, partially offset by
lower revenues from patent licensing technologies and lower ßà No significant fluctuations
unit shipments due to COVID-19
Lower revenues from decreased units shipments of STBs and TVs
Broadcast â attributable to COVID-19, and lower revenues from patent
licensing, partially offset by higher recoveries
Higher revenues from increased adoption of our patent
CE á licensing technologies, and increased adoption of our
technologies in DMAs and soundbars, partially offset by lower
unit shipments attributable to COVID-19
Products and Services
Products revenue is generated from the sale of audio, imaging, and voice
products for the cinema, television broadcast, communications, and consumer
products industries. Also included in products revenue are amounts relating to
Dolby Cinema arrangements that involve fixed or minimum amounts. Cost of
products consists of materials, labor, and manufacturing overhead, amortization
of certain intangible assets, as well as third party royalty obligations.
Services revenue consists of fees charged to support theatrical and
television production for cinema exhibition, broadcast, and home entertainment,
including equipment training and maintenance, mixing room alignment,
equalization, as well as audio, color, and light image calibration. Services
revenue also includes PCS for products sold and equipment installed at Dolby
Cinema theaters operated by exhibitor partners and support for the
implementation of our technologies into products manufactured by our licensees.
Cost of services consists of personnel and personnel-related costs for providing
our professional services, software maintenance and support, external
consultants, and other direct expenses incurred on behalf of customers.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
Products and Services 2020 2019 $ % 2020 2019 $ %
Revenue $11,784 $30,262 $(18,478) (61)% $68,928 $100,309 $(31,381) (31)%
Percentage of total revenue 5% 10% 8% 11%
Cost of products and services 17,316 26,400 (9,084) (34)% 65,876 74,133 (8,257) (11)%
Gross margin (5,532) 3,862 (9,394) (243)% 3,052 26,176 (23,124) (88)%
Gross margin percentage (47)% 13% 4% 26%
Current Quarter: Q3 2020 vs. Q3 2019
Factor Revenue Gross Margin
Lower cinema equipment and lower units of Higher excess & obsolescence charges and
Products â Dolby Voice products attributable to â lower utilization of manufacturing
COVID-19 capacity
Services ßà No significant fluctuations â
Lower utilization of available capacity
Year-To-Date: Q3 2020 vs. Q3 2019
Factor Revenue Gross Margin
Lower cinema equipment attributable to
COVID-19 and lower revenues from Dolby Higher excess & obsolescence charges and
Products â Cinema sales-type leases (hybrid â lower utilization of manufacturing
agreements) included in prior period, capacity
partially offset by higher units of Dolby
Voice products
Services ßà No significant fluctuations âLower utilization of available capacity
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Operating Expenses Research & Development
R&D expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials, and information technology expenses.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
2020 2019 $ % 2020 2019 $ %
Research and development $59,583 $60,408 $(825) (1)% $177,319 $177,680 $(361) -%
Percentage of total revenue 24% 20% 20% 19%
Current Quarter: Q3 2020 vs. Q3 2019
Category Key Drivers
Travel â Lower costs for company travel due to COVID-19 travel restrictions Professional & Consulting â Lower costs for external
professional and consulting services for
various research projects and new product development
Compensation & Benefits á Higher costs associated with increased accrued employee paid-time-off
benefits
Year-To-Date: Q3 2020 vs. Q3 2019
Category Key Drivers
Travel â Lower costs for company travel due to COVID-19 travel restrictions Professional & Consulting â Lower costs for external
professional and consulting services for
various research projects and new product development
Compensation & Benefits á Higher costs associated with increased accrued employee paid-time-off
benefits
Sales & Marketing
S&M expenses consist primarily of employee compensation and benefits
expenses, stock-based compensation, marketing and promotional expenses for
events such as trade shows and conferences, marketing campaigns, travel-related
expenses, consulting fees, facilities costs, depreciation and amortization,
information technology expenses, and legal costs associated with the protection
of our IP.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
2020 2019 $ % 2020 2019 $ %
Sales and marketing $70,934 $83,390 $(12,456) (15)% $254,537 $261,686 $(7,149) (3)%
Percentage of total revenue 29% 28% 29% 28%
Current Quarter: Q3 2020 vs. Q3 2019
Category Key Drivers
Travel â Lower costs for company travel and tradeshows due to COVID-19 travel
restrictions
Legal, Professional, & â Lower costs for IP recovery related activities
Consulting
Marketing Programs â Lower costs related to marketing programs and company branding
activities
Compensation & Benefits á Higher costs associated with increased accrued employee paid-time-off
benefits
Year-To-Date: Q3 2020 vs. Q3 2019
Category Key Drivers
Legal, Professional, & â Lower costs for IP recovery related activities
Consulting
Marketing Programs á Higher costs related to marketing programs and company branding
activities
Travel â Lower costs for company travel andtradeshows due to COVID-19 travel
restrictions
General & Administrative
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G&A expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, depreciation, facilities and information technology
costs, as well as professional fees and other costs associated with external
consulting and contract labor.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
2020 2019 $ % 2020 2019 $ %
General and administrative $50,843 $54,183 $(3,340) (6)% $164,172 $152,412 $11,760 8%
Percentage of total revenue 21% 18% 18% 16%
Current Quarter: Q3 2020 vs. Q3 2019
Category Key Drivers
Legal, Professional, & â Lower costs associated with various legal activities and patent filings
Consulting
Compensation & Benefits á Higher headcount and higher costs associated with increased accrued
employee paid-time-off benefits
Year-To-Date: Q3 2020 vs. Q3 2019
Category Key Drivers
Compensation & Benefits á Higher headcount and higher costs associated with increased accrued
employee paid-time-off benefits
Legal, Professional, & â Lower costs associated with various legal activities and patent filings Consulting
Restructuring
Restructuring charges recorded as operating expenses in our statement of
operations represent costs associated with separate individual restructuring
plans implemented in various fiscal periods. The extent of our costs arising as
a result of these actions, including fluctuations in related balances between
fiscal periods, is based on the nature of activities under the various plans.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
2020 2019 $ % 2020 2019 $ %
Restructuring $1,522 $30,232 $(28,710) (95)% $1,866 $30,264 $(28,398) (94)%
Percentage of total revenue 1% 10% -% 3%
Restructuring charges recorded in the fiscal quarter ended June 28, 2019 of
$27.5 million were incurred in relation to our early exit of a leased office
building, which includes the write-off of the carrying value of the fixed assets
associated with the building from our balance sheet and accruals representing
our remaining exit obligation for this facility.
Restructuring charges also include $2.8 million incurred for a reorganization of
our marketing function during the quarter ended June 28, 2019 that resulted in
severance and other related benefits for approximately 50 positions that were
eliminated. For additional information on our Restructuring programs, see Note
13 "Restructuring" to our unaudited interim condensed consolidated financial
statements.
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Other Income/Expense
Other income/(expense) primarily consists of interest income earned on cash and
investments and the net gains/(losses) from foreign currency transactions,
derivative instruments, and sales of marketable securities from our investment
portfolio.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 26, June 28, June 26, June 28,
2020 2019 $ % 2020 2019 $ %
Other income/(expense) $5,851 $7,544 $(1,693) (22)% $16,549 $20,199 $(3,650) (18)%
Percentage of total revenue 2% 2% 2% 2%
Current Quarter: Q3 2020 vs. Q3 2019
Category Key Drivers
Interest Income â Lower yields on current year investment balances due to decreased
interest rates
Other Income á Higher valuation on equity investments and realized gains from sales
of investments
Year-To-Date: Q3 2020 vs. Q3 2019
Category Key Drivers
Interest Income â Lower yields on current year investment balances due to decreased
interest rates
Other Income á Higher valuation on equity investments and realized gains from sales
of investments
Income Taxes
Our effective tax rate is based on our annual fiscal year results and is
affected each period-end by several factors. These include changes in our
projected fiscal year results, recurring items such as tax rates and relative
income earned in foreign jurisdictions, as well as discrete items such as
changes to our uncertain tax positions that may occur in, but are not
necessarily consistent between, periods. For additional information related to
effective tax rates, see Note 12 "Income Taxes" to our unaudited interim
condensed consolidated financial statements.
Fiscal Quarter Ended Fiscal Year-To-Date Ended
June 26, June 28, June 26, June 28,
2020 2019 2020 2019
(Provision for)/benefit from income taxes $27,388 $(2,163) $(580) $(14,486)
Effective tax rate (68.5)% 5.2% 0.3% 6.4%
Current Quarter: Q3 2020 vs. Q3 2019
Factor Impact On Effective Tax Rate
Uncertain Tax Benefits â Additional benefit in the current period due to lapse in statute
of limitations for select uncertain tax positions
Enactment of Tax Act â Higher tax expense in the prior year due to a discrete tax
expense from adjustments to the Tax Reform Transition Tax
Tax Credits á Lower benefit in current period from research and development tax
credits
Year-To-Date: Q3 2020 vs. Q3 2019
Factor Impact On Effective Tax Rate
Uncertain Tax Benefits â Additional benefit in the current period due to lapse in statute
of limitations for select uncertain tax positions
Enactment of Tax Act á Lower tax expense in the prior year due to a discrete tax benefit
from adjustments to the Tax Reform Transition Tax
Foreign Operations á Lower benefit from foreign earned income
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LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months, despite the uncertainty in the changing market and economic conditions related to COVID-19. As ofJune 26, 2020 , we had cash and cash equivalents of$855.1 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$264.2 million , which consisted primarily of municipal debt securities, certificates of deposit, government bonds, commercial paper, corporate bonds, andU.S. agency securities. The following table presents selected financial information as ofJune 26, 2020 andSeptember 27, 2019 (amounts displayed are in thousands): June 26, September 27, 2020 2019 Cash and cash equivalents$ 855,103 $ 797,210 Short-term investments 189,383 119,146 Long-term investments 74,768 179,587 Accounts receivable, net 247,486 189,115
Accounts payable and accrued liabilities 220,288 283,356 Working capital
1,245,733 1,074,687
Capital Expenditures and Uses of Capital
Our capital expenditures consist of purchases of land, building, building
fixtures, laboratory equipment, office equipment, computer hardware and
software, leasehold improvements, and production and test equipment. Included in
capital expenditures are amounts associated with Dolby Cinema locations. We
continue to invest in S&M and R&D to promote the overall growth of our business
and technological innovation.
We retain sufficient cash holdings to support our operations and we also
purchase investment grade securities diversified among security types,
industries, and issuers. We have used cash generated from our operations to fund
a variety of activities related to our business in addition to our ongoing
operations, including business expansion and growth, acquisitions, and
repurchases of our Class A common stock. We have historically generated
significant cash from operations. However, these cash flows and the value of our
investment portfolio could be affected by various risks and uncertainties, as
described in Part II, Item 1A "Risk Factors."
Shareholder Return
We have returned cash to stockholders through repurchases of Class A common
stock under our repurchase program initiated in fiscal 2010 and our quarterly
dividend program initiated in fiscal 2015. Refer to Note 9 "Stockholders' Equity
& Stock-Based Compensation" to our unaudited interim condensed consolidated
financial statements for a summary of dividend payments made under the program
during fiscal 2020 and additional information regarding our stock repurchase
program.
Stock Repurchase Program. Our stock repurchase program was approved in fiscal
2010, and since then we have completed approximately $1.8 billion of stock
repurchases.
Quarterly Dividend Program. During the first quarter of fiscal 2015, we
initiated a recurring quarterly cash dividend program for our stockholders. For
fiscal 2020, current quarterly dividends of $0.22 per share are paid on our
Class A and Class B common stock to eligible stockholders of record.
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Cash Flows Analysis
For the following comparative analysis performed for each of the sections of the
statement of cash flows, the significant factors identified as the leading
drivers contributing to the fluctuation are presented in descending order of
their impact relative to the overall change (amounts displayed in thousands,
except as otherwise noted).
Operating Activities
Fiscal Year-To-Date Ended
June 26 , June 28,
2020 2019
Net cash provided by operating activities
Net cash provided by operating activities increased$34.0 million in the fiscal year-to-date period endedJune 26, 2020 as compared to the fiscal year-to-date period endedJune 28, 2019 , primarily due to the following: Factor Impact On Cash Flows Working Capital á Higher inflows due to decreased contract assets Investing Activities Fiscal Year-To-Date Ended June 26, June 28, 2020 2019
Net cash used in investing activities
Net cash used in investing activities was
Factor Impact On
Cash Flows
á Higher inflows from the sale & maturity of marketable investment
Proceeds from Investments securities
â Higher outflows for the purchase of marketable investment
Purchase of Investments securities
Capital Expenditures á Lower expenditures for PP&E
Intangible Asset Acquisitions á Lower outflows for purchases of intangible assets
Financing Activities
Fiscal Year-To-Date Ended
June 26 , June 28,
2020 2019
Net cash used in financing activities
Net cash used in financing activities was$168.7 million lower in the fiscal year-to-date period endedJune 26, 2020 as compared to the fiscal year-to-date period endedJune 28, 2019 , primarily due to the following: Factor Impact On Cash Flows Share Repurchases á Lower outflows for common stock repurchases Common Stock Issuance á Higher inflows from
employee stock option exercises
Off-Balance Sheet Arrangements and Contractual Obligations Our liquidity is not dependent upon the use of off-balance sheet financing arrangements, and we have not entered into any arrangements that are expected to have a material effect on liquidity or the availability of capital resources. Since the end of our most recent fiscal year endedSeptember 27, 2019 , there have been no material changes in either our off-balance sheet financing arrangements or contractual obligations outside the ordinary course of business. For additional details regarding our contractual obligations, see Note 15 "Commitments & Contingencies" to our unaudited interim condensed consolidated financial statements. 52
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Indemnification Clauses
We are party to certain contractual agreements under which we have agreed to
provide indemnification of varying scope and duration to the other party
relating to our licensed IP. Historically, we have not made any payments for
these indemnification obligations and no amounts have been accrued in our
consolidated financial statements with respect to these obligations. Since the
terms and conditions of the indemnification clauses do not explicitly specify
our obligations, we are unable to reasonably estimate the maximum potential
exposure for which we could be liable. In addition, we have entered into
indemnification agreements with our officers, directors, and certain employees,
and our certificate of incorporation and bylaws contain similar indemnification
obligations. For additional details regarding indemnification clauses within our
contractual agreements, see Note 15 "Commitments & Contingencies" to our
unaudited interim condensed consolidated financial statements.
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