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 and 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
coronoavirus 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 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 March 27, 2020 , we had approximately 12,500 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 customers who 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
Dolby Atmos® that allows sound to be precisely placed and moved anywhere in the listening
environment including the overhead dimension. Dolby Atmos is an immersive
experience that can be provided via multiple Dolby audio coding 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 deliver
Dolby Vision® higher color contrast, brighter contrast, and improved details for cinema and a wide
range of media devices.
Dolby Voice® An audio conferencing technology with superior spatial perception, 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
March 27, March 29, March 27, March 29,
Market 2020 2019 2020 2019 Main Offerings Incorporating Our Technologies
Broadcast 39% 39% 39% 39% Televisions & STBs
Mobile 23% 22% 19% 18% Smartphones & Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 15% 14% 17% 16% DVDs, & HTIBs
PC 14% 13% 13% 11% Windows and macOS operating systems
Gaming consoles, Auto DVD, Dolby Cinema, &
Other 9% 12% 12% 16% 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 patent licensing. 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. In some instances, we also receive fixed or minimum amounts upfront, which are accounted for in our products and services revenue, when the appropriate parameters are met. 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. 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. Products and services revenue is derived primarily from sales of the following: 41
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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 small
conference
Dolby Voice Room rooms that
combines a
camera product
with the Dolby
Conference
Phone and
Dolby Voice
technology.
3-D glasses
Other and kits,
broadcast
hardware and
software used
to encode,
transmit, and
decode
multiple
channels of
Other Products high quality
audio for DTV
and HDTV
distribution,
monitors, and
accessibility
solutions for
hearing and
visually
impaired
consumers.
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EXECUTIVE SUMMARY
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.
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 evolve 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 also affected many of our partners, resulting in
the disruption of consumer products' supply chains and delays in shipments.
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 mandates. Our exhibition partners and customers have either
partially or fully discontinued operations during the second quarter of fiscal
2020. 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.
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.
While 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
AUDIO AND IMAGING 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
second 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 second quarter of fiscal 2020, partners launched TV models enabled with Dolby Vision and Dolby Atmos inIndia . Also this quarter at CES, we launched Dolby Vision IQ along with our TV partners LG and Panasonic.Dolby Vision IQ automatically adjusts the TV picture according to the surrounding light and the type of content being viewed, creating a more optimized viewing experience. 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 has increased uncertainty about consumer demand for devices 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 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 second quarter of fiscal 2020, Samsung, Sony, and Oppo launched their latest models enabled with Dolby Atmos, joining a growing list of Dolby-Atmos enabled devices available in the market from partners such as Amazon and Lenovo. 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 has increased 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 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. Currently, a number of streaming services supporting Dolby Vision andDolby Atmos enabled content are available in the market, including Disney+ and Apple TV+. Additional OTT services currently supporting the combined experience of Dolby Vision and Dolby Atmos include Netflix, Amazon, Tencent, and iQiYi. 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 44
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products, our revenue could be impacted. Further, COVID-19 has increased 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 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. Our PC partners continue to support our technologies while adopting Dolby Vision and Dolby Atmos into more devices. 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 has increased 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 products by partners and licensees, and the timing of launches for new products Other 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: The gaming console market continues to be challenged by competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. This may impact our future revenues. Further, COVID-19 has increased 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 products by partners and licensees, and the timing of launches for new products CINEMA AND OTHER 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. We continue to see adoption of Dolby Atmos by studios, content creators, post-production facilities, and exhibitors, and the number of Dolby Atmos-enabled screens installed or committed continues to grow around the world. As of the end of the second quarter of fiscal 2020, there were over 1,700 Dolby Atmos theatrical titles announced or released. We also offer a variety of newer 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. To the extent that these factors persist or worsen, we may be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, COVID-19 mitigation strategies, such as the 45
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closure of non-essential businesses such as 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. This negative impact is likely to continue after the end of government-imposed restrictions. Dolby Cinema Highlights: We continued to expand our global presence for Dolby Cinema. At the end of the fiscal quarter, we had 250 Dolby Cinema locations in operation across 11 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. COVID-19 mitigation strategies including the closure of cinemas,and shelter-in-place mandates, have, and are likely to continue to have, a negative impact on our cinema-related revenues and consumer demand. Dolby Voice Highlights: We continue to focus on expanding Dolby Voice's availability to the global market for audio and video conferencing services. Our newest audio and video conferencing offering isDolby Voice Room , which is aimed at customers in the growing huddle room space. We continue to see growth inDolby Voice Room including the "Room as a Service" offering, which enables our customers access to our partner's conferencing services 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. 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. 46
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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
customers who 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
March 27, March 29, March 27, March 29,
Licensing 2020 2019 $ % 2020 2019 $ %
Revenue $328,865 $310,308 $18,557 6% $586,548 $570,587 $15,961 3%
Percentage of total revenue 93% 92% 91% 89%
Cost of licensing 13,243 16,074 (2,831) (18)% 25,585 27,471 (1,886) (7)%
Gross margin 315,622 294,234 21,388 7% 560,963 543,116 17,847 3%
Gross margin percentage 96% 95% 96% 95%
Current Quarter: Q2 2020 vs. Q2 2019
Factor Revenue Gross Margin
Lower revenues from Dolby Cinema resulting from the
Other â closure of cinemas due to COVID-19, lower automotive
recoveries and gaming revenue, 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 of mobile devices attributable to COVID-19
Higher revenues from increased adoption of our patent ßà No significant
CE á licensing technologies, partially offset by lower unit fluctuations
shipments attributable to COVID-19
PC á Higher revenues from recoveries, partially offset by
lower unit shipments attributable to COVID-19
Higher recoveries and higher adoption of our
Broadcast á technologies, partially offset by lower unit shipments
of TVs and STBs attributable to COVID-19
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Year-To-Date: Q2 2020 vs. Q2 2019
Factor Revenue Gross Margin
Lower revenues from automotive recoveries and gaming,
Other â and lower revenues from Dolby Cinema due to COVID-19,
partially offset by higher patent administration fees
from Via Licensing
Higher revenues from recoveries and higher adoption of
PC á our newer technologies in more PC models, partially
offset by lower revenues from patent licensing
technologies and lower unit shipments due to COVID-19
Higher revenues from increased adoption of our patent ßà No significant
CE á licensing technologies, and increased adoption of our fluctuations
technologies in DMAs and soundbars, partially offset by
lower unit shipments attributable to COVID-19
Higher revenues from increased adoption of our patent
Mobile á licensing technologies, partially offset by lower unit
shipments attributable to COVID-19
Broadcast á Higher recoveries, partially offset by lower units
shipments of STBs and TVs 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
March 27, March 29, March 27, March 29,
Products and Services 2020 2019 $ % 2020 2019 $ %
Revenue $22,950 $27,950 $(5,000) (18)% $57,144 $70,047 $(12,903) (18)%
Percentage of total revenue 7% 8% 9% 11%
Cost of products and services 23,587 20,501 3,086 15% 48,560 47,733 827 2%
Gross margin (637) 7,449 (8,086) (109)% 8,584 22,314 (13,730) (62)%
Gross margin percentage (3)% 27% 15% 32%
Current Quarter: Q2 2020 vs. Q2 2019
Factor Revenue Gross Margin
Prior period included revenue from Dolby
Cinema sales-type leases (hybrid Higher excess & obsolescence charges and
Products â agreements), lower cinema equipment â lower utilization of manufacturing capacity
attributable to COVID-19, partially offset
by higher units of Dolby Voice products
Services ßà No significant fluctuations â Lower utilization of available capacity
Year-To-Date: Q2 2020 vs. Q2 2019
Factor Revenue Gross Margin
Prior period included revenue from Dolby
Cinema sales-type leases (hybrid Higher excess & obsolescence charges and
Products â agreements), lower cinema equipment â lower utilization of manufacturing capacity
attributable to COVID-19, partially offset
by higher units of Dolby Voice products
Services ßà No significant fluctuations â Lower 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
March 27, March 29, March 27, March 29,
2020 2019 $ % 2020 2019 $ %
Research and development $60,086 $58,625 $1,461 2% $117,736 $117,272 $464 -%
Percentage of total revenue 17% 17% 18% 18%
Current Quarter: Q2 2020 vs. Q2 2019
Category Key Drivers
Compensation & Benefits á Higher headcount and
merit increases across employee base
Year-To-Date: Q2 2020 vs. Q2 2019
Category Key Drivers
Research & Development ßà No significant fluctuations
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
March 27, March 29, March 27, March 29,
2020 2019 $ % 2020 2019 $ %
Sales and marketing $88,485 $92,694 $(4,209) (5)% $183,603 $178,296 $5,307 3%
Percentage of total revenue 25% 27% 29% 28%
Current Quarter: Q2 2020 vs. Q2 2019
Category Key Drivers
Marketing Programs á Higher costs related to
marketing efforts for growth initiatives
and company branding activities
Compensation & Benefits â Lower headcount,
partially offset by merit increases across
employee base
Travel â Lower costs for company travel and tradeshows due to COVID-19
travel restrictions
Year-To-Date: Q2 2020 vs. Q2 2019
Category Key Drivers
Marketing Programs á Higher costs related to
marketing efforts for growth initiatives
and company branding activities
Compensation & Benefits â Lower headcount,
partially offset by merit increases across
employee base
Travel â Lower costs for company travel and tradeshows 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
March 27, March 29, March 27, March 29,
2020 2019 $ % 2020 2019 $ %
General and administrative $60,800 $47,416 $13,384 28% $113,329 $98,229 $15,100 15%
Percentage of total revenue 17% 14% 18% 15%
Current Quarter: Q2 2020 vs. Q2 2019
Category Key Drivers
Legal, Professional, & á Higher costs associated with various legal activities and
Consulting patent filings
Compensation & Benefits á Higher headcount and merit increases across the existing
employee base
Year-To-Date: Q2 2020 vs. Q2 2019
Category Key Drivers
Compensation & Benefits á Higher headcount and merit increases across the existing
employee base
Legal, Professional, & á Higher costs associated with various legal activities and
Consulting patent filings
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
March 27, March 29, March 27, March 29,
2020 2019 $ % 2020 2019 $ %
Other income/(expense) $4,834 $7,072 $(2,238) (32)% $10,698 $12,655 $(1,957) (15)%
Percentage of total revenue 1% 2% 2% 2%
Current Quarter: Q2 2020 vs. Q2 2019
Category Key Drivers
Interest Income â Lower yields on current year investment balances
Year-To-Date: Q2 2020 vs. Q2 2019
Category Key Drivers
Interest Income â Lower yields on our current year investment balances
Other Income á Higher valuation on equityinvestments 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
March 27, March 29, March 27, March 29,
2020 2019 2020 2019
(Provision for)/benefit from income taxes $(22,105) $(36,427) $(27,968) $(12,323)
Effective tax rate 20.0% 33.1% 16.9% 6.7%
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Current Quarter: Q2 2020 vs. Q2 2019 Factor Impact On Effective Tax Rate 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
Stock-Based Compensation â Higher benefit related to the settlement of stock-based awards
Foreign Operations á Lower benefit from foreign earned income
Year-To-Date: Q2 2020 vs. Q2 2019
Factor Impact On Effective Tax Rate
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
Stock-Based Compensation â Higher benefit related to the settlement of stock-based awards
Foreign Operations á Lower benefit from foreign earned income
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 of March 27, 2020 , we had cash and cash equivalents of $724.9 million , which
mainly consisted of cash and highly-liquid money market funds. In addition, we
had short and long-term investments of $302.2 million , which consisted primarily
of municipal debt securities, certificates of deposit, government bonds,
commercial paper, corporate bonds, and U.S. agency securities.
The following table presents selected financial information as of March 27, 2020
and September 27, 2019 (amounts displayed are in thousands):
March 27, September 27,
2020 2019
Cash and cash equivalents $ 724,931 $ 797,210
Short-term investments 174,859 119,146
Long-term investments 127,294 179,587
Accounts receivable, net 247,043 189,115Accounts payable and accrued liabilities 254,910 283,356 Working capital
1,152,318 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."
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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$1.7 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. 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 EndedMarch 27 ,March 29, 2020 2019
Net cash provided by operating activities
Net cash provided by operating activities decreased$8.9 million in the fiscal year-to-date period endedMarch 27, 2020 as compared to the fiscal year-to-date period endedMarch 29, 2019 , primarily due to the following: Factor Impact On Cash Flows Net Income â Increased expenses, partially offset by higher revenues which has been mixed due to COVID-19 Prior period deferred tax asset activity included an additional Deferred Income Taxes á tax benefit related to adjustments to the Tax Reform Transition Tax Working Capital â Lower inflows due to increase in
accounts receivable and decrease
in accrued liabilities
Investing Activities
Fiscal Year-To-Date Ended
March 27 , March 29,
2020 2019
Net cash used in investing activities
Net cash used in investing activities was
Factor Impact On Cash Flows
Intangible Asset á
Acquisitions Lower outflows for purchases of intangible assets
Capital Expenditures á Lower expenditures for PP&E
â Higher outflows for the purchase of marketable investment
Purchase of Investments securities
Financing Activities
Fiscal Year-To-Date Ended
March 27, March 29,
2020 2019
Net cash used in financing activities
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Net cash used in financing activities was$115.0 million lower in the fiscal year-to-date period endedMarch 27, 2020 as compared to the fiscal year-to-date period endedMarch 29, 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. 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. 53
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