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 that are subject to risks and uncertainties, including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; the effect of COVID-19 on our business; market growth opportunities and trends; our ability to maintain key partnership relationships; 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 but not limited to the risks set forth in Part II, Item 1A, "Risk Factors." Such forward-looking statements are based on management's reasonable and 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 disclaim any 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 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. OVERVIEWDolby Laboratories creates audio and imaging technologies that transform entertainment and communications for content playback in movies, TV, music, and gaming. 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, DTV transmissions and devices, mobile devices, OTT video and music services, and home entertainment devices. 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. In addition, we provide products and services for a variety of applications in the cinema and broadcast markets, and offer audio and video APIs through our developer platform, Dolby.io. COVID-19 Please refer to the Executive Summary section of Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. 32
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Expanding the Reach of our Technologies. With the launch of our developer platform, Dolby.io, we are expanding our addressable market to enhance a broader range of content, by enabling developers to build high quality, interactive, and media centric applications. REVENUE GENERATION We have active licensing arrangements with over 500 electronics product OEMs and software developers. As ofDecember 31, 2021 , we had approximately 16,200 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,500 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. Licensing We license our technologies to a range of customers who incorporate them into their products for enhanced audio and imaging functionality for content playback in movies, TV, music, and gaming. 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 overheaddimension. Dolby Atmos provides
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 ultra vivid colors, sharper contrasts, and richer details for cinema
and a wide range of media devices.
An audio communications technology with superior spatial perception, voice
Dolby Voice® clarity, and background noise reduction that emulates the in-person meeting
experience.
HEVC A 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 revenue for all periods presented:
Fiscal Quarter Ended
December 31, December 25,
Market 2021 2020 Main Offerings Incorporating Our Technologies
Broadcast 37% 37% Televisions and STBs
Mobile 23% 28% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 17% 14% and DVDs
PC 10% 9% Windows and macOS operating systems
Other 13% 12% Gaming consoles, Auto DVD, and Dolby Cinema
Total 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
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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. Revenue from these initial fees is 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 sameDolby 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 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 ("Via"). By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees. The Via 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 period may include revenue from licensees and/or settlements with third parties where the use of our technology occurred in previous periods. Within the Results of Operations section of Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," revenue attributable to previous periods' usage including 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 revenue at Dolby Cinema sites through a share of box office receipts, which is recognized as licensing revenue. Products and Services We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in approximately 90 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Additionally, some of our Dolby Cinema arrangements involve fixed or minimum amounts, which are typically included in products sales. We also offer a developer platform, Dolby.io, that enables developers access to our technologies through APIs. These offerings currently include audio and video APIs for building high-quality communications, media, and streaming solutions. Over time, we intend to significantly expand the amount and types of content that can be enhanced through our technologies and capabilities. 34
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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
Cinema package digital media files for distribution.
Cinema Processors, amplifiers, and loudspeakers used to decode,
Cinema Audio Products render, and optimally playback digital cinema soundtracks including
those using Dolby Atmos.
3-D glasses and kits, broadcast hardware and software used to encode,
Other Other Products transmit, and decode multiple channels of high-quality audio for DTV
and HDTV distribution, monitors, accessibility solutions for hearing
and visually impaired consumers, and Dolby.io.
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 SUMMARYCOVID-19
The COVID-19 pandemic triggered worldwide shutdowns, supply chain constraints, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity. It is unclear how demand for consumer products that include our technologies may change in response to the ongoing pandemic. The issues and circumstances relating to COVID-19 continue to change 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, shortages of certain semiconductor components, and 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 impacted revenue pertaining to royalties on consumer devices and may cause delays in the adoption of our technologies by partners. Further, we may be negatively impacted by delays in transaction cycles and our recoveries efforts due to ongoing global restrictions related to the pandemic. The cinema market has been adversely impacted by COVID-19 social distancing mandates. At various times, our exhibition partners and customers have had to either partially or fully discontinue operations. This has resulted in a significant reduction in box office receipts at Dolby Cinema sites and lower demand for our cinema products and services. While box office receipts have improved in the first quarter of fiscal 2022, it remains uncertain when and where the cinemas will be able to operate at full capacity. Most cinema locations have been permitted to resume operations, but many such locations are operating under restricted capacity. AtDolby , we implemented work-from-home options and practices within all our offices in locations with ongoing outbreaks 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.Dolby offices in certain locations have resumed in-office work at less than full capacity, dependent on local progress against COVID-19 and applicable rules and regulations in those jurisdictions. We expect COVID-19 will continue to have an impact for the foreseeable future, with varying degrees of impact depending on geographic location. The degree of impact on our business will depend on several factors, such as the full duration and the extent of the pandemic, the spread of variants of SARS-CoV-2, the actions taken by governments, businesses and consumers in response to the pandemic, and the rate and extent of vaccine distributions to the general population, 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 EXPERIENCES We are focused on expanding our leadership in audio and imaging solutions for premium entertainment content by increasing the number ofDolby experiences that people can enjoy, which will drive revenue growth across the markets we serve. We can increase our value proposition and create opportunities by broadeningDolby technologies into new types of content, such as music and gaming. We are also beginning to leverage our audio and imaging expertise to expand the reach of our technologies to address content beyond premium entertainment that can create new revenue generating opportunities. Following is a discussion of the key markets that we address and the variousDolby 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. Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies. Licensing revenue is primarily driven by the adoption of our technologies on devices and the number of devices shipped by licensees. DD+, AC-4, and our AAC and HE-AAC audio patents (collectively, our "foundational audio technologies") have broad penetration across a diverse set of devices and end markets. Our revenue from these technologies is primarily driven by device shipments from licensees, and as such, is impacted by consumer spending. Other factors, such as global supply constraints or device lifecycles, may also impact revenue from these 36
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technologies. In the future, we expect our foundational audio technologies revenue to generally reflect market trends in device shipments. The remaining portion of our licensing revenue includes offerings such as Dolby Vision,Dolby Atmos, our imaging patents, and Dolby Cinema. These offerings have not been in the market as long as our foundational audio technologies, thus revenue growth is primarily driven by increased adoption and the addition of new licensees. The availability of content inDolby formats is an important part of creating the ecosystems that drive adoption of our technologies within a wide range of devices. Our audio and imaging technologies have a strong presence within movie and episodic content through adoption across content creators and streaming services. The availability of content on these platforms has driven strong adoption in devices such as TVs, STBs, speaker devices, and playback devices. Our audio technologies have also been broadly adopted through many forms of content, including broadcast TV, streaming, and optical disc playback. Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, HBO Max, and Paramount+ continue to enable more content in Dolby Vision and Dolby Atmos. These streaming services launch local content inDolby formats internationally. As we see an increase in new local content, we increase our value proposition for adoption of Dolby Vision and Dolby Atmos across devices such as TVs, mobile, PCs, and CE. We have also enabled a broader range of content, such as music, gaming, and user-generated content. In the first quarter of fiscal 2022, Xbox's highly anticipated Halo Infinite release supports both Dolby Vision and Dolby Atmos. Also, subsequent to the first quarter of fiscal 2022, the Honor of Kings Challenger Cup Finals was recently available in Dolby Atmos inTencent Video and Bilibili. We believe enabling our technologies in these forms of content creates additional value for the adoption ofDolby within devices like mobile, PC, gaming consoles, and automotive. The following are highlights from our first quarter of fiscal 2022 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 Dolby Atmos and AC-4, Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools. We work with many TV OEMs and strategic partners to enable and promoteDolby Vision and Dolby Atmos experiences within their TV lineups. Many such partners have continued to expand their support of the combined Dolby Vision andDolby Atmos experience. In the first quarter of fiscal 2022, Best Buy began supporting Dolby Vision in their Pioneer TVs. Additionally, at CES inJanuary 2022 , Samsung announced their adoption of Dolby Atmos in their TVs for the first time, and Sony, Panasonic, and TCL announced new TV models supporting Dolby Vision and Dolby Atmos. Also at CES, LG unveiled their latest TV lineup with Dolby Vision and Dolby Atmos, and was the first to announce support for Dolby Vision IQ with Precision Detail, and Hisense launched their laser TV projector withDolby Vision and Dolby Atmos. Key Challenges: Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors. 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. Further, in certain 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. 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 continues to cause 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. 37
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Mobile
Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android. HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices, and we offer these technologies through our patent licensing programs. We also continue to focus on expanding adoption 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. In the first quarter of fiscal 2022, Xiaomi launched their new flagship smartphones that support Dolby Vision and Dolby Atmos, and Motorola released their Edge smartphones supporting Dolby Atmos. In addition, new tablet devices from Lenovo andASUS support Dolby Vision and Dolby Atmos. 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. 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. Additionally, we must continue to support the development and distribution ofDolby -enabled content via various ecosystems. Further, COVID-19 continues to cause 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 entertainment market across devices such as AVRs, soundbars, smart speakers, DMAs, and Blu-Ray players, through the inclusion of our DD+ technology, and increasingly through the inclusion of Dolby Atmos and Dolby Vision. AAC and HE-AAC technologies also have broad adoption through our patent licensing programs. We continue to focus on expanding the availability ofDolby technologies to new devices. In the first quarter of fiscal 2022, Samsung announced their 2022 soundbar lineup that includes wireless Dolby Atmos connectivity, and Hisense launched a new soundbar that supports Dolby Atmos. 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 continues to cause uncertainty about consumer demand for devices in the home entertainment 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 audio 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 various types of content, including streaming video entertainment. A number of PCs from partners such as Apple, Lenovo,Dell , Samsung, andASUS also support Dolby Vision and/or Dolby Atmos, with continued expansion of applications through music, streaming, and gaming. In the first quarter of fiscal 2022,Dell announced support for Dolby Vision and Dolby Atmos across their latestAlienware lineup and Lenovo previewed their newly designed ThinkPad laptops, which feature Dolby Vision, Dolby Atmos Speaker System, and Dolby Voice. Also,ASUS announced their Vivobook and latest gaming laptops featuring Dolby Vision and Dolby Atmos. Key Challenges: PC revenue from audio technologies such as DD+ has 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. We must continuously collaborate and maintain our key partnerships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution ofDolby content via various ecosystems. Demand in the PC market has been positively impacted in recent quarters by work-from-remote policies due to COVID-19. It is unclear whether this heightened demand will 38
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be sustained. COVID-19 continues to cause uncertainty about 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 the Xbox and PlayStation gaming consoles that support gaming content and streaming for movie and television content. The most recently launched Xbox gaming console supports Dolby Vision and Dolby Atmos for streaming and gaming content. At CES inJanuary 2022 ,Alienware revealed their new gaming headset featuring Dolby Atmos. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system. In addition, we expect to generate revenue in the future from enabling the playback of Dolby Atmos music. In the first quarter of fiscal 2022, NIO, a Chinese electric vehicle company, announced that their new ET5 model will supportDolby Atmos. Key Challenges: Consumer demand for devices in the gaming industry is impacted by 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. Also, automotive revenue has been negatively impacted by a decline in the portion of cars that have optical disc playback in recent years. These factors may impact our future revenue. If OEMs do not incorporate our technologies in current and future products, our revenue will face downward pressure. Further, COVID-19 continues to cause 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. In addition to licensing revenue derived from the licensing of audio and imaging technologies into the markets discussed above, we offer our audio and imaging technologies to createDolby experiences through Dolby Cinema. Dolby Cinema Highlights: We continue to expand our global presence for Dolby Cinema, with six new sites opened in the first quarter of fiscal 2022, in theU.S. and internationally. As of the end of the first quarter of fiscal 2022, over 95% of our Dolby Cinema sites are open, subject to capacity restrictions per local regulations. The breadth of motion pictures for Dolby Cinema continues to grow with over 400 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all of the major studios, as compared to over 375 theatrical titles as of the end of fiscal 2021. 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 their success, and 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 a significant effect on theatrical exhibition, which could impact the financial viability of our key partners. The response to COVID-19 including the closure of cinemas and government-imposed social-distancing restrictions has had a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has improved recently. Further, certain studios have delayed the release of a number of new movie titles and/or are shifting towards a direct-to-streaming model, which as a result, has negatively impacted the rate of new Dolby Cinema content. It is uncertain whether consumer demand for the cinema will return to previous levels. PRODUCTS AND SERVICES A majority of our products and services revenue is derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries. Revenue from our developer platform, Dolby.io, is also included in products and services. Cinema Products and 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, 39
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post-production facilities, and exhibitors. As of the end of the first quarter of fiscal 2022, there are over 6,500 Dolby Atmos screens installed or committed and over 2,100 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other 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 their success in the market, industry and economic cycles, box office performance, and 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 social distancing requirements have had a negative impact on demand for cinema products and services. As demand begins to recover, supply chain constraints may impact our ability to provide products to our customers. COVID-19 has also negatively impacted the financial health of our cinema customers and partners. We continue to closely monitor the ongoing impact of these conditions. Developer Platform Services Highlights: We are focused on bringing our expertise in media and communications to a broader range of content and digital experiences. For example, we are increasing our engagement with new customers across different industries through our developer platform, Dolby.io, that enables developers to access our technologies through APIs. The current offerings include audio and video APIs for building high-quality communications, media, and streaming solutions. Following the initial launch of Dolby.io in fiscal 2020, we have seen growing use cases for the platform, such as for entertainment, social audio, online education, gaming, and content production. For example, in the first quarter of fiscal 2022, we introduced the Spatial Audio feature with Spatial Placement capability, which will enable developers and businesses to build more realistic listening experiences into their apps and services. Key Challenges: Dolby.io is an early stage business, and it is uncertain when and if it will be a material revenue driver for the Company. Our success in this market will depend on the number of developers we are able to attract and maintain, the volume of usage of the service, and our ability to monetize our services. In addition, the development and maintenance needed to provide a reliable and scalable platform may require us to internally develop new skills for our current employees or hire external specialized talent. Although the market for online experiences has been growing,Dolby's API technologies compete with other offerings. 40
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to the critical accounting policies from those included in our fiscal 2021 Annual Report on Form 10-K filed with theSEC , 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). This discussion and analysis highlights comparisons of material changes in the condensed consolidated financial statements for the quarters endedDecember 31, 2021 andDecember 25, 2020 . 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 and imaging 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. To the extent that shipment data reported by licensees differs from estimates we made and recorded, we recognize an adjustment to revenue for such difference in the period we receive the reported shipment data. 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 patent pool fees. Fiscal Quarter Ended Change December 31, December 25, Licensing 2021 2020 $ % Revenue$332,284 $373,005 $(40,721) (11)% Percentage of total revenue 94% 96% Cost of licensing 14,935 12,946 1,989 15% Gross margin 317,349 360,059 (42,710) (12)% Gross margin percentage 96% 97% Fiscal Quarter Ended Licensing Revenue By Market December 31, 2021 December 25, 2020 Broadcast$ 121,633 37 %$ 139,300 37 % Mobile 74,920 23 % 105,623 28 % CE 57,573 17 % 51,921 14 % PC 34,777 10 % 32,735 9 % Other 43,381 13 % 43,426 12 % Total licensing revenue$ 332,284 100 %$ 373,005 100 % 41
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Q1 2022 vs. Q1 2021
Factor Licensing Revenue Gross Margin
Lower revenue due to lower recoveries and timing of
Mobile â revenue under contracts, partially offset by new
licensees in our imaging patent programs
Lower revenue due to timing of revenue, the large true-up
Broadcast â in the prior year and lower recoveries, partially offset
by higher adoption of Dolby Atmos and Dolby Vision in
TVs, and new imaging patent licensees Lower gross margin
Higher revenue from increased shipments of DMAs and ßà due to lower
CE á soundbars, higher revenue from Dolby Atmos and Dolby revenue
Vision across devices, along with higher recoveries,
partially offset by the large true-up in the prior year
PC á Higher revenue due to new licensees in our imaging patent
programs and increased adoption of Dolby Vision
Lower gaming units sold and lower audio patent revenue,
Other â offset by higher revenues from Dolby Cinema due to
increased movie theater attendance
Products and Services
Products revenue is generated from the sale of audio and voice products for the
cinema and television broadcast markets. Also included in products revenue are
amounts relating to certain Dolby Cinema arrangements that are considered
sales-type leases that involve fixed or minimum fees. Cost of products includes
materials, labor, manufacturing overhead, amortization of certain intangible
assets, and certain 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. Also included in services revenue are
amounts generated through our Dolby.io developer platform. 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
December 31, December 25,
Products and Services 2021 2020 $ %
Revenue $19,349 $16,869 $2,480 15%
Percentage of total revenue 6% 4%
Cost of products and services 17,774 22,358 (4,584) (21)%
Gross margin 1,575 (5,489) 7,064 (129)%
Gross margin percentage 8% (33)%
Q1 2022 vs. Q1 2021
Factor Products and Services Revenue
Gross Margin
Higher gross margin primarily due to
lower excess and obsolescence charges,
Products ßà No significant fluctuations á from exiting our conference hardware
business in the prior year, and higher
absorption of manufacturing overhead, due
to increased product sales
Higher revenue primarily due to higher Higher gross margin primarily due to
Services á adoption of our technologies and higher á higher services revenue
Dolby Cinema revenue
Operating Expenses
Research and 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
December 31, December 25,
2021 2020 $ %
Research and development $68,824 $63,772 $5,052 8%
Percentage of total revenue 20% 16%
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Table of Contents Q1 2022 vs. Q1 2021 Category Key Drivers Stock-based Compensation á Higher costs of$2.2 million
primarily due to increased fair value of
RSUs
Higher costs of $3.2 million for higher salaries expense primarily due
Compensation & Benefits á to increased headcount and the extra week in the current fiscal year,
partially offset by lower
costs of
compensation
Sales and 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
December 31, December 25,
2021 2020 $ %
Sales and marketing $97,170 $75,445 $21,725 29%
Percentage of total revenue 28% 19%
Q1 2022 vs. Q1 2021
Category Key Drivers
Marketing Programs á Higher costs of $10.8 million primarily due to marketing efforts for
growth initiatives and branding activities
Higher costs of $4.2 million for higher salaries expense primarily due to
Compensation & Benefits á increased headcount, higher incentive compensation, and the extra week in
the current fiscal year
Stock-based Compensation á Higher costs of $2.5 million primarily due to increased fair value of
RSUs
General and Administrative
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
December 31, December 25,
2021 2020 $ %
General and administrative
14%
Q1 2022 vs. Q1 2021
Category Key Drivers
Higher costs of $3.0 million primarily due to collections of
Credit Loss Expense á previously reserved amounts in the prior year that did not recur in
the current year
Higher costs of $2.8 million for higher salaries expense primarily
Compensation & Benefits á due to increased headcount and the extra week in the current fiscal
year
Stock-based Compensation á Higher costs of $1.8 million primarily due to increased fair value of
RSUs
Gain on Sale of Assets
Fiscal Quarter Ended Change
December 31, December 25,
2021 2020 $ %
Gain on sale of assets $- $(13,871) $13,871 (100)%
Percentage of total revenue -% (4)%
Q1 2022 vs. Q1 2021
In fiscal year 2019, management committed to a plan to sell a property, which
included land and a building, after the lease on the property expired and we
re-assessed the real estate needs of our business. In the first quarter of
fiscal 2021, we finalized the sale of this property, and as a result, we
realized a gain of $13.9 million , which was
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recorded to gain on sale of assets on the condensed consolidated statements of
operations. Refer to "Net (Income)/Loss Attributable to Controlling Interest"
section below for more information.
Restructuring Charges
Restructuring charges recorded as operating expenses in our condensed
consolidated statements 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
December 31, December 25,
2021 2020 $ %
Restructuring charges/(credits)
-% 3%
Q1 2022 vs. Q1 2021
Restructuring charges were incurred during fiscal 2021 in relation to our fiscal
2021 plan to reduce certain activities, such as exiting our conferencing
hardware business, in order to focus our efforts on higher priority investment
areas, and reduce the cost structure of our manufacturing operations. For
additional information on our Restructuring programs, see Note 13
"Restructuring" to our unaudited interim condensed consolidated financial
statements.
Other Income/Expense
Other income/expense primarily consists of interest income earned on cash and
investments and the net gains or losses from foreign currency transactions,
derivative instruments, and sales of marketable securities from our investment
portfolio.
Fiscal Quarter Ended Change
December 31, December 25,
2021 2020 $ %
Other income $861 $2,215 $(1,354) (61)%
Percentage of total revenue -% 1%
Q1 2022 vs. Q1 2021
Category Key Drivers
Other Income ßà No significant fluctuations
Income Taxes
Our effective tax rate is based on our annual fiscal year results and is
affected each period-end by several factors. These factors include changes in
our projected fiscal year results, recurring items such as tax rates and
relative income earned in our foreign jurisdictions, as well as discrete items
such as changes to our unrecognized tax benefits 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
December 31, December 25,
2021 2020
Provision for income taxes $(11,432) $(24,272)
Effective tax rate 12.5% 14.5%
Q1 2022 vs. Q1 2021
Factor Impact On Effective Tax Rate
Stock-based Compensation â Higher benefit ofrelated to the settlement of stock-based
awards.
Foreign Operations â Higher benefit from earned income in lower tax jurisdictions.
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Net (Income)/Loss Attributable to Controlling Interest
Fiscal Quarter Ended Change
December 31, December 25,
2021 2020 $ %
Net (income)/loss attributable to controlling interest $4 $(7,492) $7,496 (100)%
Percentage of total revenue -% (2)%
Q1 2022 vs. Q1 2021
In the first quarter of fiscal 2021, we finalized the sale of a property, which
included land and building, and as a result, we recognized a gain of
$13.9 million from this transaction, which was recorded to gain on sale of
assets on the unaudited interim condensed consolidated statements of operations.
The property was 51% owned by the controlling interest, and therefore 51% of the
gain on sale of assets has been attributed to the controlling interest.
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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. As ofDecember 31, 2021 , we had cash and cash equivalents of$1,056.7 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$201.6 million , which consisted primarily of corporate bonds, municipal debt securities, government bonds, commercial paper,U.S. agency securities, and certificates of deposit. The following table presents selected financial information as ofDecember 31, 2021 andSeptember 24, 2021 (in thousands): December 31, September 24, 2021 2021 Cash and cash equivalents$ 1,056,686 $ 1,225,380 Short-term investments 80,618 38,839 Long-term investments 120,988 62,819 Accounts receivable, net 241,449 232,609 Accounts payable and accrued liabilities 244,951 280,507 Working capital 1,411,855 1,444,781 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 both 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 and Stock-Based Compensation" to our unaudited interim condensed consolidated financial statements for a summary of dividend payments made under the program during fiscal 2022 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$2.1 billion of stock repurchases under the program. Quarterly Dividend Program. During fiscal 2015, we initiated a recurring quarterly cash dividend program for our stockholders. For fiscal 2022, quarterly dividends of$0.25 per share were paid on our Class A and Class B common stock to eligible stockholders of record. 46
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Cash Flows Analysis
For the following comparative analysis performed for each of the sections of the
condensed consolidated 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 (in
thousands).
Operating Activities
Fiscal Quarter Ended
December 31 , December 25,
2021 2020
Net cash provided by operating activities
Net cash provided by operating activities decreased$50.5 million in the fiscal quarter-to-date period endedDecember 31, 2021 as compared to the fiscal quarter-to-date period endedDecember 25, 2020 , primarily due to the following: Factor Impact On Cash Flows Net Income â Lower revenue and higher S&M expenses Non-cash adjustment to net income for gain recognized on the Gain on Sale of Assets á sale of property that was 51%
owned by the controlling interest
in fiscal 2021, that did not recur in fiscal 2022
Working Capital â Lower inflows due to decrease in accounts receivable, and
decreased accounts payable and accrued liabilities
Investing Activities
Fiscal Quarter Ended
December 31, December 25,
2021 2020
Net cash used in investing activities
Net cash used in investing activities was$124.6 million higher in the fiscal quarter-to-date period endedDecember 31, 2021 as compared to the fiscal quarter-to-date period endedDecember 25, 2020 , primarily due to the following: Factor Impact On Cash Flows â Higher outflows for the purchase of marketable investment Purchase of Investments securities, and other
investments
â Lower inflows for the sale of property in the prior year that was
Sale of Assets 51% owned by the controlling interest
Financing Activities
Fiscal Quarter Ended
December 31 , December 25,
2021 2020
Net cash used in financing activities
Net cash used in financing activities was$26.5 million higher in the fiscal quarter-to-date period endedDecember 31, 2021 as compared to the fiscal quarter-to-date period endedDecember 25, 2020 , primarily due to the following: Factor Impact On Cash Flows Common Stock Issuance â Lower inflows from employee stock option exercises Distribution to Controlling Lower outflows for distributions to controlling interest due to Interest á the sale of property that was 51% owned by the controlling interest in fiscal 2021, that did not recur in fiscal 2022 Contractual Obligations and Commitments Since the end of our most recent fiscal year endedSeptember 24, 2021 , 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 7 "Leases" and Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. In the first quarter of fiscal 2022, we did not enter into any off-balance sheet arrangements that are expected to have a material effect onDolby's liquidity or the availability of capital resources. 47
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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
condensed 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 and
Contingencies" to our unaudited interim condensed consolidated financial
statements.
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