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.
OVERVIEW
Dolby 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 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.
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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 ofJuly 1, 2022 , we had approximately 16,800 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 Fiscal Year-To-Date Ended
July 1, June 25, July 1, June 25, Main Offerings Incorporating Our
Market 2022 2021 2022 2021 Technologies
Broadcast 37% 46% 36% 39% Televisions and STBs
Mobile 23% 18% 22% 23% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs,
CE 14% 14% 16% 15% Soundbars, and DVDs
PC 10% 9% 13% 11% Windows and macOS operating systems
Gaming consoles, Auto DVD, and Dolby
Other 16% 13% 13% 12% Cinema
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 byDolby , are available for purchase from implementation licensees by OEMs for use in end-user products. Implementation 36
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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. 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
We design and manufacture audio and imaging hardware and software 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
are classified as sales-type leases, and as a result are included in products
sales.
Key products from which we generate products revenue are summarized in the table
below:
Product Description
Digital Cinema Servers used to load, store, decrypt, decode,
Cinema Imaging Products watermark, and playback digital film files for presentation on
digital cinema projectors and software used to encrypt, encode, and
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
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Services
We 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 expect to significantly expand the amount and types of content
that can be enhanced through our technologies and capabilities.
In addition, we offer various services to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. We also provide PCS for products
sold and equipment installed at Dolby Cinema theaters operated by exhibitor
partners and support the implementation of our technologies into products
manufactured by our licensees.
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EXECUTIVE SUMMARY
COVID-19
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. It remains uncertain when and where
the cinemas will be able to operate at full capacity, and box office receipts
may fluctuate from period to period from content variability. Most cinema
locations have been permitted to resume operations, but many such locations are
operating under restricted capacity.
At Dolby , 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 technologies for 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
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technologies. In the future, we expect revenue from our foundational audio technologies to generally reflect market trends in device shipments. The remaining portion of our licensing revenue is derived from 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 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 in all market segments. We have also enabled a broader range of content, such as music, gaming, live sports, and user-generated content. For example, in the third quarter of fiscal 2022, theUEFA Champions League was broadcast in Dolby Vision and Dolby Atmos, and theFrench Open was broadcast in Dolby Atmos. Also in the third quarter of fiscal 2022, Wondery became the first podcast streaming service in theU.S. to deliver podcasts in Dolby Atmos. Additionally, Dolby Atmos music is now available onTencent Music's QQ Music streaming service inChina .
We believe enabling our technologies in these forms of content creates
additional value for the adoption of
The following are highlights from our third 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. For example, in the third quarter of fiscal 2022, Sharp and Sony launched new TVs that support Dolby Vision and Dolby Atmos. Key Challenges: Our pursuit of new licensees and further adoption of our technologies by existing licensees 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, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, current macroeconomic conditions due to inflation, COVID-19, or other economic conditions, continue 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, the timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.
Mobile
Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android. HE-AAC and HEVC are widely adopted audio and video technologies across mobile
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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 third quarter of fiscal 2022, Sharp launched their AQUOS R7 smartphone that supports Dolby Vision, and Sony launched their Xperia1 IV smartphone that supports Dolby Atmos. Also in the third quarter of fiscal 2022, Xiaomi launched their Redmi Note 11T Pro series tablet that supportsDolby Vision and Dolby Atmos. Additionally, Xiaomi recently announced that their new 12S smartphone series will be the first Android phone capable of recording video in Dolby Vision. 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. The mobile market is heavily concentrated, so we rely on a small number of partnerships with key participants in this 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. We must also continue to support the development and distribution ofDolby -enabled content via various ecosystems. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, current macroeconomic conditions due to inflation, COVID-19, or other economic conditions, continue 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, the 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 third quarter of fiscal 2022, Bose launched their latest soundbar that supportsDolby 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. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, current macroeconomic conditions due to inflation, COVID-19, or other economic conditions, continue 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, the 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 third quarter of fiscal 2022, Lenovo released their latest Yoga and Carbon laptops that support 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. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing 41
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requirements. Further, current macroeconomic conditions due to inflation, COVID-19, or other economic conditions, continue to cause uncertainty about the ability of our partners to manufacture such devices due to supply chain disruption, the 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. Additionally, our technologies continue to be incorporated into the latest headphones by various OEMs. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system. In the third quarter of fiscal 2022, Li Auto, a Chinese electric vehicle start-up, announced that their L9 SUV model will be their first vehicle to supportDolby Atmos. Also in the third quarter of fiscal 2022, NIO announced that their new model, the ES7 SUV, will support Dolby 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. In addition, recent shortages of certain semiconductor components could result in lower implementation of our technologies in vehicles by automotive manufacturers. 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. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, current macroeconomic conditions due to inflation, COVID-19, or other economic conditions, continue to cause uncertainty about consumer demand for devices in our other markets, the ability of our partners to manufacture such devices due to supply chain disruption, the 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 four new sites opened in the third quarter of fiscal 2022 in theU.S. and internationally, bringing our total count of open Dolby Cinema sites to approximately 280, 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 is 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 inChina 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. 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. 42
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Cinema Products and Services
Highlights: To help enable the playback of content inDolby formats, we offer a range of servers, which include the IMS3000 (an integrated imaging and audio server with Dolby Atmos), and audio processors, such as the CP950, to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the end of the third quarter of fiscal 2022, there are over 7,000 Dolby Atmos screens installed or committed and over 2,200 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, such as 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 other commercially available options. 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 geopolitical risks. Additionally, weakness in general economic conditions due to inflation, recession, pandemic or other worsening economic conditions could have a negative impact on our cinema-related revenue due to reduced consumer discretionary spending. 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 an expansion of the use cases for the platform. Examples include virtual live performances, online and hybrid events, social audio, premium education, gaming, and content creation and production. Dolby.io provides tools to help developers create immersive experiences through apps and services with high quality audio and video, spatialized sound, and deliver live-streamed content with low latency. Key Challenges: Dolby.io is an early stage business, and it is uncertain when or if it will be a material revenue driver. Our success in this market will depend on the number of developers we are able to attract and retain, 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 develop new skills internally 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. 43
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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 endedJuly 1, 2022 andJune 25, 2021 . 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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
Licensing 2022 2021 $ % 2022 2021 $ %
Revenue $269,289 $271,569 $(2,280) (1)% $915,406 $948,159 $(32,753) (3)%
Percentage of total revenue 93% 95% 94% 95%
Cost of licensing 13,756 12,480 1,276 10% 45,363 41,486 3,877 9%
Gross margin 255,533 259,089 (3,556) (1)% 870,043 906,673 (36,630) (4)%
Gross margin percentage 95% 95% 95% 96%
Fiscal Quarter Ended Fiscal Year-To-Date Ended
Licensing Revenue By
Market July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021
Broadcast $ 99,327 37 % $ 123,955 46 % $ 325,441 36 % $ 368,068 39 %
Mobile 63,237 23 % 49,861 18 % 204,212 22 % 221,157 23 %
CE 38,663 14 % 37,805 14 % 150,192 16 % 138,010 15 %
PC 26,947 10 % 24,870 9 % 119,190 13 % 108,709 11 %
Other 41,115 16 % 35,078 13 % 116,371 13 % 112,215 12 %
Total licensing revenue $ 269,289 100 % $ 271,569 100 % $ 915,406 100 % $ 948,159 100 %
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Current Quarter: Q3 2022 vs. Q3 2021
Factor Licensing Revenue Gross Margin
Lower foundational audio revenue due to higher recoveries
and a true-up in the prior year, and lower estimated units
Broadcast â of TVs and STBs, partially offset by higher adoption of
Dolby Vision and Dolby Atmos technologies and new
licensees in our imaging patent programs
Higher revenue due to timing of revenue under contract for
Mobile á Dolby Atmos and audio patent licensing technologies, and
higher adoption of Dolby Vision and Dolby Atmos
Higher revenue from Dolby Cinema due to strong box office ßà No significant fluctuations
Other á performance from highly anticipated theatrical title
releases
Higher revenue due to higher foundational audio revenue
PC á due to higher recoveries and higher adoption of our Dolby
Atmos and Dolby Vision technologies, partially offset by
lower units
CE á Higher revenue due to higher adoption of Dolby Atmos and
Dolby Vision in DMAs and soundbars
Year-To-Date: Q3 2022 vs. Q3 2021
Factor Licensing Revenue Gross Margin
Broadcast â Lower foundational audio revenue for TVs due to a true-up
in the prior year, lower TV units, and lower recoveries
Lower revenue from lower recoveries and from our audio
Mobile â patent licensing technologies, partially offset by higher
revenue due to new licensees in our imaging patent
programs
Higher revenue due to higher adoption of Dolby Atmos and
Dolby Vision across devices, new licensees in our imaging
CE á patent programs, and higher recoveries, partially offset
by lower revenue from our audio patent licensing
technologies ßà No significant fluctuations
Higher revenue from recoveries, higher adoption of Dolby
PC á Vision and Dolby Atmos technologies and new licensees in
our imaging patent programs, partially offset by lower
foundational audio revenue due to timing of contracts
Higher Dolby Cinema revenue due to more screens being open
Other á and strong box office performance in fiscal 2022,
partially offset by lower gaming revenue due to ongoing
supply constraints and lower automotive revenue
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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
Products and Services 2022 2021 $ % 2022 2021 $ %
Revenue $20,296 $15,230 $5,066 33% $60,183 $48,072 $12,111 25%
Percentage of total revenue 7% 5% 6% 5%
Cost of products and services 22,201 19,164 3,037 16% 58,818 57,840 978 2%
Gross margin (1,905) (3,934) 2,029 (52)% 1,365 (9,768) 11,133 (114)%
Gross margin percentage (9)% (26)%
2% (20)%
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Factor Products and Services Revenue Gross Margin
Higher sales of cinema equipment
Products á attributable to increased demand as
á Higher gross margin due to higher
the exhibitor market continues to cinema products revenue
recover
Lower gross margin due to increased
Services ßà No significant fluctuations â warranty expense on Dolby Cinema
equipment
Year-To-Date: Q3 2022 vs. Q3 2021
Factor Products and Services Revenue Gross Margin
Higher sales of cinema equipment
Higher sales of cinema equipment attributable to increased demand, lower
Products á attributable to increased demand as the á scrap in the current year, and higher
exhibitor market continues to recover absorption of manufacturing overhead,
offset by higher COGS due to higher
prices of components
Higher services revenue from Broadcast
licensing services and our developer Lower gross margin due to increased
Services á platform, offset by lower sales of Dolby â warranty expense on Dolby Cinema
Voice as a result of winding down that equipment, offset by higher revenue
business
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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
Research and development $62,859 $62,094 $765 1% $199,104 $191,674 $7,430 4%
Percentage of total revenue 22% 22% 20% 19%
Current Quarter: Q3 2022 vs. Q3 2021
Category Key Drivers
Stock-based Compensation á Higher costs of$1.9 million
primarily due to increased fair value
of RSUs
Compensation & Benefits â Lower costs of $1.6 million primarily due to our annual bonus
program
Year-To-Date: Q3 2022 vs. Q3 2021
Category Key Drivers
Stock-based Compensation á Higher costs of$6.0 million
primarily due to increased fair value of
RSUs
Lower costs of $8.0 million primarily due to our annual bonus program,
partially offset by higher salaries expense of $2.2 million primarily
Compensation & Benefits â due to severance payments and other costs from the reorganization of our
entertainment organization, and the extra week in the first quarter of
fiscal 2022
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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
Sales and marketing $87,114 $80,714 $6,400 8% $268,514 $234,205 $34,309 15%
Percentage of total revenue 30% 28% 28% 24%
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Current Quarter : Q3 2022 vs. Q3 2021 Category Key
Drivers
Travel á Higher costs of$1.6 million
for company travel and trade shows due to
COVID-19 travel restrictions in the prior year
Higher costs of $1.7 million due to higher salaries expense due to
Compensation & Benefits á increased headcount,
partially offset due to lower costs of
due to incentive compensation
Year-To-Date: Q3 2022 vs. Q3 2021
Category Key Drivers
Marketing Programs á Higher costs of $12.0 million primarily due to marketing efforts for
growth initiatives and branding activities
Legal, Professional, & Higher costs of$9.8 million primarily due to legal support for Consulting á licensee audits and higher
consulting expense for the increased
development of digital marketing programs
Stock-based Compensation á Higher costs of
RSUs
Higher costs of $7.3 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
incentive compensation
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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
General and administrative $57,113 $56,116 $997 2% $218,250 $169,968 $48,282 28%
Percentage of total revenue 20% 20% 22% 17% OnAugust 7, 2019 , Intertrust filed complaints against each of our customers AMC Entertainment Holdings, Inc., Cinemark Holdings, Inc., andRegal Entertainment Group in theU.S. District Court for the Eastern District of Texas , alleging that the use of systems including certain cinema products, which were supplied under commercial agreements that we acquired in an acquisition in 2014, infringed various Intertrust patents, and seeking damages based on the revenues of the defendants. We recorded$34.4 million in the second quarter of fiscal 2022 within G&A expenses in our condensed consolidated statements of operations, reflecting a settlement payment and an immaterial accrual. With the exception of this settlement, we have not made any payments to date in connection with any of our contractual indemnification obligations, and we believe the risk of material financial exposure in future periods from these indemnification obligations is remote. For additional information on this litigation matter, see Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. Current Quarter: Q3 2022 vs. Q3 2021 Category Key Drivers General and administrative ßà No significant fluctuations Year-To-Date: Q3 2022 vs. Q3 2021 Category Key
Drivers
Higher costs of $34.4 million related to the resolution of a legal Other Miscellaneous Expenses á matter discussed in Note 15 to the condensed consolidated financial
statements
Higher costs of $5.3 million for higher salaries expense primarily due
Compensation & Benefits á to increased headcount and the extra week in the current fiscal year,
offset by lower costs of $5.2 million primarily due to our annual
bonus program
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Gain on Sale of Assets
Fiscal Year-To-Date Ended Change
July 1, June 25,
2022 2021 $ %
Gain on sale of assets $- $(13,871) $13,871 (100)%
Percentage of total revenue -% (1)%
Year-To-Date: Q3 2022 vs. Q3 2021
In fiscal 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. This property had a carrying value of$2.2 million as ofSeptember 25, 2020 . 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 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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
Restructuring charges $976 $140 $836 597% $6,043 $10,904 $(4,861) (45)%
Percentage of total revenue -% -% 1% 1%
Year-To-Date: Q3 2022 vs. Q3 2021
The decrease in restructuring charges of$4.9 million was primarily driven by the restructuring event in fiscal 2021, partially offset by the impact of our fiscal 2022 restructuring plan within our entertainment organization to create capacity to support our higher priority focus areas. 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 Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
Other income $3,846 $3,034 $812 27% $4,808 $7,429 $(2,621) (35)%
Percentage of total revenue 1% 1% -% 1%
Current Quarter: Q3 2022 vs. Q3 2021
Category Key Drivers
Other Income ßà No significant fluctuations
Year-To-Date: Q3 2022 vs. Q3 2021 Category Key Drivers Other Income â Lower income primarily due to lower
yields on our SERP balances in
the current year
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
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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 Fiscal Year-To-Date Ended
July 1, June 25, July 1, June 25,
2022 2021 2022 2021
Provision for income taxes $(9,802) $(4,565) $(28,166) $(37,859)
Effective tax rate 19.8% 7.7% 15.3% 12.2%
Current Quarter: Q3 2022 vs. Q3 2021
Factor Impact On Effective Tax Rate
Stock-based Compensation á Lower benefit related to the settlement of stock-based awards. Foreign Operations á Lower benefit from earned income in lower tax jurisdictions. Tax Contingencies â Higher benefit from
the settlement of Federal tax audit
Year-To-Date: Q3 2022 vs. Q3 2021 Factor Impact On
Effective Tax Rate
Stock-based Compensation á Lower benefit related to the settlement of stock-based awards Foreign Operations á Lower benefit from
earned income in lower tax jurisdictions.
Net (Income)/Loss Attributable to Controlling Interest
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
July 1, June 25, July 1, June 25,
2022 2021 $ % 2022 2021 $ %
Net (income)/loss attributable to
controlling interest $(13) $61 $(74) (121)% $192 $(7,559) $7,751 (103)%
Percentage of total revenue -% -% -% (1)%
Year-To-Date: Q3 2022 vs. Q3 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. 49
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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 ofJuly 1, 2022 , we had cash and cash equivalents of$858.9 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$263.5 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 of
July 1, September 24,
2022 2021
Cash and cash equivalents $ 858,905 $ 1,225,380
Short-term investments 156,812 38,839
Long-term investments 106,726 62,819
Accounts receivable, net 236,229 232,609
Accounts payable and accrued liabilities 246,088 280,507
Working capital 1,219,234 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. Additionally, included in capital expenditures are amounts associated withDolby 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
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.
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).
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Operating Activities
Fiscal Year-to-Date Ended
July 1, June 25,
2022 2021
Net cash provided by operating activities $ 267,267 $ 337,980
Net cash provided by operating activities decreased$70.7 million in the fiscal year-to-date period endedJuly 1, 2022 as compared to the fiscal year-to-date period endedJune 25, 2021 , primarily due to the following:
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