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 the
coronavirus pandemic ("COVID-19") on our business; market growth opportunities
and trends; the development and launch of new products, features, and platforms;
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,"
"intend," "could," "can," "would," "target," "goal," "outlook," "project,"
"contemplate," "future," or the negative of these words or other similar terms
or expressions that concern our expectations, strategy, plans, or intentions
indicates a forward-looking statement. Such forward-looking statements are based
on management's reasonable and current assumptions and expectations, but such
statements inherently involve substantial risks and uncertainties. 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" and key challenges set forth in
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations." 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 may not actually
achieve the plans, intentions, or expectations disclosed in our forward-looking
statements, and you should not place undue reliance on our forward-looking
statements.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Quarterly Report on Form
10-Q, and while we believe such information forms a reasonable basis for such
statements, such information may be limited or incomplete. These statements are
inherently uncertain and investors are cautioned not to unduly rely upon these
statements. 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.
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.
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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.
Expanding the Reach of our Technologies. With 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 generate revenue from approximately 500 electronics product OEMs and software developers. As ofDecember 30, 2022 , we had approximately 17,300 issued patents relating to technologies, which are licensed to third parties and derive a significant portion of our licensing revenue. We have approximately 1,600 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, Extended HE-AAC, AVC, and HEVC, we jointly participate in patent licensing programs with other patent owners. Technology Description
AAC, HE-AAC and Advanced digital audio codec solutions with high bandwidth efficiency used Extended HE-AAC for a wide range of media applications. AVC
A digital video codec with high bandwidth efficiency used in a wide range of
media devices.
A next-generation digital audio coding technology that increases transmission
Dolby® AC-4 efficiency while delivering new audio experiences, including Dolby Atmos, to
a wide range of playback devices.
An object-oriented audio technology for cinema and a wide range of media
devices that allows sound to be precisely placed and moved anywhere in the Dolby Atmos® listening environment including the overhead dimension. Dolby Atmos provides
an immersive experience that can be provided via
multiple
technologies.
DD A digital audio coding technology that provides multichannel sound to a
variety of media applications.
DD+ 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.
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 revenue from our licensing business for all periods presented:
Fiscal Quarter Ended
December 30, December 31, Main Offerings Incorporating Our
Market 2022 2021 Technologies
Broadcast 38% 37% Televisions and STBs
Mobile 21% 23% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 18% 17% and DVDs
PC 8% 10% Windows and macOS operating systems
Dolby Cinema, Gaming consoles, andOther 15% 13% Automotive Total 100% 100%
We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, recoveries, 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.
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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 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 collaboratively developed technologies. We offer our patents related to AAC, HE-AAC, Extended HE-AAC, AVC, 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 100 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.
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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 play back 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
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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MACROECONOMIC CONDITIONS
The current macroeconomic environment has negatively impacted many of our licensees and that directly impacts our financial results. Our revenue has been impacted by macroeconomic conditions, including but not limited to, elevated inflation, rising interest rates, COVID-19-related restrictions and economic impacts, supply chain constraints, increased shipping costs, international conflicts, reduced discretionary consumer spending, and reduced new product investment by our customers caused by higher interest rates and lower demand. The impacts of the current macroeconomic environment on our partners have resulted in the disruption of consumer products' supply chains, shortages of certain semiconductor components, and delays in shipments, product development, and product launches. The macroeconomic conditions also impart substantial uncertainty into our operating environment, which presents additional challenges for our business. These factors and the related uncertainty may cause delays or a decrease in the adoption or implementation of our technologies into new products by partners and licensees. These conditions may impact consumer demand for devices and services and our partners' ability to manufacture devices. Further, we may be negatively impacted by delays in transaction cycles and our recoveries efforts due to the noted macroeconomic conditions and related uncertainty. The future implications of these macroeconomic conditions on our business, results of operations and overall financial position remain uncertain. We continue to monitor the evolving situation and the impact on our business. Further discussion of the potential impacts of these macroeconomic effects 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, gaming, live sports, and user-generated content. We are increasingly making our audio and imaging technologies available for content beyond premium entertainment through Dolby.io, creating new revenue generating opportunities. The 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 technologies. In the future, we expect revenue from our foundational audio technologies to generally reflect market trends in device shipments. Further, in certain countries, 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. The remaining portion of our licensing revenue is derived from offerings such as Dolby Vision, Dolby Atmos, our imaging patents, andDolby 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, and speaker devices. Our audio and imaging technologies are also widely available through many forms of distribution, 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. 36
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We have also enabled a broader range of content, such as music, gaming, live sports, and user-generated content. This quarter, theBelgium music festivalTomorrowland streamed their festival in Dolby Atmos, and has released replay footage of the event on Apple Music in Dolby Atmos. Also in the first quarter of fiscal 2023, the popular mobile game PUBG Mobile was made available to play in Dolby Atmos globally. The 2022 FIFA World Cup was broadcast internationally by 12 global operators and three free-to-air terrestrial broadcasters inDolby Vision and/or Dolby Atmos.Vivo launched its flagship mobile phone X90 Pro+ with Dolby Vision Capture and playback, further enabling the creation of user-generated content. We have worked with industry leaders to enhance these forms of content through the use of our technologies, creating additional value for the adoption ofDolby within devices such as mobile, PC, gaming consoles, and automotive. The following are highlights from our first quarter of fiscal 2023 and key challenges related to audio and imaging licensing, by market. Further discussion of the potential impacts of these key challenges on our business can be found in Part II, Item 1A "Risk Factors."
Broadcast
Highlights: We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices. We have expanded our offerings in the broadcast market through technologies such as 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, at CES inJanuary 2023 , LG announced their latest TV lineup that supports Dolby Vision and Dolby Atmos, and Hisense announced several new UHD TVs and Laser TVs that support Dolby Vision and Dolby Atmos. Additionally, TCL announced new QLED and Mini-LED TVs with 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. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.
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. Subsequent to the first quarter of fiscal 2023, OPPO launched theOnePlus 11, its first phone that supportsDolby 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. 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. 37
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Consumer Electronics
Highlights: We have an established presence in the home entertainment market across devices such as AVRs, soundbars, wireless and 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. At CES inJanuary 2023 , LG and Samsung each announced 2023 soundbar line-ups that support 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. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.
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. Also in the first quarter of fiscal 2023, Tencent's streaming music platform QQ Music launched Dolby Atmos support in Mac operating systems. 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. 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 requirements.
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 Xbox Series X and Series S gaming consoles support 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, and more recently through the adoption of DolbyAtmos Music . As of the first quarter of fiscal 2023, Mercedes-Benz has adopted Dolby Atmos and DolbyAtmos Music in several of their car models. In addition, Chinese electric car manufacturer Li Auto and NetEase Cloud Music announced a collaboration to deliver DolbyAtmos Music in Li Auto cars. 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. Automotive revenue has been negatively impacted by a decline in the portion of cars that have optical disc playback. Recent shortages of certain semiconductor components could result in lower implementation of our technologies in vehicles by automotive manufacturers. 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. 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. 38
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Dolby Cinema
Highlights: We continue to expand our global presence for Dolby Cinema, with over 280 open Dolby Cinema sites located in theU.S. and internationally, although some are subject to capacity restrictions per local regulations, and with five new sites opened during the first quarter of fiscal 2023. The breadth of motion pictures for Dolby Cinema continues to grow with over 400 theatrical titles in both Dolby Vision and Dolby Atmos having been announced or released from all of the major studios as of the end of the first quarter of fiscal 2023. 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 restrictions has had a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has been improving. 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, 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 first quarter of fiscal 2023, there are over 7,000 Dolby Atmos screens installed or committed and over 2,400 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, which are subject to 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. We have also experienced supply chain shortages and increased shipping costs that have created challenges to maintain the sufficient supply of cinema products to meet the demand in the market. Additionally, the effects of COVID-19 such as the closure of cinemas and public health mandates have had a negative impact on Dolby Cinema attendance. In addition, supply chain constraints may impact our ability to provide cinema products and services to our customers. COVID-19 has also negatively impacted the financial health of our cinema customers and partners.
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. Since
the 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
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education, gaming, sports, 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. 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 2022 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 unaudited 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 unaudited interim condensed consolidated financial statements for the quarters endedDecember 30, 2022 andDecember 31, 2021 . Note that adjustments related to previously misreported 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 30, December 31,
Licensing 2022 2021 $ %
Revenue $308,011 $332,284 $(24,273) (7)%
Percentage of total revenue 92% 94%
Cost of licensing 13,359 14,935 (1,576) (11)%
Gross margin 294,652 317,349 (22,697) (7)%
Gross margin percentage 96% 96%
Fiscal Quarter Ended
Licensing Revenue By Market December 30, 2022 December 31, 2021
Broadcast $ 117,334 38 % $ 121,633 37 %
Mobile 64,286 21 % 74,920 23 %
CE 55,083 18 % 57,573 17 %
PC 24,286 8 % 34,777 10 %
Other 47,022 15 % 43,381 13 %
Total licensing revenue $ 308,011 100 % $ 332,284 100 %
Q1 2023 vs. Q1 2022
Factor Licensing Revenue Gross Margin
Lower revenue due to timing of minimum volume
Mobile â transactions in the prior year, partially offset by
increased adoption of Dolby Vision and Dolby Atmos
PC â Lower revenue due to higher recoveries in the prior year,
and lower unit shipments in the current period
Lower revenue due to lower TV unit shipments and lower
Broadcast â recoveries, partially offset by a favorable true-up in
the current quarter and higher revenue from Dolby Vision ßà No significant fluctuations
and Dolby Atmos
Higher gaming revenue due to favorable true-up in the
Other á current quarter, offset by lower Dolby Cinema revenue due
to lower box office receipts
Lower revenue due to higher recoveries in the prior year,
CE â partially offset by higher adoption of Dolby Vision and
Dolby Atmos
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Products and Services
Products revenue is generated from the sale of audio and imaging hardware and
software products for the cinema, television, broadcast and entertainment
industries. 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 contractors, and other
direct expenses incurred on behalf of customers.
Fiscal Quarter Ended Change
December 30, December 31,
Products and Services 2022 2021 $ %
Revenue $26,910 $19,349 $7,561 39%
Percentage of total revenue 8% 6%
Cost of products and services 21,091 17,774 3,317 19%
Gross margin 5,819 1,575 4,244 269%
Gross margin percentage 22% 8%
Q1 2023 vs. Q1 2022
Factor Products and Services Revenue Gross Margin
Increased demand for cinema equipment Higher gross margin due to higher cinema
Products á as the exhibitor market continues to á products revenue, lower excess and
recover obsolescence charges, and lower
manufacturing spend
Higher Dolby.io revenue partially
Services ßà offset by lower cinema production ßà No significant fluctuations
services revenue
Operating Expenses
Research and Development
R&D expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, external contractor costs, depreciation and
amortization, facilities costs, costs for outside materials, and information
technology expenses.
Fiscal Quarter Ended Change
December 30, December 31,
2022 2021 $ %
Research and development $64,450 $68,824 $(4,374) (6)%
Percentage of total revenue 19% 20%
Q1 2023 vs. Q1 2022
Category Key Drivers
Compensation and Benefits â Lower salaries expense of
headcount and the extra week in the prior fiscal year
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,
contractor fees, facilities costs, depreciation and amortization, information
technology expenses,
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and legal costs associated with the protection of our IP.
Fiscal Quarter Ended Change
December 30, December 31,
2022 2021 $ %
Sales and marketing $82,205 $97,170 $(14,965) (15)%
Percentage of total revenue 25% 28%
Q1 2023 vs. Q1 2022
Category Key Drivers
Marketing Programs â Lower costs of $7.5 million primarily due to marketing efforts for
growth initiatives and branding activities in the prior period
Lower salaries expense of $3.4 million and lower fringe benefits
Compensation & Benefits â expense of
week in the prior fiscal year
Travel á Higher costs of $1.9 million for company travel due to lighter
COVID-19 travel restrictions as compared to the prior period
Legal, Professional, and â Lower costs of $1.6 million primarily for patent support activities
Contractors
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
contractors.
Fiscal Quarter Ended Change
December 30, December 31,
2022 2021 $ %
General and administrative $59,972 $62,444 $(2,472) (4)%
Percentage of total revenue 18% 18%
Q1 2023 vs. Q1 2022
Category Key Drivers
Credit Loss Expense â Lower credit loss expense of
collections from our customers
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, our proportionate share of net income or losses from our
equity method investment, and sales of marketable securities from our investment
portfolio.
Fiscal Quarter Ended Change
December 30, December 31,
2022 2021 $ %
Other income $5,894 $861 $5,033 585%
Percentage of total revenue 2% -%
Q1 2023 vs. Q1 2022
Category Key Drivers
Interest Income á Higher yields on our current year investment balances due to
increased interest rates
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
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