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 the risks set forth in Part II, Item 1A, "Risk Factors." Such forward-looking statements are based on management's reasonable current assumptions and expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We disclaim any duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results. Investors and others should note that we disseminate information to the public about our company, our products, services and other matters through various channels, including our website (www.dolby.com), our investor relations website (http://investor.dolby.com),SEC filings, press releases, public conference calls, and webcasts, in order to achieve broad, non-exclusionary distribution of information to the public. We encourage investors and others to review the information we make public through these channels, as such information could be deemed to be material information. OVERVIEWDolby Laboratories creates audio and imaging technologies that transform entertainment and communications at the cinema, at home, at work, and on mobile devices. Founded in 1965, our strengths stem from expertise in analog and digital signal processing and digital compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multiple offerings that enable more immersive sound for cinema, digital television transmissions and devices, mobile devices, OTT video and music services, and home entertainment devices. Today, we derive the majority of our revenue from licensing our audio technologies. We also derive revenue from licensing our consumer imaging and communication technologies, as well as audio and imaging technologies for premium cinema offerings in collaboration with exhibitors. Finally, we provide products and services for a variety of applications in the cinema, broadcast, communications, and home entertainment markets. COVID-19 Please refer to the Executive Summary section of 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. 34
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REVENUE GENERATION We have active licensing arrangements with over 500 electronics product OEMs and software developers. As ofDecember 25, 2020 , we had approximately 14,000 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,300 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 whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies are summarized in the table below. As it relates to AAC, HE-AAC, AVC, and HEVC, we jointly participate in patent licensing programs with other patent owners. Technology Description AAC & HE-AAC An advanced digital audio codec solution with
higher bandwidth efficiency
used for a wide range of media applications.
AVC A digital video codec with high bandwidth efficiency used in a wide range of
media devices.
A next-generation digital audio coding technology that increases transmission
Dolby® AC-4 efficiency while delivering new audio experiences, including Dolby Atmos, to
a wide range of playback devices.
An object-oriented audio technology for cinema and a wide range of media
devices that allows sound to be precisely placed and moved anywhere in the
Dolby Atmos® listening environment including the overhead dimension. Dolby Atmos is an
immersive experience that can be provided via
multiple
technologies.
Dolby Digital® A digital audio coding technology that provides multichannel sound to a
variety of media applications.Dolby Digital Plus™ An advanced digital audio coding technology that offers more efficient audio
transmission for a wide range of media applications and devices.
Dolby® TrueHD A digital audio coding technology providing lossless encoding for premium
quality media applications.
An imaging technology combining high dynamic range and dynamic metadata to
Dolby Vision® deliver higher color contrast, brighter contrast, and improved details for
cinema and a wide range of media devices.
An audio communications technology with superior spatial perception, voice
Dolby Voice® clarity, and background noise reduction that emulates the in-person meeting
experience.
HEVC A next-generation digital video codec with high bandwidth efficiency to
support ultra-high definition experiences for a wide range of media devices.
The following table presents the composition of our licensing business and revenues for all periods presented:
Fiscal Quarter Ended
December 25, December 27,
Market 2020 2019 Main Offerings Incorporating Our Technologies
Broadcast 37% 40% Televisions and STBs
Mobile 28% 13% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 14% 19% DVDs, and HTIBs
PC 9% 12% Windows and macOS operating systems
Gaming consoles, Auto DVD, Dolby Cinema, and
Other 12% 16% Dolby Voice
Total 100% 100%
We have various licensing models: a two-tier model, an integrated licensing
model, a patent licensing model, and collaboration arrangements.
Two-Tier Licensing Model. Most of our consumer entertainment licensing business
consists of a two-tier licensing model whereby our decoding technologies,
included in reference software and firmware code, are first provided under
license to semiconductor manufacturers whom we refer to as "implementation
licensees." Implementation licensees incorporate our technologies in ICs which
they sell to OEMs of consumer entertainment products, whom we refer to as
"system licensees." System licensees separately obtain licenses from us that
allow them to make and sell end-user products using ICs that incorporate our
technologies.
Implementation licensees incorporate our technologies into their chipsets that,
once approved by Dolby , are available for purchase from implementation licensees
by OEMs for use in end-user products. Implementation licensees only pay us a
nominal initial fee on contract execution as consideration for the ongoing
services that we
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provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue. System licensees provide us with prototypes of products, or self-test results of products that incorporate our technologies. Upon our confirmation that our technologies are optimally and consistently incorporated, the system licensee may buy ICs under a license for the sameDolby technology from our network of implementation licensees, and may further sell approved products to retailers, distributors, and consumers. For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect on a particular product depends on several factors including the nature of the implementations, the mix ofDolby technologies used, and the volume of products using our technologies that are shipped by the system licensee. Integrated Licensing Model. We also license our technologies to software operating system vendors and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix ofDolby technologies used, the nature of the implementations, and the volume of products using our technologies that are shipped, and is subject to the same quality control evaluation process. Patent Licensing Model. We license our patents through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. We also license our patents directly to manufacturers that use our IP in their products. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary,Via Licensing Corporation . By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees.The Via Licensing patent pools enable product manufacturers to efficiently and transparently secure patent licenses for audio coding, interactive television, digital radio, and wireless technologies. We offer our patents related to AAC, AVC, HE-AAC, HEVC, and other IP through a combination of patent pools and licensing directly to OEMs. Recoveries. Licensing revenue recognized in any given 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. Dolby Voice: We enter into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earn revenue based on access to our technology and services. Products and Services We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in approximately 90 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Additionally, some of our Dolby Cinema arrangements involve fixed or minimum amounts, which are typically included in products sales. We had also sold and leased hardware that facilitated theDolby conferencing experience. During the first quarter of fiscal 2021, we decided to exit our conferencing hardware business and shifted our focus towards expanding the availability of Dolby Voice technology through software solutions and services. Recently, we launched a developer platform, Dolby.io, that enables developers to access our technologies through APIs. These offerings currently include media processing APIs for analyzing and improving the sound of recorded audio files, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications. Over time, Dolby.io is intended to significantly expand the amount and types of content that can be enhanced through our technologies and capabilities. 36
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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 playbackdigital cinema soundtracks including
those using Dolby Atmos.
An integral hardware component of the Dolby Voice conferencing
Dolby Conference Phone solution that enhances full-roomvoice capture, spatial voice
separation, and playback.
Video conferencing solution for huddle rooms and conference rooms
Dolby Voice Room that combines a camera product with the Dolby Conference Phone and Other Dolby Voice technology.3-D glasses and kits, broadcast
hardware and software used to encode,
Other Products transmit, and decode multiple channels of high quality audio for DTV
and HDTV distribution, monitors, and accessibility solutions for
hearing and visually impaired consumers, Dolby.io
In addition, we offer various services to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. We also provide PCS for products
sold and equipment installed at Dolby Cinema theaters operated by exhibitor
partners and support the implementation of our technologies into products
manufactured by our licensees.
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EXECUTIVE SUMMARY
COVID-19
In December 2019 , a novel coronavirus disease was first reported and in January
2020 , the World Health Organization ("WHO") declared it a Public Health
Emergency of International Concern. On March 11, 2020 , the WHO characterized
COVID-19 as a pandemic.
COVID-19 has triggered worldwide shutdowns, job losses, and other disruptions
which in turn have negatively affected the global economy, including consumer
purchasing activity. Because Dolby technologies are featured in a wide array of
electronic products that are primarily purchased by consumers, our revenues have
been negatively affected by COVID-19. The issues and circumstances relating to
COVID-19 continue to change rapidly and are difficult to predict. We continue to
monitor the evolving situation and the impact on our business.
The outbreak of COVID-19 has also affected many of our partners, resulting in
the disruption of consumer products' supply chains 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 resulted in decreased
revenue pertaining to royalties on consumer devices and may cause delays in the
adoption of our technologies by partners.
The overall cinema market has been adversely impacted by COVID-19
shelter-in-place and social distancing mandates. Our exhibition partners and
customers 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. Though select cinema
locations have been permitted to resume operations, many such locations are
operating significantly below capacity. It remains uncertain when and where the
cinemas will be able to operate at full capacity.
At Dolby , we implemented work-from-home policies 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. Select 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, as well as the
readiness of our facilities to accommodate appropriate safety measures for our
employees.
We expect COVID-19 will continue to have an impact for the foreseeable future.
The degree of impact on our business will depend on several factors, such as the
full duration and the extent of the pandemic, 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 of Dolby experiences that
people can enjoy, which will drive revenue growth across the markets we serve.
We aim to drive revenue growth by broadening Dolby experiences to more types of
content, such as music and gaming, that can increase our value proposition in
our existing device categories and create opportunities in new device categories
that can accelerate adoption of our technologies. We are also beginning to
leverage our audio and imaging expertise to expand the reach of our technologies
to address content beyond premium entertainment that can create new revenue
generating opportunities. Following is a discussion of the key markets that we
address and the various Dolby technologies and solutions that serve these
markets.
LICENSING
The majority of our licensing revenue is derived from the licensing of audio and
imaging technologies for premium entertainment playback. Our audio technologies
are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC
technologies. Our imaging technologies are primarily comprised of Dolby Vision
and our AVC and HEVC technologies. The following are certain highlights from our
first quarter of fiscal 2021 and key challenges related to audio and imaging
licensing, by market.
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Broadcast
Highlights: We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices. In recent years, we have expanded our offerings in the broadcast market through the introduction of newer technologies, including our Dolby Atmos and AC-4 audio technologies,Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools. We partner with many TV OEMs around the world to enable Dolby Vision andDolby Atmos experiences within their TV lineups. Several of our existing partners, such as LG, Sony, Panasonic, Skyworth, and TCL have continued to expand their support of the combined Dolby Vision and Dolby Atmos experience by releasing new models. For example, at CES inJanuary 2021 , Skyworth and TCL launchedDolby Vision IQ in their TVs. Dolby Vision IQ automatically adjusts the TV picture according to the surrounding light and the type of content being viewed, creating an enhanced viewing experience. We continue expanding in international markets, such asIndia , with partners such as OPPO and Flipkart. Key Challenges: Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors. 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. We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, in the broadcast market, as well as other markets, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, COVID-19 continues to cause uncertainty about consumer demand for devices and services in the broadcast market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Mobile Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android. HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices, and we offer these technologies through our patent licensing programs. We also continue to focus on expanding adoption of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market. The breadth of mobile devices supportingDolby technologies continues to increase globally. In the first quarter of fiscal 2021, Apple continued to deepen their adoption ofDolby technologies from their support of the combined Dolby Vision and Dolby Atmos experience on iPhone and iPad to now include the AirPods Max, supporting the Dolby Atmos content experiences. AdditionalDolby Atmos-enabled mobile devices are available in the market from partners such as Samsung, Amazon, Oppo, and Sony. In the first quarter of fiscal 2021, Tencent Games announced that QQ Speed Mobile will be the first mobile game that supports Dolby Atmos. Additionally, BT began delivering sports content in Dolby Atmos to mobile devices via their BT Sports App.BiliBili , one of the largest video sharing platforms inChina , recently launched support for Dolby Atmos on their platform. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. We rely on a small number of partnerships with key participants in the mobile market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, we must continue to support the development and distribution ofDolby enabled content via various ecosystems. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the mobile market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. 39
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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 our Dolby Atmos technology. AAC and HE-AAC technologies also have broad adoption through our patent licensing programs. These home entertainment devices can be paired with a growing array ofDolby enabled content via OTT services and Blu-ray discs. In the first quarter of fiscal 2021, the breadth of devices in the home entertainment market supporting Dolby Atmos continued to expand, including the latest soundbars in the market from partners like LG, JBL, and TCL. We also expanded our presence in DMAs through the recent launch of the Roku Ultra, which supports Dolby Vision and Dolby Atmos. In addition, content available in Dolby Vision and Dolby Atmos continued to grow in the first quarter of fiscal 2021, as many of our major streaming partners like Netflix, Disney+, Apple TV+, and Amazon continued to enable more pieces of content in Dolby Vision and Dolby Atmos during the quarter, which increases our value proposition for higher adoption in more devices. Additionally this quarter, HBO Max began to support content in the combined Dolby Vision andDolby Atmos experience. We have also expanded our global presence with Hotstar supporting Dolby Vision within their Disney+ content inIndia , and Tencent and iQiYi supporting Dolby Vision and Dolby Atmos inChina . We continue to focus on expanding the availability ofDolby technologies to new devices and new forms of content such as music. In the first quarter of fiscal 2021, Anghami Plus became the first streaming service in theMiddle East to support Dolby Atmos music. Also in the first quarter of fiscal 2021, Amazon Prime Video began to stream live sports in Dolby Atmos. Key Challenges: We must continue to present compelling reasons for consumers to demand our technologies wherever they enjoy entertainment content, while promoting creation and broad availability of content in our formats. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the home entertainment market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Personal Computers Highlights: DD+ continues to enhance 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 , andASUS also support Dolby Vision and Dolby Atmos. This quarter, we saw the adoption of Dolby Vision and Dolby Atmos within PCs expand across use cases and international markets. At CES inJanuary 2021 , Lenovo andASUS launched new gaming PCs that supportDolby technologies , and inIndia , Flipkart brought new Nokia PCs to market that support the combined Dolby Vision and Dolby Atmos experience. Key Challenges: PC revenues have been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue. If declining conditions and trends persist, and OEMs do not incorporate our technologies in current and future products, our PC revenues will face continuing downward pressure. We must continuously collaborate and maintain our key partnership relationships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution ofDolby content via various ecosystems. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the PC market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Other Markets Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles and streaming platforms for movie and television content. In the first quarter of fiscal 2021, Microsoft launched their latest generation Xbox Series X and Series S, which support Dolby Vision and Dolby Atmos. We also generate revenue from the 40
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automotive industry primarily through disc playback devices as well as other elements of the entertainment system. Key Challenges: Consumer demand for devices in the gaming industry 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. These factors may impact our future revenues. If OEMs do not incorporate our technologies in current and future products, our revenues will face downward pressure. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the gaming industry, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. In addition to licensing revenue derived from the licensing of audio and imaging technologies from the markets discussed above, we offer our audio and imaging technologies to createDolby experiences through Dolby Cinema. Dolby Cinema Highlights: We continued to expand our global presence for Dolby Cinema. In the first quarter of fiscal 2021, the first Dolby Cinema was opened inTaiwan . At the end of the first quarter of fiscal 2021, we had over 260 Dolby Cinema locations established across 14 countries. The breadth of motion pictures for Dolby Cinema continues to grow with over 300 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all the major studios. Key Challenges: Although the premium large format market for the cinema industry has been growing, Dolby Cinema competes with other existing offerings. Our success depends on our partners and their success and our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience. In addition, the success of our Dolby Cinema offering will be tied to global box office performance generally. COVID-19 has had, and is likely to continue to have, 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, shelter-in-place mandates and government-imposed social-distancing restrictions has had, and is likely to continue to have, a negative impact on our cinema-related revenues and consumer demand. Further, certain studios have delayed the release of a number of new movie titles and/or are shifting towards a direct-to-streaming model. It is uncertain whether consumer demand for the cinema and other forms of indoor recreation will return to previous levels. In addition, when cinemas reopen, exhibitor partners may operate fewer screens in response to decreased attendance. PRODUCTS AND SERVICES A majority of our products and services revenues are derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries. Revenues from the sale of Dolby Conference Phones andDolby Voice Room , a business which we are exiting, are included in products and services. Revenues from our recently launched developer platform are also included in products and services. Cinema Products and Services Highlights: To help enable the playback of content inDolby formats, we offer a range of servers and audio processors to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the first quarter of fiscal 2021, there are over 6,000 Dolby Atmos screens installed or committed and over 1,800 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel Amplifier, and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than what was previously available to them. Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such asChina , which are 41
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subject to economic risks as well as geo-political risks. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, the effects of COVID-19 such as the closure of cinemas, social distancing requirements, and shelter-in-place mandates have had, and are likely to continue to have, a negative impact on demand for cinema products and services. COVID-19 has also negatively impacted the financial health of our cinema customers and partners. If cinemas permanently close, our equipment may be available for resale on the secondary market, and erode the demand for new products. These conditions are likely to continue after the end of government-imposed restrictions. Dolby Voice Highlights: Historically, we sold hardware products such as theDolby Conference Phone and theDolby Voice Room , that included our Dolby Voice technology. However, in the first quarter of fiscal 2021, we decided to exit our conference hardware business and focus instead on expanding the availability of Dolby Voice technology through software solutions and services. Key Challenges: As we shift away from hardware solutions, we may face challenges in how we expand our technologies to new offerings and solutions. Our success will depend on our ability to attract a robust developer community and new industry relationships as we to bring our services and technologies to market. Other 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, which enables developers to access our technologies through APIs. The initial offerings include media processing APIs for analyzing and improving the sound of recorded audio files, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications. Following the initial launch of Dolby.io, we have seen increased developer engagement with our media and interactivity APIs for use cases such as entertainment, online education and telehealth. For example, we have partnered withSoundCloud to incorporate our music mastering APIs within their online music distribution platform. Key Challenges: Our success in this market will depend on the number of developers we are able to attract, the volume of usage of the service, and our ability to monetize our services. Although the market for online experiences has been growing,Dolby's interactivity API technologies compete with other offerings. In addition, our pursuit of growth and further adoption depends on our ability to continue to innovate and add additional value to our services. 42
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no additional material changes to the critical accounting policies from those included in our fiscal 2020 Annual Report on Form 10-K as per Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates included therein. RESULTS OF OPERATIONS For each line item included on our interim condensed consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order of their impact on the overall change (from an absolute value perspective). This discussion and analysis highlights comparisons of material changes in the condensed consolidated financial statements for the quarters endedDecember 25, 2020 andDecember 27, 2019 . 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 associated fees. Fiscal Quarter Ended Change December 25, December 27, Licensing 2020 2019 $ % Revenue$373,005 $257,683 $115,322 45% Percentage of total revenue 96% 88% Cost of licensing 12,946 12,342 604 5% Gross margin 360,059 245,341 114,718 47% Gross margin percentage 97% 95% Q1 2021 vs. Q1 2020 Factor Revenue Gross Margin Higher revenues from our patent licensing technologies, due to Mobile á timing of contracts and increased adoption, and higher revenues from recoveries Higher revenues from recoveries, higher units and increased Broadcast á adoption of our technologies, primarily in TVs, and higher revenues from patent licensing technologies, partially offset by lower unit shipments of STBs CE á Higher revenues from increased adoption of our
patent licensing ßà No significant fluctuations
technologies
Higher gaming revenue and higher patent administration fees
Other á from Via Licensing, partially offset by lower revenues from
Dolby Cinema resulting from the closure of cinemas and lower
attendance due to COVID-19
PC ßà No significant fluctuations
Products and Services
Products revenue is generated from the sale of audio, imaging, and voice
products for the cinema, television broadcast, communications, and consumer
products industries. Also included in products revenue are amounts relating to
certain Dolby Cinema arrangements that are considered sales-type leases that
involve fixed or minimum fees. Cost of products consists of materials, labor,
and manufacturing overhead, amortization of certain intangible assets, as well
as third party royalty obligations.
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Services revenue consists of fees charged to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. Services revenue also includes PCS
for products sold and equipment installed at Dolby Cinema theaters operated by
exhibitor partners and support for the implementation of our technologies into
products manufactured by our licensees. Also included in services revenue are
amounts generated through our Dolby.io developer platform. Cost of services
consists of personnel and personnel-related costs for providing our professional
services, software maintenance and support, external consultants, and other
direct expenses incurred on behalf of customers.
Fiscal Quarter Ended Change
December 25, December 27,
Products and Services 2020 2019 $ %
Revenue $16,869 $34,194 $(17,325) (51)%
Percentage of total revenue 4% 12%
Cost of products and services 22,358 24,973 (2,615) (10)%
Gross margin (5,489) 9,221 (14,710) (160)%
Gross margin percentage (33)% 27%
Q1 2021 vs. Q1 2020
Factor Revenue Gross Margin
Lower sales of cinema equipment
Products â attributable to COVID-19, and lower units â Lower margins due to less revenue from
of conferencing hardware products as a Dolby Cinema
result of winding down that business.
Services ßà No significant fluctuations ßà No significant fluctuations
Operating Expenses
Research and Development
R&D expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, consulting and contract labor costs, depreciation and
amortization, facilities costs, costs for outside materials, and information
technology expenses.
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Research and development $63,772 $57,650 $6,122 11%
Percentage of total revenue 16% 20%
Q1 2021 vs. Q1 2020
Category Key Drivers
Taxes and Insurance á A property tax credit recordedin the prior year did not repeat
in the current period
Sales and Marketing
S&M expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, marketing and promotional expenses for events such as
trade shows and conferences, marketing campaigns, travel-related expenses,
consulting fees, facilities costs, depreciation and amortization, information
technology expenses, and legal costs associated with the protection of our IP.
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Sales and marketing $75,445 $95,118 $(19,673) (21)%
Percentage of total revenue 19% 33%
Q1 2021 vs. Q1 2020
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Category Key Drivers
Marketing Programs â Lower costs related to marketing programs and advertising
General and Administrative
G&A expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, depreciation, facilities and information technology
costs, as well as professional fees and other costs associated with external
consulting and contract labor.
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
General and administrative $54,454 $52,529 $1,925 4%
Percentage of total revenue 14% 18%
Q1 2021 vs. Q1 2020
Category Key Drivers
Taxes and Insurance á A property tax credit recorded inthe prior year did not repeat in
the current year
Legal, Professional, and á Higher costs associated with patent costs, outside legal counsel
Consulting costs, and compliance work
Gain on Sale of Assets
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Gain on sale of assets $(13,871) $- $(13,871) (100)%
Percentage of total revenue (4)% -%
Q1 2021 vs. Q1 2020
In fiscal year 2019, management committed to a plan to sell a property, which
included land and a building, with a carrying value of $2.2 million as of
September 25, 2020 . During the first quarter of fiscal 2021, we finalized the
sale of this property, and as a result, we recognized 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
Restructuring charges recorded as operating expenses in our statement of
operations represent costs associated with separate individual restructuring
plans implemented in various fiscal periods. The extent of our costs arising as
a result of these actions, including fluctuations in related balances between
fiscal periods, is based on the nature of activities under the various plans.
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Restructuring $10,023 $675 $9,348 1,385%
Percentage of total revenue 3% -%
Q1 2021 vs. Q1 2020
Restructuring charges recorded in the fiscal quarter ended December 25, 2020 of
$8.8 million were incurred in relation to our fiscal 2021 plan to reduce certain
activities, such as exiting our conferencing hardware business, in order to
reallocate those resources towards higher priority investment areas, and
reducing the cost structure of our manufacturing operations. These costs
represented severance and other related benefits offered to approximately
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100 employees that were impacted by this action. 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/(losses) from foreign currency transactions,
derivative instruments, and sales of marketable securities from our investment
portfolio.
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Other income $2,215 $5,864 $(3,649) (62)%
Percentage of total revenue 1% 2%
Q1 2021 vs. Q1 2020
Category Key Drivers
Interest Income â Lower yields on current year investment balances due to decreased
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 include changes in our
projected fiscal year results, recurring items such as tax rates and relative
income earned in foreign jurisdictions, as well as discrete items such as
changes to our uncertain tax positions that may occur in, but are not
necessarily consistent between, periods. For additional information related to
effective tax rates, see Note 12 "Income Taxes" to our unaudited interim
condensed consolidated financial statements.
Fiscal Quarter Ended
December 25, December 27,
2020 2019
Provision for income taxes $(24,272) $(5,863)
Effective tax rate 14.5% 10.8%
Q1 2021 vs. Q1 2020
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 foreign earned income
Net (income)/loss attributable to controlling interest
Fiscal Quarter Ended Change
December 25, December 27,
2020 2019 $ %
Net income/(loss) attributable to controlling interest
$162 $(7,654) (4,725)% Percentage of total revenue (2)% -% Q1 2021 vs. Q1 2020 During 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 condensed consolidated statements of operations. The property was 51% owned by our controlling interest, therefore 51% of the gain recognized in gain on sale of assets has been attributed to our controlling interest. 46
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LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As ofDecember 25, 2020 , we had cash and cash equivalents of$1,110.0 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$101.6 million , which consisted primarily of municipal debt securities, certificates of deposit, government bonds, commercial paper, corporate bonds, andU.S. agency securities. The following table presents selected financial information as ofDecember 25, 2020 andSeptember 25, 2020 (amounts displayed are in thousands): December 25, September 25, 2020 2020 Cash and cash equivalents$ 1,110,024 $ 1,071,876 Short-term investments 52,261 46,948 Long-term investments 49,337 52,149 Accounts receivable, net 293,948 180,340
Accounts payable and accrued liabilities 263,884 232,591 Working capital
1,408,252 1,280,087
Capital Expenditures and Uses of Capital
Our capital expenditures consist of purchases of land, building, building
fixtures, laboratory equipment, office equipment, computer hardware and
software, leasehold improvements, and production and test equipment. Included in
capital expenditures are amounts associated with Dolby Cinema locations. We
continue to invest in S&M and R&D to promote the overall growth of our business
and technological innovation.
We retain sufficient cash holdings to support our operations and we also
purchase investment grade securities diversified among security types,
industries, and issuers. We have used cash generated from our operations to fund
a variety of activities related to our business in addition to our ongoing
operations, including business expansion and growth, acquisitions, and
repurchases of our Class A common stock. We have historically generated
significant cash from operations. However, these cash flows and the value of our
investment portfolio could be affected by various risks and uncertainties, as
described in Part II, Item 1A "Risk Factors."
Shareholder Return
We have returned cash to stockholders through both repurchases of Class A common
stock under our repurchase program initiated in fiscal 2010 and our quarterly
dividend program initiated in fiscal 2015. Refer to Note 9 "Stockholders' Equity
and Stock-Based Compensation" to our unaudited interim condensed consolidated
financial statements for a summary of dividend payments made under the program
during fiscal 2021 and additional information regarding our stock repurchase
program.
Stock Repurchase Program. Our stock repurchase program was approved in fiscal
2010, and since then we have completed approximately $1.9 billion of stock
repurchases under the program.
Quarterly Dividend Program. During the first quarter of fiscal 2015, we
initiated a recurring quarterly cash dividend program for our stockholders. For
fiscal 2021, quarterly dividends of $0.22 per share were paid on our Class A and
Class B common stock to eligible stockholders of record.
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Cash Flows Analysis
For the following comparative analysis performed for each of the sections of the
statement of cash flows, the significant factors identified as the leading
drivers contributing to the fluctuation are presented in descending order of
their impact relative to the overall change (amounts displayed in thousands).
Operating Activities
Fiscal Quarter Ended
December 25 , December 27,
2020 2019
Net cash provided by operating activities
Net cash provided by operating activities increased$51.0 million in the fiscal quarter-to-date period endedDecember 25, 2020 as compared to the fiscal quarter-to-date period endedDecember 27, 2019 , primarily due to the following: Factor Impact On Cash Flows Net Income á Higher net income, partially offset by lower expenses Working Capital â Lower inflows due to increased accounts receivable Gain on Sale of Assets â Non-cash adjustment for the
gain recognized on the sale of
property previously held for sale
Investing Activities
Fiscal Quarter Ended
December 25 , December 27,
2020 2019
Net cash used in investing activities
Net cash used in investing activities was
Impact On Cash Flows
á Lower outflows for the purchase of marketable investment
Purchase of Investments securities
â Lower inflows from the sale and maturity of marketable investment
Proceeds from Investments securities
Sale of Assets á Higher inflows for sale of property previously held for sale
Financing Activities
Fiscal Quarter Ended
December 25 , December 27,
2020 2019
Net cash used in financing activities
Net cash used in financing activities was$1.9 million lower in the fiscal quarter-to-date period endedDecember 25, 2020 as compared to the fiscal quarter-to-date period endedDecember 27, 2019 , primarily due to the following: Factor Impact On Cash Flows Common Stock Issuance á Higher inflows from employee stock option exercises Share Repurchases â Higher outflows for common stock repurchases
Shares Repurchased for Tax â Higher outflows due to increased vesting of RSUs resulting in more Withholdings
shares withheld for taxes
Distribution to â Higher outflows for distributions for controlling interest due to
Controlling Interest sale of property previously held for sale
Off-Balance Sheet Arrangements and Contractual Obligations Our liquidity is not dependent upon the use of off-balance sheet financing arrangements, and we have not entered into any arrangements that are expected to have a material effect on liquidity or the availability of capital
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resources. Since the end of our most recent fiscal year endedSeptember 25, 2020 , there have been no material changes in either our off-balance sheet financing arrangements or contractual obligations outside the ordinary course of business. For additional details regarding our contractual obligations, see Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. Indemnification Clauses We are party to certain contractual agreements under which we have agreed to provide indemnification of varying scope and duration to the other party relating to our licensed IP. Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our consolidated financial statements with respect to these obligations. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. For additional details regarding indemnification clauses within our contractual agreements, see Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. 49
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