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. In addition, we provide products and services for a variety of applications in the cinema, broadcast, and communications markets, and offer media processing and interactivity APIs through our developer platform, Dolby.io. COVID-19 Please refer to the Executive Summary section of Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations for information concerning the continuing effect of COVID-19 on our business. OUR STRATEGY Key elements of our strategy include: Advancing the Science of Sight and Sound. We apply our understanding of the human senses, audio, and imaging engineering to develop technologies aimed at improving how people experience and interact with their entertainment and communications content. Providing Creative Solutions. We promote the use of our solutions as creative tools, and provide our products, services, and technologies to filmmakers, musical artists, sound mixers, and other content creators and providers. Our tools help showcase the quality and impact of their efforts and intent, which in turn may generate market demand. Delivering Superior Experiences. Our technologies and solutions optimize playback and communications so that users may enjoy richer, clearer, and more immersive sound and sight experiences. 35
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REVENUE GENERATION We have active licensing arrangements with over 500 electronics product OEMs and software developers. As ofJune 25, 2021 , we had approximately 14,900 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,400 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 revenue for all periods presented:
Fiscal Quarter Ended Fiscal Year-To-Date Ended
June 25, June 26, June 25, June 26,
Market 2021 2020 2021 2020 Main Offerings Incorporating Our Technologies
Broadcast 46% 38% 39% 39% Televisions and STBs
Mobile 18% 33% 23% 23% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 14% 9% 15% 14% DVDs, and HTIBs
PC 9% 10% 11% 12% Windows and macOS operating systems
Other 13% 10% 12% 12% Gaming consoles, Auto DVD, and Dolby Cinema
Total 100% 100% 100% 100%
We have various licensing models: a two-tier model, an integrated licensing
model, a patent licensing model, and collaboration arrangements.
Two-Tier Licensing Model. Most of our consumer entertainment licensing
business consists of a two-tier licensing model whereby our decoding
technologies, included in reference software and firmware code, are first
provided under license to semiconductor manufacturers whom we refer to as
"implementation licensees." Implementation licensees incorporate our
technologies in ICs which they sell to OEMs of consumer entertainment products,
whom we refer to as "system licensees." System licensees separately obtain
licenses from us that allow them to make and sell end-user products using ICs
that incorporate our technologies.
Implementation licensees incorporate our technologies into their chipsets that,
once approved by Dolby , are available for purchase from implementation licensees
by OEMs for use in end-user products. Implementation licensees only pay us a
nominal initial fee on contract execution as consideration for the ongoing
services that we provide to assist in their implementation process. Revenue from
these initial fees is recognized ratably over the contractual term as a
component of licensing revenue.
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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: Historically, we have entered into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earned revenue based on access to our technology and services. 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. Products and Services We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in approximately 90 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. Additionally, some of our Dolby Cinema arrangements involve fixed or minimum amounts, which are typically included in products sales. We also sell and lease hardware that facilitate theDolby conferencing experience, though at reduced levels since we decided to exit our conferencing hardware business in the first quarter of fiscal 2021. 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. 37
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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, accessibility solutions for hearing
and visually impaired consumers, and Dolby.io
In addition, we offer various services to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. We also provide PCS for products
sold and equipment installed at Dolby Cinema theaters operated by exhibitor
partners and support the implementation of our technologies into products
manufactured by our licensees.
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EXECUTIVE SUMMARYCOVID-19
The COVID-19 pandemic has triggered worldwide shutdowns, job losses, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity. BecauseDolby technologies are featured in a wide array of electronic products that are primarily purchased by consumers, our revenue for certain consumer products has been negatively affected by COVID-19, although we have experienced heightened demand for certain consumer products that feature our technologies, including TVs and PCs, during the pandemic. It is unclear how demand for these consumer products may change relative to demand levels experienced during the pandemic. 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, shortages of certain semiconductor components, and delays in shipments, product development, and product launches. Consumer demand for products that include our technologies may continue to be negatively impacted due to economic uncertainty resulting from COVID-19. These factors have impacted revenue pertaining to royalties on consumer devices and may cause delays in the adoption of our technologies by partners. The overall cinema market has been adversely impacted by COVID-19 shelter-in-place and social distancing mandates. At various times, our exhibition partners and customers have had to either partially or fully discontinue operations. This has resulted in a significant reduction in box office receipts at Dolby Cinema sites and lower demand for our cinema products and services. It remains uncertain when and where the cinemas will be able to operate at full capacity. Most cinema locations have been permitted to resume operations, but many such locations are operating under restricted capacity. AtDolby , 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. SelectDolby 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, with varying degrees of impact depending on geographic location. The degree of impact on our business will depend on several factors, such as the full duration and the extent of the pandemic, the actions taken by governments, businesses and consumers in response to the pandemic, and the rate and extent of vaccine distributions to the general population, all of which continue to evolve and remain uncertain at this time. Further discussion of the potential impacts of COVID-19 on our business can be found in Part II, Item 1A "Risk Factors." EXPANDING OUR LEADERSHIP IN AUDIO AND IMAGING EXPERIENCES We are focused on expanding our leadership in audio and imaging solutions for premium entertainment content by increasing the number ofDolby experiences that people can enjoy, which will drive revenue growth across the markets we serve. We can increase our value proposition and create opportunities by broadeningDolby technologies into new types of content, such as music and gaming. We are also beginning to leverage our audio and imaging expertise to expand the reach of our technologies to address content beyond premium entertainment that can create new revenue generating opportunities. Following is a discussion of the key markets that we address and the variousDolby technologies and solutions that serve these markets. LICENSING The majority of our licensing revenue is derived from the licensing of audio and imaging technologies for premium entertainment playback. Our audio technologies are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC technologies. Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies. 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 39
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movie and episodic content through adoption across content creators and streaming services. The availability of content on these platforms has driven strong adoption in devices such as TVs, STBs, speaker devices, and playback devices. Our coreDolby audio technologies have also been broadly adopted through many forms of content, including broadcast TV, streaming, and optical disc playback. Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, and HBO Max continue to enable more content in Dolby Vision andDolby Atmos. For example, in the third quarter of fiscal 2021, there was an increase in the global adoption of our technologies, where streaming services Netflix, Disney+, Apple TV+, Hotstar, and iQiyi are launching local content inDolby formats in countries such asKorea ,India ,Thailand , andSingapore . Recently, TV network operators have begun to broadcast live events inDolby Vision and Dolby Atmos. For example, Comcast is enabling Dolby Vision andDolby Atmos for theTokyo 2020Olympics . Also, in the third quarter of fiscal 2021, several international TV stations broadcast the Euro 2020 football championship in Dolby Atmos. We believe broadcast experiences such as these help drive further adoption of our technologies in devices such as TVs and smartphones. We have also enabled a broader range of content, such as music, gaming, and user-generated content. We believe enabling our technologies in these forms of content create additional value for adoption ofDolby within devices like mobile, PC, gaming consoles, and automotive. In the third quarter of fiscal 2021, Apple launched Dolby Atmos in their Apple Music service. Additionally,Naver Vibe , a music streaming service inKorea , launched music in DolbyAtmos Music for the first time. Also recently, DistroKid, the world's leading distributor of independent music, announced plans to deliver songs inDolby Atmos to Apple Music and Tidal. The following are highlights from our third quarter of fiscal 2021 and key challenges related to audio and imaging licensing, by market. Broadcast Highlights: We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices. In recent years, we have expanded our offerings in the broadcast market through the introduction of newer technologies, including our Dolby Atmos and AC-4 audio technologies,Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools. We partner with many TV OEMs to enable Dolby Vision and Dolby Atmos experiences within their TV lineups. Many such partners have continued to expand their support of the combined Dolby Vision and Dolby Atmos experience. For example, Skyworth recently launched its latest smart TV model that supports Dolby Vision and Dolby Atmos. In addition, LG recently announced that it plans to initiate a firmware update to its OLED TVs that can optimize the game play experience for Dolby Vision enabled games. Xiaomi inChina recently announced new TV models that support Dolby Vision, Dolby Vision IQ, and Dolby Atmos. Also, in the third quarter of fiscal 2021,Japan -based Regza launched its adoption of Dolby Vision IQ in their TVs. Dolby Vision IQ creates an enhanced viewing experience by automatically adjusting the TV picture according to the surrounding light and the type of content being viewed. Key Challenges: Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors. We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, in certain countries, such asChina , we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies. Additionally, in the broadcast market, as well as other markets, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further, COVID-19 continues to cause uncertainty about consumer demand for devices and services in the broadcast market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. 40
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Mobile
Highlights: We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android. HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices, and we offer these technologies through our patent licensing programs. We also continue to focus on expanding adoption of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market. The breadth of mobile devices supportingDolby technologies continues to increase globally. In the third quarter of fiscal 2021, OPPO launched its latest mobile phone model K9 which supports Dolby Atmos, andIndia -based Realme recently announced that its latest model will support Dolby Atmos. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. We rely on a small number of partnerships with key participants in the mobile market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Additionally, we must continue to support the development and distribution ofDolby -enabled content via various ecosystems. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the mobile market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Consumer Electronics Highlights: We have an established presence in the home entertainment market across devices such as AVRs, soundbars, smart speakers, DMAs, and Blu-Ray players, through the inclusion of our DD+ technology, and increasingly through the inclusion of our Dolby Atmos technology. AAC and HE-AAC technologies also have broad adoption through our patent licensing programs. Key Challenges: We must continue to present compelling reasons for consumers to demand our technologies wherever they enjoy entertainment content, while promoting creation and broad availability of content in our formats. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the home entertainment market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. Personal Computers Highlights: DD+ continues to enhance audio playback in both Mac and Windows operating systems, including native support in their respective Safari and Microsoft Edge browsers.Dolby's presence in these browsers enables us to reach more users through various types of content, including streaming video entertainment. A number of PCs from partners such as Apple, Lenovo,Dell , Samsung andASUS also support Dolby Vision and/or Dolby Atmos, with continued expansion of applications through music, streaming, and gaming. In the third quarter of fiscal 2021, Samsung launched their new Galaxy Book model supporting Dolby Atmos. Key Challenges: PC revenue from core audio technologies such as DD+ has been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue. We must continuously collaborate and maintain our key partnership relationships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution ofDolby content via various ecosystems. Demand in the PC market has been positively impacted in recent quarters by work-from-remote policies due to COVID-19. It is unclear whether this heightened demand will be sustained. COVID-19 continues to cause uncertainty about the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. 41
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Other Markets Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles that support gaming content and streaming for movie and television content. The most recently launched Xbox gaming console supports Dolby Vision and Dolby Atmos for streaming and gaming content. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system, including in the future, enabling the playback of Dolby Atmos music. Key Challenges: Consumer demand for devices in the gaming industry is impacted by anticipation of console refresh cycles. In addition, the gaming console market has competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. Also, automotive revenue has been negatively impacted by a decline in the portion of cars that have optical disc playback in recent years. These factors may impact our future revenue. If OEMs do not incorporate our technologies in current and future products, our revenue will face downward pressure. Further, COVID-19 continues to cause uncertainty about consumer demand for devices in the gaming industry, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products. In addition to licensing revenue derived from the licensing of audio and imaging technologies into the markets discussed above, we offer our audio and imaging technologies to createDolby experiences through Dolby Cinema. Dolby Cinema Highlights: We continue to expand our global presence for Dolby Cinema. As of the end of the third quarter of fiscal 2021, we have over 260 Dolby Cinema locations established across 14 countries, with about 95% of those sites reopened to limited capacity. The breadth of motion pictures for Dolby Cinema continues to grow with over 350 theatrical titles in Dolby Vision andDolby Atmos having been announced or released from all of 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 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 a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has improved recently. Further, certain studios have delayed the release of a number of new movie titles and/or are shifting towards a direct-to-streaming model, which as a result, has negatively impacted the rate of new Dolby Cinema content. It is uncertain whether consumer demand for the cinema and other forms of indoor recreation 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 the sale of Dolby Conference Phones andDolby Voice Room , a business which we are exiting, is included in products and services. Revenue from our recently launched developer platform, Dolby.io, is also included in products and services. Cinema Products and Services Highlights: To help enable the playback of content inDolby formats, we offer a range of servers and audio processors to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the third quarter of fiscal 2021, there are over 6,000 Dolby Atmos screens installed or committed and over 2,000 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. 42
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Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such asChina , which are subject to economic risks as well as geo-political risks. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, the effects of COVID-19 such as the closure of cinemas, social distancing requirements, and shelter-in-place mandates have had a negative impact on demand for cinema products and services, and it remains uncertain whether it will continue to have a negative impact on the demand for these 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 as government-imposed restrictions continue to lift in certain locations. 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. 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 initial offerings include media processing APIs for analyzing and improving the sound of recorded audio files, for example, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications. Following the initial launch of Dolby.io, we have seen growing developer engagement with our media and interactivity APIs for use cases such as entertainment, online education and collaboration tools. Also, in the third quarter of fiscal 2021, we completed an integration with Box by using embeddedDolby media processing APIs, that allows Box customers to enable their users to easily enhance the quality of their audio files. Key Challenges: Dolby.io is still considered in its initial stages of product launch, and it is uncertain when and if it will be a material revenue driver for the Company. Our success in this market will depend on the number of developers we are able to attract and maintain, the volume of usage of the service, and our ability to monetize our services. In addition, the development and maintenance needed to provide a reliable and scalable platform may require us to internally develop new skills for our current employees or hire external specialized talent. Although the market for online experiences has been growing,Dolby's interactivity API technologies compete with other offerings. 43
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to the critical accounting policies from those included in our fiscal 2020 Annual Report on Form 10-K filed with theSEC , as per Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates included therein. RESULTS OF OPERATIONS For each line item included on our interim condensed consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order of their impact on the overall change (from an absolute value perspective). This discussion and analysis highlights comparisons of material changes in the condensed consolidated financial statements for the quarters endedJune 25, 2021 andJune 26, 2020 . Note that adjustments related to previously under-reported sales-based royalties as well as unlicensed settlement activity, are collectively referred to as "recoveries." Amounts displayed, except percentages, are in thousands. Revenue and Gross Margin Licensing Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products and services to enable and enhance audio and imaging capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. A significant portion of our licensing revenue pertains to customer-shipment royalties that we recognize based on estimates of our licensees' shipments. To the extent that shipment data reported by licensees differs from estimates we made and recorded, we recognize an adjustment to revenue for such difference in the period we receive the reported shipment data. Our cost of licensing consists mainly of amortization of certain purchased intangible assets and intangible assets acquired in business combinations, depreciation, third party royalty obligations, and patent pool fees. Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change June 25, June 26, June 25, June 26, Licensing 2021 2020 $ % 2021 2020 $ % Revenue$271,569 $235,125 $36,444 15%$948,159 $821,673 $126,486 15% Percentage of total revenue 95% 95% 95% 92% Cost of licensing 12,480 12,572 (92) (1)% 41,486 38,157 3,329 9% Gross margin 259,089 222,553 36,536 16% 906,673 783,516 123,157 16% Gross margin percentage 95% 95% 96% 95% Fiscal Quarter Ended Fiscal Year-To-Date Ended Market June 25, 2021 June 26, 2020 June 25, 2021 June 26, 2020 Broadcast$ 123,955 46 %$ 88,824 38 %$ 368,068 39 %$ 319,634 39 % Mobile 49,861 18 % 77,641 33 % 221,157 23 % 187,819 23 % CE 37,805 14 % 20,365 9 % 138,010 15 % 118,409 14 % PC 24,870 9 % 23,537 10 % 108,709 11 % 101,171 12 % Other 35,078 13 % 24,758 10 % 112,215 12 % 94,640 12 % Total licensing revenue$ 271,569 100 %$ 235,125 100 %$ 948,159 100 %$ 821,673 100 % 44
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Current Quarter: Q3 2021 vs. Q3 2020
Factor Revenue Gross Margin
Higher revenue due to higher TV unit shipments in North America
Broadcast á and Europe, higher STB unit shipments, higher revenue from
recoveries, and higher adoption of our technologies
Lower revenue from our patent licensing technologies, primarily
Mobile â due to lower recoveries in the current year, partially offset by
higher revenue from higher unit shipments
CE á Higher revenues from higher shipments of DMAs and soundbars, and ßà No significant fluctuations
increased adoption of our patent licensing technologies
Higher gaming revenue primarily from gaming consoles and gaming
Other á headsets, higher patent administration fees from Via Licensing,
and higher revenues from Dolby Cinema due to increased movie
theater attendance
PC á Higher unit shipments due to demand from working from home
conditions of COVID-19, partially offset by lower recoveries
Year-To-Date: Q3 2021 vs. Q3 2020
Factor Revenue Gross Margin
Higher revenue from higher unit shipments in North America and
Broadcast á Europe, increased adoption of our technologies, and higher
revenue from our patent licensing technologies, partially offset
by lower recoveries
Mobile á Higher revenue from recoveries, as well as higher revenue from
our patent licensing technologies and higher unit shipments
Higher revenue from higher unit shipments, increased adoption of
CE á our Dolby Atmos and Dolby Vision technologies,and higher revenue ßà No significant fluctuations
from recoveries
Higher gaming revenue primarily from gaming consoles and higher
Other á patent administration fees from Via Licensing, partially offset
by lower automotive recoveries
Higher unit shipments due to demand from working from home
PC á conditions of COVID-19, and higher adoption of our Dolby Atmos
and Dolby Vision technologies, partially offset by lower
recoveries
Products and Services
Products revenue is generated from the sale of audio, imaging, and voice
products for the cinema, television broadcast, and communications. Also included
in products revenue are amounts relating to certain Dolby Cinema arrangements
that are considered sales-type leases that involve fixed or minimum fees. Cost
of products includes materials, labor, manufacturing overhead, amortization of
certain intangible assets, and certain third party royalty obligations.
Services revenue consists of fees charged to support theatrical and television
production for cinema exhibition, broadcast, and home entertainment, including
equipment training and maintenance, mixing room alignment, equalization, as well
as audio, color, and light image calibration. Services revenue also includes PCS
for products sold and equipment installed at Dolby Cinema theaters operated by
exhibitor partners and support for the implementation of our technologies into
products manufactured by our licensees. Also included in services revenue are
amounts generated through our Dolby.io developer platform. Cost of services
consists of personnel and personnel-related costs for providing our professional
services, software maintenance and support, external consultants, and other
direct expenses incurred on behalf of customers.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
Products and Services 2021 2020 $ % 2021 2020 $ %
Revenue $15,230 $11,784 $3,446 29% $48,072 $68,928 $(20,856) (30)%
Percentage of total revenue 5% 5% 5% 8%
Cost of products and services 19,164 17,316 1,848 11% 57,840 65,876 (8,036) (12)%
Gross margin (3,934) (5,532) 1,598 (29)% (9,768) 3,052 (12,820) (420)%
Gross margin percentage (26)% (47)% (20)% 4%
Current Quarter: Q3 2021 vs. Q3 2020
Factor Revenue Gross Margin
Higher sales of cinema equipment due to
gradual recovery from COVID-19, partially Higher gross margin primarily due to
Products á offset by lower units of conferencing á higher products and services revenue
hardware products as a result of winding
down that business
Services ßà No significant fluctuations ßà No significant fluctuations
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Year-To-Date: Q3 2021 vs. Q3 2020
Factor Revenue Gross Margin
Lower revenue from Dolby Cinema and Dolby
Lower sales of cinema equipment attributable Voice hardware sales, lower absorption of
to COVID-19, and lower units of conferencing manufacturing overhead, and higher scrap
Products â hardware products as a result of winding â from exiting our conference hardware
down that business business, partially offset by lower
variable COGS due to lower volume and
lower excess and obsolescence charges
Higher costs related to Dolby Cinema
Services ßà No significant fluctuations â services, higher depreciation expense,
and higher systems expenses to support
the developer platform
Operating Expenses
Research and Development
R&D expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, consulting and contract labor costs, depreciation and
amortization, facilities costs, costs for outside materials, and information
technology expenses.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
2021 2020 $ % 2021 2020 $ %
Research and development $62,094 $59,583 $2,511 4% $191,674 $177,319 $14,355 8%
Percentage of total revenue 22% 24% 19% 20%
Current Quarter: Q3 2021 vs. Q3 2020
Category Key Drivers
Compensation & Benefits á Higher costs of$2.3 million
due to higher salaries expense
Year-To-Date: Q3 2021 vs. Q3 2020 Category Key
Drivers
Higher costs of $5.6 million due to higher incentive compensation and
Compensation & Benefits á higher costs of $4.7 million due to higher salaries expense, due to
increased headcount
Stock-based Compensation á Higher costs of $3.1 million due to increased fair value of RSUs
Sales and Marketing
S&M expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, marketing and promotional expenses for events such as
trade shows and conferences, marketing campaigns, travel-related expenses,
consulting fees, facilities costs, depreciation and amortization, information
technology expenses, and legal costs associated with the protection of our IP.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
2021 2020 $ % 2021 2020 $ %
Sales and marketing $80,714 $70,934 $9,780 14% $234,205 $254,537 $(20,332) (8)%
Percentage of total revenue 28% 29% 24% 29%
Current Quarter: Q3 2021 vs. Q3 2020
Category Key Drivers
Marketing Programs á Higher costs of$6.2 million
primarily due to marketing efforts for
company growth initiatives and branding activities
Year-To-Date: Q3 2021 vs. Q3 2020 Category Key
Drivers
Lower costs of $22.7 million primarily related to marketing programs
Marketing Programs â that were higher in the prior year due to the timing of execution, and
lower spending due to COVID-19
Travel â Lower costs of$7.6 million
for company travel due to COVID-19 travel
restrictions
Compensation & Benefits á Higher costs of $5.2 million primarily due to higher incentive
compensation in the current year
Stock-based Compensation á Higher costs of$4.4 million
due to increased fair value of RSUs
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General and Administrative
G&A expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, depreciation, facilities and information technology
costs, as well as professional fees and other costs associated with external
consulting and contract labor.
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
2021 2020 $ % 2021 2020 $ %
General and administrative $56,116 $50,843 $5,273 10% $169,968 $164,172 $5,796 4%
Percentage of total revenue 20% 21% 17% 18%
Current Quarter: Q3 2021 vs. Q3 2020
Category Key Drivers
Bad Debt Expense â Lower costs of $3.5 million primarily due to higher charges recorded in
the prior year attributable to the onset of COVID-19
Legal, Professional, & á Higher costs of $3.2 million primarily due to higher legal expenses
Consulting
Compensation & Benefits á Higher costs of $1.1 million due to higher salaries expense
Stock-based Compensation á Higher costs of $1.1 million due to increased fair value of RSUs
Year-To-Date: Q3 2021 vs. Q3 2020
Category Key Drivers
Lower costs of $6.5 million primarily due to net increase in collections
Bad Debt Expense â in the current year, and higher charges recorded in the prior year
attributable to the onset of COVID-19
Legal, Professional, & á Higher costs of
Taxes and Insurance á Higher costs of$4.2 million
primarily due to a property tax credit
recorded in the prior year that did
not repeat in the current period
Compensation & Benefits á Higher costs of
current year
Gain on Sale of Assets
Fiscal Year-To-Date Ended Change
June 25, June 26,
2021 2020 $ %
Gain on sale of assets $(13,871) $- $(13,871) (100)%
Percentage of total revenue (1)% -%
Year-To-Date: Q3 2021 vs. Q3 2020
In fiscal year 2019, management committed to a plan to sell a property, which
included land and a building, after the lease on the property expired and we
re-assessed the real estate needs of our business. This property had a carrying
value of $2.2 million as of September 25, 2020 . In the first quarter of fiscal
2021, we finalized the sale of this property, and as a result, we realized a
gain of $13.9 million , which was recorded to gain on sale of assets on the
condensed consolidated statements of operations. Refer to "Net (Income)/Loss
Attributable to Controlling Interest" section below for more information.
Restructuring Charges
Restructuring charges recorded as operating expenses in our condensed
consolidated 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 Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
2021 2020 $ % 2021 2020 $ %
Restructuring charges $140 $1,522 $(1,382) (91)% $10,904 $1,866 $9,038 484%
Percentage of total revenue -% 1% 1% -%
Year-To-Date: Q3 2021 vs. Q3 2020
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Restructuring charges recorded in the year-to-date period endedJune 25, 2021 of$9.6 million were incurred in relation to our fiscal 2021 plan to reduce certain activities, such as exiting our conferencing hardware business, in order to focus our efforts on higher priority investment areas, and reduce the cost structure of our manufacturing operations. These costs represented severance and related benefits that were offered to approximately 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 or losses from foreign currency transactions, derivative instruments, and sales of marketable securities from our investment portfolio. Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change June 25, June 26, June 25, June 26, 2021 2020 $ % 2021 2020 $ % Other income$3,034 $5,851 $(2,817) (48)%$7,429 $16,549 $(9,120) (55)% Percentage of total revenue 1% 2% 1% 2% Current Quarter: Q3 2021 vs. Q3 2020 Category Key Drivers Interest Income â Lower yields of$1.8 million on
current year investment balances due
to decreased interest rates
Year-To-Date: Q3 2021 vs. Q3 2020
Category Key Drivers
Interest Income â Lower yields of $9.6 million 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 factors 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 unrecognized tax benefits that may occur in, but are not
necessarily consistent between, periods. For additional information related to
effective tax rates, see Note 12 "Income Taxes" to our unaudited interim
condensed consolidated financial statements.
Fiscal Quarter Ended Fiscal Year-To-Date Ended
June 25, June 26, June 25, June 26,
2021 2020 2021 2020
(Provision for)/benefit from income taxes $(4,565) $27,388 $(37,859) $(580)
Effective tax rate 7.7% (68.5)% 12.2% 0.3%
Current Quarter: Q3 2021 vs. Q3 2020
Factor Impact On Effective Tax Rate
Lower expense in prior period due to a discrete benefit
Unrecognized Tax Benefits á associated with the release of liabilities related to
unrecognized tax benefits
Year-To-Date: Q3 2021 vs. Q3 2020 Factor Impact On
Effective Tax Rate
Lower expense in prior period due to a discrete benefit
Unrecognized Tax Benefits á associated with the release of liabilities related to
unrecognized tax benefits
Net (Income)/Loss Attributable to Controlling Interest
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
June 25, June 26, June 25, June 26,
2021 2020 $ % 2021 2020 $ %
Net (income)/loss attributable to
controlling interest $61 $(93) $154 (166)% $(7,559) $(109) $(7,450) 6,835%
Percentage of total revenue -% -% (1)% -%
Year-To-Date: Q3 2021 vs. Q3 2020
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In the first quarter of fiscal 2021, we finalized the sale of a property, which included land and building, and as a result, we recognized a gain of$13.9 million from this transaction, which was recorded to gain on sale of assets on the condensed consolidated statements of operations. The property was 51% owned by the controlling interest, and therefore 51% of the gain on sale of assets has been attributed to the controlling interest. 49
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LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As ofJune 25, 2021 , we had cash and cash equivalents of$1,219.6 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$102.4 million , which consisted primarily of municipal debt securities, certificates of deposit, government bonds, commercial paper, corporate bonds, andU.S. agency securities. The following table presents selected financial information as ofJune 25, 2021 andSeptember 25, 2020 (in thousands): June 25, September 25, 2021 2020 Cash and cash equivalents$ 1,219,648 $ 1,071,876 Short-term investments 48,277 46,948 Long-term investments 54,155 52,149 Accounts receivable, net 275,080 180,340 Accounts payable and accrued liabilities 267,220 232,591 Working capital 1,463,911 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$2.0 billion of stock repurchases under the program. Quarterly Dividend Program. During fiscal 2015, we initiated a recurring quarterly cash dividend program for our stockholders. For fiscal 2021, quarterly dividends of$0.22 per share were paid on our Class A and Class B common stock to eligible stockholders of record. 50
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Cash Flows Analysis
For the following comparative analysis performed for each of the sections of the
condensed consolidated statement of cash flows, the significant factors
identified as the leading drivers contributing to the fluctuation are presented
in descending order of their impact relative to the overall change (amounts
displayed in thousands).
Operating Activities
Fiscal Year-to-Date Ended
June 25, June 26,
2021 2020
Net cash provided by operating activities $ 337,980 $ 231,187
Net cash provided by operating activities increased$106.8 million in the fiscal year-to-date period endedJune 25, 2021 as compared to the fiscal year-to-date period endedJune 26, 2020 , primarily due to the following: Factor Impact On Cash
Flows
Working Capital â Higher inflows due to
decrease in accounts payable and accrued
liabilities, partially offset by increased contract assets
Higher revenue and lower S&M expenses, partially offset by higher
Net Income á tax expense due to a discrete benefit associated with the release
of liabilities related to unrecognized tax benefits in the prior
year
Gain on Sale of Assets â Non-cash adjustment for the gain recognized on the sale of
property that was 51% owned by the controlling interest
Investing Activities
Fiscal Year-to-Date Ended
June 25, June 26,
2021 2020
Net cash used in investing activities $ (29,948) $ (20,261)
Net cash used in investing activities was
Impact On Cash Flows
â Lower inflows from the sale and maturity of marketable investment
Proceeds from Investments securities
á Lower outflows for the purchase of marketable investment
Purchase of Investments securities
á Higher inflows for the sale of property that was 51% owned by the
Sale of Assets controlling interest
Capital Expenditures á Lower expenditures for PP&E due to reduced Dolby Cinema spending
Financing Activities
Fiscal Year-to-Date Ended
June 25 , June 26,
2021 2020
Net cash used in financing activities
Net cash used in financing activities was$11.7 million higher in the fiscal year-to-date period endedJune 25, 2021 as compared to the fiscal year-to-date period endedJune 26, 2020 , primarily due to the following: Factor Impact On Cash
Flows
â Higher outflows for common stock repurchases as part of our stock
Share Repurchases repurchase program
Common Stock Issuance á Higher inflows from employee stock option exercises
Shares Repurchased for Tax â Higher outflows due to increased number of RSUs that vested,
Withholdings resulting in more shares withheld for taxes
Distribution to Controlling â Higher outflows for distributions to controlling interest due to
Interest the sale of property that was 51% owned by the controlling interest
Contractual Obligations and Commitments 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 7 "Leases" and Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. 51
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In the third quarter of fiscal 2021, we did not enter into any off-balance sheet arrangements that are expected to have a material effect onDolby's liquidity or the availability of capital resources. Indemnification Clauses We are party to certain contractual agreements under which we have agreed to provide indemnification of varying scope and duration to the other party relating to our licensed IP. Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our condensed consolidated financial statements with respect to these obligations. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. For additional details regarding indemnification clauses within our contractual agreements, see Note 15 "Commitments and Contingencies" to our unaudited interim condensed consolidated financial statements. 52
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