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. 36
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REVENUE GENERATION We have active licensing arrangements with over 500 electronics product OEMs and software developers. As ofMarch 26, 2021 , we had approximately 14,500 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 customerswho 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
March 26, March 27, March 26, March 27,
Market 2021 2020 2021 2020 Main Offerings Incorporating Our Technologies
Broadcast 35% 39% 36% 39% Televisions and STBs
Mobile 22% 23% 25% 19% Smartphones and Tablets
DMAs, Blu-ray Disc devices, AVRs, Soundbars,
CE 16% 15% 15% 17% DVDs, and HTIBs
PC 17% 14% 12% 13% Windows and macOS operating systems
Gaming consoles, Auto DVD, Dolby Cinema, and
Other 10% 9% 12% 12% Dolby Voice
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. 38
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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
InDecember 2019 , a novel coronavirus disease was first reported and inJanuary 2020 , theWorld Health Organization ("WHO") declared it a Public Health Emergency of International Concern. OnMarch 11, 2020 , theWHO 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. 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 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. 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, and has continued to negatively impact certain parts of the world, such asIndia . Our business operations and revenues have not been significantly impacted by the recent surge in COVID-19 infections inIndia . 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 also increase our value proposition and create opportunities by broadeningDolby technologies into new types of content, such as music and gaming. We are 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 40
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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 second 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. We continue to expand our offerings within international markets, such asChina andIndia . For example, in the second quarter of fiscal 2021, Hisense, Changhong, and Xiaomi inChina , andIndia -based TCL, launched TVs that support Dolby Vision andDolby Atmos. Hisense also recently launched its adoption of Dolby 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. 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 second quarter of fiscal 2021, Xiaomi launched its first smartphones supporting Dolby Vision and Dolby Atmos. Additionally, Samsung launched the latest Samsung Galaxy and OPPO launched its latest mobile phone model, both of which support Dolby Atmos. Also in the second quarter of fiscal 2021, Earshot became the first podcast platform to 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. 41
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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. In the second quarter of fiscal 2021, the breadth of devices in the home entertainment market supporting Dolby Atmos continued to expand, including soundbars such as the recently launched Samsung Q Series. In addition, content available in Dolby Vision and Dolby Atmos continued to grow in the second quarter of fiscal 2021, as many major streaming partners and services like Netflix, Disney+, Apple TV+, Amazon, and HBO Max continued to enable more content in Dolby Vision and Dolby Atmos, which increases our value proposition for adoption in more devices. We continue to focus on expanding the availability ofDolby technologies to new devices and new forms of content such as music. In the second quarter of fiscal 2021, Hungama Music, one ofIndia's leading music streaming services, began supporting Dolby Atmos. In addition, Indian music labelSaga Music recently announced that it plans to release new music using Dolby Atmos in the near future. 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, with continued expansion of applications through music, streaming, and gaming, and through international markets. 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. Other Markets Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles and streaming platforms for movie and television content. The most recent Xbox gaming console will support Dolby Vision and Dolby Atmos for streaming and gaming content. In the second quarter of fiscal 2021, Microsoft launched its new Xbox wireless headsets, which support Dolby Atmos. We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system. In the second quarter of fiscal 2021,Lucid Motors announced that their upcomingLucid Air model will be the first vehicle that features Dolby Atmos in its 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 revenue. If OEMs do not incorporate our technologies in current and future products, our revenue will face 42
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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 second quarter of fiscal 2021, we have 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 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, 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 revenue 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, 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. In addition, as cinemas have begun reopening at limited capacity, exhibitor partners may decide to operate fewer screens in response to decreased attendance. 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 second quarter of fiscal 2021, there are over 6,000 Dolby Atmos screens installed or committed and over 1,850 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel Amplifier, and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than what was previously available to them. Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such asChina , which are subject to economic risks as well as geo-political risks. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. Additionally, the effects of COVID-19 such as the closure of cinemas, 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 43
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erode the demand for new products. These conditions are likely to continue as government-imposed restrictions 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, 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, 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. For example, we have partnered withSoundCloud to incorporate our music mastering APIs within their online music distribution platform. Also, subsequent to the second quarter of fiscal 2021, we completed an integration with Box that embedsDolby media APIs, that allows Box customers to enable their users to easily enhance the quality of their audio files. 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. 44
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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 endedMarch 26, 2021 andMarch 27, 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 customerswho 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 March 26, March 27, March 26, March 27, Licensing 2021 2020 $ % 2021 2020 $ % Revenue$303,585 $328,865 $(25,280) (8)%$676,590 $586,548 $90,042 15% Percentage of total revenue 95% 93% 95% 91% Cost of licensing 16,060 13,243 2,817 21% 29,006 25,585 3,421 13% Gross margin 287,525 315,622 (28,097) (9)% 647,584 560,963 86,621 15% Gross margin percentage 95% 96% 96% 96% Fiscal Quarter Ended Fiscal Year-To-Date Ended Market March 26, 2021 March 27, 2020 March 26, 2021 March 27, 2020 Broadcast$ 104,813 35 %$ 128,677 39 %$ 244,113 36 %$ 230,810 39 % Mobile 65,673 22 % 75,697 23 % 171,296 25 % 110,178 19 % CE 48,284 16 % 49,199 15 % 100,205 15 % 98,044 17 % PC 51,104 17 % 45,791 14 % 83,839 12 % 77,634 13 % Other 33,711 10 % 29,501 9 % 77,137 12 % 69,882 12 % Total licensing revenue$ 303,585 100 %$ 328,865 100 %$ 676,590 100 %$ 586,548 100 % Current Quarter: Q2 2021 vs. Q2 2020 Factor Revenue Gross Margin Lower revenue due to large recoveries in the prior year, Broadcast â partially offset by higher TV unit shipments especially in North America and Europe, and higher adoption of our technologies Lower revenue from our patent licensing technologies, due to Mobile â timing of contracts, partially offset by higher revenue from higher unit shipments Higher revenue from higher unit shipments due to demand from PC á working from home conditions of COVID-19, as well as higher ßà No significant fluctuations revenue from our patent licensing technologies, partially offset by recoveries that were higher in the prior year Higher gaming revenue primarily from gaming consoles and gaming Other á headsets, and higher patent administration fees from Via Licensing CE ßà No significant fluctuations 45
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Year-To-Date: Q2 2021 vs. Q2 2020 Factor Revenue Gross Margin Mobile á Higher revenue from our patent licensing
technologies, as well as
higher revenue from recoveries and higher unit shipments
Higher revenue from increased adoption of our technologies,
Broadcast á especially in Europe, and higher revenue from our patent
licensing technologies, partially offset by lower recoveries
Higher gaming revenue primarily from gaming consoles and higher ßà No significant fluctuations
Other á patent administration fees from Via Licensing, partially offset
by lower automotive recoveries
Higher revenue from higher unit shipments due to demand from
PC á working from home conditions of COVID-19,partially offset by
lower recoveries due to large settlements in the prior year
CE 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 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
March 26, March 27, March 26, March 27,
Products and Services 2021 2020 $ % 2021 2020 $ %
Revenue $15,973 $22,950 $(6,977) (30)% $32,842 $57,144 $(24,302) (43)%
Percentage of total revenue 5% 7% 5% 9%
Cost of products and services 16,318 23,587 (7,269) (31)% 38,676 48,560 (9,884) (20)%
Gross margin (345) (637) 292 (46)% (5,834) 8,584 (14,418) (168)%
Gross margin percentage (2)% (3)% (18)% 15%
Current Quarter: Q2 2021 vs. Q2 2020
Factor Revenue Gross Margin
Lower sales of cinema equipment attributable Lower revenue from Dolby Cinema and
to COVID-19, and lower units of conferencing Dolby Voice product sales, partially
Products â hardware products as a result of winding â offset by lower excess and obsolescence
down that business charges and lower COGS due to lower
product sales
Services ßà No significant fluctuations ßà No significant fluctuations
Year-To-Date: Q2 2021 vs. Q2 2020
Factor Revenue Gross Margin
Lower sales of cinema equipment attributable Lower revenue from Dolby Cinema and Dolby
to COVID-19, and lower units of conferencing Voice product sales and lower absorption
Products â hardware products as a result of winding â of manufacturing overhead partially
down that business offset by lower COGS due to lower product
sales
Higher depreciation expense, and higher
Services ßà No significant fluctuations â systems expenses to support increased
efforts on interactivity APIs
Operating Expenses
Research and Development
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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
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
Research and development $65,808 $60,086 $5,722 10% $129,580 $117,736 $11,844 10%
Percentage of total revenue 21% 17% 18% 18%
Current Quarter: Q2 2021 vs. Q2 2020
Category Key Drivers
Compensation & Benefits á Higher costs of$4.0 million
due to higher incentive compensation in
the current year
Year-To-Date: Q2 2021 vs. Q2 2020
Category Key Drivers
Compensation & Benefits á Higher costs of$5.8 million
due to higher incentive compensation, as
well as increased headcount, in the current year
Fringe benefits á Higher costs of $2.3 million primarily due to increased employee
compensation
Travel â Lower costs of $2.3 million for company travel due to COVID-19 travel
restrictions
Taxes and Insurance á Higher costs of $2.2 million due to a property tax credit recorded in
the prior year that 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 Fiscal Year-To-Date Ended Change
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
Sales and marketing $78,046 $88,485 $(10,439) (12)% $153,491 $183,603 $(30,112) (16)%
Percentage of total revenue 24% 25% 22% 29%
Current Quarter: Q2 2021 vs. Q2 2020
Category Key Drivers
Lower costs of $9.5 million related to fewer marketing programs due to
Marketing Programs â timing of marketing campaign activities in the prior year that did not
reoccur, and due to COVID-19
Travel â Lower costs of $5.1 million for company travel and tradeshows due to
COVID-19 travel restrictions
Compensation & Benefits á Higher costs of $3.4 million due to higher incentive compensation in the
current year
Year-To-Date: Q2 2021 vs. Q2 2020
Category Key Drivers
Lower costs of $28.8 million related to fewer marketing programs due to
Marketing Programs â timing of marketing campaign activities in the prior year that did not
reoccur, and due to COVID-19
Travel â Lower costs of $9.8 million for company travel and tradeshows due to
COVID-19 travel restrictions
Compensation & Benefits á Higher costs of
current year
Legal, Professional, & â Lower costs of $3.6 million due to lower legal enforcement activity
Consulting
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.
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Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
General and administrative $59,398 $60,800 $(1,402) (2)% $113,852 $113,329 $523 -%
Percentage of total revenue 19% 17% 16% 18%
Current Quarter: Q2 2021 vs. Q2 2020
Category Key Drivers
Compensation & Benefits á Higher costs of
the current year
Fringe benefits â Lower costs of $1.8 million primarily due to a lower fringe benefit
expenses, and due to changes in nature of local business taxes
Legal, Professional, & â Lower costs of$1.7 million due to lower legal expenses Consulting Year-To-Date: Q2 2021 vs. Q2 2020 Category Key
Drivers
Taxes and Insurance á Higher costs of$4.1 million
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 $3.8 million due to higher incentive compensation in
the current year
Fringe benefits â Lower costs of $3.8 million primarily due to changes in nature of local
business taxes, and lower fringe benefits
Bad Debt Expense â Lower costs of $3.0 million primarily due to net increase in
collections in the current year
Gain on Sale of Assets
Fiscal Year-To-Date Ended Change
March 26, March 27,
2021 2020 $ %
Gain on sale of assets $(13,871) $- $(13,871) (100)%
Percentage of total revenue (2)% -%
Year-To-Date: Q2 2021 vs. Q2 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
Attributable to Controlling Interest" section below for more information.
Restructuring Charges/(Credits)
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
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
Restructuring charges/(credits) $741 $(331) $1,072 (324)% $10,764 $344 $10,420 3,029%
Percentage of total revenue -% -% 2% -%
Year-To-Date: Q2 2021 vs. Q2 2020
Restructuring charges recorded in the year-to-date period ended March 26, 2021
of $9.4 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.
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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
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
Other income $2,180 $4,834 $(2,654) (55)% $4,395 $10,698 $(6,303) (59)%
Percentage of total revenue 1% 1% 1% 2%
Current Quarter: Q2 2021 vs. Q2 2020
Category Key Drivers
Interest Income â Lower yields of $3.8 million on current year investment balances due
to decreased interest rates
Year-To-Date: Q2 2021 vs. Q2 2020
Category Key Drivers
Interest Income â Lower yields of $7.7 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 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 Fiscal Year-To-Date Ended
March 26, March 27, March 26, March 27,
2021 2020 2021 2020
Provision for income taxes $(9,022) $(22,105) $(33,294) $(27,968)
Effective tax rate 10.6% 20.0% 13.2% 16.9%
Current Quarter: Q2 2021 vs. Q2 2020
Factor Impact On Effective Tax Rate
Foreign Operations â Higher benefit of (8.0%) from foreign earned income
Stock-based Compensation â Higher benefit of (1.5%)related to the settlement of stock-based
awards
Year-To-Date: Q2 2021 vs. Q2 2020
Factor Impact On Effective Tax Rate
Stock-based Compensation â Higher benefit of
(1.3%) related to the settlement of stock-based
awards
Foreign Operations â Higher benefit of (1.3%) from foreign earned income
Uncertain Tax Benefits â Lower expense of (1.0%) in the current period due to lower
accrued interest on uncertain tax positions
Net Income Attributable to Controlling Interest
Fiscal Quarter Ended Change Fiscal Year-To-Date Ended Change
March 26, March 27, March 26, March 27,
2021 2020 $ % 2021 2020 $ %
Net income attributable to
controlling interest $(128) $(178) $50 (28)% $(7,620) $(16) $(7,604) 47,525%
Percentage of total revenue -% -% (1)% -%
Year-To-Date: Q2 2021 vs. Q2 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. 50
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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 ofMarch 26, 2021 , we had cash and cash equivalents of$1,104.6 million , which mainly consisted of cash and highly-liquid money market funds. In addition, we had short and long-term investments of$100.8 million , which consisted primarily of municipal debt securities, certificates of deposit, government bonds, commercial paper, corporate bonds, andU.S. agency securities. The following table presents selected financial information as ofMarch 26, 2021 andSeptember 25, 2020 (in thousands): March 26, September 25, 2021 2020 Cash and cash equivalents$ 1,104,570 $ 1,071,876 Short-term investments 58,582 46,948 Long-term investments 42,188 52,149 Accounts receivable, net 283,505 180,340 Accounts payable and accrued liabilities 262,548 232,591 Working capital 1,442,171 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 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. 51
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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
March 26, March 27,
2021 2020
Net cash provided by operating activities $ 165,628 $ 96,899
Net cash provided by operating activities increased$68.7 million in the fiscal year-to-date period endedMarch 26, 2021 as compared to the fiscal year-to-date period endedMarch 27, 2020 , primarily due to the following: Factor Impact On Cash Flows Net Income á Higher revenue and lower S&M expenses Gain on Sale of Assets â Non-cash adjustment for the gain recognized on the sale of property that was 51% owned by the controlling interest Investing Activities Fiscal Year-to-Date Ended March 26, March 27, 2021 2020 Net cash used in investing activities$ (15,757) $
(47,208)
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
á Higher inflows for the sale of property that was 51% owned by the
Sale of Assets controlling interest
á Lower expenditures for PP&E due to less Dolby Cinema screens being
Capital Expenditures added
Financing Activities
Fiscal Year-to-Date Ended
March 26 , March 27,
2021 2020
Net cash used in financing activities
Net cash used in financing activities was$4.3 million higher in the fiscal year-to-date period endedMarch 26, 2021 as compared to the fiscal year-to-date period endedMarch 27, 2020 , primarily due to the following: Factor Impact On Cash Flows Common Stock Issuance á Higher inflows from employee stock option exercises â Higher outflows for common stock repurchases as part of our stock Share Repurchases repurchase program
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 Higher outflows for distributions to controlling interest due to
Interest â 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 ended September 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.
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In the second 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. 53
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