The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those referred to herein due to a number of factors, including but not limited to key challenges listed below and risks described in Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. We disclaim any duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K 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),
SECfilings, 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.
The COVID-19 pandemic triggered worldwide shutdowns, supply chain constraints, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity. It is unclear how demand for consumer products that include our technologies may change in response to the ongoing pandemic. The issues and circumstances relating to COVID-19 continue to change and are difficult to predict. We continue to monitor the evolving situation and the impact on our business. The outbreak of COVID-19 has also affected many of our partners, resulting in the disruption of consumer products' supply chains, shortages of certain semiconductor components, and delays in shipments, product development, and product launches. Consumer demand for products that include our technologies may continue to be negatively impacted due to economic uncertainty resulting from COVID-19. These factors may cause delays in the adoption of our technologies by partners. Further, we may be negatively impacted by delays in transaction cycles and our recoveries efforts due to ongoing global restrictions related to the pandemic. The cinema market has been, and we expect to continue to be, adversely impacted by COVID-19. At various times, our exhibition partners and customers have had to either partially or fully discontinue operations. Box office receipts at
DolbyCinema sites and general demand for our cinema products and services by our broader exhibition partners have been, and we expect to remain, lower than that of pre-pandemic levels. Most cinema locations have been permitted to resume operations, but many such locations are operating under restricted capacity. Further, the spread of variants of SARS-CoV-2 may result in renewed government responses. The situation is continuing to evolve, and we cannot predict how or to what extent the cinema market, or other markets we target, may be impacted during the course of the pandemic and long-term. At Dolby, we continue to implement business strategies that support the health and safety of our employees and enable business continuity. We have implemented a flex work program that enables connection and effective work delivery in a hybrid work environment. We enable our employees with the tools and infrastructure they need to carry on our operations and progress the business forward in a hybrid working environment. 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. Further discussion of the potential impacts of COVID-19 on our business can be found in Part I, Item 1A "Risk Factors."
The current macroeconomic environment has negatively impacted many of our licensees and that directly impacts our financial results. Our revenue has been impacted by macroeconomic conditions, including but not limited to, rising inflation, rising interest rates, COVID-19 related restrictions, supply chain constraints, increased shipping costs, international conflicts, reduced discretionary consumer spending, and reduced new product investment by our customers caused by higher interest rates and lower demand. The future implications of these macroeconomic conditions on our business, results of operations and overall financial position remain uncertain. Across all of our markets, these conditions may affect consumer demand for devices and services, our partners' ability to manufacture devices, and the timing of adoption of our technologies into new products by partners and licensees. Further 31
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A discussion of the potential effects of these macroeconomic impacts on our business can be found in Part I, Item 1A “Risk Factors”.
Expanding our leadership in audio and imaging experiences
We are focused on expanding our leadership in audio and imaging solutions for premium entertainment content by increasing the number of
Dolbyexperiences that people can enjoy, which will drive revenue growth across the markets we serve. We can increase our value proposition and create opportunities by broadening Dolbytechnologies into new types of content, such as music, gaming, live sports, and user-generated content. We are also beginning to make our audio and imaging technologies available for content beyond premium entertainment through Dolby.io, creating new revenue generating opportunities. Following is a discussion of the key markets that we address and the various Dolbytechnologies and solutions that serve these markets.
The majority of our licensing revenue is derived from the licensing of audio and imaging technologies for premium entertainment playback. Our audio technologies are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC technologies. Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies. Licensing revenue is primarily driven by the adoption of our technologies on devices and the number of devices shipped by licensees. DD+, AC-4, and our AAC and HE-AAC audio patents (collectively, our "foundational audio technologies") have broad penetration across a diverse set of devices and end markets. Our revenue from these technologies is primarily driven by device shipments from licensees, and as such, is impacted by consumer spending. Other factors, such as global supply constraints or device lifecycles, may also impact revenue from these technologies. In the future, we expect revenue from our foundational audio technologies to generally reflect market trends in device shipments. The remaining portion of our licensing revenue is derived from offerings such as Dolby Vision, Dolby Atmos, our imaging patents, and Dolby Cinema. These offerings have not been in the market as long as our foundational audio technologies, thus revenue growth is primarily driven by increased adoption and the addition of new licensees. The availability of content in
Dolbyformats is an important part of creating the ecosystems that drive adoption of our technologies within a wide range of devices. Our audio and imaging technologies have a strong presence within movie and episodic content through adoption across content creators and streaming services. The availability of content on these platforms has driven strong adoption in devices such as TVs, STBs, and speaker devices. Our audio and imaging technologies are also widely available through many forms of distribution, including broadcast TV, streaming, and optical disc playback. Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, HBO Max, and Paramount+ continue to enable content in Dolby Vision and Dolby Atmos. These streaming services launch local content in Dolbyformats internationally. As we see an increase in new local content, we increase our value proposition for adoption of Dolby Vision and Dolby Atmos across devices in all market segments. We have also enabled a broader range of content, such as music, gaming, live sports, and user-generated content. In music, in fiscal 2022, Dolby Atmos music became available on TencentMusic's QQ Music streaming service in Chinaand on Melon, a streaming service in South Korea. In gaming, in fiscal 2022, Xbox's Halo Infinite was released in both Dolby Vision and Dolby Atmos, and popular mobile game PUBG Mobile was made available to play in Dolby Atmos in some markets. In addition, Moong Labsannounced the launch of its popular mobile game "Epic Cricket - Big League" in Dolby Atmos for Android smartphone. In live sports, the 2022 UEFA Champions Leaguewas broadcast in Dolby Vision and DolbyAtmos in some markets, and the 2023 UEFA Champions Leaguewill again be broadcast in Dolby Vision and Dolby Atmos. In addition, during fiscal 2022, the French Openand the German Supercup final match was broadcast in Dolby Atmos. We have worked with industry leaders to enhance these forms of content through the use of our technologies, creating additional value for the adoption of Dolbywithin devices such as mobile, PC, gaming consoles, and automotive.
Here are the highlights from fiscal 2022 and the key challenges related to audio and imaging licensing by market.
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Highlights: We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices. We have expanded our offerings in the broadcast market through technologies such as Dolby Atmos and AC-4, Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools. We work with many TV OEMs and strategic partners to enable and promote
DolbyVision and Dolby Atmos experiences within their TV lineups. Many such partners have continued to expand their support of the combined Dolby Vision and DolbyAtmos experience. For example, in fiscal 2022, LG launched new TVs that support Dolby Vision, Dolby Vision IQ, and Dolby Atmos, and Samsung launched new TVs that support Dolby Atmos. Also in fiscal 2022, Hisense launched their ULED TVs that support Dolby Vision IQ and Dolby Atmos, and launched their laser TV projector that supports Dolby Vision and Dolby Atmos, while TCL launched new TVs with Dolby Vision, Dolby Vision IQ, and Dolby Atmos. We are also seeing more STB providers adopting Dolby Vision in their devices. Key Challenges: Our pursuit of new licensees and further adoption of our technologies by existing licensees may be impacted by a number of factors. We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. Further, in certain countries, such as China, we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.
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 supporting
Dolbytechnologies continues to increase globally. In fiscal 2022, Xiaomi launched or announced a number of new smartphones supporting Dolby Vision and Dolby Atmos, including the new 12S series, the first Android phone capable of recording video in Dolby Vision. Additionally, in fiscal 2022, OnePluslaunched new Ace Prosmartphones that support Dolby Atmos. For tablets, in fiscal 2022, ASUSreleased a new tablet that supports Dolby Vision and Dolby Atmos, and Vivolaunched the Vivo Pad, which is the first Vivoproduct with Dolby Vision and Dolby Atmos. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. The mobile market is heavily concentrated, so we rely on a small number of partnerships with key participants in this market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted. We must also continue to support the development and distribution of Dolby-enabled content via various ecosystems. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.
Highlights: We have an established presence in the home entertainment market across devices such as AVRs, soundbars, wireless and smart speakers, DMAs, and Blu-Ray players, through the inclusion of our DD+ technology, and increasingly through the inclusion of Dolby Atmos and Dolby Vision. AAC and HE-AAC technologies also have broad adoption through our patent licensing programs. We continue to focus on expanding the availability of
Dolbytechnologies to new devices. In fiscal 2022, Samsung, Hisense, Prism+, and Bose all launched new soundbar models that support Dolby Atmos.
Key challenges: We must continue to provide consumers with compelling reasons to demand our technologies wherever they enjoy entertainment content, while promoting creativity and broad availability
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content in our formats. To the extent OEMs do not integrate our technologies into current and future products, our revenue could be affected. In addition, we face geopolitical challenges including changes in diplomatic and trade relations, trade protection measures, and import or export licensing requirements.
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'spresence 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, and ASUSalso support Dolby Vision and/or Dolby Atmos, with continued expansion of applications through music, streaming, and gaming. In addition, in fiscal 2022, Delland ASUSreleased their latest laptop models that now support Dolby Vision and Dolby Atmos. Key Challenges: PC revenue from audio technologies such as DD+ has been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue. We must continuously collaborate and maintain our key partnerships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution of Dolbycontent via various ecosystems. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.
Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles that support gaming content and streaming for movie and television content. The Xbox Series X and Series S gaming consoles support Dolby Vision and Dolby Atmos for streaming and gaming content. Additionally, our technologies continue to be incorporated into the latest headphones by various OEMs. In fiscal 2022, Cosmic Byte,
Alienware, and Zebronics launched headsets that 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, and more recently through the adoption of Dolby Atmos Music. In fiscal 2022, Mercedes-Benz announced they would be adopting Dolby Atmos in their Mercedes-Maybach models, the EQS and EQS SUV, as well as the EQE and the S-Class with support for Dolby Atmos Musicprovided by Apple Music. Also in fiscal 2022, Chinese electric car manufacturers NIO, Li Auto, and XPENG launched multiple car models that support Dolby Atmos. Recently, Polestar and Lotus announced that their latest models will be the first of their car models to support DolbyAtmos. Key Challenges: Consumer demand for devices in the gaming industry is impacted by anticipation of console refresh cycles. In addition, the gaming console market has competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. Also, automotive revenue has been negatively impacted by a decline in the portion of cars that have optical disc playback in recent years. In addition, recent shortages of certain semiconductor components could result in lower implementation of our technologies in vehicles by automotive manufacturers. If OEMs do not incorporate our technologies in current and future products, our revenue will face downward pressure. Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. In addition to licensing revenue derived from the licensing of audio and imaging technologies into the markets discussed above, we offer our audio and imaging technologies to create Dolbyexperiences through Dolby Cinema.
Highlights: We continue to expand our global presence for Dolby Cinema, with over 280 open Dolby Cinema sites located in the
U.S.and internationally, subject to capacity restrictions per local regulations. The breadth of motion pictures for Dolby Cinema continues to grow with over 400 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all of the major studios as of the end of fiscal 2022.
Key Challenges: While the premium large format market for the movie industry has grown, Dolby Cinema is rivaling other offerings out there. Our success depends on our partners and their success,
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and our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience. In addition, the success of our Dolby Cinema offering is tied to global box office performance generally. COVID-19 has had a significant effect on theatrical exhibition, which could impact the financial viability of our key partners. The response to COVID-19 including the closure of cinemas in
Chinaand government-imposed restrictions has had a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has improved recently. It is uncertain whether consumer demand for the cinema will return to previous levels. PRODUCTS AND SERVICES A majority of our products and services revenue is derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries. Revenue from our developer platform, Dolby.io, is also included in products and services.
Cinema products and services
Highlights: To help enable the playback of content in
Dolbyformats, we offer a range of servers, which include the IMS3000 (an integrated imaging and audio server with Dolby Atmos), and audio processors, such as the CP950, to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the end of fiscal 2022, there are over 7,000 Dolby Atmos screens installed or committed and over 2,200 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, such as the Dolby Multichannel Amplifier and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than other commercially available options. Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences. A significant portion of our growth opportunity lies in international markets, such as China, which are subject to economic risks as well as geopolitical risks. Additionally, weakness in general economic conditions due to inflation, recession, pandemic or other worsening economic conditions could have a negative impact on our cinema-related revenue due to reduced consumer discretionary spending. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. We have also experienced supply chain shortages and increased shipping costs that have created challenges to maintain the sufficient supply of cinema products to meet the demand in the market. Additionally, the effects of COVID-19 such as the closure of cinemas and public health mandates have had a negative impact on Dolby Cinema attendance. As demand continues to recover, supply chain constraints may impact our ability to provide cinema products and services to our customers. COVID-19 has also negatively impacted the financial health of our cinema customers and partners. We continue to closely monitor the ongoing impact of these conditions.
Developer platform services
Highlights: We are focused on bringing our expertise in media and communications to a broader range of content and digital experiences. For example, we are increasing our engagement with new customers across different industries through our developer platform, Dolby.io, that enables developers to access our technologies through APIs. The current offerings include audio and video APIs for building high-quality communications, media, and streaming solutions. Following the initial launch of Dolby.io in fiscal 2020, we have seen an expansion of the use cases for the platform. Examples include virtual live performances, online and hybrid events, social audio, premium education, gaming, sports, and content creation and production. Dolby.io provides tools to help developers create immersive experiences through apps and services with high quality audio and video, spatialized sound, and deliver live-streamed content with low latency. Key Challenges: Dolby.io is an early stage business, and it is uncertain when or if it will be a material revenue driver. Our success in this market will depend on the number of developers we are able to attract and retain, the volume of usage of the service, and our ability to monetize our services. In addition, the development and maintenance needed to provide a reliable and scalable platform may require us to develop new skills internally for our current employees or hire external specialized talent. Although the market for online experiences has been growing,
Dolby'sAPI technologies compete with other offerings. 35
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Accounting policies and significant estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with
U.S.GAAP, pursuant to SECrules and regulations. The preparation of these financial statements requires us to establish accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. The SECconsiders an accounting policy and estimate to be critical if it is both important to a company's financial condition or results of operations and requires significant judgment by management in its application. On a regular basis, we evaluate our assumptions, judgments, and estimates, and historically, actual results have not differed significantly from them. If actual results or events differ materially from our judgments and estimates, our reported financial condition and results of operation for future periods could be materially affected. We have reviewed the selection and development of the critical accounting policies and estimates discussed below with the Audit Committee of our Board of Directors.
We derive our revenue primarily from the licensing of our technologies and patents. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates within the revenue recognition process. Generally, revenue is recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of the IP rights. The primary judgments include estimating sales-based revenue in advance of receiving statements from our licensees, estimating variable consideration, identifying the performance obligations in the contract, and determining whether the performance obligations are distinct, and allocating consideration accordingly. Most of our licensing arrangements are structured as sales-based whereby we are paid a unit-based royalty. The unit-based sales data that triggers the royalty obligation is generally reported to us in the quarter after triggering the royalty obligation. We apply the royalty exception to these arrangements, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations. Our estimates of royalty-based revenue take into consideration the macroeconomic effect of global events, such as inflation, COVID-19, or other economic conditions, which may impact supply chain activities as well as demand for shipments. These estimates also involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period's shipments for which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we previously estimated, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. We also enter into fixed and guaranteed licensing fees arrangements, which require the licensee to pay a fixed, non-refundable fee. In these cases, control is transferred and the transaction price - the amount we expect to be entitled to in exchange for the license right - is recognized upon the later of contract execution or the effective date. Transaction price is determined at contract execution and, to the extent variable consideration applies, is updated each subsequent reporting period until the completion of the contract. We evaluate whether other distinct performance obligations exist, such as PCS, and determine the stand-alone selling price based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain. In addition, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time and extend beyond one year. In general, if the payment arrangements extend beyond the first year of the contract, we treat a portion of the payments as a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. If we assess the financing component to be significant to the contract, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. The portion related to the financing component is recorded as interest income, and is not material to our consolidated financial statements.
For additional information, see Note 3 “Recognition of Revenue” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
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The impact of new accounting standards that have not yet been adopted
For information on recent accounting standards that have not been adopted yet and the impact of these standards on our consolidated financial statements, refer to Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements in this Annual Report on Form 10-K.
For each line item included on our 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 consolidated financial statements for the years ended
September 30, 2022and September 24, 2021. For the discussion and analysis highlighting comparisons of material changes in the consolidated financial statements for the years ended September 24, 2021and September 25, 2020, refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended September 24, 2021, which is incorporated herein by reference. 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 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 license cost mainly consists of amortization of certain intangible assets purchased and intangible assets acquired in business combinations, depreciation, third party equity obligations, and patent pool fees.
Fiscal Year Ended Change September 30, September 24, Licensing 2022 2021 $ % Revenue
$1,164,533 $1,214,147 $(49,614)(4)% Percentage of total revenue 93% 95% Cost of licensing 61,597 55,421 6,176 11% Gross margin 1,102,936 1,158,726 (55,790) (5)% Gross margin percentage 95% 95% Fiscal Year Ended Licensing Revenue By Market September 30, 2022 September 24, 2021 Broadcast $ 433,99237 % $ 475,64839 % Mobile 238,735 21 % 261,232 22 % CE 186,285 16 % 181,944 15 % PC 151,079 13 % 141,919 12 % Other 154,442 13 % 153,404 12 % Total licensing revenue $ 1,164,533100 % $ 1,214,147100 % 37
Table of Contents Factor Licensing Revenue Gross Margin Lower foundational audio revenue due to lower TV unit Broadcast â shipments globally and lower recoveries, partially offset by higher adoption of Dolby Vision and Dolby Atmos technologies in TVs and STBs Lower revenue due to timing, including recoveries, Mobile â partially offset by higher adoption of Dolby Vision and Dolby Atmos technologies and new licensees in our imaging patent programs Higher adoption of Dolby Vision and Dolby Atmos PC á technologies and new licensees in our imaging patent ßà No significant fluctuations programs, and higher recoveries, partially offset by lower unit shipments CE á Higher adoption of Dolby Atmos and Dolby Vision across devices, partially offset by lower unit shipments Higher Dolby Cinema revenue due to more screens being open Other ßà and strong box office performance in fiscal 2022, partially offset by lower gaming and automotive revenue Products and Services Products revenue is generated from the sale of audio and imaging hardware and software products for the cinema, television, broadcast and entertainment industries. Also included in products revenue are amounts relating to certain Dolby Cinema arrangements that are considered sales-type leases that involve fixed or minimum fees. Cost of products includes materials, labor, manufacturing overhead, amortization of certain intangible assets, and certain third party royalty obligations. Services revenue consists of fees charged to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color, and light image calibration. Services revenue also includes PCS for products sold and equipment installed at Dolby Cinema theaters operated by exhibitor partners and support for the implementation of our technologies into products manufactured by our licensees. Also included in services revenue are amounts generated through our Dolby.io developer platform. Cost of services consists of personnel and personnel-related costs for providing our professional services, software maintenance and support, external consultants, and other direct expenses incurred on behalf of customers. Fiscal Year Ended Change September 30, September 24, Products and Services 2022 2021 $ % Revenue
$89,260 $67,109 $22,15133% Percentage of total revenue 7% 5% Cost of products and services 79,763 74,604 5,159 7% Gross margin 9,497 (7,495) 16,992 (227)% Gross margin percentage 11% (11)% Factor Products and Services Revenue Gross Margin Increased demand for cinema equipment as the Higher gross margin primarily due to Products á exhibitor market continues to recover following á higher products revenue COVID-19-related shutdowns Lower gross margin due to increased Higher services revenue primarily due to revenue warranty expense on Dolby Cinema Services á from our cloud initiatives such as Dolby.io, â equipment, higher contractor expenses, cinema production services, partially offset by and higher computer equipment and web lower Dolby Voice hardware services hosting fees for our cloud initiatives, offset by higher revenue 38
Table of Contents Operating Expenses Research and Development R&D expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, contractor and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials, and information technology expenses. Fiscal Year Ended Change September 30, September 24, 2022 2021 $ % Research and development
$261,174 $253,640 $7,5343% Percentage of total revenue 21% 20% Category Key Drivers Lower costs of $10.5 milliondue to our annual bonus program, Compensation & Benefits â partially offset by higher
Payroll calculation due to the extra week
in the current fiscal year Stock-based Compensation á Higher costs of
$7.0 milliondue to increased fair value of RSUs Systems, Telecommunications and á Higher costs of $4.1 millionprimarily due to higher cloud hosting Computer Equipment costs 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 Year Ended Change September 30, September 24, 2022 2021 $ % Sales and marketing $358,716 $332,671 $26,0458% Percentage of total revenue 29% 26% Category Key Drivers Legal, Professional, & Higher costs of $13.1 millionprimarily due to legal support for Consulting á patents and licensee audits, and
higher consulting expenses for
increased development of digital
Higher costs of
This was mainly due to an increase in the fair value of inventory-based compensation – RSUs, which was offset by lower costs of
unearned options Travel á Higher costs of
Company travel increased as a result
of fewer COVID-19 travel restrictions Lower costs of
Due to our annual bonus program, compensation and benefits are partially offset by higher costs
expense primarily due to increased
The number of employees and the extra week in
current fiscal year 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 Year Ended Change September 30, September 24, 2022 2021 $ % General and administrative
$275,315 $224,161 $51,15423% Percentage of total revenue 22% 17% 39
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August 7, 2019, Intertrust Technologies("Intertrust") filed complaints against each of our customers AMC Entertainment Holdings, Inc., Cinemark Holdings, Inc., and Regal Entertainment Groupin the U.S. District Court for the Eastern District of Texas, alleging that the use of systems including certain cinema products, which were supplied under commercial agreements that we acquired as a part of an acquisition in 2014, infringed various Intertrust patents, and seeking damages based on the revenues of the defendants. We recorded $34.4 millionin fiscal 2022 within G&A expenses, reflecting a settlement payment and an immaterial accrual. We believe that these amounts fully resolve all claims relating to Intertrust's patent assertions. Category Key
Other miscellaneous expenses á higher costs
matter discussed above Credit Loss Expense á Higher credit loss expense of
license receivable balances Lower costs of
$6.3 millionprimarily due to our annual bonus Compensation & Benefits â program, partially offset by
salaries expense primarily due
To increase the number of additional employees
week in the current fiscal year Gain on Sale of Assets Fiscal Year Ended Change September 30, September 24, 2022 2021 $ % Gain on sale of assets $-
$(13,871) $13,871100% Percentage of total revenue -% (1)% In fiscal 2021, we finalized the sale of a property, which included land and a building, resulting in a gain of $13.9 million, which was recorded to gain on sale of assets on the consolidated statements of operations. Refer to "Net (Income)/Loss Attributable to Controlling Interest" section below for more information.
Restructuring charges recorded as operating expenses in our consolidated statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. The extent of our costs arising as a result of these actions, including fluctuations in related balances between fiscal periods, is based on the nature of activities under the various plans. Fiscal Year Ended Change September 30, September 24, 2022 2021 $ % Restructuring charges
$10,623 $10,240 $3834% Percentage of total revenue 1% 1% Restructuring charges was flat due to the restructuring events in fiscal 2022 and the restructuring events in fiscal 2021, to align resources with a revised business strategy and outlook, and to support our higher priority focus areas. For additional information on our Restructuring programs, see Note 13 "Restructuring" to our consolidated financial statements.
Other income/expense primarily consists of interest income earned on cash and investments and the net gains or losses from foreign currency transactions, derivative instruments, our proportionate share of net income or losses from our equity method investment, and sales of marketable securities from our investment portfolio. Fiscal Year Ended Change
September 30, September 24,
Other income/(expense) 2022 2021 $ % Interest income
$6,568 $3,493 $3,07588% Interest expense (394) (479) 85 (18)% Other income, net 2,500 7,108 (4,608) (65)% Total $8,674 $10,122 $(1,448)(14)% 40
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Category Key Drivers Interest Income á Higher yields on current year
Investment balances due to increase
interest rates Other Income â Lower income primarily due to
Lower returns on our SERP balances with
the current year Income Taxes Our effective tax rate is based on our fiscal year results and is affected by several factors. These reflect the current statutory rates in our domestic and foreign jurisdictions, the relative income earned in our foreign jurisdictions, and nonrecurring 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 consolidated financial statements. Fiscal Year Ended September 30, September 24, 2022 2021 Provision for income taxes
$(31,381) $(36,689)Effective tax rate 15% 10% Factor Impact On Effective Tax Rate Stock-based Compensation á Lower benefit related to the settlement of stock-based awards. Foreign Operations á Lower benefit from earned income in lower tax jurisdictions. Research and Development â Higher benefit from
Research and development tax credits.
Net (income)/loss attributable to the controlling interest
Fiscal Year Ended Change September 30, September 24, 2022 2021 $ %
Net (income)/loss attributable to the controlling interest
$(7,596) $7,785(102)% Percentage of total revenue -%
In 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 millionto gain on sale of assets on the 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.
Liquidity, capital resources and financial conditions
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.
The following table presents selected financial information as of
September 30, September 24, 2022 2021 Cash and cash equivalents
$ 620,127 $ 1,225,380Short-term investments 189,213 38,839 Long-term investments 102,514 62,819 Accounts receivable, net 243,593 232,609 Accounts payable and accrued liabilities 244,408 280,507 Working capital 1,033,376 1,444,781 41
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Capital expenditures and uses of capital
Our capital expenditures consist of purchases of land, building, building fixtures, laboratory equipment, office equipment, computer hardware and software, leasehold improvements, and production and test equipment. Additionally, included in capital expenditures are amounts associated with
DolbyCinema 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 I, Item 1A "Risk Factors."
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 consolidated financial statements for a summary of dividend payments made under the program during fiscal 2022 and additional information regarding our stock repurchase program.
Stock repurchase program. Our share repurchase program was approved in fiscal 2010, and since then we’ve completed approx
The Inflation Reduction Act and CHIPS and Science Act were signed into law in
August 2022. The Inflation Reduction Act introduced a one percent non-deductible excise tax on certain public company stock buybacks made after December 31, 2022. We are currently analyzing the impact of the excise tax on our future operations. Quarterly Dividend Program. During fiscal 2015, we initiated a recurring quarterly cash dividend program for our stockholders. For fiscal 2022, quarterly dividends of $0.25per share were paid on our Class A and Class B common stock to eligible stockholders of record.
Cash flow analysis
For the following comparative analysis performed for each of the sections of the statement of cash flows, the significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order of their impact relative to the overall change (in thousands). Operating Activities Fiscal Year Ended
September 30, September 24, 20222021
Net cash generated from operating activities
Net cash from operating activities decreased
Impact On Cash
Lower revenue, higher costs associated with the resolution of a Net Income â legal matter discussed in
Note 15 to the consolidated financial statements
statements, and higher S&M
Decrease due to lower accounts payable and accrued liabilities Working Capital â and higher inventories,
Partially offset by lower accounts
receivable and contract assets Investing Activities Fiscal Year Ended
September 30, September 24, 20222021
Net cash used in investing activities
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The net cash used in investing activities was
Impact on cash flows
â Higher outflows for the purchase of marketable investment Purchase of Investments securities, and
á Higher inflows
From the sale and entitlement of marketable investment proceeds from the investments
securities â Higher outflows for the acquisition of
Millicast, Inc.Business Combinations ("Millicast")
Completed in fiscal year 2022
â Lower inflows for the sale of property in the prior year that was Sale of Assets 51% owned by the controlling interest Financing Activities Fiscal Year Ended
September 30, September 24, 20222021
Net cash used in financing activities
Net cash used in financing activities was
$358.0 millionhigher in fiscal 2022 compared to fiscal 2021, primarily due to the following: Factor Impact On Cash Flows Share Repurchases â Higher outflows from increases in common stock repurchases Common Stock Issuance â Lower inflows from employee stock option exercises Higher outflows for the payment of our quarterly cash dividend to Dividend Payments â common stockholders primarily
increase compared to the prior fiscal year Distribution to Controlling Lower outflows for distributions to controlling interest due to Interest á the sale of property that was 51% owned by the controlling interest in fiscal 2021, that did not recur in fiscal 2022
Obligations and contractual obligations
The following table presents a summary of our commitments and contractual obligations as of
Payments Due By Fiscal Period 2 - 3 4 - 5 More Than 1 Year Years Years 5 Years Total Naming rights
$ 12,474 $ 25,920 $ 22,006 $ 44,316 $ 104,716Operating leases, including imputed interest 15,995 21,626 10,595 12,240 60,456 Purchase obligations 28,228 9,695 252 - 38,175 Donation commitments 1,797 232 202 417 2,648 Total $ 58,494 $ 57,473 $ 33,055 $ 56,973 $ 205,995
Naming rights. We are party to naming rights agreements for certain facilities, the most important of which are naming rights and related benefits with respect to
Operating Leases. Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries. For additional details regarding our leases, see Note 7 "Leases" to our consolidated financial statements. Purchase Obligations. Purchase obligations primarily consist of our non-cancelable commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include information technology and telecommunications, marketing and professional services, and manufacturing and other R&D activities. Donation Commitments. Our donation commitments relate to non-cancelable obligations that consist of maintenance services and installation of imaging and audio products in exchange for various marketing, branding, and publicity benefits. For additional details regarding our donation commitments, see Note 14 "Commitments and Contingencies" to our consolidated financial statements. 43
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Unrecognized Tax Benefits. As of
September 30, 2022, we had an accrued liability for unrecognized tax benefits without interest, penalties, and related deferred tax assets, totaling $69.7 million. We are unable to estimate when any cash settlement with a taxing authority might occur and, therefore, have not reflected these anticipated future outflows in the table above.
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. 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 14 "Commitments and Contingencies" to our consolidated financial statements. In fiscal 2022, there have been no material changes in either our off-balance sheet financing arrangements or contractual obligations outside the ordinary course of business, and we did not enter into any off-balance sheet arrangements that are expected to have a material effect on
Dolby'sliquidity or the availability of capital resources.
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