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MarketScreener Homepage  >  Equities  >  Nyse  >  Dolby Laboratories, Inc.    DLB

DOLBY LABORATORIES, INC.

(DLB)
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DOLBY LABORATORIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

11/16/2020 | 08:33am EST
The following discussion contains forward-looking statements that are subject to
risks and uncertainties. Actual results may differ substantially from those
referred to herein due to a number of factors, including but not limited to key
challenges listed below and risks described in 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 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.
COVID-19
In December 2019, a novel coronavirus disease was first reported and in January
2020, the World Health Organization ("WHO") declared it a Public Health
Emergency of International Concern. On March 11, 2020, the WHO characterized
COVID-19 as a pandemic.
COVID-19 has triggered worldwide shutdowns, job losses, and other disruptions
which in turn have negatively affected the global economy, including consumer
purchasing activity. Because Dolby technologies are featured in a wide array of
electronic products that are primarily purchased by consumers, our revenues have
been negatively affected by COVID-19. The issues and circumstances relating to
COVID-19 continue to change rapidly and are difficult to predict. We continue to
monitor the evolving situation and the impact on our business.
The outbreak of COVID-19 has also affected many of our partners, resulting in
the disruption of consumer products' supply chains and delays in shipments,
product development, and product launches. Consumer demand for products that
include our technologies may continue to be negatively impacted due to economic
uncertainty resulting from COVID-19. These factors have resulted in decreased
revenue pertaining to royalties on consumer devices and may cause delays in the
adoption of our technologies by partners.
The overall cinema market has been adversely impacted by COVID-19
shelter-in-place and social distancing mandates. Our exhibition partners and
customers have had to either partially or fully discontinue operations. This has
resulted in a significant reduction in box office receipts at Dolby Cinema sites
and lower demand for our cinema products and services. Though select cinema
locations have been permitted to resume operations, many such locations are
operating significantly below capacity. It remains uncertain when the cinemas
will be able to operate at full capacity.
At Dolby, we implemented work-from-home policies within all our offices in
locations with ongoing outbreaks and put in place additional safety measures and
global travel restrictions to ensure the well-being of our employees. We have
enabled our employees with the tools and infrastructure they need to carry on
our critical operations and progress the business forward in this remote working
environment. Select Dolby offices in certain locations have resumed in-office
work at less than full capacity, dependent on local progress against COVID-19
and applicable rules and regulations in those jurisdictions, as well as the
readiness of our facilities to accommodate appropriate safety measures for our
employees.
We expect COVID-19 will continue to have an impact for the foreseeable future.
The degree of impact on our business will depend on several factors, such as the
full duration and the extent of the pandemic, as well as actions taken by
governments, businesses and consumers in response to the pandemic, 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 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 Dolby experiences that
people can enjoy, which will drive revenue growth across the
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markets we serve. We aim to drive revenue growth by broadening Dolby experiences
to more types of content, such as music and gaming, that can increase our value
proposition in our existing device categories and create opportunities in new
device categories that can accelerate adoption of our technologies. We are also
beginning to leverage our audio and imaging expertise to expand the reach of our
technologies to address content beyond premium entertainment that can create new
revenue generating opportunities. Following is a discussion of the key markets
that we address and the various Dolby technologies and solutions that serve
these markets.
LICENSING
The majority of our licensing revenue is derived from the licensing of audio and
imaging technologies for premium entertainment playback. Our audio technologies
are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC
technologies. Our imaging technologies are primarily comprised of Dolby Vision
and our AVC and HEVC technologies. The following are certain highlights from
fiscal 2020 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 continue to add new TV partners for Dolby Vision and Dolby Atmos. For
example, during fiscal 2020, Xiaomi launched their first TV model that supports
both Dolby Vision and Dolby Atmos. In addition, many of our existing partners
expanded their support of the combined Dolby Vision and Dolby Atmos experience
by releasing more models and expanding into international markets, such as
India. As a result, the adoption of Dolby Vision and Dolby Atmos within 4K TV
shipments grew compared to the previous year.
Also this year, we launched Dolby Vision IQ along with our TV partners LG and
Panasonic. Dolby Vision IQ automatically adjusts the TV picture according to the
surrounding light and the type of content being viewed, creating an enhanced
viewing experience.
We continued to see engagement with partners supporting our newer technologies
in STBs. In fiscal 2020, Free, a broadcast service provider in France, as well
as Deutsche Telekom in Germany, both launched their first STBs supporting Dolby
Vision and Dolby Atmos.
Key Challenges: Our pursuit of growth and further adoption of our technologies
may be impacted by a number of factors. 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. 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 is causing 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. 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 Dolby technologies continues to
increase globally. In fiscal 2020, Apple continued to adopt Dolby Vision and
Dolby Atmos across their portfolio of devices, leading to support for Dolby
Vision capture and playback on Apple's newest iPhone, and AirPods Pro support of
Dolby Atmos with the
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release of iOS14. In addition, a majority of Apple's other iOS product offerings
support the combined experience of Dolby Vision and Dolby Atmos. Additional
Dolby Atmos-enabled mobile devices are available in the market from partners
such as Samsung, Amazon, Oppo, and Sony.
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 of Dolby enabled content via various ecosystems. Further, COVID-19
is causing uncertainty about consumer demand for devices in the mobile market,
the ability of our partners to manufacture such devices due to supply chain
disruption, timing of the adoption of our technologies into new products by
partners and licensees, and the timing of launches for new products.
Consumer Electronics
Highlights: We have an established presence in the home entertainment market
across devices such as AVRs, soundbars, smart speakers, Blu-Ray players, and
DMAs, through the inclusion of our DD+ technology, and increasingly through the
inclusion of our Dolby Atmos technology. AAC and HE-AAC technologies also have
broad adoption through our patent licensing programs. These home entertainment
devices can be paired with a growing array of Dolby enabled content via OTT
services and Blu-ray discs.
In fiscal 2020, the breadth of devices in the home entertainment market
supporting Dolby Atmos continued to expand. Sonos launched a new soundbar that
supports Dolby Atmos, and Roku launched their new DMA supporting Dolby Vision
and Dolby Atmos.
In addition, content available in Dolby Vision and Dolby Atmos continued to grow
in fiscal 2020, broadening our opportunities for increased adoption in more
devices. Google Play, Showtime, and CBS began supporting Dolby Vision content.
Additional OTT services currently supporting the combined experience of Dolby
Vision and Dolby Atmos include Netflix, Disney+, Amazon, and Apple TV+. We have
also expanded our global presence with Hotstar supporting Dolby Vision within
their Disney+ content in India, and Tencent and iQiYi supporting Dolby Vision
and Dolby Atmos in China.
We continue to focus on expanding the availability of Dolby technologies to new
devices and new forms of content such as music, bringing new Dolby experiences
to the market. In fiscal 2020, TIDAL began enabling Dolby Atmos for music to a
growing number of TVs, soundbars, and AVR devices through their streaming app.
In addition, Dolby Atmos music is available on the Amazon Echo Studio smart
speaker streaming from Amazon Music HD.
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 is causing
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.
In fiscal 2020, Lenovo and ASUS released a number of gaming laptops with Dolby
Atmos broadening the consumer base that can experience Dolby technologies. Also
during the year, a number of gaming titles enabled in Dolby Atmos were released
across multiple gaming platforms such as PCs. In addition, a number of PCs from
partners such as Apple, Lenovo, Dell, and ASUS support Dolby Vision and Dolby
Atmos.
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Key Challenges: PC revenues have been impacted by a decline in the portion of
PCs that have optical disc functionality in recent years, which has resulted in
a decline in our ASPs, and we expect this decline in ASPs to continue. If
declining conditions and trends persist, and OEMs do not incorporate our
technologies in current and future products, our PC revenues will face
continuing downward pressure. We must continuously collaborate and maintain our
key partnership relationships with PC manufacturers to incorporate our
technologies, and we must continue to support the development and distribution
of Dolby content via various ecosystems. Further, COVID-19 is causing
uncertainty about consumer demand for devices in the PC market, the ability of
our partners to manufacture such devices due to supply chain disruption, timing
of the adoption of our technologies into new products by partners and licensees,
and the timing of launches for new products.
Other Markets
Highlights: DD+ is incorporated in the Xbox and PlayStation gaming consoles and
streaming platforms for movie and television content. In fiscal 2020, Microsoft
announced that their next generation Xbox Series X and Series S will be the
first gaming consoles to support Dolby Vision and Dolby Atmos for gaming
content.
We also generate revenue from the automotive industry primarily through disc
playback devices as well as other elements of the entertainment system, and are
focused on expanding our presence in music in the automotive industry.
Key Challenges: Consumer demand for devices in the gaming industry is impacted
by the anticipation of console refresh cycles. In addition, the gaming console
market has competition from mobile devices and gaming PCs, which have faster
refresh cycles and appeal to a broader consumer base. These factors may impact
our future revenues. If OEMs do not incorporate our technologies in current and
future products, our revenues will face downward pressure. Further, COVID-19 is
causing uncertainty about consumer demand for devices in the gaming industry,
the ability of our partners to manufacture such devices due to supply chain
disruption, timing of the adoption of our technologies into new products by
partners and licensees, and the timing of launches for new products.
In addition to licensing revenue derived from the licensing of audio and imaging
technologies from the markets discussed above, we offer our audio and imaging
technologies to create Dolby experiences through Dolby Cinema.
Dolby Cinema
Highlights: We continued to expand our global presence for Dolby Cinema. In
fiscal 2020, the first Dolby Cinemas were opened in South Korea and Saudi
Arabia, and we established more partnerships with global exhibitors. At the end
of the fiscal year, we had over 250 Dolby Cinema locations established across 13
countries. The breadth of motion pictures for Dolby Cinema continues to grow
with over 300 theatrical titles in Dolby Vision and Dolby Atmos having been
announced or released from all the major studios.
Key Challenges: Although the premium large format market for the cinema industry
has been growing, Dolby Cinema competes with other existing offerings. Our
success depends on our partners and their success and our ability to
differentiate our offering, deploy new sites in accordance with plans, and
attract and retain a global viewing audience. In addition, the success of our
Dolby Cinema offering will be tied to global box office performance generally.
COVID-19 has had, and is likely to continue to have, a significant effect on
theatrical exhibition. The response to COVID-19 including the closure of
cinemas, shelter-in-place mandates and government-imposed social-distancing
restrictions have had, and are likely to continue to have, a negative impact on
our cinema-related revenues and consumer demand. Further, studios have delayed
the release of a number of new movie titles and temporarily suspended the
production of future releases. It is uncertain whether consumer demand for the
cinema and other forms of indoor recreation will return to previous levels. In
addition, when cinemas reopen, exhibitor partners may operate fewer screens in
response to decreased attendance.

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PRODUCTS & SERVICES
A majority of our products and services revenues are derived from the sale of
audio and imaging products for the cinema, television, broadcast, communication,
and entertainment industries. Revenues from the sale of Dolby Conference Phones,
Dolby Voice Room, as well as our recently launched Developer Platform are
included in products and services.
Cinema Products & Services
Highlights: To help enable the playback of content in Dolby 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 end of fiscal 2020, there are over 6,000
Dolby Atmos screens installed or committed and over 1,800 Dolby Atmos theatrical
titles have been announced or released.
We also offer a variety of other cinema products, which include the IMS3000, an
integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel
Amplifier, and our high-power flexible line of speakers. These products allow us
to offer exhibitors a more complete Dolby Atmos solution that is often more cost
effective than what was previously available to them.
Key Challenges: Demand for our cinema products is dependent upon our partners
and their success in the market, industry and economic cycles, box office
performance, and our ability to develop and introduce new technologies, further
our relationships with content creators, and promote new cinematic audio and
imaging experiences. A significant portion of our growth opportunity lies in
international markets, such as China, 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 erode the demand for new
products. These conditions are likely to continue after the end of
government-imposed restrictions.
Dolby Voice
Highlights: In fiscal 2020, we sold hardware products such as the Dolby
Conference Phone and the Dolby Voice Room, which include our Dolby Voice
technology.
In response to the changing market opportunities, in the first quarter of fiscal
2021 we decided to begin exiting the sale and leasing of conference hardware.
Going forward, our Dolby Voice efforts will be focused on expanding the
availability of our technologies through our developer platform and our software
solutions for enterprise communications partners.
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.
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Other Services
Highlights: We are focused on bringing our expertise in media and communications
to a broader range of digital experiences. In fiscal 2020 we launched our
developer platform, Dolby.io, which enables developers to access our
technologies through APIs. The initial offerings include media processing APIs
for analyzing and improving the sound of recorded audio files, and interactivity
APIs for enabling developers to embed enhanced communications experiences within
their applications.
Following the initial launch of Dolby.io, we have seen increased customer
engagement with our media and interactivity APIs for use cases such as
entertainment, online education and telehealth. For example, we have partnered
with SoundCloud to incorporate our music mastering APIs within their online
music distribution platform.
Key Challenges: Our success in this market will depend on the number of
developers we are able to attract, the volume of usage of the service, and our
ability to monetize our services. Although the market for online experiences has
been growing, Dolby's interactivity API technologies compete with other
offerings. In addition, our pursuit of growth and further adoption depends on
our ability to continue to innovate and add additional value to our services.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements and accompanying notes are prepared in
accordance with U.S. GAAP, pursuant to SEC rules 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 SEC considers 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.
Revenue Recognition
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 intellectual property and technologies ("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 revenues 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 COVID-19 or other natural disasters 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
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each subsequent reporting period until the completion of the contract. 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. As
such, 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 "Revenue Recognition" to our consolidated
financial statements in Part II, Item 8 of this Annual Report.

IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
Collaborative Arrangements. In November 2018, the FASB issued ASU
2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction
between Topic 808 and Topic 606, which clarifies that certain transactions
between participants in a collaborative arrangement should be accounted for
under ASC 606 when the counterparty is a customer. In addition, ASU
2018-18 precludes an entity from presenting consideration from a transaction in
a collaborative arrangement as revenue from contracts with customers if the
counterparty is not a customer for that transaction. This standard will be
effective for Dolby beginning September 26, 2020. While we have a number of
collaborative arrangements, we do not believe that this standard will have a
material impact on our consolidated financial statements.
Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial
Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments,
which modifies the measurement of expected credit losses of certain financial
instruments, including trade receivables, contract assets, and lease
receivables. This standard will be effective for Dolby beginning September 26,
2020. We do not believe that this standard will have a material impact on our
consolidated financial statements.
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes, which modifies and eliminates
certain exceptions to the general principles of ASC 740, Income Taxes. This
standard will be effective for Dolby beginning September 25, 2021. We are
currently evaluating the impact of the standard on our consolidated financial
statements.
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RESULTS OF OPERATIONS
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 years ended September 25,
2020, September 27, 2019, and September 28, 2018. Note that adjustments related
to previously under-reported sales-based royalties as well as unlicensed
settlement activity, are collectively referred to as "recoveries." Amounts
displayed, except percentages, are in thousands.

Revenue and Gross Margin
Licensing
Licensing revenue consists of fees earned from licensing our technologies to
customers who incorporate them into their products and services to enable and
enhance audio and imaging capabilities. The technologies that we license are
either internally developed, acquired, or licensed from third parties. A
significant portion of our licensing revenue pertains to customer-shipment
royalties that we recognize based on estimates of our licensees' shipments. To
the extent that shipment data reported by licensees differs from estimates we
made and recorded, we recognize an adjustment to revenue for such difference.
Our cost of licensing consists mainly of amortization of certain purchased
intangible assets and intangible assets acquired in business combinations,
depreciation, third party royalty obligations, and associated fees.
                                                   Fiscal Year Ended                                      2020 vs. 2019                               2019 vs. 2018
                                                              September 25,       September 27,      September 28,
Licensing                                                         2020                2019               2018                          $               %                        $              %
Revenue                                                        $1,078,577$1,107,280$940,777$(28,703)         (3)%                    $166,503         18%
Percentage of total revenue                                        93%                 89%                89%
Cost of licensing                                                50,822              57,531             42,583                      (6,709)          (12)%                    14,948          35%
Gross margin                                                    1,027,755           1,049,749           898,194                    (21,994)          (2)%                    151,555          17%
Gross margin percentage                                            95%                 95%                95%


2020 vs. 2019
Factor                                    Licensing Revenue                                          Gross Margin
                           Lower revenues from Dolby Cinema resulting from the closure
Other               â      of cinemas and lower attendance due to COVID-19, lower
                           automotive recoveries, and gaming, partially offset by
                           higher patent administration fees from Via Licensing
                           Higher revenues from increased adoption of our patent
Mobile              á      licensing technologies and increased adoption of Dolby
                           Atmos and Dolby Vision, partially offset by lower
                           recoveries
                           Higher revenues from recoveries, higher adoption of Dolby      ßà    No significant fluctuations
PC                  á      Vision and Dolby Atmos in more PC models, and higher
                           revenues from patent licensing technologies
                           Lower revenues from patent licensing and decreased market
Broadcast           â      volume of STBs, partially offset by higher adoption of
                           Dolby Atmos and Dolby Vision, primarily in TVs
                           Lower market volumes of AVRs and home theater equipment,
CE                  â      partially offset by increased adoption of our patent
                           licensing technologies, and increased adoption of Dolby
                           Atmos and Dolby Vision in DMAs and soundbars



2019 vs. 2018
Factor                                    Licensing Revenue                                          Gross Margin
                           Higher revenues from increased adoption of our patent
Mobile              á      licensing technologies and the adoption of our technologies
                           into more devices, partially offset by lower recoveries
                           Higher revenues from increased adoption of our patent
Broadcast           á      licensing technologies, recoveries, and TVs, partially
                           offset by lower market volume of STBs
                           Higher revenues from Dolby Cinema, gaming, and automotive
Other               á      recoveries, partially offset by lower licensing in Dolby       ßà    No significant fluctuations
                           Voice
                           Higher volume of DMAs and increased adoption of our patent
CE                  á      licensing technologies, partially offset by lower
                           recoveries
                           Higher revenues from recoveries and increased adoption of
PC                  á      our patent licensing technologies, partially offset by
                           lower ASP from decreasing number of PCs with optical disc
                           functionality


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Products and Services
Products revenue is generated from the sale of audio, imaging, and voice
products for the cinema, television broadcast, communications, and consumer
products industries. Also included in products revenue are amounts relating to
certain Dolby Cinema arrangements that are considered sales-type leases that
involve fixed or minimum fees. Cost of products consists of materials, labor,
and manufacturing overhead, amortization of certain intangible assets, as well
as third party royalty obligations.
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. 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                                      2020 vs. 2019                               2019 vs. 2018
                                                                 September 25,       September 27,      September 28,
Products and Services                                                2020                2019               2018                          $               %                        $             %
Revenue                                                             $83,215$134,340$113,823$(51,125)         (38)%                   $20,517         18%
Percentage of total revenue                                           7%                  11%                11%
Cost of products and services                                       95,676              103,323            84,979                      (7,647)          (7)%                    18,344          22%
Gross margin                                                       (12,461)             31,017             28,844                     (43,478)         (140)%                    2,173          8%
Gross margin percentage                                              (15)%                23%                25%



2020 vs. 2019
Factor                           Products and Services Revenue                                    Gross Margin
                                   Lower sales of cinema equipment attributable
                                   to COVID-19 and lower revenues from Dolby             Lower utilization of manufacturing
Products                 â         Cinema sales-type leases (hybrid       

â capacity and higher excess &

                                   agreements), partially offset by higher               obsolescence charges
                                   units of Dolby Voice products
Services                ßà         No significant fluctuations            

â Lower utilization of available capacity




2019 vs. 2018
Factor                             Products and Services Revenue                                    Gross Margin
                                   Higher revenues from Dolby Cinema and Dolby
Products                 á         Voice products, and higher units of cinema         â     Higher excess & obsolescence charges
                                   equipment
Services                ßà         No significant fluctuations                        á     Higher utilization of available
                                                                                            capacity



Operating Expenses
Research and Development
R&D expenses consist primarily of employee compensation and benefits expenses,
stock-based compensation, consulting and contract labor costs, depreciation and
amortization, facilities costs, costs for outside materials, and information
technology expenses.
                                                       Fiscal Year Ended                                      2020 vs. 2019                            2019 vs. 2018
                                                                  September 25,       September 27,      September 28,
                                                                      2020                2019               2018                        $              %                       $            %
Research and development                                            $239,045$237,871$236,794$1,174          -%                     $1,077         -%
Percentage of total revenue                                            21%                 19%                22%



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2020 vs. 2019
Category                                                                Key Drivers
Compensation & Benefits                  á     Higher headcount and annual

merit increases across the existing

                                               employee base
Travel                                   â     Lower costs due to COVID-19 travel restrictions
Professional & Consulting                â     Lower costs for external 

professional and consulting services for new

                                               product development



2019 vs. 2018
           Category                                Key Drivers
           Research & Development        ßà    No significant 

fluctuations



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                                      2020 vs. 2019                              2019 vs. 2018
                                                                 September 25,       September 27,      September 28,
                                                                     2020                2019               2018                         $               %                        $             %
Sales and marketing                                                $335,933$343,835$309,762$(7,902)         (2)%                    $34,073         11%
Percentage of total revenue                                           29%                 28%                29%



2020 vs. 2019
Category                                                       Key Drivers
Travel                          â     Lower costs due to COVID-19 travel restrictions
Marketing Programs              á     Higher costs related to marketing efforts for company growth
                                      initiatives and branding activities
Legal, Professional, &          â     Lower costs for IP recovery activities
Consulting



2019 vs. 2018
Category                                                      Key Drivers
Legal, Professional, &          á     Increased IP related activities aimed at revenue generation
Consulting

Marketing Programs              á     Higher costs related to marketing programs, including branding
                                      activities, and new product launches


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                                      2020 vs. 2019                             2019 vs. 2018
                                                                     September 25,       September 27,      September 28,
                                                                         2020                2019               2018                         $              %                       $            %
General and administrative                                             $219,753$205,425$197,423$14,328          7%                     $8,002         4%
Percentage of total revenue                                               19%                 17%                19%



2020 vs. 2019
Category                                                             Key Drivers

Compensation & Benefits                 á     Higher headcount and annual

merit increases across the existing

                                              employee base
Bad Debt                                á     Higher charges recorded in the current period



2019 vs. 2018
Category                                                      Key Drivers
Legal, Professional, &          á     Higher costs associated with various legal activities and patent
Consulting                            filings
Compensation & Benefits         á     Higher headcount and annual merit increases across the existing
                                      employee base
Bad Debt                        á     Higher charges recorded in the current period


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Restructuring

Restructuring charges/(credits) recorded as operating expenses in our 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                     2020 vs. 2019                                     2019 vs. 2018
                                                                             September 25,      September 27,       September 28,
                                                                                 2020               2019                2018                       $           %                 $           %
Restructuring charges/(credits)                                                 $1,821$36,558$(446)                 $ 

(34,737) (95) % $ 37,004 (8,297) % Percentage of total revenue

                                                       -%                 3%                  -%


Subsequent to the fiscal year ended September 25, 2020, we approved a plan to
reduce certain activities in order to reallocate those resources towards higher
priority investment areas and growth opportunities for the future of our
business. Restructuring charges associated with this plan will be reflected in
fiscal 2021 financial statements. For additional information on this
restructuring program, see Note 20 "Subsequent Events" to our consolidated
financial statements.
Restructuring charges recorded in fiscal 2019 of $33.5 million represents costs
incurred as a result of our early exit of leased facilities. Included in those
costs are the write-off of the carrying value of the leasehold improvements
associated with the facilities and other expenses associated with the exit of
the facilities.
Restructuring charges recorded in fiscal 2019 also include $3.1 million
associated with a reorganization of our marketing function that resulted in
severance and other related benefits for approximately 50 positions that were
eliminated. For additional information on our Restructuring programs, see Note
13 "Restructuring" to our consolidated financial statements.
Other Income/Expense
Other income/(expense) primarily consists of interest income earned on cash and
investments and the net gains/(losses) from foreign currency transactions,
derivative instruments, and sales of marketable securities from our investment
portfolio.
                                                             Fiscal Year Ended                                      2020 vs. 2019                               2019 vs. 2018
                                                                        September 25,       September 27,      September 28,
Other Income/Expense                                                        2020                2019               2018                          $               %                        $              %
Interest income                                                            $12,725$24,919$18,970$(12,194)         (49)%                   $5,949           31%
Interest expense                                                            (186)               (170)              (198)                       (16)             9%                       28            (14)%
Other income/(expense), net                                                 8,434                481              (5,903)                      7,953          1,653%                    6,384          (108)%
Total                                                                      $20,973$25,230$12,869$(4,257)          (17)%                   $12,361          96%



2020 vs. 2019
Category                                                      Key Drivers
Interest Income              â     Lower yields on current year investment

balances due to decreased interest

                                   rates
Other Income                 á     Increase in realized gains from sales 

of investments and higher valuation

                                   on equity method investments



2019 vs. 2018
Category                                                            Key Drivers
                                         Decrease in other expense due to impairment charges recorded in the prior
Other Income/(Expense)             á     year on cost method equity 

investments that did not re-occur in 2019,

                                         higher valuation of current year 

equity method investment, and lower

                                         foreign currency translation losses
Interest Income                    á     Higher yields on investment balances


Income Taxes
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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. Our fiscal 2020
income tax provision reflects a decrease in unrecognized tax benefits due to a
lapse in the statute of limitations. Our fiscal 2018 income tax provision
reflects amounts accrued in connection with the Tax Act enacted in December
2017. For additional information related to effective tax rates, see Note 12
"Income Taxes" to our consolidated financial statements.
                                                Fiscal Year Ended
                                              September 25,     September 27,     September 28,
                                                  2020              2019              2018
Provision for income taxes                      $(8,096)$(26,802)$(154,069)
Effective tax rate                                 3%                9%                78%



2020 vs. 2019
Factor                                                         Impact On Effective Tax Rate
                                                   Additional benefit in the current year attributable to reversals of
Unrecognized Tax Benefits                â         unrecognized tax 

benefits in the third quarter due to a lapse in the

                                                   statute of limitations.



2019 vs. 2018
Factor                                                    Impact On Effective Tax Rate
                                               Lower tax expense due to a large tax charge for US tax reform in the
Enactment of Tax Act                 â         prior year, a large tax 

benefit in the current year, and the

                                               reduction of the federal statutory rate




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 of September 25, 2020, we had cash and cash
equivalents of $1,071.9 million, which mainly consisted of cash and
highly-liquid money market funds. In addition, we had short and long-term
investments of $99.1 million, which consisted primarily of municipal debt
securities, certificates of deposit, government bonds, commercial paper,
corporate bonds, and U.S. agency securities.
The following table presents selected financial information as of the fiscal
years ended September 25, 2020 and September 27, 2019 (amounts displayed are in
thousands):
                                              September 25,       September 27,
                                                   2020                2019
Cash and cash equivalents                    $    1,071,876$      797,210
Short-term investments                               46,948             119,146
Long-term investments                                52,149             179,587
Accounts receivable, net                            180,340             189,115
Accounts payable and accrued liabilities            232,591             283,356
Working capital                                   1,280,087           1,074,687


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 I, Item 1A "Risk Factors."
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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
& Stock-Based Compensation" of our consolidated financial statements for a
summary of dividend payments made under the program during fiscal 2020 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 $1.8 billion of stock
repurchases under the program.
Quarterly Dividend Program. During the first quarter of fiscal 2015, we
initiated a recurring quarterly cash dividend program for our stockholders. For
fiscal 2020, quarterly dividends of $0.22 per share were paid on our Class A and
Class B common stock to eligible stockholders of record.
Cash Flows Analysis
For the following comparative analysis performed for each of the sections of the
statement of cash flows, the significant factors identified as the leading
drivers contributing to the fluctuation are presented in descending order of
their impact relative to the overall change (amounts displayed in thousands).
Operating Activities
                                                     Fiscal Year Ended
                                              September 25,    September 27,
                                                   2020             2019

Net cash provided by operating activities $ 343,849$ 327,674

Net cash provided by operating activities increased $16.2 million in fiscal 2020 compared to fiscal 2019, primarily due to the following: Factor

                                                    Impact On Cash 

Flows

                                         Higher inflows due to decreases in accounts receivable and contract
Working Capital                 á        assets, partially offset by 

higher outflows to settle remaining exit

                                         obligations for a terminated lease of an office building


Investing Activities
                                                              Fiscal Year Ended
                                                       September 25,    September 27,
                                                            2020             2019

Net cash provided by (used in) investing activities $ 134,374 $

(56,229)

Net cash provided by investing activities was $190.6 million greater in fiscal 2020 compared to fiscal 2019, primarily due to the following: Factor

                                                               Impact On Cash Flows
Proceeds From Investments                  á        Higher inflows from 

the sale & maturity of marketable investment

                                                    securities
Capital Expenditures                       á        Lower expenditures for 

PP&E

Purchase of Investments                    â        Higher outflows for 

the purchase of marketable investment securities


Financing Activities
                                                  Fiscal Year Ended
                                           September 25,    September 27,
                                                2020             2019

Net cash used in financing activities $ (207,775)$ (385,281)




Net cash used in financing activities was $177.5 million lower in fiscal 2020
compared to fiscal 2019, primarily due to the following:
Factor                                                        Impact On Cash Flows
Share Repurchases                   á        Lower outflows for common stock repurchases
Common Stock Issuance               á        Higher inflows from employee stock option exercises


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Off-Balance Sheet Arrangements and Contractual Obligations
Our liquidity is not dependent upon the use of off-balance sheet financing
arrangements, and we have not entered into any arrangements that are expected to
have a material effect on liquidity or the availability of capital resources.
The following table presents a summary of our contractual obligations and
commitments as of September 25, 2020 (in thousands):
                                                                  Payments Due By Fiscal Period
                                                                 2 - 3       4 - 5     More Than
                                                    1 Year       Years       Years      5 Years       Total
Naming rights                                     $  7,915$ 16,131$ 16,541$  61,277$ 101,864
Operating leases, including imputed interest        18,098      28,167      21,616       22,484       90,365
Purchase obligations                                17,305       3,130           -            -       20,435
Donation commitments                                 4,803         310         310        1,002        6,425
Total                                             $ 48,121$ 47,738$ 38,467$  84,763$ 219,089


Naming Rights.   We are party to an agreement for naming rights and related
benefits with respect to the Dolby Theatre in Hollywood, California, the
location of the Academy Awards®. The term of the agreement is 20 years, over
which we will make payments on a semi-annual basis until fiscal 2032. Our
ongoing annual payment obligations are conditioned in part on the Academy Awards
being held and broadcast from the Dolby Theatre. Our payment obligations may be
suspended or reduced in certain circumstances, including protracted closure of
the Dolby Theatre.
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
commitments made under agreements to purchase goods and services related to
Dolby Cinema and for purposes that include IT 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. The recipients of these donations participate in or promote the cinema
and entertainment industry and our commitments vary in length, lasting up to 15
years.
Unrecognized Tax Benefits.  As of September 25, 2020, we had an accrued
liability for unrecognized tax benefits without interest, penalties, and related
deferred tax assets, totaling $60.7 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.
For additional details regarding our contractual obligations, see Note 14
"Commitments & Contingencies" to our consolidated financial statements.
Indemnification Clauses
We are party to certain contractual agreements under which we have agreed to
provide indemnification of varying scope and duration to the other party
relating to our licensed IP. Historically, we have not made any payments for
these indemnification obligations and no amounts have been accrued in our
consolidated financial statements with respect to these obligations. Since the
terms and conditions of the indemnification clauses do not explicitly specify
our obligations, we are unable to reasonably estimate the maximum potential
exposure for which we could be liable. In addition, we have entered into
indemnification agreements with our officers, directors, and certain employees,
and our certificate of incorporation and bylaws contain similar indemnification
obligations. For additional details regarding indemnification clauses within our
contractual agreements, see Note 14 "Commitments & Contingencies" to our
consolidated financial statements.

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