UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 30, 2016

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              To             

Commission File Number: 001-32431

DOLBY LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	90-0199783
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1275 Market Street San Francisco, CA	94103-1410	(415) 558-0200
(Address of principal executive offices)	(Zip Code)	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesýNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesýNo¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerý	Accelerated filer¨
Non-accelerated filer¨(Do not check if a smaller reporting company)	Smaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Noý

On January 27, 2017, the registrant had 57,867,086 shares of Class A common stock, par value $0.001 per share, and 44,073,597 shares of Class B common stock, par value $0.001 per share, outstanding.

DOLBY LABORATORIES, INC.

FORM 10-Q

For the Fiscal Quarter Ended December 30, 2016

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION
Item 1.	Unaudited Interim Condensed Consolidated Financial Statements	4
	Unaudited Interim Condensed Consolidated Balance Sheets	4
	Unaudited Interim Condensed Consolidated Statements of Operations	5
	Unaudited Interim Condensed Consolidated Statements of Comprehensive Income	6
	Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity	7
	Unaudited Interim Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	41
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6.	Exhibits	55
Signatures

2

GLOSSARY OF TERMS

The following table summarizes certain terms and abbreviations that may be used within the text of this report:

Abbreviation	Term
AAC	Advanced Audio Coding
AFS	Available-For-Sale (Securities)
AOCI	Accumulated Other Comprehensive Income
APIC	Additional-Paid In-Capital
ASP	Average Selling Price
ASU	Accounting Standards Update
ATSC	Advanced Television Systems Committee
AVR	Audio/Video Receiver
CE	Consumer Electronics
CODM	Chief Operating Decision Maker
COGS	Cost Of Goods Sold
COSO	Committee Of Sponsoring Organizations (Of The Treadway Commission)
DCI	Digital Cinema Initiative
DD	Dolby Digital®
DD+	Dolby Digital Plus™
DMA	Digital Media Adapter
DTV	Digital Television
DVB	Digital Video Broadcasting
DVD	Digital Versatile Disc
EPS	Earnings Per Share
ESP	Estimated Selling Price
ESPP	Employee Stock Purchase Plan
FASB	Financial Accounting Standards Board
FCPA	Foreign Corrupt Practices Act
G&A	General & Administrative
HDR	High-Dynamic Range
HDTV	High Definition Television
HE AAC	High Efficiency Advanced Audio Coding
HEVC	High Efficiency Video Coding
HFR	High Frame Rate
HTIB	Home Theater In-A-Box
IC	Integrated Circuit
IMB	Integrated Media Block
IP	Intellectual Property
IPO	Initial Public Offering
IPTV	Internet Protocol Television
ISO	Incentive Stock Option
ISV	Independent Software Vendor
IT	Information Technology
LCD	Liquid Crystal Display
LP	Limited Partner/Partnership
ME	Multiple Element
NATO	North American Theatre Owners
NOL	Net Operating Loss
NQ	Non-Qualified/Non-Statutory Stock Option
OCI	Other Comprehensive Income
ODD	Optical Disc Drive
OECD	Organization For Economic Co-Operation & Development
OEM	Original Equipment Manufacturer
OLED	Organic Light-Emitting Diode
OTT	Over-The-Top
PC	Personal Computer
PCS	Post-Contract Support
PP&E	Property, Plant And Equipment
PSO	Performance-Based Stock Option
R&D	Research & Development
RSU	Restricted Stock Unit
S&M	Sales & Marketing
SAR	Stock Appreciation Rights
SERP	Supplemental Executive Retirement Plan
SoC	System(s)-On-A-Chip
STB	Set-Top Box
TAM	Total Available Market
TPE	Third Party Evidence
TSR	Total Stockholder Return
UHD	Ultra High Definition
U.S. GAAP	Generally Accepted Accounting Principles In The United States
VSOE	Vendor Specific Objective Evidence

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PART I - FINANCIAL INFORMATION

ITEM 1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	December 30, 2016			September 30, 2016
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	512,838		$	516,112
Restricted cash	5,075			3,645
Short-term investments	164,818			121,629
Accounts receivable, net of allowance for doubtful accounts of $2,394 and $2,370	81,393			75,688
Inventories	14,773			16,354
Prepaid expenses and other current assets	32,119			26,302
Total current assets	811,016			759,730
Long-term investments	350,360			393,904
Property, plant and equipment, net	459,709			443,656
Intangible assets, net	206,862			215,342
Goodwill	307,121			309,616
Deferred taxes	171,388			166,790
Other non-current assets	24,247			21,068
Total assets	$	2,330,703		$	2,310,106
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,541		$	17,544
Accrued liabilities	169,711			169,055
Income taxes payable	1,514			2,304
Deferred revenue	24,405			24,180
Total current liabilities	207,171			213,083
Long-term deferred revenue	34,603			35,366
Other non-current liabilities	88,271			82,922
Total liabilities	330,045			331,371
Stockholders’ equity:
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 57,808,525 shares issued and outstanding at December 30, 2016 and 57,018,362 at September 30, 2016	56			57
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 44,073,597 shares issued and outstanding at December 30, 2016 and 44,403,847 at September 30, 2016	44			44
Additional paid-in capital	36,435			42,032
Retained earnings	1,977,478			1,938,320
Accumulated other comprehensive (loss)	(19,679		)	(10,197		)
Total stockholders’ equity – Dolby Laboratories, Inc.	1,994,334			1,970,256
Controlling interest	6,324			8,479
Total stockholders’ equity	2,000,658			1,978,735
Total liabilities and stockholders’ equity	$	2,330,703		$	2,310,106

See accompanying notes to unaudited interim condensed consolidated financial statements

4

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Fiscal Quarter Ended
	December 30, 2016			January 1, 2016
Revenue:
Licensing	$	232,699		$	211,129
Products	28,211			24,809
Services	5,357			4,876
Total revenue	266,267			240,814
Cost of revenue:
Cost of licensing	8,121			6,533
Cost of products	17,720			19,038
Cost of services	4,126			4,195
Total cost of revenue	29,967			29,766
Gross margin	236,300			211,048
Operating expenses:
Research and development	57,518			53,328
Sales and marketing	71,175			74,454
General and administrative	41,540			44,078
Total operating expenses	170,233			171,860
Operating income	66,067			39,188
Other income/expense:
Interest income	1,814			1,297
Interest expense	(26		)	(29		)
Other income/(expense), net	(199		)	(972		)
Total other income	1,589			296
Income before income taxes	67,656			39,484
Provision for income taxes	(14,082		)	(8,473		)
Net income including controlling interest	53,574			31,011
Less: net (income) attributable to controlling interest	(200		)	(110		)
Net income attributable to Dolby Laboratories, Inc.	$	53,374		$	30,901
Net income per share:
Basic	$	0.53		$	0.31
Diluted	$	0.51		$	0.30
Weighted-average shares outstanding:
Basic	101,483			100,734
Diluted	103,876			101,931
Related party rent expense:
Included in operating expenses	$	782		$	781
Included in net income attributable to controlling interest	$	175		$	176
Cash dividend declared per common share	$	0.14		$	0.12
Cash dividend paid per common share	$	0.14		$	0.12

See accompanying notes to unaudited interim condensed consolidated financial statements

5

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Fiscal Quarter Ended
	December 30, 2016			January 1, 2016
Net income including controlling interest	$	53,574		$	31,011
Other comprehensive income:
Foreign currency translation adjustments, net of tax	(7,724		)	(750		)
Unrealized (losses) on available-for-sale securities, net of tax	(2,019		)	(860		)
Comprehensive income	43,831			29,401
Less: comprehensive loss attributable to controlling interest	61			39
Comprehensive income attributable to Dolby Laboratories, Inc.	$	43,892		$	29,440

See accompanying notes to unaudited interim condensed consolidated financial statements

6

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Dolby Laboratories, Inc.
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Dolby Laboratories, Inc.			Controlling Interest			Total
Balance at September 30, 2016	$	101		$	42,032		$	1,938,320		$	(10,197	)	$	1,970,256		$	8,479		$	1,978,735
Net income	—			—			53,374			—			53,374			200			53,574
Currency translation adjustments, net of tax of $1,265	—			—			—			(7,463		)	(7,463		)	(261		)	(7,724		)
Unrealized (losses) on investments, net of tax of $95	—			—			—			(2,019		)	(2,019		)	—			(2,019		)
Distributions to controlling interest	—			—			—			—			—			(2,094		)	(2,094		)
Stock-based compensation expense	—			17,215			—			—			17,215			—			17,215
Repurchase of common stock	(1		)	(25,000		)	—			—			(25,001		)	—			(25,001		)
Cash dividends declared and paid on common stock	—			—			(14,216		)	—			(14,216		)	—			(14,216		)
Tax benefit from employee stock plans	—			2,853			—			—			2,853			—			2,853
Common stock issued under employee stock plans	1			13,990			—			—			13,991			—			13,991
Tax withholdings on vesting of restricted stock	(1		)	(14,655		)	—			—			(14,656		)	—			(14,656		)
Balance at December 30, 2016	$	100		$	36,435		$	1,977,478		$	(19,679	)	$	1,994,334		$	6,324		$	2,000,658

	Dolby Laboratories, Inc.
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Dolby Laboratories, Inc.			Controlling Interest			Total
Balance at September 25, 2015	$	102		$	17,571		$	1,800,857		$	(11,462	)	$	1,807,068		$	8,939		$	1,816,007
Net income	—			—			30,901			—			30,901			110			31,011
Currency translation adjustments, net of tax of $343	—			—			—			(601		)	(601		)	(149		)	(750		)
Unrealized (losses) on investments, net of tax of $168	—			—			—			(860		)	(860		)	—			(860		)
Distributions to controlling interest	—			—			—			—			—			(214		)	(214		)
Stock-based compensation expense	—			19,380			—			—			19,380			—			19,380
Repurchase of common stock	(2		)	(36,121		)	(3,326		)	—			(39,449		)	—			(39,449		)
Cash dividends declared and paid on common stock	—			—			(12,114		)	—			(12,114		)	—			(12,114		)
Tax (deficiency) from employee stock plans	—			(976		)	—			—			(976		)	—			(976		)
Common stock issued under employee stock plans	—			9,986			—			—			9,986			—			9,986
Tax withholdings on vesting of restricted stock	1			(9,840		)	—			—			(9,839		)	—			(9,839		)
Balance at January 1, 2016	$	101		$	—		$	1,816,318		$	(12,923	)	$	1,803,496		$	8,686		$	1,812,182

See accompanying notes to unaudited interim condensed consolidated financial statements

7

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Fiscal Quarter Ended
	December 30, 2016			January 1, 2016
Operating activities:
Net income including controlling interest	$	53,574		$	31,011
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,810			21,814
Stock-based compensation	17,215			19,380
Amortization of premium on investments	662			1,605
Excess tax benefit from exercise of stock options	(2,962		)	(300		)
Provision for doubtful accounts	67			(322		)
Deferred income taxes	(3,275		)	(10,488		)
Other non-cash items affecting net income	(376		)	445
Changes in operating assets and liabilities:
Accounts receivable	(5,782		)	11,961
Inventories	878			(877		)
Prepaid expenses and other assets	(8,705		)	(3,567		)
Accounts payable and other liabilities	(11,528		)	(14,574		)
Income taxes, net	6,245			5,014
Deferred revenue	(479		)	6,319
Other non-current liabilities	417			(26		)
Net cash provided by operating activities	67,761			67,395
Investing activities:
Purchase of investments	(37,073		)	(85,299		)
Proceeds from sales of investment securities	7,524			121,770
Proceeds from maturities of investment securities	26,902			14,610
Purchases of PP&E	(22,576		)	(24,368		)
Purchase of intangible assets	—			(105,270		)
Change in restricted cash	(1,430		)	(1,395		)
Net cash used in investing activities	(26,653		)	(79,952		)
Financing activities:
Proceeds from issuance of common stock	13,991			9,986
Repurchase of common stock	(25,001		)	(39,449		)
Payment of cash dividend	(14,216		)	(12,114		)
Distribution to controlling interest	(2,094		)	(214		)
Excess tax benefit from exercise of stock options	2,962			300
Shares repurchased for tax withholdings on vesting of restricted stock	(14,656		)	(9,839		)
Net cash used in financing activities	(39,014		)	(51,330		)
Effect of foreign exchange rate changes on cash and cash equivalents	(5,368		)	(940		)
Net decrease in cash and cash equivalents	(3,274		)	(64,827		)
Cash and cash equivalents at beginning of period	516,112			531,926
Cash and cash equivalents at end of period	$	512,838		$	467,099
Supplemental disclosure:
Cash paid for income taxes, net of refunds received	$	13,792		$	13,973
Non-cash investing and financing activities:
Change in PP&E purchased and unpaid at period-end	$	6,901		$	(3,636	)
Purchase consideration payable for acquisition	$	—		$	95

See accompanying notes to unaudited interim condensed consolidated financial statements

8

DOLBY LABORATORIES, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Unaudited Interim Condensed Consolidated Financial Statements

We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with U.S. GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2016 and include all adjustments necessary for fair presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements for the fiscal year ended September 30, 2016, which are included in our Annual Report on Form 10-K filed with the SEC.

The results for the fiscal quarter ended December 30, 2016 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 29, 2017.

Principles of Consolidation

The unaudited interim condensed consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.

Operating Segments

We operate as a single reportable segment. During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. Following the reorganization, we reassessed our business units and concluded that the composition of our reportable segments remains unchanged and that we continue to operate as a single reportable segment. This reflects the fact that our CODM, our Chief Executive Officer, continues to evaluate our financial information and resources, and continues to assess the performance of these resources, on a consolidated basis. All required financial segment information is therefore included in our unaudited interim condensed consolidated financial statements.

Use of Estimates

The preparation of our financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated selling prices for elements sold in ME revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and liabilities and stock-based compensation. Actual results could differ from our estimates.

Fiscal Year

Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal periods presented herein include the 13 week period ended December 30, 2016 and the 14 week period ended January 1, 2016. Our fiscal year ended September 30, 2016 (fiscal 2016) consisted of 53 weeks while our fiscal year ending September 29, 2017 (fiscal 2017) will consist of 52 weeks.

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2. Summary of Significant Accounting Policies

We continually assess any ASUs or other new accounting pronouncements issued by the FASB to determine their applicability and impact on us. Where it is determined that a new accounting pronouncement will result in a change to our financial reporting, we take the appropriate steps to ensure that such changes are properly reflected in our consolidated financial statements or notes thereto.

Recently Issued Accounting Standards

Adopted Standards

Consolidation.  During the first quarter of fiscal 2017, we adopted ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amended the consolidation requirements in ASC 810 and significantly changed the consolidation analysis required under U.S. GAAP. The ASU significantly amended how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Adoption of this new standard did not result in any changes to the entities we currently consolidate and did not otherwise have any impact on our consolidated financial statements or notes thereto.

There have been no new accounting standards made effective or otherwise adopted during the current interim period that caused any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 30, 2016.

Standards Not Yet Effective

Inventory.  In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which affects reporting entities that measure inventory using first-in, first-out (FIFO) or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The ASU is effective for us beginning no later than the first day of our fiscal 2018, or September 30, 2017. Early adoption is permitted, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.

Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new revenue recognition standard will replace existing guidance in U.S. GAAP when it becomes effective, and may also impact the accounting for certain direct costs associated with revenues and contract acquisition costs such as sales commissions. The new standard permits the use of either the retrospective or cumulative effect transition method.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The effective date for this ASU coincides with the effective date for ASU 2014-09.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers, which amends certain provisions from ASU 2014-09. The effective date for this ASU coincides with the effective date for ASU 2014-09.

In the first fiscal quarter of 2017, we initiated an assessment project to evaluate the impact on all of our revenue streams and we are currently evaluating our transition options. Accordingly, we have not yet determined the effect of the standard on our ongoing financial reporting. Although permitted, we do not intend to early-adopt the new standard, but we will adopt it beginning September 29, 2018.

Leases.  In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all long-term leases, which are those with terms in excess of twelve months. The new guidance also modifies the classification criteria and accounting for sales-type and direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. Consistent with current guidance, a lessee's recognition, measurement, and presentation of

10

expenses and cash flows arising from a lease will continue to depend primarily on its classification. The ASU is effective for us beginning September 28, 2019, and must be applied using a modified retrospective approach. Early adoption is permitted, including adoption in an interim period. Upon adoption, we will recognize a lease liability and right-of-use asset for each of our long-term lease arrangements which approximates 40 as of the end of the first quarter of fiscal 2017, and we are currently evaluating the timing of adoption and impact of the standard on our consolidated financial statements.

Share-Based Compensation.  In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. Although permitted, we do not intend to early-adopt the new standard, but we will adopt it beginning September 30, 2017. We are currently evaluating the impact of the standard on our consolidated financial statements.

Cash Flow Classification.  In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues, with the objective of reducing an existing diversity in practices regarding the manner in which certain cash receipts and payments are presented and classified in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers.In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.

Restricted Cash.  In November 2016,the FASB issued ASU 2016-18, Restricted Cash — a consensus of the FASB Emerging Issues Task Force, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. Aside from conforming to new cash flow presentation and restricted cash disclosure requirements, we do not anticipate that the new standard will impact our consolidated financial statements.

3. Composition of Certain Financial Statement Captions

The following tables present detailed information from our consolidated balance sheets as of December 30, 2016 and September 30, 2016 (amounts displayed in thousands, except as otherwise noted).

Accounts Receivable

	December 30, 2016			September 30, 2016
Trade accounts receivable	$	77,663		$	66,229
Accounts receivable from patent administration program customers	6,124			11,829
Accounts receivable, gross	83,787			78,058
Less: allowance for doubtful accounts	(2,394		)	(2,370		)
Total	$	81,393		$	75,688

Inventories

	December 30, 2016		September 30, 2016
Raw materials	$	3,709	$	3,526
Work in process	4,290		4,020
Finished goods	6,774		8,808
Total	$	14,773	$	16,354

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Inventories are stated at the lower of cost or market. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. In addition to the amounts shown in the table above, we have included $1.5 million and $1.6 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 30, 2016 and September 30, 2016, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess and obsolete inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.

Prepaid Expenses And Other Current Assets

	December 30, 2016		September 30, 2016
Prepaid expenses	$	17,424	$	13,440
Other current assets	12,363		11,578
Income tax receivable	2,332		1,284
Total	$	32,119	$	26,302

Accrued Liabilities

	December 30, 2016		September 30, 2016
Accrued royalties	$	2,145	$	1,939
Amounts payable to patent administration program partners	51,216		34,472
Accrued compensation and benefits	50,580		71,261
Accrued professional fees	7,829		6,528
Other accrued liabilities	57,941		54,855
Total	$	169,711	$	169,055

Other accrued liabilities include amounts accrued for unpaid PP&E additions of $23.9 million and $17.1 million as of December 30, 2016 and September 30, 2016, respectively.

Other Non-Current Liabilities

	December 30, 2016		September 30, 2016
Supplemental retirement plan obligations	$	2,523	$	2,540
Non-current tax liabilities	73,472		68,254
Other liabilities	12,276		12,128
Total	$	88,271	$	82,922

4. Investments & Fair Value Measurements

We use cash holdings to purchase investment grade securities diversified among security types, industries and issuers. All investments are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities, all of our investments are classified as AFS securities.

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Our investments primarily consist of municipal debt securities, corporate bonds, U.S. agency securities and commercial paper. In addition, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of our held municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consists of the following (in thousands):

	December 30, 2016
	Cost		Unrealized							Estimated Fair Value
			Gains		Losses			Total		Level 1		Level 2		Level 3
Cash and cash equivalents:
Cash	$	499,113						$	499,113
Cash equivalents:
Money market funds	13,500		—		—			13,500		13,500
Corporate bonds	225		—		—			225				225
Cash and cash equivalents	512,838		—		—			512,838		13,500		225		—
Short-term investments:
Certificate of deposit (1)	20,779		3		(6		)	20,776				20,776
U.S. agency securities	2,582		1		(1		)	2,582		2,582
Commercial paper	18,950		2		(4		)	18,948				18,948
Corporate bonds	102,856		28		(65		)	102,819				102,819
Municipal debt securities	19,707		—		(14		)	19,693				19,693
Short-term investments	164,874		34		(90		)	164,818		2,582		162,236		—
Long-term investments:
Certificate of deposit (1)	4,500		9		—			4,509				4,509
U.S. agency securities	24,948		—		(246		)	24,702		24,702
Government bonds	31,977		7		(241		)	31,743		31,743
Corporate bonds	250,688		227		(1,060		)	249,855				249,855
Municipal debt securities	36,684		7		(213		)	36,478				36,478
Other long-term investments (2)	2,754		319		—			3,073		319
Long-term investments	351,551		569		(1,760		)	350,360		56,764		290,842		—
Total cash, cash equivalents, and investments	$	1,029,263	$	603	$	(1,850	)	$	1,028,016	$	72,846	$	453,303	$	—
Investments held in supplemental retirement plan:
Assets	2,621							2,621		2,621
Included in prepaid expenses and other current assets & other non-current assets
Liabilities	2,621							2,621		2,621
Included in accrued liabilities & other non-current liabilities

(1) Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of December 30, 2016 are classified within long-term investments.

(2) Other long-term investments as of December 30, 2016 include a marketable equity security of $0.3 million, and other investments that are not carried at fair value including an equity method investment of $0.3 million and two cost method investments of $2.0 million and $0.5 million.

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	September 30, 2016
	Cost		Unrealized							Estimated Fair Value
			Gains		Losses			Total		Level 1		Level 2		Level 3
Cash and cash equivalents:
Cash	$	501,863						$	501,863
Cash equivalents:
Commercial paper	1,099		—		—			1,099				1,099
Corporate bonds	2,240		—		—			2,240				2,240
Money market funds	10,910		—		—			10,910		10,910
Cash and cash equivalents	516,112		—		—			516,112		10,910		3,339		—
Short-term investments:
Certificate of deposit (1)	13,912		6		—			13,918				13,918
Commercial paper	19,629		1		(10		)	19,620				19,620
Corporate bonds	63,762		24		(14		)	63,772				63,772
Municipal debt securities	24,334		—		(15		)	24,319				24,319
Short-term investments	121,637		31		(39		)	121,629		—		121,629		—
Long-term investments:
Certificate of deposit (1)	4,500		10		—			4,510				4,510
U.S. agency securities	27,536		24		(26		)	27,534		27,534
Government bonds	31,971		77		(12		)	32,036		32,036
Corporate bonds	295,921		715		(266		)	296,370				296,370
Municipal debt securities	30,090		28		(32		)	30,086				30,086
Other long-term investments (2)	3,002		366		—			3,368		366
Long-term investments	393,020		1,220		(336		)	393,904		59,936		330,966		—
Total cash, cash equivalents, and investments	$	1,030,769	$	1,251	$	(375	)	$	1,031,645	$	70,846	$	455,934	$	—
Investments held in supplemental retirement plan:
Assets	2,638							2,638		2,638
Included in prepaid expenses and other current assets & other non-current assets
Liabilities	2,638							2,638		2,638
Included in accrued liabilities & other non-current liabilities

(1) Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of September 30, 2016 are classified within long-term investments.

(2) Other long-term investments as of September 30, 2016 include a marketable equity security of $0.4 million, and other investments that are not carried at fair value including an equity method investment of $0.5 million and two cost method investments of $2.0 million and $0.5 million.

Fair Value Hierarchy.    Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy:

Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.

Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.

Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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Securities In Gross Unrealized Loss Position.    We periodically evaluate our investments for other-than- temporary declines in fair value. The unrealized losses on our AFS securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those AFS securities that were in an unrealized loss position for less than twelve months and for twelve months or greater as of December 30, 2016 and September 30, 2016 (in thousands):

	December 30, 2016										September 30, 2016
	Less Than 12 Months					12 Months Or Greater					Less Than 12 Months					12 Months Or Greater
Investment Type	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Certificate of deposit	$	8,494	$	(6	)	$	—	$	—		$	—	$	—		$	—	$	—
U.S. agency securities	26,707		(247		)	—		—			22,988		(38		)	—		—
Government bonds	27,740		(241		)	—		—			—		—			—		—
Commercial paper	4,817		(4		)	—		—			11,479		(10		)	—		—
Corporate bonds	232,767		(1,125		)	—		—			153,491		(280		)	1,000		—
Municipal debt securities	46,219		(226		)	1,751		(1		)	35,625		(42		)	4,615		(5		)
Total	$	346,744	$	(1,849	)	$	1,751	$	(1	)	$	223,583	$	(370	)	$	5,615	$	(5	)

Although we had certain securities that were in an unrealized loss position as of December 30, 2016, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at either December 30, 2016 or September 30, 2016 to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.

Investment Maturities.    The following table summarizes the amortized cost and estimated fair value of the AFS securities within our investment portfolio based on stated maturities as of December 30, 2016 and September 30, 2016, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):

	December 30, 2016				September 30, 2016
Range of maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within 1 year	$	178,598	$	178,543	$	135,886	$	135,884
Due in 1 to 2 years	215,450		215,047		225,679		225,953
Due in 2 to 3 years	133,348		132,240		164,339		164,583
Total	$	527,396	$	525,830	$	525,904	$	526,420

5. Property, Plant & Equipment

Property, plant and equipment are recorded at cost, with depreciation expense included in cost of licensing, cost of products, cost of services, R&D, S&M and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):

	December 30, 2016			September 30, 2016
Land	$	43,252		$	43,325
Buildings and building improvements	275,881			251,700
Leasehold improvements	60,520			60,480
Machinery and equipment	90,182			88,943
Computer equipment and software	157,754			154,291
Furniture and fixtures	27,309			26,900
Equipment provided under operating leases	59,907			35,968
Construction-in-progress	6,042			32,576
Property, plant and equipment, gross	720,847			694,183
Less: accumulated depreciation	(261,138		)	(250,527		)
Property, plant and equipment, net	$	459,709		$	443,656

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6. Goodwill & Intangible Assets

Goodwill

The following table outlines changes to the carrying amount of goodwill (in thousands):

	Goodwill
Balance at September 30, 2016	$	309,616
Translation adjustments	(2,495		)
Balance at December 30, 2016	$	307,121

During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. In accordance with ASC Topic 350, we are required to review and reassign our goodwill amongst our reporting units using a relative fair value allocation approach. Before doing so, we performed a “Step Zero” qualitative assessment during the quarter ended September 30, 2016 and determined that there was no risk of goodwill impairment in our pre-reorganization reporting units. Immediately after the reorganization, we performed a “Step One” assessment during the quarter ended December 30, 2016 whereby the estimated fair value of each reporting unit was compared to its carrying value. We initiated the "Step One" assessment using a market approach and an income approach to value our reporting units. Based on our preliminary procedures, the fair value of each of our reporting units significantly exceeded their carrying values. However, due to the complexity of this assessment, we have not finalized our procedures as of December 30, 2016. We currently expect to finalize our Step One assessment during our second fiscal quarter ending March 31, 2017.

Intangible Assets

Our intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired technology, patents, trademarks, customer relationships and contracts. Intangible assets subject to amortization consist of the following (in thousands):

	December 30, 2016							September 30, 2016
Intangible Assets, Net	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Acquired patents and technology	$	292,889	$	(107,789	)	$	185,100	$	293,824	$	(101,711	)	$	192,113
Customer relationships	56,789		(35,536		)	21,253		56,821		(34,113		)	22,708
Other intangibles	22,677		(22,168		)	509		22,716		(22,195		)	521
Total	$	372,355	$	(165,493	)	$	206,862	$	373,361	$	(158,019	)	$	215,342

We purchase various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.

Patent Portfolio Acquisition.    In the first quarter of fiscal 2016, we completed an asset purchase of a patent portfolio that fits within our existing patent licensing programs for consideration of $105.0 million. These assets are categorized within the "Acquired patents and technology" intangible asset class, and will be amortized over their weighted-average useful life of 9.0 years.

With regard to our purchase of intangible assets during the periods presented, the following table summarizes the consideration paid, the weighted-average useful lives over which the acquired assets will be amortized using the greater of either the straight-line basis or a ratio-to-revenue method, and the classification of their amortized expense in our consolidated statements of operations:

Fiscal Period	Total Purchase Consideration (1)	Weighted-Average Useful Life
	(in millions)	(in years)
Fiscal 2016
Q1 - Quarter ended January 1, 2016	$105.3	9.0
Fiscal 2017
Q1 - Quarter ended December 30, 2016	None

(1) Amortization expense on the intangible assets from patent portfolio acquisitions is included within cost of revenue in our consolidated statements of operations.

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Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. Amortization expense was $8.4 million and $8.5 million in the first quarter of fiscal 2017 and 2016, respectively. As of December 30, 2016, estimated amortization expense in future fiscal periods was as follows (in thousands):

Fiscal Year	Amortization Expense
Remainder of 2017	$	22,245
2018	25,300
2019	24,717
2020	24,253
2021	24,227
Thereafter	86,120
Total	$	206,862

7. Stockholders' Equity & Stock-Based Compensation

We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP.

Common Stock - Class A and Class B

Our Board of Directors has authorized two classes of common stock, Class A and Class B. At December 30, 2016, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 30, 2016, we had 57,808,525 shares of Class A common stock and 44,073,597 shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation.

Stock Incentive Plans

2005 Stock Plan.    In January 2005, our stockholders approved our 2005 Stock Plan, which our Board of Directors adopted in November 2004. The 2005 Stock Plan became effective on February 16, 2005, the day prior to the completion of our initial public offering. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant ISOs, NQs, restricted stock, RSUs, SARs, deferred stock units, performance units, performance bonus awards and performance shares. A total of 38.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as two shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as two shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as 1.6 shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as 1.6 for every one share returned.

Stock Options.    Stock options are granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vested over four years, with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or three months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of ten years after the date of grant or three months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.

Performance-Based Stock Options (PSOs).    In fiscal 2016, we began granting PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is seven years,

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with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period following the date of grant. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of achievement of the performance conditions by our Compensation Committee. Anywhere from 0% to 125% of the shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period.

In valuing the PSOs which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period.

On December 15, 2016, we granted PSOs exercisable for an aggregate of up to 276,199 shares to our executive officers, all of which were outstanding as of December 30, 2016. On December 15, 2015, we granted PSOs exercisable for an aggregate of up to 419,623 shares to our executive officers, of which 397,748 were outstanding as of December 30, 2016.

The following table summarizes information about all stock options issued under our 2005 Stock Plan:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life	Aggregate Intrinsic Value (1)
	(in thousands)				(in years)	(in thousands)
Options outstanding at September 30, 2016	8,690		$	35.98
Grants	1,788		45.89
Exercises	(259	)	32.94
Forfeitures and cancellations	(11	)	39.89
Options outstanding at December 30, 2016	10,208		37.79		7.3	$	77,363
Options vested and expected to vest at December 30, 2016	9,386		37.51		7.2	73,574
Options exercisable at December 30, 2016	5,138		$	35.22	6.1	50,760

(1) Aggregate intrinsic value is based on the closing price of our Class A common stock on December 30, 2016 of $45.19 and excludes the impact of options that were not in-the-money.

Restricted Stock Units.    Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of December 30, 2016. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our Class A common stock on the date of grant and is recognized on a straight-line basis over the requisite service period.

The following table summarizes information about RSUs issued under our 2005 Stock Plan:

	Shares		Weighted-Average Grant Date Fair Value
	(in thousands)
Non-vested at September 30, 2016	2,872		$	40.16
Granted	985		45.87
Vested	(871	)	36.08
Forfeitures	(19	)	38.82
Non-vested at December30, 2016	2,967		$	43.26

Employee Stock Purchase Plan.   Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock

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purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our Class A common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.

Stock Option Valuation Assumptions

We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the risk-free interest rate, and the volatility of our stock price over the expected term of the award.

Expected Term.    The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our Class A common stock, and is based on certain assumptions made regarding the future exercise and termination behavior.

Risk-Free Interest Rate.    The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards.

Expected Stock Price Volatility.    The expected volatility represents the estimated volatility in the price of our Class A common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our Class A common stock.

Dividend Yield.    The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time.

The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:

	Fiscal Quarter Ended
	December 30, 2016		January 1, 2016
Expected term (in years)	5.13		5.24
Risk-free interest rate	2.1	%	1.8	%
Expected stock price volatility	27.6	%	29.8	%
Dividend yield	1.1	%	1.4	%

Stock-Based Compensation Expense

Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.

The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):

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Expense - By Award Type

	Fiscal Quarter Ended
	December 30, 2016			January 1, 2016
Compensation Expense - By Type
Stock options	$	4,803		$	6,366
Restricted stock units	11,583			12,076
Employee stock purchase plan	829			938
Total stock-based compensation	17,215			19,380
Benefit from income taxes	(5,028		)	(5,706		)
Total stock-based compensation, net of tax	$	12,187		$	13,674

Expense - By Income Statement Line Item Classification

	Fiscal Quarter Ended
	December 30, 2016			January 1, 2016
Compensation Expense - By Classification
Cost of products	$	258		$	280
Cost of services	134			129
Research and development	4,930			5,107
Sales and marketing	6,867			7,710
General and administrative	5,026			6,154
Total stock-based compensation	17,215			19,380
Benefit from income taxes	(5,028		)	(5,706		)
Total stock-based compensation, net of tax	$	12,187		$	13,674

The tax benefit that we recognize from certain exercises of ISOs and shares issued under our ESPP are excluded from the tables above. This benefit was as follows (in thousands):

	Fiscal Quarter Ended
	December 30, 2016		January 1, 2016
Tax benefit - stock option exercises & shares issued under ESPP	$	324	$	95

Unrecognized Compensation Expense.    At December 30, 2016, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $43.5 million, which is expected to be recognized over a weighted-average period of 2.7 years. At December 30, 2016, total unrecorded compensation expense associated with RSUs expected to vest was approximately $95.2 million, which is expected to be recognized over a weighted-average period of 3.0 years.

Common Stock Repurchase Program

In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of December 30, 2016 (in thousands):

Authorization Period	Authorization Amount
Fiscal 2010: November 2009	$	250,000
Fiscal 2010: July 2010	300,000
Fiscal 2011: July 2011	250,000
Fiscal 2012: February 2012	100,000
Fiscal 2015: October 2014	200,000
Total	$	1,100,000

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Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of December 30, 2016, the remaining authorization to purchase additional shares is approximately $26.9 million.

The following table provides information regarding share repurchase activity under the program during fiscal 2017:

Quarterly Repurchase Activity	Shares Repurchased	Cost (1)		Average Price Paid Per Share (2)
		(in thousands)
Q1 - Quarter ended December 30, 2016	531,465	$	25,001	$	47.02

(1) Cost of share repurchases includes the price paid per share and applicable commissions.

(2) Average price paid per share excludes commission costs.

On January 25, 2017, we announced that our Board of Directors approved an increase to the size of our stock repurchase program by $200 million. Refer to Note 13 “Subsequent Events" for additional information.

Dividend

In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes dividend payments to be made under the program in relation to fiscal 2017:

Fiscal Period	Declaration Date	Record Date	Payment Date	Cash Dividend Per Common Share		Dividend Payment
Fiscal 2017
Q1 - Quarter ended December 30, 2016	January 25, 2017	February 6, 2017	February 15, 2017	$	0.14	$14.3 million	(1)

(1) The amount of the dividend payment is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date.

8. Accumulated Other Comprehensive Income

Other comprehensive income consists of two components: unrealized gains or losses on our AFS marketable investment securities and the gain or loss from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income, a subsection within stockholders’ equity in our consolidated balance sheet. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in AOCI.

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The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):

	Fiscal Quarter Ended December 30, 2016
	Investment Securities			Currency Translation Adjustments			Total
Beginning Balance	$	742		$	(10,939	)	$	(10,197	)
Other comprehensive income/(loss) before reclassifications:
Unrealized (losses) - investment securities	(2,160		)				(2,160		)
Foreign currency translation (losses) (1)				(8,728		)	(8,728		)
Income tax effect - benefit	102			1,265			1,367
Net of tax	(2,058		)	(7,463		)	(9,521		)
Amounts reclassified from AOCI into earnings:
Realized gains - investment securities (1)	46						46
Income tax effect - (expense) (2)	(7		)				(7		)
Net of tax	39			—			39
Net current-period other comprehensive (loss)	(2,019		)	(7,463		)	(9,482		)
Ending Balance	$	(1,277	)	$	(18,402	)	$	(19,679	)

	Fiscal Quarter Ended January 1, 2016
	Investment Securities			Currency Translation Adjustments			Total
Beginning Balance	$	350		$	(11,812	)	$	(11,462	)
Other comprehensive income/(loss) before reclassifications:
Unrealized (losses) - investment securities	(1,159		)				(1,159		)
Foreign currency translation (losses) (1)				(944		)	(944		)
Income tax effect - benefit	199			343			542
Net of tax	(960		)	(601		)	(1,561		)
Amounts reclassified from AOCI into earnings:
Realized gains - investment securities (1)	131						131
Income tax effect - (expense) (2)	(31		)				(31		)
Net of tax	100			—			100
Net current-period other comprehensive (loss)	(860		)	(601		)	(1,461		)
Ending Balance	$	(510	)	$	(12,413	)	$	(12,923	)

(1) Realized gains or losses from the sale of our AFS investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations.

(2) The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations.

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9. Earnings Per Share

Basic EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period.

Potentially dilutive shares represent the hypothetical number of incremental shares issuable under the assumed exercise of outstanding stock options (both vested and non-vested), vesting of outstanding RSUs, and shares issued under our employee stock purchase plan. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (e.g., such options' exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive.

The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc. (in thousands, except per share amounts):

	Fiscal Quarter Ended
	December 30, 2016		January 1, 2016
Numerator:
Net income attributable to Dolby Laboratories, Inc.	$	53,374	$	30,901
Denominator:
Weighted-average shares outstanding—basic	101,483		100,734
Potential common shares from options to purchase common stock	1,385		599
Potential common shares from restricted stock units	1,008		598
Weighted-average shares outstanding—diluted	103,876		101,931
Net income per share attributable to Dolby Laboratories, Inc.:
Basic	$	0.53	$	0.31
Diluted	$	0.51	$	0.30
Antidilutive awards excluded from calculation:
Stock options	739		5,698
Restricted stock units	42		215

10. Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Unrecognized Tax Benefit

As of December 30, 2016, the total amount of gross unrecognized tax benefits was $80.2 million, of which $66.6 million, if recognized, would reduce our effective tax rate. As of September 30, 2016, the total amount of gross unrecognized tax benefits was $75.2 million, of which $62.1 million, if recognized, would reduce our effective tax rate. Our net liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets.

Withholding Taxes

We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign taxes. Withholding taxes were as follows (in thousands):

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	Fiscal Quarter Ended
	December 30, 2016		January 1, 2016
Withholding taxes	$	8,991	$	9,782

Effective Tax Rate

Each period, the combination of different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items such as changes to our uncertain tax positions, that may occur in, but are not necessarily consistent between periods.

Our effective tax rate in the first quarter of fiscal 2017 was 20.8%, compared to 21.5% in the first quarter of fiscal 2016. The decrease in our effective tax rate reflects increased benefit from a relative change in foreign earned income and discrete benefits from the settlement of a multi–year state audit, partially offset by a decrease in discrete benefits from federal R&D credits.

11. Legal Matters

We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of IP rights, commercial, employment and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse impact on our operating results or financial condition. Given the unpredictable nature of legal proceedings, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period, including as a result of required changes to our licensing terms, monetary penalties and other potential consequences. However, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements, any such amounts are either immaterial, or it is not possible to provide an estimated amount of any such potential losses.

12. Commitments & Contingencies

In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of December 30, 2016 (in thousands):

	Payments Due By Fiscal Period
	Remainder Of Fiscal 2017		Fiscal 2018		Fiscal 2019		Fiscal 2020		Fiscal 2021		Thereafter		Total
Naming rights	$	3,810	$	7,715	$	7,811	$	7,909	$	8,008	$	94,972	$	130,225
Donation commitments	200		6,300		322		322		122		1,013		8,279
Operating leases	10,755		12,324		10,169		9,635		8,411		31,162		82,456
Purchase obligations	17,595		5,898		24,119		21,010		—		—		68,622
Total	$	32,360	$	32,237	$	42,421	$	38,876	$	16,541	$	127,147	$	289,582

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 payment obligations are conditioned in part on the Academy Awards® being held and broadcast from the Dolby Theatre.

Donation Commitments.     Donation commitments primarily relate to a non-cancelable obligation entered into during fiscal 2014 to install and donate imaging and audio products to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and to provide maintenance services for fifteen years from its expected opening date in fiscal 2018, in exchange for various marketing, branding and publicity benefits.

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.

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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.

Indemnification Clauses.     On a limited basis, our contractual agreements contain a clause under which we agree to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our IP property. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party IP infringement claims. Since the terms and conditions of our contractual indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our consolidated financial statements with respect to the contingent aspect of these indemnities.

13. Subsequent Events

Share Repurchase Program.    On January 25, 2017, we announced that our Board of Directors approved an

increase to the size of our stock repurchase program by $200 million, bringing the amount available for

future repurchases of the Company’s Class A Common Stock to $227 million. Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Any shares repurchased under the program will be returned to the status of authorized, but unissued shares of Class A Common Stock.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and are subject to risks and uncertainties, including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; market growth opportunities and trends; our plans, strategies and expected opportunities; future competition; our stock repurchase plan; and our dividend policy. Use of words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or similar expressions indicates a forward-looking statement. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in Part II, Item 1A, “Risk Factors.” Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to new developments or 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.

OVERVIEW

Dolby Laboratories creates audio and imaging technologies that transform entertainment and communications at the cinema, at home, at work and on mobile devices. Founded in 1965, our strengths stem from expertise in digital signal processing and compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multiple offerings that enable more immersive sound for cinema, digital television transmissions and devices, OTT video services, DVD and Blu-ray Discs, gaming consoles, and mobile devices. Today, we derive the majority of our revenue from licensing our audio technologies. We also derive revenue from licensing our consumer imaging and communication technologies, as well as audio and imaging technologies for premium cinema offerings in collaboration with exhibitors. Finally, we provide products and services for a variety of applications in the cinema, broadcast and communications markets.

OUR STRATEGY

Key elements of our strategy include:

Advancing the Science of Sight and Sound. We apply our understanding of the human senses, audio and imaging engineering to develop technologies aimed at improving how people experience and interact with their entertainment and communications content.

Providing Creative Solutions. We promote the use of our solutions as creative tools, and provide our products, services and technologies to filmmakers, sound mixers and other production teams in their creative processes. Our tools help showcase the quality and impact of their efforts and intent, and this may generate market demand.

Delivering Superior Experiences. Our technologies and solutions optimize playback and communications so that users may enjoy sound and sight in Dolby, which results in a more rich, clear, and immersive experience.

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REVENUE GENERATION

The following table presents a summary of the composition of our revenue for all periods presented:

	Fiscal Quarter Ended
Revenue	December 30, 2016	January 1, 2016
Licensing	87%	88%
Products	11%	10%
Services	2%	2%
Total	100%	100%

We license our technologies in approximately 50 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate a significant portion of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters, products revenue is based on the destination to which we ship our products, and services revenue is based on the location where services are performed.

	Fiscal Quarter Ended
Revenue By Geographic Location	December 30, 2016	January 1, 2016
United States	32%	27%
International	68%	73%

We have active licensing arrangements with over 550 electronics product OEMs and software developer licensees. As of December 30, 2016, we had approximately 6,500 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,000 trademark registrations throughout the world for a variety of wordmarks, logos, and slogans. These trademarks are an integral part of our technology licensing program as licensees typically place them on their products which incorporate our technologies to inform consumers that they have met our quality specifications.

Licensing

We license our technologies and IP to a range of customers who incorporate them into their products for enhanced audio and imaging functionality whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies and IP are as follows:

Technology	Description
AAC & HE-AAC	An advanced digital audio codec solution with higher bandwidth efficiency used for a wide range of media applications such as TVs, STBs, PCs, gaming consoles, mobile devices and digital radio.
Dolby® AC-4	A next-generation digital audio coding technology that is aimed at maximizing transmission efficiency while delivering new audio experiences to a wide range of playback devices, including TVs, STBs, PCs, and mobile devices.
Dolby Atmos®	An object-oriented audio technology for home theaters, cinema, device speakers, and headphones that allows sound to be precisely placed and moved anywhere in the listening environment including the overhead dimension. The Dolby Atmos experience can be provided via multiple Dolby audio coding technologies.
Dolby Digital®	A digital audio coding technology that provides multichannel sound to applications such as DVD players, TVs and STBs.
Dolby Digital Plus™	An advanced digital audio coding technology that offers more efficient audio transmission for a wide range of media applications such as TVs, STBs, Blu-ray Discs, PCs, and mobile devices.
Dolby® TrueHD	A digital audio coding technology providing lossless encoding for premium quality media applications such as Blu-ray Discs and home theaters.
Dolby Vision™	An imaging technology combining HDR and an expanded color spectrum to deliver higher contrast, brighter highlights, and improved details for TV, cinema, and other consumer devices.
Dolby Voice®	An audio conferencing technology with superior spatial perception, voice clarity and background noise reduction that emulates the in-person meeting experience.
HEVC	An advanced digital video codec with higher bandwidth efficiency used in a wide range of media devices.

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The following table presents the composition of our licensing business and revenues for all periods presented:

	Fiscal Quarter Ended
Market	December 30, 2016	January 1, 2016	Main Offerings Incorporating Our Technologies
Broadcast	46%	48%	STBs & Televisions
PC	15%	15%	Windows and macOS operating systems
CE	12%	13%	DMAs, Blu-ray Disc devices, AVRs, soundbars, DVDs & HTIBs
Mobile	10%	10%	Smartphones & tablets
Other	17%	14%	Gaming consoles, Auto DVD, Dolby Cinema, Dolby Voice
Total	100%	100%

We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, and more recently, collaboration arrangements.

Two-Tier Licensing Model.   Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our decoding technologies, included in reference software and firmware code, are first provided under license to semiconductor manufacturers whom we refer to as “implementation licensees.” Implementation licensees incorporate our technologies in ICs which they sell to OEMs of consumer entertainment products, whom we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell end-user products using ICs that incorporate our technologies.

Implementation licensees pay us a one-time, up-front fee per license. In exchange, the licensee receives a licensing package which includes information useful in implementing our technologies into their chipsets. Once implemented, the licensee sends us a sample chipset for quality control evaluation, and following our validation of the design, the licensee is permitted to sell the chipset for use solely to our network of system licensees.

System licensees provide us with prototypes of products, or self-test results of products that incorporate our technologies. Upon our confirmation that our technologies are optimally and consistently incorporated, the system licensee may buy ICs under a license for the same Dolby technology from our network of implementation licensees, and may further sell approved products to retailers, distributors, and consumers. For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect on a particular product depends on several factors including the nature of the implementations, the mix of Dolby technologies used, and the volume of products using our technologies that are shipped by the system licensee.

Integrated Licensing Model.    We also license our technologies to software operating system vendors and ISVs, and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations, and the volume of products using our technologies that are shipped, and is subject to the same quality control evaluation process.

Patent Licensing Model.    We license our patents through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. We also license our patents directly to manufacturers that use our IP in their products. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees. The Via Licensing patent pools enable product manufacturers to efficiently and transparently secure patent licenses for audio coding, interactive television, digital radio and wireless technologies. We offer our AAC, AVC, HE-AAC, HEVC and other IP through patent licensing. Currently, most of our revenue earned from patent licensing relates to the licensing of AAC and HE-AAC technologies.

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Collaboration Arrangements.

Dolby Cinema: We partner with exhibitors to create a premium cinema offering with Dolby Vision and Dolby Atmos at new and pre-existing venues that are optimized for an immersive entertainment experience. We receive a portion of box-office receipts from the installed theaters.

Dolby Voice: We enter into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earn revenue based on access to our technology and services as well as on sales of the Dolby Voice Conference Phone (see "Products" below).

Settlements & Back Payments From Licensees: Licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Within the Results of Operations section of Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations," settlements and back payments are collectively referred to as "recoveries." Such recoveries have become a recurring element of our business and are particularly subject to fluctuation and uncertainty.

Products

We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in over 80countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. We also market and sell the Dolby Conference Phone which optimizes the conference call experience when using Dolby Voice.

Products revenue is derived primarily from sales of the following:

Product		Description
Cinema	Digital Cinema Servers	Servers used to load, store, decrypt, decode and watermark digital film files for presentation on digital cinema projectors, and also encrypt, encode and package digital film data for distribution.
	Cinema Audio Products	Cinema Processors used to decode and render digital cinema soundtracks including those using Dolby Atmos and products that author, encrypt, encode and package Dolby Atmos soundtracks.
Other	Dolby Conference Phone	An integral hardware component of the Dolby Voice conferencing solution that enhances productivity through superior sound, full-room voice capture, spatial voice separation and touch-screen interface.
	Other Products	3-D glasses and kits, broadcast hardware and software used to encode, transmit, and decode multiple channels of high quality audio for DTV and HDTV distribution, monitors, and accessibility solutions for hearing and visually impaired consumers.

Services

We offer various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color and light image calibration.

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EXECUTIVE SUMMARY

We are focused on expanding our leadership in solutions for entertainment content and delivering dynamic new audio and visual technologies to the market. The increasing availability of Dolby Atmos in multiple markets coupled by the convergent uses of Dolby Atmos and Dolby Vision beyond Dolby Cinema and into consumer electronics create potential opportunities for further increases in our consumer base and revenues.

The following are highlights of our first quarter of fiscal 2017 as well as challenges in key areas:

AUDIO LICENSING

Broadcast

Highlights: Our broadcast revenues experienced growth of five percent in the current fiscal quarter, primarily from our established presence in developed markets. We are focused on greater adoption of our technologies in emerging markets by working with country-specific operators and standards bodies to drive longer term growth.

Challenges: To achieve growth and further adoption in emerging markets where conversion to digital television is still underway, our success will be impacted by a number of factors such as regional fragmentation of operators and regulators, and the pace of their decision-making and implementation. Further, in some emerging growth 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.

Consumer Electronics

Highlights: Dolby Atmos is being adopted in an increasing range of devices including DMAs, AVRs, speakers and soundbars, as consumer interest in this premium audio technology continues to grow. Whereas the first Dolby Atmos soundbar came to market a year ago, there are now four soundbars in the market including two models from Samsung. At CES in January 2017, Dolby Atmos soundbars were announced by LG, Sony, Onkyo, Pioneer and Xiaomi. These hardware offerings are paired with a growing amount of content via Blu-ray Discs and OTT services. Beginning January 2017, BT in the UK will deliver all of its Premiere Football League coverage in Dolby Atmos, while Comcast in the US has begun to deliver content in Dolby Atmos. We will continue to work with OEMs to expand the range of Dolby Audio-enabled hardware, and with content developers and distributors to expand the range of entertainment offerings that utilize our audio technologies.

Challenges: We must continue to present compelling reasons for consumers to demand our audio technologies wherever they enjoy premium content. To the extent that OEMs do not incorporate our technologies in current and forthcoming products, our future revenue could be impacted.

Mobile

Highlights: Our mobile market experienced growth of 16 percent in the current fiscal quarter, primarily driven by expansion of our patent licensing programs from both existing and new customers. Aside from Apple in whose ecosystem we are now fully incorporated, we continue to focus on driving further adoption of our technologies across other major mobile ecosystems - Android, Windows and Amazon. Collectively, these platforms facilitate delivery and enhanced consumption of Dolby-enabled content from a multitude of streaming services.

Challenges: Growth in this market is dependent on several factors, including our success in collaborating with manufacturers of mobile devices to incorporate our technologies, the development of and availability of Dolby content via various ecosystems, and the performance of the mobile device market as a whole.

Personal Computers

Highlights: At CES in January 2017, Lenovo announced a Legion gaming PC, which will be the first PC to support Dolby Atmos. And in December 2016, Microsoft announced support for Dolby Atmos on the Xbox One and Windows 10.

In the broader context, our technologies continue 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

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these browsers enables us to reach more users through new types of content, including streaming video entertainment.

Challenges: In recent years, unit demand for PCs has experienced secular decline as consumer choices have shifted towards other devices such as tablets and mobile phones. This has caused downward pressure on our PC revenues. Furthermore, a decline in the portion of PCs that have optical disc functionality will have a negative impact on our ASPs.

PRODUCTS

Highlights: We offer servers and audio processors to enable the playback of content in cinemas. Our most advanced audio for the cinema is Dolby Atmos. As of the end of our current fiscal quarter, there were over 2,700 Dolby Atmos-enabled screens installed or committed to be installed, an increase of approximately 1,100 screens from the first quarter of fiscal 2016, and over 600 Dolby Atmos theatrical titles announced or released, an increase of approximately 200 titles from the first quarter of fiscal 2016.

Challenges: Demand for our cinema products is dependent upon industry and economic cycles along with our ability to develop and introduce new technologies, further our relationships with content creators, and promote new consumer audio and imaging experiences. To the extent that we do not make progress in these areas, and are faced with pricing pressures or competing technologies, our revenue may be adversely affected.

NEW GROWTH INITIATIVES

Dolby Cinema™

Highlights:Launched in partnership with established movie theater exhibitors, Dolby Cinema is our premium cinema offering for moviegoers that combines Dolby Vision and Dolby Atmos at new or pre-existing venues. In total, 70 Dolby Cinema locations are now operational with locations projected to number 140 by the end of fiscal 2017. Of these, our largest partnership is with AMC which has opened 50 Dolby Cinema at AMC locations with plans to open 100 locations by the end of calendar 2017. In addition to AMC, exhibitors who feature Dolby Cinema include Wanda, the largest exhibitor in China, Cineplexx in Austria, and Vue (previously JT Bioscopen) in the Netherlands.

Dolby Cinema has also attracted strong interest from the creative community. Over 60 theatrical titles with Dolby Vision and Dolby Atmos have been announced or released with participation from every major studio. During the 2016 calendar year, the first full year for the Dolby Cinema program, nine of the ten highest-grossing films were optimized for Dolby Cinema.

Challenges: Although the premium large format sector of the cinema industry is currently growing, Dolby Cinema is in competition with other existing solutions. Our success with this initiative depends on our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience.

Dolby Vision™

Highlights: Dolby Vision TVs are now available globally, and the number of products using our technologies is growing. While Dolby Vision was available from only one partner a year ago, we now have ten TV OEM partners who have released or announced TVs with Dolby Vision. At CES in January 2017, Sony announced that its 2017 premium 4K HDR TVs will support Dolby Vision. In addition, LG, the world’s second largest TV manufacturer, announced that their 2017 OLED TVs will feature both Dolby Vision and Dolby Atmos which marks the first time that users can enjoy our premium audio and visual experience from a single product. LG's 2017 UHD TVs will also include Dolby Vision which complements their existing offerings that incorporate the imaging technology.

Other TV OEM partners include Vizio, the second largest TV manufacturer in the U.S. which includes Dolby Vision on three of their five lines, and TCL, the world’s third largest TV manufacturer, which supports Dolby Vision on four of their lines.

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The availability of entertainment content in Dolby Vision continues to expand. At CES in January 2017, the first UHD Blu-ray players that will support Dolby Vision were on display from LG, Phillips and Oppo. Three major studios - Lionsgate, Universal and Warner Bros. - have committed to release Dolby Vision titles on Blu-ray. Additionally, we now have more than 90 movie titles and over 100 hours of original TV content available in Dolby Vision through our OTT streaming partners, which include Netflix and Amazon.

Challenges:The success of Dolby Vision will depend on the expansion of content in the key categories of theatrical releases, episodic and live content as well as gaming. This will drive the broad adoption of the technology into consumer devices, including mobile.

Dolby Voice®

Highlights:BT MeetMe with Dolby Voice, the premium audio conferencing solution we launched in global partnership with BT, continues to gain traction. Dolby Voice has been incorporated into Highfive, a cloud-based collaboration and video conferencing solution that is easy to install and use. And PGi, one of the largest providers of audio conferencing software and services, offers Dolby Voice on its iMeet offering, a full video and screen sharing chat solution. In concert with these partners, we are focused on driving adoption of Dolby Voice and the Dolby Conference Phone.

Challenges:Our success in this market will depend on the number of service providers and enterprise customers we are able to attract from competing solutions, and on the volume of usage and Dolby Conference Phones that we are able to sell.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis in our Fiscal 2016 Annual Report on Form 10-K filed with the SEC.

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 according to the quantitative magnitude of their impact on the overall change (from an absolute value perspective). Note that recovery payments received from licensees either in the form of back payments or settlements are collectively referred to as "recoveries."

Our fiscal quarterly and annual reporting periods generally consist of 13 weeks and 52 weeks, respectively. However, our fiscal quarter-to-date period ended January 1, 2016 consisted of 14 weeks and our fiscal year ended September 30, 2016 consisted of 53 weeks. The occurrence of an additional week during the prior fiscal period resulted in proportionately higher operating expenses relative to the current fiscal period for compensation, depreciation and amortization.

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, imaging and voice capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. Our cost of licensing consists mainly of amortization of purchased intangible assets and intangible assets acquired in business combinations as well as third party royalty obligations paid to license IP that we then sublicense to our customers.

	Fiscal Quarter Ended		Change
Licensing	December 30, 2016	January 1, 2016	$	%
Revenue	$232,699	$211,129	$21,570	10%
Percentage of total revenue	87%	88%
Cost of licensing