10-Q 1 a10-qxq118singlesource.htm 10-Q Document

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 29, 2017
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

image0a17.jpg
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. Yes ý No ¨
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). Yes ý No ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On January 26, 2018, the registrant had 60,791,241 shares of Class A common stock, par value $0.001 per share, and 42,733,597 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 29, 2017
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


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
ASC
 
Accounting Standards Codification
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CE
 
Consumer Electronics
CES
 
Consumer Electronics Show
CODM
 
Chief Operating Decision Maker
COGS
 
Cost Of Goods Sold
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
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
FIFO
 
First-in, First-out
G&A
 
General & Administrative
HD
 
High Definition
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
IT
 
Information Technology
LIFO
 
Last-in, First-out
LP
 
Limited Partner/Partnership
ME
 
Multiple Element
NOL
 
Net Operating Loss
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, & Equipment
PSO
 
Performance-Based Stock Option
R&D
 
Research & Development
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SERP
 
Supplemental Executive Retirement Plan
SoC
 
System(s)-On-A-Chip
STB
 
Set-Top Box
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

3

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)
(unaudited)

 
December 29,
2017
September 29,
2017
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
596,390

$
627,017

Restricted cash
7,630

7,351

Short-term investments
252,607

247,757

Accounts receivable, net of allowance for doubtful accounts of $4,087 and $2,967
122,917

73,750

Inventories
24,862

25,051

Prepaid expenses and other current assets
31,105

30,508

Total current assets
1,035,511

1,011,434

Long-term investments
303,501

314,364

Property, plant, and equipment, net
493,173

485,275

Intangible assets, net
195,205

189,648

Goodwill
311,186

311,087

Deferred taxes
139,658

190,915

Other non-current assets
36,475

30,831

Total assets
$
2,514,709

$
2,533,554

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
14,408

$
14,373

Accrued liabilities
178,419

207,034

Income taxes payable
6,906

1,216

Deferred revenue
23,449

23,150

Total current liabilities
223,182

245,773

Long-term deferred revenue
36,792

36,425

Other non-current liabilities
198,811

107,514

Total liabilities
458,785

389,712

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 60,541,095 shares issued and outstanding at December 29, 2017 and 59,281,837 at September 29, 2017
59

58

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 42,733,597 shares issued and outstanding at December 29, 2017 and 42,873,597 at September 29, 2017
43

43

Additional paid-in capital
72,663

61,331

Retained earnings
1,985,064

2,083,063

Accumulated other comprehensive (loss)
(8,122
)
(7,753
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,049,707

2,136,742

Controlling interest
6,217

7,100

Total stockholders’ equity
2,055,924

2,143,842

Total liabilities and stockholders’ equity
$
2,514,709

$
2,533,554

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 29,
2017
December 30,
2016
Revenue:
 
 
Licensing
$
258,016

$
232,699

Products
24,933

28,211

Services
4,848

5,357

Total revenue
287,797

266,267

 
 
 
Cost of revenue:
 
 
Cost of licensing
9,259

8,121

Cost of products
17,035

17,720

Cost of services
4,582

4,126

Total cost of revenue
30,876

29,967

 
 
 
Gross margin
256,921

236,300

 
 
 
Operating expenses:
 
 
Research and development
56,444

57,518

Sales and marketing
70,149

71,175

General and administrative
48,285

41,540

Restructuring charges/(credits)
(197
)
—

Total operating expenses
174,681

170,233

 
 
 
Operating income
82,240

66,067

 
 
 
Other income/expense:
 
 
Interest income
3,781

1,814

Interest expense
(35
)
(26
)
Other income/(expense), net
(1,152
)
(199
)
Total other income
2,594

1,589

 
 
 
Income before income taxes
84,834

67,656

Provision for income taxes
(166,312
)
(14,082
)
Net income/(loss) including controlling interest
(81,478
)
53,574

Less: net (income) attributable to controlling interest
(144
)
(200
)
Net income/(loss) attributable to Dolby Laboratories, Inc.
$
(81,622
)
$
53,374

 
 
 
Net income/(loss) per share:
 
 
Basic
$
(0.80
)
$
0.53

Diluted
$
(0.80
)
$
0.51

Weighted-average shares outstanding:
 
 
Basic
102,552

101,483

Diluted
102,552

103,876

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
784

$
782

Included in net income attributable to controlling interest
$
177

$
175

 
 
 
Cash dividend declared per common share
$
0.16

$
0.14

Cash dividend paid per common share
$
0.16

$
0.14

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 29,
2017
December 30,
2016
Net income/(loss) including controlling interest
$
(81,478
)
$
53,574

Other comprehensive income:
 
 
Currency translation adjustments, net of tax
1,218

(7,724
)
Unrealized gains/(losses) on investments, net of tax
(1,593
)
(2,019
)
Comprehensive income/(loss)
(81,853
)
43,831

Less: comprehensive (income)/loss attributable to controlling interest
(138
)
61

Comprehensive income/(loss) attributable to Dolby Laboratories, Inc.
$
(81,991
)
$
43,892

See accompanying notes to unaudited interim condensed consolidated financial statements

6

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
 
 
 
 
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 29, 2017
$
101

$
61,331

$
2,083,063

$
(7,753
)
$
2,136,742

$
7,100

$
2,143,842

Net income/(loss)




(81,622
)


(81,622
)
144

(81,478
)
Currency translation adjustments, net of tax of $(274)






1,224

1,224

(6
)
1,218

Unrealized gains on investments, net of tax of $83






(1,593
)
(1,593
)

(1,593
)
Distributions to controlling interest








—

(1,021
)
(1,021
)
Stock-based compensation expense


18,684





18,684



18,684

Repurchase of common stock


(29,993
)




(29,993
)


(29,993
)
Cash dividends declared and paid on common stock




(16,377
)


(16,377
)


(16,377
)
Common stock issued under employee stock plans
1

41,462





41,463



41,463

Tax withholdings on vesting of restricted stock


(18,821
)




(18,821
)


(18,821
)
Balance at December 29, 2017
$
102

$
72,663

$
1,985,064

$
(8,122
)
$
2,049,707

$
6,217

$
2,055,924


 
 
 
 
 
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 gains 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


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-To-Date Ended
 
December 29,
2017
December 30,
2017
Operating activities:
 
 
Net income/(loss) including controlling interest
$
(81,478
)
$
53,574

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
19,882

21,810

Stock-based compensation
18,684

17,215

Amortization of premium on investments
742

662

Provision for doubtful accounts
1,119

67

Deferred income taxes
51,074

(3,275
)
Other non-cash items affecting net income
587

(376
)
Changes in operating assets and liabilities:


Accounts receivable
(50,268
)
(5,782
)
Inventories
(1,491
)
878

Prepaid expenses and other assets
(6,609
)
(8,705
)
Accounts payable and other liabilities
(35,390
)
(11,528
)
Income taxes, net
99,551

6,245

Deferred revenue
650

(479
)
Other non-current liabilities
96

417

Net cash provided by operating activities
17,149

70,723

 
 
 
Investing activities:
 
 
Purchases of investment securities
(74,479
)
(37,073
)
Proceeds from sales of investment securities
28,383

7,524

Proceeds from maturities of investment securities
49,476

26,902

Purchases of PP&E
(19,275
)
(22,576
)
Purchase of intangible assets
(11,198
)
—

Change in restricted cash
(279
)
(1,430
)
Net cash used in investing activities
(27,372
)
(26,653
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
41,463

13,991

Repurchase of common stock
(29,993
)
(25,001
)
Payment of cash dividend
(16,377
)
(14,216
)
Distribution to controlling interest
(1,021
)
(2,094
)
Shares repurchased for tax withholdings on vesting of restricted stock
(15,346
)
(14,656
)
Net cash used in financing activities
(21,274
)
(41,976
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
870

(5,368
)
Net decrease in cash and cash equivalents
(30,627
)
(3,274
)
Cash and cash equivalents at beginning of year
627,017

516,112

Cash and cash equivalents at end of year
$
596,390

$
512,838

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
17,355

$
13,792

 
 
 
Non-cash investing activities:
 
 
Net change in PP&E purchased and unpaid at period-end
$
2,333

$
6,901


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 29, 2017 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 29, 2017, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended December 29, 2017 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 28, 2018.
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
Since we operate as a single reporting segment, all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This determination reflects the fact that our CODM, our Chief Executive Officer, evaluates our financial information and resources, and assesses the performance of these resources on a consolidated basis.
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 periods ended December 29, 2017 and December 30, 2016. Our fiscal year ending September 28, 2018 (fiscal 2018) and our fiscal year ended September 29, 2017 (fiscal 2017) both consist of 52 weeks.
Reclassifications
We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, or net income.

9


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
Share-Based Compensation.  During the first quarter of fiscal 2018, we adopted 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. Upon adoption, excess tax benefits or deficiencies from stock-based awards are recorded as a component of the income tax provision, whereas they previously were recorded as additional paid-in capital. In the first quarter of fiscal 2018, we recognized an excess tax benefit of $6.0 million related to stock-based awards in the provision for income taxes. We elected to continue to account for forfeitures based on an estimate of expected forfeitures, rather than to account for forfeitures as they occur. Additionally, we adopted the aspects of the guidance affecting the cash flow presentation retrospectively, which results in a reclassification of excess tax benefits from financing activities to operating activities in the consolidated statements of cash flows.
Standards Not Yet Effective
Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. Amongst the elements in the new standard are requirements for 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, to capitalize certain direct costs associated with revenues and contract acquisition costs, and to provide expanded disclosures.
We have evaluated the impact of adoption of Topic 606 on all of our revenue streams and believe that the following are the most significant changes that could occur:

•
Estimating and recording royalty-based revenue earned from our licensees’ shipments in the same period in which those shipments occurred, rather than recognizing our royalty-based revenue in the quarter in which it is reported to us by our licensees, which is typically in the quarter after those shipments have occurred;
•
For certain transactions that have minimum commitment or fixed fee terms, recognizing licensing revenues on contract execution instead of over the contract term;
•
Specified performance obligations for which we have not historically had VSOE and which resulted in the deferral of revenue balances may accelerate revenue recognition as VSOE for the undelivered elements is no longer required to separately recognize revenue for the delivered elements;
•
Recording a one-time adjustment to retained earnings to reflect the cumulative impact of the changes noted above for the periods prior to adoption.
We have not yet quantified the impact of these anticipated changes.
We plan to adopt the new standard using the full retrospective method, whereby the standard is applied to all periods presented, on the adoption date. Although permitted, we do not intend to early-adopt the new standard, but will adopt it on September 29, 2018, which is the beginning of our first quarter of fiscal 2019.
In addition to our ongoing evaluation of the accounting changes and of our transition options, we are also addressing the impact of the new accounting standard and its expanded disclosure requirements on our policies, processes, controls, and systems.
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 most leases. The new guidance also modifies the classification criteria and accounting for sales-type and

10

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. The ASU must be applied using a modified retrospective approach. Upon adoption, we will recognize a lease liability and right-of-use asset for each of our long-term lease arrangements, which exceed 70 as of December 29, 2017. We intend to early adopt this new standard concurrently with the adoption of the new revenue recognition standard beginning September 29, 2018.
We continue to refine our quantification and anticipate this standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases. Our accounting for capital leases is expected to remain substantially unchanged.
Going Concern.  In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. We do not anticipate that the new standard will impact 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 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. We do not anticipate that the new standard will materially impact 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 materially impact our consolidated financial statements.
Accounting for Hedging Activities. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which enables entities to better portray the economics of their risk management activities in the financial statements while enhancing the transparency and understandability of hedge results. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness. The ASU is effective for us beginning September 29, 2018 and we do not currently plan to early adopt. We do not anticipate that the new standard will materially 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 29, 2017 and September 29, 2017 (amounts displayed in thousands, except as otherwise noted).

11

Accounts Receivable
 
December 29,
2017
 
September 29,
2017
Trade accounts receivable
$
107,068

 
$
62,305

Accounts receivable from patent administration program customers
19,936

 
14,412

Accounts receivable, gross
127,004

 
76,717

Less: allowance for doubtful accounts
(4,087
)
 
(2,967
)
Total
$
122,917

 
$
73,750

Inventories
 
December 29,
2017
 
September 29,
2017
Raw materials
$
4,465

 
$
6,812

Work in process
6,321

 
4,954

Finished goods
14,076

 
13,285

Total
$
24,862

 
$
25,051


Inventories are stated at the lower of cost and net realizable value. 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 $3.1 million and $1.8 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 29, 2017 and September 29, 2017, respectively. We write-down inventory at the time it is deemed excess or obsolete.
Prepaid Expenses And Other Current Assets
 
December 29,
2017
 
September 29,
2017
Prepaid expenses
$
17,852

 
$
16,681

Other current assets
12,743

 
11,383

Income tax receivable
510

 
2,444

Total
$
31,105

 
$
30,508

Accrued Liabilities
 
December 29,
2017
 
September 29,
2017
Accrued royalties
$
2,298

 
$
2,274

Amounts payable to patent administration program partners
59,619

 
49,141

Accrued compensation and benefits
60,365

 
92,277

Accrued professional fees
7,500

 
5,530

Unpaid PP&E additions
10,203

 
10,096

Other accrued liabilities
38,434

 
47,716

Total
$
178,419

 
$
207,034

Other Non-Current Liabilities
 
December 29,
2017
 
September 29,
2017
Supplemental retirement plan obligations
$
3,067

 
$
2,928

Non-current tax liabilities
182,882

 
91,013

Other liabilities
12,862

 
13,573

Total
$
198,811

 
$
107,514


4. Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investment securities 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.

12

Our investment securities primarily consist of government bonds, certificates of deposit, municipal debt securities, corporate bonds, U.S. agency securities, and commercial paper. In addition, our cash and cash equivalents may also consist of corporate bonds, money market funds, and municipal debt securities that meet the high liquidity requirements set forth in our accounting policy. Consistent with our investment policy, none of our municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands):
 
December 29, 2017
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:








 






Cash
$
587,136





$
587,136

 






Cash equivalents:








 






Corporate bonds
5,866



(1
)
5,865

 


5,865



Money market funds
2,787





2,787

 
2,787





Municipal debt securities
602





602

 


602



Cash and cash equivalents
596,391

—

(1
)
596,390


2,787

6,467

—

 
 
 
 
 
 
 
 
 
Short-term investments:








 






Certificate of deposit (1)
22,981

7

(2
)
22,986

 


22,986



U.S. agency securities
8,443



(33
)
8,410

 


8,410



Government bonds
535



(2
)
533

 
533





Commercial paper
13,636

—

(15
)
13,621

 


13,621



Corporate bonds
170,740

25

(295
)
170,470

 


170,470



Municipal debt securities
36,679

—

(92
)
36,587

 


36,587



Short-term investments
253,014

32

(439
)
252,607


533

252,074

—

 
 
 
 
 
 
 
 
 
Long-term investments:








 






Certificate of deposit (1)
10,345



(1
)
10,344

 


10,344



U.S. agency securities
20,283



(272
)
20,011

 


20,011



Government bonds
20,965

4

(222
)
20,747

 
20,747





Corporate bonds
225,639

147

(1,313
)
224,473

 


224,473



Municipal debt securities
23,853

1

(168
)
23,686

 


23,686



Other long-term investments (2)
3,944

296



4,240

 
296





Long-term investments
305,029

448

(1,976
)
303,501


21,043

278,514

—

 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,154,434

$
480

$
(2,416
)
$
1,152,498

 
$
24,363

$
537,055

$
—

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,165





3,165

 
3,165





Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
3,165





3,165

 
3,165





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 29, 2017 are classified within long-term investments.
(2)
Other long-term investments as of December 29, 2017 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 $0.4 million and two cost method equity investments of $3.0 million and $0.5 million.

13

 
September 29, 2017
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
623,244





$
623,244

 






Cash equivalents:






 
 






Commercial paper
1,223

—

—

1,223

 


1,223



Money market funds
2,550

—

—

2,550

 
2,550





Cash and cash equivalents
627,017

—

—

627,017

 
2,550

1,223

—

 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
17,236

9

(1
)
17,244

 


17,244



U.S. agency securities
9,518

—

(20
)
9,498

 


9,498



Government bonds
2,034

—

(6
)
2,028

 
2,028





Commercial paper
15,160

2

(1
)
15,161

 


15,161



Corporate bonds
174,750

54

(163
)
174,641

 


174,641



Municipal debt securities
29,178

16

(9
)
29,185

 


29,185



Short-term investments
247,876

81

(200
)
247,757

 
2,028

245,729

—

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
22,940

5

(6
)
22,939

 


22,939



U.S. agency securities
21,779

—

(178
)
21,601

 


21,601



Government bonds
17,839

—

(107
)
17,732

 
17,732





Corporate bonds
218,857

327

(537
)
218,647

 


218,647



Municipal debt securities
28,913

29

(25
)
28,917

 


28,917



Other long-term investments (2)
4,171

357

—

4,528

 
357



—

Long-term investments
314,499

718

(853
)
314,364

 
18,089

292,104

—

 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,189,392

$
799

$
(1,053
)
$
1,189,138

 
$
22,667

$
539,056

$
—

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,026





3,026

 
3,026





Included in prepaid expenses and other current assets & other non-current assets
 
 






Liabilities
3,026





3,026

 
3,026





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 29, 2017 are classified within long-term investments.
(2)
Other long-term investments as of September 29, 2017 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 $0.6 million and two cost method equity investments of $3.0 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.

14

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 29, 2017 and September 29, 2017 (in thousands):
 
December 29, 2017
 
September 29, 2017
 
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
$
12,323

$
(3
)
$
—

$
—

 
$
19,750

$
(6
)
$
—

$
—

U.S. agency securities
6,177

(53
)
22,243

(253
)
 
19,713

(91
)
11,386

(108
)
Government bonds
10,892

(112
)
7,412

(111
)
 
15,029

(64
)
4,729

(49
)
Commercial paper
10,015

(15
)
—

—

 
4,292

(1
)
—

—

Corporate bonds
210,057

(800
)
119,766

(808
)
 
125,890

(251
)
109,806

(449
)
Municipal debt securities
56,136

(236
)
3,586

(23
)
 
26,749

(24
)
3,625

(10
)
Total
$
305,600

$
(1,219
)
$
153,007

$
(1,195
)
 
$
211,423

$
(437
)
$
129,546

$
(616
)
Although we had certain securities that were in an unrealized loss position as of December 29, 2017, 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 29, 2017 or September 29, 2017 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 29, 2017 and September 29, 2017, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
December 29, 2017
 
September 29, 2017
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
259,529

$
259,137

 
$
251,649

$
251,530

Due in 1 to 2 years
183,876

182,787

 
213,555

213,154

Due in 2 to 3 years
119,948

119,200

 
96,773

96,682

Total
$
563,353

$
561,124

 
$
561,977

$
561,366


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 29,
2017
 
September 29,
2017
Land
$
43,363

 
$
43,364

Buildings and building improvements
280,993

 
281,196

Leasehold improvements
64,858

 
65,034

Machinery and equipment
101,436

 
98,437

Computer equipment and software
178,588

 
173,341

Furniture and fixtures
29,336

 
28,118

Equipment provided under operating leases
107,808

 
97,456

Construction-in-progress
6,467

 
3,673

Property, plant, and equipment, gross
812,849

 
790,619

Less: accumulated depreciation
(319,676
)
 
(305,344
)
Property, plant, & equipment, net
$
493,173

 
$
485,275


15


6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 29, 2017
$
311,087

Translation adjustments
99

Balance at December 29, 2017
$
311,186

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 29, 2017
 
September 29, 2017
Intangible Assets
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
311,886

$
(134,929
)
$
176,957

 
$
299,707

$
(128,986
)
$
170,721

Customer relationships
56,849

(39,035
)
17,814

 
56,843

(38,368
)
18,475

Other intangibles
22,749

(22,315
)
434

 
22,742

(22,290
)
452

Total
$
391,484

$
(196,279
)
$
195,205

 
$
379,292

$
(189,644
)
$
189,648

We purchase various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.
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 2017
 
 
Q1 - Quarter ended December 30, 2016
None
Fiscal 2018
 
 
Q1 - Quarter ended December 29, 2017
$12.0
14.1
(1) Amortization expense on the intangible assets from patent portfolio acquisitions is included within cost of revenue, R&D, and G&A in our consolidated statements of operations.
Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D, S&M, and G&A expenses in our consolidated statements of operations. Amortization expense was $6.5 million and $8.4 million in the first quarter of fiscal 2018 and 2017, respectively. As of December 29, 2017, estimated amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder of 2018
$
19,725

2019
25,719

2020
25,256

2021
25,229

2022
23,309

Thereafter
75,967

Total
$
195,205



16

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 29, 2017, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 29, 2017, we had 60,541,095 shares of Class A common stock and 42,733,597 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 incentive stock options, non-qualified stock options, restricted stock, RSUs, stock appreciation rights, deferred stock units, performance units, performance bonus awards, and performance shares. A total of 46.0 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, 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.

17

On December 15, 2017, we granted PSOs to our executive officers exercisable for an aggregate of 264,000 shares at the target award amount, which would be exercisable up to an aggregate of to 330,000 shares at 125% of the target award amount. On December 15, 2016, we granted PSOs to our executive officers exercisable for an aggregate of 276,199 shares at the target award amount, which would be exercisable up to an aggregate of 345,248 shares at 125% of the target award amount. On December 15, 2015, we granted PSOs to our executive officers exercisable for an aggregate of 335,699 shares at the target award amount, which would be exercisable up to an aggregate of 419,623 shares at 125% of the target award amount. As of December 29, 2017, PSOs which would be exercisable for an aggregate of 784,898 shares at the target award amount (981,121 at 125% of the target award amount) were outstanding.
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 29, 2017
8,741

$
38.65

 
 
Grants
1,262

62.31

 
 
Exercises
(911
)
38.31

 
 
Forfeitures and cancellations
(306
)
40.68

 
 
Options outstanding at December 29, 2017
8,786

42.02

6.9
$
175,980

Options vested and expected to vest at December 29, 2017
8,212

41.26

6.8
170,650

Options exercisable at December 29, 2017
4,529

$
36.74

5.7
114,392

(1)
Aggregate intrinsic value is based on the closing price of our Class A common stock on December 29, 2017 of 62.00 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 29, 2017. 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 29, 2017
2,839

$
44.38

Granted
1,066

62.28

Vested
(849
)
39.76

Forfeitures
(175
)
41.41

Non-vested at December 29, 2017
2,881

$
52.55

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 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.

18

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 future 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 29,
2017
December 30,
2016
Expected life (in years)
5.06

5.13

Risk-free interest rate
2.2
%
2.1
%
Expected stock price volatility
22.6
%
27.6
%
Dividend yield
1.1
%
1.1
%
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):

19

Expense - By Award Type
 
Fiscal Quarter Ended
 
December 29,
2017
December 30,
2016
Compensation Expense - By Type
 
 
Stock options
$
6,964

$
4,803

Restricted stock units
10,780

11,583

Employee stock purchase plan
940

829

Total stock-based compensation
18,684

17,215

Benefit from income taxes
(3,896
)
(5,028
)
Total stock-based compensation, net of tax
$
14,788

$
12,187


Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
December 29,
2017
December 30,
2016
Compensation Expense - By Classification
 
 
Cost of products
$
262

$
258

Cost of services
118

134

Research and development
4,877

4,930

Sales and marketing
5,951

6,867

General and administrative
7,476

5,026

Total stock-based compensation expense
18,684

17,215

Benefit from income taxes
(3,896
)
(5,028
)
Total stock-based compensation, net of tax
$
14,788

$
12,187

The tax benefit that we recognize from shares issued under our ESPP is excluded from the tables above. This benefit was as follows (in thousands):
 
Fiscal Quarter Ended
 
December 29,
2017
December 30,
2016
Tax benefit - shares issued under ESPP
$
305

$
324

Unrecognized Compensation Expense.    At December 29, 2017, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $37.6 million, which is expected to be recognized over a weighted-average period of 2.6 years. At December 29, 2017, total unrecorded compensation expense associated with RSUs expected to vest was approximately $115.7 million, which is expected to be recognized over a weighted-average period of 2.9 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 29, 2017 (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

Fiscal 2017: January 2017
200,000

Total
$
1,300,000


20

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 29, 2017, the remaining authorization to purchase additional shares is approximately $122.0 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2018:
Quarterly Repurchase Activity
Shares
Repurchased
Cost in thousands (1)
Average Price Paid Per Share (2)
 
 
 
 
Q1 - Quarter ended December 29, 2017
493,884

$
29,999

$
60.73

(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes dividends declared under the program in relation to fiscal 2018:
Fiscal Period
Declaration Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
 
Fiscal 2018
 
 
 
 
 
 
Q1 - Quarter ended December 29, 2017
January 24, 2018
February 5, 2018
February 14, 2018
$
0.16

$16.5 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 gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies. 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 sheets. 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.

21

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 29, 2017
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
(377
)
$
(7,376
)
$
(7,753
)
Other comprehensive income before reclassifications:




—

Unrealized gains/(losses) - investment securities
(1,696
)


(1,696
)
Foreign currency translation gains/(losses) (1)


1,498

1,498

Income tax effect - benefit/(expense)
87

(274
)
(187
)
Net of tax
(1,609
)
1,224

(385
)
Amounts reclassified from AOCI into earnings:
 
 
 
Realized gains/(losses) - investment securities (1)
20



20

Income tax effect - benefit/(expense) (2)
(4
)


(4
)
Net of tax
16

—

16

Net current-period other comprehensive income/(loss)
(1,593
)
1,224

(369
)
Ending Balance
$
(1,970
)
$
(6,152
)
$
(8,122
)
 
Fiscal Quarter Ended
December 30, 2016
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
742

$
(10,939
)
$
(10,197
)
Other comprehensive income before reclassifications:




 
Unrealized gains/(losses) - investment securities
(2,160
)


(2,160
)
Foreign currency translation gains/(losses) (1)


(8,728
)
(8,728
)
Income tax effect - benefit/(expense)
102

1,265

1,367

Net of tax
(2,058
)
(7,463
)
(9,521
)
Amounts reclassified from AOCI into earnings:
 
 
 
Realized gains/(losses) - investment securities (1)
46



46

Income tax effect - benefit/(expense) (2)
(7
)


(7
)
Net of tax
39

—

39

Net current-period other comprehensive income/(loss)
(2,019
)
(7,463
)
(9,482
)
Ending Balance
$
(1,277
)
$
(18,402
)
$
(19,679
)
(1)
Realized gains or losses, if any, 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.
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.
Basic and diluted EPS are computed independently for each fiscal quarter and year-to-date period presented,
which involves the use of different weighted-average share count figures relating to quarterly and annual periods. As a
result, and after factoring the effect of rounding to the nearest cent per share, the sum of all four quarter-to-date EPS
figures may not equal year-to-date EPS.

22

Potentially dilutive shares represent the hypothetical number of incremental shares issuable under the assumed exercise of outstanding stock options (both vested and non-vested) and vesting of outstanding RSUs. 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. In periods when we report a net loss, stock awards are excluded from our calculation of earnings per share as their inclusion would have an antidilutive effect. In the first quarter of fiscal 2018, we excluded stock awards of 2,424 stock options and 1,358 RSUs.
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 29,
2017
December 30,
2016
Numerator:
 
 
Net income/(loss) attributable to Dolby Laboratories, Inc.
$
(81,622
)
$
53,374

 
 
 
Denominator:
 
 
Weighted-average shares outstanding—basic
102,552

101,483

Potential common shares from options to purchase common stock
—

1,385

Potential common shares from restricted stock units
—

1,008

Weighted-average shares outstanding—diluted
102,552

103,876

 
 
 
Net income/(loss) per share attributable to Dolby Laboratories, Inc.:
 
 
Basic
$
(0.80
)
$
0.53

Diluted
$
(0.80
)
$
0.51

 
 
 
Antidilutive awards excluded from calculation:
 
 
Stock options
2,424

739

Restricted stock units
1,358

42

 
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.

Tax Act Enacted in 2017

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal corporate income taxes on dividends from foreign subsidiaries; (4) capitalizing specific R&D expenses which are amortized over five to 15 years; and (5) other changes to how foreign and domestic earnings are taxed.

Our accounting for the impact of the Tax Act reflects reasonable estimates of certain effects. We recorded a total provisional amount of $154.6 million in our first quarter of fiscal 2018 income tax provision as follows:

•
Remeasurement of net deferred tax assets: The Tax Act reduces the corporate tax rate from 35 percent to 21 percent, which results in an estimated net decrease of $57.9 million in our net deferred tax asset balance. While we are able to make a reasonable estimate of the impact of the reduced corporate tax rate on our net deferred tax asset balances, we are continuing to gather additional information to assess the impact.
•
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax ("Transition Tax") is a tax on certain unrepatriated earnings of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits of the relevant subsidiaries, as well as the amount of foreign income taxes paid on such earnings and profits. The portion of earnings and profits comprised of cash and other specified assets is taxed at a rate of 15.5 percent and any

23

remaining amount of earnings and profits is taxed at a rate of eight percent. We made a reasonable estimate of the Transition Tax and recorded a liability for a provisional Transition Tax obligation of $96.7 million payable over a period of up to eight years. However, we are continuing to gather additional information to more precisely compute the liability for the Transition Tax.
Other significant provisions that are not yet effective, but will impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, an incremental tax on excessive amounts paid to foreign related parties, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries' tangible assets ("minimum foreign tax"). We are still evaluating whether to make a policy election to treat the minimum foreign tax as a period expense or to provide U.S. deferred taxes on temporary differences related to the minimum foreign tax.
The final transitional impacts of the Tax Act may differ from our initial estimate, due to, among other things, changes in interpretations of the Tax Act, any legislative actions to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, any updates or changes to estimates we have utilized to calculate the transition impacts, any impact of changes to our current assertion to indefinitely reinvest foreign earnings as a result of the Tax Act, and any impacts from changes to current year earnings estimates. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 28, 2018.
Unrecognized Tax Benefit
As of December 29, 2017, the total amount of gross unrecognized tax benefits was $101.0 million, of which $87.9 million, if recognized, would reduce our effective tax rate. As of September 29, 2017, the total amount of gross unrecognized tax benefits was $98.7 million, of which $85.0 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 provision 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):
 
Fiscal Quarter Ended
 
December 29,
2017
December 30,
2016
Withholding taxes
$
12,264

$
8,991

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 2018 was 196.0%, compared to 20.8% in the first quarter of fiscal 2017. The 175 percentage point increase in our effective tax rate reflects a 182 percentage point impact from the Tax Act, partially offset by a seven percentage point decrease from the excess tax benefit related to stock-based awards.

11. Restructuring
Restructuring charges recorded in our statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. Costs arising from these actions, including fluctuations in related balances between fiscal periods, are based on the nature of activities under the various plans.

24

Fiscal 2017 Restructuring Plan ("Restructuring Plan").    In September 2017, we implemented a plan to reduce certain activities in order to reallocate those resources towards higher priority investment areas. As a result, we recorded $12.9 million in restructuring costs during fiscal 2017, representing severance and other related benefits offered to approximately 80 employees that were affected by this action. The table presented below summarizes changes in restructuring accruals under this plan (in thousands):
 
Severance and associated costs
Restructuring charges
$
12,856

Cash payments
(168
)
Non-cash and other adjustments
—

Balance at September 29, 2017
$
12,688

Restructuring charges
67

Cash payments
(9,060
)
Non-cash and other adjustments
(264
)
Balance at December 29, 2017
$
3,431

Accruals for restructuring charges are included within accrued liabilities in our consolidated balance sheets while restructuring charges/(credits) are included within restructuring charges/(credits) in our consolidated statements of operations.

12. 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.

13. 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 29, 2017(in thousands):
 
Payments Due By Fiscal Period
 
Remainder of
Fiscal 2018
Fiscal
2019
Fiscal
2020
Fiscal
2021
Fiscal
2022
Thereafter
Total
Naming rights
$
3,857

$
7,811

$
7,909

$
8,008

$
8,108

$
86,865

$
122,558

Operating leases
12,428

15,306

13,095

10,429

9,174

25,540

85,972

Purchase obligations
18,062

25,358

22,047

333

333

—

66,133

Donation commitments
200

6,300

322

122

122

958

8,024

Total
$
34,547

$
54,775

$
43,373

$
18,892

$
17,737

$
113,363

$
282,687

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.
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.

25

Purchase Obligations.     Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other R&D activities.
Donation Commitments.     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 2019, in exchange for various marketing, branding, and publicity benefits.
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. We have also entered into indemnification agreements with our officers, directors,
and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. 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.

26


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 analog and digital signal processing and digital compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multiple offerings that enable more immersive sound for cinema, digital television transmissions and devices, 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 provide a more rich, clear, and immersive experience.

27

REVENUE GENERATION
The following table presents a summary of the composition of our revenue for all periods presented:
 
Fiscal Quarter Ended
Revenue
December 29,
2017
December 30,
2016
   Licensing
90%
87%
   Products
8%
11%
   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 the majority 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 29,
2017
December 30,
2016
United States
26%
32%
International
74%
68%
We have active licensing arrangements with over 550 electronics product OEMs and software developer licensees. As of December 29, 2017, we had approximately 8,500 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 to a range of customers who incorporate them into their products for enhanced audio and imaging functionality whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies are 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.
AVC
A digital video codec with high bandwidth efficiency used in a wide range of media devices, such as TVs, STBs, PCs, gaming consoles, and mobile devices.
Dolby® AC-4
A next-generation digital audio coding technology that increases transmission efficiency while delivering new audio experiences to a wide range of playback devices, including TVs, STBs, PCs, gaming consoles, 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. Dolby Atmos is an immersive experience that 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, an expanded color spectrum, and dynamic metadata to deliver higher contrast, brighter highlights, and improved details for TV, cinema, mobile devices, 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
A next-generation digital video codec with high bandwidth efficiency to support ultra-high definition experiences for a wide range of media devices.


28

The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Quarter Ended
 
Market
December 29,
2017
December 30,
2016
Main Offerings Incorporating Our Technologies
Broadcast
40%
46%
STBs & Televisions
Mobile
23%
10%
Smartphones & Tablets
CE
11%
12%
DMAs, Blu-ray Disc devices, AVRs, Soundbars, DVDs, & HTIBs
PC
10%
15%
Windows and macOS operating systems
Other
16%
17%
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 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 that is 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 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-own