dlb-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended March 31, 2023


☐			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	California	94103-1410
(Address of principal executive offices)			(Zip Code)

(415) 558-0200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value	DLB	The New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by 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	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	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 ☒

On April 28, 2023, the registrant had 59,420,346 shares of Class A common stock, par value $0.001 per share, and 36,085,779 shares of Class B common stock, par value $0.001 per share, outstanding.

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DOLBY LABORATORIES, INC.

FORM 10-Q

For the Fiscal Quarter Ended March 31, 2023

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	9

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	52

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 6.	Exhibits	70

Signature

Table of Contents

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 (Loss)

API

Application Programming Interface

APIC

Additional Paid In-Capital

ASC

Accounting Standards Codification

ASP

Average Selling Price

ASU

Accounting Standards Update

ATSC

Advanced Television Systems Committee

AVC

Advanced Video Coding

AVR

Audio/Video Receiver

Consumer Electronics

CODM

Chief Operating Decision Maker

COSO

Committee Of Sponsoring Organizations (Of The Treadway Commission)

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 and Administrative

High Definition

HDR

High-Dynamic Range

HDTV

High Definition Television

HE-AAC

High Efficiency Advanced Audio Coding

HEVC

High Efficiency Video Coding

Integrated Circuit

IBR

Incremental Borrowing Rate

Intellectual Property

Limited Partner/Partnership

NOL

Net Operating Loss

OECD

Organization For Economic Co-Operation & Development

OEM

Original Equipment Manufacturer

OTT

Over-The-Top

Personal Computer

PCS

Post-Contract Support

PP&E

Property, Plant, and Equipment

PSO

Performance-Based Stock Option

PSU

Performance-Based Restricted Stock Unit

R&D

Research and Development

ROU

Right-Of-Use

RSU

Restricted Stock Unit

S&M

Sales and Marketing

SEC

U.S. Securities and Exchange Commission

SERP

Supplemental Executive Retirement Plan

STB

Set-Top Box

TSR

Total Stockholder Return

UHD

Ultra-High Definition

U.S. GAAP

Generally Accepted Accounting Principles In The United States

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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)

(unaudited)


	March 31, 2023		September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	688,443	$	620,127
Restricted cash	4,977		8,244
Short-term investments	126,393		189,213
Accounts receivable, net of allowance for credit losses of $9,991 and $11,834	283,315		243,593
Contract assets, net of allowance for credit losses of $128 and $125	275,262		176,093
Inventories, net	30,353		23,549
Prepaid expenses and other current assets	53,853		50,075
Total current assets	1,462,596		1,310,894
Long-term investments	100,797		102,514
Property, plant, and equipment, net	508,021		513,481
Operating lease right-of-use assets	44,721		46,530
Intangible assets, net	98,876		112,265
Goodwill	370,134		365,147
Deferred taxes	203,886		183,568
Other non-current assets	47,102		55,149
Total assets	$	2,836,133	$	2,689,548

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,170	$	14,171
Accrued liabilities	246,757		230,237
Income taxes payable	14,496		1,265
Contract liabilities	22,963		18,588
Operating lease liabilities	12,625		13,257
Total current liabilities	314,011		277,518
Non-current contract liabilities	22,721		23,203

Non-current operating lease liabilities	35,243		37,685
Other non-current liabilities	108,166		100,122
Total liabilities	480,141		438,528

Stockholders’ equity:
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 59,671,342 shares issued and outstanding at March 31, 2023 and 59,798,862 at September 30, 2022	54		53
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,085,779 shares issued and outstanding at March 31, 2023 and 36,085,779 at September 30, 2022	41		41

Retained earnings	2,378,115		2,297,730
Accumulated other comprehensive loss	(27,426)		(51,641)
Total stockholders’ equity – Dolby Laboratories, Inc.	2,350,784		2,246,183
Noncontrolling interest	5,208		4,837
Total stockholders’ equity	2,355,992		2,251,020
Total liabilities and stockholders’ equity	$	2,836,133	$	2,689,548

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Fiscal Quarter Ended				Fiscal Year-To-Date Ended

	March 31, 2023		April 1, 2022		March 31, 2023		April 1, 2022
Revenue:
Licensing	$	351,608	$	313,833	$	659,619	$	646,117
Products and services	24,283		20,538		51,193		39,887
Total revenue	375,891		334,371		710,812		686,004

Cost of revenue:
Cost of licensing	21,365		16,672		34,724		31,607
Cost of products and services	19,684		18,843		40,775		36,617
Total cost of revenue	41,049		35,515		75,499		68,224

Gross profit	334,842		298,856		635,313		617,780

Operating expenses:
Research and development	67,951		67,421		132,401		136,245
Sales and marketing	95,695		84,230		177,900		181,400
General and administrative	61,939		98,693		121,911		161,137

Restructuring charges/(credits)	33		5,162		(211)		5,067
Total operating expenses	225,618		255,506		432,001		483,849

Operating income	109,224		43,350		203,312		133,931

Other income/(expense):
Interest income	6,773		1,098		11,651		1,814
Interest expense	34		(87)		(47)		(171)
Other income/(expense), net	1,250		(910)		2,347		(681)
Total other income	8,057		101		13,951		962

Income before income taxes	117,281		43,451		217,263		134,893
Provision for income taxes	(21,398)		(6,932)		(41,932)		(18,364)
Net income including noncontrolling interest	95,883		36,519		175,331		116,529
Less: net (income)/loss attributable to noncontrolling interest	(187)		201		(260)		205
Net income attributable to Dolby Laboratories, Inc.	$	95,696	$	36,720	$	175,071	$	116,734

Net income per share:
Basic	$	1.00	$	0.36	$	1.83	$	1.15
Diluted	$	0.98	$	0.36	$	1.80	$	1.13
Weighted-average shares outstanding:
Basic	95,820		101,343		95,862		101,285
Diluted	97,298		102,707		97,392		103,477

Related party rent expense:

Included in net income attributable to noncontrolling interest	$	71	$	71	$	142	$	142

Cash dividend declared per common share	$	0.27	$	0.25	$	0.54	$	0.50
Cash dividend paid per common share	$	0.27	$	0.25	$	0.54	$	0.50

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Fiscal Quarter Ended				Fiscal Year-To-Date Ended
	March 31, 2023		April 1, 2022		March 31, 2023		April 1, 2022

Net income including noncontrolling interest	$	95,883	$	36,519	$	175,331	$	116,529
Other comprehensive income/(loss):
Currency translation adjustments gains/(losses), net of tax benefit of $0, $34, $0, and $0	2,497		(485)		16,878		(1,756)
Unrealized gains/(losses) on investments, net of tax benefit/(expense) of $1, ($1), $38, and ($5)	1,635		(3,516)		2,991		(4,020)
Unrealized gains/(losses) on cash flow hedges, net of tax benefit/(expense) of ($67), ($49), $89, and ($80)	391		(59)		4,723		178
Total other comprehensive income/(loss), net of tax	4,523		(4,060)		24,592		(5,598)

Total comprehensive income	100,406		32,459		199,923		110,931
Less: comprehensive (income)/loss attributable to noncontrolling interest	(261)		101		(637)		152
Comprehensive income attributable to Dolby Laboratories, Inc.	$	100,145	$	32,560	$	199,286	$	111,083

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Fiscal Quarter Ended
	Dolby Laboratories, Inc.
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity - Dolby Laboratories, Inc.		Noncontrolling Interest		Total Stockholders' Equity
Balance at December 30, 2022	$	95	$	—	$	2,319,358	$	(31,875)	$	2,287,578	$	4,947	$	2,292,525
Net income	—		—		95,696		—		95,696		187		95,883
Other comprehensive income, net of tax	—		—		—		4,449		4,449		74		4,523

Stock-based compensation expense	—		29,827		—		—		29,827		—		29,827
Capitalized stock-based compensation expense	—		330		—		—		330		—		330
Repurchase of common stock	—		(38,797)		(11,067)		—		(49,864)		—		(49,864)
Cash dividends declared and paid on common stock	—		—		(25,872)		—		(25,872)		—		(25,872)

Common stock issued under employee stock plans	—		10,440		—		—		10,440		—		10,440
Tax withholdings on vesting of restricted stock	—		(1,800)		—		—		(1,800)		—		(1,800)


Balance at March 31, 2023	$	95	$	—	$	2,378,115	$	(27,426)	$	2,350,784	$	5,208	$	2,355,992


	Fiscal Year-To-Date Ended
	Dolby Laboratories, Inc.
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity - Dolby Laboratories, Inc.		Noncontrolling Interest		Total Stockholders' Equity
Balance at September 30, 2022	$	94	$	—	$	2,297,730	$	(51,641)	$	2,246,183	$	4,837	$	2,251,020
Net income	—		—		175,071		—		175,071		260		175,331
Other comprehensive income, net of tax	—		—		—		24,215		24,215		377		24,592
Distributions to noncontrolling interest	—		—		—		—		—		(266)		(266)
Stock-based compensation expense	—		61,067		—		—		61,067		—		61,067
Capitalized stock-based compensation expense	—		671		—		—		671		—		671
Repurchase of common stock	(1)		(56,330)		(42,945)		—		(99,276)		—		(99,276)
Cash dividends declared and paid on common stock	—		—		(51,741)		—		(51,741)		—		(51,741)

Common stock issued under employee stock plans	2		21,392		—		—		21,394		—		21,394
Tax withholdings on vesting of restricted stock	—		(26,800)		—		—		(26,800)		—		(26,800)


Balance at March 31, 2023	$	95	$	—	$	2,378,115	$	(27,426)	$	2,350,784	$	5,208	$	2,355,992

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	Fiscal Quarter Ended
	Dolby Laboratories, Inc.
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity - Dolby Laboratories, Inc.		Noncontrolling Interest		Total Stockholders' Equity
Balance at December 31, 2021	$	100	$	—	$	2,649,175	$	(11,521)	$	2,637,754	$	4,767	$	2,642,521
Net income	—		—		36,720		—		36,720		(201)		36,519
Other comprehensive income/(loss), net of tax	—		—		—		(4,160)		(4,160)		100		(4,060)

Stock-based compensation expense	—		27,699		—		—		27,699		—		27,699
Repurchase of common stock	(2)		(40,588)		(44,323)		—		(84,913)		—		(84,913)
Cash dividends declared and paid on common stock	—		—		(25,398)		—		(25,398)		—		(25,398)

Common stock issued under employee stock plans	1		13,689		—		—		13,690		—		13,690
Tax withholdings on vesting of restricted stock	—		(800)		—		—		(800)		—		(800)

Deconsolidation of subsidiary	—		—		(820)		—		(820)		750		(70)
Balance at April 1, 2022	$	99	$	—	$	2,615,354	$	(15,681)	$	2,599,772	$	5,416	$	2,605,188


	Fiscal Year-To-Date Ended
	Dolby Laboratories, Inc.
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity - Dolby Laboratories, Inc.		Noncontrolling Interest		Total Stockholders' Equity
Balance at September 24, 2021	$	100	$	—	$	2,607,909	$	(10,030)	$	2,597,979	$	6,253	$	2,604,232
Net income	—		—		116,734		—		116,734		(205)		116,529
Other comprehensive income/(loss), net of tax	—		—		—		(5,651)		(5,651)		53		(5,598)
Distributions to noncontrolling interest	—		—		—		—		—		(1,435)		(1,435)
Stock-based compensation expense	—		60,355		—		—		60,355		—		60,355
Repurchase of common stock	(2)		(62,696)		(57,788)		—		(120,486)		—		(120,486)
Cash dividends declared and paid on common stock	—		—		(50,681)		—		(50,681)		—		(50,681)

Common stock issued under employee stock plans	1		35,061		—		—		35,062		—		35,062
Tax withholdings on vesting of restricted stock	—		(32,720)		—		—		(32,720)		—		(32,720)

Deconsolidation of subsidiary	—		—		(820)		—		(820)		750		(70)
Balance at April 1, 2022	$	99	$	—	$	2,615,354	$	(15,681)	$	2,599,772	$	5,416	$	2,605,188

See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Fiscal Year-To-Date Ended
	March 31, 2023		April 1, 2022
Operating activities:
Net income including noncontrolling interest	$	175,331	$	116,529
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	40,388		45,832
Stock-based compensation	61,067		60,355
Amortization of operating lease right-of-use assets	6,565		7,953
Amortization of premium on investments	37		673

Provision for/(benefit from) credit losses	(2,072)		2,333
Deferred income taxes	(19,544)		(19,363)







Other non-cash items affecting net income	(4,417)		560
Changes in operating assets and liabilities:
Accounts receivable, net	(37,769)		3,498
Contract assets, net	(99,162)		(76,447)
Inventories	(4,728)		(5,045)
Operating lease right-of-use assets	(2,643)		(265)
Prepaid expenses and other assets	12,943		(1,683)
Accounts payable and accrued liabilities	21,609		(37,472)
Income taxes, net	17,370		5,117
Contract liabilities	3,852		4,364
Operating lease liabilities	(5,415)		(7,924)
Other non-current liabilities	(2,475)		(4,356)
Net cash provided by operating activities	160,937		94,659

Investing activities:
Purchases of marketable securities	(80,561)		(201,231)
Proceeds from sales of marketable securities	52,345		5,107
Proceeds from maturities of marketable securities	94,843		29,055
Return of investment from equity method investees	—		826
Purchases of property, plant, and equipment	(14,741)		(26,053)

Payments for business combinations, net of cash acquired	—		(38,228)
Purchases of intangible assets	—		(11,528)


Purchases of other investments	—		(5,000)
Net cash provided by/(used in) investing activities	51,886		(247,052)

Financing activities:

Proceeds from issuance of common stock	21,394		35,062
Repurchase of common stock	(99,276)		(120,486)
Payment of cash dividend	(51,741)		(50,681)
Distribution to noncontrolling interest	(266)		(1,435)

Shares repurchased for tax withholdings on vesting of restricted stock	(26,800)		(32,720)

Payment of deferred consideration for prior business combinations	(500)		—
Net cash used in financing activities	(157,189)		(170,260)

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	9,415		(1,541)
Net increase/(decrease) in cash, cash equivalents, and restricted cash	65,049		(324,194)
Cash, cash equivalents, and restricted cash at beginning of period	628,371		1,233,032
Cash, cash equivalents, and restricted cash at end of period	$	693,420	$	908,838

Supplemental disclosure:
Cash paid for income taxes, net of refunds received	$	27,468	$	24,016


Non-cash investing activities and financing activities:
Change in property, plant, and equipment purchased, unpaid at period-end	$	1,635	$	(2,996)

See accompanying notes to unaudited interim condensed consolidated financial statements

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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, 2022 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, 2022, which are included in our Annual Report on Form 10-K filed with the SEC.

The results for the fiscal quarter and year-to-date period ended March 31, 2023 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, 2023.

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 noncontrolling interest. We report these noncontrolling interests as a separate line in our unaudited interim condensed consolidated statements of operations as net income attributable to noncontrolling interest and in our unaudited interim condensed consolidated balance sheets as a noncontrolling interest. We eliminate all intercompany accounts and transactions upon consolidation.

Operating Segments

Since we operate as a single reportable segment, all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This reflects the fact that our CODM, our CEO, 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 shipments by our licensees for which we are owed a sales-based royalty. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Our estimates of royalty-based revenue also take into consideration the macroeconomic effect of global events that may impact our licensees' supply chain activities as well as demand for shipments.

Additional significant items subject to such estimates and assumptions include ESPs for performance obligations within revenue arrangements; allowance for credit losses for accounts receivable; carrying values of inventories and certain PP&E, goodwill and intangible assets; fair values of investments; accrued liabilities including unrecognized tax benefits, deferred income tax assets and liabilities, and contingent 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 March 31, 2023 and April 1, 2022. Our fiscal year ending September 29, 2023 (fiscal 2023) consists of 52 weeks, and our fiscal year ended September 30, 2022 (fiscal 2022) consisted of 53 weeks.

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2. Summary of Significant Accounting Policies

Concentration of Credit Risk

Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents, investments, accounts receivable, and contract assets. We maintain cash, cash equivalents, and investments with multiple financial institutions that have high credit standing, and that we believe are financially sound and have minimal credit risk exposure, although at times our balances may exceed the applicable insurance coverage limits. We monitor and manage the overall counterparty credit risk exposure of our cash balances to individual financial institutions on an ongoing basis. Our investment portfolio consists of investment grade securities diversified amongst security types, industries, and issuers. All of our securities are held in custody by large national financial institutions. Our investment policy limits the amount of credit exposure to a maximum of 5% of our total portfolio to any one issuer, except for the U.S. Treasury, and we believe no significant concentration risk exists with respect to these investments. We also mitigate counterparty risk through entering into derivative contracts with high-credit-quality financial institutions. Actual or potential defaults of one or more financial institutions could impact our results of operations or financial position, and make it challenging to find alternative qualified counterparties.

The majority of our licensing revenue is generated from customers outside of the U.S. We manage the credit risk posed by non-U.S. customers by performing regular evaluations of the creditworthiness of our licensing customers and recognize revenue in accordance with US GAAP.

Recently Issued Accounting Standards

Standards Not Yet Adopted

Business Combinations. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by an acquirer in accordance with ASC 606, Revenue from Contracts with Customers. Currently, we recognize acquired contract assets and contract liabilities at fair value as of the acquisition date, in accordance with ASC 805. This standard will be effective for Dolby beginning September 30, 2023 on a prospective basis, but early adoption is permitted. We plan to early adopt this ASU in the third quarter of 2023.

3. Revenue Recognition

We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound and imaging solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer.

A. Identification of the Contract or Contracts with Customers

We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer's payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract.

B. Identification of Performance Obligations in a Contract

We generate revenue principally from the following sources, which represent performance obligations in our contracts with customers:

•Licensing. We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio and imaging functionality across broadcast, mobile, CE, PC, gaming, and other markets.

•Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries.

•Services. We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment,

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equalization, as well as audio, color and light image calibration. We also offer a developer platform, Dolby.io, that enables developers to access our technologies through audio and video APIs for building high-quality communications, media, and streaming solutions.

•PCS. We provide PCS for products sold and for equipment leased, and we support the implementation of our licensing technologies in our licensees’ products.

•Equipment Leases. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences by leasing equipment and licensing our IP.

•Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our subsidiary, Via (as defined below). See Note 16 "Subsequent Event" to our unaudited interim condensed consolidated financial statements for a description of the recent business combination of Via and MPEG LA, L.L.C.

Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations.

The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price:

•Digital cinema server hardware and embedded software, which is dependent on and interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation.

•The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation.

•The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. These services consist of the review of venue designs specifying proposed speaker placement as well as calibration services performed for installed speakers to ensure optimal playback.

C. Determination of Transaction Price for Performance Obligations in a Contract

After identifying the distinct performance obligations, we determine the transaction price in accordance with the terms of the underlying executed contract which may include variable consideration such as discounts, rebates, refunds, rights of returns, and incentives. We assess and update, if necessary, the amount of variable consideration to which we are entitled for each reporting period. At the end of each reporting period, we estimate and accrue a liability for returns and adjustments as a reduction to revenue based on several factors, including past returns history.

With the exception of our sales-based royalties, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some of our licensing arrangements include payment terms greater than one year from when we transfer control of our IP to a licensee and the receipt of the final payment for that IP. If a significant financing component exists, we classify a portion of the transaction price as interest income, instead of recognizing all of the transaction price as revenue. We do not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less.

D. Allocation of Transaction Price to Distinct Performance Obligations in a Contract

For our sales-based royalties where the license is the predominant item to which the royalties relate, we present all revenue as licensing.

For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain.

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Once the transaction price, including any variable consideration, has been determined, we allocate the transaction price to the performance obligations identified in the contract and recognize revenue as or when control is transferred for each distinct performance obligation.

E. Revenue Recognition as Control is Transferred to a Customer

We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers ("implementation licensees"), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below.

Initial fees from implementation licensees. Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenue from these initial fees is recognized ratably over the contractual term as a component of licensing revenue.

Sales-based licensing fees. In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date. We apply the royalty exception, which requires that we recognize sales-based royalties when the sales occur based on our estimates. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. In the second quarter of fiscal 2023, we recorded a favorable adjustment of approximately $1 million, which was primarily related to shipments that occurred in the prior two quarters.

Fixed and guaranteed licensing fees. In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees. In these cases, control is transferred and fees are recognized upon the later of contract execution or the effective date. Additionally and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenue from these arrangements is included as a component of licensing revenue.

Recoveries. Through compliance efforts, we identify misreported licensed activity related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenue from these arrangements is included as a component of licensing revenue.

We undertake activities aimed at identifying potential unauthorized uses of our technologies, which when successful result in the recognition of revenue. Recoveries stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at the time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the agreement as that is the point in time to which a contract exists and control is transferred. This revenue is classified as licensing revenue.

In general, we classify legal costs associated with activities aimed at identifying potential unauthorized uses of our technologies, auditing existing licensees, and on occasion, pursuing litigation as S&M in our unaudited interim condensed consolidated statements of operations.

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.

In addition to our licensing arrangements, we also enter into arrangements to deliver products and services.

Product Sales. Revenue from the sale of products is recognized when the customer obtains control of the promised good or service, which is generally upon shipment. Payments are generally made within 90 days of sale.

Services. We provide various services, such as engineering services related to movie soundtrack print mastering, equipment training and maintenance, mixing room alignment, equalization, and image calibration, which

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we bill on a fixed fee and time and materials basis. Most of these services are of a short duration and are recognized as control of the performance obligations are transferred which is when the related services are performed.

Cloud Services. We provide access to audio and video APIs through our developer platform as well as cloud encoding services, generally, on either a consumption or subscription basis. Revenue related to cloud services provided on a consumption basis is recognized when the customer utilizes the services, based on the quantity of services consumed. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract term as the customer receives and consumes the benefits of the cloud services.

Collaborative Arrangements. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on box office receipts, reported to Dolby by exhibitor partners on a monthly or quarterly basis, our proprietary designs and trademarks as well as for the use of our equipment at the exhibitor's venue. The use of our product solution meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply ASC 842, Leases, and recognize revenue based on monthly box office reports from exhibitors. Our revenue share is recognized as licensing revenue in our unaudited interim condensed consolidated statements of operations.

In addition, we also enter into hybrid agreements where a portion of our revenue share involves guaranteed payments, which in some cases result in classifying the arrangement as a sales-type lease. In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue.

Via Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our subsidiary, Via. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives from licensors on fixed fee contracts is recognized over the term in which we are providing services associated with the fixed fee contract. We recognize our administrative fees net of the consideration paid to the patent licensors in the pool as licensing revenue. See Note 16 "Subsequent Event" to our unaudited interim condensed consolidated financial statements for a description of the recent business combination of Via and MPEG LA, L.L.C.

Deferred revenue, which is a component of contract liabilities, represents amounts that are ultimately expected to be recognized as revenue, but for which we have yet to satisfy the performance obligation. As of March 31, 2023, we had $45.5 million of remaining performance obligations, 35% of which we expect to recognize as revenue in fiscal 2023, 24% in fiscal 2024, and the balance of 41% in fiscal years beyond 2024.

F.Disaggregation of Revenue

The following table presents a summary of the composition of our revenue for all periods presented (in thousands, except percentage amounts):


	Fiscal Quarter Ended								Fiscal Year-To-Date Ended
Revenue	March 31, 2023				April 1, 2022				March 31, 2023				April 1, 2022
Licensing	$	351,608	94	%	$	313,833	94	%	$	659,619	93	%	$	646,117	94	%
Products and services	24,283		6	%	20,538		6	%	51,193		7	%	39,887		6	%
Total revenue	$	375,891	100	%	$	334,371	100	%	$	710,812	100	%	$	686,004	100	%

The following table presents the composition of our licensing revenue for all periods presented (in thousands, except percentage amounts):

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	Fiscal Quarter Ended								Fiscal Year-To-Date Ended
Market	March 31, 2023				April 1, 2022				March 31, 2023				April 1, 2022
Broadcast	$	128,971	37	%	$	104,481	33	%	$	246,305	37	%	$	226,114	35	%
Mobile	93,126		26	%	66,055		21	%	157,412		24	%	140,975		22	%
CE	39,015		12	%	53,956		17	%	94,098		14	%	111,529		17	%
PC