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 June 30, 2023

OR

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

For the Transition Period From              To             

Commission File Number: 001-32431

DOLBY LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

Delaware			90-0199783
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
1275 Market Street	San Francisco	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 July 28, 2023, the registrant had 59,555,465 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.

DOLBY LABORATORIES, INC.

FORM 10-Q

For the Fiscal Quarter Ended June 30, 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	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	54
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
Signature

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 (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
CE	Consumer Electronics
CODM	Chief Operating Decision Maker
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
G&A	General and Administrative
HD	High Definition
HDR	High-Dynamic Range
HDTV	High Definition Television
HE-AAC	High Efficiency Advanced Audio Coding
HEVC	High Efficiency Video Coding
IC	Integrated Circuit
IBR	Incremental Borrowing Rate
IP	Intellectual Property
LP	Limited Partner/Partnership
NOL	Net Operating Loss
OECD	Organization For Economic Co-Operation & Development
OEM	Original Equipment Manufacturer
OTT	Over-The-Top
PC	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

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)

	June 30, 2023		September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	765,079	$	620,127
Restricted cash	34,080		8,244
Short-term investments	124,210		189,213
Accounts receivable, net of allowance for credit losses of $10,012 and $11,834	266,865		243,593
Contract assets, net of allowance for credit losses of $135 and $125	192,585		176,093
Inventories, net	32,398		23,549
Prepaid expenses and other current assets	54,148		50,075
Total current assets	1,469,365		1,310,894
Long-term investments	98,103		102,514
Property, plant, and equipment, net	501,666		513,481
Operating lease right-of-use assets	39,273		46,530
Intangible assets, net	177,334		112,265
Goodwill	426,307		365,147
Deferred taxes	209,681		183,568
Other non-current assets	86,209		55,149
Total assets	$	3,007,938	$	2,689,548
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,395	$	14,171
Accrued liabilities	346,525		230,237
Income taxes payable	11,018		1,265
Contract liabilities	36,586		18,588
Operating lease liabilities	13,512		13,257
Total current liabilities	423,036		277,518
Non-current contract liabilities	41,624		23,203
Non-current operating lease liabilities	36,552		37,685
Other non-current liabilities	124,003		100,122
Total liabilities	625,215		438,528
Stockholders’ equity:
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 59,702,582 shares issued and outstanding at June 30, 2023 and 59,798,862 at September 30, 2022	53		53
Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,085,779 shares issued and outstanding at June 30, 2023 and 36,085,779 at September 30, 2022	41		41
Retained earnings	2,397,307		2,297,730
Accumulated other comprehensive loss	(31,163)		(51,641)
Total stockholders’ equity – Dolby Laboratories, Inc.	2,366,238		2,246,183
Noncontrolling interest	16,485		4,837
Total stockholders’ equity	2,382,723		2,251,020
Total liabilities and stockholders’ equity	$	3,007,938	$	2,689,548

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				Fiscal Year-To-Date Ended
	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Revenue:
Licensing	$	273,108	$	269,289	$	932,727	$	915,406
Products and services	25,262		20,296		76,455		60,183
Total revenue	298,370		289,585		1,009,182		975,589
Cost of revenue:
Cost of licensing	15,610		13,756		50,334		45,363
Cost of products and services	25,905		22,201		66,680		58,818
Total cost of revenue	41,515		35,957		117,014		104,181
Gross profit	256,855		253,628		892,168		871,408
Operating expenses:
Research and development	68,696		62,859		201,097		199,104
Sales and marketing	85,594		87,114		263,494		268,514
General and administrative	69,954		57,113		191,865		218,250
Restructuring charges	16,676		976		16,465		6,043
Total operating expenses	240,920		208,062		672,921		691,911
Operating income	15,935		45,566		219,247		179,497
Other income/(expense):
Interest income	7,316		1,416		18,967		3,230
Interest expense	(114)		(84)		(161)		(255)
Other income, net	620		2,514		2,967		1,833
Total other income	7,822		3,846		21,773		4,808
Income before income taxes	23,757		49,412		241,020		184,305
Provision for income taxes	(7,352)		(9,802)		(49,284)		(28,166)
Net income including noncontrolling interest	16,405		39,610		191,736		156,139
Less: net (income)/loss attributable to noncontrolling interest	(6)		(13)		(266)		192
Net income attributable to Dolby Laboratories, Inc.	$	16,399	$	39,597	$	191,470	$	156,331
Net income per share:
Basic	$	0.17	$	0.40	$	2.00	$	1.55
Diluted	$	0.17	$	0.39	$	1.96	$	1.52
Weighted-average shares outstanding:
Basic	95,658		100,213		95,794		100,936
Diluted	97,459		101,474		97,588		102,993
Related party rent expense:
Included in net income attributable to noncontrolling interest	$	84	$	71	$	226	$	213
Cash dividend declared per common share	$	0.27	$	0.25	$	0.81	$	0.75
Cash dividend paid per common share	$	0.27	$	0.25	$	0.81	$	0.75

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				Fiscal Year-To-Date Ended
	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022
Net income including noncontrolling interest	$	16,405	$	39,610	$	191,736	$	156,139
Other comprehensive income/(loss):
Currency translation adjustments gains/(losses), net of tax benefit/(expense) of $0, $0, $0, and $0	(3,199)		(14,086)		13,679		(15,842)
Unrealized gains/(losses) on investments, net of tax benefit/(expense) of $12, $3, $50, and ($2)	(250)		(426)		2,741		(4,446)
Unrealized gains/(losses) on cash flow hedges, net of tax benefit of $26, $178, $115, and $98	(211)		(498)		4,512		(320)
Total other comprehensive income/(loss), net of tax	(3,660)		(15,010)		20,932		(20,608)
Total comprehensive income	12,745		24,600		212,668		135,531
Less: comprehensive (income)/loss attributable to noncontrolling interest	(83)		252		(720)		404
Comprehensive income attributable to Dolby Laboratories, Inc.	$	12,662	$	24,852	$	211,948	$	135,935

See accompanying notes to unaudited interim condensed consolidated financial statements

6

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 Loss		Total Stockholders' Equity - Dolby Laboratories, Inc.		Noncontrolling Interest		Total Stockholders' Equity
Balance at March 31, 2023	$	95	$	—	$	2,378,115	$	(27,426)	$	2,350,784	$	5,208	$	2,355,992
Net income	—		—		16,399		—		16,399		6		16,405
Other comprehensive income/(loss), net of tax	—		—		—		(3,737)		(3,737)		77		(3,660)
Stock-based compensation expense	—		29,224		—		—		29,224		—		29,224
Capitalized stock-based compensation expense	—		389		—		—		389		—		389
Repurchase of common stock	(1)		(53,635)		28,636		—		(25,000)		—		(25,000)
Cash dividends declared and paid on common stock	—		—		(25,843)		—		(25,843)		—		(25,843)
Common stock issued under employee stock plans	—		15,837		—		—		15,837		—		15,837
Tax withholdings on vesting of restricted stock	—		(1,819)		—		—		(1,819)		—		(1,819)
Equity issued in connection with business combination	—		10,004		—		—		10,004		11,194		21,198
Balance at June 30, 2023	$	94	$	—	$	2,397,307	$	(31,163)	$	2,366,238	$	16,485	$	2,382,723

	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	—		—		191,470		—		191,470		266		191,736
Other comprehensive income, net of tax	—		—		—		20,478		20,478		454		20,932
Distributions to noncontrolling interest	—		—		—		—		—		(266)		(266)
Stock-based compensation expense	—		90,291		—		—		90,291		—		90,291
Capitalized stock-based compensation expense	—		1,060		—		—		1,060		—		1,060
Repurchase of common stock	(2)		(109,965)		(14,309)		—		(124,276)		—		(124,276)
Cash dividends declared and paid on common stock	—		—		(77,584)		—		(77,584)		—		(77,584)
Common stock issued under employee stock plans	2		37,229		—		—		37,231		—		37,231
Tax withholdings on vesting of restricted stock	—		(28,619)		—		—		(28,619)		—		(28,619)
Equity issued in connection with business combination	—		10,004		—		—		10,004		11,194		21,198
Balance at June 30, 2023	$	94	$	—	$	2,397,307	$	(31,163)	$	2,366,238	$	16,485	$	2,382,723

7

	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 April 1, 2022	$	99	$	—	$	2,615,354	$	(15,681)	$	2,599,772	$	5,416	$	2,605,188
Net income	—		—		39,597		—		39,597		13		39,610
Other comprehensive loss, net of tax	—		—		—		(14,745)		(14,745)		(265)		(15,010)
Stock-based compensation expense	—		27,608		—		—		27,608		—		27,608
Repurchase of common stock	(2)		(44,871)		(145,127)		—		(190,000)		—		(190,000)
Cash dividends declared and paid on common stock	—		—		(25,135)		—		(25,135)		—		(25,135)
Common stock issued under employee stock plans	1		18,537		—		—		18,538		—		18,538
Tax withholdings on vesting of restricted stock	—		(1,274)		—		—		(1,274)		—		(1,274)
Balance at July 1, 2022	$	98	$	—	$	2,484,689	$	(30,426)	$	2,454,361	$	5,164	$	2,459,525

	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	—		—		156,331		—		156,331		(192)		156,139
Other comprehensive loss, net of tax	—		—		—		(20,396)		(20,396)		(212)		(20,608)
Distributions to noncontrolling interest	—		—		—		—		—		(1,435)		(1,435)
Stock-based compensation expense	—		87,963		—		—		87,963		—		87,963
Repurchase of common stock	(4)		(107,567)		(202,915)		—		(310,486)		—		(310,486)
Cash dividends declared and paid on common stock	—		—		(75,816)		—		(75,816)		—		(75,816)
Common stock issued under employee stock plans	2		53,598		—		—		53,600		—		53,600
Tax withholdings on vesting of restricted stock	—		(33,994)		—		—		(33,994)		—		(33,994)
Deconsolidation of subsidiary	—		—		(820)		—		(820)		750		(70)
Balance at July 1, 2022	$	98	$	—	$	2,484,689	$	(30,426)	$	2,454,361	$	5,164	$	2,459,525

See accompanying notes to unaudited interim condensed consolidated financial statements

8

DOLBY LABORATORIES, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Fiscal Year-To-Date Ended
	June 30, 2023		July 1, 2022
Operating activities:
Net income including noncontrolling interest	$	191,736	$	156,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	61,428		69,382
Stock-based compensation	90,291		87,963
Amortization of operating lease right-of-use assets	9,829		11,658
Amortization of premium on investments	(179)		1,109
Provision for/(benefit from) credit losses	(348)		2,166
Deferred income taxes	(21,653)		(29,143)
Other non-cash items affecting net income	(1,751)		(2,388)
Changes in operating assets and liabilities:
Accounts receivable, net	43,546		(5,395)
Contract assets, net	(10,105)		11,999
Inventories	(2,425)		(12,231)
Operating lease right-of-use assets	(3,799)		(941)
Prepaid expenses and other assets	775		(1,169)
Accounts payable and accrued liabilities	(83,737)		(29,782)
Income taxes, net	14,975		17,023
Contract liabilities	(1,686)		3,314
Operating lease liabilities	(7,452)		(10,539)
Other non-current liabilities	2,621		(1,898)
Net cash provided by operating activities	282,066		267,267
Investing activities:
Purchases of marketable securities	(123,075)		(248,156)
Proceeds from sales of marketable securities	54,020		8,970
Proceeds from maturities of marketable securities	139,423		75,890
Purchases of property, plant, and equipment	(22,154)		(37,218)
Business combinations, net of cash and restricted cash acquired	25,703		(38,171)
Purchases of intangible assets	—		(11,528)
Purchases of other investments	—		(5,000)
Net cash provided by/(used in) investing activities	73,917		(255,213)
Financing activities:
Proceeds from issuance of common stock	37,231		53,600
Repurchase of common stock	(124,276)		(310,486)
Payment of cash dividend	(77,584)		(75,816)
Distribution to noncontrolling interest	(266)		(1,435)
Shares repurchased for tax withholdings on vesting of restricted stock	(28,619)		(33,994)
Payment of deferred consideration for prior business combinations	(500)		—
Net cash used in financing activities	(194,014)		(368,131)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	8,819		(9,698)
Net increase/(decrease) in cash, cash equivalents, and restricted cash	170,788		(365,775)
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	$	799,159	$	867,257
Supplemental disclosure:
Cash paid for income taxes, net of refunds received	$	40,461	$	30,014
Non-cash investing activities and financing activities:
Change in property, plant, and equipment purchased, unpaid at period-end	$	2,047	$	(2,897)
Equity issued in connection with business combination	21,198		—

See accompanying notes to unaudited interim condensed consolidated financial statements

9

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 June 30, 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 majority-owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder or other entities have 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 June 30, 2023 and July 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.

10

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

Adopted Standards

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. This standard will be effective for Dolby beginning September 30, 2023 on a prospective basis, but early adoption is permitted. We early adopted this ASU in conjunction with the acquisition of MPEG LA (as defined below) by Via Corp (as defined below), and with that adoption, we recognized $38.1 million in deferred revenue. Refer to Note 16 "Business Combination" for a description of the recent business combination involving Via LA (as defined below). There were no other business combinations entered into during the third quarter of fiscal 2023 and year-to-date period ended June 30, 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.

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•Services.   We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, 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 LA. See Note 16 "Business Combination" for a description of the recent business combination involving Via LA.

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

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selling price of the good, most commonly a license, is highly variable or uncertain.

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 within the following two quarters. 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 third 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 at 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.

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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 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.

Licensing Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our subsidiary, Via LA. As an agent to licensors in the patent pool, Via LA 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 LA also has contracts where the fees are fixed. The revenue share Via LA 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 "Business Combination" to our unaudited interim condensed consolidated financial statements for a description of the recent business combination involving Via LA.

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 June 30, 2023, we had $78.0 million of remaining performance obligations, 19% of which we expect to recognize as revenue in fiscal 2023, 33% in fiscal 2024, and the balance of 48% 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	June 30, 2023				July 1, 2022				June 30, 2023				July 1, 2022
Licensing	$	273,108	92	%	$	269,289	93	%	$	932,727	92	%	$	915,406	94	%
Products and services	25,262		8	%	20,296		7	%	76,455		8	%	60,183		6	%
Total revenue	$	298,370	100	%	$	289,585	100	%	$	1,009,182	100	%	$	975,589	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	June 30, 2023				July 1, 2022				June 30, 2023				July 1, 2022
Broadcast	$	102,966	38	%	$	99,327	37	%	$	349,271	37	%	$	325,441	36	%
Mobile	50,363		18	%	63,237		23	%	207,775		22	%	204,212		22	%
CE	34,417		13	%	38,663		14	%	128,515		14	%	150,192		16	%
PC	29,489		11	%	26,947		10	%	97,122		10	%	119,190		13	%
Other	55,873		20	%	41,115		16	%	150,044		17	%	116,371		13	%
Total licensing revenue	$	273,108	100	%	$	269,289	100	%	$	932,727	100	%	$	915,406	100	%

We license our technologies in approximately 70 countries, and our licensees distribute products that incorporate our technologies throughout the world. We generate the majority of our revenue from outside the U.S. 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. The following table presents the composition of our revenue by geographic location for all periods presented (in thousands, except percentage amounts):

	Fiscal Quarter Ended								Fiscal Year-To-Date Ended
Geographic Location	June 30, 2023				July 1, 2022				June 30, 2023				July 1, 2022
United States	$	84,371	28	%	$	78,471	27	%	$	361,715	36	%	$	375,680	39	%
International	213,999		72	%	211,114		73	%	647,467		64	%	599,909		61	%
Total revenue	$	298,370	100	%	$	289,585	100	%	$	1,009,182	100	%	$	975,589	100	%

G. Contract Balances

Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated in a given period in the absence of receiving actual royalty statements from licensees. These estimates reflect our best judgment at that time, and are developed using a number of inputs, including historical data, industry estimates of expected shipments, anticipated sales price and performance, and third party data supporting the percentage of markets using our technologies. In the event that our estimates differ from actual amounts reported, we record an adjustment in the quarter in which the royalty statement is received, which is typically the quarter following our estimate. Actual amounts reported are typically paid within 60 days following the end of the quarter of shipment. The main drivers for change in the contract assets account are variances in quarterly estimates, and to a lesser degree, timing of receipt of actual royalty statements.

Our contract liabilities consist of advance payments and billings in advance of performance and deferred revenue that is typically satisfied within one year. The non-current portion of contract liabilities is separately disclosed in our unaudited interim condensed consolidated balance sheets. We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract. We recognized $3.1 million in the third quarter of fiscal 2023 and $14.7 million in the fiscal year-to-date period ended June 30, 2023 from prior period deferred revenue.

The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented (in thousands, except percentage amounts):

	June 30, 2023		September 30, 2022		Change ($)		Change (%)
Accounts receivable, net	$	266,865	$	243,593	$	23,272	10	%
Contract assets, net	192,585		176,093		16,492		9	%
Contract liabilities - current	36,586		18,588		17,998		97	%
Contract liabilities - non-current	41,624		23,203		18,421		79	%

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4. Composition of Certain Financial Statement Captions

The following tables present detailed information from our unaudited interim condensed consolidated balance sheets as of June 30, 2023 and September 30, 2022 (in thousands).

Accounts Receivable and Contract Assets

	June 30, 2023		September 30, 2022
Trade accounts receivable	$	130,522	$	162,531
Accounts receivable from patent administration program licensees	146,355		92,896
Contract assets	192,720		176,218
Accounts receivable and contract assets, gross	469,597		431,645
Less: allowance for credit losses on accounts receivable and contract assets	(10,147)		(11,959)
Total accounts receivable and contract assets, net	$	459,450	$	419,686

Accounts receivable as of June 30, 2023 and September 30, 2022, respectively, includes unbilled accounts receivable balances of $141.2 million and $106.9 million, related to amounts that are contractually owed. The unbilled balance represents our unconditional right to consideration related to fixed fee contracts which we are entitled to as a result of satisfying, or partially satisfying, performance obligations, as well as Via LA's unconditional right to consideration related to its patent administration programs.

Allowance for Credit Losses	Beginning Balance		Charges/(Credits)  to S&M and G&A		Additions/(Deductions)		Ending Balance
For fiscal year-to-date period ended:
September 30, 2022	$	8,952	$	5,460	$	(7)	$	14,405
June 30, 2023	14,405		(348)		(1,793)		12,264

Allowance for credit losses includes the provision for estimated credit losses on our sales-type leases, which was not material as of June 30, 2023 and September 30, 2022.

Inventories

	June 30, 2023		September 30, 2022
Raw materials	$	5,833	$	10,026
Work in process	3,961		4,955
Finished goods	22,604		8,568
Total inventories	$	32,398	$	23,549

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 unaudited interim condensed consolidated balance sheets. We have included $1.9 million and $2.8 million of raw materials inventory within non-current assets as of June 30, 2023 and September 30, 2022, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.

Prepaid Expenses and Other Current Assets

	June 30, 2023		September 30, 2022
Prepaid expenses	$	25,550	$	26,851
Other current assets	28,598		23,224
Total prepaid expenses and other current assets	$	54,148	$	50,075

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Accrued Liabilities

	June 30, 2023		September 30, 2022
Amounts payable to patent administration program partners	$	155,373	$	63,106
Accrued compensation and benefits	93,470		84,111
Accrued professional fees	22,203		13,057
Unpaid property, plant, and equipment additions	17,938		15,428
Accrued customer refunds	4,519		3,674
Accrued market development funds	14,549		7,206
Other accrued liabilities	38,473		43,655
Total accrued liabilities	$	346,525	$	230,237

Other Non-Current Liabilities

	June 30, 2023		September 30, 2022
Supplemental retirement plan obligations	$	4,088	$	4,127
Non-current tax liabilities (1)	91,333		83,758
Other liabilities	28,582		12,237
Total other non-current liabilities	$	124,003	$	100,122

(1)        Refer to Note 12 "Income Taxes" for additional information related to our tax liabilities.

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5. Investments and Fair Value Measurements

We use cash holdings to purchase investment-grade securities diversified among security types, industries, and issuers. All of our investments in debt securities are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our unaudited interim condensed consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities and our other long-term investments, all of our investments are classified as AFS securities. Derivative contracts are used to hedge currency risk, and these are carried at fair value and classified as other assets and other liabilities.

Our investments in debt securities consist of government bonds, corporate bonds, municipal debt securities, certificates of deposit, commercial paper, and U.S. agency securities. In addition, our cash and cash equivalents also consist of highly-liquid money market funds and U.S. agency securities. 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):

	June 30, 2023
	Cost		Unrealized						Estimated Fair Value
			Gains		Losses		Total		Level 1		Level 2		Level 3
Cash and cash equivalents:
Cash	$	693,427	$	—	$	—	$	693,427	$	693,427	$	—	$	—
Cash equivalents:
Money market funds	71,651		1		—		71,652		71,652		—		—
Cash and cash equivalents	765,078		1		—		765,079		765,079		—		—
Short-term investments:
Certificate of deposit	12,476		1		(12)		12,465		—		12,465		—
U.S. agency securities	5,891		2		(18)		5,875		—		5,875		—
Government bonds	43,337		1		(624)		42,714		40,026		2,688		—
Commercial paper	5,580		—		(4)		5,576		—		5,576		—
Corporate bonds	37,386		—		(396)		36,990		—		36,990		—
Municipal debt securities	20,730		1		(141)		20,590		—		20,590		—
Short-term investments	125,400		5		(1,195)		124,210		40,026		84,184		—
Long-term investments:
Government bonds	33,419		—		(1,150)		32,269		31,390		879		—
Corporate bonds	35,929		2		(707)		35,224		—		35,224		—
Municipal debt securities	21,633		32		(232)		21,433		—		21,433		—
Other investments (1)	9,177		—		—		9,177		—		—		—
Long-term investments	100,158		34		(2,089)		98,103		31,390		57,536		—
Total cash, cash equivalents, and investments	$	990,636	$	40	$	(3,284)	$	987,392	$	836,495	$	141,720	$	—
Investments held in supplemental retirement plan:
Assets	$	4,186	$	—	$	—	$	4,186	$	4,186	$	—	$	—
Included in prepaid expenses and other current assets and other non-current assets
Liabilities	$	4,186	$	—	$	—	$	4,186	$	4,186	$	—	$	—
Included in accrued liabilities and other non-current liabilities