# Dolby Laboratories, Inc. (DLB) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Dolby Laboratories, Inc.'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1308547/000162828024048519/dlb-20240927.htm Accession: 0001628280-24-048519 Filing date: 2024-11-19 Report date: 2024-09-27 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/DLB/ All MD&A years: /company/DLB/mda/ Previous year: /company/DLB/mda/fy2023/ (FY 2023) Next year: /company/DLB/mda/fy2025/ (FY 2025) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those referred to herein due to a number of factors, including but not limited to key challenges listed below and risks described in Part I, Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K. We disclaim any duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform our prior statements to actual results. Investors and others should note that we disseminate information to the public about our company, our products, services and other matters through various channels, including our website (www.dolby.com), our investor relations website (http://investor.dolby.com), SEC filings, press releases, public conference calls, and webcasts, in order to achieve broad, non-exclusionary distribution of information to the public. We encourage investors and others to review the information we make public through these channels, as such information could be deemed to be material information. MACROECONOMIC CONDITIONS The current macroeconomic environment has negatively impacted many of our licensees and this directly impacts our financial results. Our revenue has been impacted by macroeconomic conditions, including but not limited to, inflation, heightened interest rates, rising costs of material, increased shipping costs, international conflicts, labor disputes, reduced discretionary consumer spending, and reduced new product investment by our customers. The macroeconomic conditions also impart substantial uncertainty into our operating environment, which presents additional challenges for our business. These factors and the related uncertainty may cause delays or a decrease in the adoption or implementation of our technologies into new products by partners and licensees. These conditions may impact consumer demand for devices and services and our partners’ ability to manufacture devices. Further, the noted macroeconomic conditions and related uncertainty may negatively impact transaction cycles and our recovery of revenue associated with past unauthorized or unreported usage. The future implications of these macroeconomic conditions on our business, results of operations and overall financial position remain uncertain. We continue to monitor the evolving macroeconomic environment and the impact on our business. Further discussion of the potential impacts of these macroeconomic effects on our business can be found in Part I, Item 1A "Risk Factors." LICENSING The majority of our revenue is derived from two licensing models: Branded Technology Licensing, and Patent Licensing. While each has had successes in fiscal 2024, they share certain challenges. In particular, factors such as global supply constraints or device lifecycles may impact licensing revenue. Further, in certain countries, we and other IP owners face difficulties enforcing contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies. Finally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements. Further discussion of the potential impacts of the key challenges on our business can be found in Part I, Item 1A "Risk Factors." Branded Technology Licensing Dolby’s branded technology licensing offers complete technology solutions to our licensees, primarily device manufacturers. Licenses include rights to software, patent rights, know how, and the relevant Dolby brand. Our branded technologies are primarily comprised of Branded Audio Codecs (DD+ and AC-4) and Dolby Atmos and Dolby Vision (Dolby Atmos for audio, and Dolby Vision for imaging). Licensing revenue is primarily driven by the adoption of our technologies on devices and the number of devices shipped by licensees. Our branded audio codecs have broad penetration across a diverse set of devices and end markets. Revenue from these technologies is primarily driven by device shipments from licensees, and as such, is impacted by consumer spending The remaining portion of our branded licensing revenue is derived from Dolby Vision and Dolby Atmos. Dolby Vision and Dolby Atmos have not been in the market as long as our branded audio codecs, thus revenue growth is driven by device shipments, increased adoption and the addition of new licensees. We are focused on expanding our leadership in audio and imaging solutions for premium entertainment content by increasing the number of Dolby experiences that people can enjoy, which will drive revenue growth across the markets we serve. We work across our ecosystem of partners including creators, distributors and device manufacturers to increase the number of Dolby experiences that people can enjoy by enhancing content, including 33 Table of Contents movies and TV, music and live sports, using Dolby branded technologies. Increased content in these areas increases our value proposition across our end markets. In movies and TV, thousands of movie titles and tens of thousands of TV episodes have been created and released in Dolby Atmos and/or Dolby Vision. Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, Max, Paramount+, and other streaming partners and services internationally, continue to enhance content in Dolby Vision and Dolby Atmos. In Music, exiting fiscal 2024, over 90% of Billboard’s Top 100 Global artists are releasing music in Dolby Atmos, 20 music streaming services now support Dolby Atmos, and over 1,000 music studios globally have been enabled with Dolby Atmos. In sports, the 2024 Summer Olympic Games coverage was available in Dolby Vision and Dolby Atmos, as were the T20 Cricket World Cup, UEFA EURO 2024, Wimbledon, and the NHL and NBA post season. In India, the BGMI Master Series Grand Finals premiered in Dolby Atmos on Disney Star 4K. Also, US streaming provider Max announced that it will stream all of its live sports content in Dolby Atmos and Dolby Vision. In eGaming, in China, the League of Legends Summer Finals streamed live in Dolby Atmos. Patent Licensing Our patents are incorporated into the AAC, HE-AAC, and Extended HE-AAC standards for audio, and the AVC and HEVC standards for imaging. The licensing of these patents forms the core of our patent licensing. Revenue generated through our patent licensing model is driven primarily by our royalty share within patent pools, licensee penetration, device shipments, and the introduction of new standardized technologies and patent programs. This year we, together with our patent pool partners, had success renewing existing licensees and increasing licensee penetration in established programs across multiple end markets. For example, with respect to audio, we benefited from significant AAC renewals with Sony, Apple, Amazon and Samsung among others. In video, new HEVC video licensees added include Nvidia, Acer, ASUS, and, in the first quarter of fiscal 2025, TCL. We also saw traction for several of our newer programs, with new licensees added for the Opus audio program and the VP9/AV1 video program. In fiscal 2024 we also completed the acquisition of GE Licensing, which will strengthen our position in existing programs, most notably the HEVC video program. The GE Licensing transaction also yielded an increased ownership interest in Access Advance, a patent pool administrator. Income from our ownership interest in Access Advance is reflected as other income in our consolidated statements of operations. Revenue from our patent licensing depends on the adoption and use of the standardized technologies in which we participate by device manufacturers. As in any technology licensing business, it is possible that changing partner preferences, consumer preferences, or other market dynamics could lead to adoption and use of alternative technologies. Revenue derived from our patent licensing programs also depends on the success of the patent pools in which we participate, which is driven by licensee, licensor, and program renewals. The revenue we derive from patent pools also depends significantly on the patent pool administrators’ success in negotiating licenses with companies already using the relevant standard (i.e. licensee penetration). Additionally, our revenue from patent pools is also impacted by the royalty share among pool licensors, which is determined based on the value of the patents each licensor contributes to the pool, as governed by allocation rules negotiated among the pool licensors. The standardized technologies at the core of our patent licensing are intended for broad use across all device categories that play back audio and visual content. OEMs typically negotiate and acquire the patent rights for these technologies for implementation across all their device categories and product lines in their applicable end markets. Licensing End Markets The following are highlights from our fiscal 2024 and key challenges related to Dolby’s licensing businesses, by market. Broadcast Highlights: We have an established global presence and broad adoption of our branded audio and patent licensing technologies in broadcast services and devices, which primarily include TVs and STBs. In fiscal 2024, Australia selected AC-4 as part of its new broadcast STB specification. We work with many TV OEMs and strategic partners to enable and promote Dolby Vision and Dolby Atmos experiences within their TV lineups. We have strong attach rates for Dolby Atmos and Dolby Vision with high end TVs and continue to grow adoption on mid-range TVs. We estimate that Dolby Atmos and Dolby Vision were on approximately 30% of all 4K TVs shipped during fiscal 2024, 34 Table of Contents and many partners continue to expand their support of the combined Dolby Vision and Dolby Atmos experience. Throughout 2024, TCL and HiSense continued to adopt Dolby Vision and Dolby Atmos deeper within their TV lineups. Additionally, Polytron, an Indonesian TV OEM, launched a new TV that supports Dolby Atmos and Dolby Vision. Xiaomi announced new 4K QLED TVs that support Dolby Vision. Key Challenges: Our pursuit of new licensees and further adoption of our technologies by existing licensees may be impacted by a number of factors. We must continue to present compelling reasons for consumers to demand our audio and video technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed. To the extent that OEMs do not incorporate our technologies in current and future products or our technology is not included in future broadcast industry standards, our revenue could be negatively impacted. Changing trends in the way that video content is distributed and consumed may impact our business and future growth in the broadcast market, such as the trend away from subscription-based cable and satellite television providers toward streaming services. Mobile Highlights: We continue to promote adoption of our technologies across major mobile ecosystems, including Apple and Android. Our patent licensing technologies are adopted broadly throughout the mobile device ecosystem, and we completed several important renewals this year, including with Vivo. Dolby Atmos and Dolby Vision are included throughout the Apple device line-up and in Apple TV+, and Dolby Atmos is included in Apple Music. Dolby Vision Capture has been supported on all iPhones since the iPhone 12 and iOS 18 recent release unlocked support for higher frame rates. We have strong adoption of Dolby Atmos and our branded audio codecs across high-end Android mobile devices and are focused on growing our presence on low and mid-tier phones. An increasing number of Android device manufacturers have adopted Dolby Vision and Dolby Vision Capture on high end devices and we are focused on the opportunity to significantly increase our adoption. The breadth of mobile devices supporting Dolby technologies continues to increase globally. In fiscal 2024, Transsion, a global mobile device maker, announced that their latest smartphones will support Dolby Atmos. Xiaomi began shipping its premium smartphone enabled with Dolby Vision Capture, Dolby Vision, and Dolby Atmos in India. Honor launched the Magic 6 Pro smartphone that supports Dolby Vision and Lava Mobiles launched its new Blaze Curve 5G smartphone in India that supports Dolby Atmos. Oppo recently announced that they introduced five new phones supporting Dolby Vision Capture. Also in fiscal 2024 Transsion added a Dolby enabled low cost phone for consumers in Malaysia. Additionally, Sharp Singapore launched the R8s Pro smartphone series with Dolby Vision and Dolby Atmos and Realme launched the GT6, the first smartphone to support Dolby Vision video capture in telephoto video. Also, Apple launched the iPhone 16, which supports Dolby Atmos and Dolby Vision, and records in Dolby Vision. Key Challenges: Growth in this market is dependent on several factors. Due to short product life cycles, mobile device OEMs can readily add or remove certain of our technologies from their devices. Our success depends on our ability to address the rapid pace of change in mobile devices, and we must continuously collaborate with mobile device OEMs to incorporate our technologies. We rely on a small number of partnerships with key participants in this market. If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies. To the extent that OEMs do not incorporate our technologies in current and future products or our technology is not included in future mobile industry standards, our revenue could be impacted. We must also continue to support the development and distribution of Dolby-enabled content via various ecosystems. Consumer Electronics Highlights: We have an established presence in the home entertainment market across devices such as wireless and smart speakers, soundbars, DMAs (devices that connect a computer to a home media system), and AVRs, through the inclusion of our branded audio codecs, and increasingly through the inclusion of Dolby Atmos and Dolby Vision. Our patent licensing technologies also have broad adoption in the home entertainment market. We continue to focus on expanding the availability of Dolby technologies to new devices. In fiscal 2024 Sonos launched headphones that support Dolby Head Tracking with Dolby Atmos. Additionally, VIZIO announced integration of Dolby Atmos across its entire 2024 soundbar lineup. Finally, Meta announced support for Dolby Atmos across its MetaQuest headset device lineup. Key Challenges: We must continue to present compelling reasons for consumers to demand our technologies wherever they enjoy entertainment content, while promoting creation and broad availability of content in our formats. With relatively short product life cycles for many consumer electronics, OEMs can add or remove certain of our technologies from their products which could impact our revenue. In addition, to the extent that our technology is not included in future industry standards, our revenue could be impacted. 35 Table of Contents Personal Computers Highlights: DD+ enhances audio playback in Mac computers through the operating system with native support in the Safari browser, and Windows-based PCs through PC OEM implementations and native support in the Microsoft Edge browser. Dolby's presence in these browsers enables us to reach more users through various types of content, including streaming video entertainment. A number of personal computers from partners such as Apple, Lenovo, Dell, Samsung, Microsoft and ASUS also support Dolby Vision and/or Dolby Atmos, with continued expansion of applications through music, streaming, and gaming. At CES in January 2024, Alienware and ASUS announced their first gaming PC monitors to support Dolby Vision, and Dell announced that its latest XPS laptops will offer the combined Dolby Vision and Dolby Atmos experience. Also in fiscal 2024, Lenovo launched several new flagship products that support Dolby Vision and Dolby Atmos - including the Yoga Air, moto razr and moto S50 Neo. Lenovo's new Thinkpad X1 Carbon Gen 13 Aura Edition supports Dolby Vision, and its Thinkbook 16 Gen7+ and Thinkbook 16 Gen 7 supports Dolby Atmos. Several of our patent licensing technologies have significant presence in this market, and we benefited from significant new agreements this year with Lenovo, Acer, Asus, and (in October 2024) HP for HEVC. Key Challenges: Demand for personal computers has fluctuated significantly in recent years. We must continuously collaborate and maintain our key partnerships with personal computer manufacturers to incorporate our technologies, and we must continue to support the development and distribution of Dolby content via various ecosystems. To the extent that personal computer manufacturers do not incorporate our technologies in current and future products, our revenue could be impacted. Beginning with PCs shipping with Windows 11, version 24H2, Microsoft is changing the way Dolby’s DD and DD+ decoders are provided to third party personal computer OEMs. For such devices, Dolby has begun distributing those codecs directly to personal computer OEMs instead of through Microsoft’s Windows operating system. We do not expect this change to have a material impact on our revenue. Other Markets Highlights: We generate revenue from the automotive industry primarily through the adoption of Dolby Atmos in cars. During fiscal 2024, we increased the number of auto OEM customers from 10 to over 20. New partners during the year include Hyundai, Mahindra and Cadillac, the latter of whom announced the 2025 OPTIQ EV with Dolby Atmos. In addition, Mercedes continued to increase the number of models that support Dolby Atmos. Additionally, Rivian launched the second generation of its flagship vehicles, the R1S SUV and R1T pickup, that feature support for Dolby Atmos. Gaming consoles such as the Sony PlayStation and the Microsoft Xbox use DD+ to support gaming content and streaming for movie and television content. The PlayStation 5 supports compatible Dolby Atmos-enabled living room devices. The Xbox Series X and Series S gaming consoles support Dolby Vision and Dolby Atmos for streaming and gaming content. Additionally, our technologies continue to be incorporated into the latest headphones by various OEMs. In fiscal 2024, Alienware released 27 4K Dual Resolution Gaming Monitor that supports Dolby Atmos. Key Challenges: Our automotive related revenue growth will be impacted if OEMs do not incorporate our technologies in their latest products. The long development cycle of the automotive industry reduces the frequency of our opportunities to be incorporated into additional products. Additionally, the automotive industry is cyclical, so our revenue from the auto market is affected by the broader cycles of the industry. Consumer demand for gaming devices is impacted by anticipation of console refresh cycles, which could result in fluctuations in our revenue. In addition, the gaming console market has competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base. Included within Other Markets is also licensing revenue from audio and video technologies used to create Dolby experiences through Dolby Cinema. Dolby Cinema Highlights: We continue to expand our global presence for Dolby Cinema, with sites located in the U.S. and internationally. The breadth of movie content for Dolby Cinema continues to grow with films available in Dolby Atmos and Dolby Vision accounting for over 80% of U.S. Box Office revenue in fiscal 2024. In the third quarter of fiscal 2024 Melco Resorts & Entertainment opened Studio City Cinema, which is the first Dolby Cinema in the Hong Kong Macau Region. Key Challenges: Although the premium large format market for the cinema industry has been growing, Dolby Cinema competes with other existing offerings. Our success depends on our partners and their success, and our 36 Table of Contents ability to differentiate our offering and deploy new sites. In addition, the success of our Dolby Cinema offering is tied to global movie production and box office performance generally. For example, the strikes by the Writers Guild of America and Screen Actors Guild - American Federation of Television and Radio Artists ("SAG-AFTRA") in 2023 effectively halted the production, release and promotion of certain films for an extended period. That disruption resulted in, and similar disruptions to movie production and exhibition in the future may lead to, decreases in box office receipts and our cinema-related revenue. PRODUCTS AND SERVICES A majority of our products and services revenue is derived from the sale of audio and imaging products for the cinema industry. Revenue from Dolby.io is also included in products and services. Cinema Products and Services Highlights: To help enable the playback of content in Dolby formats, we offer a range of servers, which include the IMS3000 (an integrated imaging and audio server with Dolby Atmos), and audio processors, such as the CP950, to cinema exhibitors globally. Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors. As of the end of fiscal 2024, there are over 8,100 Dolby Atmos screens installed or committed and over 3,500 Dolby Atmos theatrical titles have been announced or released. We also offer a variety of other cinema products, such as the Dolby Multichannel Amplifier and our high-power flexible line of speakers. These products allow us to offer exhibitors a more complete Dolby Atmos solution that is often more cost effective than other commercially available options. Key Challenges: Demand for our cinema products is dependent upon our partners and their success in the market, industry and economic cycles, box office performance, and our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and video experiences. A significant portion of our growth opportunity lies in international markets, which are subject to geopolitical risks. Additionally, weakness in general economic conditions due to inflation, recession, pandemic or other worsening economic conditions could have a negative impact on our cinema-related revenue due to reduced consumer discretionary spending. We may also be faced with pricing pressures or competing technologies, which would affect our revenue. In addition, supply chain constraints may impact our ability to provide cinema products and services to our customers. Long lead times and increased cost of materials due to the macroeconomic conditions, including higher interest rates have also negatively impacted the financial health of our cinema customers and partners, leading to reduced new product investment and lower demand. In addition, the strikes by the Writers Guild of America and SAG-AFTRA in 2023 effectively halted the production, release and promotion of certain films for an extended period. The resulting impacts of those stoppages have resulted in, and may continue to lead to, decreased box office receipts in the near term, which could potentially impact exhibitors' willingness and ability to invest in our cinema products. Dolby.io Highlights: Our strategy for Dolby.io is to bring Dolby’s audio and video technologies to a broader range of media content and digital experiences. We are expanding our addressable market by offering solutions to companies building real-time digital experiences that increase audience engagement. For instance, our solution can provide the capability to stream high quality audiovisual content with ultra-low latency that reduces the delay between the action and the viewer. Content being delivered with almost no delay enables our customers to create real-time interaction in their apps and services. This near instantaneous interaction is essential to the experiences companies, particularly in sports and entertainment, are creating. Over time, we believe this way of delivering and engaging with content will be used more broadly, thereby increasing their business opportunity. Key Challenges: Dolby.io is an early-stage business, and it is uncertain when or if it will be a material revenue driver. Our success in this market will depend on adoption by companies building real-time digital experiences that increase audience engagement, the volume of usage of the services and our ability to monetize our services. In addition, the development and maintenance needed to provide a reliable and scalable platform may require us to incur additional costs to develop new skills within our existing employee base or hire external specialized talent. Although the market for real-time experiences has been growing, Dolby.io competes with other offerings. 37 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements and accompanying notes are prepared in accordance with U.S. GAAP, pursuant to SEC rules and regulations. The preparation of these financial statements requires us to establish accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses. The SEC considers an accounting policy and estimate to be critical if it is both important to a company’s financial condition or results of operations and requires significant judgment by management in its application. On a regular basis, we evaluate our assumptions, judgments, and estimates, and historically, actual results have not differed significantly from them. If actual results or events differ materially from our judgments and estimates, our reported financial condition and results of operation for future periods could be materially affected. We have reviewed the selection and development of the critical accounting policies and estimates discussed below with the Audit Committee of our Board of Directors. Revenue Recognition We derive our revenue primarily from the licensing of our technologies and patents. In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates within the revenue recognition process. Generally, revenue is recognized upon transfer of control of promised products, services or IP rights to customers in an amount that reflects the consideration that we expect to receive in exchange for those products, services or licensing of the IP rights. The primary judgments include estimating sales-based revenue in advance of receiving statements from our licensees, estimating variable consideration, identifying the performance obligations in the contract, and determining whether the performance obligations are distinct, and allocating consideration accordingly. Most of our licensing arrangements are structured as sales-based whereby we are paid a unit-based royalty. The unit-based sales data that triggers the royalty obligation is generally reported to us in the quarter after triggering the royalty obligation. We apply the royalty exception to these arrangements, which requires that we recognize sales-based royalties at the later of when the sales occur based on our estimates or the completion of our performance obligations. Our estimates of royalty-based revenue take into consideration the macroeconomic effect of global events, such as inflation, elevated interest rates, economic impacts related to industry challenges, or other economic conditions, which may impact supply chain activities as well as demand for shipments. These estimates also involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments for which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we previously estimated, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. We also enter into fixed and guaranteed licensing fees arrangements, that require the licensee to pay a fixed, non-refundable fee. In these cases, control is transferred and the transaction price - the amount we expect to be entitled to in exchange for the license right - is recognized upon the later of contract execution or the effective date. Transaction price is determined at contract execution and, to the extent variable consideration applies, is updated each subsequent reporting period until the completion of the contract. We evaluate whether other distinct performance obligations exist, such as PCS, and determine the stand-alone selling price. We do so by considering actual stand-alone sales in addition to 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. In addition, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time and extend beyond one year. In general, if the payment arrangements extend beyond the first year of the contract, we treat a portion of the payments as a financing component. The discount rate used for each arrangement reflects the rate that would be used in a separate financing transaction between us and the licensee at contract inception and takes into account the credit characteristics of the licensee and market interest rates as of the date of the agreement. If we assess the financing component to be significant to the contract, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component. The portion related to the financing component is recorded as interest income, and is not material to our consolidated financial statements. For additional information, see Note 3 "Revenue Recognition" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. 38 Table of Contents IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED For information on recent accounting standards that have not been adopted yet and the impact of these standards on our consolidated financial statements, refer to Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements in this Annual Report on Form 10-K. RESULTS OF OPERATIONS For each line item included on our consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order of their impact on the overall change (from an absolute value perspective). This discussion and analysis highlights comparisons of material changes in the consolidated financial statements for the years ended September 27, 2024 and September 29, 2023. For the discussion and analysis highlighting comparisons of material changes in the consolidated financial statements for the years ended September 29, 2023 and September 30, 2022, refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended September 29, 2023, which is incorporated herein by reference. Note that adjustments related to sales-based royalties that were misreported by licensees as well as unlicensed settlement activity, are collectively referred to as "recoveries." Amounts displayed, except percentages, are in thousands. Revenue and Gross Margin Licensing Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products and services to enable and enhance audio and imaging capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. We also generate administrative fees for managing patent pools on behalf of third party patent owners through our subsidiary, Via LA. A significant portion of our licensing revenue pertains to customer-shipment royalties that we recognize based on estimates of our licensees’ shipments. To the extent that shipment data reported by licensees differs from estimates we made and recorded, we recognize an adjustment to revenue for such difference in the period we receive the reported shipment data. Our cost of licensing consists mainly of amortization of certain purchased intangible assets and intangible assets acquired in business combinations, depreciation, third party royalty obligations, and patent pool fees. [[GREPCENT_TABLE]] [["","","","","Fiscal Year Ended","","Change"],["Licensing","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Revenue","","","","","","$","1,181,794","","$","1,197,930","","","","$","(16,136)","","(1)","%"],["Percentage of total revenue","","","","","","93","%","92","%"],["Cost of licensing","","","","","","67,204","","64,890","","","","2,314","","4","%"],["Gross margin","","","","","","1,114,590","","1,133,040","","","","(18,450)","","(2)","%"],["Gross margin percentage","","","","","","94","%","95","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","","Fiscal Year Ended"],["Licensing Revenue By Market","","","","","September 27, 2024","","September 29, 2023"],["Broadcast","","","","","","","$","409,105","","35","%","","$","451,719","","38","%"],["Mobile","","","","","","","235,774","","20","%","","243,897","","20","%"],["CE","","","","","","","165,817","","14","%","","170,197","","14","%"],["PC","","","","","","","141,300","","12","%","","124,362","","10","%"],["Other","","","","","","","229,798","","19","%","","207,755","","18","%"],["Total licensing revenue","","","","","","","$","1,181,794","","100","%","","$","1,197,930","","100","%"]] [[/GREPCENT_TABLE]] 39 Table of Contents [[GREPCENT_TABLE]] [["Factor","Licensing Revenue","Gross Margin"],["Broadcast","\u00e2","Lower revenue primarily due to timing of minimum volume commitments in imaging patents, lower recoveries, lower true-up impacting foundational technologies and imaging patents, and lower STB unit shipments, partially offset by adoption of Dolby Vision and Dolby Atmos","\u00df\u00e0","No significant fluctuations"],["Mobile","\u00e2","Lower revenue primarily due to timing of minimum volume commitments in our audio patent programs partially offset by timing of minimum volume commitments in our imaging patent programs and Dolby Vision adoption"],["CE","\u00e2","Lower revenue from unit shipments, including lower true up, and timing of minimum volume commitments in imaging patents, partially offset by higher recoveries"],["PC","\u00e1","Higher revenue from timing of minimum volume commitments in imaging patents, higher true-up, and higher recoveries"],["Other","\u00e1","Higher revenue from imaging patent pool administrative fees and higher automotive revenue driven by adoption of Dolby Atmos, partially offset by lower gaming revenue driven by lower unit shipments"]] [[/GREPCENT_TABLE]] Products and Services Products revenue is generated from the sale of audio and imaging hardware and software products for the cinema, television, broadcast and entertainment industries. Also included in products revenue are amounts relating to certain Dolby Cinema arrangements that are considered sales-type leases that involve fixed or minimum fees. Cost of products includes materials, labor, manufacturing overhead, amortization of certain intangible assets, and certain third party royalty obligations. Services revenue consists of fees charged to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color, and light image calibration. Services revenue also includes PCS for products sold and equipment installed at Dolby Cinema theaters operated by exhibitor partners and support for the implementation of our technologies into products manufactured by our licensees. Also included in services revenue are amounts generated through Dolby.io. Cost of services consists of personnel and personnel-related costs for providing our professional services, software maintenance and support, external contractors, and other direct expenses incurred on behalf of customers. [[GREPCENT_TABLE]] [["","","","","","Fiscal Year Ended","","Change"],["Products and Services","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Revenue","","","","","","","$","91,927","","$","101,814","","","","$","(9,887)","","(10)","%"],["Percentage of total revenue","","","","","","","7","%","8","%"],["Cost of products and services","","","","","","","73,292","","87,676","","","","(14,384)","","(16)","%"],["Gross margin","","","","","","","18,635","","14,138","","","","4,497","","32","%"],["Gross margin percentage","","","","","","","20","%","14","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factor","Products and Services Revenue","Gross Margin"],["Products","\u00e2","Lower cinema products revenue as compared to the prior year","\u00e1","Higher gross margin due to higher inventory reserve provision in prior year"],["Services","\u00df\u00e0","No significant fluctuations","\u00df\u00e0","No significant fluctuations"]] [[/GREPCENT_TABLE]] Operating Expenses Research and Development R&D expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, external contractor costs, depreciation and amortization, facilities costs, costs for outside materials, and information technology expenses. 40 Table of Contents [[GREPCENT_TABLE]] [["","","","","","Fiscal Year Ended","","Change"],["","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Research and development","","","","","","","$263,663","$271,523","","","$(7,860)","(3)%"],["Percentage of total revenue","","","","","","","21%","21%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Category","Key Drivers"],["Other","\u00e2","Lower contractor spend, stock-based compensation expense, depreciation, salaries, bonus and other miscellaneous expenses"]] [[/GREPCENT_TABLE]] Sales and Marketing S&M expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, marketing and promotional expenses for events such as trade shows and conferences, marketing campaigns, travel-related expenses, contractor fees, facilities costs, depreciation and amortization, information technology expenses, and legal costs associated with the protection of our IP. [[GREPCENT_TABLE]] [["","","","","","Fiscal Year Ended","","Change"],["","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Sales and marketing","","","","","","","$334,460","$354,364","","","$(19,904)","(6)%"],["Percentage of total revenue","","","","","","","26%","27%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Category","Key Drivers"],["Compensation & Benefits","\u00e2","Lower costs of $9.3 million in payroll salaries due to lower headcount resulting from restructuring activities"],["Tradeshows","\u00e2","Lower costs of $7.2 million primarily due to non-repeating events in the prior year"],["Contractors","\u00e2","Lower costs of $4.6 million primarily due to lower patent litigation expenses"],["Other","\u00e1","Higher costs of $5.0 million primarily due to larger marketing activations in the current year"]] [[/GREPCENT_TABLE]] General and Administrative G&A expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation and amortization, facilities and information technology costs, as well as professional fees and other costs associated with external contractors. [[GREPCENT_TABLE]] [["","","","","","Fiscal Year Ended","","Change"],["","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["General and administrative","","","","","","","$270,392","$258,477","","","$11,915","5%"],["Percentage of total revenue","","","","","","","21%","20%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Category","Key Drivers"],["Legal, Professional, and Contractors","\u00e1","Higher costs of $6.9 million in legal and professional services largely due to M&A activities"],["Other","\u00e1","Higher costs of $2.7 million in stock-based compensation expense, and higher depreciation expense"]] [[/GREPCENT_TABLE]] 41 Table of Contents Restructuring Charges Restructuring charges recorded as operating expenses in our consolidated statements of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. The extent of our costs arising as a result of these actions, including fluctuations in related balances between fiscal periods, is based on the nature of activities under the various plans. [[GREPCENT_TABLE]] [["","","","Fiscal Year Ended","","Change"],["","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Restructuring charges","","","","","","","$6,384","$47,061","","","$(40,677)","(86)%"],["Percentage of total revenue","","","","","","","1%","4%"]] [[/GREPCENT_TABLE]] In April 2024, we initiated restructuring actions with the purpose of focusing our resources on our highest strategic priorities. In connection with this plan, we recorded an expense in the third quarter of fiscal 2024 of $4.6 million in severance and other related benefits. Cash payment of the severance and other termination benefits were substantially completed by the end of the fourth quarter of fiscal 2024. These activities resulted in gross pre-tax operating income savings of approximately $3 million in fiscal 2024 and are expected to result in savings of approximately $11 million within fiscal 2025. The impact of these estimated savings on our operating expenses have been and will be mostly offset by increased investment in our strategic priorities and the effects of inflation on our remaining expenses. In September 2023, we initiated a restructuring plan with the purpose of focusing our resources on our highest strategic priorities. In connection with this plan, we recorded an expense in the fourth quarter of fiscal 2023 of $13.4 million in severance and other related benefits and an impairment loss of $16.9 million related primarily to internally developed software for projects we are no longer pursuing. In continuation with this plan, we recorded an expense in the first quarter of fiscal 2024 of $7.4 million in severance and other related benefits. Cash payment of the severance and other termination benefits were substantially completed by the end of the second quarter of fiscal 2024. These activities resulted in gross pre-tax operating income savings of approximately $40 million within fiscal 2024, which was consistent with our expectations. The impact of these savings on our operating expenses was offset by increased investment in our strategic priorities and the effects of inflation on our remaining expenses. In June 2023, we implemented a focused restructuring plan, primarily consisting of workforce reductions and facility consolidations to improve execution in alignment with our strategy and to reduce our cost structure through improved utilization of our global infrastructure. As a result of these actions, we recorded expense in the third quarter of fiscal 2023 of $10.9 million in severance and other related benefits and expense of $6.9 million related to a facility consolidation in New York, NY. Actions and expenses related to this plan were substantially completed by the end of the second quarter of fiscal 2024. These activities resulted in gross pre-tax operating income savings of approximately $20 million in fiscal 2024, which was consistent with our expectations. The impact of these savings on our operating expenses was mostly offset by increased investment in our strategic priorities and the effects of inflation on our remaining expenses. For additional information on our Restructuring programs, see Note 13 "Restructuring" to our consolidated financial statements. Other Income/Expense Other income/expense primarily consists of interest income earned on cash and investments and the net gains or losses from foreign currency transactions, derivative instruments, our proportionate share of net income or losses from our equity method investment in Access Advance, and gains and losses on the sales of marketable securities from our investment portfolio. [[GREPCENT_TABLE]] [["","","","","","Fiscal Year Ended","","Change"],["Other income/(expense)","","","","","","","September 27, 2024","September 29, 2023","","","$","%"],["Interest income","","","","","","","$34,077","$28,086","","","$5,991","21%"],["Other income, net","","","","","","","20,076","6,214","","","13,862","223%"],["Total","","","","","","","$54,153","$34,300","","","$19,853","58%"]] [[/GREPCENT_TABLE]] 42 Table of Contents [[GREPCENT_TABLE]] [["Category","Key Drivers"],["Other Income","\u00e1","Higher income from an equity method investment in the current year"],["Interest Income","\u00e1","Higher yields on invested cash balance"]] [[/GREPCENT_TABLE]] Income Taxes Our effective tax rate is based on our fiscal year results and is affected by several factors. These include the current statutory rates in our domestic and foreign jurisdictions, the relative income earned in our foreign jurisdictions, and nonrecurring items such as changes to our unrecognized tax benefits that may occur in but are not necessarily consistent between periods. For additional information related to effective tax rates, see Note 12 "Income Taxes" to our consolidated financial statements. [[GREPCENT_TABLE]] [["","","","Fiscal Year Ended"],["","","","","September 27, 2024","September 29, 2023"],["Provision for income taxes","","","","$(48,163)","$(48,409)"],["Effective tax rate","","","","15%","19%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factor","Impact On Effective Tax Rate"],["Tax Cuts and Jobs Act of 2017","\u00e2","Current year benefit related to lower Transition Tax liability under the Tax Cuts and Jobs Act of 2017 resulting from the application of a recent Tax Court opinion in Varian Medical Systems, Inc. v. Commissioner"],["Tax Contingencies","\u00e2","Higher benefit from the lapse in statute of limitations"],["Foreign Operations","\u00e1","Lower benefit from foreign earned income"]] [[/GREPCENT_TABLE]] LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Our principal sources of liquidity are cash, cash equivalents, and investments, as well as cash flows from operations. We believe that these sources will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months. As of September 27, 2024, we had cash and cash equivalents of $482.0 million, which consisted of cash. In addition, we had long-term investments of $89.3 million, which primarily consisted of an equity method investment and an equity security without a readily determinable value. The following table presents selected financial information as of September 27, 2024 and September 29, 2023 (in thousands): [[GREPCENT_TABLE]] [["","September 27, 2024","","September 29, 2023"],["Cash and cash equivalents","$","482,047","","","$","745,364"],["Short-term investments","\u2014","","","139,148"],["Long-term investments","89,267","","","97,812"],["Accounts receivable, net","315,465","","","262,245"],["Accounts payable and accrued liabilities","364,909","","","372,324"],["Working capital","776,581","","","1,065,578"]] [[/GREPCENT_TABLE]] Capital Expenditures and Uses of Capital Our capital expenditures consist of purchases of land, building, building fixtures, laboratory equipment, office equipment, computer hardware and software, leasehold improvements, and production and test equipment. Additionally, included in capital expenditures are amounts associated with Dolby Cinema locations. We continue to invest in S&M and R&D to promote the overall growth of our business and technological innovation. During fiscal 2024, we purchased all of the issued and outstanding equity interests of GE Intellectual Property Licensing, LLC and GE Technology Development, Inc, which, collectively with each of their subsidiaries, comprise GE Licensing, an intellectual property licensing business primarily targeting the consumer digital media and electronics sectors, for an aggregate cash purchase price of $443.6 million, subject to certain purchase price adjustments. Our cash and cash equivalents, short-term and long-term investments declined significantly as result of this acquisition. 43 Table of Contents We continue to retain sufficient cash holdings to support our operations and we also have historically purchased investment-grade securities diversified among security types, industries, and issuers. We have used cash generated from our operations to fund a variety of activities related to our business in addition to our ongoing operations, including business expansion and growth, acquisitions, and repurchases of our Class A common stock. We have historically generated significant cash from operations. However, these cash flows and the value of our investment portfolio could be affected by various risks and uncertainties, as described in Part I, Item 1A "Risk Factors." Shareholder Return We have returned cash to stockholders through both repurchases of Class A common stock under our repurchase program initiated in fiscal 2010 and our quarterly dividend program initiated in fiscal 2015. Refer to Note 9 "Stockholders' Equity and Stock-Based Compensation" to our consolidated financial statements for a summary of dividend payments made under the program during fiscal 2024 and additional information regarding our stock repurchase program. Stock Repurchase Program. Our stock repurchase program was approved in fiscal 2010, and since then we have completed approximately $2.9 billion of stock repurchases under the program. The Inflation Reduction Act and CHIPS and Science Act were signed into law in August 2022. The Inflation Reduction Act introduced a one percent non-deductible excise tax on certain public company stock buybacks made after December 31, 2022. We do not currently expect the excise tax to have a material impact on our results of operations or financial position, and its ongoing impact will be dependent on the extent of our future net stock repurchase activities. Quarterly Dividend Program. During fiscal 2015, we initiated a recurring quarterly cash dividend program for our stockholders. For fiscal 2024, quarterly dividends of $0.30 per share were paid on our Class A and Class B common stock to eligible stockholders of record. Cash Flows Analysis For the following comparative analysis performed for each of the sections of the consolidated statements of cash flows, the significant factors identified as the leading drivers contributing to the fluctuation are presented in descending order of their impact relative to the overall change (in thousands). Operating Activities [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["","September 27, 2024","September 29, 2023"],["Net cash provided by operating activities","$","327,252","","$","367,081"]] [[/GREPCENT_TABLE]] Net cash provided by operating activities decreased $39.8 million in fiscal 2024 compared to fiscal 2023, primarily due to the following: [[GREPCENT_TABLE]] [["Factor","Impact On Cash Flows"],["Operating assets and liabilities","\u00e2","Lower inflows due to higher accounts receivable and lower non-current liabilities, offset by higher accounts payable and accrued liabilities"],["Net Income","\u00e1","Lower restructuring charges, offset by lower revenue"]] [[/GREPCENT_TABLE]] Investing Activities [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["","September 27, 2024","September 29, 2023"],["Net cash provided by/(used in) investing activities","$","(286,292)","","$","54,206"]] [[/GREPCENT_TABLE]] Net cash provided by/(used in) investing activities was $340.5 million lower in fiscal 2024 compared to fiscal 2023, primarily due to the following: [[GREPCENT_TABLE]] [["Factor","","Impact On Cash Flows"],["Business Combinations","","\u00e2","Higher outflows due to business combinations"],["Proceeds from Investments","","\u00e1","Higher inflows from the sale of marketable investment securities"]] [[/GREPCENT_TABLE]] 44 Table of Contents Financing Activities [[GREPCENT_TABLE]] [["","Fiscal Year Ended"],["","September 27, 2024","September 29, 2023"],["Net cash used in financing activities","$","(287,814)","","$","(236,812)"]] [[/GREPCENT_TABLE]] Net cash used in financing activities was $51.0 million higher in fiscal 2024 compared to fiscal 2023, primarily due to the following: [[GREPCENT_TABLE]] [["Factor","Impact On Cash Flows"],["Dividend Payments","\u00e2","Higher outflows for the payment of our quarterly cash dividend to common stockholders primarily as a result of a $0.03 per share increase compared to the prior fiscal year"],["Share Repurchases","\u00e2","Higher outflows due to higher common stock repurchases"],["Purchase of non-controlling interest in business combination","\u00e2","Higher outflows related to acquiring a portion of the noncontrolling interest in our consolidated subsidiary"],["Shares Repurchased for Tax Withholdings","\u00e2","Higher outflows due to higher fair value of shares withheld for taxes"],["Common Stock Issuance","\u00e2","Lower inflows from employee stock option exercises"]] [[/GREPCENT_TABLE]] Contractual Obligations and Commitments Naming Rights.    We are party to agreements for naming rights of certain facilities, most significantly for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032. We also hold the naming rights to Dolby Live at the Park MGM in Las Vegas, Nevada. Dolby Live is a fully integrated performance venue offering live concerts in Dolby Atmos. As of September 27, 2024, we had $79.4 million remaining on these agreements, with $13.1 million due during fiscal 2025. For additional details regarding our naming rights commitments, see Note 14 "Commitments and Contingencies" to our consolidated financial statements. Operating Leases.    Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the noncontrolling interests in our wholly-owned and majority-owned subsidiaries. For additional details regarding our leases, see Note 7 "Leases" to our consolidated financial statements. Purchase Obligations.    Purchase obligations primarily consist of our non-cancelable commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include information technology and telecommunications, marketing and professional services, and manufacturing and other R&D activities. As of September 27, 2024, we had $16.3 million remaining on these commitments, with $12.8 million due during fiscal 2025. Donation Commitments.    Our donation commitments relate to non-cancelable obligations that consist of maintenance services and installation of audio and imaging products in exchange for various marketing, branding, and publicity benefits. As of September 27, 2024, we had $1.4 million remaining on these commitments, with $0.2 million due during fiscal 2025. For additional details regarding our donation commitments, see Note 14 "Commitments and Contingencies" to our consolidated financial statements. Unrecognized Tax Benefits.    As of September 27, 2024, we had an accrued liability for unrecognized tax benefits without interest, penalties, and related deferred tax assets, totaling $81.6 million. We are unable to estimate when any cash settlement with a taxing authority might occur and, therefore, have not reflected these anticipated future outflows in the table above. Indemnification Clauses We are party to certain contractual agreements under which we have agreed to provide indemnification of varying scope and duration to the other party relating to our licensed IP. Since the terms and conditions of the indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. In addition, we have entered into indemnification agreements with our officers, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations. For additional details regarding indemnification clauses within our contractual agreements, see Note 14 "Commitments and Contingencies" to our consolidated financial statements. 45 Table of Contents In fiscal 2024, there have been no material changes in either our off-balance sheet financing arrangements or contractual obligations outside the ordinary course of business, and we did not enter into any off-balance sheet arrangements that are expected to have a material effect on Dolby's liquidity or the availability of capital resources.