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Item 7. Management’s Discussion and Analysis

2020-11-16 compared with 2019-11-25 · 240 added, 219 removed, 210 unchanged (69% of the section changed)

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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.

We are focused on expanding our leadership in audio solutions for entertainment content and delivering dynamic new audio and imaging technologies.

This will broaden the number of Dolby experiences that people can enjoy which in turn will help drive our revenue growth.

In December 2019, a novel coronavirus disease was first reported and in January 2020, the World Health Organization ("WHO") declared it a Public Health Emergency of International Concern.

On March 11, 2020, the WHO characterized COVID-19 as a pandemic.

COVID-19 has triggered worldwide shutdowns, job losses, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity.

Because Dolby technologies are featured in a wide array of electronic products that are primarily purchased by consumers, our revenues have been negatively affected by COVID-19.

The issues and circumstances relating to COVID-19 continue to change rapidly and are difficult to predict.

We continue to monitor the evolving situation and the impact on our business.

The outbreak of COVID-19 has also affected many of our partners, resulting in the disruption of consumer products' supply chains and delays in shipments, product development, and product launches.

Consumer demand for products that include our technologies may continue to be negatively impacted due to economic uncertainty resulting from COVID-19.

These factors have resulted in decreased revenue pertaining to royalties on consumer devices and may cause delays in the adoption of our technologies by partners.

The overall cinema market has been adversely impacted by COVID-19 shelter-in-place and social distancing mandates.

Our exhibition partners and customers have had to either partially or fully discontinue operations.

This has resulted in a significant reduction in box office receipts at Dolby Cinema sites and lower demand for our cinema products and services.

Though select cinema locations have been permitted to resume operations, many such locations are operating significantly below capacity.

It remains uncertain when the cinemas will be able to operate at full capacity.

At Dolby, we implemented work-from-home policies within all our offices in locations with ongoing outbreaks and put in place additional safety measures and global travel restrictions to ensure the well-being of our employees.

We have enabled our employees with the tools and infrastructure they need to carry on our critical operations and progress the business forward in this remote working environment.

Select Dolby offices in certain locations have resumed in-office work at less than full capacity, dependent on local progress against COVID-19 and applicable rules and regulations in those jurisdictions, as well as the readiness of our facilities to accommodate appropriate safety measures for our employees.

We expect COVID-19 will continue to have an impact for the foreseeable future.

The degree of impact on our business will depend on several factors, such as the full duration and the extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.

Further discussion of the potential impacts of COVID-19 on our business can be found in Part I, Item 1A " Risk Factors ."

EXPANDING OUR LEADERSHIP IN AUDIO AND IMAGING EXPERIENCES

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 aim to drive revenue growth by broadening Dolby experiences to more types of content, such as music and gaming, that can increase our value proposition in our existing device categories and create opportunities in new device categories that can accelerate adoption of our technologies.

We are also beginning to leverage our audio and imaging expertise to expand the reach of our technologies to address content beyond premium entertainment that can create new revenue generating opportunities.

Following is a discussion of the key markets that we address and the various Dolby technologies and solutions that serve these markets.

EXPANDING OUR LEADERSHIP IN AUDIO AND IMAGING ENTERTAINMENT EXPERIENCES

AUDIO AND IMAGING LICENSING

The majority of our licensing revenue is derived from the licensing of audio and imaging technologies for premium entertainment playback.

Our audio technologies are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC technologies and related patent licensing programs.

Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies and related patent licensing programs.

Our audio technologies are primarily comprised of DD+, Dolby Atmos, AC-4, and our AAC and HE-AAC technologies.

Our imaging technologies are primarily comprised of Dolby Vision and our AVC and HEVC technologies.

The following are certain highlights from fiscal 2020 and key challenges related to audio and imaging licensing, by market.

We have an established presence in developed markets with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices.

We have an established global presence with respect to our DD+ and HE-AAC audio technologies in broadcast services and devices.

In recent years, we have expanded our offerings in the broadcast market through the introduction of newer technologies, including our Dolby Atmos and AC-4 audio technologies, Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools.

We continue to see more products introduced in the broadcast market that incorporate our newer technologies.

In fiscal 2019, Panasonic joined our growing list of TV partners supporting Dolby Vision, and Vizio expanded their support of Dolby Vision throughout their entire 4K TV lineup.

A number of TV partners have released models that feature the combined experience of Dolby Vision and Dolby Atmos, including LG, Sony, TCL, and TP Vision.

In addition, the first STBs supporting Dolby Vision and Dolby Atmos were launched in fiscal 2019, while the transition to our AC-4 technologies continued to gain momentum globally.

We also saw more instances of live content experiences featuring Dolby Atmos.

Selected NBA basketball games became the first professional sports in North America broadcast in Dolby Atmos, and DirectTV delivered certain college football primetime games in Dolby Atmos on ESPN.

In addition, BT and CCTV continued delivering Premier League Soccer and The Champions League Final in Dolby Atmos.

We continue to add new TV partners for Dolby Vision and Dolby Atmos.

For example, during fiscal 2020, Xiaomi launched their first TV model that supports both Dolby Vision and Dolby Atmos.

In addition, many of our existing partners expanded their support of the combined Dolby Vision and Dolby Atmos experience by releasing more models and expanding into international markets, such as India.

As a result, the adoption of Dolby Vision and Dolby Atmos within 4K TV shipments grew compared to the previous year.

Also this year, we launched Dolby Vision IQ along with our TV partners LG and Panasonic.

Dolby Vision IQ automatically adjusts the TV picture according to the surrounding light and the type of content being viewed, creating an enhanced viewing experience.

We continued to see engagement with partners supporting our newer technologies in STBs.

In fiscal 2020, Free, a broadcast service provider in France, as well as Deutsche Telekom in Germany, both launched their first STBs supporting Dolby Vision and Dolby Atmos.

Key Challenges :

Our pursuit of growth and further adoption of our technologies may be impacted by a number of factors.

In some emerging growth countries, such as China, we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies.

In certain countries, such as China, we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies.

We must continue to present compelling reasons for consumers to demand our audio and imaging technologies, including ensuring that there is a breadth of available content in our formats and such content is being widely distributed.

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Additionally, in the broadcast market, as well as other markets, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.

We continue to focus on adoption of our technologies across major mobile ecosystems such as Apple, Android, and Amazon.

HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices, respectively .

Further, COVID-19 is causing uncertainty about consumer demand for devices and services in the broadcast market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.

We continue to focus on adoption of our technologies across major mobile ecosystems, including Apple and Android.

HE-AAC and HEVC are widely adopted audio and video technologies across mobile devices.

We offer these technologies through our patent licensing programs.

We also continue to focus on the expansion of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market.

During fiscal 2019, the breadth of mobile devices supporting Dolby technologies increased globally.

For example, Apple announced the support of the combined experience of Dolby Vision and Dolby Atmos in their latest iOS devices.

Dolby Atmos-enabled mobile devices are now available in the market from a growing list of partners such as Samsung, Amazon, Oppo and Lenovo.

We also continue to focus on expanding adoption of our DD+, AC-4, Dolby Atmos, and Dolby Vision technologies in the mobile market.

The breadth of mobile devices supporting Dolby technologies continues to increase globally.

In fiscal 2020, Apple continued to adopt Dolby Vision and Dolby Atmos across their portfolio of devices, leading to support for Dolby Vision capture and playback on Apple’s newest iPhone, and AirPods Pro support of Dolby Atmos with the

release of iOS14.

In addition, a majority of Apple's other iOS product offerings support the combined experience of Dolby Vision and Dolby Atmos.

Additional Dolby Atmos-enabled mobile devices are available in the market from partners such as Samsung, Amazon, Oppo, and Sony.

Key Challenges:

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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.

Further, we rely on a small number of partnerships with key participants in the mobile market.

We rely on a small number of partnerships with key participants in the mobile market.

If we are unable to maintain these key relationships, we may experience a decline in mobile devices incorporating our technologies.

Finally, we must continue to support the development and distribution of Dolby content via various ecosystems.

To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted.

Additionally, we must continue to support the development and distribution of Dolby enabled content via various ecosystems.

Further, COVID-19 is causing uncertainty about consumer demand for devices in the mobile market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.

Consumer Electronics

We have an established presence in the home theater market across devices such as AVRs, soundbars, Blu-Ray players, and DMAs, through the inclusion of our DD+ technology, and increasingly through the inclusion of our Dolby Atmos technology, as well as our AAC and HE-AAC technologies and related patent licensing programs.

These hardware offerings can be paired with a growing array of Dolby enabled content via OTT services and Blu-ray discs.

In fiscal 2019, the availability of devices compatible with Dolby technologies gained momentum, as a number of streaming services indicated that they will be supporting Dolby Vision and Dolby Atmos enabled content.

Apple announced that its new content programming and video subscription service, Apple TV+, which is expected to be released in the market during calendar year 2019, will support Dolby Vision and Dolby Atmos.

In addition, Disney's new streaming service, Disney+, will support content in Dolby Vision and Dolby Atmos.

Additional OTT services supporting the combined experience of Dolby Vision and Dolby Atmos include Netflix, Amazon, Tencent, and iQiYi.

With the growing list of global streaming partners supporting our technologies, there are now over 2,400 pieces of content available in Dolby Vision, and over 1,600 pieces available in Dolby Atmos.

In addition, the first Dolby Atmos enabled smart speaker, the Amazon Echo Studio, was announced in fiscal 2019.

The availability of Dolby-Atmos enabled soundbars also continued to grow in fiscal 2019 as three of our partners, Samsung, Sony, and Vizio, introduced their new lineup of soundbars.

Certain models are now available starting at $300.

In general, as entry level price points decline, a wider range of consumers have the ability to purchase products incorporating Dolby technologies.

We have an established presence in the home entertainment market across devices such as AVRs, soundbars, smart speakers, Blu-Ray players, and DMAs, through the inclusion of our DD+ technology, and increasingly through the inclusion of our Dolby Atmos technology.

AAC and HE-AAC technologies also have broad adoption through our patent licensing programs.

These home entertainment devices can be paired with a growing array of Dolby enabled content via OTT services and Blu-ray discs.

In fiscal 2020, the breadth of devices in the home entertainment market supporting Dolby Atmos continued to expand.

Sonos launched a new soundbar that supports Dolby Atmos, and Roku launched their new DMA supporting Dolby Vision and Dolby Atmos.

In addition, content available in Dolby Vision and Dolby Atmos continued to grow in fiscal 2020, broadening our opportunities for increased adoption in more devices.

Google Play, Showtime, and CBS began supporting Dolby Vision content.

Additional OTT services currently supporting the combined experience of Dolby Vision and Dolby Atmos include Netflix, Disney+, Amazon, and Apple TV+.

We have also expanded our global presence with Hotstar supporting Dolby Vision within their Disney+ content in India, and Tencent and iQiYi supporting Dolby Vision and Dolby Atmos in China.

We continue to focus on expanding the availability of Dolby technologies to new devices and new forms of content such as music, bringing new Dolby experiences to the market.

In fiscal 2020, TIDAL began enabling Dolby Atmos for music to a growing number of TVs, soundbars, and AVR devices through their streaming app.

In addition, Dolby Atmos music is available on the Amazon Echo Studio smart speaker streaming from Amazon Music HD.

Key Challenges :

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To the extent that OEMs do not incorporate our technologies in current and future products, our revenue could be impacted.

Further, COVID-19 is causing uncertainty about consumer demand for devices in the home entertainment market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.

Personal Computers

DD+ continues to enhance playback in both Mac and Windows operating systems, including native support in their respective Safari and Microsoft Edge browsers.

Dolby's presence in these browsers enables us to reach more users through new types of content, including streaming video entertainment.

In fiscal 2019, a number of PC models were announced or released supporting the combined experience of Dolby Vision and Dolby Atmos.

Apple's newest MacBook supporting Dolby Vision and Dolby Atmos via their latest MacOS was announced during the year, and Lenovo expanded their lineup of PCs that support Dolby Vision and Dolby Atmos.

In addition, Dell released several Dolby Vision enabled PC models throughout the year, while Samsung and Huawei extended their support of Dolby Atmos to more PC models.

Dolby's presence in these browsers enables us to reach more users through various types of content, including streaming video entertainment.

In fiscal 2020, Lenovo and ASUS released a number of gaming laptops with Dolby Atmos broadening the consumer base that can experience Dolby technologies.

Also during the year, a number of gaming titles enabled in Dolby Atmos were released across multiple gaming platforms such as PCs.

In addition, a number of PCs from partners such as Apple, Lenovo, Dell, and ASUS support Dolby Vision and Dolby Atmos.

Key Challenges :

PC revenues have been impacted by a decline in the portion of PCs that have optical disc functionality in recent years, which has resulted in a decline in our ASPs, and we expect this decline in ASPs to continue.

If declining conditions and trends persist, and OEMs do not incorporate our technologies in current and future products, our PC revenues could face continuing downward pressure.

If declining conditions and trends persist, and OEMs do not incorporate our technologies in current and future products, our PC revenues will face continuing downward pressure.

We must continuously collaborate and maintain our key partnership relationships with PC manufacturers to incorporate our technologies, and we must continue to support the development and distribution of Dolby content via various ecosystems.

DD+ is incorporated in both the Xbox and PlayStation gaming consoles and platforms.

The Xbox gaming console also supports the combined experience of Dolby Vision and Dolby Atmos.

Customers can purchase an OEM gaming headset bundled with Dolby Atmos for Headphones, or an app on the Microsoft app store to enable Dolby Atmos on their headphones.

We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system.

Further, COVID-19 is causing uncertainty about consumer demand for devices in the PC market, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.

Other Markets

DD+ is incorporated in the Xbox and PlayStation gaming consoles and streaming platforms for movie and television content.

In fiscal 2020, Microsoft announced that their next generation Xbox Series X and Series S will be the first gaming consoles to support Dolby Vision and Dolby Atmos for gaming content.

We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system, and are focused on expanding our presence in music in the automotive industry.

Key Challenges :

The gaming console market continues to be challenged by competition from mobile devices and gaming PCs, which have faster refresh cycles and appeal to a broader consumer base.

This may impact our future revenues.

CINEMA AND OTHER

Consumer demand for devices in the gaming industry is impacted by the anticipation of console refresh cycles.

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.

These factors may impact our future revenues.

If OEMs do not incorporate our technologies in current and future products, our revenues will face downward pressure.

Further, COVID-19 is causing uncertainty about consumer demand for devices in the gaming industry, the ability of our partners to manufacture such devices due to supply chain disruption, timing of the adoption of our technologies into new products by partners and licensees, and the timing of launches for new products.

In addition to licensing revenue derived from the licensing of audio and imaging technologies from the markets discussed above, we offer our audio and imaging technologies to create Dolby experiences through Dolby Cinema.

We continued to expand our global presence for Dolby Cinema.

In fiscal 2020, the first Dolby Cinemas were opened in South Korea and Saudi Arabia, and we established more partnerships with global exhibitors.

At the end of the fiscal year, we had over 250 Dolby Cinema locations established across 13 countries.

The breadth of motion pictures for Dolby Cinema continues to grow with over 300 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all the major studios.

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 ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience.

In addition, the success of our Dolby Cinema offering will be tied to global box office performance generally.

COVID-19 has had, and is likely to continue to have, a significant effect on theatrical exhibition.

The response to COVID-19 including the closure of cinemas, shelter-in-place mandates and government-imposed social-distancing restrictions have had, and are likely to continue to have, a negative impact on our cinema-related revenues and consumer demand.

Further, studios have delayed the release of a number of new movie titles and temporarily suspended the production of future releases.

It is uncertain whether consumer demand for the cinema and other forms of indoor recreation will return to previous levels.

In addition, when cinemas reopen, exhibitor partners may operate fewer screens in response to decreased attendance.

PRODUCTS & SERVICES

A majority of our products and services revenues are derived from the sale of audio and imaging products for the cinema, television, broadcast, communication, and entertainment industries.

Revenues from the sale of Dolby Conference Phones, Dolby Voice Room, as well as our recently launched Developer Platform are included in products and services.

Cinema Products & Services

To help enable the playback of content in Dolby formats, we offer a range of servers and audio processors to cinema exhibitors globally.

We continue to see adoption of Dolby Atmos by studios, content creators, post-production facilities, and exhibitors.

At the end of fiscal 2019, there were over 5,000 Dolby Atmos-enabled screens installed or committed across 90 countries around the world, and over 1,500 Dolby Atmos theatrical titles announced or released.

We also offer a variety of newer cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, the Dolby Multichannel Amplifier, and our 3-Axis speaker.

Dolby Atmos has been adopted broadly across studios, content creators, post-production facilities, and exhibitors.

As of the end of fiscal 2020, there are over 6,000 Dolby Atmos screens installed or committed and over 1,800 Dolby Atmos theatrical titles have been announced or released.

We also offer a variety of other cinema products, which include the IMS3000, an integrated imaging and audio server with Dolby Atmos, 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 what was previously available to them.

Key Challenges:

Demand for our cinema products is dependent upon industry and economic cycles and box office performance generally, along with our ability to develop and introduce new technologies, further our relationships with content creators, and promote new cinematic audio and imaging experiences.

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 imaging experiences.

A significant portion of our growth opportunity lies in international markets, such as China, which are subject to economic risks as well as geo-political risks.

To the extent that these factors persist or worsen, we may be faced with pricing pressures or competing technologies, our revenue may be affected.

In fiscal 2019, we continued to expand our global presence for Dolby Cinema.

At the end of the year, we had over 230 Dolby Cinema locations in operation across 11 countries, and a total of more than 400 screens open or committed.

During the year, several of the top global box office films were featured in Dolby Cinema, including "Avengers:

Endgame" and "The Lion King." The breadth of motion pictures for Dolby Cinema continues to grow with over 260 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all the major studios.

We may also be faced with pricing pressures or competing technologies, which would affect our revenue.

Additionally, the effects of COVID-19 such as the closure of cinemas, social distancing requirements, and shelter-in-place mandates have had, and are likely to continue to have, a negative impact on demand for cinema products and services.

COVID-19 has also negatively impacted the financial health of our cinema customers and partners.

If cinemas permanently close, our equipment may be available for resale on the secondary market, and erode the demand for new products.

These conditions are likely to continue after the end of government-imposed restrictions.

In fiscal 2020, we sold hardware products such as the Dolby Conference Phone and the Dolby Voice Room, which include our Dolby Voice technology.

In response to the changing market opportunities, in the first quarter of fiscal 2021 we decided to begin exiting the sale and leasing of conference hardware.

Going forward, our Dolby Voice efforts will be focused on expanding the availability of our technologies through our developer platform and our software solutions for enterprise communications partners.

Key Challenges:

Although the premium large format market for the cinema industry is currently growing, Dolby Cinema competes with other existing offerings.

Our success depends on our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience.

In addition, the success of our Dolby Cinema offering will be tied to global box office performance generally.

Our newest audio and video conferencing offering is Dolby Voice Room, which is aimed at customers in the growing huddle room space.

In fiscal 2019, we added LogMeIn as a partner, joining BlueJeans and Highfive.

Also in fiscal 2019, together with BlueJeans and LogMeIn, we introduced a "Room as a Service" offering, which enables our customers access to our partner's conferencing services with our Dolby Voice Room solution for a monthly subscription fee.

We continue to focus on expanding Dolby Voice’s availability to the global market for audio and video conferencing services.

As we shift away from hardware solutions, we may face challenges in how we expand our technologies to new offerings and solutions.

Our success will depend on our ability to attract a robust developer community and new industry relationships as we to bring our services and technologies to market.

Other Services

We are focused on bringing our expertise in media and communications to a broader range of digital experiences.

In fiscal 2020 we launched our developer platform, Dolby.io, which enables developers to access our technologies through APIs.

The initial offerings include media processing APIs for analyzing and improving the sound of recorded audio files, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications.

Following the initial launch of Dolby.io, we have seen increased customer engagement with our media and interactivity APIs for use cases such as entertainment, online education and telehealth.

For example, we have partnered with SoundCloud to incorporate our music mastering APIs within their online music distribution platform.

Key Challenges:

Our success in this market will depend on the number of service providers and enterprise customers we are able to attract, the volume of products that we are able to sell, and the volume of usage of the service.

Revenue From Significant Customers

In fiscal 2019 , 2018 , and 2017 , we did not have any individual customers that accounted for more than 10% of our total revenue.

Our success in this market will depend on the number of developers we are able to attract, the volume of usage of the service, and our ability to monetize our services.

Although the market for online experiences has been growing, Dolby's interactivity API technologies compete with other offerings.

In addition, our pursuit of growth and further adoption depends on our ability to continue to innovate and add additional value to our services.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

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 take into consideration the macroeconomic effect of global events, such as COVID-19 or other natural disasters 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, which require the licensee to pay a fixed, non-refundable fee independent of the actual sales.

We also enter into fixed and guaranteed licensing fees arrangements, which 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.

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.

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.

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.

As such, 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.

Our arrangements often include promises to transfer multiple performance obligations, such as license rights, multiple products, PCS, or services.

In such arrangements where we have identified distinct performance obligations within the contract, we determine the SSP for each distinct performance obligation, the timing of revenue recognition for each distinct performance obligation and allocate the transaction price accordingly.

SSPs for distinct performance obligations are based on direct observable pricing.

In instances where the SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions, entity-specific factors and other inputs.

In some licensing arrangements, we use the residual approach when the SSP for one or more promised goods or services is highly variable or uncertain.

Under the residual approach, the unallocated portion of the transaction price can be allocated to a delivered performance obligation.

For additional information, see Note 3 “ Revenue Recognition ” to our consolidated financial statements in Part II, Item 8 of this Annual Report.

IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which amends the existing accounting standards for leases.

Under the new standard, a lessee will be required to recognize a lease liability and right-of-use asset for most leases.

The new standard also modifies the classification criteria and accounting for sales-type and direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

We will adopt the new standard using the modified retrospective transition method, thereby recognizing the cumulative effect of initially applying Topic 842 as an adjustment to opening retained earnings on the adoption date, without revising the balances in comparative periods.

We have evaluated the impact of Topic 842, and upon adoption, we will recognize a lease liability and right-of-use asset for each of our existing lease arrangements, which we anticipate to be material on our consolidated balance sheet.

Adoption of the standard will not have a material impact on our consolidated income statement or our consolidated statement of cash flow.

We plan to elect to utilize the transition guidance within the new standard which allows us to retain the historical lease classification and initial direct costs for any leases that exist prior to adoption of the standard.

All new leases executed subsequent to adoption will be evaluated, and accounted for under Topic 842.

ASU 2016-02 is effective for Dolby beginning September 28, 2019.

We are still completing our assessment of the remaining lease term of our existing leases, assessing the completeness of our population of leases, and finalizing our determination of the discount rate used to calculate the right of use asset and lease liability.

Income Taxes:

Comprehensive Income.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act").

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires entities to provide certain disclosures regarding stranded tax effects.

The ASU is effective for Dolby beginning September 28, 2019.

We do not believe that this standard will have a material impact on our consolidated financial statements.

Collaborative Arrangements.

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In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.

This standard will be effective for Dolby beginning September 26, 2020, and we do not currently plan to early adopt.

We do not believe that this standard will have a material impact on our consolidated financial statements.

This standard will be effective for Dolby beginning September 26, 2020.

While we have a number of collaborative arrangements, we do not believe that this standard will have a material impact on our consolidated financial statements.

Financial Instruments.

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Measurement of Credit Losses on Financial Instruments , which modifies the measurement of expected credit losses of certain financial instruments, including trade receivables, contract assets, and lease receivables.

This standard will

be effective for Dolby beginning September 26, 2020, and we do not currently plan to early adopt.

This standard will be effective for Dolby beginning September 26, 2020.

We do not believe that this standard will have a material impact on our consolidated financial statements.

Income Taxes.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes , which modifies and eliminates certain exceptions to the general principles of ASC 740, Income Taxes.

This standard will be effective for Dolby beginning September 25, 2021.

We are currently evaluating the impact of the standard on our consolidated financial statements.

RESULTS OF OPERATIONS

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Revenue and Gross Margin

Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products and services to enable and enhance audio, imaging, and voice capabilities.

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.

A significant portion of our licensing revenue pertains to customer-shipment royalties that we recognize based on estimates of our licensees’ shipments in the current period.

Within the current period, to the extent that shipment data reported by licensees differs from estimates we made and recorded in the prior quarter, we recognize an adjustment to revenue for such difference.

Our comparisons for fiscal years 2018 and 2017 financial information as recast under ASC 606 reflects the impact of certain contract modifications which results in a reduction of our previously reported revenues in those periods.

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.

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 associated fees.

Fiscal Year Ended

September 27,

Fiscal Year Ended 2020 vs.

2019 2019 vs.

Licensing September 25,

2020 September 27,

2019 September 28,

Revenue $1,078,577 $1,107,280 $940,777 $(28,703) (3)% $166,503 18%

Percentage of total revenue 93% 89% 89%

Cost of licensing 50,822 57,531 42,583 (6,709) (12)% 14,948 35%

Gross margin 1,027,755 1,049,749 898,194 (21,994) (2)% 151,555 17%

Gross margin percentage 95% 95% 95%

Higher revenues from patent licensing and the adoption of our technologies into more devices, partially offset by lower recoveries

No significant fluctuations

Higher revenues from patent licensing, recoveries, and TVs, partially offset by lower volume of STBs

Higher revenues from Dolby Cinema, gaming, and automotive recoveries, partially offset by lower licensing in Dolby Voice

Higher volume of DMAs and higher patent licensing, partially offset by lower recoveries

Higher revenues from recoveries and patent licensing, partially offset by lower ASP from decreasing number of PCs with optical disc functionality

Lower ASP from decreasing number of PCs with optical disc functionality and lower recoveries, partially offset by higher patent licensing

No significant fluctuations

Higher patent licensing and higher volume of DMAs, partially offset by lower volume of DVDs

Lower patent licensing, volume of STBs and TVs, and lower recoveries

Higher patent licensing, revenue from Dolby Cinema, and Via administrative fees, partially offset by lower recoveries in automotive

Higher recoveries and adoption of our technologies into more devices, partially offset by lower patent licensing

Factor Licensing Revenue Gross Margin

Other â Lower revenues from Dolby Cinema resulting from the closure of cinemas and lower attendance due to COVID-19, lower automotive recoveries, and gaming, partially offset by higher patent administration fees from Via Licensing ßà No significant fluctuations

Mobile á Higher revenues from increased adoption of our patent licensing technologies and increased adoption of Dolby Atmos and Dolby Vision, partially offset by lower recoveries

PC á Higher revenues from recoveries, higher adoption of Dolby Vision and Dolby Atmos in more PC models, and higher revenues from patent licensing technologies

Broadcast â Lower revenues from patent licensing and decreased market volume of STBs, partially offset by higher adoption of Dolby Atmos and Dolby Vision, primarily in TVs

CE â Lower market volumes of AVRs and home theater equipment, partially offset by increased adoption of our patent licensing technologies, and increased adoption of Dolby Atmos and Dolby Vision in DMAs and soundbars

Factor Licensing Revenue Gross Margin

Mobile á Higher revenues from increased adoption of our patent licensing technologies and the adoption of our technologies into more devices, partially offset by lower recoveries ßà No significant fluctuations

Broadcast á Higher revenues from increased adoption of our patent licensing technologies, recoveries, and TVs, partially offset by lower market volume of STBs

Other á Higher revenues from Dolby Cinema, gaming, and automotive recoveries, partially offset by lower licensing in Dolby Voice

CE á Higher volume of DMAs and increased adoption of our patent licensing technologies, partially offset by lower recoveries

PC á Higher revenues from recoveries and increased adoption of our patent licensing technologies, partially offset by lower ASP from decreasing number of PCs with optical disc functionality

Products and Services

Products revenue is generated from the sale of audio, imaging, and voice products for the cinema, television broadcast, communications, and consumer products industries.

Also included in products revenue are amounts relating to Dolby Cinema arrangements that involve fixed or minimum amounts.

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 consists of materials, labor, and manufacturing overhead, amortization of certain intangible assets, as well as third party royalty obligations.

Services revenue consists of fees for 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 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.

Cost of services consists of personnel and personnel-related costs for providing our professional services, software maintenance and support, external consultants, and other direct expenses incurred on behalf of customers.

Fiscal Year Ended

Products and Services

September 27,

Fiscal Year Ended 2020 vs.

2019 2019 vs.

Products and Services September 25,

2020 September 27,

2019 September 28,

Revenue $83,215 $134,340 $113,823 $(51,125) (38)% $20,517 18%

Percentage of total revenue 7% 11% 11%

Cost of products and services 95,676 103,323 84,979 (7,647) (7)% 18,344 22%

Gross margin (12,461) 31,017 28,844 (43,478) (140)% 2,173 8%

Gross margin percentage (15)% 23% 25%

Higher revenues from Dolby Cinema and Dolby Voice products, and higher units of cinema equipment

Higher excess & obsolete charges

No significant fluctuations

Higher utilization of available capacity

No significant fluctuations

Lower utilization of manufacturing capacity and higher excess & obsolete charges, partially offset by improved mix of products

Support & Other

Decreased support and maintenance services

Lower utilization of available capacity

Factor Products and Services Revenue Gross Margin

Products â Lower sales of cinema equipment attributable to COVID-19 and lower revenues from Dolby Cinema sales-type leases (hybrid agreements), partially offset by higher units of Dolby Voice products â Lower utilization of manufacturing capacity and higher excess & obsolescence charges

Services ßà No significant fluctuations â Lower utilization of available capacity

Factor Products and Services Revenue Gross Margin

Products á Higher revenues from Dolby Cinema and Dolby Voice products, and higher units of cinema equipment â Higher excess & obsolescence charges

Services ßà No significant fluctuations á Higher utilization of available capacity

Operating Expenses

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R&D expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization, facilities costs, costs for outside materials, and information technology expenses.

Fiscal Year Ended

Fiscal Year Ended 2020 vs.

2019 2019 vs.

September 25,

3 unchanged sentences

Percentage of total revenue 21% 19% 22%

Research & Development

No significant fluctuations

Higher costs associated with our worldwide headquarters

Depreciation & Amortization

Lower depreciation as certain assets have been fully depreciated

Compensation & Benefits

Higher headcount on R&D projects along with merit increases across the employee base

Category Key Drivers

Compensation & Benefits á Higher headcount and annual merit increases across the existing employee base

Travel â Lower costs due to COVID-19 travel restrictions

Professional & Consulting â Lower costs for external professional and consulting services for new product development

Category Key Drivers

Research & Development ßà No significant fluctuations

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, consulting fees, facilities costs, depreciation and amortization, information technology expenses, and legal costs associated with the protection of our IP.

Fiscal Year Ended

Fiscal Year Ended 2020 vs.

2019 2019 vs.

September 25,

3 unchanged sentences

Percentage of total revenue 29% 28% 29%

Legal, Professional, & Consulting

Increased IP related activities aimed at revenue generation

Marketing Programs

Higher costs related to marketing programs, including branding activities, and new product launches

Legal, Professional, & Consulting

Increased IP related activities aimed at revenue generation

Compensation & Benefits

Higher headcount and merit increases across the employee base

Marketing Programs

Higher costs related to marketing efforts for growth initiatives

Category Key Drivers

Travel â Lower costs due to COVID-19 travel restrictions

Marketing Programs á Higher costs related to marketing efforts for company growth initiatives and branding activities

Legal, Professional, & Consulting â Lower costs for IP recovery activities

Category Key Drivers

Legal, Professional, & Consulting á Increased IP related activities aimed at revenue generation

Marketing Programs á Higher costs related to marketing programs, including branding activities, and new product launches

General and Administrative

G&A expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation, facilities and information technology costs, as well as professional fees and other costs associated with external consulting and contract labor.

Fiscal Year Ended

Fiscal Year Ended 2020 vs.

2019 2019 vs.

September 25,

3 unchanged sentences

Percentage of total revenue 19% 17% 19%

Legal, Professional, & Consulting

Higher costs associated with various legal activities and patent filings

Compensation & Benefits

Higher headcount and merit increases across the existing employee base

Higher charges recorded in the current period

Compensation & Benefits

Increase in headcount, merit increases, and higher employer costs

Legal, Professional, & Consulting

Higher costs associated with various legal activities, patent filings, and implementing regulatory changes

Stock-Based Compensation

Higher fair value of awards

Category Key Drivers

Compensation & Benefits á Higher headcount and annual merit increases across the existing employee base

Bad Debt á Higher charges recorded in the current period

Category Key Drivers

Legal, Professional, & Consulting á Higher costs associated with various legal activities and patent filings

Compensation & Benefits á Higher headcount and annual merit increases across the existing employee base

Bad Debt á Higher charges recorded in the current period

Restructuring

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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.

Fiscal Year Ended

Fiscal Year Ended 2020 vs.

2019 2019 vs.

September 25,

3 unchanged sentences

Percentage of total revenue —% 3% —%

Subsequent to the fiscal year ended September 25, 2020, we approved a plan to reduce certain activities in order to reallocate those resources towards higher priority investment areas and growth opportunities for the future of our business.

Restructuring charges associated with this plan will be reflected in fiscal 2021 financial statements.

For additional information on this restructuring program, see Note 20 " Subsequent Events " to our consolidated financial statements.

Restructuring charges recorded in fiscal 2019 of $33.5 million represents costs incurred as a result of our early exit of leased facilities.

1 unchanged sentence

Restructuring charges recorded in fiscal 2019 also include $3.1 million associated with a reorganization of our marketing function that resulted in severance and other related benefits for approximately 50 positions that were eliminated.

Restructuring charges recorded in fiscal 2017 were incurred in relation to our fiscal 2017 restructuring plan, and represent costs to reduce certain activities in order to reallocate resources towards higher priority investment areas.

For additional information on our Restructuring programs, see Note 13 " Restructuring " to our consolidated financial statements.

1 unchanged sentence

Other income/(expense) primarily consists of interest income earned on cash and investments and the net gains/(losses) from foreign currency transactions, derivative instruments, and sales of marketable securities from our investment portfolio.

Fiscal Year Ended

Other Income/Expense

September 27,

Fiscal Year Ended 2020 vs.

2019 2019 vs.

Other Income/Expense September 25,

2020 September 27,

3 unchanged sentences

Other income/(expense), net 8,434 481 (5,903) 7,953 1,653% 6,384 (108)%

Other Income/(Expense)

Decrease in other expense due to impairment charges recorded in the prior year on cost method equity investments that did not re-occur in 2019, higher valuation of current year equity method investment valuations, and lower foreign currency translation losses

Interest Income

Higher yields on investment balances

Interest Income

Higher yields on our increased investment balances

Other Income/(Expense)

Increase in other expense primarily due to impairment charges recorded on cost method equity investments

Our effective tax rate is based on our annual fiscal year results and is affected each period-end by several factors.

These include changes in our projected fiscal year results, recurring items such as tax rates and relative income earned in foreign jurisdictions, as well as discrete items such as changes to our uncertain tax positions that may occur in, but are not necessarily consistent, between periods.

Total $20,973 $25,230 $12,869 $(4,257) (17)% $12,361 96%

Category Key Drivers

Interest Income â Lower yields on current year investment balances due to decreased interest rates

Other Income á Increase in realized gains from sales of investments and higher valuation on equity method investments

Category Key Drivers

Other Income/(Expense) á Decrease in other expense due to impairment charges recorded in the prior year on cost method equity investments that did not re-occur in 2019, higher valuation of current year equity method investment, and lower foreign currency translation losses

Interest Income á Higher yields on investment balances

Our effective tax rate is based on our fiscal year results and is affected by several factors.

These reflect 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.

Our fiscal 2020 income tax provision reflects a decrease in unrecognized tax benefits due to a lapse in the statute of limitations.

Our fiscal 2018 income tax provision reflects amounts accrued in connection with the Tax Act enacted in December 2017.

6 unchanged sentences

Effective tax rate 3% 9% 78%

Impact On Effective Tax Rate

Enactment of Tax Act

Lower tax expense due to a large tax charge for US tax reform in the prior year, a large tax benefit in the current year, and the reduction of the federal statutory rate

Impact On Effective Tax Rate

Enactment of Tax Act

Higher tax provision for deemed repatriation and write-down of deferred tax assets offset by higher benefit for the reduction of the federal statutory rate

Valuation Allowance

Higher tax provision reflecting valuation allowance for California R&D Tax Credits

Stock-Based Compensation

Higher benefit related to the settlement of stock-based awards

Factor Impact On Effective Tax Rate

Unrecognized Tax Benefits

â Additional benefit in the current year attributable to reversals of unrecognized tax benefits in the third quarter due to a lapse in the statute of limitations.

Factor Impact On Effective Tax Rate

Enactment of Tax Act â Lower tax expense due to a large tax charge for US tax reform in the prior year, a large tax benefit in the current year, and the reduction of the federal statutory rate

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

19 unchanged sentences

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.

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 .”

14 unchanged sentences

Net cash provided by operating activities $ 343,849 $ 327,674

Net cash provided by operating activities decreased $24.5 million in fiscal 2019 compared to fiscal 2018 , primarily due to the following:

Impact On Cash Flows

Fiscal 2018 results included a loss in Q1 due to impact of the Tax Act

Working Capital

Lower inflows due to increases in accounts receivable and contract assets

Deferred Income Taxes

Deferred tax asset increased due to additional tax benefit recognized from the repatriation transition tax recorded in fiscal 2018

Net cash provided by operating activities increased $16.2 million in fiscal 2020 compared to fiscal 2019, primarily due to the following:

Factor Impact On Cash Flows

Working Capital á Higher inflows due to decreases in accounts receivable and contract assets, partially offset by higher outflows to settle remaining exit obligations for a terminated lease of an office building

Investing Activities

3 unchanged sentences

Net cash provided by (used in) investing activities $ 134,374 $ (56,229)

Net cash used in investing activities was $134.3 million greater in fiscal 2019 compared to fiscal 2018 , primarily due to the following:

Impact On Cash Flows

Purchase of Investments

Higher outflows for the purchase of marketable investment securities

Capital Expenditures

Higher expenditures for PP&E

Proceeds From Investments

Lower inflows from the sale & maturity of marketable investment securities

Net cash provided by investing activities was $190.6 million greater in fiscal 2020 compared to fiscal 2019, primarily due to the following:

Factor Impact On Cash Flows

Proceeds From Investments á Higher inflows from the sale & maturity of marketable investment securities

Capital Expenditures á Lower expenditures for PP&E

Purchase of Investments â Higher outflows for the purchase of marketable investment securities

Financing Activities

3 unchanged sentences

Net cash used in financing activities $ (207,775) $ (385,281)

Net cash used in financing activities increased $251.7 million in fiscal 2019 compared to fiscal 2018 , primarily due to the following:

Impact On Cash Flows

Share Repurchases

Higher outflows from increases in common stock repurchases

Common Stock Issuance

Lower inflows from employee stock option exercises

Net cash used in financing activities was $177.5 million lower in fiscal 2020 compared to fiscal 2019, primarily due to the following:

Factor Impact On Cash Flows

Share Repurchases á Lower outflows for common stock repurchases

Common Stock Issuance á Higher inflows from employee stock option exercises

Off-Balance Sheet Arrangements and Contractual Obligations

As of September 27, 2019 , we did not engage in off-balance sheet financing arrangements other than operating leases for office space and computer equipment, and the following table presents a summary of our contractual obligations and commitments as of that date (in thousands):

Our liquidity is not dependent upon the use of off-balance sheet financing arrangements, and we have not entered into any arrangements that are expected to have a material effect on liquidity or the availability of capital resources.

The following table presents a summary of our contractual obligations and commitments as of September 25, 2020 (in thousands):

Payments Due By Fiscal Period

Years More Than

5 Years Total

Naming rights $ 7,915 $ 16,131 $ 16,541 $ 61,277 $ 101,864

Operating leases

Operating leases, including imputed interest 18,098 28,167 21,616 22,484 90,365

Purchase obligations 17,305 3,130 — — 20,435

Donation commitments 4,803 310 310 1,002 6,425

Total $ 48,121 $ 47,738 $ 38,467 $ 84,763 $ 219,089

Naming Rights.

In fiscal 2012, we entered into an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards.

The term of the agreement is 20 years (beginning in fiscal 2012), over which we make payments on a semi-annual basis.

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

We are party to an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®.

The term of the agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032.

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

Our payment obligations may be suspended or reduced in certain circumstances, including protracted closure of the Dolby Theatre.

Operating Leases.

Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for office space, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries.

For additional details regarding our leases, see Note 7 " Leases " to our consolidated financial statements.

Purchase Obligations.

Our purchase obligations consist of agreements to purchase goods and services, entered into in the ordinary course of business.

These represent non-cancelable commitments for which a penalty would be imposed if the agreement was canceled for any reason other than an event of default as described by the agreement.

Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other R&D activities.

Donation Commitments.

Our donation commitments relate to non-cancelable obligations to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and the Smithsonian Institution in Washington, DC.

Our commitment to the Museum of the Academy of Motion Picture Arts and Sciences is for 15 years from its expected opening date in 2020 , and the Smithsonian Institution is for the next 5 years.

Both donation commitments consist of the installation of imaging and audio products in the theaters and providing maintenance services in exchange for various marketing, branding, and publicity benefits.

Our donation commitments relate to non-cancelable obligations that consist of maintenance services and installation of imaging and audio products in exchange for various marketing, branding, and publicity benefits.

The recipients of these donations participate in or promote the cinema and entertainment industry and our commitments vary in length, lasting up to 15 years.

Unrecognized Tax Benefits.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis