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Item 7. Management’s Discussion and Analysis

2022-11-18 compared with 2021-11-17 · 166 added, 160 removed, 282 unchanged (54% of the section changed)

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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 Item 1A, "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

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.

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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.

The COVID-19 pandemic 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 revenue for certain consumer products has been negatively affected by COVID-19, although we have experienced heightened demand for certain consumer products that feature our technologies, including TVs and PCs, during the pandemic.

It is unclear how demand for these consumer products may change relative to demand levels experienced during the pandemic.

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

EXECUTIVE SUMMARY

The COVID-19 pandemic triggered worldwide shutdowns, supply chain constraints, and other disruptions which in turn have negatively affected the global economy, including consumer purchasing activity.

It is unclear how demand for consumer products that include our technologies may change in response to the ongoing pandemic.

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

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

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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 impacted 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.

These factors may cause delays in the adoption of our technologies by partners.

Further, we may be negatively impacted by delays in transaction cycles and our recoveries efforts due to ongoing global restrictions related to the pandemic.

The cinema market has been, and we expect to continue to be, adversely impacted by COVID-19.

At various times, 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.

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

M ost cinema locations have been permitted to resume operations, but many such locations are operating under restricted capacity.

At Dolby, we implemented work-from-home options and practices 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.

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.

Box office receipts at Dolby Cinema sites and general demand for our cinema products and services by our broader exhibition partners have been, and we expect to remain, lower than that of pre-pandemic levels.

Most cinema locations have been permitted to resume operations, but many such locations are operating under restricted capacity.

Further, the spread of variants of SARS-CoV-2 may result in renewed government responses.

The situation is continuing to evolve, and we cannot predict how or to what extent the cinema market, or other markets we target, may be impacted during the course of the pandemic and long-term.

At Dolby, we continue to implement business strategies that support the health and safety of our employees and enable business continuity.

We have implemented a flex work program that enables connection and effective work delivery in a hybrid work environment.

We enable our employees with the tools and infrastructure they need to carry on our operations and progress the business forward in a hybrid working environment.

We expect COVID-19 will continue to have an impact for the foreseeable future, with varying degrees of impact depending on geographic location.

The degree of impact on our business will depend on several factors, such as the full duration and the extent of the pandemic, the spread of Delta or other variants, the actions taken by governments, businesses and consumers in response to the pandemic, and the rate and extent of vaccine distributions to the general population, all of which continue to evolve and remain uncertain at this time.

The degree of impact on our business will depend on several factors.

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

MACROECONOMIC CONDITIONS

The current macroeconomic environment has negatively impacted many of our licensees and that directly impacts our financial results.

Our revenue has been impacted by macroeconomic conditions, including but not limited to, rising inflation, rising interest rates, COVID-19 related restrictions, supply chain constraints, increased shipping costs, international conflicts, reduced discretionary consumer spending, and reduced new product investment by our customers caused by higher interest rates and lower demand.

The future implications of these macroeconomic conditions on our business, results of operations and overall financial position remain uncertain.

Across all of our markets, these conditions may affect consumer demand for devices and services, our partners’ ability to manufacture devices, and the timing of adoption of our technologies into new products by partners and licensees.

discussion of the potential impacts of these macroeconomic effects 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 can increase our value proposition and create opportunities by broadening Dolby technologies

into new types of content, such as music and gaming.

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.

We can increase our value proposition and create opportunities by broadening Dolby technologies into new types of content, such as music, gaming, live sports, and user-generated content.

We are also beginning to make our audio and imaging technologies available for content beyond premium entertainment through Dolby.io, creating 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.

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

Licensing revenue is primarily driven by the number of devices shipped by our licensees and by adoption of our technologies on additional devices.

DD+, AC-4, and our AAC and HE-AAC audio patents (collectively, our "foundational audio technologies") have broad penetration across a diverse set of devices and end markets, and our revenue from these technologies is primarily impacted by device shipments by licensees.

Revenue growth from Dolby Vision, Dolby Atmos, our imaging patents, and Dolby Cinema are primarily a result of increased adoption.

Licensing revenue is primarily driven by the adoption of our technologies on devices and the number of devices shipped by licensees.

DD+, AC-4, and our AAC and HE-AAC audio patents (collectively, our "foundational audio technologies") have broad penetration across a diverse set of devices and end markets.

Our revenue from these technologies is primarily driven by device shipments from licensees, and as such, is impacted by consumer spending.

Other factors, such as global supply constraints or device lifecycles, may also impact revenue from these technologies.

In the future, we expect revenue from our foundational audio technologies to generally reflect market trends in device shipments.

The remaining portion of our licensing revenue is derived from offerings such as Dolby Vision, Dolby Atmos, our imaging patents, and Dolby Cinema.

These offerings have not been in the market as long as our foundational audio technologies, thus revenue growth is primarily driven by increased adoption and the addition of new licensees.

The availability of content in Dolby formats is an important part of creating the ecosystems that drive adoption of our technologies within a wide range of devices.

Our audio and imaging technologies have a strong presence within movie and episodic content through adoption across content creators and streaming services.

The availability of content on these platforms has driven strong adoption in devices such as TVs, STBs, speaker devices, and playback devices.

Our audio technologies have also been broadly adopted through many forms of content, including broadcast TV, streaming, and optical disc playback.

Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, HBO Max, and Paramount+ continue to enable more content in Dolby Vision and Dolby Atmos.

For example, in fiscal 2021, there was an increase in the global adoption of our technologies due to streaming services such as Netflix, Disney+, Apple TV+, Hotstar, and iQiyi launching local content in Dolby formats in countries such as Korea, India, Thailand, and Singapore.

Also, in fiscal 2021, it was announced that Amazon Prime Video will be the first to stream live Premier League matches in Dolby Atmos.

Recently, TV network operators have begun to broadcast live events in Dolby Vision and Dolby Atmos.

In fiscal 2021, Comcast enabled the Tokyo 2020 Olympics in both Dolby Vision and Dolby Atmos in the U.S.

Internationally, the Euro 2020 football championship was broadcast to several TV stations in Dolby Atmos.

We believe broadcast experiences such as these help drive further adoption of our technologies in devices such as TVs and smartphones.

We have also enabled a broader range of content, such as music, gaming, and user-generated content.

We believe enabling our technologies in these forms of content creates additional value for the adoption of Dolby within devices like mobile, PC, gaming consoles, and automotive.

In fiscal 2021, several music streaming services began supporting Dolby Atmos music including Apple with their Apple Music service, Naver Vibe in Korea, Hungama Music in India, and Anghami Plus in the Middle East.

Also in fiscal 2021, Vimeo, a platform to create, manage, and share videos, added support for Dolby Vision content within the Apple device ecosystem, and BiliBili, one of the largest video sharing platforms in China, launched support for Dolby Vision and Dolby Atmos.

Additionally, Tencent Games announced that QQ Speed Mobile was the first mobile game that supports Dolby Atmos, and BT began delivering sports content in Dolby Atmos to mobile devices via their BT Sports App.

The availability of content on these platforms has driven strong adoption in devices such as TVs, STBs, and speaker devices.

Our audio and imaging technologies are also widely available through many forms of distribution, including broadcast TV, streaming, and optical disc playback.

Major streaming partners and services such as Netflix, Disney+, Apple TV+, Amazon, HBO Max, and Paramount+ continue to enable content in Dolby Vision and Dolby Atmos.

These streaming services launch local content in Dolby formats internationally.

As we see an increase in new local content, we increase our value proposition for adoption of Dolby Vision and Dolby Atmos across devices in all market segments.

We have also enabled a broader range of content, such as music, gaming, live sports, and user-generated content.

In music, in fiscal 2022, Dolby Atmos music became available on Tencent Music’s QQ Music streaming service in China and on Melon, a streaming service in South Korea.

In gaming, in fiscal 2022, Xbox's Halo Infinite was released in both Dolby Vision and Dolby Atmos, and popular mobile game PUBG Mobile was made available to play in Dolby Atmos in some markets.

In addition, Moong Labs announced the launch of its popular mobile game "Epic Cricket – Big League" in Dolby Atmos for Android smartphone.

In live sports, the 2022 UEFA Champions League was broadcast in Dolby Vision and Dolby Atmos in some markets, and the 2023 UEFA Champions League will again be broadcast in Dolby Vision and Dolby Atmos.

In addition, during fiscal 2022, the French Open and the German Supercup final match was broadcast in Dolby Atmos.

We have worked with industry leaders to enhance these forms of content through the use of our technologies, creating additional value for the adoption of Dolby within devices such as mobile, PC, gaming consoles, and automotive.

The following are highlights from our fiscal 2022 and key challenges related to audio and imaging licensing, by market.

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 partner with many TV OEMs to enable Dolby Vision and Dolby Atmos experiences within their TV lineups.

We have expanded our offerings in the broadcast market through technologies such as Dolby Atmos and AC-4, Dolby Vision, as well as AVC and HEVC imaging technologies which we license through patent pools.

We work with many TV OEMs and strategic partners to enable and promote Dolby Vision and Dolby Atmos experiences within their TV lineups.

Many such partners have continued to expand their support of the combined Dolby Vision and Dolby Atmos experience.

For example, in fiscal 2021, Amazon introduced a new smart TV series that will support Dolby Vision.

In addition, Xiaomi in China recently launched new TV models that support Dolby Vision and Dolby Atmos.

Also, in fiscal 2021, Toshiba, TCL, Skyworth, Xiaomi, and Hisense launched TVs equipped with Dolby Vision IQ.

Dolby Vision IQ creates an enhanced viewing experience by automatically adjusting the TV picture according to the surrounding light and the type of content being viewed.

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

In fiscal 2021, Comcast announced the launch of XiOne, a new wireless streaming STB that supports Dolby Vision and Dolby Atmos, for their global customers including Sky in Europe.

For example, in fiscal 2022, LG launched new TVs that support Dolby Vision, Dolby Vision IQ, and Dolby Atmos, and Samsung launched new TVs that support Dolby Atmos.

Also in fiscal 2022, Hisense launched their ULED TVs that support Dolby Vision IQ and Dolby Atmos, and launched their laser TV projector that supports Dolby Vision and Dolby Atmos, while TCL launched new TVs with Dolby Vision, Dolby Vision IQ, and Dolby Atmos.

We are also seeing more STB providers adopting Dolby Vision in their devices.

Key Challenges :

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

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 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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Further, 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.

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.

Further, COVID-19 continues to cause 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.

Additionally, 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, including Apple and Android.

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

In fiscal 2021, Apple continued to deepen their adoption of the combined Dolby Vision and Dolby Atmos experience across Apple mobile devices.

In addition, mobile devices from Samsung, Sony, OPPO, and Lenovo support Dolby Atmos.

Also in fiscal 2021, Xiaomi launched its first smartphones supporting Dolby Vision and Dolby Atmos.

In fiscal 2022, Xiaomi launched or announced a number of new smartphones supporting Dolby Vision and Dolby Atmos, including the new 12S series, the first Android phone capable of recording video in Dolby Vision.

Additionally, in fiscal 2022, OnePlus launched new Ace Pro smartphones that support Dolby Atmos.

For tablets, in fiscal 2022, ASUS released a new tablet that supports Dolby Vision and Dolby Atmos, and Vivo launched the Vivo Pad, which is the first Vivo product with Dolby Vision and Dolby Atmos.

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.

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

The mobile market is heavily concentrated, so 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, 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 continues to cause 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.

We must also continue to support the development and distribution of Dolby-enabled content via various ecosystems.

Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.

Consumer Electronics

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

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

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

We continue to focus on expanding the availability of Dolby technologies to new devices.

In fiscal 2022, Samsung, Hisense, Prism+, and Bose all launched new soundbar models that support Dolby Atmos.

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.

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.

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

Further, COVID-19 continues to cause 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.

Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.

Personal Computers

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A number of PCs from partners such as Apple, Lenovo, Dell, Samsung, and ASUS also support Dolby Vision and/or Dolby Atmos, with continued expansion of applications through music, streaming, and gaming.

In fiscal 2021, Microsoft launched the Surface Pro 8 and Surface Studio, which enable playback in Dolby Vision, Dolby Vision IQ, and Dolby Atmos.

In addition, in fiscal 2022, Dell and ASUS released their latest laptop models that now support Dolby Vision and Dolby Atmos.

Key Challenges :

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

Demand in the PC market has been positively impacted in recent quarters by work-from-remote policies due to COVID-19.

It is unclear whether this heightened demand will be sustained.

COVID-19 continues to cause uncertainty about 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.

Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.

Other Markets

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

The most recently launched Xbox gaming console supports Dolby Vision and Dolby Atmos for streaming and gaming content.

We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system, including in the future, enabling the playback of Dolby Atmos music.

In fiscal 2021, Lucid Motors announced that their Lucid Air model is the first vehicle that features Dolby Atmos in its entertainment system.

Subsequent to fiscal 2021, Mercedes-Benz announced that they expect to adopt the Dolby Atmos Car Experience in two of their luxury car models, the Mercedes-Maybach and Mercedes-Benz S-Class.

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 2022, Cosmic Byte, Alienware, and Zebronics launched headsets that support Dolby Atmos.

We also generate revenue from the automotive industry primarily through disc playback devices as well as other elements of the entertainment system, and more recently through the adoption of Dolby Atmos Music.

In fiscal 2022, Mercedes-Benz announced they would be adopting Dolby Atmos in their Mercedes-Maybach models, the EQS and EQS SUV, as well as the EQE and the S-Class with support for Dolby Atmos Music provided by Apple Music.

Also in fiscal 2022, Chinese electric car manufacturers NIO, Li Auto, and XPENG launched multiple car models that support Dolby Atmos.

Recently, Polestar and Lotus announced that their latest models will be the first of their car models to support Dolby Atmos.

Key Challenges :

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Also, automotive revenue has been negatively impacted by a decline in the portion of cars that have optical disc playback in recent years.

These factors may impact our future revenue.

In addition, recent shortages of certain semiconductor components could result in lower implementation of our technologies in vehicles by automotive manufacturers.

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

Further, COVID-19 continues to cause 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.

Additionally, we face geopolitical challenges including changes in diplomatic and trade relationships, trade protection measures, and import or export licensing requirements.

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

We continue to expand our global presence for Dolby Cinema.

As of the end of fiscal 2021, we had over 260 Dolby Cinema locations established across 14 countries, as compared to over 250 Dolby Cinema locations established across 13 countries as of the end of fiscal 2020.

In fiscal 2021, over 95% of those sites reopened within capacity restrictions per local regulations.

The breadth of motion pictures for Dolby Cinema continues to grow with over 375 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all of the major studios, as compared to over 300 theatrical titles as of the end of fiscal 2020.

We continue to expand our global presence for Dolby Cinema, with over 280 open Dolby Cinema sites located in the U.S.

and internationally, subject to capacity restrictions per local regulations.

The breadth of motion pictures for Dolby Cinema continues to grow with over 400 theatrical titles in Dolby Vision and Dolby Atmos having been announced or released from all of the major studios as of the end of fiscal 2022.

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 a significant effect on theatrical exhibition, which could impact the

financial viability of our key partners.

The response to COVID-19 including the closure of cinemas, shelter-in-place mandates and government-imposed social-distancing restrictions has had a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has improved recently.

Further, certain studios have delayed the release of a number of new movie titles and/or are shifting towards a direct-to-streaming model, which as a result, has negatively impacted the rate of new Dolby Cinema content.

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 is tied to global box office performance generally.

COVID-19 has had a significant effect on theatrical exhibition, which could impact the financial viability of our key partners.

The response to COVID-19 including the closure of cinemas in China and government-imposed restrictions has had a negative impact on our cinema-related revenue and consumer demand, although consumer demand for the cinema has improved recently.

It is uncertain whether consumer demand for the cinema will return to previous levels.

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

Revenue from the sale of Dolby Conference Phones and Dolby Voice Room, a business which have exited, is included in products and services.

Revenue from our recently launched developer platform, Dolby.io, is also included in products and services.

Revenue from our developer platform, Dolby.io, is also included in products and services.

Cinema Products and Services

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

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 2022, there are over 7,000 Dolby Atmos screens installed or committed and over 2,200 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.

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 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.

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

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

We have also experienced supply chain shortages and increased shipping costs that have created challenges to maintain the sufficient supply of cinema products to meet the demand in the market.

Additionally, the effects of COVID-19 such as the closure of cinemas and public health mandates have had a negative impact on Dolby Cinema attendance.

As demand continues to recover, supply chain constraints may impact our ability to provide cinema products and services to our customers.

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 as government-imposed restrictions continue to lift in certain locations.

Historically, we sold hardware products such as the Dolby Conference Phone and the Dolby Voice Room, that included our Dolby Voice technology.

However, in the first quarter of fiscal 2021, we decided to exit our conference hardware business and focus instead on expanding the availability of Dolby Voice technology through software solutions and services.

Key Challenges:

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.

We continue to closely monitor the ongoing impact of these conditions.

Developer Platform Services

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For example, we are increasing our engagement with new customers across different industries through our developer platform, Dolby.io, that 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, for example, and interactivity APIs for enabling developers to embed enhanced communications experiences within their applications.

Following the initial launch of Dolby.io, we have seen growing developer engagement with our media and interactivity APIs for use cases such as entertainment, online education and collaboration tools.

For example, in fiscal 2021, we completed an integration with Box by using embedded Dolby media processing APIs, that allows Box customers to enable their users to easily enhance the quality of their audio files.

The current offerings include audio and video APIs for building high-quality communications, media, and streaming solutions.

Following the initial launch of Dolby.io in fiscal 2020, we have seen an expansion of the use cases for the platform.

Examples include virtual live performances, online and hybrid events, social audio, premium education, gaming, sports, and content creation and production.

Dolby.io provides tools to help developers create immersive experiences through apps and services with high quality audio and video, spatialized sound, and deliver live-streamed content with low latency.

Key Challenges:

Dolby.io is still considered in its initial stages of product launch, and it is uncertain when and if it will be a material revenue driver for the Company.

Our success in this market will depend on the number of developers we are able to attract and maintain, the volume of usage of the service, 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 internally develop new skills for our current employees or hire external specialized talent.

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

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 the number of developers we are able to attract and retain, the volume of usage of the service, 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 develop new skills internally for our current employees or hire external specialized talent.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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 intellectual property and technologies ("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.

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.

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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.

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.

Our estimates of royalty-based revenue take into consideration the macroeconomic effect of global events, such as inflation, COVID-19, 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.

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We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain.

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 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.

As such, the amount of fixed fee revenue recognized at the beginning of the license term will be reduced by the calculated financing component.

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.

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Factor Licensing Revenue Gross Margin

Broadcast á Higher revenue from higher unit shipments in North America and Europe, increased adoption of our technologies, and higher revenue from our patent licensing technologies, partially offset by lower recoveries ßà No significant fluctuations

Mobile á Higher revenue from recoveries, as well as higher adoption of our technologies and higher unit shipments

CE á Higher revenue from higher unit shipments, increased adoption of our Dolby Atmos and Dolby Vision technologies, and higher revenue from recoveries and from our patent licensing technologies

Other á Higher gaming revenue primarily from gaming consoles, higher revenue from our patent licensing technologies, and higher patent administration fees from Via, partially offset by lower automotive recoveries

PC á Higher unit shipments due to demand from working from home conditions of COVID-19, and higher adoption of our Dolby Atmos and Dolby Vision technologies, partially offset by lower recoveries

Broadcast â Lower foundational audio revenue due to lower TV unit shipments globally and lower recoveries, partially offset by higher adoption of Dolby Vision and Dolby Atmos technologies in TVs and STBs ßà No significant fluctuations

Mobile â Lower revenue due to timing, including recoveries, partially offset by higher adoption of Dolby Vision and Dolby Atmos technologies and new licensees in our imaging patent programs

PC á Higher adoption of Dolby Vision and Dolby Atmos technologies and new licensees in our imaging patent programs, and higher recoveries, partially offset by lower unit shipments

CE á Higher adoption of Dolby Atmos and Dolby Vision across devices, partially offset by lower unit shipments

Other ßà Higher Dolby Cinema revenue due to more screens being open and strong box office performance in fiscal 2022, partially offset by lower gaming and automotive revenue

Products and Services

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

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.

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Factor Products and Services Revenue Gross Margin

Products â Lower sales of cinema products and cinema hardware attributable to COVID-19, and lower units of conferencing hardware products as a result of exiting that business

á Lower excess and obsolescence charges and favorable product mix offset by lower utilization of available capacity

Services ßà No significant fluctuations â Higher systems and consulting costs to support the developer platform, and higher depreciation expense

Products á Increased demand for cinema equipment as the exhibitor market continues to recover following COVID-19-related shutdowns

á Higher gross margin primarily due to higher products revenue

Services á Higher services revenue primarily due to revenue from our cloud initiatives such as Dolby.io, cinema production services, partially offset by lower Dolby Voice hardware services

â Lower gross margin due to increased warranty expense on Dolby Cinema equipment, higher contractor expenses, and higher computer equipment and web hosting fees for our cloud initiatives, offset by higher revenue

Operating Expenses

Research and Development

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.

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

Fiscal Year Ended Change

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Category Key Drivers

Compensation & Benefits á Higher costs of $6.0 million due to higher salaries expense primarily related to increased headcount, and higher costs of $3.3 million due to higher incentive compensation

Compensation & Benefits â Lower costs of $10.5 million due to our annual bonus program, partially offset by higher salaries expense due to the extra week in the current fiscal year

Stock-based Compensation á Higher costs of $7.0 million due to increased fair value of RSUs

Travel â Lower costs of $2.1 million for company travel due to COVID-19 travel restrictions

Systems, Telecommunications and Computer Equipment á Higher costs of $4.1 million primarily due to higher cloud hosting costs

Sales and Marketing

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Category Key Drivers

Travel â Lower costs of $7.1 million for company travel due to COVID-19 travel restrictions

Marketing Programs â Lower costs of $6.3 million primarily related to marketing programs that were higher in the prior year and lower spending due to COVID-19

Consulting and External Labor á Higher costs of $6.0 million primarily due to increased spend on marketing campaigns, including digital and social marketing efforts

Facilities Costs â Lower facilities costs of $6.0 million due to reduced occupancy during COVID-19 related office closures

Stock-based Compensation á Higher costs of $4.5 million due to increased fair value of RSUs

Compensation & Benefits á Higher costs of $4.0 million due to higher salaries expense primarily related to increased headcount

Legal, Professional, & Consulting á Higher costs of $13.1 million primarily due to legal support for patents and licensee audits, and higher consulting expense for the increased development of digital marketing programs

Stock-based Compensation á Higher costs of $6.0 million primarily due to increased fair value of RSUs, offset by lower costs of $1.4 million due to fewer outstanding unearned options

Travel á Higher costs of $4.5 million for increased company travel as a result of fewer COVID-19 travel restrictions

Compensation & Benefits â Lower costs of $7.6 million primarily due to our annual bonus program, partially offset by higher costs of $7.1 million for higher salaries expense primarily due to increased headcount and the extra week in the current fiscal year

General and Administrative

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Percentage of total revenue 22% 17%

On August 7, 2019, Intertrust Technologies ("Intertrust") filed complaints against each of our customers AMC Entertainment Holdings, Inc., Cinemark Holdings, Inc., and Regal Entertainment Group in the U.S.

District Court for the Eastern District of Texas, alleging that the use of systems including certain cinema products, which were supplied under commercial agreements that we acquired as a part of an acquisition in 2014, infringed various Intertrust patents, and seeking damages based on the revenues of the defendants.

We recorded $34.4 million in fiscal 2022 within G&A expenses, reflecting a settlement payment and an immaterial accrual.

We believe that these amounts fully resolve all claims relating to Intertrust’s patent assertions.

Category Key Drivers

Bad Debt Expense â Lower costs of $10.5 million primarily due to higher charges recorded in the prior year attributable to the onset of COVID-19, and higher net collections in the current year

Taxes and Insurance á Higher costs of $6.1 million primarily due to a property tax credit recorded in the prior year that did not repeat in the current period, and due to changes in nature of local business taxes

Stock-based Compensation á Higher costs of $4.5 million due to increased fair value of RSUs

Compensation & Benefits á Higher costs of $3.6 million due to higher salaries expense due to increased headcount

Other Miscellaneous Expenses á Higher costs of $34.4 million related to the resolution of the legal matter discussed above

Credit Loss Expense á Higher credit loss expense of $8.4 million primarily due to aging license receivable balances

Compensation & Benefits â Lower costs of $6.3 million primarily due to our annual bonus program, partially offset by higher costs of $5.9 million for higher salaries expense primarily due to increased headcount and the extra week in the current fiscal year

Gain on Sale of Assets

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Percentage of total revenue —% (1)%

In fiscal year 2019, management committed to a plan to sell a property, which included land and a building, after the lease on the property expired and we re-assessed the real estate needs of our business.

This property had a carrying value of $2.2 million as of September 25, 2020.

In the fiscal 2021, we finalized the sale of this property, and as a result, we realized a gain of $13.9 million, which was recorded to gain on sale of assets o n the consolidated statements of operations.

Refer to "Net Income Attributable to Controlling Interest" section below for more information.

In fiscal 2021, we finalized the sale of a property, which included land and a building, resulting in a gain of $13.9 million, which was recorded to gain on sale of assets o n the consolidated statements of operations.

Refer to "Net (Income)/Loss Attributable to Controlling Interest" section below for more information.

Restructuring Charges

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Percentage of total revenue 1% 1%

Restructuring charges recorded in fiscal 2021 of $9.5 million were incurred in relation to our fiscal 2021 plan to reduce certain activities, such as exiting our conferencing hardware business, in order to focus our efforts on higher priority investment areas, and reduce the cost structure of our manufacturing operations.

These costs represented severance and related benefits that were offered to approximately 100 employees impacted by this action.

Restructuring charges was flat due to the restructuring events in fiscal 2022 and the restructuring events in fiscal 2021, to align resources with a revised business strategy and outlook, and to support our higher priority focus areas.

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, and sales of marketable securities from our investment portfolio.

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, and sales of marketable securities from our investment portfolio.

Fiscal Year Ended Change

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Category Key Drivers

Interest Income â Lower yields of $9.2 million on current year investment balances due to decreased interest rates

Interest Income á Higher yields on current year investment balances due to increased interest rates

Other Income â Lower income primarily due to lower yields on our SERP balances in the current year

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

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Factor Impact On Effective Tax Rate

Unrecognized Tax Benefits á Lower expense in prior period due to a discrete benefit associated with the release of liabilities related to unrecognized tax benefits

Foreign Operations â Higher benefit from changes in jurisdictional mix of income

Stock-Based Compensation â Higher benefit related to the settlement of stock-based awards

Net Income Attributable to Controlling Interest

Stock-based Compensation á Lower benefit related to the settlement of stock-based awards.

Foreign Operations á Lower benefit from earned income in lower tax jurisdictions.

Research and Development â Higher benefit from R&D tax credits.

Net (Income)/Loss Attributable to Controlling Interest

Fiscal Year Ended Change

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2022 September 24,

Net income attributable to controlling interest $(7,596) $(256) $(7,340) 2,867%

Net (income)/loss attributable to controlling interest $189 $(7,596) $7,785 (102)%

Percentage of total revenue —% (1)%

In fiscal 2021, we finalized the sale of a property, which included land and building, and as a result, we recognized a gain of $13.9 million from this transaction, which was recorded to gain on sale of assets on the consolidated statements of operations.

In fiscal 2021, we finalized the sale of a property, which included land and building, and as a result, we recognized a gain of $13.9 million to gain on sale of assets on the consolidated statements of operations.

The property was 51% owned by the controlling interest, and therefore 51% of the gain on sale of assets has been attributed to the controlling interest.

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As of September 30, 2022, we had cash and cash equivalents of $620.1 million, which mainly consisted of cash and highly-liquid money market funds.

In addition, we had short and long-term investments of $101.7 million,

which consisted primarily of corporate bonds, municipal debt securities, government bonds, commercial paper, U.S.

agency securities, and certificates of deposit.

The following table presents selected financial information as of the fiscal years ended September 24, 2021 and September 25, 2020 (in thousands):

In addition, we had short and long-term investments of $291.7 million, which consisted primarily of corporate bonds, government bonds, municipal debt securities, certificates of deposit, commercial paper, and U.S.

agency securities.

The following table presents selected financial information as of September 30, 2022 and September 24, 2021 (in thousands):

September 30,

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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.

Included in capital expenditures are amounts associated with Dolby Cinema locations.

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.

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Our stock repurchase program was approved in fiscal 2010, and since then we have completed approximately $2.6 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 are currently analyzing the impact of the excise tax on our future operations.

Quarterly Dividend Program.

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Cash Flows Analysis

For the following comparative analysis performed for each of the sections of the statement 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 (amounts displayed in thousands).

Operating Activities

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Net cash provided by operating activities $ 318,576 $ 447,753

Net cash provided by operating activities increased $103.9 million in fiscal 2021 compared to fiscal 2020, primarily due to the following:

Net cash provided by operating activities decreased $129.2 million in fiscal 2022 compared to fiscal 2021, primarily due to the following:

Factor Impact On Cash Flows

Working Capital á Increase due to higher accounts payable and accrued liabilities, partially offset by increased accounts receivable

Net Income á Higher revenue and lower COGS

Gain on Sale of Assets â Non-cash adjustment for the gain recognized on the sale of property that was 51% owned by the controlling interest

Net Income â Lower revenue, higher costs associated with the resolution of a legal matter discussed in Note 15 to the consolidated financial statements, and higher S&M expenses

Working Capital â Decrease due to lower accounts payable and accrued liabilities and higher inventories, partially offset by lower accounts receivable and contract assets

Investing Activities

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2022 September 24,

Net cash provided by (used in) investing activities $ (44,905) $ 134,374

Net cash provided by/(used in) investing activities was $179.3 million lower in fiscal 2021 compared to fiscal 2020, primarily due to the following:

Net cash used in investing activities $ (295,935) $ (44,905)

Net cash used in investing activities was $251.0 million higher in fiscal 2022 compared to fiscal 2021, primarily due to the following:

Factor Impact On Cash Flows

Proceeds from Investments â Lower inflows from the sale and maturity of marketable investment securities

Purchase of Investments á Lower outflows for the purchase of marketable investment securities

Sale of Assets á Higher inflows for the sale of property that was 51% owned by the controlling interest

Capital Expenditures á Lower expenditures for PP&E in the current year due to reduced Dolby Cinema spending

Purchase of Investments â Higher outflows for the purchase of marketable investment securities, and other investments

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

Business Combinations â Higher outflows for the acquisition of Millicast, Inc.

("Millicast") completed in fiscal 2022

Sale of Assets â Lower inflows for the sale of property in the prior year that was 51% owned by the controlling interest

Financing Activities

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Factor Impact On Cash Flows

Share Repurchases â Higher outflows for common stock repurchases as part of our stock repurchase program

Common Stock Issuance á Higher inflows from employee stock option exercises

Shares Repurchased for Tax Withholdings â Higher outflows due to higher fair value of shares withheld for taxes

Distribution to Controlling Interest â Higher outflows for distributions to controlling interest due to the sale of property that was 51% owned by the controlling interest

Share Repurchases â Higher outflows from increases in common stock repurchases

Common Stock Issuance â Lower inflows from employee stock option exercises

Dividend Payments â 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

Distribution to Controlling Interest á Lower outflows for distributions to controlling interest due to the sale of property that was 51% owned by the controlling interest in fiscal 2021, that did not recur in fiscal 2022

Contractual Obligations and Commitments

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Naming Rights.

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

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.

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Purchase Obligations.

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

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.

Donation Commitments.

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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.

Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our consolidated financial statements with respect to these obligations.

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.

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For additional details regarding indemnification clauses within our contractual agreements, see Note 14 " Commitments and Contingencies " to our consolidated financial statements.

In fiscal 2021, 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 .

In fiscal 2022, 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.

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