10-Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 1, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From              To             
Commission File Number: 001-32431

DOLBY LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
90-0199783
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1275 Market Street
San Francisco, CA
94103-1410
(415) 558-0200
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
 
Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý
On January 29, 2016, the registrant had 52,221,668 shares of Class A common stock, par value $0.001 per share, and 48,574,390 shares of Class B common stock, par value $0.001 per share, outstanding.


Table of Contents


DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended January 1, 2016
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


2

Table of Contents


GLOSSARY OF TERMS
The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation
 
Term
AAC
 
Advanced Audio Coding
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CODM
 
Chief Operating Decision-Maker
COGS
 
Cost Of Goods Sold
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
DCI
 
Digital Cinema Initiative
DD
 
Dolby Digital®
DD+
 
Dolby Digital Plus™
DMA
 
Digital Media Adapter
DTV
 
Digital Television
DVB
 
Digital Video Broadcasting
DVD
 
Digital Versatile Disc
EPS
 
Earnings Per Share
ESP
 
Estimated Selling Price
ESPP
 
Employee Stock Purchase Plan
FASB
 
Financial Accounting Standards Board
FCPA
 
Foreign Corrupt Practices Act
G&A
 
General & Administrative
GAAP
 
Generally Accepted Accounting Principles
HDR
 
High Dynamic Range
HDTV
 
High Definition Television
HE AAC
 
High Efficiency Advanced Audio Coding
HEVC
 
High Efficiency Video Coding
HFR
 
High Frame Rate
HTIB
 
Home Theater In-A-Box
IC
 
Integrated Circuit
IMB
 
Integrated Media Block
IPO
 
Initial Public Offering
IPTV
 
Internet Protocol Television
ISO
 
Incentive Stock Option
ISV
 
Independent Software Vendor
IT
 
Information Technology
LCD
 
Liquid Crystal Display
LP
 
Limited Partner/Partnership
ME
 
Multiple Element
NATO
 
North American Theatre Owners
NOL
 
Net Operating Loss
NQ
 
Non-Qualified/Non-Statutory Stock Option
OCI
 
Other Comprehensive Income
ODD
 
Optical Disc Drive
OECD
 
Organization For Economic Co-Operation & Development
OEM
 
Original Equipment Manufacturer
OTT
 
Over-The-Top
PC
 
Personal Computer
PCS
 
Post-Contract Support
PP&E
 
Property, Plant And Equipment
PSO
 
Performance-Based Stock Option
R&D
 
Research & Development
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SAR
 
Stock Appreciation Rights
SERP
 
Supplemental Executive Retirement Plan
SoC
 
System-On-A-Chip
STB
 
Set-Top Box
TAM
 
Total Available Market
TPE
 
Third Party Evidence
TSR
 
Total Stockholder Return
UHD
 
Ultra High Definition
U.S. GAAP
 
Generally Accepted Accounting Principles In The United States
VSOE
 
Vendor Specific Objective Evidence

3

Table of Contents


PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)


 
January 1,
2016
September 25,
2015
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
467,099

$
531,926

Restricted cash
4,331

2,936

Short-term investments
139,144

138,901

Accounts receivable, net of allowance for doubtful accounts of $1,456 and $1,542
89,935

101,563

Inventories
14,237

13,872

Prepaid expenses and other current assets
23,195

32,031

Total current assets
737,941

821,229

Long-term investments
266,904

321,015

Property, plant and equipment, net
410,063

403,091

Intangible assets, net
224,151

127,507

Goodwill
308,374

307,708

Deferred taxes
154,277

143,279

Other non-current assets
11,894

9,464

Total assets
$
2,113,604

$
2,133,293

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
12,207

$
20,710

Accrued liabilities
159,635

169,307

Income taxes payable
2,701

754

Deferred revenue
21,992

18,910

Total current liabilities
196,535

209,681

Long-term deferred revenue
33,813

30,581

Other non-current liabilities
71,074

77,024

Total liabilities
301,422

317,286

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 52,089,249 shares issued and outstanding at January 1, 2016 and 50,291,426 at September 25, 2015
52

51

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 48,681,489 shares issued and outstanding at January 1, 2016 and 50,743,311 at September 25, 2015
49

51

Additional paid-in capital

17,571

Retained earnings
1,816,318

1,800,857

Accumulated other comprehensive income/(loss)
(12,923
)
(11,462
)
Total stockholders’ equity – Dolby Laboratories, Inc.
1,803,496

1,807,068

Controlling interest
8,686

8,939

Total stockholders’ equity
1,812,182

1,816,007

Total liabilities and stockholders’ equity
$
2,113,604

$
2,133,293

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Revenue:
 
 
Licensing
$
211,129

$
216,598

Products
24,809

13,263

Services
4,876

4,377

Total revenue
240,814

234,238

 
 
 
Cost of revenue:
 
 
Cost of licensing
6,533

3,481

Cost of products
19,038

12,584

Cost of services
4,195

3,345

Total cost of revenue
29,766

19,410

 
 
 
Gross margin
211,048

214,828

 
 
 
Operating expenses:
 
 
Research and development
53,328

48,594

Sales and marketing
74,454

68,018

General and administrative
44,078

44,716

Restructuring charges/(credits)

(39
)
Total operating expenses
171,860

161,289

 
 
 
Operating income
39,188

53,539

 
 
 
Other income/expense:
 
 
Interest income
1,297

900

Interest expense
(29
)
(15
)
Other income/(expense), net
(972
)
(108
)
Total other income
296

777

 
 
 
Income before income taxes
39,484

54,316

Provision for income taxes
(8,473
)
(12,379
)
Net income including controlling interest
31,011

41,937

Less: net (income) attributable to controlling interest
(110
)
(580
)
Net income attributable to Dolby Laboratories, Inc.
$
30,901

$
41,357

 
 
 
Net Income Per Share:
 
 
Basic
$
0.31

$
0.40

Diluted
$
0.30

$
0.40

Weighted-Average Shares Outstanding:
 
 
Basic
100,734

102,303

Diluted
101,931

104,275

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
781

$
788

Included in net income attributable to controlling interest
$
176

$
1,153

 
 
 
Cash dividend declared per common share
$
0.12

$
0.10

Cash dividend paid per common share
$
0.12

$
0.10

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Net income including controlling interest
$
31,011

$
41,937

Other comprehensive income:
 
 
Foreign currency translation adjustments, net of tax
(750
)
(5,553
)
Unrealized losses) on available-for-sale securities, net of tax
(860
)
(177
)
Comprehensive income
29,401

36,207

Less: comprehensive (income)/loss attributable to controlling interest
39

(52
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
29,440

$
36,155


See accompanying notes to unaudited interim condensed consolidated financial statements


6

Table of Contents


DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Dolby Laboratories, Inc.
 
 
 
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total Dolby Laboratories, Inc.
Controlling
Interest
Total
Balance at September 25, 2015
$
102

$
17,571

$
1,800,857

$
(11,462
)
$
1,807,068

$
8,939

$
1,816,007

Net income


30,901


30,901

110

31,011

Currency translation adjustments, net of tax of $343



(601
)
(601
)
(149
)
(750
)
Unrealized losses on investments, net of tax of $168



(860
)
(860
)

(860
)
Distributions to controlling interest





(214
)
(214
)
Stock-based compensation expense

19,380



19,380


19,380

Repurchase of common stock
(2
)
(36,121
)
(3,326
)

(39,449
)

(39,449
)
Cash dividends declared and paid on common stock


(12,114
)

(12,114
)

(12,114
)
Tax (deficiency) from employee stock plans

(976
)


(976
)

(976
)
Common stock issued under employee stock plans

9,986



9,986


9,986

Tax withholdings on vesting of restricted stock
1

(9,840
)


(9,839
)

(9,839
)
Balance at January 1, 2016
$
101

$

$
1,816,318

$
(12,923
)
$
1,803,496

$
8,686

$
1,812,182



 
Dolby Laboratories, Inc.
 
 
 
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 26, 2014
$
103

$
46,415

$
1,660,485

$
3,014

$
1,710,017

$
21,631

$
1,731,648

Net income


41,357


41,357

580

41,937

Currency translation adjustments, net of tax of $528



(5,025
)
(5,025
)
(528
)
(5,553
)
Unrealized gains on investments, net of tax of $166



(177
)
(177
)

(177
)
Distributions to controlling interest





(5,591
)
(5,591
)
Stock-based compensation expense

17,842



17,842


17,842

Repurchase of common stock
(1
)
(16,952
)


(16,953
)

(16,953
)
Cash dividends declared and paid on common stock


(10,228
)

(10,228
)

(10,228
)
Tax benefit from employee stock plans

1,509



1,509


1,509

Common stock issued under employee stock plans
1

7,510



7,511


7,511

Tax withholdings on vesting of restricted stock

(10,846
)


(10,846
)

(10,846
)
Exercise of class B stock options

1



1


1

Balance at December 26, 2014
$
103

$
45,479

$
1,691,614

$
(2,188
)
$
1,735,008

$
16,092

$
1,751,100


See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Operating activities:
 
 
Net income including controlling interest
$
31,011

$
41,937

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
21,814

16,524

Stock-based compensation
19,380

17,842

Amortization of premium on investments
1,605

2,391

Excess tax benefit from exercise of stock options
(300
)
(1,944
)
Provision for doubtful accounts
(322
)
(376
)
Deferred income taxes
(10,488
)
(6,310
)
Other non-cash items affecting net income
445

653

Changes in operating assets and liabilities:
 
 
Accounts receivable
11,961

(22,442
)
Inventories
(877
)
(2,997
)
Prepaid expenses and other assets
(3,567
)
(4,473
)
Accounts payable and other liabilities
(14,574
)
(46,801
)
Income taxes, net
5,014

3,692

Deferred revenue
6,319

4,452

Other non-current liabilities
(26
)
1,297

Net cash provided by operating activities
67,395

3,445

 
 
 
Investing activities:
 
 
Purchase of investments
(85,299
)
(110,508
)
Proceeds from sales of investment securities
121,770

63,454

Proceeds from maturities of investment securities
14,610

42,700

Purchases of PP&E
(24,368
)
(21,661
)
Payments for business acquisitions, net of cash acquired

(93,516
)
Purchase of intangible assets
(105,270
)
(6,416
)
Proceeds from sale of PP&E and assets held for sale

3

Change in restricted cash
(1,395
)
102

Net cash used in investing activities
(79,952
)
(125,842
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
9,986

7,512

Repurchase of common stock
(39,449
)
(16,953
)
Payment of cash dividend
(12,114
)
(10,228
)
Distribution to controlling interest
(214
)
(5,591
)
Excess tax benefit from the exercise of stock options
300

1,944

Shares repurchased for tax withholdings on vesting of restricted stock
(9,839
)
(10,846
)
Net cash used in financing activities
(51,330
)
(34,162
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(940
)
(2,798
)
Net decrease in cash and cash equivalents
(64,827
)
(159,357
)
Cash and cash equivalents at beginning of period
531,926

568,472

Cash and cash equivalents at end of period
$
467,099

$
409,115

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
13,973

$
13,739

 
 
 
Non-cash investing and financing activities:
 
 
Change in PP&E purchased and unpaid at period-end
$
(3,636
)
$
33,260

Purchase consideration payable for acquisition
$
95

$
740

See accompanying notes to unaudited interim condensed consolidated financial statements

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Table of Contents


DOLBY LABORATORIES, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 25, 2015 and include all adjustments necessary for fair presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements for the fiscal year ended September 25, 2015, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended January 1, 2016 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 30, 2016.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of Dolby Laboratories, Inc. and our wholly owned subsidiaries. In addition, we have consolidated the financial results of jointly owned affiliated companies in which our principal stockholder has a controlling interest. We report these controlling interests as a separate line in our consolidated statements of operations as net income attributable to controlling interest and in our consolidated balance sheets as a controlling interest. We eliminate all intercompany accounts and transactions upon consolidation.
Operating Segments
We operate as a single reporting segment, and thus all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This determination reflects the fact that our CODM, our Chief Executive Officer, evaluates our financial information and resources, and assesses the performance of these resources on a consolidated basis.
Use of Estimates
The preparation of our financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated selling prices for elements sold in ME revenue arrangements; valuation allowances for accounts receivable; carrying values of inventories and certain property, plant, and equipment, goodwill and intangible assets; fair values of investments; accrued liabilities including liabilities for unrecognized tax benefits, deferred income tax assets and liabilities and stock-based compensation. Actual results could differ from our estimates.
Fiscal Year
Our fiscal year is a 52 or 53 week period ending on the last Friday in September. The fiscal periods presented herein include the 14 week period ended January 1, 2016 and the 13 week period December 26, 2014. Our fiscal year ended September 25, 2015 (fiscal 2015) consisted of 52 weeks while our fiscal year ending September 30, 2016 (fiscal 2016) will consist of 53 weeks.
Reclassifications
We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, operating cash flows or net income.

9

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2. Summary of Significant Accounting Policies
We continually assess any ASUs or other new accounting pronouncements issued by the FASB to determine their applicability and impact on us. Where it is determined that a new accounting pronouncement will result in a change to our financial reporting, we take the appropriate steps to ensure that such changes are properly reflected in our consolidated financial statements or notes thereto.
Recently Issued Accounting Standards
Adopted Standards
Balance Sheet Classification - Deferred Taxes.  During the first quarter of fiscal 2016, we elected to early-adopt ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires classification of all deferred tax assets and liabilities as non-current, which represents a change from our historical presentation whereby certain of our deferred tax assets and liabilities were classified as current, and the remainder were classified as non-current. We elected a transition method to apply the changes from the new standard on a retrospective basis, and upon adoption, reclassified $97.1 million of deferred tax assets from current assets to non-current assets on our consolidated balance sheet as of September 25, 2015.
With the exception of the impact from the adoption of ASU 2015-17 discussed above, there have not been any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 25, 2015.
Standards Not Yet Effective
Revenue Recognition.  In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new standard will replace existing revenue recognition guidance in U.S. GAAP when it becomes effective, and may also impact the accounting for certain direct costs associated with revenues. The new standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this standard will have on our consolidated financial statements and related disclosures, and have yet to select a transition method or determine the effect of the standard on our ongoing financial reporting. The new standard is effective for us, and we intend to adopt it beginning September 29, 2018. Although permitted, we do not intend to early adopt the new standard beginning September 30, 2017.
Consolidation.  In February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. Among others, the ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. The ASU is effective for us on October 1, 2016. Early adoption is permitted, including adoption in an interim period. We have not yet selected the timing, the transition method or determined the effect of the standard on our ongoing financial reporting.
Inventory.  In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which affects reporting entities that measure inventory using first-in, first-out (FIFO) or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update are effective for us beginning September 30, 2017, and early adoption is permitted. We are currently evaluating the impact of adoption on our consolidated financial statements.

3. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of January 1, 2016 and September 25, 2015 (amounts displayed in thousands, except as otherwise noted).

10

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Accounts Receivable
Accounts Receivable, Net
January 1,
2016
September 25,
2015
Trade accounts receivable
$
86,129

$
94,559

Accounts receivable from patent administration program customers
5,262

8,546

Accounts receivable, gross
91,391

103,105

Less: allowance for doubtful accounts
(1,456
)
(1,542
)
Total
$
89,935

$
101,563

Inventories
Inventories
January 1,
2016
September 25,
2015
Raw materials
$
2,600

$
3,246

Work in process
4,338

3,279

Finished goods
7,299

7,347

Total
$
14,237

$
13,872


Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. In addition to the amounts shown in the table above, we have included $1.4 million and $1.4 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of January 1, 2016 and September 25, 2015, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
Prepaid Expenses And Other Current Assets
January 1,
2016
September 25,
2015
Prepaid expenses
$
14,901

$
13,680

Other current assets
7,338

7,525

Income tax receivable
956

10,826

Total
$
23,195

$
32,031

Accrued Liabilities
Accrued Liabilities
January 1,
2016
September 25,
2015
Accrued royalties
$
2,057

$
1,951

Amounts payable to patent administration program partners
45,336

40,466

Accrued compensation and benefits
51,410

70,317

Accrued professional fees
5,003

6,523

Other accrued liabilities
55,829

50,050

Total
$
159,635

$
169,307

Other accrued liabilities include the accrual for unpaid PP&E additions of $21.1 million and $20.5 million as of January 1, 2016 and September 25, 2015, respectively.
Other Non-Current Liabilities
Other Non-Current Liabilities
January 1,
2016
September 25,
2015
Supplemental retirement plan obligations
$
2,480

$
2,400

Non-current tax liabilities
57,011

62,843

Other liabilities
11,583

11,781

Total
$
71,074

$
77,024

 
4. Investments & Fair Value Measurements
Investment Strategy.    Under our investment management strategy, we use cash holdings to purchase investment grade securities that are diversified among security types, industries and issuers. Each of the investments within our investment portfolio is measured at fair value, and is recorded within cash equivalents, short-term investments, and long-term investments in our consolidated balance sheets.

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With the exception of our mutual fund investments held in our supplemental retirement plan, all of our investments are classified as available-for-sale securities. Investments held in our supplemental retirement plan are classified as trading securities. Our investments primarily consist of municipal debt securities, corporate bonds, United States agency securities and commercial paper. In addition to the security types noted above, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of the municipal debt investments that we hold are supported by letters of credit or standby purchase agreements.
Our cash and investment portfolio, which is recorded as cash equivalents and both short and long-term investments, consists of the following (in thousands):
 
January 1,
2016
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
417,973

 
 
$
417,973

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
49,126



49,126

 
49,126

 
 
Cash and cash equivalents
467,099



467,099


49,126



 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Commercial paper
13,843


(11
)
13,832

 
 
13,832

 
Corporate bonds
83,258

9

(103
)
83,164

 
 
83,164

 
Municipal debt securities
42,116

39

(7
)
42,148

 
 
42,148

 
Short-term investments
139,217

48

(121
)
139,144



139,144


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
8,500



8,500

 
 
8,500

 
U.S. agency securities
999

1


1,000

 
1,000

 
 
Government bonds
30,486

1

(186
)
30,301

 
30,301

 
 
Corporate bonds
149,384

40

(563
)
148,861

 
 
148,861

 
Municipal debt securities
75,035

41

(87
)
74,989

 
 
74,989

 
Other long-term investments (2)
2,812

441


3,253

 
441

 


Long-term investments
267,216

524

(836
)
266,904


31,742

232,350


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
873,532

$
572

$
(957
)
$
873,147

 
$
80,868

$
371,494

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
 
Assets
2,579

 
 
2,579

 
2,579

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,579

 
 
2,579

 
2,579

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration related to acquisition:
 
 
 
 
 
 
 
 
Liabilities
95

 
 
95

 


 
95

Included in accrued liabilities
 
 
 
 
 
(1)
The certificate of deposit includes marketable securities, and has a maturity in excess of one year as of January 1, 2016.
(2)
Other long-term investments as of January 1, 2016 include a marketable equity security of $0.4 million, and other investments that are not carried at fair value including an equity method investment of $0.3 million and two cost method investments of $2.0 million and $0.5 million.




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September 25,
2015
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
511,736

 
 
$
511,736

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
19,014



19,014

 
19,014

 
 
Corporate bonds
1,176



1,176

 
 
1,176

 
Cash and cash equivalents
531,926



531,926

 
19,014

1,176


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Government bonds
2,000

1


2,001

 
2,001

 
 
Commercial paper
6,478



6,478

 
 
6,478

 
Corporate bonds
86,543

46

(11
)
86,578

 
 
86,578

 
Municipal debt securities
43,746

98


43,844

 
 
43,844

 
Short-term investments
138,767

145

(11
)
138,901

 
2,001

136,900


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. agency securities
1,999

1


2,000

 
2,000

 
 
Government bonds
30,505

19

(17
)
30,507

 
30,507

 
 
Corporate bonds
167,394

138

(392
)
167,140

 
 
167,140

 
Municipal debt securities
117,552

189

(60
)
117,681

 
 
117,681

 
Other long-term investments (1)
2,961

726


3,687

 
726

 
 
Long-term investments
320,411

1,073

(469
)
321,015

 
33,233

284,821


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
991,104

$
1,218

$
(480
)
$
991,842

 
$
54,248

$
422,897

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
2,498

 
 
2,498

 
2,498

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,498

 
 
2,498

 
2,498

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration related to acquisition:
 
 
 
 
 
 
 
 
Liabilities
95

 
 
95

 
 
 
95

Included in accrued liabilities
 
 
 
 
 
(1)
Other long-term investments as of September 25, 2015 include a marketable equity security of $0.7 million, and other investments that are not carried at fair value including an equity method investment of $0.5 million and two cost method investments of $2.0 million and $0.5 million.
Fair Value Hierarchy.    Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. We minimize the use of unobservable inputs and use observable market data, if available, when determining fair value. We classify our inputs to measure fair value using the following three-level hierarchy:
Level 1: Quoted prices in active markets at the measurement date for identical assets and liabilities. We base the fair value of our Level 1 financial instruments, which are traded in active markets, using quoted market prices for identical instruments.
Level 2: Prices may be based upon quoted prices in active markets or inputs not quoted on active markets but are corroborated by market data. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or model driven valuations using observable market data or inputs corroborated by observable market data. To validate the fair value determination provided by our primary pricing service, we perform quality controls over values received which include comparing our pricing service provider’s assessment of the fair values of our investment securities against the fair values of our investment securities obtained from another independent source, reviewing the pricing movement in the context of overall market trends, and reviewing trading information from our investment managers. In addition, we assess the inputs and methods used in determining the fair value in order to determine the classification of securities in the fair value hierarchy.
Level 3: Unobservable inputs are used when little or no market data is available and reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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Securities In Gross Unrealized Loss Position.    We periodically evaluate our investments for other-than- temporary declines in fair value. The unrealized losses on our available-for-sale securities were primarily the result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The following table presents the gross unrealized losses and fair value for those available-for-sale securities that were in an unrealized loss position as of January 1, 2016 and September 25, 2015 (in thousands):
 
January 1, 2016
 
September 25, 2015
Investment Type
Fair Value
Gross Unrealized Losses (1)
 
Fair Value
Gross Unrealized Losses (1)
U.S. agency securities
$
29,302

$
(186
)
 
$
19,005

$
(17
)
Commercial paper
13,832

(11
)
 


Corporate bonds
195,014

(666
)
 
148,034

(403
)
Municipal debt securities
60,886

(94
)
 
35,476

(60
)
Total
$
299,034

$
(957
)
 
$
202,515

$
(480
)
(1)
Our available-for-sale securities in an unrealized loss position were in such position for less than twelve months as of both January 1, 2016 and September 25, 2015.
Although we had certain securities that were in an unrealized loss position as of January 1, 2016, we expect to recover the full carrying value of these securities as we do not intend to, nor do we currently anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, we do not consider any portion of the unrealized losses at either January 1, 2016 or September 25, 2015 to represent an other-than-temporary impairment, nor do we consider any of the unrealized losses to be credit losses.
Investment Maturities.    The following table summarizes the amortized cost and estimated fair value of the available-for-sale securities within our investment portfolio based on stated maturities as of January 1, 2016 and September 25, 2015, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
January 1, 2016
 
September 25, 2015
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
187,978

$
187,904

 
$
158,957

$
159,090

Due in 1 to 2 years
133,489

133,256

 
173,571

173,577

Due in 2 to 3 years
130,915

130,395

 
143,879

143,752

Total
$
452,382

$
451,555

 
$
476,407

$
476,419


5. Property, Plant & Equipment
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of products, cost of services, R&D, S&M and G&A expenses in our consolidated statements of operations. PP&E consist of the following (in thousands):
Property, Plant And Equipment
January 1,
2016
 
September 25,
2015
Land
$
43,497

 
$
43,537

Buildings and building improvements
257,723

 
248,390

Leasehold improvements
59,861

 
61,455

Machinery and equipment
73,583

 
70,143

Computer systems and software
142,990

 
136,666

Furniture and fixtures
27,115

 
25,489

Cinema equipment provided under operating leases
13,796

 
7,638

Construction-in-progress
5,669

 
11,448

Property, plant and equipment, gross
624,234

 
604,766

Less: accumulated depreciation
(214,171
)
 
(201,675
)
Property, plant and equipment, net
$
410,063

 
$
403,091


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6. Goodwill & Intangible Assets
Goodwill
The following table outlines changes to the carrying amount of goodwill (in thousands):
 
Goodwill
Balance at September 25, 2015
$
307,708

Translation adjustments
666

Balance at January 1, 2016
$
308,374

Intangible Assets
Our intangible assets are stated at their original cost less accumulated amortization, and principally consist of acquired technology, patents, trademarks, customer relationships and contracts. Intangible assets subject to amortization consist of the following (in thousands):
 
January 1, 2016
 
September 25, 2015
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
279,082

$
(82,497
)
$
196,585

 
$
172,787

$
(74,398
)
$
98,389

Customer relationships
56,889

(29,897
)
26,992

 
56,933

(28,275
)
28,658

Other intangibles
22,776

(22,202
)
574

 
22,564

(22,104
)
460

Total
$
358,747

$
(134,596
)
$
224,151

 
$
252,284

$
(124,777
)
$
127,507

During both the first quarter of fiscal 2016 and the first quarter of fiscal 2015, we purchased various patents and developed technology for cash consideration that enable us to further develop our audio, imaging and potential product offerings.
Patent Portfolio Acquisition.    On September 30, 2015, we completed an asset purchase of a patent portfolio that fits within our existing patent licensing programs for total consideration of $105.0 million. These assets are categorized within the "Acquired patents and technology intangible asset class", and will be amortized over their weighted-average useful life of 9.0 years.
Other.    During the first quarter of fiscal 2016, we also acquired other intangible assets for cash consideration of $0.3 million, which will be amortized over their weighted-average useful life of 18.0 years.
With regard to our purchase of intangible assets during the periods presented, the following table summarizes the cash consideration paid, the weighted-average useful lives over which the acquired assets will be amortized using the greater of either the straight-line basis or a ratio-to-revenue method, and the classification of their amortized expense in our consolidated statements of operations:
Fiscal Period
Total Purchase Consideration
Weighted-Average Useful Life
Income Statement Classification: Amortization Expense
 
(in millions)
(in years)
 
Fiscal 2015
 
 
 
Q1 - Quarter ended December 26, 2014
$6.4
18.0
Cost of Revenue
 
 
 
 
Fiscal 2016
 
 
 
Q1 - Quarter ended January 1, 2016
$105.3
9.0
Cost of Revenue
Amortization expense for our intangible assets is included in cost of licensing, cost of products, R&D and S&M expenses in our consolidated statements of operations. Amortization expense was $8.5 million and $5.4 million in the first quarter of fiscal 2016 and 2015, respectively. As of January 1, 2016, estimated amortization expense in future

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fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder of 2016
$
24,478

2017
29,846

2018
24,157

2019
23,634

2020
23,371

Thereafter
98,665

Total
$
224,151

 
7. Stockholders' Equity & Stock-Based Compensation
We provide stock-based awards as a form of compensation for employees, officers and directors. We have issued stock-based awards in the form of stock options and RSUs under our equity incentive plans, as well as shares under our ESPP.
Common Stock - Class A and Class B
Our Board of Directors has authorized two classes of common stock, Class A and Class B. At January 1, 2016, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At January 1, 2016, we had 52,089,249 shares of Class A common stock and 48,681,489 shares of Class B common stock issued and outstanding. Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Shares of Class B common stock can be converted to shares of Class A common stock at any time at the option of the stockholder and automatically convert upon sale or transfer, except for certain transfers specified in our amended and restated certificate of incorporation.
Stock Incentive Plans
2005 Stock Plan.    In January 2005, our stockholders approved our 2005 Stock Plan, which our Board of Directors adopted in November 2004. The 2005 Stock Plan became effective on February 16, 2005, the day prior to the completion of our initial public offering. Our 2005 Stock Plan, as amended and restated, provides for the ability to grant ISOs, NQs, restricted stock, RSUs, SARs, deferred stock units, performance units, performance bonus awards and performance shares. A total of 29.0 million shares of our Class A common stock is authorized for issuance under the 2005 Stock Plan. For awards granted prior to February 2011, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as two shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as two shares for every one share returned. For those awards granted from February 2011 onward, any shares subject to an award with a per share price less than the fair market value of our Class A common stock on the date of grant and any shares subject to an outstanding RSU award will be counted against the authorized share reserve as 1.6 shares for every one share subject to the award, and if returned to the 2005 Stock Plan, such shares will be counted as 1.6 for every one share returned.
Stock Options.    Stock options are generally granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vest over four years, with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 months after termination of service. Options granted to employees and officers from June 2008 onward generally vest over four years, with 25% of the shares subject to the option becoming exercisable on the one-year anniversary of the date of grant and the balance of the shares vesting in equal monthly installments over the following 36 months. These options expire on the earlier of 10 years after the date of grant or 3 months after termination of service. All options granted vest over the requisite service period and upon the exercise of stock options, we issue new shares of Class A common stock under the 2005 Stock Plan. Our 2005 Stock Plan also allows us to grant stock awards which vest based on the satisfaction of specific performance criteria.
Performance-Based Stock Options.    On December 15, 2015, we granted PSOs to our executive officers with shares of our Class A common stock underlying such options. The contractual term for the PSOs is seven years, with vesting contingent upon market-based performance conditions, representing the achievement of specified Dolby annualized TSR targets at the end of a three-year measurement period ending December 15, 2018. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of

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achievement of the performance conditions by our Compensation Committee. Anywhere from 0% to 125% of the shares subject to a PSO may vest based on achievement of the performance conditions at the end of the three-year performance period.
During the first quarter of fiscal 2016, we granted 419,623 PSOs to our executive officers. In valuing the PSOs which will be recognized as compensation cost, we used a Monte Carlo valuation model. Aside from the use of an expected term for the PSOs commensurate with their shorter contractual term, the nature of the valuation inputs used in the Monte Carlo valuation model were consistent with those used to value our non-performance based options granted under the 2005 Plan. Compensation cost is being amortized on a straight-line basis over the requisite service period.
The following table summarizes information about all stock options issued under our 2005 Stock Plan:
 
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value (1)
 
(in thousands)
 
(in years)
(in thousands)
Options outstanding at September 25, 2015
8,835

$
35.85

 
 
Grants
2,167

33.15

 
 
Exercises
(196
)
28.02

 
 
Forfeitures and cancellations
(122
)
40.40

 
 
Options outstanding at January 1, 2016
10,684

35.39

7.5
$
16,417

Options vested and expected to vest at January 1, 2016
9,849

35.31

7.4
16,130

Options exercisable at January 1, 2016
5,188

$
33.65

6.1
14,117

(1)
Aggregate intrinsic value is based on the closing price of our common stock on December 31, 2015 of $33.65 and excludes the impact of options that were not in-the-money.
Restricted Stock Units.    Beginning in fiscal 2008, we began granting RSUs to certain directors, officers and employees under our 2005 Stock Plan. Awards granted to employees and officers generally vest over four years, with equal annual cliff-vesting. Awards granted to directors prior to November 2010 generally vest over three years, with equal annual cliff-vesting. Awards granted after November 2010 and prior to fiscal 2014 to new directors vest over approximately two years, with 50% vesting per year, while awards granted from November 2010 onward to ongoing directors generally vest over approximately one year. Awards granted to new directors from fiscal 2014 onward vest on the earlier of the first anniversary of the award’s date of grant, or the day immediately preceding the date of the next annual meeting of stockholders that occurs after the award’s date of grant. Our 2005 Stock Plan also allows us to grant RSUs which vest based on the satisfaction of specific performance criteria, although no such awards have been granted as of January 1, 2016. At each vesting date, the holder of the award is issued shares of our Class A common stock. Compensation expense from these awards is equal to the fair market value of our common stock on the date of grant and is recognized on a straight-line basis over the requisite service period.
The following table summarizes information about RSUs issued under our 2005 Stock Plan:
 
Shares
Weighted-Average
Grant Date
Fair Value 
 
(in thousands)
 
Non-vested at September 25, 2015
2,830

$
40.73

Granted
1,133

33.19

Vested
(817
)
36.11

Forfeitures
(44
)
39.60

Non-vested at January 1, 2016
3,102

$
39.21

Employee Stock Purchase Plan.   Our plan allows eligible employees to have up to 10 percent of their eligible compensation withheld and used to purchase Class A common stock, subject to a maximum of $25,000 worth of stock purchased in a calendar year or no more than 1,000 shares in an offering period, whichever is less. An offering period consists of successive six-month purchase periods, with a look back feature to our stock price at the commencement of a one-year offering period. The plan provides for a discount equal to 15 percent of the lower of the closing price of our common stock on the New York Stock Exchange on the first and last day of the offering periods. The plan also includes an automatic reset feature that provides for an offering period to be reset and recommenced to a new lower-priced offering if the offering price of a new offering period is less than that of the immediately preceding offering period.

17

Table of Contents


Stock Option Valuation Assumptions
We use the Black-Scholes option pricing model to determine the estimated fair value of employee stock options at the date of the grant. The Black-Scholes model includes inputs that require us to make certain estimates and assumptions regarding the expected term of the award, as well as the future risk-free interest rate, and the volatility of our stock price over the expected term of the award.
Expected Term.    The expected term of an award represents the estimated period of time that options granted will remain outstanding, and is measured from the grant date to the date at which the option is either exercised or canceled. Our determination of the expected term involves an evaluation of historical terms and other factors such as the exercise and termination patterns of our employees who hold options to acquire our common stock, and is based on certain assumptions made regarding the future exercise and termination behavior.
Risk-Free Interest Rate.    The risk-free interest rate is based on the yield curve of United States Treasury instruments in effect on the date of grant. In determining an estimate for the risk-free interest rate, we use average interest rates based on these instruments’ constant maturities with a term that approximates and corresponds with the expected term of our awards.
Expected Stock Price Volatility.    The expected volatility represents the estimated volatility in the price of our common stock over a time period that approximates the expected term of the awards, and is determined using a blended combination of historical and implied volatility. Historical volatility is representative of the historical trends in our stock price for periods preceding the measurement date for a period that is commensurate with the expected term. Implied volatility is based upon externally traded option contracts of our common stock.
Dividend Yield.    The dividend yield is based on our anticipated dividend payout over the expected term of our option awards. Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of our stockholders. The dividend policy may be changed or canceled at the discretion of the Board of Directors at any time.
The weighted-average assumptions used in the determination of the fair value of our stock options were as follows:
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Expected term (in years)
5.24

4.58

Risk-free interest rate
1.8
%
1.5
%
Expected stock price volatility
29.8
%
29.7
%
Dividend yield
1.4
%
0.9
%
Stock-Based Compensation Expense
Stock-based compensation expense for equity awards granted to employees is determined by estimating their fair value on the date of grant, and recognizing that value as an expense on a straight-line basis over the requisite service period in which our employees earn the awards. Compensation expense related to these equity awards is recognized net of estimated forfeitures, which reduce the expense recorded in the consolidated statements of operations. The selection of applicable estimated forfeiture rates is based on an evaluation of trends in our historical forfeiture data with consideration for other potential driving factors. If in subsequent periods actual forfeitures significantly differ from our initial estimates, we will revise such estimates accordingly.
The following two tables separately present stock-based compensation expense both by award type and classification in our consolidated statements of operations (in thousands):

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Expense - By Award Type
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Compensation Expense - By Type
 
 
Stock options
$
6,366

$
6,283

Restricted stock units
12,076

10,215

Employee stock purchase plan
938

1,344

Total stock-based compensation
19,380

17,842

Benefit from income taxes
(5,706
)
(5,151
)
Total stock-based compensation, net of tax
$
13,674

$
12,691

Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Compensation Expense - By Classification
 
 
Cost of products
$
280

$
246

Cost of services
129

122

Research and development
5,107

5,274

Sales and marketing
7,710

5,909

General and administrative
6,154

6,291

Total stock-based compensation
19,380

17,842

Benefit from income taxes
(5,706
)
(5,151
)
Total stock-based compensation, net of tax
$
13,674

$
12,691

The tax benefit that we recognize from certain exercises of ISOs and shares issued under our ESPP are excluded from the tables above. This benefit was as follows (in thousands):
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Tax benefit - stock option exercises & shares issued under ESPP
$
95

$
168

Unrecognized Compensation Expense.    At January 1, 2016, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $45.5 million, which is expected to be recognized over a weighted-average period of 2.7 years. At January 1, 2016, total unrecorded compensation expense associated with RSUs expected to vest was approximately $90.7 million, which is expected to be recognized over a weighted-average period of 2.9 years.
Common Stock Repurchase Program
In November 2009, we announced a stock repurchase program ("program"), providing for the repurchase of up to $250.0 million of our Class A common stock. The following table summarizes the initial amount of authorized repurchases as well as additional repurchases approved by our Board of Directors as of January 1, 2016 (in thousands):
Authorization Period
Authorization Amount
Fiscal 2010: November 2009
$
250,000

Fiscal 2010: July 2010
300,000

Fiscal 2011: July 2011
250,000

Fiscal 2012: February 2012
100,000

Fiscal 2015: October 2014
200,000

Total
$
1,100,000


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Stock repurchases under the program may be made through open market transactions, negotiated purchases, or otherwise, at times and in amounts that we consider appropriate. The timing of repurchases and the number of shares repurchased depend upon a variety of factors, including price, regulatory requirements, the rate of dilution from our equity compensation plans and other market conditions. The program does not have a specified expiration date, and can be limited, suspended or terminated at our discretion at any time without prior notice. Shares repurchased under the program will be returned to the status of authorized but unissued shares of Class A common stock. As of January 1, 2016, the remaining authorization to purchase additional shares is approximately $113.3 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2016:
Quarterly Repurchase Activity
Shares
Repurchased
Cost (1)
Average Price Paid Per Share (2)
 
 
(in thousands)
 
Q1 - Quarter ended January 1, 2016
1,140,700

$
39,449

$
34.57

Total
1,140,700

$
39,449

 
(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes the dividend payments made under the program during fiscal 2016:
Fiscal Period
Declaration Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
 
Fiscal 2016
 
 
 
 
 
 
Q1 - Quarter ended January 1, 2016
January 25, 2016
February 8, 2016
February 17, 2016
$
0.12

$12.1 million
(1)
(1)
The amount of the dividend payment is estimated based on the number of shares of our Class A and Class B common stock that we estimate will be outstanding as of the Record Date.

8. Accumulated Other Comprehensive Income
Other comprehensive income consists of two components: unrealized gains or losses on our available-for-sale marketable investment securities and the gain or loss from foreign currency translation adjustments. Until realized and reported as a component of net income, these comprehensive income items accumulate and are included within accumulated other comprehensive income, a subsection within stockholders’ equity in our consolidated balance sheet. Unrealized gains and losses on our investment securities are reclassified from AOCI into earnings when realized upon sale, and are determined based on specific identification of securities sold. Gains and losses from the translation of assets and liabilities denominated in non-U.S. dollar functional currencies are included in AOCI.

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The following table summarizes the changes in the accumulated balances during the period, and includes information regarding the manner in which the reclassifications out of AOCI into earnings affect our consolidated statements of operations (in thousands):
 
Fiscal Quarter Ended
January 1, 2016
 
Investment Securities
Currency Translation Adjustments
Total
Balance, beginning of period
$
350

$
(11,812
)
$
(11,462
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
Unrealized (losses) - investment securities
(1,159
)


(1,159
)
Foreign currency translation (losses) (1)


(944
)
(944
)
Income tax effect - benefit
199

343

542

Net of tax
(960
)
(601
)
(1,561
)
Amounts reclassified from AOCI into earnings:






Realized gains - investment securities (1)
131



131

Income tax effect - (expense) (2)
(31
)


(31
)
Net of tax
100


100

Net current-period other comprehensive income/(loss)
(860
)
(601
)
(1,461
)
Balance, end of period
$
(510
)
$
(12,413
)
$
(12,923
)
 
Fiscal Quarter Ended
December 26, 2014
 
Investment Securities
Currency Translation Adjustments
Total
Balance, beginning of period
$
505

$
2,509

$
3,014

Other comprehensive income/(loss) before reclassifications:
 
 
 
Unrealized (losses) - investment securities
(385
)
 
(385
)
Foreign currency translation (losses) (1)
 
(5,553
)
(5,553
)
Income tax effect - benefit
180

528

708

Net of tax
(205
)
(5,025
)
(5,230
)
Amounts reclassified from AOCI into earnings:
 
 
 
Realized gains - investment securities (1)
42

 
42

Income tax effect - (expense) (2)
(14
)
 
(14
)
Net of tax
28


28

Net current-period other comprehensive income/(loss)
(177
)
(5,025
)
(5,202
)
Balance, end of period
$
328

$
(2,516
)
$
(2,188
)
(1)
Realized gains or losses from the sale of our available-for-sale investment securities or from foreign currency translation adjustments are included within other income/expense, net in our consolidated statements of operations.
(2)
The income tax benefit or expense is included within provision for income taxes in our consolidated statements of operations.

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9. Earnings Per Share
Basic EPS is computed by dividing net income attributable to Dolby Laboratories, Inc. by the number of weighted-average shares of Class A and Class B common stock outstanding during the period. Through application of the treasury stock method, diluted EPS is computed in the same manner, except that the number of weighted-average shares outstanding is increased by the number of potentially dilutive shares from employee incentive plans during the period.
Potentially dilutive shares represent the hypothetical number of incremental shares issuable under the assumed exercise of outstanding stock options (both vested and non-vested), vesting of outstanding restricted stock units, and shares issued under our employee stock purchase plan. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options' exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive.
The following table sets forth the computation of basic and diluted EPS attributable to Dolby Laboratories, Inc. (in thousands, except per share amounts):
 
Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Numerator:
 
 
Net income attributable to Dolby Laboratories, Inc.
$
30,901

$
41,357

 
 
 
Denominator:
 
 
Weighted-average shares outstanding—basic
100,734

102,303

Potential common shares from options to purchase common stock
599

992

Potential common shares from restricted stock units
598

980

Weighted-average shares outstanding—diluted
101,931

104,275

 
 
 
Net income per share attributable to Dolby Laboratories, Inc.:
 
 
Basic
$
0.31

$
0.40

Diluted
$
0.30

$
0.40

 
 
 
Antidilutive awards excluded from calculation:
 
 
Stock options
5,698

2,683

Restricted stock units
215

159

 
10. Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.
Unrecognized Tax Benefit
As of January 1, 2016, the total amount of gross unrecognized tax benefits was $59.9 million, of which $49.0 million, if recognized, would reduce our effective tax rate. As of September 25, 2015, the total amount of gross unrecognized tax benefits was $65.2 million, of which $53.0 million, if recognized, would reduce our effective tax rate. The decrease was due to the effective settlement of an IRS tax examination in which the related tax reserve balance was re-classified from long-term income tax payable to current income tax payable. Our net liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets.
Withholding Taxes
We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign taxes. Withholding taxes were as follows (in thousands):

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Fiscal Quarter Ended
 
January 1,
2016
December 26,
2014
Withholding taxes
$
9,782

$
12,200

Effective Tax Rate
Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of 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.
Our effective tax rate decreased from 23% in the first quarter of fiscal 2015 to 21% in the first quarter of fiscal 2016, which reflects an increased benefit from federal R&D tax credits. The overall decrease in the rate was partially offset by the impact of our settlement of the I.R.S. audit for tax years 2011 and 2012.

11. Restructuring
Restructuring charges recorded in our statement of operations represent costs associated with separate individual restructuring plans implemented in various fiscal periods. The extent of our costs arising as a result of these actions, including fluctuations in related balances between fiscal periods, is based on the nature of activities under the various plans.
No restructuring charges were recorded in the fiscal quarter ended January 1, 2016, while our statement of operations for the fiscal quarter ended December 26, 2014 reflects a credit of an immaterial amount coinciding with the completion of activity under our fiscal 2014 restructuring plan.
Accruals for restructuring charges are included within accrued liabilities in our consolidated balance sheets while restructuring charges/(credits) are included within restructuring charges/(credits) in our consolidated statements of operations.

12. Commitments & Contingencies
In the ordinary course of business, we enter into contractual agreements with third parties that include non-cancelable payment obligations, for which we are liable in future periods. These arrangements can include terms binding us to minimum payments and/or penalties if we terminate the agreement for any reason other than an event of default as described by the agreement. The following table presents a summary of our contractual obligations and commitments as of January 1, 2016 (in thousands):
 
Payments Due By Fiscal Period
 
Remainder Of
Fiscal 2016
Fiscal
2017
Fiscal
2018
Fiscal
2019
Fiscal
2020
Thereafter
Total
Naming rights
$
3,763

$
7,619

$
7,715

$
7,811

$
7,909

$
102,980

$
137,797

Donation commitments

6,045

67

67

67

738

6,984

Operating leases
10,127

11,891

10,045

8,056

7,531

30,657

78,307

Purchase obligations
11,394

2,612





14,006

Total
$
25,284

$
28,167

$
17,827

$
15,934

$
15,507

$
134,375

$
237,094

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®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis until fiscal 2032. Our payment obligations are conditioned in part on the Academy Awards® being held and broadcast from the Dolby Theatre.

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Donation Commitments.     During fiscal 2014, we entered into an agreement to contribute and install imaging and audio products to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and provide maintenance services for a fifteen-year period following the Museum's expected opening date in 2017, in exchange for various marketing, branding and publicity benefits.
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.
Purchase Obligations.     Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other research and development activities.
Indemnification Clauses.     On a limited basis, our contractual agreements will contain a clause under which we have agreed to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our intellectual property. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party intellectual property infringement claims. Since the terms and conditions of our contractual indemnification clauses do not explicitly specify our obligations, we are unable to reasonably estimate the maximum potential exposure for which we could be liable. Furthermore, we have not historically made any payments in connection with any such obligation and believe there to be a remote likelihood that any potential exposure in future periods would be of a material amount. As a result, no amounts have been accrued in our consolidated financial statements with respect to the contingent aspect of these indemnities.

13. Business Combinations
Doremi Technologies, LLC.
On October 31, 2014 ("acquisition date"), we completed our acquisition of all outstanding interests of Doremi Technologies, LLC. ("Doremi"), a privately held company, and certain assets related to the business of Doremi from Doremi Labs, Inc. and Highlands Technologies SAS (the "Doremi-related assets") for cash consideration of $98.4 million and up to an additional $20.0 million in contingent consideration that may be earned over a four-year period following the closing of the acquisition. Upon acquisition, the fair value of the contingent consideration liability was estimated as $0.7 million and was determined by applying a discounted and probability-weighted approach to potential shipments of specified products over the four-year period. Based on a revision to initial estimates, the fair value of this liability was remeasured to $0.1 million as of September 25, 2015. No further changes to our estimates have since been made, and accordingly the liability of $0.1 million remains included within our consolidated balance sheet as of January 1, 2016.
The following table summarizes the purchase price allocation made to the net tangible and intangible assets acquired (including cash of $8.4 million) and liabilities assumed based on their acquisition date fair values, with the excess amount recorded as goodwill, which is representative of the expected benefits and synergies from the integration of Doremi technology with ours as well as their assembled workforce.
Purchase Price Allocation
 
Current assets
$
17,231

Inventories
16,372

Intangible assets
45,600

Goodwill
39,672

Current liabilities
(11,653
)
Non-current liabilities
(8,820
)
Cash consideration paid to sellers
98,402

Add: contingent consideration
740

Total purchase consideration
$
99,142

The following table summarizes the fair values allocated to the various intangible assets acquired (in thousands), the weighted-average useful lives over which they will be amortized using the straight-line method, and the classification of their amortized expense in our consolidated statements of operations. The value of these acquired intangibles was determined based on the present value of estimated future cash flows under various valuation techniques and inputs.

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Intangible Assets Acquired
Purchase Price Allocation
Weighted-Average Useful Life (Years)
Income Statement Classification: Amortization Expense
Customer relationships
$25,600
10
Sales & Marketing
Developed technology
17,500
7.5
Cost of Sales
Trade name
1,300
1
Sales & Marketing
Backlog
1,200
1
Cost of Sales
Total
$45,600
 
 
Total acquisition-related costs incurred in connection with the transaction were $6.3 million, of which $0.4 million were recorded during the fiscal quarter ended December 26, 2014 and none thereafter. These costs were included in G&A expenses in our consolidated statements of operations. Pro forma financial information for Doremi's post-acquisition results is not deemed significant and is thus not provided.

14. Legal Matters
In December 2013, the Korean Fair Trade Commission (“KFTC”) initiated a review of the Company under Korean competition law. The KFTC requested information relating to our business practices in Korea and we cooperated during its review. As a result of this review, in July 2015, the KFTC issued an order and we agreed to modify certain terms in our standard licensing agreements going forward without admitting to any liability or wrongdoing.
In March 2014, the National Development and Reform Commission of China (“NDRC”) initiated a review of our business practices under the Chinese competition laws, and requested information relating to our business practices in China. In early May 2015, the NDRC confirmed that the matters under review have been resolved on mutually agreeable terms. The implementation of these terms remains ongoing.
We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of intellectual property rights, commercial, employment and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse impact on our operating results or financial condition. Given the unpredictable nature of legal proceedings, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period, including as a result of required changes to our licensing terms, monetary penalties and other potential consequences. However, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements, any such amount is either immaterial, or it is not possible to provide an estimated amount of any such potential loss.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and are subject to risks and uncertainties, including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; market growth opportunities and trends; our plans, strategies and expected opportunities; future competition; our stock repurchase plan; and our dividend policy. Use of words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or similar expressions indicates a forward-looking statement. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in Part II, Item 1A, “Risk Factors.” Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to new developments or actual results.
OVERVIEW
Dolby Laboratories creates audio, imaging, and voice technologies that transform entertainment and communications at the cinema, at home, at work and on mobile devices. Founded in 1965, our core strengths stem from expertise in digital signal processing and compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multichannel sound for cinema, digital television transmissions and devices, OTT video services, DVD and Blu-ray discs, gaming consoles, and mobile devices. More recently, our technologies have played a prominent role in the development of the next generation of audio for the cinema, home entertainment, mobile and gaming experiences. Today, we derive the majority of our revenue from licensing our audio technologies. We also provide products and services that enable content creators and distributors to produce, encode, transmit and playback content for superior consumer experiences. We have also developed new applications, most recently for voice conferencing, as well as imaging solutions that enable HDR picture quality in televisions and cinemas.
Revenue Generation
The following table presents a summary of the composition of our revenues for all periods presented:
 
Fiscal Quarter Ended
Revenue
January 1,
2016
December 26,
2014
   Licensing
88%
92%
   Products
10%
6%
   Services
2%
2%
Total
100%
100%
We license our technologies in over 50 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate a significant portion of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters. Products revenue is based on the destination to which we ship our products, while services revenue is based on the location where services are performed.
 
Fiscal Quarter Ended
Revenue By Geographic Location
January 1,
2016
December 26,
2014
United States
27%
26%
International
73%
74%
We have active licensing arrangements with over 540 electronics product OEMs and software developer licensees. As of January 1, 2016, we had approximately 5,600 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,080 trademark registrations throughout

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the world for a variety of wordmarks, logos, and slogans. These trademarks are an integral part of our technology licensing program as licensees typically place them on their products which incorporate our technologies to inform consumers that they have met our quality specifications.
Licensing
The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Quarter Ended
 
Market
January 1,
2016
December 26,
2014
Main Offerings Incorporating Our Technologies
Broadcast
48%
41%
Televisions & STBs
PC
15%
16%
Windows operating systems & DVD software players
Consumer Electronics
13%
15%
DVD and Blu-ray Disc devices, AVRs, DMAs, HTIBs & Soundbars
Mobile
10%
16%
Smartphones, tablets & other mobile devices
Other
14%
12%
Gaming consoles, auto DVD, audio conferencing & Dolby Cinema
Total
100%
100%
 
We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, and most recently, a revenue-sharing model.
Two-Tier Licensing Model.   Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our decoding technologies, included in reference software and firmware code, are first provided under license to a semiconductor manufacturer. The manufacturer then incorporates our technologies in ICs. Licensed semiconductor manufacturers, whom we refer to as “implementation licensees,” sell their ICs to OEMs of consumer entertainment products, which we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell finished end-user products that incorporate our technologies in ICs purchased from our implementation licensees.
Implementation licensees pay us a one-time, up-front fee per license. In exchange, the licensee receives a licensing package which includes information useful in implementing our technologies into their chipsets. Once implemented, the licensee sends us a sample chipset for quality control evaluation, and after we validate the design, the licensee may sell the chipset for use to our network of system licensees.
System licensees provide us with prototypes of products, or self-test results of products that incorporate our technologies. Upon our confirmation that our technologies are optimally and consistently incorporated, the system licensee may buy ICs under a license for the same Dolby technology from our network of implementation licensees, and may further sell approved products to retailers, distributors, and consumers.
For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect from a system licensee on a particular product depends on a number of factors including the mix of Dolby technologies used, the nature of the implementations, and the volume of products incorporating our technologies that are shipped by the system licensee.
Integrated Licensing Model.    We also license our technologies to software operating system vendors and ISVs, and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations, and the volume of products incorporating our technologies that are shipped, and is subject to the same quality control evaluation process.

Patent Licensing Model.    We license our patents directly to manufacturers that use our intellectual property in their products. We also license our patents indirectly through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. The Via Licensing patent pools enable product manufacturers to efficiently and transparently secure patent licenses for audio coding, interactive television, digital radio and wireless technologies. Currently, most of our revenues earned from patent licensing relate to the licensing of audio encoding technologies.

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Collaboration Arrangements
Dolby Cinema: We partner with cinema exhibitors to create premium large-format cinematic experiences that include a Dolby Vision projection system, a Dolby Atmos audio system, and venue design concepts at new and pre-existing theaters of multi-cinema complexes. We receive royalties based on a percentage of box-office receipts from the installed theaters.
Dolby Voice: We enter into arrangements with audio conferencing providers where, in return for licensing our intellectual property and know-how, we earn revenues based on specified metrics.
Settlements & Back Payments From Licensees.   Due to ongoing collection efforts, licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Such collections have become a recurring element of our business which we cannot predict with certainty. Within the Results of Operations section, settlements and back payments are collectively referred to as "recoveries."
Products
We design and manufacture audio and imaging products for cinema, television, broadcast, and entertainment industries. Distributed in over 70 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback. We also market the Dolby Voice conference phone which enhances and optimizes the conference call experience using Dolby Voice.
The following table presents the composition of our products revenue for all periods presented:
 
Fiscal Quarter Ended
Market
January 1,
2016
December 26,
2014
Cinema
98%
90%
Broadcast
2%
10%
Total
100%
100%
Services
We offer a broad array of services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, as well as support and maintenance for products we sell. Our engineers assist in the integration and support of our technologies and products to create and reproduce both audio and imaging content. The specific areas in which their assistance is provided can involve equipment calibration, mixing room alignment, equalization, as well as color and light image calibration. Our engineers also provide equipment training, system and venue design consultation, as well as on-site technical expertise to cinema operators, film festivals, movie premieres, and trade shows throughout the world.

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EXECUTIVE SUMMARY

We are focused on expanding our leadership in audio solutions for entertainment, and growing revenue from our new experiences. Following are highlights of our first quarter of fiscal 2016 as well as future challenges in key areas:
CORE AUDIO LICENSING
Broadcast
Highlights: We continue to focus on growing our presence in emerging markets where both the potential for increasing TV and STB shipments is significant, and the transition to digital broadcast is still underway, particularly in Asia and Africa. Our strategy is to work with country-specific operators and standards bodies to encourage adoption of our technologies, and renew our value proposition with new offerings. We expect Comcast X1 service to support Dolby Atmos in 2016, and thereby deliver the most immersive broadcast audio experience.
Challenges: To achieve growth and further adoption in emerging markets where conversion to digital television is still underway, our success will be impacted by a number of factors such as regional fragmentation of operators and regulators, and the pace of decision-making and implementation. Globally, we must continue to adapt to changing technologies and methods of content delivery, and must also continue to develop and encourage adoption of new technologies. Further, in some emerging growth countries such as China, we face significant challenges enforcing our contractual and intellectual property rights. The failure of our licensees to accurately report the shipment of products incorporating our technologies may adversely impact future revenues.
Personal Computers
Highlights: Revenues from the PC market account for approximately 15% of our licensing revenues. Our technologies enhance playback in the various Windows operating systems for PCs and tablets, and this functionality is natively supported in Microsoft’s latest browser, Microsoft Edge. Dolby's presence in the browser enables us to reach more users and new types of content, including streaming video entertainment.
Challenges: Demand in this sector has been subject to significant fluctuations. In recent years, unit demand for PCs has been in secular decline and the percentage of PCs with optical disc functionality has also been decreasing.
Consumer Electronics
Highlights: We continue to see opportunities in new and existing use cases such as soundbars, DMAs including Apple TV, and Dolby Atmos for the home. Dolby Atmos is now included in AVRs from numerous leading providers, and more than 29 Dolby Atmos-enabled speakers from 17 partnering companies have been announced or released. In the current fiscal quarter, the Yamaha Dolby Atmos soundbar became available for purchase, and three additional Dolby Atmos soundbars were announced at CES in January 2016 from Samsung, Creative Labs and Philips.
We have worked with major studios to release and distribute movie titles in Dolby Atmos via Blu-ray Disc. In addition, Vudu is currently streaming in Dolby Atmos, and we will continue to work with content developers and distributors to expand entertainment selections using the Dolby Atmos format.
Challenges: We must continue to present compelling reasons for consumers to demand our audio technologies wherever they consume and enjoy premium content. To the extent that OEMs do not incorporate our technologies in current and developing products, our future revenues could be impacted.
Mobile
Highlights: We continue to focus on promoting the adoption of our technologies in smartphones and tablets across the Android™, Windows and Amazon ecosystems. Collectively, these devices now deliver enhanced entertainment experiences by accessing content from an increasing number of OTT services, including Netflix, which is streaming in DD+. In addition, Dolby Atmos is being included in an increasing array of mobile devices.

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Challenges: Growth in this market is dependent on several factors, including our success in collaborating with manufacturers of mobile devices to incorporate our technologies, the development of various ecosystems, which includes the availability of content in Dolby formats, and the performance of the mobile device market as a whole. The rate of new product development in this sector continues to be rapid and can result in dramatic swings in consumer trends as well as design changes that may exclude our technologies. To facilitate our growth, we must work closely with our partners to further enhance the content, distribution and playback on all major ecosystems.

NEW GROWTH INITIATIVES
Dolby Voice®
Opportunity: Dolby Voice is an audio conferencing solution that emulates the in-person meeting experience with superior spatial perception, voice clarity, and background noise suppression. Launched in fiscal 2014 in global partnership with BT®, a leading provider of audio and imaging conferencing systems, the BT MeetMe with Dolby Voice service is available via the desktop, on mobile devices, and using the Dolby Conference Phone which was designed specifically to further enhance and optimize the Dolby Voice experience. In January 2016, we announced that PGi, one of the largest providers of audio conferencing software and services, has been added as another partner who will begin offering Dolby Voice to customers. As further deployment continues, we continue to see a steady increase in the customer base.
Challenges: Our success in this market will depend on the number of conference service providers and enterprise customers we are able to attract, and the volume of usage and Dolby conference phones they ultimately acquire over time.

Dolby Vision™
Opportunity: Dolby Vision is an HDR imaging technology that offers more realistic distinctions in color, brighter highlights, and improved shadow details for cinema and digital TV. This playback technology focuses on the ability of each pixel to contribute to the overall image, and is not dependent on the number of pixels. In January 2016, LG, the world's second largest TV manufacturer, announced that they will feature Dolby Vision in their 2016 OLED and Super UHD LCD TVs. In addition, TCL recently announced the specifics of its first Dolby Vision television, the 65 inch X1 UHD TV. Finally, Vizio began shipping its Vizio Reference Series, the industry's first UHD 4K TV with Dolby Vision. With these developments, we will see a range of TVs coming to market this year at a variety of price points.
In addition to the progress with TV OEMs, SoC providers MStar, MediaTek, Sigma Designs, Realtek and HiSilicon have all indicated that they are supporting Dolby Vision on televisions, which is significant as these partners collectively provide chipsets for a large majority of the current TV market. Additionally, Roku has announced that their next 4K UHD Roku TV reference design for their OEM partners will include Dolby Vision.
To support home entertainment, MGM, Universal Pictures, Warner Bros. Home Entertainment Inc. and Sony Pictures have all announced that they will provide content for the home in Dolby Vision. In addition, Netflix Inc. and Vudu Inc. have indicated that they will stream content in Dolby Vision.
Challenges: To successfully establish Dolby Vision, we will need to continue to expand the array of consumer devices that incorporate Dolby Vision, expand the pipeline of Dolby Vision entertainment available from content creators, and encourage consumer adoption in the face of competing products and technologies.
Dolby Cinema™
Opportunity: In fiscal 2015 and in partnership with established movie theater exhibitors, we launched Dolby Cinema, a branded premium cinema that features spectacular imagery using Dolby Vision laser projection, Dolby Atmos audio technology, and inspired theater design. To date, we have announced four key exhibitors that will have Dolby Cinema sites. These include AMC in the U.S., Wanda in China, Cineplexx in Austria, and JT Biscopen in the Netherlands. The combined commitment from these four exhibitors so far is over 230 Dolby Cinema sites worldwide. Within that total, AMC has indicated that it plans to have 50 sites open by the end of calendar 2016. Dolby Cinema has also attracted strong support from the creative community, as every major studio has released or announced theatrical titles that take advantage of the audio and visual capabilities of Dolby Cinema. This includes titles such as "Star Wars - The Force Awakens", "The Revenant" , "The Martian", and "Inside Out."

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Challenges: Although the premium large format sector of the cinema industry is currently a growing segment, Dolby Cinema is a new offering and will be in competition with other existing solutions. Our success with this initiative depends in large part on our ability to differentiate our offering, deploy new sites in accordance with plans, provide a compelling experience, and attract and retain a viewing audience.
PRODUCTS
Highlights: In our core cinema markets, we offer servers and audio processors to enable the playback of content in cinemas. Our product revenue base has increased with the inclusion of shipments from Doremi, a leading developer and manufacturer of digital cinema servers that we acquired in the first quarter of fiscal 2015. Product sales have also increased due to shipments of Dolby Atmos. As a stand-alone offering, Dolby Atmos continues to enjoy increasing adoption by studios, content creators, post-production facilities and exhibitors. As of the end of our current fiscal quarter, there are over 1,600 Dolby Atmos-enabled screens installed or committed to be installed, and nearly 400 Dolby Atmos theatrical titles announced or released.
Challenges: Demand for our cinema products is dependent upon industry economic cycles along with our ability to develop and introduce new technologies, further our relationships with content creators, and promote new consumer audio and imaging experiences. To the extent that we do not make progress in these areas, and are unsuccessful in resisting pricing pressures and prevailing over competing technologies, our revenues may be adversely affected.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis in our Fiscal 2015 Annual Report on Form 10-K filed with the SEC.


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RESULTS OF OPERATIONS
For each line item included on our consolidated statements of operations described and analyzed below, the significant factors identified as the leading drivers contributing to the overall fluctuation are presented in descending order according to the quantitative magnitude of their impact on the overall change (from an absolute value perspective). Note that recovery payments received from licensees either in the form of back payments or settlements are collectively referred to as "recoveries."
Our fiscal quarterly and annual reporting periods generally consist of 13 weeks and 52 weeks, respectively. However, our fiscal quarter-to-date period ended January 1, 2016 consisted of 14 weeks and our fiscal year ending September 30, 2016 consists of 53 weeks. The occurrence of an additional week during the current fiscal period results in proportionately higher operating expenses related to compensation, depreciation and amortization that are not entirely offset by incremental revenues that may have been achieved during the additional week.
Revenue and Gross Margin
Licensing
Licensing revenue consists of fees earned from licensing our technologies to customers who incorporate them into their products and services to enable and enhance audio and voice capabilities. The technologies that we license are either internally developed, acquired, or licensed from third parties. Our cost of licensing consists mainly of amortization of purchased intangible assets and intangible assets acquired in business combinations as well as third party royalty obligations paid to license intellectual property that we then sublicense to our customers.
 
Fiscal Quarter Ended
Licensing
January 1,
2016
December 26,
2014
$
%
Revenue
$211,129
$216,598
$(5,469)
(3)%
Percentage of total revenue
88%
92%
 
 
Cost of licensing
6,533
3,481
3,052
88%
Gross margin
204,596
213,117
(8,521)
(4)%
Gross margin percentage
97%
98%
 
 

Quarter-To-Date: Q1'16 vs. Q1'15
Factor
Revenue
Gross Margin
Mobile
â
Decrease primarily due to timing of revenue under contractual arrangements
â
Increase in cost of licensing primarily due to amortization on newly-acquired intangible assets
Broadcast
á
Increase in recoveries and higher volumes from TVs
PC
â
Lower units largely attributed to declines in PC market volumes
CE
â
Lower units of AVRs, Blu-ray and DVD players that incorporate our technologies, partially offset by higher units of DMAs and soundbars
Other
á
Higher units of gaming consoles and increased revenues from the administration of Via Licensing patent pools
Products
Products revenue is generated from the sale of audio and imaging products for the cinema and television broadcast industries. Cost of products consists primarily of the cost of materials related to products sold, labor and manufacturing overhead, and amortization of certain intangible assets. Our cost of products also includes third party royalty obligations paid to license intellectual property that we include in our products.
 
Fiscal Quarter Ended
Products
January 1,
2016
December 26,
2014
$
%
Revenue
$24,809
$13,263
$11,546
87%
Percentage of total revenue
10%
6%
 
 
Cost of products
19,038
12,584
6,454
51%