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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 December 30, 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

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11357792&doc=15
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 27, 2017, the registrant had 57,867,086 shares of Class A common stock, par value $0.001 per share, and 44,073,597 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 December 30, 2016
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


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GLOSSARY OF TERMS
The following table summarizes certain terms and abbreviations that may be used within the text of this report:
Abbreviation
 
Term
AAC
 
Advanced Audio Coding
AFS
 
Available-For-Sale (Securities)
AOCI
 
Accumulated Other Comprehensive Income
APIC
 
Additional-Paid In-Capital
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVR
 
Audio/Video Receiver
CE
 
Consumer Electronics
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
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
IP
 
Intellectual Property
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
OLED
 
Organic Light-Emitting Diode
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(s)-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

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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)


 
December 30,
2016
September 30,
2016
ASSETS
(unaudited)
 
Current assets:
 
 
Cash and cash equivalents
$
512,838

$
516,112

Restricted cash
5,075

3,645

Short-term investments
164,818

121,629

Accounts receivable, net of allowance for doubtful accounts of $2,394 and $2,370
81,393

75,688

Inventories
14,773

16,354

Prepaid expenses and other current assets
32,119

26,302

Total current assets
811,016

759,730

Long-term investments
350,360

393,904

Property, plant and equipment, net
459,709

443,656

Intangible assets, net
206,862

215,342

Goodwill
307,121

309,616

Deferred taxes
171,388

166,790

Other non-current assets
24,247

21,068

Total assets
$
2,330,703

$
2,310,106

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
11,541

$
17,544

Accrued liabilities
169,711

169,055

Income taxes payable
1,514

2,304

Deferred revenue
24,405

24,180

Total current liabilities
207,171

213,083

Long-term deferred revenue
34,603

35,366

Other non-current liabilities
88,271

82,922

Total liabilities
330,045

331,371

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 57,808,525 shares issued and outstanding at December 30, 2016 and 57,018,362 at September 30, 2016
56

57

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 44,073,597 shares issued and outstanding at December 30, 2016 and 44,403,847 at September 30, 2016
44

44

Additional paid-in capital
36,435

42,032

Retained earnings
1,977,478

1,938,320

Accumulated other comprehensive (loss)
(19,679
)
(10,197
)
Total stockholders’ equity – Dolby Laboratories, Inc.
1,994,334

1,970,256

Controlling interest
6,324

8,479

Total stockholders’ equity
2,000,658

1,978,735

Total liabilities and stockholders’ equity
$
2,330,703

$
2,310,106


 






See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
December 30,
2016
January 1,
2016
Revenue:
 
 
Licensing
$
232,699

$
211,129

Products
28,211

24,809

Services
5,357

4,876

Total revenue
266,267

240,814

 
 
 
Cost of revenue:
 
 
Cost of licensing
8,121

6,533

Cost of products
17,720

19,038

Cost of services
4,126

4,195

Total cost of revenue
29,967

29,766

 
 
 
Gross margin
236,300

211,048

 
 
 
Operating expenses:
 
 
Research and development
57,518

53,328

Sales and marketing
71,175

74,454

General and administrative
41,540

44,078

Total operating expenses
170,233

171,860

 
 
 
Operating income
66,067

39,188

 
 
 
Other income/expense:
 
 
Interest income
1,814

1,297

Interest expense
(26
)
(29
)
Other income/(expense), net
(199
)
(972
)
Total other income
1,589

296

 
 
 
Income before income taxes
67,656

39,484

Provision for income taxes
(14,082
)
(8,473
)
Net income including controlling interest
53,574

31,011

Less: net (income) attributable to controlling interest
(200
)
(110
)
Net income attributable to Dolby Laboratories, Inc.
$
53,374

$
30,901

 
 
 
Net income per share:
 
 
Basic
$
0.53

$
0.31

Diluted
$
0.51

$
0.30

Weighted-average shares outstanding:
 
 
Basic
101,483

100,734

Diluted
103,876

101,931

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
782

$
781

Included in net income attributable to controlling interest
$
175

$
176

 
 
 
Cash dividend declared per common share
$
0.14

$
0.12

Cash dividend paid per common share
$
0.14

$
0.12





See accompanying notes to unaudited interim condensed consolidated financial statements

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DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
December 30,
2016
January 1,
2016
Net income including controlling interest
$
53,574

$
31,011

Other comprehensive income:
 
 
Foreign currency translation adjustments, net of tax
(7,724
)
(750
)
Unrealized (losses) on available-for-sale securities, net of tax
(2,019
)
(860
)
Comprehensive income
43,831

29,401

Less: comprehensive loss attributable to controlling interest
61

39

Comprehensive income attributable to Dolby Laboratories, Inc.
$
43,892

$
29,440
















See accompanying notes to unaudited interim condensed consolidated financial statements

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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 30, 2016
$
101

$
42,032

$
1,938,320

$
(10,197
)
$
1,970,256

$
8,479

$
1,978,735

Net income


53,374


53,374

200

53,574

Currency translation adjustments, net of tax of $1,265



(7,463
)
(7,463
)
(261
)
(7,724
)
Unrealized (losses) on investments, net of tax of $95



(2,019
)
(2,019
)

(2,019
)
Distributions to controlling interest





(2,094
)
(2,094
)
Stock-based compensation expense

17,215



17,215


17,215

Repurchase of common stock
(1
)
(25,000
)


(25,001
)

(25,001
)
Cash dividends declared and paid on common stock


(14,216
)

(14,216
)

(14,216
)
Tax benefit from employee stock plans

2,853



2,853


2,853

Common stock issued under employee stock plans
1

13,990



13,991


13,991

Tax withholdings on vesting of restricted stock
(1
)
(14,655
)


(14,656
)

(14,656
)
Balance at December 30, 2016
$
100

$
36,435

$
1,977,478

$
(19,679
)
$
1,994,334

$
6,324

$
2,000,658


 
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





















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
 
December 30,
2016
January 1,
2016
Operating activities:
 
 
Net income including controlling interest
$
53,574

$
31,011

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
21,810

21,814

Stock-based compensation
17,215

19,380

Amortization of premium on investments
662

1,605

Excess tax benefit from exercise of stock options
(2,962
)
(300
)
Provision for doubtful accounts
67

(322
)
Deferred income taxes
(3,275
)
(10,488
)
Other non-cash items affecting net income
(376
)
445

Changes in operating assets and liabilities:
 
 
Accounts receivable
(5,782
)
11,961

Inventories
878

(877
)
Prepaid expenses and other assets
(8,705
)
(3,567
)
Accounts payable and other liabilities
(11,528
)
(14,574
)
Income taxes, net
6,245

5,014

Deferred revenue
(479
)
6,319

Other non-current liabilities
417

(26
)
Net cash provided by operating activities
67,761

67,395

 
 
 
Investing activities:
 
 
Purchase of investments
(37,073
)
(85,299
)
Proceeds from sales of investment securities
7,524

121,770

Proceeds from maturities of investment securities
26,902

14,610

Purchases of PP&E
(22,576
)
(24,368
)
Purchase of intangible assets

(105,270
)
Change in restricted cash
(1,430
)
(1,395
)
Net cash used in investing activities
(26,653
)
(79,952
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
13,991

9,986

Repurchase of common stock
(25,001
)
(39,449
)
Payment of cash dividend
(14,216
)
(12,114
)
Distribution to controlling interest
(2,094
)
(214
)
Excess tax benefit from exercise of stock options
2,962

300

Shares repurchased for tax withholdings on vesting of restricted stock
(14,656
)
(9,839
)
Net cash used in financing activities
(39,014
)
(51,330
)
 
 
 
Effect of foreign exchange rate changes on cash and cash equivalents
(5,368
)
(940
)
Net decrease in cash and cash equivalents
(3,274
)
(64,827
)
Cash and cash equivalents at beginning of period
516,112

531,926

Cash and cash equivalents at end of period
$
512,838

$
467,099

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
13,792

$
13,973

 
 
 
Non-cash investing and financing activities:
 
 
Change in PP&E purchased and unpaid at period-end
$
6,901

$
(3,636
)
Purchase consideration payable for acquisition
$

$
95





See accompanying notes to unaudited interim condensed consolidated financial statements

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

1. Basis of Presentation
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with U.S. GAAP, and with SEC rules and regulations, which allow for certain information and footnote disclosures that are normally included in annual financial statements prepared in accordance with U.S. GAAP to be condensed or omitted. In our opinion, these unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 30, 2016 and include all adjustments necessary for fair presentation. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements for the fiscal year ended September 30, 2016, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended December 30, 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 29, 2017.
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 reportable segment. During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. Following the reorganization, we reassessed our business units and concluded that the composition of our reportable segments remains unchanged and that we continue to operate as a single reportable segment. This reflects the fact that our CODM, our Chief Executive Officer, continues to evaluate our financial information and resources, and continues to assess the performance of these resources, on a consolidated basis. All required financial segment information is therefore included in our unaudited interim condensed consolidated financial statements.
Use of Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our unaudited interim condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include estimated 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 13 week period ended December 30, 2016 and the 14 week period ended January 1, 2016. Our fiscal year ended September 30, 2016 (fiscal 2016) consisted of 53 weeks while our fiscal year ending September 29, 2017 (fiscal 2017) will consist of 52 weeks.

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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
Consolidation.  During the first quarter of fiscal 2017, we adopted ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which amended the consolidation requirements in ASC 810 and significantly changed the consolidation analysis required under U.S. GAAP. The ASU significantly amended how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Adoption of this new standard did not result in any changes to the entities we currently consolidate and did not otherwise have any impact on our consolidated financial statements or notes thereto.
There have been no new accounting standards made effective or otherwise adopted during the current interim period that caused any changes to our significant accounting policies from those that were described in our Form 10-K for the prior fiscal year ended September 30, 2016.
Standards Not Yet Effective
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 ASU is effective for us beginning no later than the first day of our fiscal 2018, or September 30, 2017. Early adoption is permitted, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 revenue recognition standard will replace existing guidance in U.S. GAAP when it becomes effective, and may also impact the accounting for certain direct costs associated with revenues and contract acquisition costs such as sales commissions. The new standard permits the use of either the retrospective or cumulative effect transition method.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The effective date for this ASU coincides with the effective date for ASU 2014-09.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers, which amends certain provisions from ASU 2014-09. The effective date for this ASU coincides with the effective date for ASU 2014-09.
In the first fiscal quarter of 2017, we initiated an assessment project to evaluate the impact on all of our revenue streams and we are currently evaluating our transition options. Accordingly, we have not yet determined the effect of the standard on our ongoing financial reporting. Although permitted, we do not intend to early-adopt the new standard, but we will adopt it beginning September 29, 2018.
Leases.  In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for leases. Under the new guidance, a lessee will be required to recognize a lease liability and right-of-use asset for all long-term leases, which are those with terms in excess of twelve months. The new guidance also modifies the classification criteria and accounting for sales-type and direct financing leases, and requires additional disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. Consistent with current guidance, a lessee's recognition, measurement, and presentation of

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expenses and cash flows arising from a lease will continue to depend primarily on its classification. The ASU is effective for us beginning September 28, 2019, and must be applied using a modified retrospective approach. Early adoption is permitted, including adoption in an interim period. Upon adoption, we will recognize a lease liability and right-of-use asset for each of our long-term lease arrangements which approximates 40 as of the end of the first quarter of fiscal 2017, and we are currently evaluating the timing of adoption and impact of the standard on our consolidated financial statements.
Share-Based Compensation.  In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the statement of cash flows. Although permitted, we do not intend to early-adopt the new standard, but we will adopt it beginning September 30, 2017. We are currently evaluating the impact of the standard on our consolidated financial statements.
Cash Flow Classification.  In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues, with the objective of reducing an existing diversity in practices regarding the manner in which certain cash receipts and payments are presented and classified in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers.  In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period, and we are currently evaluating the timing and impact of the standard on our consolidated financial statements.
Restricted Cash.  In November 2016, the FASB issued ASU 2016-18, Restricted Cash — a consensus of the FASB Emerging Issues Task Force, which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The ASU is effective for us beginning September 29, 2018. Early adoption is permitted, including adoption in an interim period. Aside from conforming to new cash flow presentation and restricted cash disclosure requirements, we do not anticipate that the new standard will impact our consolidated financial statements.

3. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of December 30, 2016 and September 30, 2016 (amounts displayed in thousands, except as otherwise noted).
Accounts Receivable
 
December 30,
2016
 
September 30,
2016
Trade accounts receivable
$
77,663

 
$
66,229

Accounts receivable from patent administration program customers
6,124

 
11,829

Accounts receivable, gross
83,787

 
78,058

Less: allowance for doubtful accounts
(2,394
)
 
(2,370
)
Total
$
81,393

 
$
75,688

Inventories
 
December 30,
2016
 
September 30,
2016
Raw materials
$
3,709

 
$
3,526

Work in process
4,290

 
4,020

Finished goods
6,774

 
8,808

Total
$
14,773

 
$
16,354



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Inventories are stated at the lower of cost 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 $1.5 million and $1.6 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 30, 2016 and September 30, 2016, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess and obsolete inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
 
December 30,
2016
 
September 30,
2016
Prepaid expenses
$
17,424

 
$
13,440

Other current assets
12,363

 
11,578

Income tax receivable
2,332

 
1,284

Total
$
32,119

 
$
26,302

Accrued Liabilities
 
December 30,
2016
 
September 30,
2016
Accrued royalties
$
2,145

 
$
1,939

Amounts payable to patent administration program partners
51,216

 
34,472

Accrued compensation and benefits
50,580

 
71,261

Accrued professional fees
7,829

 
6,528

Other accrued liabilities
57,941

 
54,855

Total
$
169,711

 
$
169,055

Other accrued liabilities include amounts accrued for unpaid PP&E additions of $23.9 million and $17.1 million as of December 30, 2016 and September 30, 2016, respectively.
Other Non-Current Liabilities
 
December 30,
2016
 
September 30,
2016
Supplemental retirement plan obligations
$
2,523

 
$
2,540

Non-current tax liabilities
73,472

 
68,254

Other liabilities
12,276

 
12,128

Total
$
88,271

 
$
82,922


4. Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries and issuers. All investments are measured at fair value, and are recorded within cash equivalents and both short-term and long-term investments in our consolidated balance sheets. With the exception of our mutual fund investments held in our SERP and classified as trading securities, all of our investments are classified as AFS securities.

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Our investments primarily consist of municipal debt securities, corporate bonds, U.S. agency securities and commercial paper. In addition, our cash and cash equivalents also consist of highly-liquid money market funds. Consistent with our investment policy, none of our held municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consists of the following (in thousands):
 
December 30, 2016
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
499,113

 
 
$
499,113

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
13,500



13,500

 
13,500

 
 
Corporate bonds
225



225

 
 
225

 
Cash and cash equivalents
512,838



512,838


13,500

225


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
20,779

3

(6
)
20,776

 
 
20,776

 
U.S. agency securities
2,582

1

(1
)
2,582

 
2,582

 
 
Commercial paper
18,950

2

(4
)
18,948

 
 
18,948

 
Corporate bonds
102,856

28

(65
)
102,819

 
 
102,819

 
Municipal debt securities
19,707


(14
)
19,693

 
 
19,693

 
Short-term investments
164,874

34

(90
)
164,818


2,582

162,236


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
4,500

9


4,509

 
 
4,509

 
U.S. agency securities
24,948


(246
)
24,702

 
24,702

 
 
Government bonds
31,977

7

(241
)
31,743

 
31,743

 
 
Corporate bonds
250,688

227

(1,060
)
249,855

 
 
249,855

 
Municipal debt securities
36,684

7

(213
)
36,478

 
 
36,478

 
Other long-term investments (2)
2,754

319


3,073

 
319

 


Long-term investments
351,551

569

(1,760
)
350,360


56,764

290,842


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,029,263

$
603

$
(1,850
)
$
1,028,016

 
$
72,846

$
453,303

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
 
Assets
2,621

 
 
2,621

 
2,621

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,621

 
 
2,621

 
2,621

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
(1)
Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of December 30, 2016 are classified within long-term investments.
(2)
Other long-term investments as of December 30, 2016 include a marketable equity security of $0.3 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 30, 2016
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:
 
 
 
 
 
 
 
 
Cash
$
501,863

 
 
$
501,863

 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Commercial paper
1,099



1,099

 
 
1,099

 
Corporate bonds
2,240



2,240

 
 
2,240

 
Money market funds
10,910



10,910

 
10,910

 
 
Cash and cash equivalents
516,112



516,112

 
10,910

3,339


 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
13,912

6


13,918

 
 
13,918

 
Commercial paper
19,629

1

(10
)
19,620

 
 
19,620

 
Corporate bonds
63,762

24

(14
)
63,772

 
 
63,772

 
Municipal debt securities
24,334


(15
)
24,319

 
 
24,319

 
Short-term investments
121,637

31

(39
)
121,629

 

121,629


 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Certificate of deposit (1)
4,500

10


4,510

 
 
4,510

 
U.S. agency securities
27,536

24

(26
)
27,534

 
27,534

 
 
Government bonds
31,971

77

(12
)
32,036

 
32,036

 
 
Corporate bonds
295,921

715

(266
)
296,370

 
 
296,370

 
Municipal debt securities
30,090

28

(32
)
30,086

 
 
30,086

 
Other long-term investments (2)
3,002

366


3,368

 
366

 
 
Long-term investments
393,020

1,220

(336
)
393,904

 
59,936

330,966


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,030,769

$
1,251

$
(375
)
$
1,031,645

 
$
70,846

$
455,934

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
2,638

 
 
2,638

 
2,638

 
 
Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
2,638

 
 
2,638

 
2,638

 
 
Included in accrued liabilities & other non-current liabilities
 
 
 
 
 

(1)
Certificates of deposit include marketable securities, while those with a maturity in excess of one year as of September 30, 2016 are classified within long-term investments.
(2)
Other long-term investments as of September 30, 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 $0.5 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 AFS 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 AFS securities that were in an unrealized loss position for less than twelve months and for twelve months or greater as of December 30, 2016 and September 30, 2016 (in thousands):
 
December 30, 2016
 
September 30, 2016
 
Less Than 12 Months
12 Months Or Greater
 
Less Than 12 Months
12 Months Or Greater
Investment Type
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
 
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Certificate of deposit
$
8,494

$
(6
)
$

$

 
$

$

$

$

U.S. agency securities
26,707

(247
)


 
22,988

(38
)


Government bonds
27,740

(241
)


 




Commercial paper
4,817

(4
)


 
11,479

(10
)


Corporate bonds
232,767

(1,125
)


 
153,491

(280
)
1,000


Municipal debt securities
46,219

(226
)
1,751

(1
)
 
35,625

(42
)
4,615

(5
)
Total
$
346,744

$
(1,849
)
$
1,751

$
(1
)
 
$
223,583

$
(370
)
$
5,615

$
(5
)
Although we had certain securities that were in an unrealized loss position as of December 30, 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 December 30, 2016 or September 30, 2016 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 AFS securities within our investment portfolio based on stated maturities as of December 30, 2016 and September 30, 2016, which are recorded within cash equivalents and both short and long-term investments in our consolidated balance sheets (in thousands):
 
December 30, 2016
 
September 30, 2016
Range of maturity
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Due within 1 year
$
178,598

$
178,543

 
$
135,886

$
135,884

Due in 1 to 2 years
215,450

215,047

 
225,679

225,953

Due in 2 to 3 years
133,348

132,240

 
164,339

164,583

Total
$
527,396

$
525,830

 
$
525,904

$
526,420


5. Property, Plant & Equipment
Property, plant and equipment are recorded at cost, with depreciation expense included in cost of licensing, 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):
 
December 30,
2016
 
September 30,
2016
Land
$
43,252

 
$
43,325

Buildings and building improvements
275,881

 
251,700

Leasehold improvements
60,520

 
60,480

Machinery and equipment
90,182

 
88,943

Computer equipment and software
157,754

 
154,291

Furniture and fixtures
27,309

 
26,900

Equipment provided under operating leases
59,907

 
35,968

Construction-in-progress
6,042

 
32,576

Property, plant and equipment, gross
720,847

 
694,183

Less: accumulated depreciation
(261,138
)
 
(250,527
)
Property, plant and equipment, net
$
459,709

 
$
443,656


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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 30, 2016
$
309,616

Translation adjustments
(2,495
)
Balance at December 30, 2016
$
307,121

During the fiscal quarter ended December 30, 2016, we reorganized certain aspects of our internal business infrastructure primarily to integrate and align sales support more directly with our business units. In accordance with ASC Topic 350, we are required to review and reassign our goodwill amongst our reporting units using a relative fair value allocation approach. Before doing so, we performed a “Step Zero” qualitative assessment during the quarter ended September 30, 2016 and determined that there was no risk of goodwill impairment in our pre-reorganization reporting units. Immediately after the reorganization, we performed a “Step One” assessment during the quarter ended December 30, 2016 whereby the estimated fair value of each reporting unit was compared to its carrying value. We initiated the "Step One" assessment using a market approach and an income approach to value our reporting units. Based on our preliminary procedures, the fair value of each of our reporting units significantly exceeded their carrying values. However, due to the complexity of this assessment, we have not finalized our procedures as of December 30, 2016. We currently expect to finalize our Step One assessment during our second fiscal quarter ending March 31, 2017.
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):
 
December 30, 2016
 
September 30, 2016
Intangible Assets, Net
Cost
Accumulated
Amortization
Net
 
Cost
Accumulated
Amortization
Net
Acquired patents and technology
$
292,889

$
(107,789
)
$
185,100

 
$
293,824

$
(101,711
)
$
192,113

Customer relationships
56,789

(35,536
)
21,253

 
56,821

(34,113
)
22,708

Other intangibles
22,677

(22,168
)
509

 
22,716

(22,195
)
521

Total
$
372,355

$
(165,493
)
$
206,862

 
$
373,361

$
(158,019
)
$
215,342

We purchase various patents and developed technologies that enable us to further develop our audio, imaging and potential product offerings.
Patent Portfolio Acquisition.    In the first quarter of fiscal 2016, we completed an asset purchase of a patent portfolio that fits within our existing patent licensing programs for 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.
With regard to our purchase of intangible assets during the periods presented, the following table summarizes the 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 (1)
Weighted-Average Useful Life
 
(in millions)
(in years)
Fiscal 2016
 
 
Q1 - Quarter ended January 1, 2016
$105.3
9.0
 
 
 
Fiscal 2017
 
 
Q1 - Quarter ended December 30, 2016
None
(1) Amortization expense on the intangible assets from patent portfolio acquisitions is included within cost of revenue in our consolidated statements of operations.

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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 $8.4 million and $8.5 million in the first quarter of fiscal 2017 and 2016, respectively. As of December 30, 2016, estimated amortization expense in future fiscal periods was as follows (in thousands):
Fiscal Year
 Amortization Expense
Remainder of 2017
$
22,245

2018
25,300

2019
24,717

2020
24,253

2021
24,227

Thereafter
86,120

Total
$
206,862


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 December 30, 2016, we had authorized 500,000,000 Class A shares and 500,000,000 Class B shares. At December 30, 2016, we had 57,808,525 shares of Class A common stock and 44,073,597 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 38.0 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 granted at fair market value on the date of grant. Options granted to employees and officers prior to June 2008 generally vested over four years, with equal annual cliff-vesting and expire on the earlier of ten years after the date of grant or three 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 ten years after the date of grant or three 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 (PSOs).    In fiscal 2016, we began granting 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,

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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 following the date of grant. If the minimum conditions are met, the PSOs earned will cliff vest on the third anniversary of the grant date, upon certification of 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.
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.
On December 15, 2016, we granted PSOs exercisable for an aggregate of up to 276,199 shares to our executive officers, all of which were outstanding as of December 30, 2016. On December 15, 2015, we granted PSOs exercisable for an aggregate of up to 419,623 shares to our executive officers, of which 397,748 were outstanding as of December 30, 2016.
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 30, 2016
8,690

$
35.98

 
 
Grants
1,788

45.89

 
 
Exercises
(259
)
32.94

 
 
Forfeitures and cancellations
(11
)
39.89

 
 
Options outstanding at December 30, 2016
10,208

37.79

7.3
$
77,363

Options vested and expected to vest at December 30, 2016
9,386

37.51

7.2
73,574

Options exercisable at December 30, 2016
5,138

$
35.22

6.1
50,760

(1)
Aggregate intrinsic value is based on the closing price of our Class A common stock on December 30, 2016 of $45.19 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 that vest based on the satisfaction of specific performance criteria, although no such awards had been granted as of December 30, 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 Class A 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 30, 2016
2,872

$
40.16

Granted
985

45.87

Vested
(871
)
36.08

Forfeitures
(19
)
38.82

Non-vested at December 30, 2016
2,967

$
43.26

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

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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 Class A 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.
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 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 Class A 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 Class A 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 Class A 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
 
December 30,
2016
January 1,
2016
Expected term (in years)
5.13

5.24

Risk-free interest rate
2.1
%
1.8
%
Expected stock price volatility
27.6
%
29.8
%
Dividend yield
1.1
%
1.4
%
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
 
December 30,
2016
January 1,
2016
Compensation Expense - By Type
 
 
Stock options
$
4,803

$
6,366

Restricted stock units
11,583

12,076

Employee stock purchase plan
829

938

Total stock-based compensation
17,215

19,380

Benefit from income taxes
(5,028
)
(5,706
)
Total stock-based compensation, net of tax
$
12,187

$
13,674


Expense - By Income Statement Line Item Classification
 
Fiscal Quarter Ended
 
December 30,
2016
January 1,
2016
Compensation Expense - By Classification
 
 
Cost of products
$
258

$
280

Cost of services
134

129

Research and development
4,930

5,107

Sales and marketing
6,867

7,710

General and administrative
5,026

6,154

Total stock-based compensation
17,215

19,380

Benefit from income taxes
(5,028
)
(5,706
)
Total stock-based compensation, net of tax
$
12,187

$
13,674

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
 
December 30,
2016
January 1,
2016
Tax benefit - stock option exercises & shares issued under ESPP
$
324

$
95

Unrecognized Compensation Expense.    At December 30, 2016, total unrecorded compensation expense associated with employee stock options expected to vest was approximately $43.5 million, which is expected to be recognized over a weighted-average period of 2.7 years. At December 30, 2016, total unrecorded compensation expense associated with RSUs expected to vest was approximately $95.2 million, which is expected to be recognized over a weighted-average period of 3.0 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 December 30, 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 December 30, 2016, the remaining authorization to purchase additional shares is approximately $26.9 million.
The following table provides information regarding share repurchase activity under the program during fiscal 2017:
Quarterly Repurchase Activity
Shares
Repurchased
Cost (1)
Average Price Paid Per Share (2)
 
 
(in thousands)
 
Q1 - Quarter ended December 30, 2016
531,465

$
25,001

$
47.02

(1)
Cost of share repurchases includes the price paid per share and applicable commissions.
(2)
Average price paid per share excludes commission costs.
On January 25, 2017, we announced that our Board of Directors approved an increase to the size of our stock repurchase program by $200 million. Refer to Note 13Subsequent Events" for additional information.
Dividend
In October 2014, our Board of Directors initiated a recurring quarterly dividend program for our stockholders. The following table summarizes dividend payments to be made under the program in relation to fiscal 2017:
Fiscal Period
Declaration Date
Record Date
Payment Date
Cash Dividend Per Common Share
Dividend Payment
 
Fiscal 2017
 
 
 
 
 
 
Q1 - Quarter ended December 30, 2016
January 25, 2017
February 6, 2017
February 15, 2017
$
0.14

$14.3 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 AFS 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
December 30, 2016
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
742

$
(10,939
)
$
(10,197
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
Unrealized (losses) - investment securities
(2,160
)
 
(2,160
)
Foreign currency translation (losses) (1)
 
(8,728
)
(8,728
)
Income tax effect - benefit
102

1,265

1,367

Net of tax
(2,058
)
(7,463
)
(9,521
)
Amounts reclassified from AOCI into earnings:
 
 
 
Realized gains - investment securities (1)
46

 
46

Income tax effect - (expense) (2)
(7
)
 
(7
)
Net of tax
39


39

Net current-period other comprehensive (loss)
(2,019
)
(7,463
)
(9,482
)
Ending Balance
$
(1,277
)
$
(18,402
)
$
(19,679
)
 
Fiscal Quarter Ended
January 1, 2016
 
Investment Securities
Currency Translation Adjustments
Total
Beginning Balance
$
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 (loss)
(860
)
(601
)
(1,461
)
Ending Balance
$
(510
)
$
(12,413
)
$
(12,923
)
(1)
Realized gains or losses from the sale of our AFS 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 RSUs, and shares issued under our employee stock purchase plan. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (e.g., 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
 
December 30,
2016
January 1,
2016
Numerator:
 
 
Net income attributable to Dolby Laboratories, Inc.
$
53,374

$
30,901

 
 
 
Denominator:
 
 
Weighted-average shares outstanding—basic
101,483

100,734

Potential common shares from options to purchase common stock
1,385

599

Potential common shares from restricted stock units
1,008

598

Weighted-average shares outstanding—diluted
103,876

101,931

 
 
 
Net income per share attributable to Dolby Laboratories, Inc.:
 
 
Basic
$
0.53

$
0.31

Diluted
$
0.51

$
0.30

 
 
 
Antidilutive awards excluded from calculation:
 
 
Stock options
739

5,698

Restricted stock units
42

215

 
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 December 30, 2016, the total amount of gross unrecognized tax benefits was $80.2 million, of which $66.6 million, if recognized, would reduce our effective tax rate. As of September 30, 2016, the total amount of gross unrecognized tax benefits was $75.2 million, of which $62.1 million, if recognized, would reduce our effective tax rate. 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
 
December 30,
2016
January 1,
2016
Withholding taxes
$
8,991

$
9,782

Effective Tax Rate
Each period, the combination of 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 in the first quarter of fiscal 2017 was 20.8%, compared to 21.5% in the first quarter of fiscal 2016. The decrease in our effective tax rate reflects increased benefit from a relative change in foreign earned income and discrete benefits from the settlement of a multi–year state audit, partially offset by a decrease in discrete benefits from federal R&D credits.

11. Legal Matters
We are involved in various legal proceedings that occasionally arise in the normal course of business. These can include claims of alleged infringement of IP 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 amounts are either immaterial, or it is not possible to provide an estimated amount of any such potential losses.

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 December 30, 2016 (in thousands):
 
Payments Due By Fiscal Period
 
Remainder Of
Fiscal 2017
Fiscal
2018
Fiscal
2019
Fiscal
2020
Fiscal
2021
Thereafter
Total
Naming rights
$
3,810

$
7,715

$
7,811

$
7,909

$
8,008

$
94,972

$
130,225

Donation commitments
200

6,300

322

322

122

1,013

8,279

Operating leases
10,755

12,324

10,169

9,635

8,411

31,162

82,456

Purchase obligations
17,595

5,898

24,119

21,010



68,622

Total
$
32,360

$
32,237

$
42,421

$
38,876

$
16,541

$
127,147

$
289,582

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.
Donation Commitments.     Donation commitments primarily relate to a non-cancelable obligation entered into during fiscal 2014 to install and donate imaging and audio products to the Museum of the Academy of Motion Picture Arts and Sciences in Los Angeles, California, and to provide maintenance services for fifteen years from its expected opening date in fiscal 2018, 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.

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Purchase Obligations.     Purchase obligations primarily consist of our commitments made under agreements to purchase goods and services related to Dolby Cinema and for purposes that include IT and telecommunications, marketing and professional services, and manufacturing and other R&D activities.
Indemnification Clauses.     On a limited basis, our contractual agreements contain a clause under which we agree to provide indemnification to the counterparty, most commonly to licensees in connection with licensing arrangements that include our IP property. Additionally, and although not a contractual requirement, we have at times elected to defend our licensees from third party IP 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. Subsequent Events
Share Repurchase Program.    On January 25, 2017, we announced that our Board of Directors approved an
increase to the size of our stock repurchase program by $200 million, bringing the amount available for
future repurchases of the Company’s Class A Common Stock to $227 million. 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. Any shares repurchased under the program will be returned to the status of authorized, but unissued shares of Class A Common Stock.

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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.
Investors and others should note that we disseminate information to the public about our company, our products, services and other matters through various channels, including our website (www.dolby.com), our investor relations website (http://investor.dolby.com), SEC filings, press releases, public conference calls and webcasts, in order to achieve broad, non-exclusionary distribution of information to the public. We encourage investors and others to review the information we make public through these channels, as such information could be deemed to be material information.
OVERVIEW
Dolby Laboratories creates audio and imaging technologies that transform entertainment and communications at the cinema, at home, at work and on mobile devices. Founded in 1965, our 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 multiple offerings that enable more immersive sound for cinema, digital television transmissions and devices, OTT video services, DVD and Blu-ray Discs, gaming consoles, and mobile devices. Today, we derive the majority of our revenue from licensing our audio technologies. We also derive revenue from licensing our consumer imaging and communication technologies, as well as audio and imaging technologies for premium cinema offerings in collaboration with exhibitors. Finally, we provide products and services for a variety of applications in the cinema, broadcast and communications markets.
OUR STRATEGY
Key elements of our strategy include:
Advancing the Science of Sight and Sound. We apply our understanding of the human senses, audio and imaging engineering to develop technologies aimed at improving how people experience and interact with their entertainment and communications content.
Providing Creative Solutions. We promote the use of our solutions as creative tools, and provide our products, services and technologies to filmmakers, sound mixers and other production teams in their creative processes. Our tools help showcase the quality and impact of their efforts and intent, and this may generate market demand.
Delivering Superior Experiences. Our technologies and solutions optimize playback and communications so that users may enjoy sound and sight in Dolby, which results in a more rich, clear, and immersive experience.

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REVENUE GENERATION
The following table presents a summary of the composition of our revenue for all periods presented:
 
Fiscal Quarter Ended
Revenue
December 30,
2016
January 1,
2016
   Licensing
87%
88%
   Products
11%
10%
   Services
2%
2%
Total
100%
100%
We license our technologies in approximately 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, and services revenue is based on the location where services are performed.
 
Fiscal Quarter Ended
Revenue By Geographic Location
December 30,
2016
January 1,
2016
United States
32%
27%
International
68%
73%
We have active licensing arrangements with over 550 electronics product OEMs and software developer licensees. As of December 30, 2016, we had approximately 6,500 issued patents relating to technologies from which we derive a significant portion of our licensing revenue. We have approximately 1,000 trademark registrations throughout 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
We license our technologies and IP to a range of customers who incorporate them into their products for enhanced audio and imaging functionality whether it be at home, at work, on mobile devices, or at the cinema. Our key technologies and IP are as follows:
Technology
Description
AAC & HE-AAC
An advanced digital audio codec solution with higher bandwidth efficiency used for a wide range of media applications such as TVs, STBs, PCs, gaming consoles, mobile devices and digital radio.
Dolby® AC-4
A next-generation digital audio coding technology that is aimed at maximizing transmission efficiency while delivering new audio experiences to a wide range of playback devices, including TVs, STBs, PCs, and mobile devices.
Dolby Atmos®
An object-oriented audio technology for home theaters, cinema, device speakers, and headphones that allows sound to be precisely placed and moved anywhere in the listening environment including the overhead dimension. The Dolby Atmos experience can be provided via multiple Dolby audio coding technologies.
Dolby Digital®
A digital audio coding technology that provides multichannel sound to applications such as DVD players, TVs and STBs.
Dolby Digital Plus™
An advanced digital audio coding technology that offers more efficient audio transmission for a wide range of media applications such as TVs, STBs, Blu-ray Discs, PCs, and mobile devices.
Dolby® TrueHD
A digital audio coding technology providing lossless encoding for premium quality media applications such as Blu-ray Discs and home theaters.
Dolby Vision™
An imaging technology combining HDR and an expanded color spectrum to deliver higher contrast, brighter highlights, and improved details for TV, cinema, and other consumer devices.
Dolby Voice®
An audio conferencing technology with superior spatial perception, voice clarity and background noise reduction that emulates the in-person meeting experience.
HEVC
An advanced digital video codec with higher bandwidth efficiency used in a wide range of media devices.

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The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Quarter Ended
 
Market
December 30,
2016
January 1,
2016
Main Offerings Incorporating Our Technologies
Broadcast
46%
48%
STBs & Televisions
PC
15%
15%
Windows and macOS operating systems
CE
12%
13%
DMAs, Blu-ray Disc devices, AVRs, soundbars, DVDs & HTIBs
Mobile
10%
10%
Smartphones & tablets
Other
17%
14%
Gaming consoles, Auto DVD, Dolby Cinema, Dolby Voice
Total
100%
100%
 
We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, and more recently, collaboration arrangements.
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 semiconductor manufacturers whom we refer to as “implementation licensees.” Implementation licensees incorporate our technologies in ICs which they sell to OEMs of consumer entertainment products, whom we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell end-user products using ICs that incorporate our technologies.
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 following our validation of the design, the licensee is permitted to sell the chipset for use solely 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 on a particular product depends on several factors including the nature of the implementations, the mix of Dolby technologies used, and the volume of products using 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 using our technologies that are shipped, and is subject to the same quality control evaluation process.
Patent Licensing Model.    We license our patents through patent pools which are arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. We also license our patents directly to manufacturers that use our IP in their products. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. By aggregating and offering pooled IP, patent pools deliver efficiencies that reduce transactional costs for both IP owners and licensees. 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. We offer our AAC, AVC, HE-AAC, HEVC and other IP through patent licensing. Currently, most of our revenue earned from patent licensing relates to the licensing of AAC and HE-AAC technologies.

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Collaboration Arrangements.    
Dolby Cinema: We partner with exhibitors to create a premium cinema offering with Dolby Vision and Dolby Atmos at new and pre-existing venues that are optimized for an immersive entertainment experience. We receive a portion of box-office receipts from the installed theaters.
Dolby Voice: We enter into arrangements with audio and video conferencing providers where, in return for licensing our IP and know-how, we earn revenue based on access to our technology and services as well as on sales of the Dolby Voice Conference Phone (see "Products" below).
Settlements & Back Payments From Licensees: Licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Within the Results of Operations section of Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations," settlements and back payments are collectively referred to as "recoveries." Such recoveries have become a recurring element of our business and are particularly subject to fluctuation and uncertainty.
Products
We design and manufacture audio and imaging products for the cinema, television, broadcast, and entertainment industries. Distributed in over 80 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 and sell the Dolby Conference Phone which optimizes the conference call experience when using Dolby Voice.
Products revenue is derived primarily from sales of the following:
Product
Description
Cinema
Digital Cinema Servers
Servers used to load, store, decrypt, decode and watermark digital film files for presentation on digital cinema projectors, and also encrypt, encode and package digital film data for distribution.
Cinema Audio Products
Cinema Processors used to decode and render digital cinema soundtracks including those using Dolby Atmos and products that author, encrypt, encode and package Dolby Atmos soundtracks.
Other
Dolby Conference Phone
An integral hardware component of the Dolby Voice conferencing solution that enhances productivity through superior sound, full-room voice capture, spatial voice separation and touch-screen interface.
Other Products
3-D glasses and kits, broadcast hardware and software used to encode, transmit, and decode multiple channels of high quality audio for DTV and HDTV distribution, monitors, and accessibility solutions for hearing and visually impaired consumers.
Services
We offer various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training and maintenance, mixing room alignment, equalization, as well as audio, color and light image calibration.

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EXECUTIVE SUMMARY

We are focused on expanding our leadership in solutions for entertainment content and delivering dynamic new audio and visual technologies to the market. The increasing availability of Dolby Atmos in multiple markets coupled by the convergent uses of Dolby Atmos and Dolby Vision beyond Dolby Cinema and into consumer electronics create potential opportunities for further increases in our consumer base and revenues.

The following are highlights of our first quarter of fiscal 2017 as well as challenges in key areas:
AUDIO LICENSING
Broadcast
Highlights: Our broadcast revenues experienced growth of five percent in the current fiscal quarter, primarily from our established presence in developed markets. We are focused on greater adoption of our technologies in emerging markets by working with country-specific operators and standards bodies to drive longer term growth.
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 their decision-making and implementation. Further, in some emerging growth countries such as China, we face difficulties enforcing our contractual and IP rights, including instances in which our licensees fail to accurately report the shipment of products using our technologies.
Consumer Electronics
Highlights: Dolby Atmos is being adopted in an increasing range of devices including DMAs, AVRs, speakers and soundbars, as consumer interest in this premium audio technology continues to grow. Whereas the first Dolby Atmos soundbar came to market a year ago, there are now four soundbars in the market including two models from Samsung. At CES in January 2017, Dolby Atmos soundbars were announced by LG, Sony, Onkyo, Pioneer and Xiaomi. These hardware offerings are paired with a growing amount of content via Blu-ray Discs and OTT services. Beginning January 2017, BT in the UK will deliver all of its Premiere Football League coverage in Dolby Atmos, while Comcast in the US has begun to deliver content in Dolby Atmos. We will continue to work with OEMs to expand the range of Dolby Audio-enabled hardware, and with content developers and distributors to expand the range of entertainment offerings that utilize our audio technologies.
Challenges: We must continue to present compelling reasons for consumers to demand our audio technologies wherever they enjoy premium content. To the extent that OEMs do not incorporate our technologies in current and forthcoming products, our future revenue could be impacted.
Mobile
Highlights: Our mobile market experienced growth of 16 percent in the current fiscal quarter, primarily driven by expansion of our patent licensing programs from both existing and new customers. Aside from Apple in whose ecosystem we are now fully incorporated, we continue to focus on driving further adoption of our technologies across other major mobile ecosystems - Android, Windows and Amazon. Collectively, these platforms facilitate delivery and enhanced consumption of Dolby-enabled content from a multitude of streaming services.
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 and availability of Dolby content via various ecosystems, and the performance of the mobile device market as a whole.
Personal Computers
Highlights: At CES in January 2017, Lenovo announced a Legion gaming PC, which will be the first PC to support Dolby Atmos. And in December 2016, Microsoft announced support for Dolby Atmos on the Xbox One and Windows 10.
In the broader context, our technologies continue to enhance playback in both Mac and Windows operating systems including native support in their respective Safari and Microsoft Edge browsers. Dolby's presence in

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these browsers enables us to reach more users through new types of content, including streaming video entertainment.
Challenges: In recent years, unit demand for PCs has experienced secular decline as consumer choices have shifted towards other devices such as tablets and mobile phones. This has caused downward pressure on our PC revenues. Furthermore, a decline in the portion of PCs that have optical disc functionality will have a negative impact on our ASPs.
PRODUCTS
Highlights: We offer servers and audio processors to enable the playback of content in cinemas. Our most advanced audio for the cinema is Dolby Atmos. As of the end of our current fiscal quarter, there were over 2,700 Dolby Atmos-enabled screens installed or committed to be installed, an increase of approximately 1,100 screens from the first quarter of fiscal 2016, and over 600 Dolby Atmos theatrical titles announced or released, an increase of approximately 200 titles from the first quarter of fiscal 2016.
Challenges: Demand for our cinema products is dependent upon industry and 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 faced with pricing pressures or competing technologies, our revenue may be adversely affected.

NEW GROWTH INITIATIVES

Dolby Cinema™
Highlights: Launched in partnership with established movie theater exhibitors, Dolby Cinema is our premium cinema offering for moviegoers that combines Dolby Vision and Dolby Atmos at new or pre-existing venues. In total, 70 Dolby Cinema locations are now operational with locations projected to number 140 by the end of fiscal 2017. Of these, our largest partnership is with AMC which has opened 50 Dolby Cinema at AMC locations with plans to open 100 locations by the end of calendar 2017. In addition to AMC, exhibitors who feature Dolby Cinema include Wanda, the largest exhibitor in China, Cineplexx in Austria, and Vue (previously JT Bioscopen) in the Netherlands.
Dolby Cinema has also attracted strong interest from the creative community. Over 60 theatrical titles with Dolby Vision and Dolby Atmos have been announced or released with participation from every major studio. During the 2016 calendar year, the first full year for the Dolby Cinema program, nine of the ten highest-grossing films were optimized for Dolby Cinema.
Challenges: Although the premium large format sector of the cinema industry is currently growing, Dolby Cinema is in competition with other existing solutions. Our success with this initiative depends on our ability to differentiate our offering, deploy new sites in accordance with plans, and attract and retain a global viewing audience.

Dolby Vision™
Highlights: Dolby Vision TVs are now available globally, and the number of products using our technologies is growing. While Dolby Vision was available from only one partner a year ago, we now have ten TV OEM partners who have released or announced TVs with Dolby Vision. At CES in January 2017, Sony announced that its 2017 premium 4K HDR TVs will support Dolby Vision. In addition, LG, the world’s second largest TV manufacturer, announced that their 2017 OLED TVs will feature both Dolby Vision and Dolby Atmos which marks the first time that users can enjoy our premium audio and visual experience from a single product. LG's 2017 UHD TVs will also include Dolby Vision which complements their existing offerings that incorporate the imaging technology.
Other TV OEM partners include Vizio, the second largest TV manufacturer in the U.S. which includes Dolby Vision on three of their five lines, and TCL, the world’s third largest TV manufacturer, which supports Dolby Vision on four of their lines.

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The availability of entertainment content in Dolby Vision continues to expand. At CES in January 2017, the first UHD Blu-ray players that will support Dolby Vision were on display from LG, Phillips and Oppo. Three major studios - Lionsgate, Universal and Warner Bros. - have committed to release Dolby Vision titles on Blu-ray. Additionally, we now have more than 90 movie titles and over 100 hours of original TV content available in Dolby Vision through our OTT streaming partners, which include Netflix and Amazon.
Challenges: The success of Dolby Vision will depend on the expansion of content in the key categories of theatrical releases, episodic and live content as well as gaming. This will drive the broad adoption of the technology into consumer devices, including mobile.

Dolby Voice®
Highlights: BT MeetMe with Dolby Voice, the premium audio conferencing solution we launched in global partnership with BT, continues to gain traction. Dolby Voice has been incorporated into Highfive, a cloud-based collaboration and video conferencing solution that is easy to install and use. And PGi, one of the largest providers of audio conferencing software and services, offers Dolby Voice on its iMeet offering, a full video and screen sharing chat solution. In concert with these partners, we are focused on driving adoption of Dolby Voice and the Dolby Conference Phone.
Challenges: Our success in this market will depend on the number of service providers and enterprise customers we are able to attract from competing solutions, and on the volume of usage and Dolby Conference Phones that we are able to sell.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a description of the cri