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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 27, 2019
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

https://cdn.kscope.io/e31f1c6e2cc58c3bd5e5f3daa22709d3-image0a30.jpg
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
California
94103-1410
(Address of principal executive offices)
 
 
(Zip Code)

(415) 558-0200
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, $0.001 par value
DLB
The New York Stock Exchange
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer  
Non-accelerated Filer  
Smaller Reporting Company  
 
 
Emerging Growth Company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
On January 24, 2020, the registrant had 64,744,160 shares of Class A common stock, par value $0.001 per share, and 36,224,820 shares of Class B common stock, par value $0.001 per share, outstanding.




DOLBY LABORATORIES, INC.
FORM 10-Q
For the Fiscal Quarter Ended December 27, 2019
TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


2



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
ASC
 
Accounting Standards Codification
ASP
 
Average Selling Price
ASU
 
Accounting Standards Update
ATSC
 
Advanced Television Systems Committee
AVC
 
Advanced Video Coding
AVR
 
Audio/Video Receiver
CE
 
Consumer Electronics
CES
 
Consumer Electronics Show
CODM
 
Chief Operating Decision Maker
COGS
 
Cost Of Goods Sold
COSO
 
Committee Of Sponsoring Organizations (Of The Treadway Commission)
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
HD
 
High Definition
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
IBR
 
Incremental Borrowing Rate
IP
 
Intellectual Property
IPO
 
Initial Public Offering
IPTV
 
Internet Protocol Television
IT
 
Information Technology
LP
 
Limited Partner/Partnership
ME
 
Multiple Element
NOL
 
Net Operating Loss
OCI
 
Other Comprehensive Income
ODD
 
Optical Disc Drive
OECD
 
Organization For Economic Co-Operation & Development
OEM
 
Original Equipment Manufacturer
OTT
 
Over-The-Top
PC
 
Personal Computer
PCS
 
Post-Contract Support
PP&E
 
Property, Plant, & Equipment
PSO
 
Performance-Based Stock Option
PSU
 
Performance-Based Restricted Stock Unit
R&D
 
Research & Development
ROU
 
Right-Of-Use
RSU
 
Restricted Stock Unit
S&M
 
Sales & Marketing
SERP
 
Supplemental Executive Retirement Plan
SoC
 
System(s)-On-A-Chip
SSP
 
Standalone Selling Price
STB
 
Set-Top Box
TPE
 
Third Party Evidence
TSR
 
Total Stockholder Return
UHD
 
Ultra High Definition
U.S. GAAP
 
Generally Accepted Accounting Principles In The United States

3



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)
(unaudited)

 
December 27,
2019
September 27,
2019
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
741,429

$
797,210

Restricted cash
11,726

8,383

Short-term investments
170,234

119,146

Accounts receivable, net of allowance for doubtful accounts of $8,898 and $9,775
191,001

189,115

Contract assets
204,963

195,651

Inventories, net
29,104

32,331

Prepaid expenses and other current assets
52,551

39,704

Total current assets
1,401,008

1,381,540

Long-term investments
141,720

179,587

Property, plant, and equipment, net
549,495

537,432

Operating lease right-of-use assets
71,071


Intangible assets, net
175,981

180,891

Goodwill
335,443

334,829

Deferred taxes
123,284

114,075

Other non-current assets
95,282

93,395

Total assets
$
2,893,284

$
2,821,749

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
13,700

$
15,212

Accrued liabilities
242,052

268,144

Income taxes payable
2,318

3,506

Contract liabilities
19,785

19,991

Operating lease liabilities
15,604


Total current liabilities
293,459

306,853

Non-current contract liabilities
23,917

24,404

Non-current operating lease liabilities
57,985


Other non-current liabilities
179,222

177,462

Total liabilities
554,583

508,719

 
 
 
Stockholders’ equity:
 
 
Class A, $0.001 par value, one vote per share, 500,000,000 shares authorized: 64,649,011 shares issued and outstanding at December 27, 2019 and 63,911,270 at September 27, 2019
58

58

Class B, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 36,229,820 shares issued and outstanding at December 27, 2019 and 36,229,820 at September 27, 2019
41

41

Retained earnings
2,351,251

2,327,877

Accumulated other comprehensive (loss)
(18,060
)
(20,625
)
Total stockholders’ equity – Dolby Laboratories, Inc.
2,333,290

2,307,351

Controlling interest
5,411

5,679

Total stockholders’ equity
2,338,701

2,313,030

Total liabilities and stockholders’ equity
$
2,893,284

$
2,821,749

See accompanying notes to unaudited interim condensed consolidated financial statements

4



DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Fiscal Quarter Ended
 
December 27,
2019
December 28,
2018
Revenue:
 
 
Licensing
$
257,683

$
260,279

Products and services
34,194

42,097

Total revenue
291,877

302,376

 
 
 
Cost of revenue:
 
 
Cost of licensing
12,342

11,397

Cost of products and services
24,973

27,232

Total cost of revenue
37,315

38,629

 
 
 
Gross margin
254,562

263,747

 
 
 
Operating expenses:
 
 
Research and development
57,650

58,647

Sales and marketing
95,118

85,602

General and administrative
52,529

50,813

Restructuring charges
675

14

Total operating expenses
205,972

195,076

 
 
 
Operating income
48,590

68,671

 
 
 
Other income/expense:
 
 
Interest income
4,932

5,185

Interest expense
(72
)
(45
)
Other income, net
1,004

443

Total other income
5,864

5,583

 
 
 
Income before income taxes
54,454

74,254

(Provision for)/benefit from income taxes
(5,863
)
24,104

Net income including controlling interest
48,591

98,358

Less: net loss/(income) attributable to controlling interest
162

(139
)
Net income attributable to Dolby Laboratories, Inc.
$
48,753

$
98,219

 
 
 
Net income per share:
 
 
Basic
$
0.49

$
0.96

Diluted
$
0.47

$
0.93

Weighted-average shares outstanding:
 
 
Basic
100,336

102,677

Diluted
103,078

106,130

 
 
 
Related party rent expense:
 
 
Included in operating expenses
$
70

$
880

Included in net income attributable to controlling interest
$
(106
)
$
176

 
 
 
Cash dividend declared per common share
$
0.22

$
0.19

Cash dividend paid per common share
$
0.22

$
0.19

See accompanying notes to unaudited interim condensed consolidated financial statements

5



DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Fiscal Quarter Ended
 
December 27,
2019
December 28,
2018
Net income including controlling interest
$
48,591

$
98,358

Other comprehensive income:
 
 
Currency translation adjustments, net of tax of $40 and $0
3,620

(3,728
)
Unrealized gain/(loss) on investments, net of tax of ($261) and $40
(1,162
)
770

Unrealized gain on cash flow hedges, net of tax of ($37) and $0
284


Total other comprehensive income/(loss), net of tax
2,742

(2,958
)
 
 
 
Total comprehensive income
51,333

95,400

Less: comprehensive (income) attributable to controlling interest
(15
)
12

Comprehensive income attributable to Dolby Laboratories, Inc.
$
51,318

$
95,412

See accompanying notes to unaudited interim condensed consolidated financial statements

6



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 27, 2019
$
99

$

$
2,327,877

$
(20,625
)
$
2,307,351

$
5,679

$
2,313,030

Net income


48,753


48,753

(162
)
48,591

Other comprehensive income, net of tax



2,565

2,565

177

2,742

Distributions to controlling interest





(283
)
(283
)
Stock-based compensation expense

22,614



22,614


22,614

Repurchase of common stock

(26,705
)
(3,298
)

(30,003
)

(30,003
)
Cash dividends declared and paid on common stock


(22,081
)

(22,081
)

(22,081
)
Common stock issued under employee stock plans

24,373



24,373


24,373

Tax withholdings on vesting of restricted stock

(20,282
)


(20,282
)

(20,282
)
Balance at December 27, 2019
$
99

$

$
2,351,251

$
(18,060
)
$
2,333,290

$
5,411

$
2,338,701

 
 
 
 
 
 
 
 
 
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 28, 2018
$
102

$
66,127

$
2,313,539

$
(15,832
)
$
2,363,936

$
6,567

$
2,370,503

Net income


98,219


98,219

139

98,358

Other comprehensive loss, net of tax



(2,807
)
(2,807
)
(151
)
(2,958
)
Distributions to controlling interest





(906
)
(906
)
Stock-based compensation expense

21,482



21,482


21,482

Repurchase of common stock

(82,203
)
(30,342
)

(112,545
)

(112,545
)
Cash dividends declared and paid on common stock


(19,573
)

(19,573
)

(19,573
)
Common stock issued under employee stock plans

14,272



14,272


14,272

Tax withholdings on vesting of restricted stock
(1
)
(19,678
)


(19,679
)

(19,679
)
Balance at December 28, 2018
$
101

$

$
2,361,843

$
(18,639
)
$
2,343,305

$
5,649

$
2,348,954

 
 
 
 
 
 
 
 
See accompanying notes to unaudited interim condensed consolidated financial statements

7



DOLBY LABORATORIES, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Fiscal Quarter-To-Date Ended
 
December 27,
2019
December 28,
2018
Operating activities:
 
 
Net income including controlling interest
$
48,591

$
98,358

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
20,239

20,029

Stock-based compensation
22,614

21,482

Amortization of premium on investments
160

309

Provision for doubtful accounts
575

1,605

Deferred income taxes
(9,174
)
(32,571
)
Restructuring charge for exit of leased facility
486


Other non-cash items affecting net income
(10
)
3,393

Changes in operating assets and liabilities:


Accounts receivable, net
(2,331
)
17,736

Contract assets
(9,310
)
(33,519
)
Inventories
767

(2,709
)
Operating lease right-of-use assets
(8,644
)

Prepaid expenses and other assets
(13,245
)
(13,157
)
Accounts payable and accrued liabilities
(30,785
)
(26,332
)
Income taxes, net
945

1,546

Contract liabilities
(724
)
(678
)
Operating lease liabilities
8,664


Other non-current liabilities
2,341

1,460

Net cash provided by operating activities
31,159

56,952

 
 
 
Investing activities:
 
 
Purchases of investment securities
(129,325
)
(63,329
)
Proceeds from sales of investment securities
97,717

32,582

Proceeds from maturities of investment securities
17,876

19,785

Purchases of property, plant, and equipment
(23,385
)
(18,539
)
Purchase of intangible assets
(290
)
(12,065
)
Net cash used in investing activities
(37,407
)
(41,566
)
 
 
 
Financing activities:
 
 
Proceeds from issuance of common stock
24,373

14,272

Repurchase of common stock
(30,003
)
(112,545
)
Payment of cash dividend
(22,081
)
(19,573
)
Distribution to controlling interest
(283
)
(906
)
Shares repurchased for tax withholdings on vesting of restricted stock
(20,282
)
(19,679
)
Net cash used in financing activities
(48,276
)
(138,431
)
 
 
 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
2,086

(2,419
)
Net decrease in cash, cash equivalents, and restricted cash
(52,438
)
(125,464
)
Cash, cash equivalents, and restricted cash at beginning of period
805,593

925,250

Cash, cash equivalents, and restricted cash at end of period
$
753,155

$
799,786

 
 
 
Supplemental disclosure:
 
 
Cash paid for income taxes, net of refunds received
$
17,999

$
10,722

 
 
 
Non-cash investing activities:
 
 
Property, plant, and equipment purchased and unpaid at period-end
$
(582
)
$
6,642

Purchase consideration payable for intangibles
$
2,610

$


See accompanying notes to unaudited interim condensed consolidated financial statements

8



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 27, 2019 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 27, 2019, which are included in our Annual Report on Form 10-K filed with the SEC.
The results for the fiscal quarter ended December 27, 2019 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 25, 2020.
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
Since we operate as a single reporting segment, all required financial segment information is included in our unaudited interim condensed consolidated financial statements. This reflects the fact that our CODM, our Chief Executive Officer, evaluates our financial information and resources, and assesses the performance of these resources on a consolidated basis.
Use of Estimates
The preparation of our financial statements in accordance with 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 shipments by our licensees for which we are owed a sales–based royalty, estimated selling prices for performance obligations within 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 periods ended December 27, 2019 and December 28, 2018. Our fiscal year ending September 25, 2020 (fiscal 2020) and our fiscal year ended September 27, 2019 (fiscal 2019) both consist of 52 weeks.
Reclassifications
We have reclassified certain prior period amounts within our consolidated financial statements and accompanying notes to conform to our current period presentation. These reclassifications did not affect total revenue, operating income, or net income.

9



2. Summary of Significant Accounting Policies
Recently Issued Accounting Standards
Adopted Standards
At the beginning of fiscal 2020, we adopted the following standards:
Leases.  In the first quarter of fiscal 2020, we adopted ASU 2016-02, Leases (ASC 842) along with all subsequent applicable ASU clarifications and improvements, which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements. We adopted ASC 842 using the modified retrospective transition method and used the effective date as the date of initial application. Consequently, financial information is not updated and the disclosures required under ASC 842 are not provided for dates and periods prior to implementation. ASC 842 provides a number of optional practical expedients in transition. We elected the “package of practical expedients,” which permits us not to reassess under ASC 842 our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we account for lease and non-lease components as a single lease component.

Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current and non-current operating lease liabilities, and non-current operating lease liabilities on our interim condensed consolidated balance sheets.

As a lessee, the adoption of ASC 842 resulted in the recording of Operating lease right-of-use ("ROU") assets and Operating lease liabilities of $62.1 million and $64.6 million, respectively, as of September 28, 2019. The difference between the operating lease assets and liabilities was recorded as an adjustment to Other non-current liabilities, primarily related to deferred rent and other lease incentives. As a lessor, the adoption of ASC 842 did not have a material impact. The adoption of ASC 842 did not impact Retained Earnings.
Income Taxes: Comprehensive Income. During the first quarter of fiscal 2020, we adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. We elected to not reclassify the stranded tax effects to retained earnings as they were not material to Dolby's consolidated financial statements.
Standards Not Yet Effective
Collaborative Arrangements. In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, ASU 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This standard will be effective for Dolby beginning September 26, 2020, and we do not currently plan to early adopt. We do not believe that this standard will have a material impact on our consolidated financial statements.
Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments, including trade receivables, contract assets, and lease receivables. This standard will be effective for Dolby beginning September 26, 2020, and we do not currently plan to early adopt. We do not believe that this standard will have a material impact on our consolidated financial statements.

3. Revenue Recognition
We enter into revenue arrangements with our customers to license technologies, trademarks and patents for sound, imaging and voice solutions, and to sell products and services. We recognize revenue when we satisfy a performance obligation by transferring control over the use of a license, product, or service to a customer.
A.
Identification of the Contract or Contracts with Customers

10



We generally determine that a contract with a customer exists upon the execution of an agreement and after consideration of collectability, which could include an evaluation of the customer's payment history, the existence of a standby letter-of-credit between the customer’s financial institution and our financial institution, public financial information, and other factors. At contract inception, we also evaluate whether two or more non-standard agreements with a customer should be combined and accounted for as a single contract.
B.
Identification of Performance Obligations in a Contract
We generate revenues principally from the following sources, which represent performance obligations in our contracts with customers:
Licensing.   We license our technologies, including patents, to a range of customers who incorporate them into their products for enhanced audio, imaging and voice functionality across broadcast, mobile, CE, PC, gaming, and other markets.
Product Sales. We design and provide audio and imaging products for the cinema, television, broadcast, communications, and entertainment industries.
Services.  We provide various services to support theatrical and television production for cinema exhibition, broadcast, and home entertainment, including equipment training, mixing room alignment, equalization, as well as audio, color and light image calibration.
PCS. We provide PCS for products sold and for the equipment leased, and we support the implementation of our licensing technologies in our licensees’ products.
Equipment Leases. We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences by leasing equipment and licensing our intellectual property. We also lease hardware that facilitates the Dolby conferencing experience, including the Dolby Conference Phone, and the Dolby Voice Room solution.
Licensing Administration Fees. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation.
Some of our revenue arrangements include multiple performance obligations, such as hardware, software, support and maintenance, and extended warranty services. We evaluate whether promised products and services are distinct performance obligations.
The majority of our arrangements with multiple performance obligations pertain to our digital cinema server and processor sales that include the following distinct performance obligations to which we allocate portions of the transaction price based on their stand-alone selling price:
Digital cinema server hardware and embedded software, which is highly dependent on and highly interrelated with the hardware. Accordingly, the hardware and embedded software represent a single performance obligation.
The right to support and maintenance, which is included with the purchase of the digital cinema server hardware, is a distinct performance obligation.
The right to receive commissioning services is a distinct performance obligation within the sale of the Dolby Atmos Cinema Processor. These services consist of the review of venue designs specifying proposed speaker placement as well as calibration services performed for installed speakers to ensure optimal playback.
C.
Determination of Transaction Price for Performance Obligations in a Contract
After identifying the distinct performance obligations, we determine the transaction price in accordance with the terms of the underlying executed contract which may include variable consideration such as discounts, rebates, refunds, rights of returns, and incentives. We assess and update, if necessary, the amount of variable consideration to which we are entitled for each reporting period. At the end of each reporting period, we estimate and accrue a liability for returns and adjustments as a reduction to revenue based on several factors, including past returns history.
With the exception of our sales-based royalties, we evaluate whether a significant financing component exists when we recognize revenue in advance of customer payments that occur over time. For example, some of our licensing arrangements include payment terms greater than one year from when we transfer control of our IP to a

11



licensee and the receipt of the final payment for that IP. If a significant financing component exists, we classify a portion of the transaction price as interest income, instead of recognizing all the transaction price as revenue. We do not adjust the transaction price for the effects of financing if, at contract inception, the period between the transfer of control to a customer and final payment is expected to be one year or less.
D.
Allocation of Transaction Price to Distinct Performance Obligations in a Contract
For our sales-based royalties where the license is the predominant item to which the royalties relate, we present all revenues as licensing.
For revenue arrangements that include multiple performance obligations, we determine the stand-alone selling price for each distinct performance obligation based on the actual selling prices made to customers. If the performance obligation is not sold separately, we estimate the stand-alone selling price. We do so by considering market conditions such as competitor pricing strategies, customer specific information and industry technology lifecycles, internal conditions such as cost and pricing practices, or applying the residual approach method when the selling price of the good, most commonly a license, is highly variable or uncertain.
Once the transaction price - including any variable consideration - has been determined, we allocate the transaction price to the performance obligations identified in the contract, and recognize revenue as or when control is transferred for each distinct performance obligation.
E.
Revenue Recognition as Control is Transferred to a Customer
We generate our licensing revenue by licensing our technologies and patents to various types of licensees, such as chip manufacturers ("implementation licensees"), consumer product manufacturers, software vendors, and communications service providers. Our revenue recognition policies for each of these arrangements are summarized below.
Initial fees from implementation licensees.   Implementation licensees incorporate our technologies into their chipsets that, once approved by Dolby, are available for purchase by OEMs for use in end-user products. Implementation licensees only pay us a nominal initial fee on contract execution as consideration for the ongoing services that we provide to assist in their implementation process. Revenues from these initial fees are recognized ratably over the contractual term as a component of licensing revenue.
Sales-based licensing fees.   In our royalty bearing licensing agreements with OEMs, control is transferred upon the later of contract execution or the contract’s effective date. We apply the royalty exception, which requires that we recognize sales-based royalties when the sales occur based on our estimates. These estimates involve the use of historical data and judgment for several key attributes including industry estimates of expected shipments, the percentage of markets using our technologies, and average sale prices. Generally, our estimates represent the current period’s shipments to which we expect our licensees to submit royalty statements in the following quarter. Upon receipt of royalty statements from the licensees with the actual reporting of sales-based royalties that we estimated previously, we record a favorable or unfavorable adjustment based on the difference, if any, between estimated and actual sales. In the first quarter of fiscal 2020, we recorded a favorable adjustment of approximately $9 million, which was primarily related to July through September shipments and largely based on actual royalty statements received from licensees.
Fixed and guaranteed licensing fees.   In certain cases, our arrangements require the licensee to pay fixed, non-refundable fees independent of the actual number of units they may distribute in the future. In these cases, control is transferred and fees are recognized upon the later of contract execution or the effective date. Additionally and separate from initial fees from implementation licensees, our sales- and usage-based licensing agreements include a nominal fee, which is also recognized at a point in time in which control of the IP has been transferred. Revenues from these arrangements are included as a component of licensing revenue.
Recoveries.  Through our contract compliance efforts, we identify under-reported or misreported licensee royalties related to non-current periods. We may record a favorable or unfavorable revenue adjustment in connection with the findings from these compliance efforts generally upon resolution with the licensee through agreement of the findings, or upon receipt of the licensee’s correction statement. Revenues from these arrangements are included as a component of licensing revenue.
We also undertake activities aimed at identifying potential unauthorized uses of our technologies by third parties with whom we don't have a licensing agreement for such use, which when successful result in the recognition of r

12



evenue. These back royalties stem from third parties who agree to remit payments to us based on past use of our technology. In these scenarios, a legally binding contract did not exist at time of use of our technology, and therefore, we recognize revenue recoveries upon execution of the agreement as that is the point in time to which a contract exists and control is transferred. These revenues are classified as licensing revenue.
In general, we classify legal costs associated with activities aimed at identifying potential unauthorized uses of our technologies, auditing existing licensees, and on occasion, pursuing litigation as S&M in our consolidated statements of operations.
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.
In addition to our licensing arrangements, we also enter into arrangements to deliver products and services.
Product Sales.   Revenue from the sale of products is recognized when the customer obtains control of the promised good or service, which is generally upon shipment.
Services.  We provide various services, such as engineering services related to movie soundtrack print mastering, equipment training and maintenance, mixing room alignment, equalization, and image calibration, which we bill on a fixed fee and time and materials basis. Most of these services are of a short duration and are recognized as control of the performance obligations are transferred which is when the related services are performed.
Collaborative Arrangements.   We collaborate with established cinema exhibitors to offer Dolby Cinema, a branded premium cinema offering for movie audiences. Under such collaborations, Dolby and the exhibitor are both active participants, and share the risks and rewards associated with the business. Accordingly, these collaborations are governed by revenue sharing arrangements under which Dolby receives revenue based on monthly box office reports from exhibitors in exchange for the use of our imaging and sound technologies, our proprietary designs and trademark as well as for the use of our equipment at the exhibitor’s venue. The use of our equipment meets the definition of a lease, and for the related portion of Dolby's share of revenue, we apply ASC 842, Leases, and recognize revenue based on monthly box office reports from exhibitors. Our revenue share is recognized as licensing revenue in our consolidated statements of operations.
In addition, we also enter into hybrid agreements where a portion involves guaranteed payments, which in some cases result in classifying the payments as a sales-type lease. In such arrangements, we consider control to transfer at the point in time to which we have installed and tested the equipment, at which point we record such guaranteed payments as product revenue.
Via Administration Fee. We generate service fees for managing patent pools on behalf of third party patent owners through our wholly-owned subsidiary, Via Licensing Corporation. As an agent to licensors in the patent pool, Via receives a share of the sales-based royalty that the patent pool licensors earn from licensees. As such, we apply the sales-based royalty exception as the service provided is directly related to the patent pool licensors’ provision of IP, which results in recognition based on estimates of the licensee’s quarter shipments that use the pool’s patents. In addition to sales-based royalties, Via also has contracts where the fees are fixed. The revenue share Via receives from licensors on fixed fee contracts is recognized over the term in which we are providing services associated with the fixed fee contract. We recognize our administrative fees net of the consideration paid to the patent licensors in the pool as licensing revenue.
Deferred revenue, which is a component of contract liabilities, represents amounts that are ultimately expected to be recognized as revenue, but for which we have yet to satisfy the performance obligation. On December 27, 2019, we had $41.5 million of remaining performance obligations, 36% of which we expect to recognize as revenue in fiscal 2020, 24% in fiscal 2021, and the balance of 40% in fiscal years beyond 2021.
F.
Disaggregation of revenue
The following table presents a summary of the composition of our revenue for all periods presented:

13



 
Fiscal Quarter Ended
Revenue
December 27, 2019
 
December 28, 2018
Licensing
$
257,683

88
%
 
$
260,279

86
%
Products and services
34,194

12
%
 
42,097

14
%
Total revenue
$
291,877

100
%
 
$
302,376

100
%
The following table presents the composition of our licensing revenue for all periods presented:
 
Fiscal Quarter Ended
Market
December 27, 2019
 
December 28, 2018
Broadcast
$
102,133

40
%
 
$
100,138

38
%
Mobile
34,481

13
%
 
34,173

13
%
CE
48,845

19
%
 
43,750

17
%
PC
31,843

12
%
 
23,157

9
%
Other
40,381

16
%
 
59,061

23
%
Total licensing revenue
$
257,683

100
%
 
$
260,279

100
%
We license our technologies in approximately 60 countries, and our licensees distribute products that incorporate our technologies throughout the world. As shown in the table below, we generate the majority 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 27, 2019
 
December 28, 2018
United States
$
107,627

37
%
 
$
119,799

40
%
International
184,250

63
%
 
182,577

60
%
Total revenue
$
291,877

100
%
 
$
302,376

100
%

G.
Contract assets and liabilities
Our contract assets represent rights to consideration from licensees for the use of our IP that we have estimated in a given quarter in the absence of receiving actual royalty statements from licensees. These estimates reflect our best judgment at that time, and are developed using a number of inputs, including historical experience, anticipated performance, and third-party data. In the event that our estimates differ from actual amounts reported, we record an appropriate adjustment in the quarter in which the report is received which is typically the quarter following our estimate. Actual amounts reported are typically paid within sixty days. The main drivers for change in the contract assets account are variances in quarterly estimates, and to lesser degree, timing of receipt of actual royalty statements.

Our contract liabilities consist of advance payments and billings in excess of amounts earned and deferred interest where we have significant financing. The non-current portion of contract liabilities is separately disclosed in our consolidated balance sheets. We present the net contract asset or liability when we have both contract assets and contract liabilities for a single contract. In the first quarter of fiscal 2020, we recognized $6.8 million from prior period deferred revenue and deferred interest from arrangements which include a significant financing component.
The following table presents a summary of the balances to which contract assets and liabilities related to revenue are recorded for all periods presented:
 
December 27, 2019
September 27, 2019
Change ($)
Change (%)
Accounts receivable, net
$
191,001

$
189,115

$
1,886

1
 %
Contract assets
204,963

195,651

9,312

5
 %
Contract liabilities - current
19,785

19,991

(206
)
(1
)%
Contract liabilities - non-current
23,917

24,404

(487
)
(2
)%



4. Composition of Certain Financial Statement Captions
The following tables present detailed information from our consolidated balance sheets as of December 27, 2019 and September 27, 2019 (amounts displayed in thousands, except as otherwise noted).

14



Accounts Receivable
 
December 27,
2019
 
September 27,
2019
Trade accounts receivable
$
148,625

 
$
151,996

Accounts receivable from patent administration program licensees
51,274

 
46,894

Accounts receivable, gross
199,899

 
198,890

Less: allowance for doubtful accounts
(8,898
)
 
(9,775
)
Total
$
191,001

 
$
189,115



Accounts receivable, gross includes unbilled accounts receivable balances of $84.4 million as of December 27, 2019 related to amounts that are contractually owed. The unbilled balance represents our unconditional right to consideration related to fixed fee contracts which we are entitled to as a result of satisfying, or partially satisfying, performance obligations, as well as Via's unconditional right to consideration related to their patent administration programs.
Inventories
 
December 27,
2019
 
September 27,
2019
Raw materials
$
6,933

 
$
8,031

Work in process
4,432

 
4,872

Finished goods
17,739

 
19,428

Total
$
29,104

 
$
32,331



Inventories are stated at the lower of cost and net realizable value. Inventory with a consumption period expected to exceed twelve months is recorded within other non-current assets in our consolidated balance sheets. We have included $3.3 million and $3.0 million of raw materials inventory within other non-current assets in our consolidated balance sheets as of December 27, 2019 and September 27, 2019, respectively. Based on anticipated inventory consumption rates, and aside from existing write-downs due to excess inventory, we do not believe that material risk of obsolescence exists prior to ultimate sale.
Prepaid Expenses And Other Current Assets
 
December 27,
2019
 
September 27,
2019
Prepaid expenses
$
28,774

 
$
17,997

Other current assets
23,105

 
20,924

Income tax receivable
672

 
783

Total
$
52,551

 
$
39,704



As of December 27, 2019, other current assets include the carrying value of $2.2 million of land and building that are currently held for sale. Management has committed to a plan to sell the property. Based on current estimated selling prices in the market, we have determined that no indicators of potential impairment exist.
Accrued Liabilities
 
December 27,
2019
 
September 27,
2019
Accrued royalties
$
3,107

 
$
2,957

Amounts payable to patent administration program partners
58,015

 
58,899

Accrued compensation and benefits
60,698

 
78,716

Accrued professional fees
16,165

 
19,216

Unpaid PP&E additions
14,350

 
15,332

Accrued customer refunds
18,222

 
24,299

Other accrued liabilities
71,495

 
68,725

Total
$
242,052

 
$
268,144



15



Other Non-Current Liabilities
 
December 27,
2019
 
September 27,
2019
Supplemental retirement plan obligations
$
3,649

 
$
3,466

Non-current tax liabilities (1)
138,305

 
136,323

Other liabilities
37,268

 
37,673

Total
$
179,222

 
$
177,462


(1)    Refer to Note 12Income Taxes” for additional information related to tax liabilities.


5. Investments & Fair Value Measurements
We use cash holdings to purchase investment grade securities diversified among security types, industries, and issuers. All of our investment securities 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. Derivative contracts are used to hedge currency risk, these are carried at fair value and classified as other assets and other liabilities.
Our investment securities primarily consist of government bonds, certificates of deposit, 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 municipal debt investments are supported by letters of credit or standby purchase agreements. Our cash and investment portfolio consisted of the following (in thousands):
 
December 27, 2019
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents:








 






Cash
$
719,126

$

$

$
719,126

 
$
719,126

$

$

Cash equivalents:








 






Money market funds
22,303



22,303

 
22,303



Cash and cash equivalents
741,429



741,429


741,429



 
 
 
 
 
 
 
 
 
Short-term investments:








 






Certificate of deposit
4,730


(2
)
4,728

 

4,728


U.S. agency securities
6,396

4

(1
)
6,399

 

6,399


Government bonds
44,911

15


44,926

 
41,658

3,268


Commercial paper
15,884

4

(8
)
15,880

 

15,880


Corporate bonds
83,679

153

(22
)
83,810

 

83,810


Municipal debt securities
14,470

22

(1
)
14,491

 

14,491


Short-term investments
170,070

198

(34
)
170,234


41,658

128,576


 
 
 
 
 
 
 
 
 
Long-term investments:








 






U.S. agency securities
8,704

132

(1
)
8,835

 

8,835


Government bonds
26,219

78

(20
)
26,277

 
22,865

3,412


Corporate bonds
91,812

759

(88
)
92,483

 

92,483


Municipal debt securities
12,532

99

(1
)
12,630

 

12,630


Other long-term investments (1)
1,495



1,495

 



Long-term investments
140,762

1,068

(110
)
141,720


22,865

117,360


 
 
 
 
 
 
 
 
 
Total cash, cash equivalents, and investments
$
1,052,261

$
1,266

$
(144
)
$
1,053,383

 
$
805,952

$
245,936

$

 
 
 
 
 
 
 
 
 
Investments held in supplemental retirement plan:
 
 
 
 
 
 
 
Assets
3,746



3,746

 
3,746



Included in prepaid expenses and other current assets & other non-current assets
 
 
 
 
 
Liabilities
3,746



3,746

 
3,746



Included in accrued liabilities & other non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency derivatives as hedge instruments:
 
 
 
 
 
 
 
 
Assets

426


426

 

426


Included in other current assets
 
 
 
 
 
 
 
 
Liabilities


(62
)
(62
)
 

(62
)

Included in other accrued expenses
 
 
 
 
 
 
 
 
(1)
Other long-term investments as of December 27, 2019 include investments that are not carried at fair value including an equity method investment of $1.5 million.

16




 
September 27, 2019
 
Cost
Unrealized
 
 
Estimated Fair Value
 
Gains
Losses
Total
 
Level 1
Level 2
Level 3
Cash and cash equivalents: