Dolby Laboratories(DLB) - 2024 Q4 - Annual Report

Part I Item 1. Business Dolby Laboratories specializes in advancing audio and video entertainment, primarily through licensing technologies (93% of FY2024 revenue) to consumer electronics manufacturers - Dolby's business model is centered on inventing and innovating technology to improve audio and video entertainment experiences, with a strong focus on licensing to content creators, distributors, and consumer electronics manufacturers[21] Revenue Composition (FY2022-FY2024) | Revenue Source | FY 2024 | FY 2023 | FY 2022 | | :--------------------- | :------ | :------ | :------ | | Licensing | 93% | 92% | 93% | | Products and services | 7% | 8% | 7% | | Total | 100%| 100%| 100%| Licensing Dolby's licensing business, comprising over 90% of revenue, focuses on branded technologies and standard-essential patents, utilizing various royalty and fixed-fee models - The licensing business is composed of two primary components: Branded Technologies (including Branded Audio Codecs, Dolby Atmos & Dolby Vision) and Patents (including Audio and Imaging Patents)[29] - Branded technologies like DD+, Dolby AC-4, Dolby Atmos, and Dolby Vision are licensed to approximately 1,000 electronics manufacturers, creating a virtuous cycle where more content drives more device adoption and vice versa[29][32][39] - Patent licensing revenue is mainly from standard-essential patents for codecs like AAC, AVC, and HEVC, primarily through patent pools such as Access Advance and Via LA[47][51][54] - Revenue models for licensing include per-unit royalties, minimum volume commitments, fixed-fee contracts, and recoveries for prior period under-reporting, leading to potential revenue variability[40][41][42] Products & Services Dolby provides hardware and software solutions for cinema, broadcast, and live entertainment, including digital cinema products and professional services - The company designs and manufactures audio and imaging hardware and software for cinema and other entertainment industries, including digital cinema servers, processors, amplifiers, and loudspeakers[62][63] - Services offered include equipment training, maintenance, mixing room alignment, and calibration for theatrical and television production[64] Dolby.io Dolby.io is a SaaS platform for high-quality, low-latency interactive live events, shifting the company to a direct-to-enterprise, consumption-based revenue model - Dolby.io is a SaaS platform offering high-quality, low-latency streaming solutions for interactive live events[68] - The platform operates on a consumption-based revenue model, sold directly to enterprises, which is a departure from the company's traditional device-centric licensing business[69] End Markets In FY2024, 93% of Dolby's revenue derived from licensing across end markets, with Broadcast (35%) and Mobile (20%) as largest contributors Licensing Revenue by End Market (FY2022-FY2024) | Market | FY 2024 | FY 2023 | FY 2022 | Main Components | | :-------- | :------ | :------ | :------ | :----------------------------------------------------------------------------- | | Broadcast | 35% | 38% | 37% | Televisions and STBs | | Mobile | 20% | 20% | 21% | Smartphones and Tablets | | CE | 14% | 14% | 16% | DMAs, Blu-ray Disc devices, AVRs, Soundbars, and DVDs | | PC | 12% | 10% | 13% | Windows and macOS operating systems and devices | | Other | 19% | 18% | 13% | Dolby Cinema, Gaming consoles, Automotive, and Patent pool administrative fees | | Total | 100%| 100%| 100%| | Intellectual Property Dolby's business relies on a robust IP portfolio of 27,400 issued patents and 5,900 pending applications, actively enforced against unauthorized use - As of September 27, 2024, Dolby held approximately 27,400 issued patents and had 5,900 pending patent applications globally, with expirations extending through December 2047[74][75] - While some patents for Dolby Digital (DD) technologies have expired, leading to a decline in related revenue, the company has successfully transitioned many licensees to the newer DD+ technologies[76] - The company actively enforces its IP rights to address issues of underreporting and unauthorized use of its technologies by OEMs[79] Human Capital As of September 27, 2024, Dolby employed 2,080 people globally, offering competitive compensation and benefits under Board oversight - As of September 27, 2024, Dolby had 2,080 employees worldwide, none of whom are subject to a collective bargaining agreement[91] - The company offers competitive compensation and benefits packages, including salary, incentive bonuses, equity, and an Employee Stock Purchase Plan (ESPP)[92] Item 1A. Risk Factors Dolby faces significant risks including market volatility, IP protection challenges, operational dependencies, intense competition, regulatory compliance, and the influence of its dual-class stock structure - Revenue Generation: Risks include changing content trends like 'cord-cutting' affecting STB demand, concentration and competition in the mobile market, reliance on key partnerships in the PC market, and the success of Dolby Cinema being tied to external factors like movie production and box office performance[100][101][103][104] - Intellectual Property: The business is dependent on protecting its IP. Risks include the expiration of patents (specifically for older DD technologies), unauthorized use of IP, potential litigation, and challenges in enforcing IP rights in foreign jurisdictions[132][134][138][139] - Operations & Cybersecurity: The company relies on sole-source suppliers for certain components. It faces significant threats to its information systems from cyber attacks, which could lead to data breaches, business disruption, and financial loss. Compliance with evolving data privacy regulations like CPRA is also a key risk[145][148][153] - Competition: The company faces aggressive competition and pricing pressure across all markets. Competitors may offer integrated systems at lower prices or for free, and disruptive technologies like AI/ML could alter the market[85][154][157] - Legal & Regulatory: A substantial portion of revenue is international, exposing the company to risks from trade restrictions, sanctions, and complex foreign laws. Changes in tax laws, such as the OECD's Pillar 2 minimum tax, could also impact financial results[167][178][180] - Stock-Related Issues: The Dolby family controls a majority of the voting power (85.6% as of Sept 27, 2024) through a dual-class stock structure, giving them significant influence over corporate decisions[182][184] Item 1C. Cybersecurity Dolby's cybersecurity strategy, overseen by the CISO and Audit Committee, achieved ISO 27001 certification in 2024, with no material incidents reported to date - The company's cybersecurity risk management strategy is based on monitoring threats, adapting capabilities, and aligning practices with business goals, including processes for identifying, assessing, and managing risks[197][198] - In 2024, Dolby received ISO 27001 certification for its cybersecurity function and for streaming media through Dolby Millicast[199] - The Board of Directors, through its Audit Committee, oversees cybersecurity risk, with the Chief Information Security Officer (CISO) managing these risks and providing quarterly briefings[203][204][207] - The company has not encountered any cybersecurity incident that had a material impact on its operations or financial standing[202] Item 2. Properties Dolby owns headquarters in San Francisco and Sunnyvale, leases global facilities, and has related-party leases with Dolby family entities, with one San Francisco lease expiring in October 2024 - The company owns its headquarters at 1275 Market Street, San Francisco, and a commercial building in Sunnyvale, California[209][210] - Dolby has related-party lease agreements with entities affiliated with the Dolby family for properties in Burbank, CA and Wootton Bassett, England, holding minority ownership interests in these real estate entities[211] - The lease for the 100 Potrero Avenue office in San Francisco, leased from Dolby family trusts, expired on October 31, 2024, and the company has ceased occupancy[212][213] Item 3. Legal Proceedings Dolby is involved in various legal proceedings, primarily IP-related, which management expects will not materially impact financial results, though specific outcomes could be material - The company is involved in various legal proceedings in the normal course of business, with management not expecting a material adverse impact on financial results, but acknowledging litigation's unpredictable nature[216] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Dolby's Class A common stock trades on NYSE, supported by a quarterly $0.33 per share dividend and an active $3.3 billion stock repurchase program - The company maintains a quarterly cash dividend program, with the most recent dividend announced on November 19, 2024, at $0.33 per share[221] - A stock repurchase program has been in place since November 2009, with total Board authorizations reaching $3.3 billion as of August 2024[224][225] Share Repurchase Activity (Q4 FY2024) | Period | Total Shares Purchased | Average Price Paid Per Share | Remaining Authorized Repurchases | | :--------------------------------- | :--------------------- | :--------------------------- | :------------------------------- | | June 29, 2024 - July 26, 2024 | 250,757 | $79.76 | $51.6 million | | July 27, 2024 - August 23, 2024 | — | — | $401.6 million | | August 24, 2024 - September 27, 2024 | — | — | $401.6 million | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2024, Dolby's total revenue decreased to $1.27 billion, driven by lower licensing and product revenue, while operating income increased to $258.3 million due to reduced restructuring charges Results of Operations FY2024 total revenue decreased 2% to $1.27 billion, with licensing down 1%, while operating income increased 20% to $258.3 million due to lower expenses and a 15% effective tax rate Licensing Revenue by Market (FY2024 vs FY2023) | Market | FY 2024 ($M) | FY 2023 ($M) | | :-------------------- | :----------- | :----------- | | Broadcast | 409.1 | 451.7 | | Mobile | 235.8 | 243.9 | | CE | 165.8 | 170.2 | | PC | 141.3 | 124.4 | | Other | 229.8 | 207.8 | | Total Licensing | 1,181.8 | 1,197.9 | - Licensing revenue decreased by 1% ($16.1 million) in FY2024, primarily due to lower revenue from the Broadcast market because of the timing of minimum volume commitments and lower recoveries[281][283] - Products and services revenue decreased by 10% ($9.9 million) due to lower cinema products revenue, while gross margin for this segment increased from 14% to 20% due to a higher inventory reserve provision in the prior year[286] - Restructuring charges decreased by $40.7 million (86%) in FY2024 compared to FY2023, significantly boosting operating income[294] - The effective tax rate for FY2024 was 15%, down from 19% in FY2023, mainly due to a tax benefit related to the Transition Tax liability under the Tax Cuts and Jobs Act of 2017[302][540] Liquidity, Capital Resources, and Financial Condition As of September 27, 2024, Dolby's liquidity was $482.0 million in cash, significantly impacted by the $443.6 million GE Licensing acquisition, with $327.3 million cash from operations Selected Financial Information (as of Fiscal Year End) | Item | Sept 27, 2024 ($M) | Sept 29, 2023 ($M) | | :---------------------------- | :----------------- | :----------------- | | Cash and cash equivalents | 482.0 | 745.4 | | Short-term investments | 0.0 | 139.1 | | Working capital | 776.6 | 1,065.6 | - In fiscal 2024, the company acquired GE Licensing for a cash purchase price of $443.6 million, significantly reducing cash and investment balances[307] Cash Flow Summary (FY2024 vs FY2023) | Activity | FY 2024 ($M) | FY 2023 ($M) | | :------------------- | :----------- | :----------- | | Net Cash from Ops | 327.3 | 367.1 | | Net Cash from/(used in) Inv | (286.3) | 54.2 | | Net Cash used in Fin | (287.8) | (236.8) | - Net cash used in investing activities was $286.3 million, driven by business combinations, a sharp contrast to the $54.2 million provided by investing activities in the prior year[315] - The company has significant future commitments, including $79.4 million for naming rights (e.g., Dolby Theatre) and $16.3 million in purchase obligations[319][321][554] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Dolby faces market risks from interest rate and foreign currency fluctuations, mitigating the latter with $111.7 million in forward contracts to hedge international operating expenses - The company's investment portfolio is subject to interest rate fluctuations, but the policy is conservative, focusing on capital preservation and high-rated securities[327] - Dolby faces foreign currency risk as most international revenue is in USD, while foreign operating expenses are in local currencies, exposing operating margins to exchange rate movements[328] - The company uses foreign currency forward contracts to hedge against currency volatility, with a total notional amount of $111.7 million as of September 27, 2024[329][332][333] Item 8. Consolidated Financial Statements This section presents Dolby's consolidated financial statements, including KPMG's unqualified audit opinion, showing $3.11 billion in total assets and $261.8 million net income for FY2024 Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Dolby's consolidated financial statements and internal controls, identifying revenue estimate assessment as a Critical Audit Matter - KPMG LLP provided an unqualified audit opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[343] - The audit identified a Critical Audit Matter related to the 'Assessment of revenue estimate related to sales-based licensing arrangements' due to challenging and subjective judgments involved in the estimation process[352][353] Consolidated Financial Statements Dolby's consolidated financial statements show $3.11 billion in total assets, $1.27 billion in total revenue, and $261.8 million net income for FY2024 Consolidated Balance Sheet Highlights (FY2024 vs FY2023) | Account | Sept 27, 2024 ($M) | Sept 29, 2023 ($M) | | :------------------------------------ | :----------------- | :----------------- | | Total Assets | 3,109.9 | 2,979.8 | | Cash and cash equivalents | 482.0 | 745.4 | | Goodwill | 533.2 | 408.4 | | Total Liabilities | 623.0 | 607.6 | | Total Stockholders' Equity | 2,486.9 | 2,372.2 | Consolidated Statement of Operations Highlights (FY2024 vs FY2023) | Account | FY 2024 ($M) | FY 2023 ($M) | FY 2022 ($M) | | :--------------------------- | :----------- | :----------- | :----------- | | Total Revenue | 1,273.7 | 1,299.7 | 1,253.8 | | Gross Margin | 1,133.2 | 1,147.2 | 1,112.4 | | Operating Income | 258.3 | 215.8 | 206.6 | | Net Income (attributable to Dolby) | 261.8 | 200.7 | 184.1 | | Diluted EPS | $2.69 | $2.05 | $1.81 | Notes to Consolidated Financial Statements Notes detail accounting policies, including revenue recognition estimates, $432.9 million GE Licensing acquisition, $58.7 million THEO acquisition, stock repurchases, and a reduced 15.4% effective tax rate - Revenue Recognition (Note 3): A significant portion of licensing revenue is estimated based on licensee sales data, reported a quarter in arrears, involving judgment and potential subsequent adjustments[273][436] - Business Combinations (Note 15): In FY2024, Dolby acquired GE Licensing for $432.9 million (net consideration), adding $80.8 million in goodwill and $274.2 million in intangible assets, and THEO Technologies for $58.7 million, adding $39.9 million in goodwill[560][561][566][570] - Stockholders' Equity (Note 9): The company repurchased 1.94 million shares for $160.0 million in FY2024 and declared dividends totaling $1.23 per share during the fiscal year[522][523] - Restructuring (Note 13): The company initiated restructuring plans in April 2024 and September 2023, incurring total charges of $6.4 million in FY2024, a significant decrease from $47.1 million in FY2023[549][551][553] - Income Taxes (Note 12): The effective tax rate decreased to 15.4% in FY2024 from 19.4% in FY2023, primarily due to a $10.0 million benefit related to a U.S. Tax Court opinion on the 2017 Tax Act's Transition Tax[540] Item 9A. Controls and Procedures Management and KPMG concluded that Dolby's disclosure controls and internal control over financial reporting were effective as of September 27, 2024, with no material changes reported - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the fiscal year-end[598] - Management assessed internal control over financial reporting based on the COSO framework and concluded it was effective as of September 27, 2024, an assessment audited and confirmed by KPMG LLP[601] Item 9B. Other Information On August 21, 2024, SVP John Couling adopted a Rule 10b5-1 trading plan for the potential sale of up to 57,000 shares of Class A common stock - On August 21, 2024, John Couling, SVP, Entertainment, adopted a Rule 10b5-1 trading plan for the sale of up to 57,000 shares of Class A common stock[604] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement[609] Item 11. Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2025 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2025 Proxy Statement[611] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and equity compensation plans, is incorporated by reference from the 2025 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the 2025 Proxy Statement[612] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2025 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2025 Proxy Statement[612] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2025 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 2025 Proxy Statement[613] Part IV Item 15. Exhibits and Financial Statement Schedules This section provides an index of exhibits filed with the report, noting that financial statement schedules are omitted as information is in Item 8 - This section provides an index of all exhibits filed with or incorporated by reference into the Form 10-K[616][619]