Dolby Laboratories(DLB) - 2022 Q3 - Quarterly Report

PART I Unaudited Interim Condensed Consolidated Financial Statements Dolby Laboratories' unaudited financial statements for Q3 and nine months ended July 1, 2022, show total revenue of $289.6 million and net income of $39.6 million for the quarter, and $975.6 million and $156.1 million respectively for the nine months Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 1, 2022 | September 24, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,504,719 | $1,760,498 | | Cash and cash equivalents | $858,905 | $1,225,380 | | Total Assets | $2,919,936 | $3,105,687 | | Total Current Liabilities | $285,485 | $315,717 | | Total Liabilities | $460,411 | $501,455 | | Total Stockholders' Equity | $2,459,525 | $2,604,232 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $289,585 | $286,799 | $975,589 | $996,231 | | Licensing Revenue | $269,289 | $271,569 | $915,406 | $948,159 | | Products and Services Revenue | $20,296 | $15,230 | $60,183 | $48,072 | | Operating Income | $45,566 | $56,091 | $179,497 | $304,025 | | Net Income | $39,597 | $54,621 | $156,331 | $266,036 | | Diluted EPS | $0.39 | $0.52 | $1.52 | $2.54 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | YTD Ended July 1, 2022 | YTD Ended June 25, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $267,267 | $337,980 | | Net cash used in investing activities | ($255,213) | ($29,948) | | Net cash used in financing activities | ($368,131) | ($165,650) | | Net (decrease)/increase in cash | ($365,775) | $147,273 | Note 3. Revenue Recognition This note details revenue recognition policies, showing 93% of Q3 2022 revenue from licensing, disaggregated by market and geography, with Broadcast as the largest licensing contributor and international sales dominating total revenue Licensing Revenue by Market (Q3 2022 vs Q3 2021) | Market | Q3 2022 Revenue (in thousands) | % of Licensing | Q3 2021 Revenue (in thousands) | % of Licensing | | :--- | :--- | :--- | :--- | :--- | | Broadcast | $99,327 | 37% | $123,955 | 46% | | Mobile | $63,237 | 23% | $49,861 | 18% | | CE | $38,663 | 14% | $37,805 | 14% | | PC | $26,947 | 10% | $24,870 | 9% | | Other | $41,115 | 16% | $35,078 | 13% | | Total | $269,289 | 100% | $271,569 | 100% | Total Revenue by Geographic Location (Q3 2022 vs Q3 2021) | Geography | Q3 2022 Revenue (in thousands) | % of Total | Q3 2021 Revenue (in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | United States | $78,471 | 27% | $73,355 | 26% | | International | $211,114 | 73% | $213,444 | 74% | | Total | $289,585 | 100% | $286,799 | 100% | - As of July 1, 2022, the company had $44.4 million of remaining performance obligations, with 20% expected in fiscal 2022, 31% in fiscal 2023, and 49% thereafter[63] Note 9. Stockholders' Equity and Stock-Based Compensation This note details equity structure, stock incentive plans, and dividend policy, highlighting a $2.6 billion authorized stock repurchase program with $230.9 million remaining, and quarterly dividends of $0.25 per share Quarterly Share Repurchase Activity (Fiscal 2022) | Quarter | Shares Repurchased | Cost (in thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | :--- | | Q1 | 408,508 | $35,573 | $87.08 | | Q2 | 1,116,032 | $84,913 | $76.08 | | Q3 | 2,549,474 | $190,000 | $74.53 | | Total YTD | 4,074,014 | $310,486 | N/A | - As of July 1, 2022, the remaining authorization for the stock repurchase program was approximately $230.9 million[131] - The company declared a quarterly cash dividend of $0.25 per common share for Q1, Q2, and Q3 of fiscal 2022[133] Note 12. Income Taxes This note explains income tax expense and effective tax rate, with Q3 2022 at 19.8%, up from 7.7% in Q3 2021, primarily due to earnings mix and lower stock-based award benefits Effective Tax Rate Comparison | Period | Effective Tax Rate | | :--- | :--- | | Q3 Fiscal 2022 | 19.8% | | Q3 Fiscal 2021 | 7.7% | | YTD Fiscal 2022 | 15.3% | | YTD Fiscal 2021 | 12.2% | - The increase in the Q3 effective tax rate was mainly driven by a shift in the mix of earnings to jurisdictions with higher tax rates and lower tax benefits from stock-based award settlements[147] Note 15. Commitments and Contingencies This note outlines contractual obligations and legal contingencies, with total commitments of $150.9 million as of July 1, 2022, and a $34.4 million charge for resolving a legal matter with Intertrust Technologies - The company recorded a charge of $34.4 million within G&A expenses in the fiscal year-to-date period ended July 1, 2022, to resolve a legal matter with Intertrust Technologies concerning patent infringement allegations against Dolby's customers[162] Contractual Obligations and Commitments as of July 1, 2022 (in thousands) | Commitment | Total Amount | | :--- | :--- | | Naming rights | $106,791 | | Purchase obligations | $41,425 | | Donation commitments | $2,698 | | Total | $150,914 | Note 16. Business Combination This note describes the acquisition of Millicast, Inc. on January 31, 2022, for $38.8 million, allocating $8.7 million to intangible assets and $31.7 million to goodwill, enhancing Dolby.io's streaming capabilities - On January 31, 2022, Dolby acquired Millicast, Inc. for a total purchase consideration of $38.8 million[164][165] - The acquisition resulted in the recording of $31.7 million in goodwill and $8.7 million in identifiable intangible assets, primarily developed technology[165] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Q3 fiscal 2022 financial performance, business strategy, and market conditions, discussing COVID-19 impacts, strategic expansion into new content areas, revenue breakdown, operating expenses, liquidity, and cash flows Executive Summary This section highlights the ongoing impact of COVID-19 on supply chains and the cinema market, emphasizing a strategic focus on expanding Dolby's audio and imaging leadership into new content areas like music and gaming - The COVID-19 pandemic continues to negatively affect the business through supply chain constraints, component shortages, and disruptions in the cinema market, impacting royalties and product demand[193][194][195] - A key strategic focus is expanding Dolby experiences into new content areas such as music, gaming, live sports, and user-generated content to create additional value and drive adoption on devices like mobile, PCs, and gaming consoles[198][204][205] Results of Operations This section analyzes Q3 and YTD fiscal 2022 financial results, noting a slight decrease in Q3 licensing revenue, a 33% increase in products and services revenue, and significant operating expense changes including a $34.4 million legal settlement - Q3 Licensing revenue decreased 1% YoY, primarily due to lower Broadcast revenue from higher prior-year recoveries, partially offset by growth in Mobile from timing of contracts and higher adoption of Dolby Atmos and Dolby Vision[238][240] - Q3 Products and Services revenue increased 33% YoY, driven by higher sales of cinema equipment as the exhibitor market continues to recover[242][244] - YTD G&A expenses increased by $48.3 million (28%) YoY, primarily due to a $34.4 million charge for the resolution of a legal matter with Intertrust[252] Liquidity, Capital Resources, and Financial Condition As of July 1, 2022, Dolby maintained strong liquidity with $858.9 million in cash and $263.5 million in investments, returning capital via $310.5 million in YTD stock repurchases and $75.8 million in dividends, despite a decrease in operating cash flow to $267.3 million Key Liquidity Metrics (in thousands) | Metric | July 1, 2022 | September 24, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $858,905 | $1,225,380 | | Total Investments | $263,538 | $101,658 | | Working capital | $1,219,234 | $1,444,781 | - YTD cash used in financing activities increased significantly to $368.1 million from $165.7 million in the prior year, driven by higher common stock repurchases[278] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate sensitivity, with a 1% rate change impacting the investment portfolio by $2.3 million, and foreign currency exchange risk, where a 10% USD shift impacts derivative instruments by $7.3 million - A hypothetical 1% change in interest rates would impact the carrying value of the company's investment portfolio by approximately $2.3 million as of July 1, 2022[285] - A sensitivity analysis on foreign currency forward contracts indicated that a 10% shift in the value of the U.S. dollar would change the fair value of these instruments by $7.3 million[293] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of July 1, 2022, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that as of July 1, 2022, the company's disclosure controls and procedures were effective to meet their objectives at a reasonable assurance level[297] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[298] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, not expecting a material adverse impact, except for the Intertrust litigation matter detailed in Note 15 - The company is involved in various legal proceedings but does not expect them to have a material adverse impact, other than the litigation matter with Intertrust discussed in Note 15[301] Risk Factors This section details significant risks, including COVID-19 impacts, dependence on licensees, media distribution trends, intense competition, intellectual property protection challenges, supplier reliance, and international operations and tax regulations - COVID-19 continues to pose a significant risk, impacting supply chains, consumer product demand, and particularly the cinema market through social distancing and operational disruptions[304][305] - The business is highly dependent on licensees incorporating Dolby technologies into their products, and is exposed to risks from changing media consumption trends, such as the shift from optical discs and cable to streaming services[311][312] - Protecting intellectual property is critical, with risks including patent expiration, unauthorized IP use in markets like China, and potential for costly IP litigation[343][347][351][352] - The Dolby family and their affiliates control approximately 85.1% of the combined voting power of the company's stock, giving them significant influence over management and corporate matters[395] Unregistered Sales of Equity Securities and Use of Proceeds This section reports on equity repurchase activity, with Dolby repurchasing 2,549,474 shares for approximately $190.0 million in Q3 fiscal 2022, leaving $230.9 million authorized for future repurchases Share Repurchase Activity (Q3 Fiscal 2022) | Period | Total Shares Repurchased | Average Price Paid Per Share | Remaining Authorization | | :--- | :--- | :--- | :--- | | Apr 2 - Apr 29, 2022 | — | $— | $420.9 million | | Apr 30 - May 27, 2022 | 1,071,950 | $74.73 | $340.7 million | | May 28 - Jul 1, 2022 | 1,477,524 | $74.38 | $230.9 million | | Total for Quarter | 2,549,474 | N/A | $230.9 million | Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and XBRL interactive data files - The exhibits filed with this report include certifications from the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act[412]