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| DLB > SEC Filings for DLB > Form 10-K on 15-Nov-2012 | All Recent SEC Filings |
15-Nov-2012
Annual Report
Overview
Dolby Laboratories has been a leading solutions provider to the entertainment
industry for more than 45 years. We provide products, services, and technologies
to capture, distribute, and play back entertainment content that gives consumers
a premium entertainment experience, regardless of how or where they choose to
enjoy it. Our core strengths range from our expertise in digital signal
processing and compression technology to our long history of providing products,
tools, and technologies to participants in the entertainment industry at each
stage in the content creation, distribution, and playback process. We provide
products and services that enable content creators and distributors to produce,
encode, and transmit content with our premium audio technologies, and we license
decoding technologies to the manufacturers of entertainment devices to ensure
that content is ultimately experienced as the creator and distributor intended.
Throughout our history, we have introduced numerous innovations that have
significantly improved the quality of audio entertainment, such as noise
reduction for the recording and cinema industries and surround sound for cinema
and home entertainment. Today, we continue to derive the vast majority of our
revenue from our audio technologies.
Looking forward, we see a number of industry trends that create opportunities
for the continued growth of our audio business, including the ongoing global
transition from analog to digital television and consumers' increasing use of
mobile devices, such as tablets and smartphones, to play back digital content.
Our portfolio of technologies and solutions optimize the audio experience for
portable devices to provide consumers with a rich, clear, and immersive sound,
despite the bandwidth limitations of online and cellular networks and the
physical limitations of devices with tiny speakers.
We also see opportunities to apply our core strengths in areas beyond audio. For
example, we believe that significant improvements can be made in the technology
currently used to deliver and play back premium video, and we have identified
solutions that may substantially improve the video experience. Similarly, we
believe we can apply our existing audio technologies to improve the clarity and
quality of voice communications in areas such as multi-party teleconferencing.
Business Model
We generate the majority of our revenue by licensing technologies to original
equipment manufacturers ("OEM") of consumer entertainment ("CE") products and to
software vendors. We also generate revenue by selling products and related
services to creators and distributors and exhibitors of entertainment content.
We participate in the global entertainment industry in three important ways:
We offer products, services, and technologies to creators and distributors
of entertainment content, such as motion picture, television, and music
recording studios, television broadcasters, satellite and cable operators,
cinema theatre chains, and increasingly, Internet content streaming and
download service providers. These content creators and distributors use
our products, services, and technologies to encode and transmit content,
creating rich, clear, and immersive audio experiences for consumers upon
playback.
We license technologies, such as Dolby Digital, Dolby Digital Plus, Dolby TrueHD, to OEMs and software vendors for incorporation into their CE and other products, so that consumers can play back audio content with our technologies in the rich, clear, and immersive manner the creators intended.
We work directly with standards-setting organizations in the entertainment and technology industries, as well as governments and other regulatory bodies, to promote adoption of our technologies in their standards. As a result, our technologies are included in the majority of worldwide TV shipments to support digital TV standards around the world that mandate our formats. Our technologies are also included in virtually all DVD players, Blu-ray Disc players, audio/video receivers, and personal computer ("PC") DVD software players.
We license our technologies to OEMs and software vendors in 44 countries and our licensees distribute products incorporating our technologies throughout the world. We sell our products and services in over 80 countries. In fiscal 2012, 2011, and 2010 revenue from outside of the U.S. was 68%, 68%, and 66% of our total revenue, respectively. Our licensing business is our most significant revenue stream, representing 86%, 83%, and 77% of our total revenue in fiscal 2012, 2011, and
2010, respectively. Geographic data for our licensing revenue is based on the location of our licensees' headquarters. Product revenue is based on the destination to which we ship our products, while services revenue is based on the location where services are performed.
Opportunities, Challenges, and Risks
Our licensing and product markets are characterized by rapid technological
changes, new and improved product introductions, changing customer demands,
evolving industry standards, changing licensee needs, and product obsolescence.
We believe that these changes present us with opportunities to provide realistic
and immersive audio experiences to consumers through new and emerging delivery
channels. However, as described below, our licensing revenue is subject to
uncertainties and trends relating to technology and market growth, as well as
the mix of CE products sold that incorporate our technologies. Our licensing
business also could be affected by adverse general economic conditions, because
many of the products in which our technologies are incorporated are
discretionary goods. Furthermore, our products business is subject to intense
competition and uncertainties relating to the transition to digital cinema and
purchasing decisions by our cinema customers. We expect recent declines in our
3D revenue to continue, as the market for 3D products becomes increasingly
saturated.
Licensing
Licensing revenue constitutes the majority of our total revenue, representing
86%, 83%, and 77% of total revenue in fiscal 2012, 2011, and 2010, respectively.
The entertainment industry is in transition. As consumers are presented with
more options for receiving entertainment content, competition across the
delivery channels has intensified. We see this reflected in the changing
composition of our licensing revenue, driven by a shift away from optical disc
based products. Our optical disc based revenue is generated from the sale of
technology solutions that enable DVD or Blu-ray Disc playback functionality,
licensing including the Windows 7 operating system, independent PC DVD software
players, DVD, and Blu-ray Disc technologies included in consumer products.
However, most of these products can also receive content over mobile or online
networks and we have increased our technology penetration into these other
distribution channels. Non-optical disc based revenue is generated from the sale
of technology solutions other than those used to enable DVD or Blu-ray Disc
playback functionality. Non-optical disc based revenue includes licensing
revenue derived from products such as TVs, set-top boxes, and mobile devices, as
well as from the incorporation of our post processing technologies in a range of
devices. We remain focused on delivering the products, tools, and technologies
needed to ensure a high quality audio experience from any device.
Looking forward, we expect continued growth in the proportion of our licensing
revenue we derive from non-optical disc sources. This will be driven partly by
the maturity of optical disc as a method for delivering content, but also by the
significant opportunities presented by digital broadcast and online and mobile
distribution, as well as the inclusion of our technologies in the Windows 8
operating system to enable the playback of online content. We also see
significant opportunities to offer encode/decode solutions in video and voice
that leverage our expertise in signal processing, compression, and the capture
and playback of content.
Our licensing revenue comes from the following markets and primarily from the
inclusion of our technologies in the products indicated for each market:
Broadcast market: primarily televisions and set-top boxes
PC market: primarily DVD software players and Microsoft Windows operating systems
CE market: primarily DVD and Blu-ray Disc players and recorders, audio/video receivers, and home-theater-in-a-box systems
Other markets:
Mobile - primarily cell phones, tablets and other mobile devices
Gaming - primarily video game consoles
Licensing services - primarily administration of joint licensing programs
Automotive - primarily in-car DVD players
The growth of the Internet, and the related shift by consumers toward online entertainment content, has resulted in a global trend toward an array of online content streaming and download services. Today content is captured, delivered, and played back in more ways than ever before. Content creators and distributors are increasingly focused on delivering content across a multitude of media and devices with varying bandwidth and performance requirements, including PCs, connected TVs, set-top boxes, gaming consoles, connected Blu-ray Disc players, and a variety of mobile devices. Many of these mobile devices
are increasingly designed to capture and distribute content through improved
camera and WiFi technologies, as well as to play back rich entertainment
experiences. This increasingly complex array of devices, with capability for
both creating and playing back content, presents a challenge for content
creators and device manufacturers seeking consistent audio quality. We believe
this challenge provides an opportunity similar to that of digital broadcast,
whereby we can provide solutions to optimize the audio experience across the
online and portable device ecosystem.
In the area of content creation and delivery, our technologies are included in
DVD, Blu-ray Disc, and certain broadcast standards, and we are working to extend
our technologies to online delivery services. Online content aggregators,
including Netflix, Amazon, VUDU, Apple, HBO GO, Samsung's Acetrax, and the Roxio
Now platform, use our technologies to encode video and audio content. Leading
music services such as Rhapsody and Omnifone use our audio encoding tools to
deliver a rich music experience to their subscribers. In the second quarter of
fiscal 2012, HBO adopted Dolby Digital Plus in its HBO GO content for select
connected TVs. HBO will also offer Dolby Digital Plus in its HBO GO service for
content delivered to Blu-ray Disc players. In addition, Samsung now offers Dolby
Digital Plus surround sound audio through the Acetrax Video on Demand
application.
Our broadcast market, driven by demand for our technologies in televisions and
set-top boxes, represented approximately 34%, 31%, and 27% of our licensing
revenue in fiscal 2012, 2011, and 2010, respectively. Dolby technology was
included in a higher percentage of televisions and set-top boxes in fiscal 2012
which drove increased revenue relative to fiscal 2011. We view the broadcast
market as an area for potential continued growth, primarily in geographic
markets outside of the U.S. We see opportunities in working with specific
operators and standards bodies across emerging markets to adopt our multichannel
formats. Given, the percentage of the world's population that lives in countries
in emerging markets and the number of televisions and set-top boxes sold in such
markets, we believe that these markets present significant opportunities for
growth. While there is no guarantee that the counties in the emerging markets
will convert to digital television, we intend to ensure that we are well
positioned to benefit from such transition if it occurs. We also view broadcast
services, such as terrestrial broadcast or IPTV services, which operate under
bandwidth constraints, as another area of opportunity for Dolby Digital Plus.
These technologies enable the delivery of high quality audio content at reduced
bit rates, thereby conserving bandwidth. We may not, however, be able to extend
our current success in the broadcast market to these new opportunities.
Our PC market represented approximately 28%, 30%, and 36% of our licensing
revenue in fiscal 2012, 2011, and 2010, respectively. Our technologies are
incorporated in the majority of PCs sold today, primarily because of the
inclusion of DVD and Blu-ray Disc playback in the majority of PCs and the
inclusion of Dolby technologies in the DVD and Blu-ray Disc standards.
Historically, we have licensed our technologies to a range of PC licensees,
including independent software vendors ("ISV"), PC OEMs, and operating system
providers. The release of new versions of major PC operating systems has often
resulted in changes in the mix of our PC licensees. In 2007, Microsoft
introduced its Windows Vista operating system, which included our technologies
to enable DVD audio playback in two of its editions. In fiscal 2009, Microsoft
released its current operating system, Windows 7, which includes our
technologies within four editions. As a result, since 2007 the mix of our PC
licensing revenue from operating systems has increased relative to that from
OEMs and ISVs. We currently license our audio codec technologies directly to
OEMs such as Apple, Toshiba, and Sony to support optical disc playback on PCs,
and we license our PC Entertainment Experience ("PCEE") technologies to multiple
PC OEMs through our PCEE licensing program.
In May 2012, we entered into an agreement with Microsoft under which Dolby
Digital Plus 5.1 channel decoding and Dolby Digital two-channel encoding will be
included in all PCs and tablets licensed to run the Windows 8 operating system.
Under the arrangement, OEMs generally will be required to directly license and
pay us a base royalty rate for the right to use the Dolby technologies included
in Windows 8 installed on the PCs and tablets they produce for online and
file-based content. OEMs will be required to pay a higher per-unit royalty for
Windows 8 PCs that also include optical disc playback functionality, which will
be implemented by ISV applications. This higher rate is consistent with rates
paid historically for the inclusion of Dolby disc playback software in the PC
market. In the near term, we expect the majority of PCs to continue to ship with
optical disc drives and to include optical disc playback functionality.
We believe the Microsoft Windows 8 arrangement provides a simple and consistent
way for OEMs to enable playback with our technologies of content delivered by
online services and video in local files on the device. This is a different
licensing arrangement than the one we have for Windows 7. The release of Windows
8 did not have a material financial impact in fiscal 2012, as Microsoft
continued to license its Windows 7 operating systems with our technologies. The
ultimate financial impact of these licensing arrangements for Windows 8 on our
licensing revenue is uncertain and will depend on several factors, including:
The extent and rate at which Windows 8 is adopted in the marketplace;
The extent to which OEMs include optical disc playback in Windows 8 devices;
The extent to which earlier versions of Microsoft operating systems, including Windows 7, continue to be licensed after the release of Windows 8;
Our ability to establish and extend licensing relationships directly with PC OEMs and ISVs;
The rate at which entertainment content shifts from optical disc media to online media, thus reducing the need for PCs to have optical disc drives and DVD and Blu-ray Disc software players; and
Our ability to extend the adoption of our technologies to online and mobile platforms.
In the short term, revenue from our PC market remains dependent on several
factors, including underlying PC unit shipment growth and the extent to which
our technologies are included in operating systems and ISV media applications.
We continue to face risks relating to:
Purchasing trends away from traditional PCs and towards portable devices
without optical disc drives, such as ultrabooks and tablets, which may not
include our technologies;
The prevalence of PC software that includes our technologies on an unauthorized and infringing basis, for which we receive no royalty payments; and
Continued decreasing inclusion of ISV media applications by PC OEMs in their Windows 7-based PCs, as Windows 7 already incorporates DVD playback software.
Our CE market, driven primarily by revenue attributable to sales of DVD and
Blu-ray Disc players and recorders, represented approximately 18%, 21%, and 22%
of licensing revenue in fiscal 2012, 2011, and 2010, respectively. Blu-ray Disc
players continue to represent an important source of revenue within our CE
market, as these players are required by the applicable standards of the Blu-ray
Disc Association to include Dolby Digital technology for primary audio content
and our Dolby Digital Plus technology for secondary audio content. In addition,
our Dolby TrueHD technology is an optional audio standard for Blu-ray Disc.
Sales of DVD players are declining, as a result of the maturity of the DVD
platform and a shift to Blu-ray Disc players and other connected devices capable
of delivering content; however, our revenue from sales of Blu-ray Disc players
is also decreasing and has not offset the decline in revenue from DVD.
Revenue generated from our other markets includes revenue attributable to
mobile, gaming, licensing services, and automotive, and represented
approximately 20%, 18%, and 15% of licensing revenue in fiscal 2012, 2011, and
2010, respectively. Mobile revenue is primarily driven by demand for the Dolby
Digital Plus, AAC, Dolby Mobile, and Dolby Digital. We view the mobile device
market as an area of opportunity for us to increase revenue; however, actual
results may differ from our expectations. In addition, because the mobile device
market is a relatively new market for us, our growth in this market is dependent
not only on the anticipated growth of the mobile device market as a whole, but
also on the success of the mobile devices incorporating our technologies.
Revenue attributable to gaming and automotive is primarily driven by sales of
video game consoles and in-car entertainment systems, respectively, that
incorporate our Dolby Digital, Dolby Digital Plus, AAC, and Dolby TrueHD
technologies. Licensing services revenue, from administration of joint licensing
programs, is primarily driven by demand for standards-based audio compression
technologies for broadcast, PC, CE, and mobile products.
Consumer entertainment products throughout the world incorporate our
technologies. We expect that sales of such products incorporating our
technologies in emerging economies such as Brazil, China, India, and Russia,
will increase in the future as consumers in these markets acquire more
disposable income with which to purchase entertainment products. However, events
in these economies or in the world economy in general may contradict these
expectations. Moreover, we expect that OEMs in lower-cost manufacturing
countries, including China, will increase production in response to this demand
and that traditional OEMs will continue to shift their manufacturing operations
to these lower-cost manufacturing countries. There are substantial risks
associated with doing business in such countries, including OEMs failing to
report or underreporting shipments of products incorporating our technologies,
that have affected and will continue to affect our operating results.
Revenue from Microsoft represented approximately 14%, 13%, and 12% of our total
revenue in fiscal 2012, 2011, and 2010, respectively, and included licensing
revenue from our PC, CE, and other markets.
Products
Products revenue is driven primarily by sales of equipment to cinema operators
and broadcasters and represented 11%, 14%, and 20% of our total revenue in
fiscal 2012, 2011, and 2010, respectively.
Our cinema products represented approximately 87%, 87%, and 90% of total
products revenue in fiscal 2012, 2011, and 2010, respectively. Sales of our
cinema products tend to fluctuate based on the underlying trends in the cinema
industry, including the popularity of individual movies, as cinema owners often
purchase equipment to meet expected box office demand.
The cinema industry is transitioning from traditional film to digital cinema,
and we estimate that the industry is more than halfway through this transition.
Digital cinema offers motion picture studios a means to save costs in printing
and distributing movies, combat piracy, and enable repeated movie playback
without degradation in image and audio quality. Our cinema
products include our Dolby Digital Cinema screen server and central library
server, for the storage and playback of digital content, and our digital audio
processor, which provides audio control for our digital cinema servers. We
expect that most cinema owners who are either constructing new theaters or
upgrading existing theaters will choose digital cinema products over traditional
film cinema products. However, our competitive position in the digital cinema
market is not as strong as our position in the traditional film cinema market.
For example, digital cinema specifications are based on open standards which,
unlike traditional cinema standards, do not include our proprietary audio
technologies. Furthermore, we are facing more pricing and other competitive
pressures for our digital cinema products than we experience for our traditional
film cinema products.
Digital cinema standards are defined by the Digital Cinema Initiative ("DCI")
specifications, and we have developed software for our currently available
digital cinema server that is DCI compliant. This software was made commercially
available during fiscal 2012. We do not have significant contractual provisions
arising from the sale of products relating to DCI compliance that would require
additional performance from us.
Our digital 3D products provide 3D image capabilities when combined with a
digital cinema projector and server. Our cinema products revenue has been
negatively impacted by declines in unit shipments and lower selling prices for
3D products, as the market for 3D cinema equipment has become increasingly
competitive. We also believe the decrease in revenue from our 3D products
reflects the increasing saturation of 3D enabled screens within the cinema
industry.
Our traditional film cinema products are used primarily to read, decode, and
play back film soundtracks, to calibrate cinema sound systems, and to enable
soundtracks encoded in digital audio formats to be played back on analog cinema
audio systems. As investment by the cinema industry in digital cinema has
increased, revenue from our traditional film cinema products has declined, and
we expect this decline to continue.
Our broadcast products represented approximately 10%, 10%, and 9% of products
revenue in fiscal 2012, 2011, and 2010, respectively. Our broadcast products are
used to encode, transmit, and decode multiple channels of high quality audio
content for DTV and HDTV program production and broadcast distribution and to
measure the subjective loudness of audio content within broadcast programming.
In fiscal 2011, we began selling our Professional Reference Monitor product, a
flat-panel video reference display for video professionals. These video
professionals use the monitor for color critical tasks, such as calibrating
color accuracy to professional reference standards. Our Professional Reference
Monitor uses our dynamic range imaging technologies, which enhance contrast and
extend brightness and dynamic range, while reducing power consumption in LED
backlit LCD televisions. We did not generate significant revenue from this
product in fiscal 2012.
Services
Services revenue represented approximately 3% of total revenue in each of fiscal
2012, 2011, and 2010. The level of our services revenue is primarily tied to
activity in the cinema industry, and in particular, to the number of movies
being produced and distributed by studios and independent filmmakers. Several
factors influence the number of movies produced in a given fiscal period,
including strikes and work stoppages within the cinema industry, as well as tax
incentive arrangements provided by many governments to promote local filmmaking.
Services revenue is also impacted by the transition to digital cinema in some
regions.
Other
We are party to an agreement under which we obtained naming rights and related
benefits with respect to the Dolby Theatre in Hollywood, California. Under the
agreement, we made one annual payment in fiscal 2012 and will subsequently make
semi-annual payments over the term, which will be recorded as marketing
expenses. Our payment obligations are conditioned in part on the Academy Awardsฎ
being held and broadcast from the Dolby Theatre. For additional details, see
Note 10 "Commitments and Contingencies" to our consolidated financial
statements. In addition to these contractual obligations, we anticipate that we
will continue to incur increased marketing expenses associated with promoting
our products, technologies, and brand at the Dolby Theatre.
Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"), and pursuant to Securities and Exchange Commission ("SEC") rules and regulations. GAAP and SEC rules and regulations require us to use accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements, and the reported amounts of revenue and expenses during a fiscal period. The SEC considers an accounting policy and estimate to be critical if it is both important to a company's financial condition and/or results of operations and requires significant judgment on the part of management in its application. On a regular basis, we evaluate our assumptions, judgment, and estimates. We have discussed the selection and
development of the critical accounting policies and estimates with the Audit
Committee of our Board of Directors. The Audit Committee has reviewed our
related disclosures in this Annual Report on Form 10-K. Although we believe that
our judgments and estimates are appropriate and correct, actual results may
differ from these estimates.
We consider the following to be critical accounting policies and estimates
because we believe they are both important to the portrayal of our financial
condition and results of operations and require management judgments about
matters that are uncertain. If actual results or events differ materially, our
reported financial condition and results of operation for future periods could
be materially affected. See our "Risk Factors" for further information on the
potential risks to our future results of operations.
Revenue Recognition
We enter into revenue arrangements with our customers to license technologies,
. . .
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