Add
DLB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DLB > SEC Filings for DLB > Form 10-Q on 6-Feb-2013 | All Recent SEC Filings |
6-Feb-2013
Quarterly 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
mobile 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 small speakers.
In 2012, we announced Dolby Atmos, a new audio platform for cinema that delivers
a more natural and realistic sound field. Since then, numerous movie titles have
been released or announced in Dolby format from major studios such as Disney,
Twentieth Century Fox, and Warner Bros.
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, distributors and exhibitors of entertainment content.
We participate in the global entertainment industry in several 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, and 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. 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 49 countries, and
our licensees distribute products incorporating our technologies throughout the
world. We sell our products and services in over 80 countries. In the first
quarter of fiscal 2013 and first quarter of fiscal 2012, revenue from outside of
the U.S. represented 68% and 69% of our total revenue, respectively. 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, 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 features and performance, changing customer
demands, evolving industry standards, changing licensee needs, and product life
cycles that can result in 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.
Licensing
Licensing revenue constitutes the majority of our total revenue, representing
86% of total revenue in both the first quarter of fiscal 2013 and the first
quarter of fiscal 2012.
The entertainment industry is continually 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 licensing of technologies that enable DVD or Blu-ray Disc playback,
including the licensing of such technologies in the Microsoft Windows operating
system, independent PC DVD software players, and consumer DVD and Blu-ray Disc
players. 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. 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
• Mobile - primarily smartphones, tablets and other mobile devices
• Other markets:
? 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 markets.
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 now offers Dolby Digital Plus in its HBO GO service for
content delivered to certain TV's and gaming consoles. 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 33% and 31% of our licensing revenue in
the first quarter of fiscal 2013 and first quarter of fiscal 2012, respectively.
Dolby technology was included in a higher percentage of televisions and set-top
boxes in the first fiscal quarter of 2013, which drove increased revenue
relative to the same period in the prior year. 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 countries in the
emerging markets will convert to digital television, we believe we are well
positioned to benefit from such transition if it occurs. Broadcast services,
such as terrestrial broadcast or IPTV services that operate under bandwidth
constraints, represent another area of opportunity for Dolby technologies, which
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 29% of our licensing revenue in both the
first quarter of fiscal 2013 and first quarter of fiscal 2012. 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 released
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 Windows 7 operating system, which included 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 are included in all PCs and tablets licensed to run the Windows 8 operating system. Under
the arrangement, OEMs generally are 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 they produce for online and file-based content. OEMs are required to pay a higher per-unit royalty for Windows 8 PCs that also include optical disc playback functionality, which is implemented by ISV applications. This higher rate is comparable to the 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 that 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. In the
current quarter, we began generating revenue from the Windows 8 arrangement,
while Microsoft continues to license its Windows 7 operating systems with our
technologies. The impact on our licensing revenue from the transition to Windows
8 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 toward alternative 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 Blu-ray Disc and DVD players and recorders, represented approximately 17% and 20% of licensing revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012, respectively. Sales of DVD players are declining as a result of the maturity of the DVD platform and a shift to Blu-ray players and other connected devices capable of delivering content. The decline in DVD revenue is only partly offset by revenue from Blu-ray players which have been adversely impacted by the popularity of other connected devices. At the same time, royalties on Blu-ray players have declined as licensees have migrated to products with lower average selling prices. Revenue from other home theater devices categorized in our CE market remained relatively unchanged from the first quarter of fiscal 2012. Our Mobile market represented approximately 11% and 8% of our licensing revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012, respectively. Mobile revenue is largely driven by sales of smartphones and tablet devices that incorporate our technologies. Our growth in this market is dependent not only on the underlying growth of the mobile device market as a whole, but also on the success of the mobile devices incorporating our technologies. Under our arrangement entered into with Microsoft in May 2012 as noted above, OEMs generally are 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 tablets they produce for online and file-based content. Revenue generated from our other markets stem from gaming, automotive and licensing services, and represented approximately 10% and 12% of licensing revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012, respectively. 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 12% and 14% of our total
revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012,
respectively, and included licensing revenue from our PC, CE, and other markets.
Additionally, revenue from Samsung represented approximately 11% of our total
revenue in the first quarter of fiscal 2013, and included licensing revenue from
our PC, CE, mobile, and other markets.
Products
Products revenue is driven primarily by sales of equipment to cinema operators
and broadcasters and represented 11% of our total revenue in both the first
quarter of fiscal 2013 and first quarter of fiscal 2012.
Our cinema products represented approximately 87% and 84% of total products
revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012,
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.
Our recently introduced Dolby Atmos enhances the cinema experience through the
use of a hybrid approach that combines multi-channel audio with discrete audio
objects. This approach provides more flexibility and control for sound designers
and mixers to deliver a more natural and realistic sound environment.
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 Integrated Media Block, 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.
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 a higher 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 9% and 13% of total products
revenue in the first quarter of fiscal 2013 and first quarter of fiscal 2012,
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.
Services
Services revenue represented approximately 3% of our total revenue in both the
first quarter of fiscal 2013 and first quarter of fiscal 2012. The level of our
services revenue is primarily tied to activity in the cinema industry, and has
been adversely impacted by the industry's transition from film to digital-based
production. Services are also dependent upon the volume of film production 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.
Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our condensed 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 or 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, judgments, and estimates. We have discussed the selection and . . .
|
|