DTS Sees Blu-ray and Connected Devices As Future Growth Keys

DTS needs for future growth to focus on growth categories such as Blu-ray players and “network connected” devices as a hedge against the “softness” in gaming, automotive and AV businesses, they said during the company’s Q3 earnings call late Monday. DTS profit dropped from $3.4 million in Q3 2010 to $2.9 million in Q3 2011, with revenue slipping from $21 million in Q3 2010 to $20.5 million in Q3 2011, the company said.

DTS is maintaining its $95 million-$100 million revenue forecast for 2011, said Chief Financial Officer Mel Flanigan, but given the “ongoing challenges” in the global economy, questions about the upcoming holiday season and recent flooding in Thailand, the company feels “it’s prudent to gather more data before issuing our 2012 growth expectations and guidance.” DTS will issue guidance for 2012 in the February earnings call, Flanigan said.

Blu-ray revenue comprised just under 35 percent of total revenue for the quarter, up from less than 30 percent in Q3 2010, according to Flanigan. Projected Blu-ray player sales of 30 million to 35 million units for the year are at the low end of DTS’ guidance issued earlier this year, but Chief Operating Officer Brian Towne said lower unit numbers were offset by a high proportion of Blu-ray players incorporating 7.1 DTS-HD Master Audio, resulting in better-than-forecast ASPs. “Net-net, we believe it’s going to be quite a positive year for Blu-ray,” he said. Overall, Blu-ray revenues for the quarter were up 21 percent over Q3 2010, led by standalone players and PCs, which posted year-over-year growth of 23 and 68 percent, respectively, compared with gaming console revenues that fell more than 25 percent, Flanigan said.

Blu-ray players will see “a lot of volume sub-$100,” during the upcoming holiday season, CEO Jon Kirchner said. “It remains to be seen how much supply lives in the channel and how aggressive people will be from a pricing perspective,” he said, but some players have already started “pushing the $50 envelope on promotion.” In PCs, DTS is encouraged about penetration at the higher end of the market where Blu-ray is enjoying support, said Kirchner. The company reported increased adoption of Blu-ray players in PCs in the $500-$1,000 range, he said. On the content side, DTS is seeing “overwhelming market adoption” of DTS on Blu-ray discs, according to Kirchner, who said “nearly 90 percent of top Hollywood titles” incorporate DTS-HD Master Audio soundtracks.

Despite reports that Windows 8 will not incorporate a surround-sound codec for optical disk drives in Windows 8, DTS remains positive about the PC market, Kirchner said. The PC business lived with a third-party model for media-related tools and playback software “before it got co-opted into the Windows platform, so a return to that could mean a lot of different things,” Kirchner said. Blu-ray remains “the highest quality entertainment experience available today,” he said, especially compared with limitations in streaming due to bandwidth constraints. Blu-ray “will remain an important part of delivering high-quality entertainment,” he said. Rather than pitting one video playback system against another, Kirchner suggested that the industry “focus more holistically on how both optical media and the online experience can deliver entertainment anywhere, anytime and where consumers want it.”

Revenue declines in automotive, gaming console, and AV businesses for Q3, attributed partly to supply chain disruptions arising from the Japan earthquake in March, should be “substantially behind us,” Kirchner said. Based on early production reports, the company expects a strong sequential increase in key areas in Q4 and is maintaining its outlook for the year, he said.

In the network connected market, DTS reported revenue growth of 45 percent year-over-year and 11 percent sequentially. The category represented just above 15 percent of revenue for the quarter, Flanigan said, primarily driven by TVs and digital media players. The automotive market came in under 15 percent of revenue, down 10 percent from Q3 2010, he said, to meet levels the company forecast following the earthquake.

DTS’ standard-definition AV business dropped 19 percent in Q3 2011 year-over-year due in part to continuing declines in DVD-based products, including a shift in the home-theater-in-a-box category from DVD to Blu-ray, Flanigan said. Home AV comprised more than a quarter of total revenue in Q3, he said. Broadcast accounted for less than 5 percent, down 27 percent from Q3 2010, primarily due to lower satellite radio-related revenue, he said. The company’s focus now “is squarely on IPTV,” where revenue jumped 75 percent year over year “as our efforts in Europe begin to bear fruit,” he said.

DTS plans to boost penetration in the network connected market as the industry undergoes a “long-term transformation in entertainment delivery and consumption,” Kirchner said. Market projections for 2011 call for 60 million TVs to be network-enabled this year, and Kirchner estimated that DTS technology will be in a third of them. The network connected category is expanding its footprint beyond TVs to include smartphones, tablets and digital media players, and DTS has expanded relationships with Samsung, LG, Panasonic, Intel, Pantech, Skyworth and Huawei to support expansion, Kirchner said. DTS believes the network connected market, supported by cloud-based delivery, will account for a “significant increase in our total addressable market opportunity” and extends growth potential “far beyond” traditional AV and optical media business, he said.

As part of its effort to support the growing network connected market, DTS partnered with Adobe in Q3 to deliver DTS surround sound on TVs and Blu-ray players with Adobe AIR 3 platform that enables flash-based HD video with up to 7.1 channels of surround sound. In addition, Rovi recently announced that its DivX Plus streaming platform for connected devices will support DTS (CED Sept 2 p5), he noted. Kirchner also said DTS recently partnered with Digital Rapids for the upcoming release of an encoding tool with DTS Audio encoding capability that’s compliant with UltraViolet. Kirchner, who cited UltraViolet’s “soft launch” last month, called the platform the “continued evolution of cloud-based market development.” He said the platform is expected to see “much wider industry support and focus” moving into 2012. DTS and Dolby are both optional formats within the UltraViolet standard, along with other formats, he said.

Kirchner compared the vision for UltraViolet to that of DVD “where you can buy a DVD or Blu-ray Disc anywhere in the world, and it will play on any player that supports that standard.” UltraViolet customers will be able to buy content anywhere and play it on a UV-capable device, he said. As the platform establishes itself, there will be varying degrees of demand for higher quality entertainment experiences, Kirchner said. “That will be one of the drivers in the cloud-based ecosystem that helps DTS find further penetration from both a content and device perspective,” he said.