Blu-ray to Be ‘Relevant’ in ‘Major Growth Cycle,’ DTS Says

The CE industry is in the early stages of a “major growth cycle” driven by Blu-ray and network-connected devices, said DTS CEO Jon Kirchner Wednesday during the company’s Q4 2011 earnings webcast. DTS is in a “strong position” to take advantage of emerging opportunities, Kirchner said, and the company expects DTS growth rates to “substantially exceed those of our primary competition in the audio space over the next 3-5 years.” Chief Financial Officer Mel Flanigan said the company believes its network-connected device business could reach a compounded annual growth rate of 40 percent or higher through 2016 as the company expands to penetrate a “much larger total addressable market."

But in response to an analyst question about the incorporation of both Dolby and DTS on network connected devices, Kirchner said, “We live in a world where there are going to be increasingly large amounts of content in both formats.” As a result, he said, “You will see a predominant number of devices ultimately adopting all the technologies necessary” to support a wide range of encoding technologies “whether they be video or audio."

The two trends behind DTS’ near-term growth strategy are a shift toward cloud-based entertainment and connected devices, which are expected to reach an installed base of 2 billion units by 2016, and consumer demand for “higher quality HD entertainment that’s convenient and portable,” Kirchner said. Network-connected devices contributed more than 20 percent to the DTS bottom line in Q4, and just under 20 percent for the year, said Flanigan. Company revenue from decoders and audio processing technology in networked smartphones, TVs, PCs and tablets will grow by 70 percent in 2012 to 20-25 percent of total revenues, Flanigan said.

Blu-ray will continue to “do well,” and will be “relevant for a long time,” Kirchner said, citing historical experience with optical media formats “having very long tails.” Forecasting a Blu-ray peak in 2015-2016, Kirchner said Blu-ray’s hybrid online/offline feature set preserves consumers’ investments in disc libraries “while enabling a low cost and easy connection to cloud-based entertainment,” he said. The percentage of Blu-ray players that are networked is above 95 percent, Kirchner said.

Home AV business was down 10 percent in Q4 year over year at DTS and down 16 percent for the year, which Flanigan said was “a little more than expected” but part of the continuing shift to Blu-ray from DVD. Home AV represented “just under” a quarter of revenues in 2011, down from 30-plus percent in 2010, he said. DTS 2012 revenue is forecast to be $112-$116 million, assuming 35-40 million DTS-equipped standalone Blu-ray players and HTIB systems, 14-15 million game consoles and 10-12 million PCs, Flanigan said. Blu-ray is expected to comprise 35-40 percent of revenue in 2012, he said. Growth drivers for 2012 -- increased penetration in network connected devices and expansion of Blu-ray business -- will be partially offset by declines in DVD and DVD-based home theater products including home-theater-in-a-box systems, Flanigan said. Home AV will be “flat to slightly down” on declines of DVD-based products but will get a partial boost from growth in soundbars, he said. Home AV will represent roughly 20 percent of revenue in 2012, he said.

DTS will continue to invest in next-gen growth, Kirchner said. He cited progress on the “content and tools front,” including DTS and Digital Rapids announcing late last year the first UltraViolet-compliant encoder, “paving the way for UV streams in DTS.” The UV user base is expected to grow “exponentially” this year as additional film and TV titles become available, he said. “We're working toward enabling the delivery of DTS-encoded UV files in the latter part of 2012,” Kirchner said, citing a recent agreement with Qualcomm to include DTS in the Snapdragon chipset for smartphones and tablets that will ship later this year.

DTS is also working with an “industry leading content fulfillment solutions provider” that will include DTS-encoded content as part of a “cloud-based delivery service” which will be publicly announced in Q2, Kirchner said. The solution will help build “a meaningful cloud-based delivery footprint along with Rovi,” which last year announced support for DTS in its upcoming Rovi entertainment store, he noted.

The automotive market was 12-15 percent of revenue for the quarter and the year, and is expected to remain at that level in 2012, Flanigan said. Broadcast revenue will “grow modestly” and be less than 5 percent of revenue this year, he said, but the emergence of IPTV creates opportunities for DTS in Europe and Asia in coming years. “Over time, we'll be turning on more network operators that will translate to set-top box growth and ultimately deliver a meaningful stream,” he said.

Revenue will be slightly weighted toward the second half of the year, Flanigan said, partially due to product cycles and partly due to supply disruptions due to the Thailand floods. Q1 will be down 10-15 percent sequentially, he said. Executives wouldn’t detail which categories have been hit by the Thailand supply shortages.

For the quarter, DTS had revenue of $29 million, up 8 percent over Q4 2010. Net income from continuing operations grew 15 percent to $7.1 million, or $0.42 per share, from $6.1 million, $0.34, in Q4 2010, the company said.