DTS Cuts 2012 Revenue Forecast on Slowdown in CE Business

DTS and Dolby continue to bet heavily on the mobile business to offset market weakness in PCs, Blu-ray and home AV revenue, the companies said on earnings calls Thursday. DTS stock sank 28.2 percent Friday closing at $14.80 after the company reported a loss of $19.1 million for Q3 compared to a profit of $2.9 million in Q3 2011, and competitor Dolby was down 4 percent closing at $32.74 as both companies were hit by the economic climate, a slowdown in PC sales and a cautious spending environment, they said.

DTS cut its fiscal 2012 revenue forecast to $100 million-$105 million from $112 million-$116 million, said DTS CEO Jon Kirchner after “a number of the largest companies in the CE industry have recently described a significant slowdown in the consumer electronics business.” Over the past two weeks, he said, many of the companies -- “some of which are major customers -- have significantly reduced near-term expectations,” he said. The outlook for fiscal 2013 is $140 million to $150 million in revenue, he said.

Kirchner attributed the DTS loss largely to two factors: The company was required to record “all the costs” of the SRS and Phorus purchases completed in Q3 but could only recognize a “small portion” of the quarter’s related revenue, he said. The company also experienced a “significant tax impact” from its Irish licensing operation, he said.

Revenue for the quarter at DTS fell 8 percent from Q3 2011 to $22.2 million, despite 41 percent year-over-year growth from the network-connected markets, Kirchner said. The segment represented almost 30 percent of company revenue for the quarter, he said. DTS grew its mobile business in Q3 by 106 percent and network-connected TV revenue was up 92 percent, said Chief Financial Officer Mel Flanigan. But Blu-ray player revenue was “flat” at roughly 30 percent of total revenue. DTS expects standalone Blu-ray player unit volume to total 30 million units for the year, Blu-ray-equipped PCs to reach seven to eight million units and game consoles to total 12 million. Flanigan reiterated DTS expectations from last quarter that the company expects Blu-ray to contribute 25-30 percent of total revenue for the year and, growing “modestly” but declining as a percentage of total revenue.

The home AV category, which includes DVD, was down 8 percent for the quarter and represented about 20 percent of revenue, Flanigan said. Automotive came in at $22.2 million, up 8 percent over Q3 2011, and it accounted for 15 percent of total revenue, Flanigan said. The addition of SRS will help DTS target the premium sound business in emerging markets such as China, he said.

Digital media player sales were also down, “falling off more quickly than we originally expected,” according to Flanigan. Although the licensee roster for digital media players numbers 50, media players have become a “transitional segment” as media player functionality is increasingly built into other devices, Kirchner said.

At Dolby, fiscal Q4 revenue was $224.8 million, with licensing accounting for $191.2 million, down 7 percent, or $14.6 million, the company said. Fiscal Q4 income of $51.5 million was down about $27.6 million year over year, said Chief Financial Officer Lewis Chew, noting that last year’s revenue included about $15 million received as a settlement from Research In Motion. Revenue from other markets, “primarily mobile devices,” was up for the quarter and “enough to offset” a 6 percent drop in PC revenue due to the Windows 8 transition and a 10 percent CE falloff on DVD and Blu-ray declines, he said.

In mobile, Dolby audio formats are in 25 percent of Android smartphone shipments and a third of Android tablets, said CEO Kevin Yeaman. With no optical disc support in Windows 8, Dolby is hoping to gain revenue from playback of online content on PCs and tablets, Yeaman said. The business model for mobile devices involves working directly with device makers and other supporting players, “whether that’s the operating systems or integrated circuits,” he said. Dolby entered the fiscal year targeting low to mid-teens attach rate for smartphones and finished at 15 percent, Chew said, up from 4 percent the prior fiscal year.

Momentum in mobile phones will drive Dolby to break out the category separately next year, Chew said. Analysts predict mobile phone market growth of 20 percent plus for next year, and “we don’t have any reason to disagree with that,” Chew said. Dolby sees a five percent increase in attachment rate for smartphones and tablets for fiscal 2013, Yeaman said, due to design wins with the Kindle Fire family and Windows 8. Dolby is looking to expand its presence across the mobile ecosystem rather than “to extend into new ones,” he said. The company has a “pipeline of potential design wins that we're working,” he said.

In international markets, Dolby audio is now in more than half of high-definition TV channels in China, Yeaman said, where it’s an option in the country’s terrestrial digital TV standard. Dolby audio is on the way toward inclusion in India’s standards, he said. Singapore has included Dolby technologies in its draft spec for digital TV, and South Africa, Austria and Turkey have all mandated Dolby technologies into their final digital TV specs, he said.

In fiscal 2013, TV revenue will be “relatively flattish,” Chew said, with Blu-ray and DVD continuing to decline “mainly because we don’t see any reason for that to reverse itself.” To offset those categories, Dolby expects to bring its consumer 3D technology to market and “sign a leading TV OEM,” Yeaman said. Dolby plans to have its Atmos cinema sound system on 500 screens globally by summer supported by more than 20 films by the end of calendar 2013, he said, and Dolby Voice is expected to release commercially with British Telecom’s conference call service, he said. In a world that has “changed dramatically” over the last few years, Dolby has been able to diversify and extend its presence in the various ways consumers want to experience entertainment, Yeaman said.

Dolby’s outlook for fiscal 2013 includes a decline in PC revenue, Chew said, citing uncertainties with a new PC operating system. He quoted industry research forecasts of more than 20 percent growth in 2013 for smartphones and for “significant” growth in tablets. Taking into account questions about consumer spending and the underlying health of the economy, he said Dolby is forecasting $900 million-$950 million in revenues for fiscal 2013.