DTS ‘Long Way’ From Its Days as Surround-Codec Firm, CEO Says

DTS “significantly enhanced our network-connected footprint,” saidCEO Jon Kirchner on the company’s Q4 earnings call Monday. Through acquisitions such as Phorus, and its headphone technology partnership with Qualcomm, DTS will have an important role to play in the cloud-based delivery of high-quality entertainment, Kirchner said.

Saying DTS’s business has been “completely transformed,” Kirchner said, “we've come a long way from the days as predominantly a premium surround-sound codec company servicing the home theater and optical media markets.” He called DTS’s current portfolio a “complete set of audio solutions and services focused on serving a much broader market opportunity,” including mobile, portable and wireless entertainment products. Network connected revenue for DTS in Q4 grew 86 percent to $29.8 million, the company said.

Audio has not been the focus of product innovation in the connected electronics space, Kirchner said, saying that’s changing, leaving an opportunity for DTS. He cited multi-hundred-dollar premium headphones as one opportunity. The company recently launched its Headphone:X surround-sound technology and has a partnership with Qualcomm.

DTS continues to expand its footprint in the connected TV space, Kirchner said, saying connected TVs are expected to represent a third of all TVs sold this year. With the addition of Sony TVs that are now shipping, DTS has licensing agreements with all of the top 10 connected TV makers and will be in over half of all connected TVs in 2013, he said. In phones, DTS technology is integrated in more than 150 smartphone models, he said. Kirchner cited design wins in the tablet market, including recent announcements for tablets from Panasonic, Lenovo and Pantech.

DTS net income in Q4 totaled $302,000, compared with $7.1 million in the year-ago quarter, DTS said. Q4 net income included $3 million in stock-based compensation expense, $4.8 million in acquisition and integration-related costs of the SRS and Phorus purchases, and $2 million in amortization of intangibles, the company said. For the year, revenue was $100.6 million, up from $96.9 million in 2011, it said.

SRS Labs, purchased last year, contributed revenue in the $7 million range, most coming from the network-connected category, said Chief Financial Officer Mel Flanigan. DTS and SRS technologies are now “fully integrated solutions,” Flanigan said, and results for the two entities will be combined going forward.

Blu-ray revenue in Q4 was up 19 percent sequentially at DTS due to typical seasonality, but fell 30 percent year to year on a weaker season and lower average selling prices, Flanigan said. The configuration of players began to change in Q4 as “Blu-ray players mature into the low end of the mass market,” Flanigan said. Blu-ray contributed more than 25 percent of Q4 revenue and just over 30 percent total revenue for the year, Flanigan said. DTS remains bullish on Blu-ray, holding the format as “still the gold standard for quality,” Flanigan said. DTS believes Blu-ray “will remain relevant in digital video entertainment as the demand for high-end, high-resolution content continues to increase,” Flanigan said. He cited the 10 percent bump in Blu-ray software sales for 2012 and a catalog of titles “that continues to expand.” Flanigan said Blu-ray has enabled DTS to maintain a “meaningful revenue stream with low marginal expense."

DVD-related revenue, meanwhile, dropped 9 percent for the quarter and year as consumers continue to transition to Blu-ray and network-connected devices, Flanigan said. Home AV brought just under 20 percent of total revenue for the quarter and just over 20 percent for the year, he said. Q4 growth in the automotive category was “modest” at 2 percent for the quarter and 7 percent for the year, Flanigan said, representing 15 percent of total revenue for the quarter and year. The automotive segment remains “quite interesting” to DTS as vehicles are increasingly integrated with cloud-based entertainment and mobile devices, he said.

Broadcast accounted for 5 percent of revenue for the quarter and year, Flanigan said, primarily from license fees for dedicated set-tops and professional broadcast equipment. Broadcast revenue doesn’t include connected TVs, which DTS includes in the network-connected category, he said.

For 2013, DTS projects revenue in the range of $140 million-$146 million, including a “normal level of royalty recovery,” Flanigan said. The midpoint of the range would be 42 percent year-over-year growth, including 16 percent from organic growth and 26 percent from acquired technologies that have been integrated into the business, he said. Growth will come from the connected market, with the category expanding to more than 40 percent of total revenue in 2013, led by TVs at more than half of that amount. Blu-ray is expected to generate 25 percent of revenue, due to the “benefit of the new game console cycle,” he said, while standalone players experience “flat to mid-level growth.” DTS sees a modest decline in Blu-ray related PC sales for the year, Flanigan said. Automotive is projected to be 10-15 percent of revenue and Home AV 15 percent of total revenue for the year, he said. DTS shares closed down 7.5 percent to $19.00.