DTS Sanguine on Connected Device Market but Sees Blu-Ray as ‘Relevant for Quite a While’

DTS had a 33 percent revenue increase to $32.7 million in Q1 on growth in its network-connected device business, Chief Financial Officer Mel Flanigan said on the company’s earnings call Wednesday. Network-connected income was the largest contributor to revenues “by far,” jumping 246 percent year-over-year and 37 percent sequentially, accounting for 45 percent of Q1 revenue, Flanigan said.

The network-connected segment will continue to grow as a percentage of sales and become the largest revenue contributor going forward, as segments including Blu-ray and home AV decline, Flanigan said. While revenue from connected TV was up 448 percent, PC 345 percent and mobile 98 percent over the year-ago quarter, Blu-ray revenue fell 27 percent, contributing 20 percent of total revenue for the quarter, he said. Home AV revenue dropped 16 percent year-over-year, “primarily due to the continuing shift from DVD players to network-connected devices,” Flanigan said. Home AV accounted for 15 percent of revenue in Q1, he said.

DTS expects a “modest uptick” in Blu-ray unit volume coinciding with the next game console cycle that will arrive later this year, Flanigan said. DTS is expecting 20-25 percent of revenue to come from Blu-ray. Production on next-gen game consoles is due to start “any time now” and the company is expected to see revenue from that in Q3 and “certainly in Q4,” he said. Blu-ray will remain important to the company and the industry “for some time to come,” he said, providing “an attractive source of profit and cash flow as our business continues to accelerate in the network-connected space."

Blu-ray is going to continue to be “relevant for quite a while,” said CEO Jon Kirchner. He envisions Blu-ray co-existing with digital distribution and streaming as consumers tap their existing libraries and look to “match their desired entertainment experience with whatever environment they're in,” he said. “You're going to see more entertainment consumed in more ways on more devices through more mediums in the future than we ever have seen before,” he said. Kirchner doesn’t envision one format or medium falling “off a cliff” but predicts an overall expansion in content consumption that will benefit devices is needed to “consume all this content.” Devices are growing in unit volumes and in the number of form factors, which offers growth potential for DTS, he said.

On the connected side, Kirchner referred to DTS’s announcement Tuesday of Samsung TV’s being the first to offer a high-resolution surround-sound solution for streaming content through CinemaNow, calling it an “inflection point” for the industry. Infrastructure and audio solutions in development over the past few years -- including DTS’s Headphone:X and DTS Layered Audio for MPEG-DASH -- are now complete, and industry support for DTS technologies “is accelerating” as a result, he said. He predicted more content and device announcements that “underscore the demand for higher quality network-connected entertainment experiences” as brands look to differentiate products.

Chief Operating Officer Brian Towne said DTS is working with “almost all of the TV manufacturers right now” on deploying DTS-HD beyond the Samsung TVs, but there are “a lot of pieces that go into making this happen” including digital rights management issues and “other things that have to go on inside the application.” The ICs powering DTS decoding now from suppliers including MStar and Mediatech are able to handle HD, he said, “substantially” lowering the technical hurdle. Most new product introductions for 2013 are complete, he said, but additional manufacturers will add the technology first half 2014, he said. Kirchner added, “By the time we get to the end of the year, we won’t simply be talking about Samsung TV as it relates to streaming support."

On the mobile side, DTS is currently in 160 smartphones, and DTS Headphone:X is still on track to roll out in Qualcomm’s Snapdragon 800 and 600 chipsets later this year, Kirchner said. The company has received positive response from smartphone makers, he said, but wouldn’t expand on talks. DTS is also in discussions with numerous PC, tablet and content partners for the technology, he said. Kirchner said the PC market is still a potential growth area for DTS “regardless of whether optical drives are attached.” He cited the company’s announcement Monday that Toshiba’s new Kira Ultrabook line will include DTS technology.

On a response to a question about DTS revenue from the connected market lagging behind those of competitor Dolby, Kirchner said the mobile market is “wide open” and has potential for “huge unit volumes.” The combination of smartphones, tablets and PCs where today DTS doesn’t have significant penetration represents “tremendous upside,” he said. Flanigan added that in TVs, DTS managed to hit 50 percent penetration even while Dolby was the mandated audio format for digital TV. “That’s not a bad model to use when you look at these other markets,” he said.

DTS had a loss of $1.5 million, compared with net income of $4 million in Q1 2012, Flanigan said. DTS generated a three-year cumulative pretax loss in the U.S. relating to recent acquisitions, which required the company to record a valuation allowance against deferred tax assets at the end of the quarter, Flanigan said. The impact within the tax provision calculation in Q1 was that it couldn’t use the losses to offset taxes payable in other jurisdictions, Flanigan said. The company believes the tax loss issue is temporary and is working to resolve the situation, he said.

For 2013, DTS expects more than 40 percent of revenue to come from network-connected business, 25 percent from Blu-ray, 10-15 percent from automotive and 15 percent from home AV. DTS shares closed up 11.7 percent to $18.71.