DTS Cites CE Product ‘Uncertainties’ in Downgrading Its 2013 Outlook

Potential second-half product delays across several categories could affect DTS revenues for the year, company executives said on the company’s Q2 earnings call late Thursday. DTS has adjusted its outlook as a result due to “uncertainties around the timing of certain CE, mobile and Play-Fi product shipments, which are now expected to push into 2014,” said Chief Financial Officer Mel Flanigan. He cautioned about a “modestly weakening near-term consumer electronic business environment” that has lowered expectations for home theater-in-a-box systems, Blu-ray players and automotive unit volumes. In addition, the company is projecting lower-than-expected royalty recoveries, Flanigan said. DTS expects 2013 revenue in the range of $130 million-$136 million, down from previous expectations of $140 million-$146 million, it said.

Among CE categories, a near-term concern for DTS is “some uncertainty around start of production on the new gaming cycle,” said DTS Chief Operating Officer Brian Towne. The question for DTS is “how much of that will be manufactured in Q3 versus how much would be manufactured in Q4 before the holiday season,” Towne said. Product manufactured in Q4 would roll into next year’s revenue, he said. Further, he cited “a few other deals, particularly as we're rolling out Headphone:X,” where the company is trying to get “better visibility” on launch cycles with key customers, he said.

While the timing of some Play-Fi product announcements also “has shifted,” CEO Jon Kirchner said product launches are “certain by early 2014” and called them “solid strikes for the wireless audio ecosystem.” In its Play-Fi product line, acquired with the purchase of Phorus last year, DTS sees a “tremendous opportunity to open hi-fi over Wi-Fi” to large Asian markets, Kirchner said. He also cited upcoming announcements from a third-party Play-Fi provider at CEDIA in September and more at CES in January.

A $5.4 million year-over-year rise in revenues at DTS for the quarter ended June 30 owed largely to royalty increases from connected devices, the company said in a 10-Q filing. Royalties for network-connected markets doubled for the quarter compared with the year-ago quarter, partially offsetting royalty declines from Blu-ray and DVD players, the company said. Network-connected business accounted for nearly half of revenues for the quarter, with mobile posting 318 percent revenue growth, PC at 448 percent growth and connected TV at 114 percent growth, Flanigan said.

Responding to a question on opportunities for delivering high-quality audio in the streaming world, Towne cited the UltraViolet platform where “part of the business model to replace optical disc over time is actually electronic sell-though.” In that scenario, “there’s nothing that … prohibits the content owner or service provider to give an identical experience to Blu-ray,” he said. Today, companies are not providing a Blu-ray-level audio experience through EST, he said, but “over time, I think as bandwidths improve, you may see this,” he said, adding that full lossless 7.1 DTS-HD Master Audio is possible within the UltraViolet spec. DTS is also seeing other “physical but not optical disc formats under consideration that have the same amount of quality,” he said. “You're going to see varied quality depending on the application and depending on the screen,” Towne said, adding that DTS technologies can give “best-in-class performance across the full range of applications.”

In the the Play-Fi streaming audio system, meanwhile, Towne said DTS is moving from four streams to a “guaranteed eight” across a standard Wi-Fi network. The quality of those streams will be determined by “what comes in from your media player,” he said.

Since it is a mandatory technology in the Blu-ray standard, DTS revenues from that market closely track the sales trend of Blu-ray-equipped players, game consoles and PCs -- a market that “has slowed” in wake of a growing trend toward network-based delivery of entertainment via network-connected devices, the company said in the 10-Q. The decline in royalties from the Blu-ray market was largely the result of “softness in consumer demand,” leading to a 10 percent fall to 20 percent of company revenues over the prior-year quarter, it said.

Within the Blu-ray segment, game console sales were down 36 percent ahead of the new console cycle coming this fall, Flanigan said, while standalone player sales were down 7 percent. Blu-ray PC revenues stepped up 3 percent, he said. Although the company expects to see a “slight pickup” in Blu-ray royalties from the next game console cycle, it expects network-connected revenue to be “the most significant revenue contributor going forward,” Flanigan said. On future trends in Blu-ray, Flanigan said in the Q-and-A, “You'll see kind of a rounding top over the next 2 or 3 years,” which he said would be “pretty modest” while there’s likely to be a “long tail based on everything we've seen.”

Despite ongoing declines in PC industry shipments, DTS is seeing “increasing customer penetration” that should enable it to be “a larger provider of audio solutions for the next generation of PCs,” Kirchner said. The company is encouraged by growth in the category, he said.

In DTS’ Home AV segment, revenues fell 19 percent on declines in DVD and home-theater-in-a-box systems, Flanigan said. Home AV came in at just under 15 percent total revenue, while broadcast was up slightly to 5 percent of company revenues and automotive remained flat at 15 percent of total revenues, he said.

DTS posted a $2 million net loss for Q2 compared with a loss of $755,000 for Q2 2012. DTS shares closed 12.7 percent lower Friday at $20.51.