DTS Targeting Connectivity, 4K, As Legacy CE Lags More Than Expected

Q4 revenue at DTS grew 25 percent to $37.1 million, below expectations, said CEO Jon Kirchner on an earnings call Monday. Kirchner cited as drivers later-than-expected production starts on products in the mobile and gaming console categories and deeper-than-expected declines in the home-theater-in-a-box and DVD categories. He said that in 2014 the declining DVD-based category is forecast to account for less than 2 percent of business, as the connected market gains steam. Kirchner said DTS is focusing on four key growth drivers in 2014: Headphone:X, Play-Fi, streaming and Ultra HD. DTS shares closed 6.9 percent lower Tuesday at $19.75.

Kirchner highlighted two aspects of the Headphone:X platform on the call: (1) Tuning, which enables manufacturers or content creators to tune their audio experience to “match their desired intent”; (2) And personalization, which lets consumers create a stored personal sound profile so headphones can render consumers’ desired listening preferences. Headphone manufacturers work with DTS to tune and store their headphone attributes in the Headphone:X cloud service, and then consumers can access and optimize their Headphone:X experience across multiple devices regardless of the content source, Kirchner said. More headphone makers are expected to join headphone program during the year, following Panasonic, Republic of Friends and Skullcandy, all of which DTS announced at CES as Headphone:X licensees.

DTS acquired Play-Fi wireless audio technology with the purchase of Phorus in 2012, and Kirchner said Play-Fi products from Polk and Definitive Technology are due to come to market by Q3. He said the licensable, open, multizone platform is “attracting the interest of speaker, PC, AV and mobile manufacturers” and that a “top-five” PC maker will support Play-Fi drivers on upcoming platforms, which will enable consumers to push content from their PC to Play-Fi-enabled speakers. DTS expects to announce a similar agreement with another PC supplier this year, Kirchner said. DTS has added the Songza streaming service to Play-Fi, he said.

DTS continues “to make progress” on bringing to market its audio product that supports object-based mixing, playback and interactivity, Kirchner said. The product has two parts: MDA (multidimensional audio), an open, mixing, storage and playback spec for digital cinema and pro markets, and DTS UHD, an audio codec that supports MDA and object-based file delivery and playback on CE products and broadcast devices, he said. DTS demoed MDA at an AMC theater in Burbank, Calif., in January and is “moving forward toward commercialization” with a number of industry partners, he said. DTS showed DTS UHD running on a Cirrus Logic DSP at CES, and Kirchner cited “strong” interest and demand for a chip from some AV receiver and soundbar manufacturers.

The network-connected business surged 94 percent at DTS in 2013, to 45 percent of revenue versus less than 30 percent a year ago, said Chief Financial Officer Mel Flanigan. Connected TVs drove most of the business, with revenue up 41 percent in Q4 and 116 percent for the year, Flanigan said. The company estimated its decoders are now in nearly 60 percent of connected TVs. Counting TVs with DTS that have only DTS audio processing, the company pegs its share of the total TV market at 47 percent, Flanigan said. DTS audio processing is supported by the top 15 TV makers and its codec is supported by the top 12 connected TV makers worldwide, Flanigan said.

Mobile business was flat for Q4 due to timing issues with certain IC platforms, but mobile revenue was up 82 percent for the year, Flanigan said. For Headphone:X and Play-Fi, the investment phase is “now behind us” and the company is “entering the investment return cycle,” as market penetration and unit volumes begin to grow within the mobile market, he said.

DTS PC revenue was flat last quarter despite declines in the overall PC industry, and it expects its PC business to grow this year due to recent design wins, Flanigan said. For the year, PC revenue was up 173 on audio processing offerings, he said. As Play-Fi becomes a PC feature going forward, that revenue will be included in the network-connected category, Flanigan said.

Blu-ray revenue at DTS was hit hard in Q4 by the timing of new game console production and “continued softness in both stand-alone players and PC adoption,” Flanigan said. Blu-ray was down slightly in the Q4 and down 14 percent for the year. The company expects Blu-ray game consoles to show “modest growth” throughout 2014, Flanigan said. Production of the PS4 started later than DTS expected in Q4, and the company didn’t see any revenue from Xbox One in the quarter, he said. DTS expects to realize the full benefit from the new game console cycle this year, which will give a bump to the Blu-ray segment, he said. But the company doesn’t expect “huge changes” in stand-alone Blu-ray player sales, and Blu-ray adoption in PCs is “fairly soft,” he said. Kirchner said there’s “solid growth” on the Blu-ray software side and predicted “flattish to slightly up” near-term growth in the segment for DTS. Blu-ray generated just under 25 percent of revenue, Flanigan said.

Home AV revenue dropped 18 percent in Q4 from the year-ago quarter and 15 percent year on year, Flanigan said, and the category was less than 15 percent of total revenue during both periods. The higher-than-expected decline in home theater-in-a-box systems reflects a consumer shift toward “on-the-go entertainment devices,” Flanigan said.

DTS reported modest declines for both Q4 and 2013 in the automotive segment, which generated just over 10 percent of total revenue, Flanigan said. While DTS expects automotive revenue to be flat in 2014 versus 2013, it ultimately expects the business to return to growth as it brings new technologies to market, he said.

Total Q4 revenue rose 25 percent to $37.1 million year over year, the company said, and full-year revenue rose 24 percent to $125.1 million. Q4 profit was $17.3 million compared with a $102,000 loss in Q4 2012, the company said. In 2014, DTS is calling for revenue in the range of $132 million-$138 million, Flanigan said. The main growth drivers will come from the network-connected markets, particularly TVs, PCs and mobile devices, Flanigan said, with that segment growing to more than 50 percent of revenue. Blu-ray is expected to be nearly 20 percent of revenue, driven by game consoles and the auto market, and home AV markets are expected to account for 10 percent and 15 percent of revenue, he said.