DTS Expects to Be Installed in 65 Percent of Networked TVs by Year-End

Timing of contract renewals led to a 7 percent revenue drop in quarterly revenues year over year in DTS’s network-connected unit for Q1, but unit volume was up year-over-year and the company expects to see “solid growth” for the category over the next three quarters, said DTS CEO Jon Kirchner on an earnings call Monday. Network-connected business was more than 45 percent of revenue in the quarter and is on track to pass 50 percent for the year, said Chief Financial Officer Mel Flanigan.

Within the network-connected segment, the TV business was impacted by contract renewals that were “pushed out” of Q1, leading to a 20 percent revenue drop year-over-year, Flanigan said. DTS believes the decline “solely relates to contract execution timing” and expects the TV business to grow in 2014, Flanigan said. In its 10-Q filed with the SEC Monday, DTS noted the market shift away from disc-based media for entertainment content and toward network-connected devices. As a response to market trends, “we have transitioned our primary focus to providing end-to-end audio solutions to the network-connected markets.”

Kirchner said many of DTS’s contract renewals “layer in next-generation audio technologies.” They compare favorably to prior licensing deals in terms of technology and economics, he said. DTS is seeing increased TV manufacturer interest in long-term product roadmaps as the market transitions to “higher quality experiences” through Ultra HD TV, Kirchner said. By year-end, DTS expects to be in 65 percent of all networked TVs. On the content side, Kirchner cited its NAB announcement with Deluxe Digital Distribution (D3) for DTS audio technologies to be integrated with D3’s streaming media library. Deluxe is the provider for Samsung’s $299 UHD Video Pack hard drive that will come preloaded with UHD movies and is bundled for free with select curved Samsung 4K TVs.

PC was the strongest growth category within DTS’s network-connected category in Q1, posting 70 percent year-over-year revenue growth on a licensing deal with HP. Kirchner said in Q&A that DTS’s penetration in the PC segment historically has been “very low” since DTS wasn’t a mandatory requirement in the DVD standard. With optical media and network-connected options in PCs today, DTS has “a sizable opportunity for us to grow into that market where our audio solution can make a real difference,” Kirchner said. He called PC business “incremental” for HP, however. The deal is direct between DTS and HP via the Intel platform, Kirchner said, “and is not related to Microsoft."

The license with HP also includes support for Play-Fi wireless audio technology, Kirchner said. DTS expects to make more PC announcements in the second half, which could lead to “substantial growth” in the PC space for DTS, given its low penetration in the industry, “even as the market undergoes significant transition,’ he said.

Play-Fi is generating “significant interest” from home AV, PC and speaker manufacturers, Kirchner said, along with ODMs. The whole-home wireless audio market is at the beginning of a “major growth trend,” Kirchner said, and DTS plans to bring Play-Fi to market through a variety of different partners, he said. Play-Fi-enabled speakers and accessories will begin to reach retail stores “soon” and will represent an “important milestone in the commercialization process,” he said.

In the Blu-ray segment of the network-connected category, revenue was up 27 percent, driven by the PS4 and Xbox One, which both support DTS audio through streaming and Blu-ray disc playback, Flanigan said. Demand will remain strong for consoles, but DTS will see “modest” overall growth from Blu-ray as standalone and home-theater-in-a-box revenue remains flat this year, he said.

In Q2, DTS revenue grew 13 percent to $36.8 million. The company posted a $5.6 million profit versus a loss of $1.5 million a year ago, it said. DTS shares closed 2 percent lower Tuesday at $17.48.