DTS Misses on Q1 Earnings, Beats Revs - Analyst Blog

DTS Inc. DTSI reported first quarter 2014 earnings of 22 cents per share, which missed the Zacks Consensus Estimate of 31 cents. However, earnings per share in the reported quarter were significantly up from a nickel reported in the year-ago quarter.

Quarter Details

Revenues jumped 12.5% year over year to $36.8 million and managed to beat the Zacks Consensus Estimate of $35.0 million. The company registered modest year-over-year revenue growth.

Operating expenses (excluding amortization & acquisition cost but including stock-based compensation) as a percentage of revenues declined to 81.7% from 87.8% in the year-ago quarter.

This was primarily attributed to a decrease in selling, general & administrative expense (SG&A) as a percentage of revenues, which declined 570 basis points (bps) on a year-over-year basis. Research & development expense (R&D) as a percentage of revenues declined 30 bps from the year-ago quarter.

DTS reported operating income (excluding amortization & acquisition cost but including stock-based compensation) of $6.55 million compared with an operating income of $3.88 million in the year-ago quarter.

Net income (excluding amortization & acquisition costs but including stock-based compensation) was $3.9 billion or 22 cents per share compared with $975.0 million or 5 cents per share reported in the year ago quarter.

Exiting the first quarter, DTS had cash and short-term investments of $62.8 million compared with $71.0 million at the end of the fourth quarter. Moreover, the company bought back 374,200 shares as part of the approved 2 million share buyback program in the quarter.

Future Plan

DTS is working with Unified Streaming to incorporate DTS Layered Audio Reconstruction SDK into their streaming platform that will support leading formats like DASH, HLS and Microsoft Smooth Streaming.

DivX will incorporate DTS-HD audio encoding and decoding capability into their upcoming DivX software release.

A major PC manufacturer is incorporating DTS audio processing technologies into its product line. The license includes support for Play-Fi, the wireless platform of DTS.

Outlook

For 2014, DTS expects revenues to be between $132.0 million and $138.0 million, including a normal level of royalty recoveries. Non-GAAP operating margins are expected to be in the mid-20s.

Non-GAAP earnings per share are expected to be in the range of $1.20 to $1.40 based on a 30.0% effective tax rate while the Zacks Consensus Estimate for the same period is pegged at 79 cents per share.  

Segment-wise, Network Connected is expected to contribute more than 50.0% of total revenue whereas Blu-Ray is expected to account for 20.0% of total revenue. Automotive is expected to contribute 10.0% of total revenue while Home AV is expected to account for less than 15.0% of the same.

The company expects growth in 2014 to primarily come from the network-connected markets, specifically connected TVs, mobile devices and PCs. Network-connected markets are expected to represent more than 50% of total revenue in 2014.

Recommendation    

DTS reported mixed first quarter numbers. The company's profits and revenues were up from the year-ago quarter.

We believe that DTS will continue to gain market share riding on its strong product portfolio, increasing online availability and accelerated expansion of the DTS technology into new markets, such as smartphones, portable devices, digital media players and the smart TV space.

Moreover, the company's extended partnership programs with Samsung to provide sound solutions for TV and inclusion of DTS's technologies in Qualcomm's QCOM latest generation of processors are positives for the company. This apart, other partnerships with mobile and tablet makers such as Huawei, Pantech, Lenovo and Panasonic are also encouraging.

On the other hand, unpredictable macroeconomic environment, weakness in the consumer electronics market and sluggish consumer spending are the near-term headwinds for the company. Moreover, higher costs are likely to hurt profitability in the near term.

Further, the company faces significant competition from Dolby Laboratories Inc. DLB, Sony Corp. SNE and privately-held THX Limited, which may hurt its profitability.

Currently, DTSI has a Zacks Rank #3 (Hold).