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DTS Inc. (DTSI - Snapshot Report) reported third quarter earnings of 8 cents per share, recovering from a loss of 70 cents per share reported in the year-ago quarter.

Quarter Details

Revenues jumped 26.6% year over year to $28.2 million, but lagged the Zacks Consensus Estimate of $31.0 million. The strong year-over-year growth was primarily driven by the company’s network-connected business, which grew 104% on a year-over-year basis.

Within the network-connected category, network-connected TV contributed the maximum, and moved up 92% on a year-over-year basis.

Operating expenses (excluding amortization & acquisition cost but including stock-based compensation) as a percentage of revenues declined to 88.3% from 110.5% 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 from 80.2% in the year ago quarter, to 61.7%, while research & development expense (R&D) as a percentage of revenues declined to 26.6% from 30.3% reported in the year ago quarter.

DTS reported operating income (excluding amortization & acquisition cost but including stock-based compensation) of $3.1 million compared with a loss of $2.4 million in the year-ago quarter.

Net income (excluding amortization & acquisition costs but including stock-based compensation) was $2.45million compared to a net loss of $12.8 million in the year-ago quarter.

Exiting the third quarter, DTS had cash and short-term investments of $76.1 million compared with $71.7 million at the end of the second quarter. Cash flow from operations was $11.4 million compared with $2.4 million cash generated in operations in the previous quarter.

Outlook

For fiscal 2013, the company expects GAAP operating income as a percentage of revenues to remain in the range of 5 – 8%, whereas non-GAAP operating income as a percentage of revenue is likely to be in the range of 21.0 – 26.0%.GAAP net income per share is expected to be in the range of 3 cents to 8 cents while non-GAAP net income per share is likely to be 98 cents to $1.12.

Recommendation

DTS reported a modest third quarter numbers, with the company reporting a profit and revenues substantially 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 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 - Analyst Report) 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 - Snapshot Report), Sony Corp. (SNE - Snapshot Report) and privately-held THX Limited, which may hurt its profitability.

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

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