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DTS Inc. (DTSI - Snapshot Report) recently announced that it has entered into a partnership with Interra Systems. Under the terms of the partnership, DTS will integrate its high-definition audio codec support into Interra’s digital media quality control and media analysis solutions.

Interra Systems is a software products and services provider for the digital media industry. Interra's Digital Media solutions are led by its flagship product Baton, an automated verification system, which ensures media content readiness, and Vega, a product line of audio/video analyzers for standards compliant media content creation and distribution.

Baton and Vega will initially integrate DTS technology. The integration will help digital media providers, content distributors, and broadcast companies to offer enterprise-class file validation at the time of delivering content to multiple screens. The integration is also expected to boost operational efficiency in file-based workflows.

Interra’s products have been widely adopted by global media companies all over the world with broadcasters, post production houses, IPTV, satellite and archiving companies being the major clients. We believe the DTS-Interra partnership will particularly facilitate DTS’ market share gain as the company continues to make headways into the digital and online entertainment market.

DTS has primarily focused on accretive partnerships with major players for driving growth. DTS has also partnered with noted technology companies such as LG, Samsung, Onkyo, Pantech and Intel Corp. (INTC - Analyst Report), which will augment its top-line growth in the coming quarters.

Moreover, DTS has partnerships with a number of Chinese manufacturers such as Changhong, Skyworth, Hisense, Haier, TLC and Konka, which will drive growth going forward. The company’s existing partnerships with the Internet Protocol television (IPTV) operators in the broadcast market will also enhance top-line growth and expand their business going forward.

Our Take

We believe the widespread adoption of DTS high-definition audio technology will facilitate DTS’ expansion into new markets over the long term, thus driving further market share gains. Moreover, we believe these partnerships will help DTS to counter significant competition from Dolby Laboratories Inc. (DLB - Snapshot Report) and Sony Corporation (SNE - Snapshot Report) going forward.

However, flat second quarter 2011 results and cautious near-term outlook will remain an overhang on the stock, in our view. The company has reduced its revenue expectation from $100.0 million - $105.0 million to $95.0 million - $100.0 million for fiscal 2011 and also lowered its EPS estimate from $1.40 - $1.49 to $1.30 - $1.42, citing the weak macro-economic environment and cautious consumer spending.

Moreover, year-to-date DTS shares have decreased 42.0% compared with S&P 500’s decline of 9%. This keeps us on the sidelines for the time being.

We maintain a Neutral rating on a long-term basis (6-12 months). Currently, DTS has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).

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