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Analyst Blog

Entertainment technology provider DTS Inc. (DTSI - Snapshot Report) is scheduled to announce its fourth quarter 2011 results after the market closes today. We expect the company to earn 40 cents per share in this quarter based on an estimated 8.0% year-over-year growth in revenue to $29.0 million.

Prior-Quarter Recap

DTS posted lackluster third quarter results, which missed the Zacks Consensus Estimate on both the top and bottom lines. DTS reported third quarter 2011 earnings (excluding amortization but including stock-based compensation) of 15 cents per share, below the Zacks Consensus Estimate of 18 cents. Most significantly, reported earnings declined 16.7% on a year-over-year basis.

Revenues of $20.5 million for the reported quarter not only plunged 2.4% on a year-over-year basis, but also lagged the Zacks Consensus Estimate of $22.0 million. The miss was primarily attributed to weakness in the auto and AV revenues segment arising from the negative impacts of the Japan earthquake, which hampered production. Although DTS did not provide any guidance for the fourth quarter, the company expects results to be driven by continued strength in Blu-ray and network-connected markets and expects a rebound in the game console and automotive markets.

For further details please see DTS Inc. Reports Lackluster 3Q.

Estimate Revision Trend

In the run-up to the earnings report, we witness no major variation in consensus estimates. Given no changes in the Zacks Consensus Estimate for the fourth quarter of 2011 over the last 30 days, the analysts appear to be confident about their expectations.

We note that on an average, DTS has posted an earnings surprise of 11.29% in the trailing four quarters, implying that it has outdone the Zacks Consensus Estimate by the same magnitude over the period. We do not expect a major change in the earnings surprise trend for the current quarter.

Our Recommendation

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 and digital media players.

We remain optimistic about DTS due to its global presence, particularly in the emerging markets of the Asia-Pacific. The Asia-Pacific has been one of the most important, dynamic and fast-growing consumer electronics markets over the past few years. Most importantly, the region remains mostly under-penetrated in comparison to other international markets, and thus represents a huge opportunity, in our view.

We believe that DTS is well positioned to grab this huge opportunity over the long term based on its partnerships with several Asia-based companies such as Pantech, Fujitsu, Haier, Samsung, LG, Panasonic, Changhong, Hisense, TCL, Konka, Skyworth and Huawei. We believe that these partnerships will drive top-line growth over the long term.

DTS’s growth is totally dependent on Blu-ray penetration, which increased 40.0% in 2011. However, we believe that the volatile macro environment and sluggish consumer spending will remain headwinds for Blu-ray sales going forward. Further, the company faces significant competition from Dolby Laboratories Inc. (DLB - Snapshot Report), Sony Corp. (SNE - Snapshot Report) and privately-held THX Limited, which will hurt its profitability going forward.

Thus, we remain Neutral over the long term (6-12 months). Currently, DTS Inc. has a Zacks #3 Rank, which implies a Hold rating in the near term.

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