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DTS Inc.’s (DTSI - Snapshot Report) high definition (“HD”) sound technology, Envelo, will now be available on Huawei C8655 smartphones. The Envelo technology, which will be available through China Telecom (CHA - Snapshot Report), promises enhanced sound quality on the newly-launched smartphones from Huawei.

We believe that DTS is expanding its footprint in the growing Chinese smartphone market, where Huawei Technologies Co. has a significant presence. According to research firm Analysys International, despite Apple Inc. (AAPL - Analyst Report) and Samsung’s growing share in the Chinese market, the low-end smartphones (priced between 700 yuan and 1,500 yuan) jumped to 64% in the first quarter of 2012 from 45% in the year-ago quarter.

Consequently, the demand for low-end smartphones also increased Huawei’s market share to 12.2% in the first quarter of 2012 from 7.4% in the comparable quarter of the prior year. Huawei is now trying to get a foothold in the high-end smartphone market with innovative branding and competitive pricing.

We believe that DTS’ partnership with Huawei would be incrementally beneficial for the former in the long run.

Asia has been one of the most important, dynamic and fast-growing consumer electronics markets over the past few years, and it plays a critical role in the development and manufacturing of innovative mobile, PC and network-connected products and technologies. However, it remains significantly underpenetrated in comparison to several developed markets, and thus represents a huge opportunity, in our view.

We believe that DTS is well positioned to gain from this growth potential 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 now Huawei. We believe that these partnerships will drive top-line growth over the long term.

We believe that DTS will continue to gain market share riding on its strong product portfolio, robust growth from the Blu-ray market and increasing penetration into network-connected devices, such as Internet enabled television, smartphones, personal computers and portable devices going forward.

Moreover, we believe that the strong growth of network-connected devices will eventually cannibalize the sales of DVD and Blu-ray-based products. This in turn will hurt DTS’ growth over the long 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 will impact its profitability going forward.

Thus, we remain Neutral over the long term (6-12 months). Currently, DTS Inc. has a Zacks #2 Rank, which implies a Buy rating in the near term.

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