DTS Audio for Coolpad Smartphones

DTS Inc.’s (DTSI - Snapshot Report) high-definition (“HD”) audio solutions will be available on Coolpad Quattro 4G smartphones, manufactured by the Chinese company Yulong Computer Communications. The 4GLTE-enabled smartphones will be marketed in the U.S. through MetroPCS Communications Inc. (PCS).

We believe that DTS is expanding its footprint in the booming Chinese smartphone market, where Coolpad already has a significant presence. 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 under-penetrated in comparison to several developed markets, and thus represents a huge opportunity.

According to IDC, 26.5% of the total smartphone shipments will be from China in 2012, whereas the U.S. is estimated to contribute 17.8%. Robust customer demand for low-priced smartphones is the primary reason for China’s growing contribution.

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.

Moreover, we believe that DTS’s investment in the network connected business will help it to gain significant market share going forward. This, coupled with an improving tax rate and incremental revenue from the acquisition of SRS labs, will drive top-line growth in 2013.

However, the volatile macroeconomic environment and sluggish consumer spending will remain the headwinds for Blu-ray sales in the near term. Moreover, we believe that the strong growth of network connected devices will eventually cannibalize the sales of DVD-based products and Blu-ray sales.

Further, the company faces significant competition from Dolby Laboratories Inc. (DLB - Snapshot Report), Sony Corp. (SNE - Snapshot Report) and privately-held THX Limited, which remains a headwind going forward.

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