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Analyst Blog

Entertainment technology provider DTS Inc. (DTSI - Snapshot Report) is scheduled to announce its third quarter 2012 results after the market closes today (November 8, 2012). As per the Zacks Consensus Estimate, the company is expected to earn 3 cents per share in this quarter based on an estimated 22.0% year-over-year growth in revenue to $25.0 million.

Prior-Quarter Recap

DTS reported mixed second quarter 2012 results, with earnings exceeding the Zacks Consensus Estimate by 8 cents but revenue missing the consensus mark.

Revenue climbed 5.7% year over year to $21.8 million during the quarter. The year-over-year growth was driven by 81.0% annual surge in network-connected business (30% of total revenue). This strong growth fully offset an 11.0% year-over-year decline in the Blu-Ray business (25.0% of total revenue).

DTS expects full year 2012 revenue to be in the range of $110.0 million to $115.0 million (down from prior outlook of $112.0 million to $116.0 million). Operating margin is now expected to be approximately 20.0% (down from 40.0%) and earnings are expected in the range of 90 cents to $1.00 per share (down from prior outlook of $1.60 to $1.65 per share).

For further details please see DTS Reports Mixed 2Q.

Estimate Revision Trend

In the run-up to the earnings report, we witness no variation in the consensus estimates. Given no changes in the Zacks Consensus Estimate for the third quarter of 2012 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 negative 14.17% in the trailing four quarters, implying that it has underperformed 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.

Moreover, DTS continues to invest in the network connected business, which will help it to gain significant market share going forward. This, coupled with higher penetration in the Chinese smartphone market and incremental revenue from the acquisition of SRS labs, will drive top-line growth in 2013.

However, we believe that the volatile macro environment, weakness in the consumer electronics market and sluggish consumer spending will remain headwinds for DTS going forward. We also 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 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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