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DTS (DTSI) Beats on Q2 Earnings and Revenues; Up Y/Y

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DTS Inc. reported second-quarter 2014 non-GAAP earnings per share of 30 cents compared to a loss of a penny reported in the year-ago quarter. Earnings also convincingly beat the Zacks Consensus Estimate of a penny.
Quarter Details

Revenues for the quarter increased 33.1% on a year-over-year basis to $36.2 million. Revenues comfortably beat the Zacks Consensus Estimate of $28.0 million. Top-line growth was boosted by DTS’ network-connected segment as well as by the resolution of several royalty audit matters.

The network-connected business contributed a little over 50% of total revenues in the quarter. Within the network-connected business segment, the TV business grew 27% on a year-over-year basis in the second quarter.

PC registered robust growth and was up 53% in the quarter, primarily attributable to the deal that DTS had signed with Hewlett-Packard (HPQ - Free Report) in the first quarter of 2014.

Blu-Ray revenues were up 27% on a year-over-year basis in the reported quarter, driven by the persistent success of the new game console cycle.

However, DTS’ Home AV revenues remained relatively flat on a year-over-year basis in the reported quarter. It constituted a little over 10% of revenues in the quarter.

Automotive was up 21% on a year-over-year basis in the second quarter, constituting about 10% of total revenues in the quarter.

In the second quarter, the company recognized $3.8 million in royalties.

Operating expenses (excluding amortization & acquisition cost but including stock-based compensation) jumped 4.8% year over year to $27.5 million, primarily due to an increase in spending on new product initiatives.

DTS reported operating profit (excluding amortization & acquisition cost but including stock-based compensation) of $8.3 million compared with $0.73 million in the previous-year quarter. Operating margin was 23% versus 2.7% reported in the year-ago quarter.

Net income (excluding amortization & acquisition costs but including stock-based compensation) was $5.1 million compared to a net loss of $0.11 million reported in the previous-year quarter.

During the quarter, the company entered into a partnership with renowned U.S.-based music artist and two-time Grammy award nominee, Morgan Page to deliver his music mixed in its headphones. The quarter also witnessed a partnership between DTS and Universal Music Enterprises for the release of an exclusive DTS Headphone mix of Sound Garden’s famous album Super Unknown.


Balance Sheet & Cash Flow

Exiting the second quarter, DTSI had cash and short-term investments of $69.5 million compared with $69.1 million at the end of the first quarter of 2014. The company generated an operating cash flow of $5.5 million in the quarter compared to cash outflow of $1.3 million in the prior quarter.


DTS expects 2014-full year revenues to range between $137 million and $142 million while the Zacks Consensus Estimate for the same is pegged at $135 million. The company continues to expect that its organic growth in 2014 will come primarily from network-connected markets, specifically connected TVs, mobile devices and PCs. Network-connected markets are expected to represent more than 50% of total revenue in 2014.

DTS expects non-GAAP operating margin in the mid to upper-20s. Non-GAAP earnings per share are expected to be in the range of $1.40 to $1.50 while the Zacks Consensus Estimate for the same is pegged at 86 cents per share.

Management expects automotive to be up modestly for the rest of fiscal year 2014. The company expects to register double-digit growth in Blu-Ray revenues in full year 2014.


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, digital media players and network-connected TV space.

We believe that the Play-Fi technology positions the company extremely well to capture a larger share of the expanding wireless audio market.

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 the long term.

Additionally, partnership with Samsung to provide sound solutions for TV and inclusion of DTS’s technologies in Qualcomm’s (QCOM - Free Report) latest generation of processors are positives for the company. The company has also garnered several partnerships with tablet makers such as Pantech, Lenovo and Panasonic.

However, the ongoing volatile macroeconomic environment, weakness in the consumer electronics market and sluggish consumer spending are the near-term headwinds for the company. Moreover, higher costs are likely to hurt profitability in the near term.

Further, the company faces significant competition from Dolby Laboratories Inc. (DLB - Free Report) , Sony Corp. and privately-held THX Limited, which may hurt its profitability.

Currently, DTSI has a Zacks Rank #3 (Hold).

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