DTS Inc. (DTSI) reported second quarter 2010 results, with earnings decreasing 57.1% to 9 cents from 21 cents reported in the prior-year quarter. However, earnings per share beat the Zacks Consensus Estimate by a penny. The weak year-over-year results were primarily due to lackluster revenue growth and higher operating expenses.
Revenue
Revenues plunged 27.7% year over year to $17.5 million in the quarter, in line with the Zacks Consensus Estimate.
The year-over-year decline in revenues was primarily due to a $13.0 million decrease in royalty recoveries from intellectual property compliance and enforcement activities. This decrease in royalty recoveries resulted primarily from the settlement of legal matters with Zoran Corporation (ZRAN) during the second quarter of 2009.
DTS achieved a strong growth in the car and Blu-ray markets during the quarter. Car market contributed 15.0% to quarterly revenues and posted 115.0% year-over-year growth.
Blu-ray contributed 25.0% to revenue growth and posted 29.0% year-over-year growth. Standalone players and game consoles achieved robust year-over-year growth rates of 139% and 153%, respectively. According to DTS, more than 50 million Blu-ray devices have been sold globally through the end of the second quarter.
DTS continues to experience strong contributions from markets that serve network-connected consumers, including television, personal computers and smartphones. In the reported quarter, these represented more than 15% of total revenue.
Standard definition home AV business decreased 7.0% in the quarter and contributed 30.0% of the total revenue. Broadcast contributed 5.0% to revenues in the quarter.
DTS has already developed partnerships with a number of companies such as Onkyo, Pantech, Intel Corp. (INTC) and MSI, which will drive its top-line growth in the long term.
The company signed an important partnership with Sonic Solutions (SNIC) in the quarter, and continues to make progress in licensing its technology to television partners such as Samsung and LG in offering high-performance DTS audio on their network connected televisions. We believe these partnerships will drive profitability over the long term.
Margins
Gross profit fell 28.3% year over year to $17.0 million and gross margin in the quarter decreased 70 basis points to 97.4%.
Selling, general and administrative (SG&A) expense was down 27.0% year over year to $11.7 million in the quarter. The year-over-year decline was primarily due to a $6.2 million decrease in professional fees associated with the Zoran litigation.
Research and development (R&D) expense upped 19.4% year over year to $2.8 million, primarily due to employee-related costs.
Operating profit plummeted 53.9% year over year to $2.4 million in the quarter and margin decreased 790 basis points to 13.9% in the second quarter of 2010. Excluding the impact of the Zoran litigation and settlement, operating profit in the second quarter of 2009 was $1.3 million.
Balance Sheet
As of June 30, 2010, cash and short-term investments were $76.6 million as compared with $78.8 million at the end of March 31, 2010.
DTS repurchased 421,000 shares for a total of $14.1 million under its share repurchase program.
Outlook
For fiscal year 2010, DTS continues to expect revenues in the range of $81.0 million to $84.0 million, operating margins in the upper 20’s and earnings per share in the range of 75 cents to 80 cents. Gross margin is expected to remain in the 97.0% to 98.0% range.
DTS expects SG&A and R&D expenses to continue to increase, primarily to provide support to new technology initiatives, international expansion and intellectual property enforcement.
Recommendation
We maintain a Neutral rating on a long-term basis (6 to 12 months). We believe DTS continues to gain market share based on its strong product portfolio, increasing online availability and accelerated expansion of the DTS technology into new form of market such as smartphones, portable devices and digital media players.
In the near term, weak Blu-ray unit growth and increasing operating expenses could suppress profitability. Further, DTS continues to face stiff competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately held THX limited. Currently, DTS has a Zacks #4 Rank, which implies a Sell rating on a short-term basis.
DOLBY LAB INC-A (DLB): Free Stock Analysis Report
DTS INC (DTSI): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
SONIC SOLUTIONS (SNIC): Free Stock Analysis Report
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Revenues plunged 27.7% year over year to $17.5 million in the quarter, in line with the Zacks Consensus Estimate.
The year-over-year decline in revenues was primarily due to a $13.0 million decrease in royalty recoveries from intellectual property compliance and enforcement activities. This decrease in royalty recoveries resulted primarily from the settlement of legal matters with Zoran Corporation (ZRAN) during the second quarter of 2009.
DTS achieved a strong growth in the car and Blu-ray markets during the quarter. Car market contributed 15.0% to quarterly revenues and posted 115.0% year-over-year growth.
Blu-ray contributed 25.0% to revenue growth and posted 29.0% year-over-year growth. Standalone players and game consoles achieved robust year-over-year growth rates of 139% and 153%, respectively. According to DTS, more than 50 million Blu-ray devices have been sold globally through the end of the second quarter.
DTS continues to experience strong contributions from markets that serve network-connected consumers, including television, personal computers and smartphones. In the reported quarter, these represented more than 15% of total revenue.
Standard definition home AV business decreased 7.0% in the quarter and contributed 30.0% of the total revenue. Broadcast contributed 5.0% to revenues in the quarter.
DTS has already developed partnerships with a number of companies such as Onkyo, Pantech, Intel Corp. (INTC) and MSI, which will drive its top-line growth in the long term.
The company signed an important partnership with Sonic Solutions (SNIC) in the quarter, and continues to make progress in licensing its technology to television partners such as Samsung and LG in offering high-performance DTS audio on their network connected televisions. We believe these partnerships will drive profitability over the long term.
Margins
Gross profit fell 28.3% year over year to $17.0 million and gross margin in the quarter decreased 70 basis points to 97.4%.
Selling, general and administrative (SG&A) expense was down 27.0% year over year to $11.7 million in the quarter. The year-over-year decline was primarily due to a $6.2 million decrease in professional fees associated with the Zoran litigation.
Research and development (R&D) expense upped 19.4% year over year to $2.8 million, primarily due to employee-related costs.
Operating profit plummeted 53.9% year over year to $2.4 million in the quarter and margin decreased 790 basis points to 13.9% in the second quarter of 2010. Excluding the impact of the Zoran litigation and settlement, operating profit in the second quarter of 2009 was $1.3 million.
Balance Sheet
As of June 30, 2010, cash and short-term investments were $76.6 million as compared with $78.8 million at the end of March 31, 2010.
DTS repurchased 421,000 shares for a total of $14.1 million under its share repurchase program.
Outlook
For fiscal year 2010, DTS continues to expect revenues in the range of $81.0 million to $84.0 million, operating margins in the upper 20’s and earnings per share in the range of 75 cents to 80 cents. Gross margin is expected to remain in the 97.0% to 98.0% range.
DTS expects SG&A and R&D expenses to continue to increase, primarily to provide support to new technology initiatives, international expansion and intellectual property enforcement.
Recommendation
We maintain a Neutral rating on a long-term basis (6 to 12 months). We believe DTS continues to gain market share based on its strong product portfolio, increasing online availability and accelerated expansion of the DTS technology into new form of market such as smartphones, portable devices and digital media players.
In the near term, weak Blu-ray unit growth and increasing operating expenses could suppress profitability. Further, DTS continues to face stiff competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately held THX limited. Currently, DTS has a Zacks #4 Rank, which implies a Sell rating on a short-term basis.
DOLBY LAB INC-A (DLB): Free Stock Analysis Report
DTS INC (DTSI): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
SONY CORP ADR (SNE): Free Stock Analysis Report
SONIC SOLUTIONS (SNIC): Free Stock Analysis Report
Zacks Investment Research
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