Earnings Preview: DTS Inc.

Entertainment technology provider DTS Inc. (DTSI) is scheduled to announce its first quarter 2011 results after the market closes today.

Shares of DTS plunged 12.4% year-to-date compared to a 5.4% increase in the S&P 500 for the same period. Despite this weakness in the stock, DTS is expected to outperform the Zacks Consensus Estimate for the fifth consecutive quarter, based on strong sales growth.

Currently, the Zacks Consensus Estimate for revenue is pegged at $26.0 million for the first quarter of 2011, reflecting an upside of 19.6% year over year.

DTS posted an average earnings surprise of 13.84% in the trailing four quarters, implying that it has outpaced the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Fourth Quarter Recap

DTS reported fourth quarter 2010 earnings per share (EPS) of 32 cents, edging out the Zacks Consensus Estimate of 31 cents. Earnings, including stock-based compensation but excluding one-time items, grew 23.1% year over year from 26 cents. The year-over-year growth was driven by accelerating revenue.

Revenue increased 26.6% year over year to $26.9 million, marginally surpassing the Zacks Consensus Estimate of $25.0 million. The growth was primarily driven by strong performance in the Blu-ray market.

DTS continues to experience strong contributions from markets that serve network-connected consumers, including television, personal computers and smartphones.

For further details please see DTS Marginally Beats Consensus.


For fiscal 2011, DTS expects revenues in the range of $100.0 million to $105.0 million, operating margins in the lower 40’s range and earnings per share on a non-GAAP basis in the $1.40 to $1.49 range.

Given the robust growth in Blu-ray and connected devices, management anticipates worldwide Blu-ray units to be in the range of 30 million to 35 million, game consoles in the range of 13 million to 14 million and PCs in the range of 8 million to 10 million for fiscal 2011.

DTS expects to generate 15% to 20% of 2011 revenue to come from new network-connected markets such as televisions, smartphones, digital media players, PCs (DTS Premium Suite, DTS Ultra PC, Envelo) and other virtual audio applications. Home AV, Broadcast & Car market is expected to be flat with royalty recoveries estimated around $4.0 million for 2011.

However, DTS did not provide any quarterly guidance. Currently, the Zacks Consensus Estimate is pegged at 31 cents for the first quarter of 2011.

No Movement in Estimates

We maintain our Neutral rating on DTS Inc. over the long term (6-12 months). We believe 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.

However, DTS continues to face stiff competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately held THX limited.

Given no changes in the Zacks Consensus Estimate for the first quarter of 2011 in the last 60 days, the analysts appear to be confident about their expectations. However, they believe blue laser diodes shortage could impact Blu-ray device shipments in 2011.

DTS has a Zacks #3 Rank, which implies a Hold rating in the near term (1-3 months).

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