) reported mixed second quarter results. Earnings exceeded the
Zacks Consensus Estimate by 8 cents (61.5%), while revenue was just
short of 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).
The Home AV business continued to remain weak, with revenue
declining 3.0% year over year, due to the ongoing transition from
DVD-based products to network connected business. Automotive
business jumped 12.0% year over year in the reported quarter.
Gross profit (excluding amortization & acquisition cost but
including stock-based compensation) for the quarter increased 5.8%
year over year to $21.7 million. Gross margin expanded 10 basis
points (bps) on a year-over-year basis to 99.9%.
Operating expenses soared 20.1% year over year to $19.1 million,
primarily due to a 12.2% rise in selling, general &
administrative expense (SG&A) and a 52.5% jump in research
& development expense (R&D) related to continuing
investments in network connected business in the quarter.
Higher operating expenses dragged down operating income
(excluding amortization & acquisition cost but including
stock-based compensation), which plunged 42.8% year over year to
$2.7 million in the reported quarter. Operating margin for the
quarter was 12.3% compared with 22.7% in the previous-year
Net income (excluding amortization, acquisition cost &
stock-based compensation) was $3.5 million or 21 cents per share
compared with $4.2 million or 24 cents in the year-ago quarter.
However, excluding amortization expense and acquisition cost but
including stock-based compensation expense and related tax effect,
net income was $1.01 million or 6 cents compared with $2.8 million
or 16 cents in the year-ago quarter.
Exiting the second quarter, DTS had cash and short-term
investments of $100.7 million compared with $79.0 million at the
end of first quarter of 2012. Cash flow from operations was $3.8
million compared with $6.8 million in the previous quarter. DTS did
not buy back any shares during the quarter.
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 in the range of
90 cents to $1.00 per share (down from prior outlook of $1.60 to
$1.65 per share).
For fiscal 2013, DTS expects revenue to be in the range of
$160.0 million to $175.0 million and non-GAAP earnings to be in the
range of $1.85 to $2.00 per share.
DTS's full year 2012 results are expected to be negatively
impacted by a much higher tax rate than normal and continued
investments related to product development in the network connected
business. However, the tax rate is expected to come down
significantly in fiscal 2013 (expected 40.0% versus 52% for
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
However, we believe that the volatile macro environment and
sluggish consumer spending will remain 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. This in turn will likely hurt
DTS' growth over the long term.
Further, the company faces significant competition from
Dolby Laboratories Inc.
) and privately-held THX Limited, which remain headwinds going
Thus, we remain Neutral on DTS over the long term (6-12 months).
Currently, DTS Inc. has a Zacks #4 Rank, which implies a 'Sell'
rating in the near term.
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