DTSI

DTS, Inc. (DTSI)

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DTS, Inc. (DTSI)

Q3 2008 Earnings Call

November 10, 2008 4:30 p.m. ET

Executives

Ann McGuinness – Investor Relations

Jon Kirchner – President, Chief Executive Officer

Melvin Flanigan – Chief Financial Officer

Analysts

Ralph Schackart – William Blair & Company

Alan Davis – D.A. Davidson & Company

Paul Coster – JPMorgan Chase & Company

Barbara Coffey – Kaufman Brothers, L.P.

Brian Thackray – Deutsche Bank

Mike Olson – Piper Jaffray & Company

Sanjay Puri – Walker Smith Capital

Jill Mastoloni – Catapult Capital Management

Stefan Mykytiuk – Pike Place Capital

Brad Hendrickson – Nokomis Capital

Presentation

Operator

Welcome to the Q3 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Ann McGuinness of DTS Investor Relations. Please go ahead

Ann McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report third quarter 2008 financial results for DTS. Joining me on the call today are Jon Kirchner, President and CEO, and Mel Flanigan, CFO of DTS.

Before we begin, let me remind you that during this conference call management may make forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause DTS' actual results to differ materially from those expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including statements containing the words planned, expect, believe, anticipate and similar expressions that look to future events and performance. These statements may include, among others, plans, strategies and objectives of management for future operations, any statements regarding proposed new products, services or developments, any statements regarding future financial results or operating performance or economic conditions, statements of belief and any statements of assumptions underlying any of the foregoing.

Factors that could cause our actual results to differ materially from the forward-looking statements made during this call are more fully described in our most recent filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2008, which are available at www.sec.gov. Any forward-looking statements made during this conference call are based on current expectations and projections. The company does not intend to update these forward-looking statements to reflect events or circumstances arising after this call.

Again, this quarter the company is reporting the results of its Consumer Business as continuing operations and reporting the activities of the digital cinema and digital images businesses it sold during the second quarter of 2008 as discontinued operations. Income or loss from discontinued operations, net of tax, will appear as a single line item below Income from Continuing Operations on the company’s Statement of Operations. All financial results discussed in this call will reflect continuing operations unless otherwise noted.

Now, I will turn the call over to Jon. Please go ahead, Jon.

Jon Kirchner

Thanks, Ann, and thanks to all of you for joining us today as we report third quarter 2008 financial results. We are pleased with our operating results for the quarter, reporting revenue of $13.9 million and earnings per diluted share of $0.11. Our high margin licensing model continue to generate cash, which amounted to more than $4.7 million during the quarter, which we feel is particularly important in light of today’s challenging economy and a pull-back in consumer spending.

With our performance in the third quarter and confidence in our long-term prospects, we repurchased 700,000 shares at an average price of $20.49 per share over the past three months. Blu-ray products accounted for 11% of our revenue in the third quarter, essentially flat from the prior quarter and up from 9% in the third quarter of 2007. In dollar terms, Blu-ray-related revenues were up nearly 67% for the three months ended September 30, 2008, compared to the same period in 2007.

Sales of stand-alone Blu-ray players and Blu-ray-enabled PCs are now supplementing revenues from game consoles which previously constituted the majority of Blu-ray product shipments. Price points for stand-alone Blu-ray players are quickly dipping below the $200 mark as we head into the holiday season and we may see some units sold on promotion at a price around $150. In addition, we are seeing several retailers get aggressive about bundling Blu-ray players with televisions, significantly lowering the effective cost of the player and seeing the first televisions with integrated Blu-ray playback from Sharp.

Turning to the PC space, manufacturers increasingly are offering products that will support the BD (ph 00:07:26) format. However, significant increases in unit volumes are likely dependent upon a further decrease in the cost of Blu-ray components, which is unlikely to occur until the latter half of 2009. The potential for Blu-ray in the PC segment remains large and third-party estimates suggest that as many as 20 million PCs could ship with Blu-ray drives in 2009, up from just a few million projected in 2008.

Supporting Blu-ray hardware growth is the significant increase in the number of titles which are now approaching 900, and declining price points. So,me new releases are available at prices as low as $15.99 and certain older titles as low as $9.99. Importantly, retail support for the format is also increasing, with greater shelf space and promotional activities slated for Blu-ray in the upcoming weeks. According to recent reports, more than 100 Blu-ray playback devices are expected to be in the market by the end of the year, including players, game consoles and PCs, dramatically improving the range of choice, pricing and availability of products for consumers ready to enhance their home entertainment experience.

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