DTSI

DTS, Inc. (DTSI)

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DTS Inc. (DTSI)

Q1 2008 Earnings Call

May 12, 2008 5:00 pm ET

Executives

Ann McGuinness - Investor Relations

Jon E. Kirchner - President, Chief Executive Officer, Director

Melvin L. Flanigan - Chief Financial Officer, Executive Vice President - Finance

Analysts

Ralph Schackart - William Blair

Brian Thackray - Deutsche Bank

Rob Stone - Cowen & Company

Alan Davis - D.A. Davidson & Company

Barbara Coffey - Kaufman Brothers

Michael Olson - Piper Jaffray

Lloyd Walmsley - Thomas Weisel Partners

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the DTS first quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Ann McGuinness of DTS Incorporated. Please go ahead.

Ann McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report first 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 within the meaning of the Private Securities Litigation Reform Act of 1995 that involves risks, uncertainties, assumptions, and other factors which, if they do not materialize or prove correct, could cause DTS' results to differ materially from historical results or those expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements containing the words plans, expects, believes, strategy, opportunity, anticipates, and similar words. 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 economic conditions or financial or operating performance, statements of belief and any statements of assumptions underlying any of the foregoing.

The potential risks and uncertainties that could cause actual growth and results to differ materially include, but are not limited to, the timing, costs and attention attendant to the divesture of the non-consumer business, the transition to the next generation optical drives and consumer adoption of such technology, the rapidly changing and competitive nature of the digital audio, consumer electronics and entertainment markets, the company’s inclusion in or exclusion from governmental and industry standards, customer acceptance of the company’s technology, products, services and pricing, risks related to ownership and enforcement of intellectual property, the continued release and availability of entertainment content containing DTS audio soundtracks, changes in domestic and international market and political conditions, risks related to integrating acquisitions and other risks and uncertainties more fully described in DTS’ public filings with the Securities and Exchange Commission, available at www.sec.gov.

The information in this conference call related to projections or other forward-looking statements is based on current expectations. The company does not intend to update its forward-looking statements to reflect the events or circumstances arising after the date on which made.

Again this quarter, the company is reporting the results of its consumer business as continuing operations and reporting the activities of its digital cinema and images business as discontinued operations. Income or loss from discontinued operations net of tax will appear as a single 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 E. Kirchner

Thanks, Ann and thanks to all of you for joining us today as we report first quarter 2008 financial results. As a reminder, today we will be discussing results from continuing operations unless otherwise noted.

We posted solid revenue again this quarter. Revenue for the first quarter was $15.2 million, up 21% over the first quarter of 2007. Earnings per diluted share were $0.18. Operating income was $4.4 million, or 29% of revenue compared to $2.7 million or 21% of revenue in the same period last year. This year-over-year improvement demonstrates the potential leverage in our business model as revenue scales upward.

Before I provide more details about the first quarter, I would like to touch on the sale of our digital cinema and digital images businesses. As you know, we sold the digital images business in early April and today we announced the sale of our digital cinema business. The D-cinema business was acquired by Beaufort California Inc., a member of Beaufort International Group PLC in England. In this transaction, we received approximately $3.3 million in cash and the buy assumed certain liabilities of the business. Further, we could receive up to $11.7 million in additional consideration over the next few years.

We truly appreciate the dedication of the management teams and employees who have continued to build these businesses throughout the sales processes. We wish both teams a very successful future.

I will now turn back to our consumer business. Due to the holiday promotions of Blu-Ray and HD DVD products, revenue from the high definition formats accounted for 21% of our revenue in the first quarter, ahead of our expected pace for the year. This compares to just 5% of our total revenue in the first quarter of 2007.

Unit volumes from PS3 game consoles and standalone players accounted for the growth in the high definition related revenue in the first quarter. Resolution of the format war, declining player prices and availability of more players and content appear to be spurring increasing interest in the Blu-Ray format.

A few manufacturers have also announced new combo players, such as high definition TVs with integrated Blu-Ray players, and we expect to see more announcements like this in the coming months.

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