DTSI

DTS, Inc. (DTSI)

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DTS, Inc. (DTSI)

Q4 2008 Earnings Call

February 26, 2009 4:30 pm ET

Executives

Ann McGuinness - IR

Jon Kirchner - President and CEO

Mel Flanigan - EVP, Finance and CFO

Analysts

Ralph Schackart - William Blair & Company

Mike Olson - Piper Jaffray

Paul Coster - JPMorgan

Tom Kucera - Avondale Partners

Jim Goss - Barrington Research

John Vinh - Collins Stewart

Barbara Coffey - Kaufman Brothers

Brian Thackray - Deutsche Bank

Rob Stone - Cowen and Company

Jeffery DeCowerith - Dougherty and Co

Presentation

Operator

Welcome to the DTS fourth quarter and fiscal year 2008 conference call. During today's presentation all parties will be in listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, February 26th, 2009.

I would now like to turn the conference over to Ann McGuinness with DTS Investor Relations. Please go ahead.

Ann McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report fourth quarter 2008 and fiscal 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's actual results to differ materially from those expressed in or implied by such forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including statements containing the words plan, expect, believe, anticipate, and similar expressions that look to future events performance. These statements may include, among others, plans, strategies and objectives of management for future operations; any statements regarding proposed new product, services or developments; any statements regarding future financial results or operating performance or economic conditions. Statements of beliefs 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 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 second quarter of 2008 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 Kirchner

Thanks Anna. Thanks to all of you for joining us today as we report strong fourth quarter and fiscal 2008 financial results. This is especially satisfying considering the current overall economic climate.

Our fourth quarter results were nicely above the outlook we provided last quarter. Revenue for the quarter was $18.3 million, up 8% over the prior year's fourth quarter. Royalty recoveries were $2.1 million, down $2.5 million from last year's fourth quarter. Our core revenue growth rate, excluding recoveries was 32%.

Earnings per diluted share were $0.16, which include the $1.1 million charge for in-process R&D related to our acquisition of Neural Audio. This one time charge reduced fourth quarter and full year earnings per diluted share by $0.04 net of tax.

The fourth quarter wraps up a strong 2008 for DTS where we reported a 14% increase in revenues. Excluding royalty recoveries, revenue increased 20% year-over-year. Income from continuing operations for the year was $0.52 per diluted share, including the $0.04 in-process R&D charge.

Blu-ray product in all categories, game consoles, stand-alone players and PCs accounted for 22% of revenue in the fourth quarter, nearly four times greater in dollar terms than the same period in 2007. We are encouraged by a number of positive data points on Blu-ray. Holiday results illustrate that consumer demand for Blu-ray products is increasing as prices fall. With further reductions anticipated in the cost of players, we expect retail price points to continue to decline.

Additionally, PC OEMs have begun to sell Blu-ray drive upgrades for less than $100 for a reader and $200 for read/write capability. Importantly, sales of Blu-ray content also have been accelerating. For example, it's been reported that the Blu-ray release of the Dark Knight sold 600,000 copies in its first day.

The reality of Blu-ray adoption is that it's happening much faster than the DVD video cycle did two years into its start. More than 4 million stand-alone Blu-ray players have been sold to-date compared to just to 1.5 million players in the second year of DVD player sales. When you factor in sales of Blu-ray-enabled game consoles and PCs, the story is even stronger.

As a reminder, stand-alone players, game consoles and PCs are nearly all incremental growth opportunities for DTS, since our penetration rate in these categories was low, due to our optional status in the DVD format. Given our mandatory position in Blu-ray, DTS has the potential for major revenue upside even if the penetration of Blu-ray comes in at the lower end of long-term market forecasts.

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