DTSI

DTS, Inc. (DTSI)

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DTS (DTSI)

Q4 2012 Earnings Call

March 11, 2013 4:30 pm ET

Executives

Anne McGuinness

Melvin L. Flanigan - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Jon E. Kirchner - Chairman and Chief Executive Officer

Brian D. Towne - Chief Operating Officer and Executive Vice President

Analysts

Paul Coster - JP Morgan Chase & Co, Research Division

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

James C. Goss - Barrington Research Associates, Inc., Research Division

Robert W. Stone - Cowen and Company, LLC, Research Division

Steven B. Frankel - Dougherty & Company LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the DTS Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Monday, March 11, 2013. I would now like to turn the conference over to Anne McGuinness of DTS Investor Relations. Anne, please go ahead.

Anne McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report fourth quarter and fiscal year 2012 financial results for DTS. Joining me on the call today are Jon Kirchner, Chairman and CEO; Mel Flanigan, CFO; and Brian Towne, COO of DTS.

Before we begin, I would like to provide 2 reminders. First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs and therefore, subject to risks, uncertainties and changes in circumstances. Please refer to the Risk Factor section in our SEC filings, including our most recent forms 10-K and 10-Q for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discussed today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call.

Second, we refer to certain non-GAAP financial measures, which generally exclude charges for stock-based compensation, amortization of intangibles and certain acquisition and integration related expenses and the related tax effects, if any. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the Investor Relations section of our website. A recording of this conference call will be available on our Investor Relations website at www.dts.com, and unauthorized recording of this webcast is not permitted.

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

Melvin L. Flanigan

Thanks, Anne, and good afternoon, everyone. I'll review the financials and our 2013 outlook, then turn the call over to Jon for his strategic comments and observations on how we're positioned coming off a very productive and transformational 2012.

Revenues in the fourth quarter came in at $29.8 million, up 9% year-over-year and 34% sequentially. Full year revenues were $100.6 million, up 3% over the prior year. We continue to be pleased with the performance of our network-connected business, which grew 86% in the fourth quarter on a year-over-year basis.

Similar to last quarter, we saw impressive year-over-year growth rates in several segments of this business, with connected PCs up 259%, mobile up 126% and network-connected TVs up 86% in the fourth quarter. Consistent with our expectations, the network-connected business was the largest contributor to total revenue for the quarter at nearly 40%.

On full year basis, network-connected was up 58% year-over-year and represented just under 30% of total revenue. As we've said previously, we expect this business to continue to increase as a percentage of total revenue and to be our largest revenue contributor going forward.

As expected, SRS contributed revenues in the $7 million range, most of which falls into the network-connected markets category. Importantly, DTS and SRS technologies are now offered as fully integrated solutions and thus, we will not be providing separate SRS detail going forward. I'm also pleased to report that we fully realized our target synergy goals.

Blu-ray revenue for the quarter was up 19% sequentially as a result of typical seasonality, although down 30% year-to-year due to a stronger Q4 2011 holiday season and lower ASPs due to a changing product mix. We began to see the configuration of players change in the fourth quarter as Blu-ray players mature into the lower ends of the mass market. Historically, ASPs peak north of $0.75 per unit and are now, depending on the product mix in any particular quarter, expected to average in the lower 60s, still well within the $0.50 to $0.75 range we've previously discussed.

Overall, Blu-ray contributed north of 25% of total revenue for the fourth quarter and just over 30% of total revenue for the year. Blu-ray is still the gold standard for quality. We believe it will remain relevant within digital video entertainment as the demand for high-end, higher-resolution content continues to increase.

For example, Blu-ray Disc sales were up 10% in 2012, and the catalog of titles continues to expand. Also, keep in mind that Blu-ray enables us to maintain a meaningful revenue stream with low marginal expense.

Home A/V was down 9% for both the quarter and the full year as consumers continue to transition from DVD to Blu-ray and network-connected devices. The Home A/V category constituted just under 20% of total revenue for the quarter and just over 20% of total revenue for the year.

Q4 revenues for the automotive business saw relatively modest year-over-year growth of 2% for the quarter and 7% for the year. Automotive contributed nearly 15% of revenue for both the quarter and the year. This segment remains quite interesting to us as the automotive entertainment experience is increasingly integrated with mobile devices and cloud-based entertainment delivery. This opens the door for DTS to deploy a wider range of our audio solutions, which we expect will drive further growth in the space going forward.

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