DTS, Inc. (DTSI)

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Q1 2013 Earnings Call

May 08, 2013 4:30 pm ET


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


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

Paul Coster - JP Morgan Chase & Co, Research Division

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

James Medvedeff

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



Good day, ladies and gentlemen. Thank you for standing by. Welcome to the DTS First Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, May 8, 2013. And 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 first quarter 2013 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 discuss 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.

In addition, management believes that due to the tax rate experienced in Q1, which is expected to be temporary, the appropriate measures for the company's effective tax rate is to impute a normalized 40% effective tax rate on the pretax earnings of the company. 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 any unauthorized recording of this webcast is not permitted.

Now, I will turn the call over to Mel.

Melvin L. Flanigan

Thanks, Anne, and good afternoon, everyone.

I'll start by reviewing the quarter's financial results and then discuss our 2013 outlook. Then I'll turn the call over to Jon for his comments on our performance during the quarter and how we will continue to build strategic momentum throughout the year.

The first quarter was a solid start to the year and overall, results were in line with our expectations. Revenues were $32.7 million, up 33% year-over-year excluding royalty recoveries and up 10% sequentially.

Strong momentum continues in our network-connected business with revenues up 246% year-over-year and 37%, sequentially.

Network-connected revenues represented our largest revenue contributor by far, accounting for over 45% of total revenue, consistent with what we've said previously about our expectations for this business.

We expect that network-connected will continue to increase as a percentage of total revenue and be our largest revenue contributor going forward. These impressive results in network-connected were driven by the connected TV, PC and mobile segments, which were up 448%, 345% and 98%, respectively on a year-over-year basis. Jon will share with you some additional detail about those segments in just a few minutes.

Blu-ray revenue was down 27% year-over-year and 7% sequentially, contributing over 20% of total revenue in the first quarter.

In the near term, we expect a modest uptick in unit volumes and Blu-ray revenues in conjunction with the next game console cycle later this year. Thereafter, we believe Blu-ray will remain important to DTS and the industry for some time to come, but since we don't see any compelling growth drivers in this segment, it will primarily provide an attractive source of profit and cash flow as our business continues to accelerate in the network-connected space.

Also consistent with our expectations, home A/V was down 16% year-over-year, primarily due to the continuing shift from DVD players to network-connected devices. The home A/V category constituted nearly 15% of revenue in the first quarter, representing the third largest contributor to total revenue.

Our automotive and broadcast businesses were both up modestly year-over-year, representing a little over 10% and under 5% of revenue, respectively, for the quarter.

Non-GAAP gross margin was nearly 100% for the first quarter. Our GAAP gross margin was 93%, down from 99% a year ago, due primarily to the amortization of purchased intangibles. On a non-GAAP basis, operating expenses for the quarter were $25.7 million, up from $16.7 million in the prior year's first quarter.

On a GAAP basis, our operating expenses totaled $29.4 million compared to $19.8 million in the first quarter of 2012. The increase was largely driven by increased headcount and expenses related to the SRS and Phorus acquisitions as we expand our network-connected business.

As a reminder, we achieved the level of operating cost synergies that we had targeted in connection with these acquisitions.

Non-GAAP SG&A was $18.8 million in the quarter, up 48% from $12.7 million in the first quarter of 2012. Non-GAAP R&D was $6.9 million in Q1, up from $4 million in the prior year's first quarter. This reflects our continued investment in a robust product pipeline and product development activities for innovative new offerings such as Play-Fi and Headphone:X.

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