DTSI

DTS, Inc. (DTSI)

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DTS (DTSI)

Q2 2013 Earnings Call

August 15, 2013 5:00 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

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

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

James Medvedeff - 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 Second Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 15, 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 second quarter 2013 financial results. Joining me on the call today are Jon Kirchner, Chairman and CEO; Mel Flanigan, CFO; and Brian Towne, COO. 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 Factors 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, and 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 dts.com. And 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. Hopefully, you've all had a chance to review our results for the second quarter. We filed our 10-Q yesterday after filing a Form 12b-25 notification with the SEC. To give you some context around the timing, we have delayed our filing while we work to finalize the accounting related to a $2.9 million royalty recovery received by DTS under an SRS license. This particular royalty recovery, which resulted from a recent audit by DTS, has been reflected as an adjustment to goodwill and receivables as of the acquisition date. With the SRS purchase accounting now closed, any future royalty recoveries will be booked as revenue, consistent with our historical practice.

And now on to the results. We had a solid second quarter, and results for the first half of the year were in line with our expectations. Revenue for the quarter was $27.2 million, up 25% year-over-year and down 17% sequentially. Royalty recoveries do not have a meaningful impact on revenues in either period. Our network-connected business continues its momentum and was the most significant driver of growth in the quarter. Network-connected revenue was up 100% year-over-year, down 13% sequentially due in part to seasonality, and represented nearly 50% of total revenue, all consistent with our expectations for the business. Within network-connected, the growth is a result of strong gains in mobile, PC and network-connected TVs, which were up 318%, 448% and 114%, respectively, on a year-over-year basis. Jon will provide more color on those results and what to expect as we continue to grow.

Blu-ray revenue was down 10% year-to-year and 32% sequentially, accounting for just under 20% of total revenue in the quarter. Within Blu-ray, game consoles were down 36% in front of a new product cycle. Stand-alone players were down 7%, and Blu-ray PC was up 3%. While we expect to see a slight pickup in Blu-ray coming from the next game console cycle later this year, we expect network-connected revenue to continue to be the most significant revenue contributor going forward.

As anticipated, home A/V was down 19% year-to-year as the market continues to experience declines in DVD-based products for home theater in a box systems, reflecting the consumers' shift towards Blu-ray and connected devices. The home A/V business represented just under 15% of total revenue.

Broadcast was up slightly, while automotive remained relatively flat on a year-over-year basis. Broadcast and automotive represented less than 5% and 15%, respectively, of total revenue for the second quarter.

Non-GAAP gross margin was 99%, down only slightly from a year ago. Our GAAP gross margin was 91% compared to 99% in the second quarter of 2012. The change is due primarily to amortization of purchased intangibles in the 2013 numbers.

GAAP operating expenses totaled $26.6 million for the quarter compared to $21.5 million in the second quarter of 2012. On a non-GAAP basis, operating expenses for the quarter were $23.4 million, up from $16.2 million in the prior year's second quarter. Increased operating expenses are primarily attributable to the inclusion in 2013 of ongoing operating costs related to the acquisitions of SRS and Phorus in July of 2012.

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