DTSI

DTS, Inc. (DTSI)

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DTS, Inc. (DTSI)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Ann McGuinness - Investor Relations

Jon E. Kirchner - President, Chief Executive Officer

Melvin L. Flanigan - Chief Financial Officer

Analysts

Ralph Schackart - William Blair & Company, L.L.C.

Brian Thackray - Deutsche Bank Securities

Barbara Coffey - Kaufman Bros.

Lloyd Walmsley - Thomas Weisel Partners

Presentation

Operator

Welcome to the DTS second quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Ann McGuinness of Investor Relations.

Ann McGuinness

Joining me on the call today are Jon Kirchner, President and CEO, and Mel Flanigan, CFO of DTS.

Before we begin, let me re-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 involve 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 planned, expect, believe, strategy, opportunity, anticipate 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, cost and attention attendant to the divestiture of the Non-Consumer business, the transition to next generation optical drives and consumer adoption of such technology, the rapidly changing and competitive nature of the digital audio consumer electronics and entertainment market, 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 integrated 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 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 businesses 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. Because the Digital Cinema and Images businesses were sold during the quarter, all assets and liabilities related to those businesses has been removed from the consolidated balance sheet as of June 30, 2008.

All financial results discussed in this call will reflect continuing operations unless otherwise noted.

Now I will turn this over to Jon.

Jon E. Kirchner

We posted solid revenue again this quarter. Revenue for the second quarter was $12.8 million and earnings per diluted share were $0.07. Blu-ray products accounted for 11% of our revenue in the second quarter, down from 21% in the first quarter of 2008 and down slightly from the 12% in the second quarter of 2007.

As we mentioned on last quarter's call, some manufacturers are moving to upgrade their Blu-ray products to either add features or reduce costs or both. These upgrades are important as manufacturers now need to produce feature-rich products and at competitive prices. These product transitions resulted in relatively light player production at certain manufacturers. For the first half of the year, though, Blu-ray and HD-DVD products still accounted for over 16% of our revenue, essentially in line with our expectations for the year.

We are now beginning to see increased player availability at retail, with some at prices below $300 and as low as $339 for major name brands. We are also starting to see some Blu-ray Disc Profile 2.0 or BD-Live Interactive capable players, with DTS 7.1 Master Audio selling for less than $400. In June, WalMart ran a special promotion, a $100 gift card with the purchase of a Blu-ray player, making the purchase price effectively $199 for some models. We are also seeing advertisements for high-def TV and Blu-ray player bundles.

On the content side, retailers are increasing their in-store footprint available for Blu-ray titles and have also begun to increase promotional activities to support the Blu-ray format. There are currently more than 600 Blu-ray titles available.

Across the board we have seen an increasing number of movie titles available in the Blu-ray format and at better price points, with new releases available at prices as low as $15.99 and older titles as low as $9.99. Declining prices and greater title availability should help stimulate further demand.

In the PC space, the adoption of Blu-ray by some PC manufacturers is progressing more quickly than had been anticipated, in part because prices have continued to decline for Blu-ray drive components. We understand that the price to implement a Blu-ray drive into PCs has now dropped to below $100. Today there are more than 12 different Blu-ray drives available and more than 40 PC models with Blu-ray capability. Supporting the increasing number of product options is a growing amount of PC advertising featuring Blu-ray, along with declining end-user prices. For example, you can now purchase a Dell desktop PC equipped with Blu-ray drive and integrated DTS 7.1 Master Audio for under $800.

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