DTS Inc. (DTSI) reported fourth quarter 2010 earnings per share of 32 cents, marginally beating the Zacks Consensus Estimate of 31 cents. Earnings, including stock-based compensation but excluding one-time items, grew 23.1% year over year from 26 cents. The year-over-year growth was driven by accelerating revenue.
Revenue
Revenue increased 26.6% year over year to $26.9 million, marginally surpassing the Zacks Consensus Estimate of $25.0 million. The growth was primarily driven by a strong performance in the Blu-ray market.
DTS continues to experience strong contributions from markets that serve network-connected consumers, including television, personal computers and smartphones.
Operational Performance
Gross profit escalated 27.5% year over year to $26.5 million and gross margin inched up to 98.7% from 98.0% in the prior-year quarter. This was primarily due to lower cost of sales.
Total operating expenses were up 30.4% year over year to $16.6 million, due to higher selling, general & administrative expenses and research & development expenses. The majority of the increase reflects expansion of sales and marketing investments.
Although operating profit increased 24.5% year over year to $10.6 million in the quarter, operating margin declined 70 basis points to 39.3% in the fourth quarter of 2010. Operating profit includes stock-based compensation, but excludes one-time charges.
As of December 31, 2010, cash and short-term investments were $96.1 million compared with $84.3 million at the end of September 30, 2010. The company had no long-term debt at the end of the fourth quarter.Cash flow from operations was $15.4 million compared with a cash flow of $8.4 million in the previous quarter.
Outlook
For fiscal 2011, DTS expects revenues in the range of $100.0 million to $105.0 million, operating margins in the lower 40’s and earnings per share on a non-GAAP basis in the range of $1.40 to $1.49.
Given the robust growth in Blu-ray and connected devices, management anticipates worldwide Blu-ray units to be in the range of 30 million to 35 million, game consoles in the range of 13 million to 14 million and PCs in the range of 8 million to 10 million in fiscal 2011.
DTS expects 15% to 20% of 2011 revenue to come from new network-connected markets such as televisions, smartphones, digital media players, PCs (DTS Premium Suite, DTS Ultra PC, Envelo), other virtual audio applications. Home AV, Broadcast & Car market is expected to be flat with royalty recoveries anticipated around $4.0 million in 2011.
Our Take
We maintain our Neutral rating on a long-term basis (6-12 months). We believe DTS continues to gain market share, riding on its strong product portfolio, increasing online availability and accelerated expansion of the DTS technology into new markets, such as smartphones, portable devices and digital media players.
However, DTS continues to face stiff competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately held THX limited.
Moreover, DTS is expected to benefit from new partnerships with Panasonic Corp. (PC), Huawei, Freebox and LG, all of which closed in the fourth quarter. DTS also partnered with Lenovo to offer its technology in Lenovo’s new digital home products scheduled to be launched in China in 2011.
Currently, DTS has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).
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