DTS Reports First-Quarter Results Above Street With Royalty Recovery

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DTS reported first-quarter results after the markets closed on Monday, May 12. Revenue of $36.8 million (up 13% year-over-year) was above consensus expectations of $35.3 million (due in part to a $3.7 million royalty recovery), and non-GAAP EPS of $0.36 were $0.01 above consensus.

Management reaffirmed its outlook for 2014 on both the top and bottom lines. On the previous earnings call, DTS noted that its 2014 guidance was more cautious than in previous years because of uncertainty around the timing of certain product shipments.

DTS repurchased 374,200 shares during the quarter and has roughly 1.6 million shares remaining on its 2.0 million share repurchase program announced last quarter.

Revenue from Blu-ray devices was up 27% year-over-year, driven by the successful launch of PlayStation4 and Xbox One. Management reiterated that it expects modest growth in Blu-ray revenue for the full year from the new game console cycle.

Networkconnected device revenue was down 7% year-over-year, primarily due to a decline in revenue from connected TVs (down 20% year-over-year). Management attributed the decline to several contract renewals slipping out of the first quarter, but it believes it is just a timing issue and expects the overall TV business to grow for full year 2014. Partly offsetting the decline in connected TVs, revenue from PCs increased 70% year-over-year and management noted it reached an agreement with Hewlett- Packard (HPQ $32.82) to incorporate DTS audio processing technologies into its product lines (including support for Play-Fi). See exhibit 1, on the following page, for a summary of year-over-growth and percentage-of-total revenue by segment.

At $18.00 after hours, shares trade at a 2014 EV-to-adjusted-EBITDA multiple of 7.2 times and a 2014 non-GAAP P/E multiple of 13.7 times. If DTS continues to demonstrate growth in network-connected devices, we believe investors will refocus their attention on the long-term opportunity of this market, driving upside from the current price.

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