Foolish Forecast: DTS Leaves Theaters, Goes Home

The No. 2 name in sound technology, DTS (Nasdaq: DTSI), will report first-quarter 2007 financial results on Thursday, May 10.

What analysts say:

• Buy, sell, or waffle? With 11 analysts covering DTS, five rate it a strong buy, five say "hold," and one analyst is giving it some static with a sell.
• Revenues. Despite the general bullishness, revenues are expected to tumble 53% to $13 million as the company exits the digital cinema business.
• Earnings. Profits are also expected to quiet down, falling 71% to $0.11 per share.

What management says:
After more than a decade of building DTS into a multichannel digital-sound competitor to industry leader Dolby (NYSE: DLB), the company formerly called Digital Theater Systems has decided to abandon the digital cinema business in favor of the greater growth prospects inherent in consumer electronics. President and CEO Jon Kirchner has noted that this segment is in the midst of a major transition to high-definition technology, for which DTS (and Dolby) will be considered "standard" equipment. "DTS will continue as a business purely focused on licensing intellectual property and branded technologies to consumer electronics, integrated circuit, and content providers. We believe this business is highly attractive due to its potential for great scalability and high margins."

What management does:
While the reorganization knocked down operating and net margins, the company eventually expects better profits, since it will simply be focusing on licensing its technology. Margins are very high in such a streamlined business, and management expects gross margins in the 97% to 98% range, with operating margins around 20% or so. That would reflect a much smaller business carrying the entire corporate cost structure.

Margin	12/05	03/06	06/06	09/06	12/06
Gross	75.2%	74%	73.8%	73.5%	75.8%
Operating	15.8%	18.4%	15.9%	12.3%	9.7%
Net	10.5%	13.9%	14.1%	11.9%	3.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While DTS is seen as something of a "me-too" company in comparison to Dolby -- maybe more of an "oh yeah" one, as in, "oh yeah, there's another logo on my sound equipment" -- it's actually very well positioned to grow from its smaller, more focused base. Like Dolby, it has previously enjoyed healthy expansion as a result of DVD sales, and when (as opposed to if) a standard is finally developed for next-generation players, it will be there as part of the sound standards incorporated by manufacturers. Similarly, the switch to HD television tuners will include DTS right alongside Dolby. Since that mandated change to all TV tuners sold took effect March 1, expect DTS to report a decent earnings picture -- perhaps surprising analysts, even -- as much as Dolby did. Consumer electronics have served Dolby well, and you can expect DTS to walk in lockstep with its rival in the consumer electronics arena.

Further 5.1-channel Foolishness:

• No Red Light District for Dolby
• DTS Sounds Scratchy
• Foolish Fundamentals: Margins

DTS has earned a two-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Dolby is a three-time recommendation of Motley Fool Stock Advisor. A 30-day trial subscription lets you sample the sweet sounds of David and Tom Gardner's flagship investing service, which is beating the market by 40 percentage points.

Fool contributor Rich Duprey owns shares of Dolby, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.