Sound technology company DTS (NASDAQ:DTSI) gave the market what it wanted to hear last week: rising revenues, huge profit margins, and a smaller, more focused business. Shares jumped 10%, even though management also said it would delay filing its reports with the SEC because of the complexity of exiting its digital cinema business.
No matter, the core operating business that's left -- licensing its digital sound technology -- performed as expected and should allow DTS to broadcast revenues and earnings in a much more meaningful way. It's just funny that a company that began as Digital Theater Systems is opting out of the digital cinema industry -- expecting to close a deal in the second half of the year.
That, of course, leaves Dolby Labs (NYSE:DLB) as one of the premier digital cinema providers. The two technologies will be considered standard sound formats on a host of consumer applications, from high-definition DVD players to new digital TV tuners, car audio systems to game consoles.
Licensing is a fat profits business and DTS will be enjoying the sweet sound of its technology. That's how it was able to post gross margins of 98% on revenues of $12.6 million. While it had made nearly $29 million a year ago, it excluded its digital cinema revenues from its continuing operations. That means, however, that revenues came in a little shy of the $13 million expected, though it reiterated its guidance for the year of as much as $58 million in revenues and profits of $0.47 per share.
The quarterly performance shows what the next generation of technology can produce. HD-DVD and Blu-Ray disk formats contributed more than 5% to revenues and should generate more going forward, as manufacturers start bringing more players to market.
Much as Dolby has experienced a slowing in the standard DVD market -- the industry is mature and adoption of the next generation hardware has been delayed as the two formats fight it out for supremacy -- DTS also saw a slide in its home AV segment. It'll be some time yet before hi-def DVD players account for the lion's share of revenues the way standard DVD players did.
In the interim, personal computers and game consoles are strong markets, and DTS believes that incorporating its technology into car stereo systems will drive growth higher. Its digital multi-channel sound systems are already incorporated in some models of Acura, BMW (OTCBB: BAMXF.PK), Honda (NYSE:HMC), and Toyota (NYSE:TM), among others. The second half of the year or the early part of 2008 should see these areas contributing more heavily to results. By then DTS will also no longer have the drag of the digital cinema business to hold it back.
As one half of the typical technology duo incorporated into virtually all of our sound experiences, it sounds like investors can now more fully enjoy this leaner and still very profitable company.
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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.
