Zacks_Analysts' Blog : DTS Beats; Reaffirms Guidance - Analyst Blog

DTS Inc. (DTSI) reported first quarter 2011 earnings per share (EPS) of 33 cents, beating the Zacks Consensus Estimate by 2 cents. The upside in earnings was driven by strong revenue growth in the quarter.

Based on the strong first quarter results, DTS reiterated its fiscal 2011 guidance.

Operational Performance

EPS, including stock-based compensation but excluding one-time items, grew 43.5% year over year from 23 cents.

Net income was $5.9 million, up 41.6% year over year. This excludes $0.3 million related to amortization and $0.1 million related to tax impact, but includes stock-based compensation charges of $1.9 million. Net margin expanded 90 basis points (bps) in the quarter to 22.0%, due to higher operating margin.

Operating income (excluding amortization but including stock-based compensation) increased 42.4% year over year to $9.7 million. Operating margin expanded 480 bps in the reported quarter, driven by a 70-bp increase in gross margin to 99.9%.

Strong gross margin expansion fully offset higher selling, general and administrative expense (up 12.4% year over year) and research and development expense (up 32.0% year over year).

Revenue

Revenue increased 23.2% year over year to $26.8 million, edging past the Zacks Consensus Estimate of $26.0 million. The growth was primarily driven by increased adoption of Blu-ray and network connected entertainment products, as well as a solid contribution from the automobile market.

Balance Sheet

As of March 31, 2011, cash and short-term investments were $102.0 million compared with $96.1 million at the end of December 31, 2010. The company had no long-term debt at the end of the first quarter. Cash flow from operations was $3.9 million compared with $15.4 million in the previous quarter.

Outlook

For fiscal 2011, DTS continues to expect revenues in the range of $100.0 million to $105.0 million, operating margins in the low-40’s range and EPS on a non-GAAP basis in the $1.40 to $1.49 range.

Recommendation

We maintain our Neutral rating on a long-term basis (6-12 months). We believe DTS will gain significant 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.

Moreover, the company’s existing partnerships with the Internet Protocol television (IPTV) operators in the broadcast market will boost top-line growth and expand business going forward.

However, DTS continues to face stiff competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately held THX limited.

Currently, DTS has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).