EDITOR'S NOTE: This story has been changed from the original to correct the company's revenue last year, and add an explanation about why revenue related to an acquisition was not recorded in the third quarter.
Calabasas company DTS Inc., once known for making movie theater sound systems, hit on another formula for success during the last decade when it switched to audio technology for Blu-ray disc players. Now, the company is attempting a second transformation around mobile devices and Internet-connected televisions.
But it’s off to a rough start.
That was evidenced last week, when shares plummeted after a disappointing third quarter earnings report. DTS on Nov. 8 posted a larger than expected $19 million loss and lowered revenue guidance for next year. Investors fled and the stock fell 29 percent to $14.80 for the week ended Nov. 14, making it the biggest loser on the LABJ Stock Index. More than $100 million in market capitalization was wiped out during the week as shares hit a three-and-a-half-year low.
“Physical media is going away,” said Andy Hargreaves, an analyst at Pacific Crest Securities LLC in Portland, Ore. “They’ve been trying to offset that with smart TVs, smartphones and tablets, but it hasn’t worked as well as they’d hoped.”
This quarter’s loss marks the largest since the company went public in 2003. Executives partly blamed an overall slowdown in the consumer electronics industry, lowering revenue guidance to between $140 million and $150 million, down from $160 million to $175 million.
The company also attributed the loss to costs associated with investments in new technology as it transitions to streaming devices. Most notably, the company spent $148 million earlier this year in its largest-ever acquisition to purchase SRS Labs of Santa Ana, which specializes in enhancing audio output from mobile devices.
Much of those costs were recorded in the third quarter. The company said that certain revenue related to the acquisition was not recorded in the quarter due to accounting rules.
But during a Nov. 8 earnings call, Chief Executive Jon Kirchner said the company was on the right path.
“We continue to believe that our strategy is the right one,” he said. “The long-term drivers of our business, namely the acceleration towards cloud-based entertainment delivery and the proliferation of network connected devices, remain very much intact.”
The company declined to comment for this article.
It’s not the first time the company has remade itself. DTS launched in the early 1990s by supplying digital sound systems to movie theaters linked to the release of the blockbuster film “Jurassic Park.” The company, then known as Digital Theater Systems Inc., began shifting to home theater systems in the last decade, signing an agreement in 2004 to supply audio coding technology on all Blu-ray players.
In 2005, it changed its name to DTS Inc., and in 2008, sold off its digital cinema business. Royalties from Blu-ray sales poured in, helping boost the company’s revenue from $50 million in 2006 to $97 million last year.
But as online streaming has risen, Blu-ray sales growth has slowed; the company’s Blu-ray revenues in the most recent quarter were flat compared with last year.
The shift has led to a steady erosion in shares of DTS, which have fallen 47 percent over the past year. That outpaces a 27 percent decline in an average of publicly traded sound technology companies tracked by Bloomberg News.
DTS has had to look to streaming devices, which Kirchner said earlier this month “will be our largest revenue category going forward.” Nearly 30 percent of the company’s revenues in the third quarter were from selling audio technology to Internet-connected device makers.
Analysts agree that the growth opportunities are huge, but there are several factors working against DTS.
Currently, there isn’t much consumer demand for high-quality audio on mobile devices, with only a small percentage of device makers opting to build in the kind of technology DTS offers. What’s more, royalties from the sales of such devices are lower than that from Blu-ray sales. Analysts also say DTS lags its chief competitor in the space, San Francisco’s Dolby Laboratories Inc.
Some analysts, such as Hargreaves, say the challenges will be difficult for DTS to overcome, but others are more optimistic. John Bright, director at Avondale Partners LLC in Nashville, said the company would succeed despite a bumpy transition.
“DTS is going to play a very significant role (in mobile device audio),” he said. “In the long term, if you and or I want to watch a video on our tablet or our smartphone, we are going to want to have quality sound. We may not want it today, but tomorrow we’re going to want it.”
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