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DTS to Sell Cinema and Digital Images Business

DTS Takes Steps to Improve Future Performance

DTS, Inc. (Nasdaq:DTSI) today announced that its Board of Directors approved a plan to sell its cinema and digital images business in order to focus exclusively on licensing branded entertainment technology to the large and evolving audio, game console, PC, portable and broadcast markets. The sales process has begun and is expected to conclude later in 2007. The cinema and digital images business, now known as “DTS Digital Cinema,” will focus on the potentially large and emerging market for digital cinema products and services.

In addition, the Company reported financial results for the fourth quarter and fiscal year ended December 31, 2006.

In the consumer business, the Company took steps during the fourth quarter to improve future performance, including the restructuring of its international licensing and DTS Entertainment activities and the buy-out of a commission agreement related to licensing intellectual property in the China market.

For fiscal year 2006, DTS reported total revenue of $78.3 million and net income of $3.0 million, or $0.16 per diluted share. This compares to total revenue of $75.3 million and net income of $7.9 million, or $0.43 per diluted share for fiscal year 2005. Included in the 2006 results were:

  • $3.6 million, or $0.12 per share net of tax, in stock-based compensation expenses under FAS 123R;
  • $3.0 million, or $0.16 per share net of tax, in restructuring costs to buy out a commission agreement for licensing intellectual property in the China market;
  • $0.8 million, or $0.03 per share net of tax, in restructuring costs related to the write down of DTS Entertainment inventory and other assets; and
  • $1.1 million, or $0.06 per share, in non-deductible costs related to the separation of the DTS Digital Cinema business; and
  • $0.3 million, or $0.01 per share net of tax, in Avica Technology Corporation expenses.

Excluding the above charges, Non-GAAP net income for 2006 would have been $10.0 million, or $0.54 per share.

For the fourth quarter of 2006, DTS reported revenue of $17.5 million and a net loss of $5.0 million, or $0.28 per share. This compares to revenue of $17.9 million and net income of $1.3 million, or $0.07 per diluted share, reported in the fourth quarter of 2005. Included in the fourth quarter 2006 results were $1.0 million, or $0.04 per share net of tax, in FAS 123R stock based compensation expenses, $3.8 million, or $0.20 per share net of tax, in restructuring costs, $0.7 million, or $0.04 per share, in non-deductible separation costs, and $0.3 million, or $0.01 per share net of tax, in Avica expenses.

Excluding the above charges, Non-GAAP net income for the fourth quarter of 2006 would have been $0.1 million, or $0.01 per share.

“Revenue in the fourth quarter of 2006 was lower than expected and, when taken in conjunction with separation and restructuring costs as well as the inventory write-down, our earnings performance was below our expectations,” commented Jon Kirchner, President and CEO. “Importantly, however, we have begun the process of divesting our DTS Digital Cinema business and are taking steps to better position the consumer business to capitalize on the expected acceleration of the high definition cycle.”

“The fourth quarter wraps up a challenging but productive year for DTS where we took significant steps toward evolving into a highly focused, scalable IP-centric consumer licensing business. As we enter 2007, we are at the beginning of what we believe will be a major transition to high-definition delivery, which we expect will result in significant revenue and profit growth over the next five years,” concluded Kirchner.

Included in DTS’ 2006 results and on its December 31, 2006 balance sheet is the impact of consolidating the results and financial position of Avica Technology Corporation. The Company’s license and option agreements have been interpreted to give DTS control over Avica’s activities and income streams, which necessitates consolidation under GAAP. This resulted in an increase in DTS’ consolidated assets of $3.6 million, liabilities of $3.9 million and an increase in consolidated expenses of $0.3 million.

Business Outlook
Beginning in the first quarter of 2007, management expects to report financial results related to its DTS Digital Cinema business as “discontinued operations” and is only providing an outlook for its consumer business in 2007.

For the consumer business in 2007:

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  • Management expects revenue of $53 to $58 million for the year, including approximately $4 million in royalty recoveries. Year-over-year, royalty recoveries are expected to decline by more than $7 million in 2007. Excluding royalty recoveries, licensing growth would be in the range of 26% to 38% in 2007.
  • Management expects operating margins of approximately 20% in 2007. Operating margins are expected to increase in future years in conjunction with the acceleration of the high definition optical media cycle. Operating margins are targeted at or above 50% within the next five years.
  • Management expects EPS from continuing operations of $0.40 to $0.47, on an assumed share count of 18.5 million and a tax rate of 40%.

About DTS
DTS, Inc. (Nasdaq:DTSI) is a digital technology company dedicated to delivering the ultimate entertainment experience. DTS decoders are in virtually every major brand of 5.1-channel surround processor, and there are hundreds of millions of DTS-licensed consumer electronics products available worldwide. A pioneer in multi-channel audio, DTS technology is in home theatre, car audio, PC and game console products, as well as DVD-Video, Surround Music and DVD-ROM software. DTS audio products are featured on more than 28,000 motion picture screens worldwide. Additionally, DTS provides imaging technology and services for the motion picture industry; DTS Digital Images is a wholly-owned subsidiary of DTS and an industry leader in image enhancement and restoration. Founded in 1993, DTS is headquartered in Agoura Hills, California and has offices in Canada, China, France, Hong Kong, Ireland, Italy, Japan, and the United Kingdom. For further information, please visit http://www.dts.com.

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