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DTS, Inc. (NASDAQ:DTSI)

Q4 2008 Earnings Call

February 26, 2009 4:30 pm ET

Executives

Ann McGuinness - IR

Jon Kirchner - President and CEO

Mel Flanigan - EVP, Finance and CFO

Analysts

Ralph Schackart - William Blair & Company

Mike Olson - Piper Jaffray

Paul Coster - JPMorgan

Tom Kucera - Avondale Partners

Jim Goss - Barrington Research

John Vinh - Collins Stewart

Barbara Coffey - Kaufman Brothers

Brian Thackray - Deutsche Bank

Rob Stone - Cowen and Company

Jeffery DeCowerith - Dougherty and Co

Operator

Welcome to the DTS fourth quarter and fiscal year 2008 conference call. During today's presentation all parties will be in listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, February 26th, 2009.

I would now like to turn the conference over to Ann McGuinness with DTS Investor Relations. Please go ahead.

Ann McGuinness

Good afternoon, ladies and gentlemen. Thanks for joining us as we report fourth quarter 2008 and fiscal 2008 financial results for DTS. Joining me on the call today are Jon Kirchner, President and CEO; and Mel Flanigan. CFO of DTS.

Before we begin, let me remind you that during this conference call management may make forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize, or prove correct, could cause DTS's actual results to differ materially from those expressed in or implied by such forward-looking statements.

All statements other than statements of historical fact are forward-looking statements, including statements containing the words plan, expect, believe, anticipate, and similar expressions that look to future events performance. These statements may include, among others, plans, strategies and objectives of management for future operations; any statements regarding proposed new product, services or developments; any statements regarding future financial results or operating performance or economic conditions. Statements of beliefs and any statements of assumptions underlying any of the foregoing.

Factors that could cause, our actual results to differ materially from the forward-looking statements made during this call are more fully described in our most recent filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2008, which are available at www.sec.gov. Any forward-looking statements made during this conference are based on current expectations and projections. The company does not intend to update these forward-looking statements to reflect events or circumstances arising after this call.

Again, this quarter the company is reporting the results of its consumer business as continuing operations and reporting the activities of the digital cinema and digital images businesses, it sold during second quarter of 2008 as discontinued operations. Income or loss from discontinued operations net of tax will appear as a single item below income from continuing operations on the company's statement of operations. All financial results discussed in this call will reflect continuing operations unless otherwise noted.

Now I will turn the call over to Jon. Please go ahead, Jon.

Jon Kirchner

Thanks Anna. Thanks to all of you for joining us today as we report strong fourth quarter and fiscal 2008 financial results. This is especially satisfying considering the current overall economic climate.

Our fourth quarter results were nicely above the outlook we provided last quarter. Revenue for the quarter was $18.3 million, up 8% over the prior year's fourth quarter. Royalty recoveries were $2.1 million, down $2.5 million from last year's fourth quarter. Our core revenue growth rate, excluding recoveries was 32%.

Earnings per diluted share were $0.16, which include the $1.1 million charge for in-process R&D related to our acquisition of Neural Audio. This one time charge reduced fourth quarter and full year earnings per diluted share by $0.04 net of tax.

The fourth quarter wraps up a strong 2008 for DTS where we reported a 14% increase in revenues. Excluding royalty recoveries, revenue increased 20% year-over-year. Income from continuing operations for the year was $0.52 per diluted share, including the $0.04 in-process R&D charge.

Blu-ray product in all categories, game consoles, stand-alone players and PCs accounted for 22% of revenue in the fourth quarter, nearly four times greater in dollar terms than the same period in 2007. We are encouraged by a number of positive data points on Blu-ray. Holiday results illustrate that consumer demand for Blu-ray products is increasing as prices fall. With further reductions anticipated in the cost of players, we expect retail price points to continue to decline.

Additionally, PC OEMs have begun to sell Blu-ray drive upgrades for less than $100 for a reader and $200 for read/write capability. Importantly, sales of Blu-ray content also have been accelerating. For example, it's been reported that the Blu-ray release of the Dark Knight sold 600,000 copies in its first day.

The reality of Blu-ray adoption is that it's happening much faster than the DVD video cycle did two years into its start. More than 4 million stand-alone Blu-ray players have been sold to-date compared to just to 1.5 million players in the second year of DVD player sales. When you factor in sales of Blu-ray-enabled game consoles and PCs, the story is even stronger.

As a reminder, stand-alone players, game consoles and PCs are nearly all incremental growth opportunities for DTS, since our penetration rate in these categories was low, due to our optional status in the DVD format. Given our mandatory position in Blu-ray, DTS has the potential for major revenue upside even if the penetration of Blu-ray comes in at the lower end of long-term market forecasts.

Turning to the PC market, this morning we announced the co-marketing agreement with Intel for their mobile platform. Under the terms of the agreement, DTS will license a suite of technologies that will bring enhanced audio playback to a range of laptop and net book products.

This agreement will significantly expand DTS's presence in the PC area and will provide an important source of revenue growth separate from Blu-ray over the next few years. The strength of DTS's technologies and brand bring real value to both, PC partners and to consumers. We believe that this program represents a significant opportunity for DTS, and we anticipate revenue to begin in 2010.

Throughout 2008 we also took important steps to increase our focus on emerging next generation technologies. As you know, from our press release, a few weeks ago, we've recently completed the acquisition of Neural Audio. This was a strategically important acquisition, which expands DTS's offerings of branded technologies for the broadcast, automotive, and AV markets.

Specifically, Neural Audio licenses audio enhancement technology and software solutions to CE manufacturers and satellite radio providers for the production of TV and radio broadcasts. For example, as you may have seen from our recent press release, we partnered with the NFL to deliver the HD International Broadcast of Super Bowl XLIII using a technology known as DTS Neural Surround.

This technology enabled international TV viewers to experience the Super Bowl in 5.1 using any consumer surround sound system. The acquisition is expected to contribute annual revenue in the mid single digit millions in 2009.

With this acquisition we also added executives Geir Skaaden, Mark Seigle, Jeff Thomson and “JJ” Johnston to our team. “JJ” is known as a pioneer in the field of perceptual audio having significantly contributed to the development of MP3 and AAC.

During the fourth quarter, we also hired several key developers from Creative Labs Advanced Technology Center. With these hires, we have established a new Silicon Valley, R&D facility. Dr. Jean-Marc Jot is a world renowned audio signal processing scientist, and together with the rest of his team, is expected to substantially advance DTS's position in the developing Internet, PC, and mobile device technology areas. We expect that his team will also be instrumental in supporting go forward relationship with Intel. We welcome all of these new members of our team and look forward to their contributions to our future success.

In summary, the fourth quarter wrapped up a strong 2008 for DTS. We are generally quite optimistic about our business because a new technology is underway. And we are specifically taking steps to invest and strengthening our future. However, we are also in the midst of unprecedented macro-economic challenges; with consumer spending and consumer confidence expected to remain highly uncertain in the near-term. Therefore, we are appropriately cautious about our outlook for 2009, even though at the core we are positive about our future.

With that I will turn the call over to Mel for a financial review.

Mel Flanigan

Thanks Jon. As Jon mentioned, revenue in the quarter was strong, coming in above our expectations at $18.3 million and income from continuing operations was $2.9 million or $0.16 per diluted share. Included in our results, was $1.1 million or $0.04 per diluted share net of tax, and in-process R&D charges arising out of the Neural Audio acquisition which closed on December 31st.

Revenue in the fourth quarter also included $2.1 million in royalty recovery payments, compared to $4.6 million in the fourth quarter of last year. Adjusted for royalty recoveries, our core revenue growth for the fourth quarter of 2008 would have been 32%.

Stock-based compensation in the fourth quarter was $1.1 million, or $0.04 per diluted share net of tax, compared to $779,000, or $0.03 per diluted share in the fourth quarter 2007. Revenue for the year was $60.2 million and net income from continuing operations were $49.5 million, or $0.52 per diluted share.

In 2007, revenue was $53.1 million and income from continuing operations was $9.6 million or $0.52 per diluted share. Royalty recoveries were $5.5 million in 2008, compared to $7.2 million in the prior year. Adjusted for royalty recoveries, revenue growth in 2008 would have been 20%.

Our standard definition home AV business was up 2% for both the fourth quarter and the full year. Blu-ray revenues were up a 127% for the year in each of the three main Blu-ray categories; standalone players, game consoles and PCs showed relative strength. Blu-ray revenues comprised 22% of total revenue in the fourth quarter and 17% for the year.

In the car market, Q4 revenues were up 7% over the last year, and our car business comprised about 16% of revenue for the year. However, car related revenues were down 16% sequentially, so we'll be monitoring this segment throughout 2009 and are planning for it to be down, year-to-year considering the status of the automotive industry.

Gross margins in the fourth quarter were 99%, up from 97% in the same period last year, due primarily to a relatively high revenue level in the quarter. For the full year gross margins were 98%, in line with our expectations and consistent with 2007.

SG&A expenses for the fourth quarter were up 6% over last year's fourth quarter at $10.4 million. For the year, SG&A expenses were up 11% at $36.8 million from 33.1 million in the prior year. The increase related primarily to additional employee-related costs in our sales and marketing functions, and an increase in advertising and promotional expense in support of our expanding product and technology offering. G&A expenses were up only 1% for the year reflecting the G&A leverage in the pure play licensing model that we've discussed on previous calls.

R&D expenses for the fourth quarter were $1.6 million essentially flat with last year's fourth quarter. For the years R&D expenses totaled 6.9 million, up 7% from the prior year. Stock-based compensation for the full year was $4.3 or $0.14 per diluted share net of tax compared to $3.1 million or $0.10 per diluted share net of tax in 2007.

Fourth quarter operating profit was $5 million, which was essentially flat with last year's fourth quarter. However, as we've mentioned, the 2008 results were impacted by the Neural Audio in-process R&D charge, which reduced Q4 and 2008 operating profit by $1.1 million and income from continuing operations by $0.04 million per diluted share.

For the full year, operating profit was $14.3 million or 24% of revenue, again, including the in-process R&D charge. In 2007, operating profit from continuing operations was $12.2 million or 23% of revenue. Overall operating profit increased 17% in 2008 and a 14% increase in revenues.

Interest and other income for the fourth quarter of 2008 was $617,000 compared to $565,000 in last year's fourth quarter. Interest and other income for the full year was approximately $2.4 million, compared to $2.7 million in 2007. The year-to-year decline was due primarily to lower average invested balances in 2008 and declining interest rates.

Certain tax accruals related to routine state and federal audits of multiple prior year returns impacted our tax rate by over 10 points for the quarter and over five points for the year. This brought our effective tax rates to 49% for the quarter and 43% for the full year. From an EPS perspective, these accruals amounted to $0.05 per diluted share in the fourth quarter and $0.06 for the full year. For 2009, we're targeting an effective tax rate of around 41%.

Turning to the balance sheet, we closed the year with overall cash, cash equivalents and short-term investments of $68 million, down from $85 million at the end of 2007. In November, we completed the buyback a million shares for a total of $18.9 million. Also, as of today our exposure related to auction-rate securities has been reduced to just $2.2 million.

Turning to our outlook for 2009, there are a few key issues that will impact our results. First, with regard to revenue, Neural Audio will contribute to growth in our broadcast, automotive, and AV businesses, and we expect these incremental revenues to be in the mid-single-digit millions.

In addition, Blu-ray, primarily in the PC and standalone player markets, will continue to be a growth driver, while standard definition home AV sales are expected to decline.

Second, with regard to expenses, our outlook for 2009 reflects a couple of notable changes from 2008. Our ongoing litigation with [Zoran] Corporation will begin to ramp up in the first half of the year. This litigation involves a host of issues, but fundamentally relates to {Zoran's} misuse of DTS's technology in prior years and our refusal to grant them a license to develop integrated circuits targeted for the Blu-ray player market, until the prior issues are adequately addressed.

We are suing for substantial damages and expect we could see material royalty recoveries if we prevail. However, the near-term expense implications are significant. We expect to spend at least $2 million to $4 million or $0.07 to $0.13 per diluted share net of tax on this matter over the next six months. Our history of successful IP enforcement is very strong and we believe that we'll prevail even if the matter goes all the way through to the courts.

The Neural Audio acquisition will also add a few million dollars to SG&A in 2009 and just under a $1 million per year, about $0.03 per diluted share net of tax, for the amortization of purchased intangible assets. Notably, the Neural Audio acquisition is expected to be accretive to our GAAP earnings in 2009.

Finally, R&D expenses are expected to increase to $9 million to $11 million for the year, primarily due to the addition of the Neural Audio and Silicon Valley R&D team. Therefore, after taking these items into account, overall we expect operating expenses for 2009 to increase to a total of $12 million to $14 million per quarter.

Given our moderate revenue growth expectations and the overall increase in costs mentioned, we still expect 2009 operating margins to be in the lower 20s on a GAAP basis.

So summarizing our outlook for 2009, we're excited about the opportunities in front of us, but we remain cautious about near-term financial expectations. We currently expect full year revenues of $65 million to $69 million, including about $4 million in royalty recoveries.

We expect GAAP EPS in the range of $0.45 to $0.50 per diluted share for the full year and 17.9 million shares outstanding. These numbers reflects $0.10 to $0.15 per share related to the impact of the litigation and purchase accounting charges mentioned earlier.

With that, I'll turn the call back over to Jon for his closing remarks.

Jon E. Kirchner

Thanks for the detail, Mel. In summary, 2008 was an important year in which we took great strides to position DTS for the future. As we move forward in 2009, we expect to see greater acceleration in Blu-ray and the expanded use of DTS technologies in a number of markets. Further, we continue to work hard laying the foundation for many years of attractive future growth.

Before I conclude, I'd like to thank our partners, customers, and employees for their continued support and commitment to DTS in 2008.

That concludes our prepared remarks. I'll now turn the call back over to the operator so we can take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question, comes from the line of Ralph Schackart with William Blair. Please go ahead.

Jon Kirchner

How are you doing?

Ralph Schackart - William Blair & Company

Very well.

Mel Flanigan

Hi, Ralph.

Ralph Schackart - William Blair & Company

Hey, couple of questions if I could. First and foremost, on the recent news about the economics changing with the Blu-ray licensing, just curious what impact that has if any on sort of your ASPs for the Blu-ray cycle?

Jon Kirchner

None.

Ralph Schackart - William Blair & Company

Okay. That was easy. Secondly, Jon or Mel, can you give us some insights what happened to Blu-ray post-holiday, on a year-over-year basis? Do you see any acceleration year-over-year despite sort of the increased pricing, promotion pricing that was saw during the holidays?

Jon Kirchner

Well I think, what happened Ralph is that, during the holiday season, obviously manufacturers have pulled back somewhat on their expectations at retail. Such that a number of retailers that we are aware of, we're largely stocked out of products of $200 during the Christmas season.

So coming into CES and they are after what we had heard is there were a number of people that were back ordered and brought it in to fill the channels here in the very near future, as people completely want changes and what not. And essentially wrap up to meet the demand that we think exists and that’s of $200 category.

Ralph Schackart - William Blair & Company

Okay great. And then in terms of the '09 guidance, couldn’t write this fast, Neural is expected to add single-digit -- millions in the single digit million. Is that correct? To your revenue?

Jon Kirchner

Yes.

Ralph Schackart - William Blair & Company

And then BD as a percentage for '09 guidance, if you don’t want to give it, that’s fine. But can you sort of help us think about, the acceleration in BD year-over-year, is that 100% plus again year-over-year, and standalone in PC categories, that we should be thinking about?

Jon Kirchner

Ralph, we think it -- you know it very well. When you think about it on a unit volume basis, the unit volumes for BD are going to go up by more than a factor or two. So as a percentage of revenue its going to be well north of where it is this year. And Mel do you want to comment further?

Mel Flanigan

I think we're definitely expecting to see an increase in Blu-Ray as a percentage of total -- going from roughly the 16%, 17% kind of range this year up to something a little bit south of 30% for 2009.

Ralph Schackart - William Blair & Company

Great and then Jon can you talk about the Intel agreement, seems pretty exciting. Did you said it starts from 2010, is that correct?

Jon Kirchner

Yes we expect product to hit the market in early 2010.

Ralph Schackart - William Blair & Company

And can you help us think about the economics, sort of at a higher level, not two granular, is that, sort of consistent with your previous licensing deals or will it be per unit?

Jon Kirchner

It will be, and while we've been asked to not say too much until we're closer to product release, I can tell you Ralph that we expect the royalties on a per unit basis from this to be above, kind of the average Blu-ray license fees.

Ralph Schackart - William Blair & Company

Above, on a two-channel or on a one channel licensing?

Jon Kirchner

On a blended basis. So, if you think about the Blu-ray market increasingly heading towards the 5.1 type license, the average license fees are going to be in the mid to upper double digits sense and so we expect, yes this program to do at least that one.

Ralph Schackart - William Blair & Company

And is that on a specific Intel chips then that would carry it or is it sort of a cross multiples used for Intel chips?

Mel Flanigan

Well, the program is targeted at net books and laptops that will be using a, will be using a real tech part and as far as the up-take in our expectations about unit volumes, I think we're still doing a bunch of homework around that, obviously working with Intel. We will know more as we get further on into the year.

Ralph Schackart - William Blair & Company

Okay great. Thanks.

Operator

Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please go ahead.

Mike Olson - Piper Jaffray

Hey, thanks very much. The PC is always a critical component, vertical I should say going forward and with standard def, I think, we saw a one to two year delay for standard def drives on PC following, when we saw standalone, standard def player adoption. What do you think, is going to be the lag with Blu-ray. I would imagine, it's going to be pretty close to a similar adoption curve with Blu-ray, given people are more familiar with the optical format. But just wondering what your take is on that?

Jon Kirchner

Don’t expect much for delay, Mike at all and in fact while PC volumes, based on what we can gather in 2008, were lower than the player volume this year, PC volumes should dramatically outstrip player volumes. So we've, based on a number of forecasts that we've seen from various data providers, we could easily be looking at 15 million to 20 million PC units this year, which clearly would be larger -- significantly larger than the installed player base.

Mike Olson - Piper Jaffray

Okay. Got you. So based on that, should we -- is it fair to say that PC will be the most important vertical for you guys for Blu-ray this year?

Jon Kirchner

Yes.

Mike Olson - Piper Jaffray

Okay. Cool. Thanks very much.

Operator

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Please go ahead.

Paul Coster - JPMorgan

Yeah. Thanks. Mel, can I just check here, you said that was standard Blu-ray was 22% its total revenue or total X the recoveries?

Mel Flanigan

For the fourth quarter?

Paul Coster - JPMorgan

Yeah.

Mel Flanigan

It was 22% of total for the quarter and I believe it was 17% for the full year.

Paul Coster - JPMorgan

Twenty two percent of the full revenues, and recoveries, presumably is more oriented towards standard definition product then the high definitions. Is that correct?

Jon Kirchner

Definitely.

Paul Coster - JPMorgan

So the real composition is greater than 22%.

Mel Flanigan

Yes, I think I don't have that at my fingertips here but it would definitely be higher if we pulled 2.50 million, 2.1 million in recoveries out.

Paul Coster - JPMorgan

Fine I got it. Now you've obviously got a good insight for the product plans of the consumer electronics and PC industry. Are there any specific product lines or price points or other events during the year that you think we should be on the lookout for that will drive this Blu-ray adoption?

Jon Kirchner

I think it's -- Paul, it's a combination of the big three, which is greater product availability at lower price points, and as you start to get in, more second and third tier 2 manufactures coming in to the DVD market, which are rallying round and in some cases single chip solutions, which will lower the manufacturing costs. Keep an eye on that, and as you move south from $200 and approach $100, I think the demand curve spikes up, pretty significantly, and I think the last two Christmas seasons have essentially demonstrated that, that there is consumer demand at those price points.

The second thing is the amount of retail presence that people are putting forward both for software and hardware, and I think you'll see more and more promotion. Blu-ray is an important product for electronics retailers.

And thirdly content support. Today there are over 1100 Blu-ray titles, and I think, it's fair to say that the early sale numbers around new title releases are improving, and that should drive both more content and ultimately lower prices for content.

And the combination of those three things I think will basically help further accelerate Blu-ray's progress throughout the year.

Paul Coster - JPMorgan

Do you have any idea when the Zoran court case may actually occur?

Jon Kirchner

I think there's actually multiple aspects to it and we obviously don’t want to comment too much, there's a federal case, a state case and an arbitration case. The majority of the work is likely to be done in the near-term, thus our expectation around significant spend, and the timing of the cases, they will be heard at various times during the course of the year, but I think we'll know obviously a hell of a lot more as we get a little further into it.

But suffice it to say that we think our position has a lot of merit and given our willingness obviously to pursue this road, it says something about what we believe, both our chances of success are as well as the fact that the ultimate pursued of the matter is going to be beneficial in the end.

Paul Coster - JPMorgan

Okay. Finally, this one-time hit essentially through ‘09 to your operating expenses from these litigation expenses. What is your vision for the long-term business model? Can you just remind us, please?

Jon Kirchner

Well, I think we've long said, that as revenues scale, we expect operating margins to move into 40’s, as we move in north of say a $100 million to $125 million of revenue. And I think they certainly have upside potential beyond that depending on the timing of the revenue growth.

And there is no reason, given that I think we continue to demonstrate quarter-over-quarter, year-over-year with, when you have the right revenue growth, there is tremendous amount of scalability in the model that were -- there is no reason we wont see that overtime.

Paul Coster - JPMorgan

Got it. Thanks very much.

Operator

Thank you. Our next question comes from the line of Tom Kucera with Avondale Partners. Please go ahead.

Tom Kucera - Avondale Partners

Good afternoon, John and Mel. First question I wanted to ask about the Blu-ray ASP and kind of your assumptions there. Those ASPs have been stable and maybe even with lower price players selling more - is that, are willing to the generation in ASPs or speak to that?

Jon Kirchner

Sure, we’ve long, basically say conservatively that obviously the mandatory re-license involves a two channel DTS. decoder, which the economics around that are roughly $0.30 in volume. But what we’ve seen that there has been a clear trend towards manufacturers adopting DTS 5.1 or 7.1 on their players as a value-added feature, which obviously drives up the economics; order of magnitude; roughly $0.15 a channels or somewhere in the $0.75 to a $1 range. And potentially in the full 7.1 Version above that.

So I think the trend is definitely towards more channels and actually higher ASPs as manufacturers work to make their products as attractive as possible for consumers, and naturally it will probably move around a bit, as the market goes through its different phases. But in general I think we fully expect to do well better than the basic $0.30 a unit and only time will tell in terms of what that mix is going be.

Tom Kucera - Avondale Partners

Is it fair to assume in 2009 you think ASPs will be better than 2008?

Jon Kirchner

Yes.

Tom Kucera - Avondale Partners

Okay. And also if we could dig into the Intel agreement a little more and maybe just help me to understand this little better, because in my understanding maybe the economics of selling into PC is more a matter of the laptop maker themselves to determine if they are going to put your technology on it and maybe the ones paying the royalties. So is this kind of a shift maybe in the economics of how that's been working, or maybe I just misunderstand it?

Jon Kirchner

You're correct. The program will be marketed to vendors. They will be the ones essentially signing the licenses and ultimately paying the fees. I think what's notable about it is that the DTS premium suite, which is a new offering for the space, includes a comprehensive set of audio-related tools and enhancement applications that we think coupled with Intel, who is obviously clearly on board and supporting this are going to provide a pretty persuasive technology package for laptops and net books, which I think is going to certainly and greatly increase the adoption.

And our goal obviously is to work together to make it a must have as opposed to a nice to have. But we're -- we and our partners we’ve been working with, I think are very excited about the program. In the early indication as we've discussed this, have been quite positive.

Tom Kucera - Avondale Partners

And next I want to get into the seasonality that you're expecting, and maybe specifically what I have in mind is -- some of CE makers selling Sony, we have seen them piling up some inventory and I guess obviously we don’t know how much that is, Blu-Ray from what you are saying, the lower priced Blu-Ray model were certainly, they are selling out. But there may a risk here that they pile up some inventories, there are going to shut down productions to some degree. Does it work through that, and may be the first quarter or two?

Jon Kirchner

Well, I think what we expected originally. I think we said this in the last call in November that the first half of the year would certainly be softer than the second half. We said that originally, partially because of uncertainty and partially we did expect manufacturers to pull back in Q4. I think what we've seen thus far indicates and certainly there's been no cliff that we’re falling off with respect to the Blu-Ray market.

And that manufacturers are working aggressively to go through line changes to take advantage of some of the newer solutions that enable them to consolidate chipsets and what not to lower their bomb costs, so they can come into the market and kind of meet the pent-up demand that's been -- that hasn’t been satisfied since things got stopped out of the holidays as rapidly as possible. And I think that begins to start in this quarter as we sit here and likely will certainly continue into the second quarter.

What I can't tell you is, what the ultimate near-term size of that demand is, or exactly what the pricing plans maybe around some of these players, but I do believe that the doomsday scenario for Blu-ray would somehow, if kind of predicted, is certainly just not real.

Tom Kucera - Avondale Partners

Okay. And then my last question for Mel, just on the tax rate, I am curious, it looks like it's going to be ticking up next year and my thought was, sort of over the long-term you are trying to work that down, the shifting operations to Ireland. Is that assumption is still kind of accurate for the long-term, just a quick comment there?

Mel Flanigan

Yes, it's absolutely the plan and the expectation. I think what happens in the near-term is there are shifts in geographic earnings expectations that can affect the near-term tax rate, and with the addition of Neural, which brings in additional US earnings, it's sort of changes things a little bit.

Over the next several years though, we certainly expect to see the tax rate start to trend down and these things never happen overnight, right? The most significant benefit from our current operational structure won't be seen -- realized for five to seven years plus from now.

Tom Kucera - Avondale Partners

Right, thank you. Appreciate it.

Operator

Thank you. Our next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

Jim Goss - Barrington Research

Thank you. Couple of questions. One, as you look at 2009 and you have talked about BD players and technology getting into, close to 30% of your revenue mix. How would you say that would break down between dedicated players versus PC drives, and to what extent does the Intel deal, sort of represent your effort in the PC area rather than Blu-ray?

Jon Kirchner

Well, in terms of 2009 we've got, we don't expect any revenue to come from the Intel agreement that we just announced so it would be zero. And then certainly we'll be ramping up in 2010 and beyond.

With respect to how you can think about Blu-ray revenue, broadly speaking the expectation is going to be in the neighborhood of 10 million to 12 million units for PS3, roughly in the 10 millionish range for players on a global basis and PCs is essentially 15 million to 20 million units. And in the -- when you do the math on some of that, and obviously some of the mix of ASPs will be slightly different, that's essential how you build up to the breakdown between the various markets.

Jim Goss - Barrington Research

Okay. And I know what you said about Intel deal being 2010 and beyond. I just meant in the future does that represent more of the trust or do you do both the Blu-ray drives and the…

Jon Kirchner

I'm sorry. They are both very complimentary. We think both opportunities in and themselves are quite sizable, and honestly we'll super-charge our growth rates meaningfully in 2010 or '11.

Jim Goss - Barrington Research

Okay. And the R&D run rate with the incremental R&D with Neural Audio, does that bump the entire amount up on a run rate, or is that just an adjustment that you are bringing in for this one quarter?

Mel Flanigan

Now so we did -- well, the in-process R&D charge is a one-time charge that hit in Q4. What we said about '09 guidance is that R&D will move up to the $9 million to $11 million range for the year, which includes the impact of both adding additional staff out of our DTS Kirtland office, the Neural acquisition, and our new Silicon Valley office.

Jim Goss - Barrington Research

Okay. And then lastly for now, the accounting treatment of the litigation, and then the purchase accounting, are you going to attempt to break out that separately, both now and if you get a settlement on it? How will that be treated and isolated for our benefit?

Mel Flanigan

So there are two different issues. With respect to the amortization of purchased intangibles, that's an expense that's going to hit in each of the next seven years roughly, and we said it's going to be a little under $1 million in 2009. So we will probably continue, to sort of, report that the results for the quarter included X amount for amortization of intangibles.

With respect to the Zoran litigation, both the expense side and any recoveries that we might see, I think those are going to be sizable enough that it will -- we will want and need to highlight those in our script. So I would expect to be able to -- I don't think that we're -- I don't know that we will do non-GAAP presentation with tables and such, but at a minimum I think all of these issues are large enough that it makes sense that we will be talking about them and letting you guys know what the numbers are, so you can adjust your models accordingly.

Jim Goss - Barrington Research

All right. Thank you.

Operator

Thank you. Our next question comes from the line of John Vinh with Collins Stewart. Please go ahead.

John Vinh - Collins Stewart

Good afternoon. First question is just a clarification on Blu-ray PC drives. Your assumptions there from a modeling perspective, that we should assume that all those drives are essentially two-channel drives, or is there an opportunity for additional higher end mix there?

Jon Kirchner

At this point I think that's the safest assumption.

John Vinh - Collins Stewart

Great, okay. and then you talked about ASP trends for players based on some of the progress that’s been made in the SoC chip world. What are your assumptions, what do you guys see in terms of ASP player trends for end this year. And what are assuming for a common share one vender versus maybe two or three vendor, in terms of price points. I’ll the price points able to reach.

Jon Kirchner

I think certainly, 149 is pretty much a foregone conclusion given that people have already spend some time there. I think as we get into the Christmas reason, I would expect it to approach a $100 on promotion, whether that is a long-term sustainable price point or nor. I don’t know. I certainly think $99 in ‘010 is certainly not out of the question.

So, in short and I also by the way don’t expect to see there being a significant price spread between what, first tier manufacturers are doing and where some of the second tiers may play. Now, mind you that the first tiers may have a range of products under different brands and feature sense that expand the price for the various items. Performance came at a greater degree, but at the lower end of the marketplace I don’t expect to see a tremendous gap there. And I think when you about the sponsors and the proponents of Blu-ray whether it be you know Sharp or Panasonic or Samsung and Sony among others, they have been quite aggressive about looking to compete, recognizing that there is a very large market opportunity as you get down to the lower price points.

John Vinh - Collins Stewart

Got you. And get to a $99 ASPs, do you believe that there will be ASP concessions by kind of royalty partners such as yourself and others to get there?

Mel Flanigan

You know I can’t, certainly can’t speak for others in terms of how they get there. I mean I think, when you think about value engineering and some of the changes that have already gone on, around Blue-ray, I think it is accomplishable. You also have to factor in obviously retail margins and how that factors into retailers' plans to both drive traffic and obviously meet their own needs.

So at the end of the day, I believe that history has shown that it will work, and with respect to DTS, I mean we feel good about our agreements, and we're working heavily to support our partners, and I don't expect any more changes in that regard at all.

John Vinh - Collins Stewart

And I have just a last question on automotive, can you kind of refresh our memory in terms of what your mix is in terms of OEM versus aftermarket and what's kind of built into full-year guidance from an automotive perspective for 2009?

Jon Kirchner

John, if I may add, one other thing real quick before Mel goes to automotive. Just an FYI, you can currently get a PC drive for under a $100 for Blu-ray. So grab it. It doesn't have sheet metal wrapped around it, but essentially the drives are available.

John Vinh - Collins Stewart

Great.

Mel Flanigan

Yes, John I don’t think I am going to add, that there has been some talk recently about some pooling of the royalty pool and potentially some reductions at a much higher level that wouldn't impact DTS' royalties directly. But it would be a good thing for the industry in that any costs that are cut out would be beneficial to us. Can you repeat the question on the car market?

John Vinh - Collins Stewart

Oh, I'm sorry. I appreciate the follow-up on the Blu-ray side for the royalties. Yes. On automotive, just wondering if you could refresh my memory in terms of what your mix there roughly is between aftermarket versus OEM and what's kind of built into your 2009 revenue assumptions in terms of automotive contribution?

Mel Flanigan

With respect to the first part of the question, we don't provide that level of detail, breaking out the OEM aftermarket etcetera. With respect to 2009 auto expectations, we expect that the percentage will decline. We expect the growth rate in our auto business to be flat to slightly down relative to 2008.

John Vinh - Collins Stewart

Right. Okay, thank you very much.

Mel Flanigan

Sure.

Operator

Thank you. Our next question comes from the line of Barbara Coffey with Kaufman Brothers. Please go ahead.

Barbara Coffey - Kaufman Brothers

Hi there. Actually a couple of questions. Are there other chip manufacturers in Intel, are these others also looking to enhance their chipsets to have more multi-capabilities immediately at this level and then any update on the worldwide shift to more digital broadcast and sort of how fast are these other countries migrating to digital broadcasting and how do we proceed on that?

Jon Kirchner

Sure. I think broadly speaking, Bobby, the entire PC industry is looking at how to make multifunction units that will support in entertainment, it will be increasing -- an ever increasing use for PCs. So certainly people are looking at all kinds of solutions.

I think as we sit here today, we're pleased to have made an agreement with Intel, obviously given their leadership in the space. And as we go forward, we'll naturally be looking for other ways to expand our business in the space and there will be more to come on that over time.

With regard to broadcast, we're pleased that as of the end of the year that we had seen DTS technology be deployed fairly broadly in Norway. And obviously we've begun to see revenue flow from that, although it's not material relative to our overall results.

I think a number of countries continue to look at a range of solutions, everything from using DTS in satellite broadcasts to IPTV, among others, and I think generally speaking, country-by-country or broadcaster-by-broadcaster, as the case may be, people are migrating towards, some kind of digital delivery. We have maintained and in some cases even accelerated some of our resource investment in broadcast related opportunities, believing that there are some real opportunities that we can push over the finish line that will be beneficial to our business. And so as that happens, we will let you know.

Barbara Coffey - Kaufman Brothers

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Thackray with Deutsche Bank. Please go ahead.

Brian Thackray - Deutsche Bank

Hi. Thanks. First question, you talked about the PC opportunity, 15 million to 20 million this year. Can you give a little more clarity, just in terms of how much that you expect in the first half versus the second half of the year

Jon Kirchner

Brian, I don’t have that at my fingertips, I don't actually have that detail broken out. I think it's fair to say though, that you would expect a lot of it to happen in the back half, as you get back to school and you've got the holidays, kind of, throughout the summer and fall time frame.

Brian Thackray - Deutsche Bank

So should we expect more SKUs to be in the marketplace by, kind of midsummer to get some better visibility into that? Is that fair?

Jon Kirchner

Yes.

Brian Thackray - Deutsche Bank

Okay. I guess the second question, given where asset prices in general are right now, can you just update us in terms of your thoughts on acquisitions, bolt-on technologies you've continue to build your business for the long term?

Jon Kirchner

Absolutely, I think we continue to be active in evaluating a range of opportunities. I think Neural is a good example of the deal that plugs in nicely to our business, great group of people. It is one that is of similar business model and it's accretive out the gate, and I think, we'll continue to look to build our business in that way, along with our own organic development.

And I think our criteria, as asset, values have fallen, are really looking for things that we think we can leverage in a meaningful way and are similar to our existing business model. It would be easy to, through temptation, to at times, if you weren't really laser focused to head in directions that maybe begin to water down the very attractive model that we've spent a lot of time building, and I think we're dead set on the remaining focused and will be patient, but as we find things, we certainly will look to create very good economic outcomes and strategic outcomes by doing deals.

Brian Thackray - Deutsche Bank

Last question for Mel. Given some of the one-time items and the accruals in the tax side can you give us what the cash flow was for the quarter?

Mel Flanigan

Cash flow for the full year was about $20 million from operations.

Brian Thackray - Deutsche Bank

Okay. Okay. Just final question, you guys have talked about the '09 guidance, different components of that. Can you specifically break out AVR and home theater box, given just how significant they are? Is that included in the consumer standard def guidance you gave before?

Jon Kirchner

Yes. Broadly speaking, yes it is. Brian, I mean I think the thing about the AV receiver space, and generally speaking it's always relatively flat to slightly up or slightly down. I think as we look at '09 it's probably going to be slightly down. And as you think about HTiB, again kind of somewhat similar.

So although we don't expect the fall-off in either one of those categories to be anything like what you might see and say, DVD players themselves, which obviously are falling off at a more rapid rate as Blu-ray begins to move in.

Brian Thackray - Deutsche Bank

Fine. Thanks. Good luck.

Jon Kirchner

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Rob Stone with Cowen and Company. Please go ahead.

Rob Stone - Cowen and Company

Hi, guys.

Jon Kirchner

Hi Rob.

Rob Stone - Cowen and Company

On the car business, I wonder if you could just give us a little more color in terms of - could be down slightly that’s net of what sort of order of magnitude contribution from Neural to keeping it flat?

Jon Kirchner

Sorry Rob, I missed the first part of that, would you repeat.

Rob Stone - Cowen and Company

If I heard you correctly, I think you said that the car business is going to be down from this year, down in revenue terms, and down as a percent of revenues. And I was wondering, that's a combination of incremental revenue from the Neural Audio acquisition, and then lower activity in the auto space.

So I'm just trying to get roughly a sense of the contribution of Neural to keeping that down slightly.

Jon Kirchner

Sure. Neural will have an impact in car, Rob, although it's basically very small. The majority of their business really comes into broadcast domain. So it's not significant enough -- I think to call out in any way and relative to the size of our existing decoder based car business.

Rob Stone - Cowen and Company

Okay. And for the traditional AVR and home theater in a box, you're expecting that to account for roughly what percent of revenue this year?

Jon Kirchner

Don’t believe we typically break out HTiB in and itself Rob, so can't comment on that.

Rob Stone - Cowen and Company

I didn’t mean HTiB by itself, I was lumping that into -- since you've given broadly PCs and Blu-ray of all flavors, that sort of leaves broadcast car and home AV of non-Blu-ray --just trying to get a sense of the prior generation technology, if you like, or non-Blu-ray player , game console and PC roughly how much of that is - how much is revenue is that?

Mel Flanigan

Yeah, that’s so routed. Well after the impact of Blu-ray expanding as a percentage of revenues and some of the recent movement in the car market etcetera. How may we, which encompasses standard definition in AVRs and HtiBPs, DVD players etcetera. Which has traditionally been north of 60% almost two third of the business, actually will make up a little over 50% in 2009.

Rob Stone - Cowen and Company

Okay. Finally, Jon you’ve commented a lot on the falling price points for Blu-ray players as being a big trigger for the next player of demand. It seems to me, I was out buying a few titles recently that the content itself is still rather pricy.

Do you think that, that’s part of the equation or will people be willing to pay this premium price for Blu-ray disks in the foreseeable future?

Mel Flanigan

No, I think Rob, I think you will see as the size of the installed base grows, the content providers naturally look to maximize revenue and profits from their offerings. I think you will see prices decline there as well. I just think the…

Jon Kirchner

And the fact is, you got everybody looking to figure how they maximize their own individual situation. And in some cases thus far, there hasn’t, perhaps hasn’t been a, compelling enough reason to, to begin to see, to get a different level of demand for as it relates to content, although that is clearly the studios have as much interest in seeing Blu-ray be as big as possible as everybody else in this market.

I think, the other interesting thing to note, however is that the rental market, as it relates to Blu-ray, Netflix is approaching a million users that are renting Blu-ray discs. It's pretty clear that people are looking for ways to get access to Blu-ray discs in an affordable manner, and I think that's also a good sign as people evaluate what step to take with respect to content availability and pricing.

Rob Stone - Cowen and Company

Great. Thank you very much.

Mel Flanigan

Sorry, Rob, I was going to add, I think what the content guys are finding though is that even at those mid-20 price point the new releases are actually doing pretty well. And I think the other thing that's going on is that a lot of this content guys are sort of playing with the model to see what consumers value and there's the dual disk approach, there is a Blu-ray disc with the digital copy, is that providing enough additional value to warrant the extra $5 or $6 or whatever. So I think all of that stuff over the next six months, you are going start seeing the industry sort of zeroing in on a model that makes a lot of sense.

Jon Kirchner

Yeah. I guess the push/pull I'm thinking of is -- new titles at the moment with the installed base is as the size it is probably are still and you the skim the cream of the early adapters phase, but catalog conversion of older titles isn't really happening and with up conversion of your standard of DVD got a lot of players. There's not that much incentive to convert to the -- convert the catalog at these higher prices.

Rob Stone - Cowen and Company

Yeah. Fair point. I think the studios are also playing with windows, release windows as it relates to the content. So, Mel put it well. There's a lot of experimentation going on to figure out what is the optimal equation, and I guess my overall point is everybody in this game has an incentive to build this market in an aggressive way sooner rather than later. And I think we'll see that exactly play out for manufacturers, content providers and retailers.

Rob Stone - Cowen and Company

Okay. Thank you.

Operator

Thank you. And our final question comes from the line of Jeffery DeCowerith with Dougherty and Co. Please go ahead.

Jeffery DeCowerith - Dougherty and Co

Yes. Thank you. You were talking about buying a new headquarter at the building. And I was just wondering if the current cash balance reflects that purchase?

Mel Flanigan

Yes it does.

Jeffery DeCowerith - Dougherty and Co

Okay. But second question, you did not authorize another buyback. And I am just curiously stand on buying back more stock?

Jon Kirchner

We continually discuss it with the Board of Directors. And at this point, there is no additional share purchase authorized. But obviously the market knows, when we make those decisions but I think its fair to say, we're constantly looking at ways to increase value for shareholders and also thinking about our operating needs and our strategic needs. And as we balance that, we're now showing two different tranches that we’ve essentially gone ahead and bought back a large number of shares and it remains on our mind.

Jeffery DeCowerith - Dougherty and Co

Yeah that you do buyback a lot of shares. That hasn’t decreased a share count in big ways. So it'll be nicer if you kind of buyback shares, especially at these levels to more meaningfully reduce the share gap. Thanks very much.

Operator

Ladies and gentlemen, this concludes the DTS fourth quarter 2008 Earnings Call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236. You can pass code 11126458.

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