DTS's (DTSI) Jon E. Kirchner on Q2 2014 Earnings Results - Earnings Call Transcript

Aug.11.14 | About: DTS, Inc. (DTSI)

DTS, Inc. (NASDAQ:DTSI)

Q2 2014 Results Earnings Conference Call

August 11, 2014 4:30 pm ET

Executives

Geri Weinfield – Director of Investor Relations

Jon E. Kirchner – Chairman of the Board & Chief Executive Officer

Melvin L. Flanigan – Chief Financial Officer & Executive Vice President Finance

Brian D. Towne – Executive Vice President & President DTS Asia Pacific

Analyst

Eric Wold – B. Riley & Co.

Paul Coster – JP Morgan

James Goss – Barrington Research

[Unidentified Analyst – Cohen & Company]

Steven Frankel – Dougherty & Company

Operator

Welcome to the DTS second quarter fiscal 2014 earnings conference call. During today’s presentation all participants will be in a listen-only mode. Following the presentation the call will be opened for questions. (Operator Instructions) Also, please note this call is being recorded today, Monday, August 11, 2014. I would now like to turn the call over to Mr. Weinfield, Director of Investor Relations.

Geri Weinfield

Thanks for joining us as we report our second quarter fiscal 2014 results. With me on the call today are Jon Kirchner, Chairman and CEO, Mel Flanigan, CFO, and Brian Towne, President Asia Pacific. Before we begin I would like to provide two reminders. First, today’s discussion contains forward-looking statements that are predictions, projections, or other statements about future events which are based on management’s current expectations and beliefs in they are therefore subject to risks, uncertainties, and changes in circumstances. Please refer to the risk factors section in our SEC filings including our most recent Forms 10K and 10Q for more information on the risks and uncertainties that could cause our actual results to differ materially from what we discussed today. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call.

Second, we refer to certain non-GAAP financial measures which generally true targets for stock-based compensation, amortization of intangibles and certain acquisition, integration, and restructuring related expenses and the related tax effects, if any, and [inaudible] an expected 30% effective tax rate. We’ve provided reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release and on the investor relations section of our website.

A recording of this conference call will be available on our investor relations website at www.DTS.com. Any unauthorized recording is not permitted. Now, I will turn the call over to Jon.

Jon E. Kirchner

I’m pleased to report that DTS delivered very strong second quarter results. Revenues were $36.2 million up 33% year-over-year while non-GAAP operating margins grew to 31%. We reported non-GAAP net income of $8 million. During the quarter our top line growth was driven by further penetration of the network connected segment as well as the resolution of several royalty audit matters. As you can see our audit program is yielding positive returns by improving realization of current licensing revenue while ensuring compliance with our agreements over time.

As a result of our first half performance and our confidence level as we enter into the remainder of the year, I’m also pleased to share that we’re raising our outlook for the full year. We now expect revenues in the range of $137 million to $142 million and non-GAAP diluted EPS of $1.40 to $1.50. Importantly, we have made good progress in the first half of the year and are well on track to achieve our strategic goals for 2014.

Now, I’ll turn the call over to Mel to discuss our financial results in more detail. Afterwards, I will discuss our performance during the quarter and our plans to continue to build on our first half momentum.

Melvin L. Flanigan

Our results for the quarter were strong, coming in ahead of our expectations for the first half of the year. Overall, network connected represented just over 50% of the revenues in line with our expectation that this category will exceed 50% of revenue this year. Within the network connected category, the TV business grew 27% year-over-year. As expected, we signed the contract renewals discussed last quarter and importantly these renewals typically include more DTS technologies than prior agreements.

We expect TV penetration to continue to increase throughout the remainder of the year. Mobile was essentially flat year-on-year as we await the launch of Headphone:X and our newest suite of technologies on a range of IC and ARM platforms later this year. Over the past two quarters we have signed several new mobile agreements and expect to see products ship under those agreements later this year.

PC continues to show strengths, up 53% year-over-year primarily driven by the new HP deal signed last quarter. We’re optimistic about our opportunity in the PC space as we continue to roll out Play-Fi and work towards the launch of Headphone:X in PCs. Blu-Ray revenues were up 27% year-over-year driven by the continued success of the new game console cycle. We expect continued growth out of this category as console sales expand in newer markets like China while standalone player sales and Blu-Ray PC adoption remain soft. As a whole, we still expect to see double digit growth in Blu-Ray revenues this year.

Home AV was essentially flat year-to-year. The home AV category constituted a little over 10% of revenue in the second quarter as we continue to see a shift from traditional home to the network connected market. Automotive was up 21% year-over-year representing over 10% of revenue for the quarter. We expect automotive to be up modestly for the year.

Our legacy business continues to deliver a stable foundation of revenue and cash flow. With home AV relatively flat year-to-year, Blu-Ray supported by the new console cycle, and automotive showing modest gains. The performance of the legacy business allows us to continue to invest in the rapidly growing network category.

In addition, we’re extremely pleased with the progress of our royalty audit program. In the second quarter we recognized $3.8 million in royalties or approximately $0.15 per share net of tax. This is a normal aspect of our revenue stream as these royalties related to products licensed and shipped into our various markets. Excluding the royalty audit results in Q2, revenues were up 20% year-over-year.

In the second quarter GAAP gross margin was 93%. GAAP operating expenses were $28 million up 5% year-over-year mainly due to an increase in spending on new product initiatives. On a non-GAAP basis, operating expenses for the quarter were $24.6 million up minimally from $23.4 million in the prior year second quarter. Non-GAAP SG&A was $16.1 million in the quarter, down slightly from the second quarter 2013. Non-GAAP R&D was $8.5 million in Q2 up from $7.1 million in the prior year second quarter.

GAAP operating income was up significantly totaling $5.8 million compared to a $1.8 million loss in the second quarter of 2013. On a non-GAAP basis operating income was $11.3 million, more than three times the $3.6 million we generated in the second quarter last year. Non-GAAP operating margin in the second quarter was 31% compared to 13% a year ago demonstrating earnings leverage as our business scales.

On the bottom line, non-GAAP net income was $8 million or $0.47 per diluted share compared to $2.1 million or $0.11 per diluted share in the prior years second quarter, a year-over-year increase of nearly 300%. On a GAAP basis net income was $7 million or $0.41 per diluted share compared to a net loss of $2 million or $0.11 per share in Q2 2013. GAAP net income for the second quarter 2014 includes $0.12 per diluted share net of tax and stock-based compensation expense and $0.11 per diluted share net of tax an amortization of intangibles.

Additionally, during the quarter we settled certain matters arising out of regular tax audits which resulted in a discrete tax credit of around $3 million or approximately $0.17 per diluted share. As a result, for GAAP reporting we posted a net income tax benefit of $1 million for the quarter. For 2014 our guidance around taxes is to use a normalized 30% rate for non-GAAP reporting. For GAAP purposes we expect a full year tax rate of -5% to -10% which represents $5 million to $6 million in total net credits from discrete items.

Now, let’s move onto the balance sheet. We finished the quarter with $69.5 million in cash and investments and we generated $5.5 million in cash flow from operations during the quarter. Moving onto our outlook. We’re off to a very strong start for the year and as John mentioned we’re raising our outlook for the full year 2014. We now expect revenue in the range of $137 million to $142 million. Note that we expect second half revenue to be less heavily weighted in Q4 as minimal guarantee contracts become a greater portion of our revenue mix. Minimum guarantees give us greater visibility and reduce seasonality in the business while still providing favorable ASPs and preserving per unit upside potential.

We expect non-GAAP operating margins in the mid to upper 20s and non-GAAP diluted EPS in the range of $1.40 to $1.50 on approximately 17.5 million shares outstanding. On a GAAP basis, we expect operating margins of 9% to 11% and diluted EPS of $0.85 to $0.95. With that, I’ll turn the call over to Jon.

Jon E. Kirchner

Q2 closed a very strong first half in which we significantly advanced a number of key initiatives including expanding market support for Play-Fi, advancing key software development and IC integrations relating to our Headphone:X program, continuing to expand an innovative suite of tools to facilitate DTS content generation and building a broader coalition of support for our multidimensional audio program in the cinema space. These key strategic efforts combined with continued growth in our core network connected markets position us well for what we believe will be the next wave of long term growth in our business.

Today a material portion of our network connected revenue comes from the TV space. Our penetration in the connected TV space is growing and network connected TVs continue to grow as a percentage of the total TVs sold. Importantly, our penetration is growing in two ways: first, with further penetration of our core codec and audio processing technologies; and second, through the adoption of certain next generation TV solutions including support for DTS enabled streaming content.

DTS’ solution suite is particularly relevant as the market resets to support 4K or ultra high definition delivery which we believe will be disrupted with playback devices and will also require content services to rethink their high definition audio and video offerings. Already, DTS has partnered with companies to develop proof of concept 4K video distribution with DTS HD audio solutions specifically designed for OTT.

In mobile we continue to work aggressively with partners to implement our full range of audio solutions suites. These cover a variety of chips and media frameworks that span all three key mobile operating systems: Android; iOS; and Windows. In concert with our engineering efforts we are actively working on business pipeline and marketing plans that will tightly correspond to product launches in late 2014 and in 2015. As Mel mentioned, we are laying the ground work for a much broader expansion of the number of SKUs and brands that utilize our audio solutions.

During the quarter we announced that we are working with Gigabyte to integrate DTS Studio Sound into their latest GSmart smartphone the GX2. The smartphone will launch in Q3 and will be available internationally. This adds to a list of nearly 400 smartphone models already available with DTS technology.

Our mobile work also extends into the large and growing headphone category. We had a strong showing at e3 working with partners like Turtle Beach, a market leader for gaming headphones. The new Stealth 500x headphone for Xbox One utilizes Headphone:X to keep consumers immersed in an amazing audio experience. Also featured was the elite 800 headset which employs Headphone:X along with noise cancellation features to nullify virtually all peripheral distractions, representing an entirely new level of performance.

Moving onto PC, we broadened our footprint of licensed products during the quarter, especially from HP. We expect a number of new PC models to ship later this year with our post processing and Play-Fi technologies on board. We believe innovative solutions like Headphone:X and Play-Fi which are specifically targeted for the way consumers enjoy entertainment today, provide a great opportunity for our licensees to enhance their PC offerings by bringing compelling new value propositions to market.

Play-Fi continues to generate significant interest and momentum from home, mobile, PC, and speaker manufacturers. Recently, we announced the addition of Macintosh, Sonus Faber and Wadia to our rooster of brands that will soon deploy Play-Fi technology. Importantly, we expect to have the largest and most diverse base of wireless speakers available in the marketplace by the end of this year. We now have more than a dozen brands with over 20 SKUs preparing to go to market. The wireless audio market is the fastest growing of all the market segments in which we operate and Play-Fi positions us extremely well to capture a large share of this expanding market.

On the content front, as I mentioned earlier, we continue to work aggressively to support a variety of digital retailers and partners with the tools necessary for digital delivery. These efforts are bearing fruit and should result in more service announcements before the end of the year. In addition, Comcast has partnered with Lionsgate to create uniquely immersive multiplatform experiences with digital consumers through its Xfinity service beginning with the launch of an app for the motion picture Divergent which includes exclusive content mixed in Headphone:X.

Headphone:X allows fans of the movie to share a truly immersive surround sound experience using any brand of headphones, marking one of the first times this groundbreaking technology has been included in the special features of a home entertainment release. This opens up a whole new audience to the Headphone:X experience in a very unique way. Beyond movie playback we continue to work actively to build a Headphone:X content pipeline in other areas including music and games.

For example, this quarter we teamed up with Universal Music Enterprises to release an exclusive DTS Headphone:X mix of Sound Garden’s landmark album Super Unknown. Super Unknown is the first rock album to be offered with an exclusive 11.1 DTS headphone surround mix which allows fans to hear the music as if they are sitting in the producer’s chair in the studio with the band. The artist and fan feedback has been tremendous.

In another example of Headphone:X as a differentiating technology, this quarter Panasonic launched a program on over 1,000 kiosks in Japan. These kiosks contain music encoded in Headphone:X to promote Panasonic brand headphones and to drive retail sales of accessories and content. This demonstrates how DTS is increasingly a primary source of differentiation for both hardware and content providers as consumers demand higher quality entertainment experiences.

Lastly, on the content front, we are very proud that DTS technology was recently featured on the US broadcast of both the World Cup and Wimbledon. Both events were mixed onsite in DTS neuro surround sound, technology that broadcasters worldwide have adopted to manage high quality surround sound mixes for global distribution. We expect to see our broadcast footprint continue to grow over time.

In the cinema space, interest is growing in MDA, our solution for an open interoperable standard for the production, delivery, and storage of next generation object based movie soundtracks. MDA enables a film mixer to develop a more immersive soundtrack and ensure a film will be played back as intended regardless of speaker configuration in a cinema. We’ve been demonstrating the playback of standard digital theater files with MDA at a Burbank theater since February and the feedback continues to be very positive. The list of partners supporting MDA as a broad solution has grown considerably since the start of the year. We expect deployment of MDA in cinemas and the first films mixed in MDA to come to market over the next several quarters.

Sound technology is equally changing in the home market and we continue to get extremely positive feedback on DTS UHD, our object based next generation codec solution for the home market. We’ve gone from demonstrating DTS UHD working on silicon prototypes at this past CES to preparing for the 2014 commercial launch of our newest technology suite on partner products. Importantly, this solution sets the stage for a new standard of home audio entertainment extending from feature films into broadcast and console based games.

In summary, we had a really strong first half, not just financially but strategically with many of our investments in R&D now coming to fruition. There’s a large opportunity in the network connected space while our legacy business remains stable and our comprehensive audit program is improving overall revenue timeliness and realization. As a result, we believe we are well positioned as we enter the second half of the year and even more importantly to continue to drive growth in 2015 and beyond.

We look forward to sharing more updates on our next call. With that, I’ll turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Wold – B. Riley & Co.

Eric Wold – B. Riley & Co.

A couple questions, one just first on the guidance, it looks like you guys increased by about $4 million to $5 million on the top line and you had the almost $4 million settlement. Can you just refresh us, did the guidance previously include any expected settlements and does this new guidance assume any settlements to come in Q3/Q4?

Melvin L. Flanigan

We did say that we’d see sort of a normal level of recoveries last time we spoke back in May so some of this was expected. I think obviously at nearly $4 million it was a stronger quarter than we had anticipated. As we look forward to the rest of the year I think you will see some additional settlements but they tend to be fairly lumpy so we expect it to be sort of within that same normal range of $1 million to $2 million a quarter.

Eric Wold – B. Riley & Co.

Then on the expectation of Headphone:X being incorporated to some of the phone models coming out later this year with Snapdragon, I know you may not be able to announce some of those models yet or some of those prototypes yet if those phone models may have not been announced themselves, and knowing they probably will not generate revenues for you this fiscal year given the one quarter’s lag, is there a way to kind of gage or wrap your hands around kind of the magnitude of what you have been placed so far to give us a sense of how that is trending and how your implementations have been on track?

Jon E. Kirchner

Well Eric, I would say first given our penetration in the mobile space is so small, the applicability of technologies like Headphone:X as well as our codec and post processing technology to the broad market for smartphones and tablets of course, is extremely good so there is a huge market opportunity. We continue to lay the ground work not only in the IC base with partners like QUALCOMM but elsewhere in the IC space and through ARM based implementations to expand the number of phones that could take advantage of not only Headphone:X but a range of our solutions kind of in the short term.

So, unfortunately given the confidentiality and the nature of our customers not wanting us to speak about their products before they release them we’re not in a position to give you greater visibility there except to say that, as Mel indicated in the script, we continue to sign mobile agreements. The interest in our broad suite of solutions again, not just Headphone:X but all the different offerings we have in the mobile space as well as the intensity of our focus on that space I think, is going to bode well over the next couple of quarters and into the next couple of years as mobile becomes, I think, a primary engine of growth for us.

Operator

Your next question comes from Paul Coster – JP Morgan.

Paul Coster – JP Morgan

First up, can you just give us a bit more color around the minimum guarantees? Was that something that you chose to enter into or your clients kind of forced upon you? Is it kind of an industry standard now? You kept the point that maybe fourth quarter ramp might not be so pronounced, does that also mean that the first quarter or the second quarter with the lag, decline might be a little more less pronounced as well?

Melvin L. Flanigan

In terms of the minimum guarantees I think it’s becoming kind of a standard for us. There’s a lot of positives in the program. It allows us greater visibility as we said and a lot of the factors that we mentioned on the call. I think when we look at the impact on seasonality there’s a couple of things going on. One is as we look at the models that are out there, there was a very, very steep ramp building in Q4 relative to Q2 and Q3 and I think that’s going to be less pronounced, in part in result of the minimum guarantees as we mentioned before. So that’s just something to consider.

I think that the greater the percentage of minimum guarantees, and I think a lot of new deals that we’re signing today tend to be minimum guarantees including some of the larger ones, the way that revenue is accounted for is essentially straight line over the course of the contract. So if it’s a one year deal it’s straight lined over four quarters regardless of what production levels actually are. The one exception to that is once you exceed the minimum guarantee then we would book that revenue on a quarter lag like everything else. So the earlier in the cycle we are the less likely we are going to see some overages. I believe in Q4 we might start seeing a little bit of that, not a lot this year.

Paul Coster – JP Morgan

The other thing, following on from Eric’s question, you really are bringing a lot of new things to market quite quickly and I can understand that any one of them you might not want to be drawn into quantifying the future revenues around it but can you sort of in aggregate give us some sense of how much revenue or what percentage of growth you think will come from all these new category initiatives Play-Fi, Headphone:X, MDA in the year head? Or, any other way in which you can help us sort of think through the growth prospects associated to de novo products.

Jon E. Kirchner

I think in a way it will be difficult to give you very specific feedback on that because we haven’t given ’15 guidance. So I think more directionally we do believe that Play-Fi and our broader mobile initiatives will begin to make more material contributions to our growth as we get into ’15 and ’16. We think technologies like UHD, DTS UHD which are more driven initially about in the home, are likely to be less material in the balance of ’14 and ’15 just because they’re on a slightly different cycle. But I think the most exciting news is that we have been working for years, in some of these cases, back five, six, seven years on a technology pipeline as well as a tools and infrastructure pipeline to really take DTS to a very new place consistent with where we see the trends around digital delivery of entertainment and its consumption and I think we’re finally seeing ourselves be in a position to begin to realize the fruit of a lot of that investment and work. So, I might appear to be quick on the outside, those of us who have been working on this for an awfully long time are finally glad that we’re moving into primetime.

Operator

Your next question comes from James Goss – Barrington Research.

James Goss – Barrington Research

With the network connected services, do you expect a lot of that value creation to be on the hardware side or the service provider side, or is it some of both?

Jon E. Kirchner

I think you’ll still see a device centric model out of us Jim. I do think there will certainly be contributions on the service side and I think the long term split between those things still very much remains a question. But there are clear performance advantages and let’s call it compatibility advantages across implementing our technologies and devices as opposed to in specifically service applications. But I think you’re going to see both as people try to address how to lean forward and deal with what they know is to come in the marketplace as well as deal with existing installation bases where our technologies may not be implemented in hardware.

James Goss – Barrington Research

When you mentioned partnerships with Turtle Beach or Sonos, where in some ways it might almost seem competitive with what you’re trying to do, how exactly do those partnerships work and what is the economic model and split, the nature of that beast if you will?

Jon E. Kirchner

They’re two very different circumstances. So, just to clarify in regard to the wireless audio space we actually are not partnering with Sonos. We believe there are essentially two players in this marketplace that are positioned to continue to drive that market forward in a much bigger way. Sonos obviously has been there a while, they have a proprietary system. DTS Play-Fi on the other hand we believe has the opportunity to be the industry’s most broadly adopted interoperable system where people have the benefit of choice where they can choose speakers and electronics from different brands and get them all to work together seamlessly without being committed to a proprietary ecosystem like Sonos where you have to buy their hardware. In that case there’s not a partnership effort going on.

With other people like, let’s call it Turtle Beach, who is a licensee of ours or some of the other headphone makers we’re working with, the range of cooperation extends everywhere from just being a licensee which would be on pretty typical terms to working jointly to develop technology or copromotion marketing campaigns to even work on advanced technology development, as the case maybe. It’s very difficult to answer that question beyond the general that we have I think, a range of licensee customers here that we’re working with in different ways to basically advance our broader technology agenda.

Operator

Your next question comes from [Unidentified Analyst – Cohen & Company].

[Unidentified Analyst – Cohen & Company]

The first question has to do with the seasonality on the guidance. Should we think of Q4 as being up from Q3 substantially or not at all?

Melvin L. Flanigan

Typically there will be some Q3 to Q4 increase, it’s just in the past you’ve seen some fairly steep ramps going into Q4 from Q3 and I think that’s a way a lot of the models out there were reflecting the expectations for this year. I think this year it will be a much more muted ramp from three to four.

[Unidentified Analyst – Cohen & Company]

Then given your comments about scale driving operating margin, would we also expect Q4 operating margins to be higher than Q3?

Melvin L. Flanigan

I think if you look at the guidance and expectations for the full year we think within the revenue range, you end up in the mid to upper 20s, so Q2 was particularly strong. The point of the 31% in part is just to show that there’s tremendous leverage in the model and with the kind of gross margins we throw off any kind of overages on revenue essentially drop straight to the bottom line so there’s a lot of power in the licensing business model.

[Unidentified Analyst – Cohen & Company]

Typically you’ve given us not just percentages of the various businesses but also their growth rates. I didn’t think I heard one for network connected, just that it was slightly greater than 50%.

Melvin L. Flanigan

Network connected in totality was up 21% year-over-year excluding any royalty recoveries.

[Unidentified Analyst – Cohen & Company]

And how about home AV?

Melvin L. Flanigan

Home AV was flat as one might expect.

[Unidentified Analyst – Cohen & Company]

Then I didn’t get the mix or the contribution of Blu-Ray. It was 50% network connected, 10%, and 10%, and how much was Blu-Ray in the mix?

Melvin L. Flanigan

Blu-Ray was a little under 20% of the revenues.

[Unidentified Analyst – Cohen & Company]

Finally, did any of these growth rates surprise you? For example, auto up 20% plus and Blu-Ray up 27%? I understand the console cycle but was that greater than your internal planning?

Melvin L. Flanigan

I don’t think so. I think maybe auto was a little on the higher side. We picked up a new licensee during the quarter which certainly helped a little bit but that’ll lead to ongoing revenues from that licensee as well. I think with respect to Blu-Ray and the game console cycle, keep in mind that we’re on a quarter lag so we’re looking back to earlier production and I think we expected a fairly strong performance out of both the PS4 and the Xbox One.

[Unidentified Analyst – Cohen & Company]

How long into the year does that continue or into next year for that matter?

Melvin L. Flanigan

Good question. I think the consoles are selling well. They’re starting to expand distribution, which is a good thing. So I think we would expect to see some continued growth there. Generally speaking the first couple of years are fairly strong in a new cycle.

Jon E. Kirchner

Jim I would just add that historically as it relates to us, we have not participated in the Xbox console platform so this time around with the latest generation of consoles we’re seeing revenues on both the Sony as well as the Microsoft platforms.

Operator

Your last question comes from Steven Frankel – Dougherty & Company.

Steven Frankel – Dougherty & Company

Let me go back to guidance one more time, because I understand the impact of the minimum guarantees on seasonality but it also seems to me the guidance implies some margin pressure in the back half relative to at least how the street had modeled the year. Are you saying that’s because really you’ve taken away the Q4 revenue ramp or is there some increase in expenses also factored into your full year guidance now that maybe we weren’t anticipating before?

Melvin L. Flanigan

No, I don’t think we have any expense surprises coming. We’re still running in the range of $24 million to $25 million a quarter on a non-GAAP basis which is where we expected to be. We talked earlier in the year about aggressively managing expenses to start driving some additional profitability. That’s still very much in play and I think things are going well there. I think with respect to second half profitability, part of it is the fact that some of the revenues were accelerated by virtue of some earlier license settlements which pulls a little bit out of Q4 effectively and so I think that’s probably the primary impact that you’re going to see in the second half. The second half should be equally, I think, strong overall.

Steven Frankel – Dougherty & Company

Do you now feel like Headphone:X is positioned to perform better in ’15 than you thought six or nine months ago?

Jon E. Kirchner

I think we continue to get a tremendous amount of interest and so I think translating that interest into shipping product is really the key. So I think I would be better positioned to answer that question once we start to see the magnitude of the product shipments. We’ve kind of been in a little bit of hurry up and wait mode a little bit as we’ve worked on the IC infrastructure and ultimately getting this out in an ARM form. But there is certainly no decline in interest, quite the opposite the interest that has existed remains and I think there are other people that are looking at what we’re doing and considering it to be pretty innovative and I think that should positively accrue as we get into ’15 and beyond with more device wins.

Steven Frankel – Dougherty & Company

The last question on Play-Fi looking at the [Denton] pricing and the fact that you have Macintosh as another licensee, it almost looks like at least the initial licensees are positioning Play-Fi at a premium to where Sonos is. Do you have other partners coming to market that will bring down the price point to the system to something that’s maybe a broader market appeal?

Brian D. Towne

First of all I think we have with the [inaudible] product, the $199 or even $149 if all you want is connectivity without the speaker coverage, so we think the price points are pretty aggressive. On the branded front we are working on more cost effective solutions which I think you’ll start seeing from third parties when you get out into 2015. We’re actually quite happy with the realm of price points going up to certainly the very high end. We think that’s one of the interesting things that Play-Fi gives you is that you can have any breadth of price points that you want.

I would also comment that the retailers are certainly supportive of this direction and it gives them flexibility with their line up and how they want to manage that inside their store. $299 for a wireless speaker of good quality or a wireless sound bar that has this type of functionality clearly above the functionality and performance you’re going to get with Bluetooth is a strong price point. But you will see that come down obviously, over time.

Jon E. Kirchner

I would just add one more thing which is if you think about the fact that you’ve got an entire industry of companies that have decades of audio and acoustic engineering expertise who have been building speaker products and investing and have obviously significant and globally known brands who have largely not been able to participate in the wireless audio market to date, Play-Fi essentially becomes the grand enabler for all those brands to get in the game and play the entire breadth of quality of offerings as well as sizes and price points and so I think that’s part of the reason we’re seeing as much traction as we are and it’s building. With every brand usually comes a few more because people are looking around the space competitively at what they’re doing and believing this to be a fairly neutral way again, for everybody to be able to play the wireless audio trend.

Operator

This concludes the question and answer session for today. Thank you for your participation on the call.

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DTS (NASDAQ:DTSI): Q2 EPS of $0.47 beats by $0.31. Revenue of $36.2M (+33.1% Y/Y) beats by $7.72M. Shares +12.6%.