Piper Jaffray: Next Few Quarters To Be 'Challenging' For DTS (DTSI)

Digital theater systems company DTS (DTSI) held an analysts' day at CES last week. Piper Jaffray's Gene Munster, who has a 'market perform' rating and $14 price target on DTSI, sent a note to clients to summarize -- excerpts:

DTS has several longer term growth opportunities and we are optimistic regarding the company's prospects in high-def DVD and digital image enhancement. That said, we continue to believe that the next few quarters may prove to be challenging for DTS, as growth in standard-def DVD continues to slow...

How Will High-Def DVD Impact DTS? DTS has been named a mandatory inclusion for high-def DVD. While we do not expect next-gen DVD to have significant uptake until 2H06 into CY07, we do believe DTS will receive revenue from the use of its technology in high-def DVD players in CY06, and we expect the Street will begin pricing this opportunity into shares in mid-CY06. DTS will likely receive a royalty for high-def DVD that is approximately double its existing DVD player royalty of $0.10-$0.20 (likely in the $0.25-$0.30 range).

Overall Thoughts On DTSI. DTS is in a transition period. As standard-def DVD becomes saturated prior to the high-def DVD roll out, DTS is trying to fill the void with business from new initiatives. Starting in late CY06, we believe DTS will benefit from high-def DVD adoption. DTSI stock action over the next few quarters, however, will be dictated by the company's ability to grow outside of standard definition DVD in newer areas such as multi-channel audio for auto and PC. We believe the next 2-3 quarters will continue to be challenging for DTS.

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