Digital Theater Systems Sees Growth After Successful IPO CORPORATE FOCUS By SLAV KANDYBA Staff Reporter Executives at Digital Theater Systems Inc. of Agoura Hills saw an improving IPO market last summer and decided it was time to take their digital audio business public. The IPO was timed well, as it turned out, and the company so far has flourished, seeing its opening stock price rise by about 40 percent since the initial public offering went out in July. “As far as the earnings, the company has exceeded expectations” said Steven B. Frankel, an analyst in the Boston office of Adams, Harkness & Hill, Inc., one of the brokerages that underwrote the DTS offering. “I look for continued growth for 2004. “The company is well-managed and in a good business,” he said. DTS provides surround sound technology products for movie theaters, consumer electronics manufacturers and other makers of audio equipment. Most recently, the company has moved into the PC and automobile markets. DTS CFO Mel Flanigan describes the company as a multi-legged stool and says it is clearly standing strong due to one of those legs, namely licensing the digital audio technology it produces to companies including Sony and Philips for home theater systems. Although demand has been increasing for all of the markets it serves, it is the home entertainment market where DTS has seen its greatest growth because prices for those types of systems have come down considerably, reaching a far larger market of consumers than ever before. Home theater systems using the technology, for instance, now sell for as little as $200 at big-box retailers such as Best Buy and Circuit City, and more than 30 percent of U.S. homes had them last year, according to industry figures. The figure is expected to double in the next three to four years. DTS is already reaping some of the rewards of that growth. For the fourth quarter ending Dec. 31, 2003 net income dipped to $3.3 million or $0.20 per diluted share on revenues of $14.9 million. That compares with earnings of $3.6 million or $0.31 per share on $13.8 million in revenues for the same period in 2002. But for the full year, DTS earned $9.9 million, or $0.80 per diluted share on revenues of $51.7 million, compared with $6.3 million, or $0.47 per share on revenues of $41.1 million for the 2002 year. “The force behind that growth is the amazing buildup of the DVD and home theater market,” Flanigan said. Founded in 1990, DTS initially launched its technology in about 900 movie theaters nationally by 1993. Today the company’s equipment is found in 23,000 movie theaters both domestically and overseas. Targeting consumers The company then set its sights on the consumer business, and it hasn’t looked back. DTS has reported profitable quarters consecutively since Sept., 2001. In July, DTS issued its IPO, raising $65.3 million to pay down debt and raise capital for expansion. The stock, which was priced at $17 per share when trading began, rose immediately to the mid-$20 range, and after trading as high as $34 per share, on March 11, closed at $24.93. Flanigan said the company is now debt-free. Consumer electronics manufacturers install DTS’s technology into DVD players, televisions, and new markets are on the horizon. “Europe has tremendous growth potential,” Flanigan said. In 2004, all Acura TL sedans come with DTS technology as standard equipment. At the same time, PC makers are incorporating DVD players into computers offering another outlet for the company’s products. Last year for the first time, DTS technology was used in a PC product. Yet another division within DTS is called DTS Entertainment. It is a “boutique shop” music label, Flanigan said. It sells DVDs of feature film releases, such as last year’s “Monster” with Oscar winner Charlize Theron. While applying its technology in new ways, DTS is also sticking with its original business: providing movie theaters with audio equipment that creates better-quality sound. DTS competes with Dolby Laboratories, but technologies provided by the two companies often co-exist, and Hollywood studios and DVD makers often choose to use both DTS and Dolby in their offerings, Flanigan said.