FIN 419: Real Client Managed Portfolio, FIN 419: Real Client Managed Portfolio, Spring 2012 Spring 2012

DTS, IncDTS, IncNasdaq: DTSINasdaq: DTSI

Thursday 26Thursday 26thth April 2012 April 2012

Tyler HaidaMike OllmanAmin Rizwan

IntroductionIntroduction Founded 1990 IPO 2003 at $17 per

share Market Capitalization $490.34mn Employees 258 (Full-Time) (25th April) Stock Price $30.13 52 Week Range $20.93-$47.19 Trailing P/E 28.96 Forward P/E 15.94 PEG 0.86 Dividend n/a Beta 1.07 1 Year Growth Rate 82% 7-10 Year Growth Rate 60.235% Greenblatt Measure 0.47 GICS: Application Software (45103010)

Stock Market AnalysisStock Market Analysis

Source: http://finance.yahoo.com/q/bc?s=DTSI&t=5y&l=on&z=l&q=l&c=DLB%2CSRSL%2C%5EIXIC

Technical AnalysisTechnical Analysis

Source: http://finance.yahoo.com/q/ta?s=DTSI&t=2y&l=on&z=l&q=l&p=m20%2Cm200&a=&c=

Company OverviewCompany OverviewDTS Inc. is a digital entertainment technology company that focuses on high-definition audio technology for various forms of devices and applications. These devices include home theaters, car audio, PCs, videogames, DVD players, TVs, smart phones, and every device capable of playing Blu-Ray.

License the software & technology to semiconductor manufacturers and consumer product manufacturers, upon which they receive a royalty for each product produced that uses their software & technology

Total revenue for 2011 was $96.9mn with a gross margin of 99.11% and a profit margin of 18.85%.

International company with offices in the US, China, France, Hong Kong, Japan, South Korea, Taiwan, and the UK.

Source: investor.dts.com

ProductsProducts

Source: DTS 2011 Investor Presentation

• Key Markets:• Home AV, Automotive, PC, Broadcast, Mobile

Electronics, Production Tools

Licensees/CustomersLicensees/Customers

Source: DTS 2011 Investor Presentation

Blu-Ray Blu-Ray

Source: DTS 2011 Investor Presentation & 2011 10-K

• Blu-Ray Licenses• Product in every Blu-Ray playing device• DTS is the mandatory audio format for Blu-Ray

• Outlook• Blu-Ray household penetration at 34% in 2011, up from 24% in 2010

Future AcquisitionFuture AcquisitionPlan to acquire SRS Labs for $9.50/share in

a combination of cash and stock purchasesTotal value of $148 millionExpected to close in Q3 2012SRS Business:

◦ Develops audio and voice tech solutions◦ Audio rendering, voice processing, and

surround sound technology Process and enhance audio quality

Expands brand footprint, customer base, and ability of DTS to provide audio solutions to consumers

Source: DTS Investor Relations Page

OwnershipOwnershipHolder Shares

% Out

Value Reported

WELLS FARGO & COMPANY3,772,7

698.83

176,376,950

Dec 31, 2011

THORNBURG INVESTMENT MANAGEMENT INC.

3,583,930

8.39167,548,72

7Dec 31,

2011

KORNITZER CAPITAL MANAGEMENT, INC.2,947,6

306.90

137,801,702

Dec 31, 2011

COLUMBIA WANGER ASSET MANAGEMENT, L.P.

2,875,600

6.73134,434,30

0Dec 31,

2011

WASATCH ADVISORS INC2,535,6

875.93

118,543,367

Dec 31, 2011

KALMAR INVESTMENTS INC.2,025,3

384.74 94,684,551

Dec 31, 2011

VANGUARD GROUP, INC. (THE)1,902,1

384.45 88,924,951

Dec 31, 2011

EARNEST PARTNERS LLC1,875,6

564.39 87,686,918

Dec 31, 2011

BlackRock Fund Advisors1,431,0

823.35 66,903,083

Dec 31, 2011

STATE STREET CORPORATION1,399,0

023.27 65,403,343

Dec 31, 2011

Source: Yahoo Finance

Industry Trends/FactorsIndustry Trends/FactorsAnalog TV cutoff in 2009Falling HDTV prices

◦Falling Blu-Ray prices 60% of consumers cited higher costs as the main

reason for not using Blu-Ray discsIncreasing focus on Picture & Sound

quality◦Growth in HD programming

DVD’s still very popular due to lower price◦Blu-Rays taking away market share

Digital MediaDigital MediaUltraViolet – high definition, Blu-Ray

quality, digital copy of a movie purchased from the web (also comes with some Blu-Ray purchases)◦DTS already has technology licensed to this◦Possibly the next generation past Blu-Ray

discs

Financial AnalysisFinancial Analysis

2007 2008 2009 2010 2011

Gross Profit Margin 97.60%

98.04%

97.73%

98.18%

99.11%

Operating Profit Margin

23.00%

25.47%

23.36%

28.02%

30.56%

Profit Margin -38.51%

20.68%

13.64%

18.42%

18.85%

Region

2011 2010 2009

U.S. $10,838mn

$9,805mn

$17,421mn

Japan $43,814mn

$41,392mn

$34,241mn

S. Korea

$22,549mn

$21,148mn

$14,414mn

Other $19,721mn

$14,751mn

$11,646mn

Total $96,922mn

$87,096mn

$77,722mn

Public Comparable Public Comparable AnalysisAnalysis Dolby Laboratories, Inc (NYSE: DLB) Founded 1965 Market Cap $4.19bn Employees 1369 (Full-Time) (25th April) Stock Price $38.56 52 Week Range $25.70-$51.28Provides products, services, and technologies for the entertainment

industry. It designs and manufactures video and audio products for film production, cinema, and television broadcast industries.

SRS Labs Inc. (Nasdaq: SRSL) Founded 1993 Market Cap $133.63mn Employees 85 (Full-Time) (25th April) Stock Price $9.33 52 Week Range $5.43-$10.14 Engages in the development and provision of audio and voice

technology. The company principally develops and markets audio rendering, voice, and surround sound technologies and solutions to original equipment manufacturers, original design manufacturers, semiconductor manufacturers, and software providers.

SRS Labs AcquisitionSRS Labs Acquisition50/50 Cash & Stock Acquisition

◦$67.925 million cash◦2,225,581 new shares

Equivalent of $67.945 cash

◦18.725 million total shares outstanding

◦13.49% dilution of current shares

DCF ValuationDCF ValuationSee Excel

RecommendationRecommendationCurrent Stock Price (04/25/2012) $30.13

Public Comps Value $24.84-$30.13

DCF Value $35.05

Final RecommendationPurchase 200 shares at market price