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DTS's Audio for Pantech Tabs

Zacks Equity Research

DTS Inc.’s (DTSI) high-quality sound solutions will be available on Pantech Element, a 4G LTE waterproof tablet from the Korean mobile handset maker Pantech Co. Ltd. Under the terms of the multi-year agreement, DTS’s audio technology will be integrated into all Pantech devices including smartphones and tablets.

The partnership initially pertained to smartphones but was later extended to Pantech’s tablet phone Vega and now Pantech Element [exclusively available with AT&T Inc. (T)], which has received positive response from customers, primarily based on DTS high-performance audio technology. With the increasing adoption of smartphones and tablets for entertainment as well as professional purposes, it is becoming increasingly important for manufactures to provide high-quality visual and audio solutions for a unique experience among customers.

We believe that with the extension of its relationship with DTS, Pantech will see stronger top-line growth going forward. Simultaneously, it will help DTS to expand its footprint in the growing Asian economies where Pantech has a significant presence.

Asia has been one of the most important, dynamic and fast-growing consumer electronics markets over the past few years and plays a critical role in the development and manufacturing of innovative mobile, PC and network-connected products and technologies. However, it remains significantly under-penetrated in comparison to several developed markets, and thus represents a huge opportunity in our view.

We believe that DTS is well positioned to grab this huge opportunity over the long term, based on its partnerships with several Asia-based companies such as Pantech, Fujitsu, Haier, Samsung, LG, Panasonic, Changhong, Hisense, TCL, Konka, Skyworth and Huawei. We believe that these partnerships will drive top-line growth over the long term

DTS is expected to gain from the growing customer demand in new sectors such as Televisions (particularly home entertainment), smartphones, tablets, Digital Media Players and Virtual audio applications (PCs). Network-connected devices are expected to grow in excess of 70% on a yearly basis, representing 20% to 25% of 2012 revenue. This strong growth is expected to be driven primarily by DTS decoders and audio processing technology on smartphones, TVs, PCs and tablets.

We believe that DTS will continue to gain market share riding on its strong product portfolio, robust growth from the Blu ray market and increasing penetration into network-connected devices such as Internet enabled television, smartphones, personal computers and portable devices going forward.

Moreover, we believe that the strong growth of network-connected devices will eventually cannibalize the sales of DVD-based products and Blu-ray sales. This in turn will hurt DTS’ growth over the long term. Further, the company faces significant competition from Dolby Laboratories Inc. (DLB), Sony Corp. (SNE) and privately-held THX Limited, which will impact its profitability going forward.

Thus, we remain Neutral over the long term (6-12 months). Currently, DTS Inc. has a Zacks #3 Rank, which implies a Hold rating in the near term.

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