FIN 419: Real Client Managed Portfolio, Spring 2012 DTS, Inc Nasdaq: DTSI Thursday 26 th April 2012 Tyler Haida Mike Ollman Amin Rizwan

Introduction Founded1990 IPO 2003 at $17 per share Market Capitalization $490.34mn Employees258 (Full-Time) (25 th April) Stock Price $ Week Range$20.93-$47.19 Trailing P/E Forward P/E PEG0.86 Dividendn/a Beta Year Growth Rate 82% 7-10 Year Growth Rate60.235% Greenblatt Measure0.47 GICS: Application Software ( )

Stock Market Analysis Source:

Technical Analysis Source:

Company Overview DTS 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

Products Source: DTS 2011 Investor Presentation Key Markets: Home AV, Automotive, PC, Broadcast, Mobile Electronics, Production Tools

Licensees/Customers Source: DTS 2011 Investor Presentation

Blu-Ray Source: DTS 2011 Investor Presentation & 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 Acquisition Plan to acquire SRS Labs for $9.50/share in a combination of cash and stock purchases Total value of $148 million Expected to close in Q SRS 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

Ownership HolderShares% OutValueReported WELLS FARGO & COMPANY3,772, ,376,950Dec 31, 2011 THORNBURG INVESTMENT MANAGEMENT INC.3,583, ,548,727Dec 31, 2011 KORNITZER CAPITAL MANAGEMENT, INC.2,947, ,801,702Dec 31, 2011 COLUMBIA WANGER ASSET MANAGEMENT, L.P.2,875, ,434,300Dec 31, 2011 WASATCH ADVISORS INC2,535, ,543,367Dec 31, 2011 KALMAR INVESTMENTS INC.2,025, ,684,551Dec 31, 2011 VANGUARD GROUP, INC. (THE)1,902, ,924,951Dec 31, 2011 EARNEST PARTNERS LLC1,875, ,686,918Dec 31, 2011 BlackRock Fund Advisors1,431, ,903,083Dec 31, 2011 STATE STREET CORPORATION1,399, ,403,343Dec 31, 2011 Source: Yahoo Finance

Industry Trends/Factors Analog TV cutoff in 2009 Falling HDTV prices ◦ Falling Blu-Ray prices  60% of consumers cited higher costs as the main reason for not using Blu-Ray discs Increasing 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 Media UltraViolet – 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 Analysis Gross Profit Margin97.60%98.04%97.73%98.18%99.11% Operating Profit Margin23.00%25.47%23.36%28.02%30.56% Profit Margin-38.51%20.68%13.64%18.42%18.85% Region 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 Analysis Dolby Laboratories, Inc (NYSE: DLB) Founded1965 Market Cap$4.19bn Employees1369 (Full-Time) (25 th April) Stock Price $ Week Range$25.70-$51.28 Provides 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) Founded1993 Market Cap$133.63mn Employees85 (Full-Time) (25 th April) Stock Price $ 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 Acquisition 50/50 Cash & Stock Acquisition ◦ $ million cash ◦ 2,225,581 new shares  Equivalent of $ cash ◦ million total shares outstanding ◦ 13.49% dilution of current shares

DCF Valuation See Excel

Recommendation Current Stock Price (04/25/2012)$30.13 Public Comps Value$24.84-$30.13 DCF Value $35.05 Final Recommendation Purchase 200 shares at market price