DTS sees strength in impending split of two divisions; electronics, digital units face different challenges.

Faced with two business divisions growing at different rates and in different directions, DTS Inc. will spin off its digital cinema business later this year.

How that will be done has not been decided as company officials continue to meet with bankers and investors to determine which direction to pursue to best serve the company, its shareholders, and customers.

The DTS electronics division would remain in Agoura Hills while the newly-named DTS Digital Cinema will be headquartered from an existing facility in Burbank.

By splitting the company in two, executives remove from the equation how the decisions made for one business unit will affect the other.

"We think a pure focus in both businesses on the markets that each serves will result in us being able to service our customers as well as to competitively win in these markets," said President and CEO Jon Kirchner.

Founded in 1993. DTS became a major player in the entertainment audio business as its products found their way into movie theater sound systems, home theaters, car audio, and PC and gaming consoles.

The electronics division licenses its entertainment technology to all the major consumer products manufacturers. It is the well established, low-investment, and high profit division of the company.

The digital cinema side is quite the opposite--a capital intensive business still in its early stages.

Showing its strength

Spinning the digital cinema business off is a good maneuver for DTS as it will show the value of the strong revenue stream of the electronics division, said Barbara Coffey, an analyst with investment banking firm Kaufman Bros.

"If you have one business that is losing money and another business that is making money if you put them together you can't see the strength of the one because it is hidden by the losses of the other," Coffey said.

Company executives have evaluated the two divisions over the past several years and in November formally announced the split.

In what form the breakup takes remains unknown.

DTS could sell the digital cinema business to a private or strategic investor; it could spin off the business into a separate publicly traded company; or bring in a majority partner to move the business forward and DTS would maintain a minority stake.

Each option has its pros and cons and those are being evaluated by company officials, bankers and investors, Kirchner said.

A 14-year veteran of the company, Kirchner, CFO Mel Flanigan, and general counsel Blake Welcher will remain with the electronics business. Other company executives will move over to the digital cinema side.

For its audio products, DTS faces competition from Dolby Laboratories, Inc. In the digital cinema arena, it faces multiple competitors, including Technicolor in Camarillo.

Still not in U.S.

Whereas Technicolor has its digital cinema equipment in theaters in the U.S. and Europe, the single rollout by DTS has been in Ireland. Getting its equipment into U.S. theaters should happen by year's end.

Out of the 36,000 indoor movie screens, about 1,000 are equipped to show digital films, according to statistics from Digdia, a Silicon Valley consulting firm for the digital entertainment industry.

By MARK R. MADLER

Staff Reporter