Movie sound system firm DTS expanding into digital cinema.

A player in the entertainment audio business, Agoura Hills-based DTS Inc. is making noise in the emerging digital cinema world.

The company has long been in the movie audio business--most major feature films released in the United States feature its surround sound audio tracks--but now a recent agreement is accelerating its foray into digital cinema.

Earlier this month, the company announced a deal with Santa Monica-based Avica Technology Corp. that gives DTS exclusive global rights to its digital post-production, distribution and exhibition technologies.

"We are moving into a complete digital world," said DTS Chief Executive Jon Kirchner. "There's tremendous demand for services to get the content ready."

Terms of the deal were not disclosed, but it should give the company a head start as theater owners begin the costly switch over to digital projection. As part of the deal, DTS has an option to acquire Avica's assets, something Kirchner said was likely in the future.

Meanwhile, about eight of Avica's core team members have already joined DTS, which presently employs about 350 people. Wall Street has reacted positively to the announcement sending its stock up 21 percent to close at $19.27 on Aug. 17.

Backed by Universal City Studios Inc. and with Steven Spielberg as an early investor, the company was founded in 1990 and made its splash with a digital soundtrack for the 1993 blockbuster "Jurassic Park."

Today, surround sound audio tracks are standard, and its audio technology and services--along with that by competitor Dolby Laboratories Inc.--are used to produce them. Moreover, its playback equipment is installed in more than 28,000 theaters worldwide.

But the Avica deal is expected to significantly increase the business that is generated by the company's higher risk cinema division, which currently amounts to about one third of revenue. And that could pose a problem to some investors.

Fast forward

Currently about 60 percent of the company's revenues are generated by its steadily performing consumer division, which includes home theater, audio/video receivers and other consumer electronic devices, as well as professional audio products for coding multi-channel content.

The smallest piece of its existing business is in restoration, cleaning and conversion of 35 millimeter films to digital format. The work amounts to about 10 percent of the company's business, and came courtesy of the January 2005 acquisition of Burbank film restoration and enhancement boutique Lowry Digital Images.

Now with the Avica acquisition, Kirchner is floating the idea of splitting off the higher risk theatrical businesses, with the consumer taking the digital film restoration. At least initially, some Wall Street analysts are looking favorably on the idea.

Analysts Rob Stone and Siddhartha Nargundkar of Cowen & Co. wrote in an August report wrote that, "Separating the consumer and theatrical businesses could increase shareholder value, because each has different growth rates and opportunities/risks, which may be attractive to different investors."

However, DTS does seem to already have a good foothold in the theater market, given its audio playback equipment is already in nearly 30,000 theaters.

"The studios have very high incentive to get away from print, so they're going to play with everybody," said analyst Steve Frankel of Canaccord Adams in Boston. "The exhibitors are looking for a partner that brings a high quality product, and I think (DTS) has got that reputation. It's a natural extension since it's the same customer base. They've got plenty of cash and have the financial resources to do it."

Indeed, the company has made other moves to solidify its relationships with theater owners. Last year, DTS acquired Digital Booking Systems from FilmStew International Inc. The system allows film exhibitors and distributors to book play dates, show times, trailers and track data and payments online.

And in an unrelated market, DTS received a boost when its proprietary surround sound technology, along with that of its competitor Dolby, was selected for use in the new generation of high definition DVD players by the separate manufacturers of the competing HD-DVD and Blu-ray formats.

DTS reported slightly higher than expected second-quarter earnings this month, with net income at $1.9 million (10 cents per share), compared with $1.8 million (10 cents) in the same period a year ago. +++++++++