The future sounds promising to digital entertainment firm.

THE rollout of high-definition television programming is expected to alter the entertainment landscape over the next two years, as consumers trade in their old TV sets and DVD players and buy movies in yet another new format.

That's good news for Agoura Hills-based DTS Inc., a digital audio competitor to surround-sound giant Dolby Laboratories Inc.

Many consumers recognize Dolby as the de facto "surround sound" standard used in thousands of movie theaters and in most DVD titles.

DTS Digital Surround is lesser-known, but is used in many automobiles, DVD and home theater systems. It was first introduced in the movie "Jurassic Park" --Steven Spielberg was an early investor in the company--and some audiophiles claim the technology sounds richer and more detailed than Dolby Digital.

DTS scored a huge boost when it was chosen, along with Dolby, as the standard format for next-generation high-definition DVD players expected to hit the market by next year.

"The market opportunity for us as a technology licensor is in the hundreds of millions of dollars," said Jon Kirchner, DTS' president and chief executive. "We expect a slower kick-off and then acceleration in 2007, 2008 and 2009."

Short-term slowdown

While DTS' long-term outlook appears promising, the company faces plenty of short-term challenges as sales of DVD players and home theater systems decline.

DTS Inc. shares have fallen 45 percent in the past year to $16.80 a share, and now trade at the same level of its IPO two years ago.

The company lowered its earnings and revenue guidance for the second-quarter and year, citing softness in its DVD trademark licensing and a lower-than-expected ramp-up of its digital images business.

In the first quarter, DTS reported net income of $3.6 million, up from $3.4 million for the like period a year earlier. Revenues rose 41 percent to $22.1 million.

"We've gotten feedback from the DVD industry that sales are slowing," said Kirchner. "There is a fair amount of news about slowing growth rates in DVD and a lot of people are looking to the next-generation formats to light a new spark in the industry."

Ralph Schackart, an analyst at William Blair & Co. in Chicago, said DTS has "a great long-term opportunity now that it's a standard on the next-generation of DVDs." He thinks 2005 is a year of "building and repositioning."

One move has been to snap up Lowry Digital Images, a well-known name in Hollywood for film restoration and enhancement. Lowry, based in Burbank, has scrubbed and upgraded nearly 200 movie titles, including the "Star Wars" and "Indiana Jones" DVD series.

The purchase, for $11 million, gave DTS yet another product category to capitalize on the expected surge in demand for high-definition DVD products, as movie studios enhance and upgrade older films to the new format.

Scrubbing film

To assist in the ramp-up of Lowry, the company hired Bill Neighbors, who helped launch DTS in 1993 and served as its president for three years. He was named vice president and general manager of Lowry Digital.

"One of the things we know about digital entertainment is that the world is moving to ever-better pictures and ever-better sound quality," said Kirchner. He pointed to the announcement in April by Sony Pictures Entertainment, a unit of Sony Corp., to begin digitizing its vast library of TV shows and movies as an example of growing demand for digital services.

Today, DTS derives 70 percent of its revenues from licensing its audio technology and trademarks to a variety of manufacturers, including car makers, personal computer companies and theater owners. Several car makers now offer DTS' audio technology as an option. Acura has made it a standard on two of its models, according to a recent report by Gene Munster, a senior research analyst at Piper Jaffray & Co.

The remaining 30 percent of the company's business comes from selling services to movie studios and hardware to movie theaters. Lowry, with sales of roughly $6 million last year, represents 10 percent of DTS' overall sales.

DTS Inc.

Stock Prices
YEAR (Dec. 31)                     2004          2003

Revenue (millions)                $61.4         $51.7
Total Expenses (millions)          47.3          36.5
Operating Income (millions)        14.1          15.2
Net Income (millions)                10           9.9
Earnings Per Share                 $.59          $.95

SUMMARY

Business: Digital sound and imaging technology

Headquarters: Agoura Hills

CEO: Jon Kirchner

Market Cap: $294 million Dividend Yield: None

Total Liabilities: $18 million P/E Ratio: 30.7

Long-Term Debt: $0

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].