Digital Theater IPO Makes Noise

Theatrical surround-sound company Digital Theater Systems Inc. blasted onto Wall Street on Thursday with the market’s strongest initial public offering in more than a year, jumping 47% in its first day of trading.

The performance by Agoura Hills-based DTS was another in a series of recent signs that the IPO market may be warming back up.

The profitable company -- whose digital audio system is installed in more than 20,000 theaters worldwide -- sold 3.84 million shares at $17 each, raising $65.3 million in its IPO.

The stock then soared $7.92 on Thursday to $24.92 in Nasdaq trading.

The IPO market has been slow to recover after crashing with the technology sector in 2001 and 2002. Some investors have been put off by revelations that Wall Street manipulated IPO prices during the late-1990s market boom.

But a few companies with solid sales and earnings track records have been able to coax investors to buy their IPOs.

“The companies that are braving this IPO market are, almost without an exception, making money,” said David Menlow, head of IPOFinancial.com in Milburn, N.J. For those companies, he said, “this is a window of opportunity.”

A number of recent offerings have gotten strong receptions. Last week, for example, managed health-care company Molina Healthcare Inc. of Long Beach sold 6.6 million shares at $17.50 each. The stock rose 14% on the first trading day and has continued to climb, closing at $22.50 on Thursday.

Founded in 1990, Digital Theater Systems was built on the belief that movie soundtracks could be stored more effectively on digital discs than on the film stock, as long as the disc was synchronized with what audiences saw on the screen.

The result was a digital audio system that attracted the likes of Steven Spielberg and Universal City Studios Inc., two of the company’s earliest investors. One of the first movies to showcase the technology was Spielberg’s dinosaur flick “Jurassic Park.”

Today, DTS’ audio system is a leading player in the U.S. theatrical market, though it faces stiff competition from Sony Corp.’s Cinema Products group and privately held Dolby Laboratories Inc., which is the industry leader.

Theaters equipped with DTS’ system show a brief commercial in which the words “The ... Digital ... Experience” slide on top of a compact disc with a metallic clang, before they disintegrate in a glassy explosion.

The firm, whose staff of 136 is based primarily in Southern California, took in $11.8 million in sales and earned a $2-million profit in the first three months of 2003. Its financial performance has improved steadily from a loss of $99,000 in 2000 to a profit of $6.3 million in 2002.

Recently, DTS has been pushing into consumer electronics, selling audio software for CDs and DVDs and licensing its technology for home theater systems. Although the theatrical market is key to the company’s health, analysts say the consumer electronics business promises to drive much of its future sales.

“If you’re in the market for electronics and you want to get a quality system, you’re going to get a system that has DTS,” said Paul Bard, an analyst with the IPO Plus Aftermarket Fund, a mutual fund in Greenwich, Conn.

DTS’ debut was the biggest first-day percentage gain for a new stock offering since retailer Aeropostale Inc. jumped 54% on its launch day in May 2002, according to data tracker Thomson Financial.

More than 2.9 million DTS shares changed hands Thursday, equivalent to 77% of the 3.84 million shares the company sold. That suggests that many who bought the shares at the offering price quickly “flipped” them as the price rocketed.

Given the first-day surge, DTS conceivably could have raised more than $65.3 million if the underwriters, led by investment firm SG Cowen, had priced the stock higher to begin with.

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Dow Jones/Associated Press was used in compiling this report.