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Audio Advance

The sounds of creatures scampering through the forest jump at you from every direction.

A fight breaks out, and the din of hand-to-hand combat abounds.

It’s startling until you realize you’re sitting in a leather chair at SRS Labs Inc. in Santa Ana.

That’s where the company’s advanced rendering lab shows off the clarity of its audio technology with the help of a battle scene from Avatar on a flat TV.

The 700-square-foot, sound-proof room has 22 speakers and two subwoofers controlled by a laptop computer in the center of the room.

The 10-minute demonstration ends, and SRS Chief Technology Officer Alan Kraemer lets you in on a secret: All those sounds that traveled around the room—from wall to wall and corner to corner, front and back—didn’t come from the 22 speakers.

It was just the two in front and one subwoofer below them.

Kraemer is clearly in his element as he smiles: “It’s a leap forward for us.”

Welcome to the future of surround sound.

It’s called CircleCinema 3D, a technology rooted in psychoacoustics, the science of sound perception. CircleCinema is set to appear in HDTVs and soundbars under licensing deals in 2012.

It has already caught the eye of Hollywood and music industry brass, prompting SRS to open an office in Santa Monica earlier this year and retrofit it with a smaller version of the Santa Ana rendering lab. The one at headquarters cost $250,000 and took six months to build. It’s been instrumental in landing new customers and cementing ties with existing ones, according to Kraemer.

“We want to make sure they know we’re on top of the future,” he said.

Growth Spurt

SRS is in the midst of a growth spurt as consumers and businesses seek better audio quality from their TVs, tablets and smart phones.

The company—which specializes in surround sound, audio rendering and voice processing—hit $31 million in revenue in 2010, up more than 41% from a year earlier. Profits were about $3 million.

It recently expanded its headquarters, adding a wing that cost another $300,000 to retrofit. SRS plans to use the new space to house beefed-up sales and marketing departments, according to Allen Gharapetian, senior vice president of marketing.

The company competes against much-bigger Dolby Laboratories Inc. in San Francisco, which sees annual revenue of $940 million, and a host of smaller companies.

SRS licenses its technology to consumer electronics makers, home theater builders, computer game developers, carmakers and others.

SRS counts some of the largest TV designers and makers as clients, including Irvine-based Vizio Inc., Samsung Group of South Korea and Japan-based Funai Electric Corp., which sells sets under the Philips brand in the U.S.

Samsung accounted for 38% of SRS’ revenue in 2010, according to filings with the Securities and Exchange Commission.

· Headquarters: Santa Ana

· Business: audio technology with specialty in surround sound

· Founded: 1993

· Ticker symbol: SRSL (Nasdaq)

· Market value: about $102 million

· Notable: 2010 sales of $31 million, up 25%; inroads with entertainment industry spark lab in Santa Monica

Tablets

SRS also licenses its technology to six of the top 10 largest tablet makers, according to Kraemer.

In many instances, the SRS name might not be branded on a product, but it’s usually found in the user’s manual.

The company has started to make headway in smart phones, grabbing about 7% of market share, according to Kraemer.

“As people start consuming entertainment (on smart phones) it’s more important to get the best possible experience,” he said. “It gives us an opportunity to expand further in that market.”

In February, SRS debuted a plug-and-play product designed to provide better audio quality on iPads, iPhones and iPods from Cupertino-based Apple Inc. The products are carried on SRS’ website and through other online retailers.

SRS employs about 130 people companywide. More than half of its work force are engineers.

It has has sales offices in Japan, South Korea, Taiwan and across Europe.

History

The company’s origins date back to the late 1970s when Hughes Aircraft Co. landed a government contract to develop a test communication system for airplanes on aircraft carriers.

In 1984, Hughes hired noted researcher and inventor Arnold Klayman as a senior scientist to build an audio division around him. He later led Hughes’ creation of advanced entertainment systems for commercial aircraft.

It was at Hughes that Klayman created SRS’ namesake technology: the sound retrieval system.

The technology, which captures certain qualities of sound lost in stereo recordings, eventually became the standard for 3D audio technology.

Klayman developed several more audio technologies and patents before joining a few engineers from Hughes in buying the SRS name and taking the company independent in 1993.

A year later prospective investor Tom Yuen, cofounder of one-time Irvine-based computer maker AST Research, visited SRS’ offices.

As company folklore has it, Yuen asked SRS executives on the spot: “How much?”

Yuen now is chairman and chief executive of SRS and controls about 20% of the company’s stock.

He recruited former AST engineer Kraemer to lead the technology side of the business.

Complementary

The two complement each other, according to Gharapetian.

“Tom is very practical—Alan isn’t that practical and is a freak when it comes to technology,” he said. “Both are audiophiles and really understand the consumer electronics business.”

In 1996 SRS went public with a $22 million public offering.

From the company’s inception until early 1998, its revenue was derived from audio technology licensing for consumer electronics, computers and video games.

In 2001 SRS revised its business strategy to focus on licensing the company’s audio and voice enhancement technology for Internet audio, online radio and traditional broadcast applications.

In 2006 Klayman retired from the company, passing the torch to the next generation of SRS audio engineers.

He died two years later.

SRS honors his legacy with a placard above the door of the advanced rendering lab.

The lab’s foundation is one of the last remnants of the old Hughes operation in Santa Ana.

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