Sep 11, 2006

Pirate Software Cleans Up, Goes to Wall Street

San Diego, CA

DivX, Inc.; San Diego, California; (858) 882-0600; divx.com; Lead Underwriter: JPMorgan; Offering Price: $12-14; Expected date: Week of Sept. 18; Ticker: DIVX.

DivX is treading a similar path.  It's video compression-decompression technology - known as codec for short- got rolling in the later 1990s as a way to download pirated movies off the Internet.  Now the DivX team is partners with DVD and software makers to sell legitimate content.

As with MP3-compatible CDs, DVDs have to be specifically made to be compatible with DivX.  Shoppers in consumer electronics stores can find DVD players by Philips Electronics (NYSE: PHG- News) and Samsung with the "DivX certified" logo.  That means you can burn DivX files onto your DVDs and play them on the players.

THE COMPANY

DivX was founded in 2000 and since then consumers have downloaded its software 180 million times.  Fifty milion of those downloads have occurred in the last year.  More recently it has rolled out consumer software products such as the DivX Player, similar to the RealPlayer or Windows Media Player.

However, most of the money doesn't come from consumers.

About 70% of current revenue comes from licensing fees from hardware makers that use DivX technology.  Philips is the largest customer, providing about 13% of all revenue.  Google (NASDAQ:GOOG - News), which pays to have its own software included in DivX's downloads, provides about 20%.  The rest of the firm's income is from vendor fees, direct sales via the company Web site and revenue-sharing deals with content providers.  One example of the latter is a new online video community called Stage6.com, which DivX hopes will take off and provide a larger share of revenue.

RISKS, CHALLENGES

Although no company competes in DivX's precise niche, there's an abundance of video software out there, by companies like RealNetworks (NASDAQ:RNWK - News), Microsoft (NASDAQ:MSFT - News) and Apple (NASDAQ:AAP - News).  These and other firms can potentially move onto DivX's turf.

DivX is still new and much depends on establishing brand awareness and loyalty.  It became profitable about a year ago. 

The company depends on a few companies for much of its revenue.  Aside from Google's 20%, the top 10 hardware licensees account for an additional 41%.  Any disruption in these relationships could be costly.

More than three-quarters of sales come from outside North America.  This exposes DivX to risks of different foreign standards on taxes, trade, regulations and intellectual property rights. 

Prices of DVD players have dropped sharply over the years.  The continued downward pressure can hurt the amount that DivX can demand in licensing fees.

THE RESULTS 

DivX is still in ramp-up mode, with revenue at least doubling every year since inception.  In the first six months of this year, revenue rose 94% over the prior year to $27.2 million. 

The firm became profitable in the second half of last year.  In the first half of this year operating income totaled $6.7 million, or 25% of total revenue.

USE OF PROCEEDS

DivX expects to net $87.4 million from the offering of 9.1 million shares.  It gives no specific plans for the money, saying it will use it for general corporate purposes and working capital and possibly for buying technologies or businesses.

THE MANAGEMENT

R. Jordan Greenhall
Chairman and Executive
Co-founded the company after bried stints working for MP3.com and Intervu.  He has a law degree from Harvard.

Kevin Hell
Chief DivX Officer, Partners and Licensing
Joined in May 2002 and attained his current position in April.  Before that he spent a year as a senior executive at Palm (NASDAQ:PALM - News) and two years at Gateway (NYSE:GTW - News).  From 1991 to 1999 he worked at Boston Consulting Group.  He has an MBA from the Wharton School of Business.

David Richter
General Counsel, Legal and Corporate Development
Joined in 2004 from the venture capital firm Maveron.  He has a law degree from Yale.