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Tuesday, August 29, 2006

The Divx IPO Starts To Look Better

When Divx started the process of filing papers for its IPO in April, the numbers were a bit thin, but the first half of 2006 has made the company a more attractive candidate for the public markets.

During the six months ending in June, revenue almost doubled from $14.1 million last year to $27.3 million in 2006. For the full-year 2005, revenue was $33 million, so the multimedia player company might be able to get an enterprise value of $200 million based on a comparable from RealNetworks, a competitor that trades at five times sales.

Divx had income from operations of $6.7 million in the first half.

The risks surrounded the Divx business model are still daunting. The company uses the MPEG-4 compression software for its video, and this technology comes from a patent pool. AT&T has challenged some of the technology, suggesting that its IP may have been violated, so the cost of doing business with MPEG could go up.

Another major issue is that Google represented 20% of Divx’s revenue in the first six months of 2006. Divx downloads some of Google’s software with its products and collects a fee. If the relationship were to be modified, the affect on the Divx revenue base could be considerable.

The last significant risk with Divx is that it is up against products like Apple Quicktime, RealNetworks RealPlayer, and, most important, the Microsoft Windows Media Player. With huge amounts of content already delivered in these formats to both PCs and portable devices, there is a real question as to whether Divx can turn itself into a big business. Microsoft’s stronghold in this business has been close to insurmountable for both Real and Quicktime.

In the Divx S-1, the company also talks about building a video community around its player distribution and content that has already been created using its format or will be in the future. With companies like You Tube enjoying a huge head start, this would seem like a difficult business to enter.

Unlike many other companies in the multimedia sector, Divx has proven that its can grow at a rapid pace and make money.

Balancing the company’s financial success with the risks that it points out in its won document, it would be fair to assume that in this market, the company may be able to support a market capitalization of $175 million to $200 million. Whether they can raise enough money from that valuation to sustain their momentum is another question.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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