IPO Report: What Is DivX Worth? (RNWK, DIVX)

Includes: DIVX, RNWK
by: Douglas McIntyre

DivX Inc (DIVX) has just filed its S-1 with the SEC. By comparing it to its mostly closely related public company, DivX is worth about $160 million. The whole company. The IPO is to raise as much as $135 million.

DivX's businesses are similar to those of RealNetworks. Real's (NASDAQ:RNWK) revenue last year was $325 million. Its market capitalization is $1.59 billion according to Yahoo!Finance. The DivX S-1 says its revenue in 2005 was $33 million. That's the math.

One could make the argument, for several reasons, that Real should have a higher multiple than DivX. Real has $700 million in cash on its balance sheet. That's nearly half of its market cap. Real's distribution, and, more importantly, its use on PC's, cellphones, and consumer electronics devices is probably much greater than DivX's. Real's Helix media server system is almost certainly more widely deployed than DivX's servers and the amount of content on the internet played back in the RealPlayer is also almost certainly greater.

Real also has a well-developed subscription service that includes its Rhapsody and SuperPass products. Real, because of its size and recent settlement of antitrust claims with Microsoft, is in a better position to compete with the Windows Media Player platform than is DivX. And Real's digital rights management software, used to protect content from piracy, is almost certainly more widely deployed and used that DivX's.

Perhaps the most important issue mentioned in the DivX S-1 is the following: DivX has

entered into a license agreement with MPEG LA pursuant to which we have acquired rights to use in our technologies and products certain MPEG-4 intellectual property licensed to MPEG LA. Our licensing agreement with MPEG LA grants us a sublicense only to the rights in MPEG-4 intellectual property licensed to MPEG LA. ...We have been contacted by third parties regarding the licensing of certain patents characterized by such parties as being essential to the MPEG-4 visual standard. In this regard, AT&T has offered to license us certain patents it claims are essential to MPEG-4 and our products

Having AT&T (NYSE: T) looking at patents on the technology you use is not a good thing.

Unlike RealNetworks, DivX must license some of its core technology from the MPEG patent pool (www.mpegla.com), and the current version licensed by DivX is a bit long in the tooth. So, DivX faces competing with companies like Real and Microsoft (NASDAQ:MSFT) who have their own core technology, developed in-house, while DivX must rely on an outside provider that has to be paid annually for the license to its patents.

A couple of other ratios worth reviewing are revenue per share and revenue per employee. The DivX filing lists fully diluted shares at 49.4 million. So, their revenue is $.668 per share. RealNetworks has 176.9 million shares. That puts revenue per share at $1.81, or 2.7 times the DivX figure. Turning to employees, DivX has 189, so revenue yield per employee is about $175,000. Real has 915 employees, so revenue yield there is $355,000, or over two times DivX.

DivX will almost certainly have to show first quarter, and, perhaps, first half numbers before the IPO goes to market. It should be telling. The company's cash position is about $25 million. It made $3.1 million on $33 million in revenue in 2005.

It will require some extremely big numbers in early 2006 to convince those looking at the IPO that it should trade at a premium to RealNetworks. At this point, there are simply not enough compelling reasons. And, raising $135 million on a rational market valuation for the whole enterprise of $160 million would be a very big stretch indeed.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.