Is DivX Just a Troubled Kid?

Apr.24.08 | About: DivX, Inc. (DIVX)

Did everyone see yesterday’s announcement from DivX (DIVX)? TVs that are DivX Certified, from HP and LG. Yawn. DivX has had an HP TV certified for some time, and the rest of this was distressingly devoid of details. (Nice to see the SKU count up, though.)

Particularly curious was the mention of internet video streaming capability on some models, but the wording suggests DivX isn’t involved in this part. If any of these SKUs incorporated DivX Connected technology I’m sure it would have been announced.

All in all quite a fluffy release, without much new in it. I wouldn’t have thought DivX was one to use puff pieces prior to earnings. But then…

Parents are always on the lookout for those telltale danger signs in their kids: falling grades, withdrawal from family involvement, strange friends, mood swings, glassy eyes, smoky odors clinging to clothes, etc.

I wonder. Is DivX a troubled kid?

First, there was the Stage6 imbroglio, with Jordan Greenhall and most of the founding team leaving for parts unknown. Stage6 was neither retained as an (expensive) venture investment nor spun off to others, but simply value destroyed - complete with swirling rumors of hot tempers and incompetence.

Then the departure of SVP Sales & Marketing Pamela Johnston early this month. These things are rarely explained adequately, or truthfully. Might be poor performance, might be strategic disagreement. But it could have been “time to get the hell out of Dodge”.

Third, sagging guidance for 2008, leading to a reduction in analyst estimates on the stock. The 2008 mean estimate has fallen 8% to $0.47, while the 2009 estimate dropped 15% to $0.55. The stock price followed. Everyone had been holding their collective breath for the end of the Stage6 drag on costs, but the MainConcept deal has brought unanticipated expenses and 2008 is now being billed as “an investment year”. I thought 2007 was the investment year.

Finally, I have heard rumblings lately about layoffs at DivX. If true, this could really hit the stock where it hurts, although any associated cost is almost certainly already in management–if not analyst–estimates.

DivX is cheap. It’s trading at about 15 times forward earnings, and has an enterprise value on the order of only $100M. This is simply nuts for a company with high gross margins and rapidly growing license revenue. It generated $13.3M in free cash flow last year, and that was when it was burdened to the tune of about $20M by Stage6. But some of the points above help explain why this thing has been so badly ostracized by the investment community, which is understandably nervous after a long roller coaster ride.

I like DivX. I use their tech and it’s excellent, especially DivX Connected. Their user base is rabid and involved. I like the management team. They’ve made impressive announcements recently about licensing and content deals which should prove lucrative. The DivX format will soon incorporate perhaps the best H.264 codec.

But like a good kid going through a rough patch, their potential always seems to be receding into the future. And like most teens, DivX can rightly complain that “nobody understands me.”

On the other hand, maybe it’s just puberty.

Disclosure: I hold no position in any of the stocks mentioned here.