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DivX, Inc: DIVX 0.00 [N/A]

High Cash reviewed companies

November 11, 2009

RE: High Cash Stock Review on DivX, Inc.  (DIVX $5.26) – A Technology Licensing Company

Dear Valued Customer,

We like this one, and it fits our model! Here is our review process, including support for why this is currently one of our top picks.

Step 1 – We first search for companies with pristine balance sheets.

DivX has roughly $143 million dollars in cash, or $4.38 per share, and no long term debt. Divx has a very strong balance sheet.

Step 2 – We like extremely low enterprise values.

When you subtract out the cash and debt out of the enterprise, DivX’s enterprise value, or the value of the ongoing operations of the company, is actually very small. So if you buy the company for say about $5.25 dollars per share, or about $167 million dollars, then you remove the $4.38 of cash, or $143 million dollars, the remaining value of the company is only about $24 million dollars. For a very high margin licensing company that trying to dominate high-quality digital video across any device, with very nice established franchise, and a great ability to leverage off it’s large footprint and ecosystem, this appears to us to be extremely low.

Step 3 – Is the operation or enterprise driving value to the shareholders?

DivX receives another yes. They had an outstanding quarter, as they lost 1 cent per share but their forecast for profits of 1-3 cents and higher margins and revenues next quarter. With many people worried about the dollar, DivX gains most of it’s revenues, about 3/4 of their income, from outside of North America. So if the dollar declines it should be an added windfall for a US licensing company selling it’s intellectual properties abroad. This might be why DivX has a .74 Beta, one of the lowest I could remember especially for a technology licensing company.

Step 4 – Is this a good business?

We believe this is a very good business with a chance for monopolist standard setting returns. DivX today serves approximately 200,000,000 devices throughout it’s total ecosystem. That allows for a large market for any upgrade and/or new service, knowing the world wants a seamless way to convert your favorite flick or video onto your desired device for the day. The value to leverage a new fee-based upgrade, or add on products and services to it’s already existing 200,000,000 installed base of clients, is quite attractive. Hopefully they can create new and innovative ways to monitor this over sized footprint.

Step 5 – Is the Train Wreck and, then, the fog from the Wreck clearing?

When finding companies around cash value, often there is what we call a Train Wreck. With DivX, I believe the biggest negative issue is as follows: Will their technology become the true standard for engaging, creation, distribution and licensing of digital video technologies? The roadblocks often seen to DivX’s success are:

1) a highly fractured industry.

2) a new wide open paradigm emerging.

3) not a proven profitable market for companies.

4) very large companies are trying to establish simulator or competitive standards.

5) top management is over compensated.

6) UMG lawsuit.

I believe all these factors and more have been priced into this company’s current price, due to their small size and single products. Being seen as Swiss, they’re not seen as a threat to most companies, and industries often in hard times will let single companies establish a standard because uniting an industry on a single standard often can greatly enhance and grow the whole industry. With DivX’s large footprint, the new paradigm and the overall poor global economy, these factors could help DivX’s chances at becoming the defacto standard, or (simply put) obtain a monopolist position with strong industry leverage. DivX’s CEO, Kevin Hell, earlier comments were, “I believe we are in a strong position to emerge as the defacto standard for high-quality digital video across any device”. The value of DivX (which is just above cash) is priced as if it might not survive, but we believe that it’s large and increasing cash, forecast growth of profits, top line growth and focus to be the monopolist leader help DivX to be in a very strong position, being well placed to expand and profit plus possibly lead a revolution area of change.

DivX expect that it’s future success will depend upon their ability to successfully penetrate the existing markets of digital media technologies including:

Established Markets

• DVD players;
• DVD recorders;

New Markets

• network connected DVD players;
• Blue Ray players;

• high definition DVD players;
• portable media players;
• digital still cameras;
• digital camcorders;
• mobile handsets;
• digital media software applications;
• digital TVs;
• home media centers;
• set-top boxes; and
• video game consoles.

To date, the DVD Markets have been the top revenue providers, but due to economic conditions the DVD sales appear to have stalled, and this has been the reason for the DivX reduction of sales for year to date in 2009.

In the 3rd Quarter, 2009, DivX announced it had 16% of sales from the New Markets category, and DivX has forecasted that 24% of revenues will come from the New Markets in the next 4th Quarter, 2009. This large uptake is helping DivX to also forecast overall higher top line revenue growth, quarter to quarter. Since royalties and licensing revenues for DivX, and most companies along similar models, are posting a quarter in arrears, a very large amount of this current quarter should already be completed with profits and sales already booked. It appears this New Market has just started to prove a nice lift to sales, and the main reason for DivX increased forecast. This also is a good time, since knowing the often much larger Christmas quarter (again in arrears) will be forecasted at the end of this quarter. Christmas could provide a much bigger boost knowing the historical large increases in volume for both the New Market category and DVD’s.

It’s my belief that the enterprise could achieve 4 times sales (giving DivX’s industry average is 4.58), which  is a valuation that could be low for a very high margin licensing firm. Four times revenues would put the enterprise value at around $8.12 a share, adding in the cash of $4.38 per share and this could have an upside of $12.50 per share and still be in parity with other technology firms. If DivX is able to gain a monopolist position and the corresponding advantages, this could put them in the 10 times revenues league.

In Summary

DivX currently is in a position that we are trying to identify for our clients – a good business with operations showing many strong tangible signs of improvement, at a very low price, with the possibilities of great appreciation and/or possible buyouts, and the hopefully limited downsize. Even if DivX isn’t able to achieve monopolistic appreciation in our best case scenario, DivX’s very low enterprise value alone could be the basis for a limited value increase.

Disclosure

Yes, and absolutely yes, I and related accounts own this company. We started buying around 5.07 per share. I just wish I could raise the money and buy the whole company. We like to invest in profitable business enterprises that have almost zero or, like in this case, a very small enterprise value. I’m sure other successful business persons would also like to do the same.

P.S.  I can’t wait and am already sorting through the new wreckage. If you would like other ideas like DivX, please give us your email and phone number. Making money after a demise can be fun and rewarding, and, if done right, you can help reduce the many risks that is involved with every equity investment.

More data can be found below. Please feel free to contact me about this investment opportunity.

Sincerely,

Randy Durig
Financial Investment Advisor
DIR 971-732-5119

_______________________________

11600 SW 69th Avenue | Tigard, OR 97223

971-327-8847 TEL  877-720-3010 TOLL FREE
Durig.com | Investment-Income.net

A+ Rating with the BBB!


DivX News

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DivX Financial Ratios

Updated 9November2009.

Dividend DIVX Industry Sector S&P 500
Dividend Yield N/A 1.51 1.72 2.40
Dividend Yield – 5 Year Avg. 0.00 1.89 0.95 2.04
Payout Ratio (TTM) 0.00 11.03 12.09 34.53
Efficiency DIVX Industry Sector S&P 500
Revenue to Employee (TTM) 271,583.30 431,087.89 496,239.38 795,221.68
Net Income to Employee (TTM) 6,860.00 95,490.15 85,087.34 87,884.40
Receivable Turnover (TTM) 9.15 6.69 7.72 10.27
Inventory Turnover (TTM) N/A 13.32 15.40 10.89
Asset Turnover (TTM) 0.43 0.52 0.70 0.90
Management metrics DIVX Industry Sector S&P
% Return on Asset (TTM) 1.08 10.50 7.15 5.90
% Return on Asset – 5 Year Avg. N/A 13.29 10.70 8.69
% Return on Investment (TTM) 1.18 15.83 10.39 8.50
% Return on Investment – 5 Year Avg. N/A 23.76 16.23 12.51
% Return on Equity (TTM) 1.21 24.23 18.48 15.48
% Return on Equity – 5 Year Avg. N/A 25.07 20.56 20.43
Share-related DIVX Industry Sector S&P
Market Cap N/A 2,054M 1,704M 20,192M
Beta N/A 1.05 1.17 1.00
Valuation DIVX Industry Sector S&P 500
P/E Ratio (TTM) 88.10 24.70 27.35 22.15
P/E High – Last 5 Years N/A 37.27 36.24 29.92
P/E Low – Last 5 Years N/A 11.34 12.32 10.41
Price to Tangible Book (MRQ) 1.14 N/A N/A N/A
Price to Book (MRQ) 1.01 5.11 4.49 3.57
Price to Sales (TTM) 2.19 4.58 3.91 2.37
Price to Cash Flow (TTM) 22.57 19.48 19.34 14.28
Price to Free Cash Flow (TTM) 7.30 18.86 20.63 22.66
% Owned Institutions 62.13 N/A N/A N/A
Profitability DIVX Industry Sector S&P 500
% Gross Margin (TTM) 91.24 73.72 53.01 45.78
% Gross Margin – 5 Year Average 92.97 75.69 53.50 45.87
% EBITD Margin (TTM) 12.50 30.92 19.68 20.71
% EBITD Margin – 5 Year Average 12.70 23.12 19.91 22.95
% Operating Margin (TTM) 5.34 25.60 15.50 14.95
% Operating Margin – 5 Year Average 9.12 23.17 17.17 19.24
% Pre-Tax Margin (TTM) 7.62 25.54 16.51 13.76
% Pre-Tax Margin – 5 Year Average 14.34 16.98 16.43 18.24
% Net Profit Margin (TTM) 2.53 18.41 11.32 8.54
% Net Profit Margin – 5 Year Average 11.69 7.02 10.15 12.61
% Effective Tax Rate (TTM) 66.87 26.74 25.30 29.25
% Effective Tax Rate – 5 Year Average 18.50 20.06 24.72 30.43
% Return on Equity (TTM) 1.21 24.23 18.48 15.48
% Interest Coverage (TTM) N/A 2.68 9.65 11.21
Financial strength DIVX Industry Sector S&P 500
Quick ratio (MRQ) 11.54 1.33 2.39 1.46
Current ratio (MRQ) 11.54 1.50 2.81 1.99
Long term debt to equity (MRQ) 0.00 23.60 28.90 64.60
Total debt to equity (MRQ) 0.00 27.80 34.70 75.20
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6 Comments

  1. Hello,

    I happen to read your article about Divx INC at my friend’s site, the OSV. I had a question regarding a potential risk that might take away Divx’s moat and appeal. It has something to do with Xvid Codec. I don’t know if you already know what this codec is but it is essentially a free codec version of Divx’s software that packages high quality video files into small files. History goes, one disgruntled software engineer “Sparky” from Divx Network back in the day wrote encoding algorithm called ecore2. The Divx codec and Xvid codec both uses this encoding therefore it is know to the people of the tech world that Xvid codec files can be played with Divx Players and usable on all platforms and OS.

    Now, I can see how companies may rather work with Divx due to their Brand Recognition, large media player implementation and most importantly DRM to prevent illegal pirating, but Xvid codec formating is free, compatible with much more platforms, has a large user base and quite possibly DRM-ready.

    I’m concerned that Divx’s moat may be reduced and it’s ability to grow in the future would diminish. I feel Divx’s revenue which is primarily from licensing could diminish if companies opted to use this free codec rather than Divx’s.

    Your opinion on this subject matter is greatly appreciated. I am still learning so any insight or information I maybe missing is welcomed.

    Thank you very much.

    SHM

  2. Your right it’s a potential threat. Because it’s a free codec it at first looked attractive to me, but I’m not seeing where it’s managed properly, it’s hard to pay people when you make nothing, so the older DivX looks, from my review, one of many technology lost products.

    Great question, we think alike

  3. congrats on DivX… up $1 so far when I looked recently – nice pick!

  4. Randy,

    Can you clarify on your reply above, “Because it’s a free codec it at first looked attractive to me, but I’m not seeing where it’s managed properly, it’s hard to pay people when you make nothing, so the older DivX looks, from my review, one of many technology lost products.” Trying to understand what you mean by “the older DivX looks”? Is the free codec a moot issue at this point and DivX is definitely on it’s way to becoming a standard or is this still a very real threat to DivX future revenues? Thanks, love your blog site by the way!

  5. Mark,

    Thanks for the complement.

    Your question- “Is the free codec a moot issue at this point and DivX is definitely on it’s way to becoming a standard or is this still a very real threat to DivX future revenues?”

    Upon first review it of course was, but with DivX excellent execution and it’s expansion into many new markets, so “MOOT” is just to strong of word, but in a couple quarters of this type of performance I think we could use it.

    Randy

  6. Very informative article… Looking forward for more articles on your blog

 

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