DivX Sues Yahoo Over Toolbar Agreement; Readies New Google Pact

DivX met all the agreement’s requirements, the suit said. It downloaded “tens of millions” of Yahoo Toolbars and Internet Explorer 7 optimized for Yahoo to DivX customers since the pact began Sept. 27, 2007, DivX said. Sales to Yahoo totaled about 22 percent of DivX revenue in the first three quarters of 2008, or more than $15 million, it said. DivX revenue from Yahoo was $2.6 million over six weeks of Q4, or about 11 percent of the quarter’s sales, DivX Chief Financial Officer Dan Halvorson said in an earnings call earlier this month. The suit seeks more than $25 million in damages.

DivX, having signed a two-year pact with Google March 9, is expected to begin pairing its software with Google’s by Q2, DivX said in a 10-K filing at the SEC. The agreement marks DivX’s return to Google, with which DivX parted ways in 2007 after a two-year run. Google, which Yahoo replaced two years ago as a DivX partner, accounted for 16 percent of DivX sales in 2006 and 17 percent in 2007, DivX said.

Red-laser DVD accounted for 66 percent of DivX’s $93.9 million in fiscal 2008 sales, down from 70 percent of $84.8 million in sales a year earlier, the DivX 10-K said. Blu-ray is “emerging rapidly” for DivX, which has 117 player models with its compression software installed, including decks from JVC, Denon, LG, Marantz, Panasonic, Philips, Pioneer and Samsung, CEO Kevin Hell said in the company’s recent earnings call.

DivX as a feature was installed in 42 percent of the world’s DVD players as of Sept. 30, Hell said. It had a 26 percent Blu-ray player install base in Europe as of Dec. 31, he said. DivX hasn’t disclosed data on Blu-ray penetration in the U.S., a spokeswoman said. DivX also has certified more than 200 models of DTV sets, with another 300 pending, Hell said, and it cleared 10 chipsets from Broadcom, Mediatek, MStar and others in Q4. More than 20 cellphones also have been certified and DivX has had more than 1.1 million downloads of its mobile player software, including 300,000 in Q4, Hell said.

The company has released DivX 7 software, which adds supports for H.264, and established the DivX Plus HD certification program for that platform, Hell said. During the first 50 days of availability, downloads to consumers were up 62 percent and direct sales up 41 percent, compared with the same launch period for DivX 6, he said. DivX is holding off marketing DivX 7 software until it has a distribution partner in place, which is expected by Q2, Hell said.

DivX doesn’t expect “significant short term revenue” from its agreements with Sony Pictures Television International and Warner Bros. Digital Distribution to release DivX-compatible movies, Hell said. The pacts will provide “significant fuel” for DivX’s CE business and increase brand recognition in the U.S., Hell said. Sonic Solutions’ CinemaNow is among those expected to sell DivX- encoded films. DivX has paid Sony a one-time $1 million fee and issued vested warrants for 50,000 shares of its stock with a $9.45 price and an 18-month exercise period dating from their agreement in June 2008, the company said. In October, Warner was paid $5 million and received 320,000 shares with a $6.85 strike price and 22-month exercise period, DivX said. “The pieces of the pie are getting the e- tailers launched so we have sites that are selling content in the DivX format and adding studios,” Hell said.

DivX’s Connected Solutions software has been “slow to materialize over the past several years,” due partly to its being an open platform, Hell said. Proprietary streaming services from Apple TV, Netflix, Sony Bravia and others have been faster to catch on, industry executives have said. DivX is “working hard” to enable its Connected platform to stream Internet content and services directly to CE devices without the need for a PC, Hell said. H.264 will be key to expanding Connected beyond initial devices from D-Link and Hauppauge Digital and into embedded devices, DivX has said.

H.264 developer MainConcept, which DivX acquired in late 2007 for $22.6 million, generated $6.2 million in technology licensing revenue last year, DivX said. In 2008, $2.5 million was added to the MainConcept purchase price as milestone payments, DivX said. It paid $2 million in license fees to MPEG LA in 2008, unchanged from the previous year. It expects to pay MPEG LA $5 million this year, the 10K stated. DivX’s MPEG-4 Part 2 Visual Patent Portfolio license expires Dec. 31, 2013, the company said.

DivX’s Q4 profit narrowed to $2.56 million from $3.72 million a year earlier as revenue declined to $23.1 million from $24.4 million. Technology licensing sales rose to $20.4 million from $18.3 million, the company said. Hardware was 70 percent of licensing revenue, while software, which includes MainConcept, was 19 percent, Halvorson said. Media and distribution sales declined to $2.67 million from $6.1 million, largely from the loss of the Yahoo agreement, which stopped producing revenue Nov. 11, the company said. DivX is forecasting a per-share Q1 loss of two to four cents as revenue drops to $17.5 million to $18.5 million from the lack of toolbar sales.

DivX trimmed 20 jobs in Q4 to end 2008 with 310 employees, down from 380 a year ago when it still operated Stage6, the company said. It shut down Stage6 in February 2008. In a cost-saving move, DivX won’t renew a lease that expires this month for 6,700 square feet of additional space at its 47,000-square-foot headquarters in San Diego, the company said.