Jordan Greenhall makes no attempt at hiding his ambition. The intense, young chief executive officer of DivX Inc. says what he feels, and what he feels is that his 6-year-old digital-video software company is going to be huge.
"We fully intend to be the largest company in San Diego," said Greenhall during a recent interview at DivX's University City headquarters. "Bigger than Qualcomm."
Greenhall probably isn't the first San Diego executive to aspire to the position, but he just might be the one with the best shot of following through.
Jordan Greenhall is the CEO of DivX. Photo - J. Kat Woronowicz
DivX (Nasdaq: DIVX) is surely one of San Diego's brightest young companies. Alongside the incendiary growth of online video content over the past few years, the company has emerged as a major player in the online video sector. Essentially, DivX makes software that enables users to shrink digital video into a size small enough to be played on the Internet. It also allows users to export online video content to their living rooms through DVD players embedded with DivX software.
"Arguably, they were the first to bridge the gap between the home office and the living room," said Rob Adams, an analyst with Montgomery & Co. in San Francisco.
40% gain
Since going public Sept. 22, which netted the company approximately $111 million in cash, DivX shares have performed extremely well. The share price has gained approximately 40 percent in value in the month and a half since it debuted at $16. Shares of DivX closed at $26.89 Friday.
Part of the hype surrounding the company could be related to a recent spike in corporate interest in the online video market following last month's much publicized acquisition of the online video-sharing Web site Youtube.com by Google Inc. (Nasdaq: GOOG). Google paid $1.65 billion in stock.
Since its founding in February 2005, YouTube has grown from a small collection of videos being viewed by a handful of users to -- at the time of its purchase -- a daily upload rate of 65,000 new videos, which generates 100 million views per day. (YouTube currently recommends DivX software for uploading video.)
The other attraction of DivX is the company's opportunity for revenue growth and, quite simply, its high rate of profitability.
This has made DivX a darling of Wall Street analysts. Of the four analysts currently covering the company, all have a Buy rating or higher on the nearly $900 million company. On becoming the biggest company in San Diego, Montgomery's Adams said with a chuckle, "It's good to have goals." And referring to Greenhall: "But this man does have an enormous market opportunity. The beauty of the (DivX) story is they've really built themselves a marketplace in the consumer electronic space."
Powerful following
Adams said DivX has created such a powerful following and brand recognition that many Silicon Valley insiders predict consumers won't be able to find a DVD player without DivX technology within a few years. He also noted there are currently more than 120 million DVD players shipped per year. In the second quarter 2006, 20 percent of all DVD players worldwide were DivX-enabled. At more than $1 per unit, the potential for revenue growth in the DVD realm alone is large. And according to Greenhall, that's just the beginning.
His vision for the company is to continue to expand into more electronic devices like digital cameras, portable media players, cell phones and smart TVs. DivX already has enabled still cameras on the market.
Reports from France indicate DivX-enabled still cameras are outselling the same models without DivX by a 3-1 ratio, according to Adams.
Under Greenhall's stewardship DivX has expanded into the content realm as well. In August, the company launched Stage6, an online forum that the CEO envisions as a serious competitor to YouTube, but with a special emphasis on enabling video providers to generate a brand and create a following.
DivX's profitability, which Greenhall will gladly tell you sets it apart from YouTube -- a company that hasn't managed to turn a profit in nearly two years of operation -- has been a factor in DivX's spurning of numerous acquisition offers since its inception.
Throughout the company's history, Greenhall said his mantra has been to pursue the path that offers the highest likelihood of success for the company.
"So far that has been pursuing a private path and going public ... and frankly, I still think that's the best path," he added. "But if somebody came along with an offer that was compelling and we believed that it would be more effective in accomplishing our long-term mission, we'd look at it very closely."
According to Montgomery & Co.'s Adams, DivX is an acquisition target, and a firm like Google or Yahoo (Nasdaq: YHOO) ultimately will have to "take these guys out."
Building a company
DivX was founded just before the dotcom bust in February 2000 after Greenhall managed to convince Jerome Rota -- a French software engineer who created DivX's founding technology -- to join him in building a company. Including Greenhall and Rota, eventually there would be five co-founders, all of whom are younger than Greenhall and still with the company.
Greenhall speaks with the aplomb and knowledge one would expect from someone who went to Harvard Law School because he thought "it would be intriguing." Did he intend to practice law? "Not really. I just thought that going to law school, particularly at Harvard, would be ... a way for me to get broader horizons," he said during an interview at DivX's stylish headquarters in University City.
His approach appears to have worked. At 35 years of age, he finds himself at the helm of a company that is continually expanding into uncharted water, in which Greenhall's personal stake is 8 percent, valued at $75 million. Including Greenhall, DivX management currently controls 40 percent of the company's shares.
With a rapidity fitting for a potential auctioneer, Greenhall will describe at length why Microsoft (Nasdaq: MSFT) beat Apple (Nasdaq: AAPL) in the personal computer wars, why Google bested Yahoo in the search-engine game, and, with the most devotion, why DivX will prevail over its competition.
That might be because there isn't much direct competition out there. According to Greenhall, DivX is the only "open-ended comprehensive" digital video media company, meaning that some companies may offer a good product but they aren't supported by an extensive online community or content providers.
Closed system
Apple's iTunes ecosystem, according to Greenhall, is an example of a closed system, though he added that these types of companies could become valuable should they decide to become "open."
"Closed systems have the advantage on the short game," said Greenhall. "Open systems, however, you have to get a bunch of people together to make it happen. Once you do get everyone working together, that momentum almost invariably wins."
By taking the open approach, Greenhall is completely confident in DivX's long-term position.
"Virtually no competitor scares me," said Greenhall, dressed in a T-shirt and shorts, with his legs propped up by a leather chair in the company's boardroom. "Not because we're anything special, but because of the approach we take."
He said the company's model is supported because of the lengths it has taken to develop a faithful following of software users and content providers.
"There's nothing that pulls you into a market better than people saying, 'I'm willing to pay for it,'" he said of his users' willingness to pay extra for DivX-enabled DVD players.
Consumer electronics licensing currently generates the lion's share of DivX revenues, weighing in at 70 percent; and analysts expect it to fuel the company's growth in the near term. The company also generates revenue from advertising and product distribution (18 percent), digital media distribution (2 percent) and software sales (11 percent). Analysts anticipate media distribution revenues to pick up slightly but otherwise to stay within these boundaries.
In its first quarterly filing released Oct. 30, DivX reported net income of $3.1 million, or 10 cents per share, on $15.4 million in revenues. Analysts trumpet the company's 93 percent gross margins and were encouraged by DivX's $147 million in cash reserves.
With such a multifaceted business model, Greenhall said the biggest challenge for DivX is making sure all of its products can be integrated smoothly.
"We have a strategy that covers a large front and many of them seem quite diverse," he noted. "Making sure that everyone speaks DivX and making sure all the content providers speak DivX" is the company's greatest challenge.
For instance, if consumers were to have DivX cameras that for some reason weren't 100 percent compatible with their DivX DVD player, then the benefit of having elements of the DivX ecosystem would be lost. To solve this problem, Greenhall rests his faith in the hands of his company's 250 employees who go through a rigorous interview process, he said, that involves both a skills interview and a culture interview, which is "necessary to have character and personality in order to thrive in an open environment." He also said San Diego is an ideal location for a digital media company because it is near Los Angeles and Silicon Valley, but not too close.
"For DivX to be successful over the long term, we need to be both open and healthy," Greenhall said. "We want to be like Microsoft, but good. You have to have the right people and the right environment."
Nov. 20, 2009, 11:45 a.m. -- San Diego's web video news: Today's breaking major business events, economic, and financial announcements from the Daily Transcript/San Diego Source newsroom.
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