September 26, 2006, 4:29 pm

MR - Mindray pre-ipo analysis of today's ipo MR. Note that analysis was available to subscribers of the site 2 days prior to ipo pricing/open.

MR - Mindray Medical International

MR, Mindray Medical International plans on offering 20 million ADS at a range of $10-$12. Of the 20 million offering, 9.4 million will be coming from insiders. Goldman Sachs and UBS are lead managing the deal, 4 houses co-managing. 1 ADS equals one share and post-offering MR will have 103.7 million shares outstanding. On a pricing of $11, MR would have a $1.14 billion market cap. Approximately 75% of IPO proceeds will be used for construction of a new headquarters building and expansion of our manufacturing, assembly and warehouse facilities, including the potential relocation into a new facility in Shenzhen, China. The other 25% will be used for general corporate purposes.

Executives and directors will own approximately 75% of MR post-offering.

From the prospectus:

“We are a leading developer, manufacturer and marketer of medical devices in China. We also have a significant and growing presence outside of China, primarily in other regions of Asia and in Europe.”

The driver for this IPO is that MR is able to utilize low cost manufacturing in their homeland, China, and sell their products abroad cheaper than the competition. MR manufactures and sells more then 40 medical devises in three business segments: patient monitoring devices, diagnostic laboratory instruments and ultrasound imaging systems.

In terms of units sold, MR believes they've the leading market position in China for ALL three of their business segments. MR also believes their nationwide distribution, sales and service network is the largest of any medical device company in China. MR utilizes 1,950 distributors and 500 direct sales personnel in China and 600 distributors internationally. MR has sold their products to approximately 25,000 hospitals, clinics and other healthcare facilities in China and sold over 170,000 devices worldwide.

So we've a leading medical device manufacturer in China, now leveraging their low cost Chinese manufacturing capability to sell internationally. MR estimates they're able to undercut the competition on price internationally by up to 30%. MR's products are currently sold in more than 120 countries, and international sales grew from 24.7% of revenues in 2003 to 43.7% of revenues during the six months ended June 30, 2006.

Products: MR's leading product is a portable patient monitoring device which accounted for 13% of revenues first 6 months of '06. MR offers 15 different patient monitoring devices including 4 that have received United States FDA clearance. In their diagnostic segment MR offers ten hematology and biochemistry analyzers that perform analysis on blood, urine and other bodily fluids. In the ultrasound imaging systems business segment, MR offers more than ten ultrasound imaging systems

Patient monitoring products account for 40% of revenues, diagnostic instruments 30% and ultrasound 30%.

MR spends heavily on R&D and that investment has resulted in a steady stream of new products MR. These include MR's first color Doppler ultrasound monitor, MR's first 5-part hematology analyzer and MR's first anesthesia monitor.

It should be noted that MR expects that 2 recent Chinese government regulations will mute '06 revenues a bit. China instituted tighter regulations on medical distributors accepting kickbacks from hospitals. MR believes this new regulation will lengthen the sales cycle as hospitals take extra precautions to comply with this new regulation. The Chinese government has also added a new medical equipment safety standard before approving new devices. This extra layer of regulation has pushed back by 1-2 quarters MR's new product launches. Both regulations would appear to have only lengthened the sales cycle a bit for MR, and shouldn't impact gross sales over a longer period of time.


$1.25 per share in cash post offering, no debt.

Dividends- MR does plan on paying a dividend of 20% of annual net income annually. Based on 2006 earnings projections, MR's dividend would equal approximately a 1% annual yield.

MR has seen their revenues grow swiftly the past few years. Top-line growth was 50% in 2004, and then leaped 57% in 2005 to $135 million. Gross margins have been consistent in the 54- 55% range. Operating expenses have been in the 30% ballpark past few years. Operating income in 2005 was 21% historically however; in the first 6 months of '06 operating margins were closer to 25% than 21%. Stock-based compensation costs were wholly responsible for the operating margin dip in 2005.

Net margins in 2005 were 18%, helped in part to the 7% overall tax rate. Earnings per share in 2005 were $0.25. At a pricing of $11, MR would be trading at 44 X's trailing earnings.

MR has had a sub 10% tax rate since commencing operations. It appears they will lose some tax protections beginning in 2007 and I'm going to be conservative and factor in a 15% overall tax rate for 2007 and beyond. Tax rate should be closer to 10% in '06 after being 7- 8% historically.

MR looks poised for another 50%+ revenue gain in 2006. MR's growth has been impressive as 2006 looks to be the 5th consecutive year of 50%+ revenue growth. That is an achievement and would seem to indicate that MR's Chinese manufactured products are competing quite well internationally. The driver here of course is price, as MR is able to utilize their cheap domestic manufacturing base to undercut prices internationally. It is a good model and the revenue growth appears to indicate it is working nicely.

2006 revenues should approach $200 million. Gross margins again are in the 54%- 55% range. MR looks to book less stock comp charges in 2005, so operating margins should blip back up to the 25% level. Some of that margin increase will be given back by slightly higher tax rate, although overall tax rate for 2006 should still come in a bit below 10%.

I'd estimate net margins for 2006 to be in the 23%- 24% range. Earnings per share should be in the $0.45 ballpark. At a pricing of $11 then, MR would be trading 24 X's 2006 earnings.

Conclusion- China has been leading the world in GDP growth this decade and MR should continue to grow based just on their leading position in China. MR is doing a fantastic job taking their market leading medical device operation global. Due to their cheap manufacturing base in China, they've been able to grow foreign sales strongly by undercutting the competition on price. The result of all this has been 5 straight years of 50%+ revenue growth along with strong gross and operating margins. Due to the large number of outstanding shares available, MR is not coming at a dirt cheap valuation. Insiders are selling 1/2 of the shares in this offering; absolutely expect a secondary in 6 months time. However if they continue the trends of the past 5 years, MR should be a money making machine for years to come. This is one of the stronger Chinese IPOs to come along this decade in my opinion.

Leading Chinese medical device manufacturer utilizing low cost manufacturing base to increase international revenues. Very strong growth trends should continue for MR domestically and abroad. Recommend strongly in range and reasonably above range. MR has a chance to be a nice long term winner. .

September 22, 2006, 11:06 am


As the calendar picks up again, just want to mention that I analyze every offering before they come to market. We've also a lively message board on the site with over 100 posts and 2000 page views by myself/subscribers this week alone. We focus on ipos at and we do it well.

Our pre-ipo analysis of DIVX, which ipo'd today(disclosure - purchased shares of DIVX on the open market today at roughly $18 1/2) :


DIVX, DivX plans on offering 9.1 million shares at a range of $12-$14. 1.6 million shares of the offering will be sold by insiders. JP Morgan is lead managing the deal, Banc of America and Cowen co-managing. Post-offering DIVX will have 33.5 million shares outstanding for a market cap of $435 million on a $13 pricing. IPO proceeds will be utilized for working capital and general corporate purposes and potentially to acquire or license products, technologies or businesses.

Post-offering Zone Venture Fund will own 23% of DIVX while founder and CEO R. Jordan Greenhall will own nearly 9%.

From the prospectus:.

“We create products and services designed to improve the experience of media. Our first product offering was a video compression-decompression software library, or codec, which has been actively sought out and downloaded by consumers over 180 million times in the last four years, including over 50 million times during the last twelve months.”

DIVX's video compression technology uses a mixture of video compression tools, including some from the MPEG-4 standard, and is capable of producing high-quality video using only a fraction of the amount of data required by a standard-length DVD. DIVX has also developed a digital rights management technology that encrypts and manages the playback of protected content on PCs and consumer hardware devices. It said this ensures that digital video is delivered in a secure manner and used in accordance with rules defined by its publisher.

DIVX's video coding/ compression software was the 13th most downloaded software in August 2006 according to

Note that DIVX makes little money from the consumer downloads. They are mostly given away free as trial versions by DIVX with more advanced fee versions also available. DIVX derives the bulk of revenues through a licensing model of their technology to consumer hardware device manufacturers as well as via software licensing, advertising and content distribution.

Below we'll look at DIVX technology, relationships and revenues however 1 thing should be noted up front: Since inception in 2000 DIVX's products, due to transfer speed and storage size, have become one of the standards/ leaders in video coding/ compression/ decompression technology. DIVX main products compress digital video files to allow for easier transfer and storage. The compression (and then decompression) comes with minimum sacrifice in quality of video. With the swift rise in the video storage/ transfer sector, a technology leadership position in this space is a very sweet spot to be. This has allowed DIVX to operate a high margin licensing model of their compression/ decompression technology as demand for said DIVX technology among hardware manufacturers has been strong. This strong demand for the DIVX codec/ player applications has also led to a high margin revenue stream from a software licensing deal with Google. Yes Google pays DIVX for the Google toolbar and Firefox operating system to be bundled with DIVX products. .

Industry- Video content has boomed this decade. According to DIVX the increase in digitization, connectedness and openness has created a historic transformation of video content. Video content is being created in ever expanding methods and can not be played on more and more devices. DIVX has placed themselves in the middle of the video boom. According to the prospectus, “We have built the technological platform and galvanized the community necessary to enable a digital media ecosystem of consumers, content creators, software vendors, hardware device manufacturers and advertisers, allowing all to benefit from the participation of each other.” How?

1_ The DIVX solutions are supported by dozens of software products and operate on over 1,800 models of consumer hardware devices. DIVX features interoperability with many different platforms and products.

2_ DIVX provides the ability to cost-effectively and securely create and distribute high-quality content to a large market of consumers and to deliver that content when, where and how consumers want it..

3_ To consumer hardware device manufacturers, the DIVX ecosystem provides the ability to offer capture and playback devices that are interoperable with millions of other DIVX Certified devices in a high-quality, secure digital media format that consumers want and use.


DIVX was an early successful mover in the digital video space by gaining a market leadership position for their coding/ compression/ decompression products. DIVX has also created a video 'community' however thus far it is their video coding/ compression/ decompression products that have been the revenue drivers. I suspect this will continue to be the case, as DIVX really looks outclassed when it comes to creating a leading video community. There is money to be made in swift growing sectors and Apple right now is the leading video community with their iPod products. Other competition will surely increase with MySpace, Yahoo, Microsoft, YouTube and Google having their own digital community versions. Looking at the video community competitive landscape I would tend to view DIVX future to continue as more of a 'nuts/ bolts' company rather then a destination video community. I applaud the attempt, but I foresee the revenue drivers here to continue to be DIVX licensing their compression/ decompression tools much more so then their 'Stage 6' video community.

I feel DIVX will continue to be more of a technology licensing company, then a full content provider and/or video community destination.

There is of course competition also in their technology licensing space. However thus far DIVX has been able to grab early mover status and hold onto that status. They'll need to continue to innovate and improve, but they've done just that in their short history. Adobe Systems, Google, Microsoft and RealNetworks offer competing video formats, although it is quite telling that Google pays DIVX a significant sum to have their toolbar bundled with the DIVX coding/ compression/ decompression downloads. .


Licensing their technology has accounted for 80% of all revenues the previous 18 months. Licenses royalties from Philips have accounted for 10% of revenues the past 18 months.

Google has been DIVX largest revenue driver the previous 18 months accounting for approximately 18% of revenues. DIVX has a marketing agreement with Google, not a licensing agreement. Under an agreement between DIVX/ Google, DIVX bundles the Google toolbar and Firefox operating system into the DIVX compression/decompression products. Google pays DIVX a fee for each Google/ Firefox download originated from the bundled DIVX software. .

Interesting in that DIVX derives 80% of their revenues from licensing their technology to hardware manufacturers, yet their largest revenue source is from a marketing agreement with Google. NOTE***: The licensing agreement with Philips and the marketing agreement with Google are both set to expire in late 2006/ early 2007. These companies combined accounted for 28% of DIVX revenues the past 18 months. I would expect new agreements between DIVX/Philips, however there is no guarantee at this point of that happening..

75%+ of DIVX revenues since 1/1/05 have been outside North America. With most hardware manufacturers being based in Asia, this is no surprise.

Risks - Other then the technology risk inherent in all these type tech infrastructure IPOs the largest risk for DIVX going forward is the potential for the DVD player market slowing. Most of DIVX's licensing revenue is derived from DVD player manufacturers; whether in computer hardware or stand alone. It is anticipated that DVD player sales will continue to grow, that pace will slow.

Financials .

$4 a share in cash post-offering, no debt. .

3.7 X's book value on a $13 pricing.

DIVX revenues were in start-up stage in 2001. Since then they've ramped impressively, doubling in both 2004 and then again in 2005 to $33 million. It has been licensing of the DIVX technology that has driven revenue growth. DIVX appears on track to double revenues yet again in 2006 to $65 million or so. 3 years in a row of doubling revenues is always impressive.

Licensing models can be quite powerful. Once the technology is developed, gross margins in a licensing model tend to be robust. Also, because extensive sales/ marketing personnel are not usually needed for this type of model, operating margins tend to be rather strong as well. DIVX does derive the bulk of their revenue from technology licensing, however they're also attempting to branch out into a content community which has impacted their operating margins a bit.

Gross margins for 2005 were 89%, for first 6 months of 2006 93%. Again these strong gross margins are indicative of a licensing revenue model.

Operating expenses have declined sharply as a % of revenue the past few years. From 100% operating expense ratio in 2004, DIVX posted an 80% operating expense margin in 2005 and appear on track for a 55-60% operating expense margin in 2006.

2005 was DIVX first year of posting an operating/net profit. DIVX booked a 7% net margin in 2005 and earned $0.07 a share. On a $13 pricing, DIVX would be trading 186 X's trailing earnings.

Margins and profits are growing strongly in 2006. At a $65 million revenue run rate, net margins should explode to approximately 20-25%. This strong net revenue growth is a testament to the power of a licensing business model. This model allows operating/ net margins to really ramp if/ when revenues take off. 3 straight years of doubling revenues does constitute 'taking off'. I would expect DIVX after full taxes to earn approximately $0.40 a share in 2006. At a $13 pricing, DIVX would be trading at 33 X's 2006 earnings.

I'm not a tech-head, so I certainly cannot make any claims on DIVX technology in comparison to say quicktime/ realnetworks products. However I do know numbers. For a company that has doubled revenues for 3 years and expects net margins at a whopping 20-25% annually in '06, 33 X's earnings is too cheap.

Let's try and forecast 2007. First I'll be conservative and assume some revenue growth slowdown. In other words let’s assume DIVX will NOT be able to double revenues again in 2007. First of all I'd expect the pace of revenue from Google to slow, which should slow DIVX revenue growth rate a bit. Let us assume just 50% revenue growth to $100 million, which based on trends the past few years and recent quarters should definitely be achievable. Let us go a step further and assume DIVX picks up the pace on operational expenses as they work on new technology and continue to expand their '' community. When interest on the $100+ million cash on hand is factored in, DIVX should post net margins of 30%. This again assumes a 50% revenue growth rate (not 100% as in previous 3 years) and an increase in the rate of operating expense growth. I would expect DIVX then to earn at least $0.90 a share in 2007 or 15 X's forward earnings on a pricing of $13. Again this is simply way too cheap for this sort of growth and net margins.

There are risks here. There is always the technology risk that DIVX will lose their edge. If that occurs then it is conceivable that licensing revenues will dry up. Of note, it does not appear that Apple (arguably the video content leader) utilizes DIVX technology at this point. Still, $13 looks much too cheap here for the growth, margins and business model. If my estimates for 2007 are anywhere in the ballpark, DIVX could easily command a price tag of $25-$30.

Note- Personally I would rather see DIVX continue to license their coding/ compression/ decompression video technology rather then spend in an attempt to gain a foothold in the video community space. I like this IPO a great deal, I would like it even more if DIVX did not have the expense draining effort. I've always been a fan of 'do what you do well' and focus. seems a diversion to me, one that takes away operating profits from the real company driver, the video technology.

September 20, 2006, 5:53 am

The ipo schedule is back

We've 7 deals on the calendar this week with another 9 scheduled for next. That is a hefty 16 deals over the next 8 market days. On the site I've an in depth analysis piece for every one of this week's ipos and will have all of next week's on site be early next week:

With the schedule picking up I'll resume the practice of posting 2-3 analysis pieces on the blog each month, note though that I will not post anything here before ipo. That content is reserved for subscribers to the site. If you're interested in ipos, I break down every one of them pre-offering for $20 a month.

Some very interesting offerings coming up, should be a fun 2 weeks.


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