DivX, Inc. (NDAQ:DIVX) is up 13% in mid-day trading today on its debut on the NASDAQ. Those familiar with technology know DivX very well as one of the most popular codecs on the market for compressing video. But the company also licenses its technologies to consumer hardware device manufacturers and certifies their products to ensure the interoperable support of DivX-encoded content.

Let's take a look at whether or not the company is a good buy... Financially, Divx has done extremely well. The companies revenues tripled between 2003 and 2004, and more than doubled between 2004 and 2005. Notably, the company also achieved profitability in 2005 with a net income of $2,295,000 or $0.05 per share (diluted). As of December 31, 2005, the company also had a strong cash position of over $25 million with only $1.2 million in debt and a deficit of $19.4 million. This is a rather healthy balance sheet for a technology company that is just IPO'ing. But are the revenues sustainable? First, let's look at where they are coming from; according to their S-1 filing:

"We derive most of our revenue from the licensing of our technologies to consumer hardware device manufacturers, software vendors and consumers. We derived 81%, 75% and 55% of our total revenues from licensing our technology in 2005, 2004 and 2003, respectively ... In the year ended December 31, 2005, Philips accounted for approximately 13% of our total revenues, and our top 10 licensees by revenue accounted for approximately 41% of our total revenues."

The company also relies on an agreement with Google:

"Revenues under the Google agreement represented approximately 15% of our total revenues in 2005. We currently include Google software in both the basic and enhanced versions of our software that we make available to consumers at no cost from our website. In exchange for offering the included Google software to our consumers, and the subsequent activation of the software by those consumers, Google pays us royalties based on specific performance targets."

At first glance, this seems like bad news. With an increasing amount of their total revenues coming from one market (licensing) and only a few key customers, there is a risk that these deals could go bad, which would significantly impact the company's bottom line. However, as long as the DivX brand name remains strong and their technology keeps evolving, it should not be difficult for the company to retain these contracts. Many public companies have survived with non-diversified revenue streams, including Google! However, it is important for investors to watch the market for competitors and keep an eye on the revenue numbers in the future.

Overall, DivX appears to be a relatively stable company now with its main risk being in non-diversified revenue streams. The shares are trading at a premium now after the IPO, but the company could make a great buy in the near future after the shares settle down. It is a great stock to keep an eye on!