Getty Reports Q1 2007 Results

Getty Images reported revenue for Q1 2007 of $212.6 million, up from $200.9 million in Q1 2006 and $203.5 million in Q4 2006. First quarter net income was $38 million or $.63 per share. The quarterly profit topped Wall Street expectations as editorial imagery revenue rose 16 percent over the same period in the previous year.

Getty also announced that it has acquired Punchstock, an aggregator of RF and RM imagery. Punchstock represents 1.3 million RF images, 4,991 RF discs from 85 different brands and 161,244 RM images from 27 brands. Getty did not acquire Punchstock's wholly owned brand, Upper Cut, which has 32,816 images.

Almost half of the 1.3million RF images on the site (628,010) are from Getty brands and a significant part of the revenue they generate already appears on the Getty balance sheet. Jonathan Klein, CEO Getty Images, said that revenue from Punchstock will be immaterial to the earning-per-share guidance they have given for Q2 2007.

Klein indicated that this acquisition is part of a multi-site strategy designed, "to offer all of our products to all customers on whatever platform they wish to use and at every price point. Punchstock has been particularly successful with design and communication firms." As a result of this acquisition they have three web sites that address a broad variety of customer needs - Gettyimages.com, Punchstock.com and iStockphoto.com.

"Customers have a wide array of projects with varying requirements for the quality of the imagery and the related budget," commented Klein. "The addition of PunchStock extends Getty Images' reach to a customer base that places high importance on value-priced, high-quality imagery coupled with simplified search and licensing. We look forward to further innovation with expanded licensing options, additional language capabilities, and many new products and services."

Klein continued, "It is clear to us that some buyers like to have more than one place to look at and license imagery. We have been working for some time now on the concept of creating a multiple site experience for our customers and prospects. The acquisition of Punchstock accelerates and expedites these efforts (rather than trying to build their own separate site to so the same thing). We will also use Punchstock to offer some special promotions and to experiment a little with some new license models. It is our intention to continue to offer a wide variety of content from different providers at Punchstock. We believe that having a broad range of imagery is an integral part of a value proposition for our new site."

That said, this acquisition raises some interesting questions relative to Corbis and Jupiter.
There are 272,920 RF images on the site from Jupiterimages brands and 178,620 from Corbis brands. It is unclear whether Getty will continue to represent these images since they view Corbis and Jupiter as serious competitors. In 2005 after Jupiter acquired Picture Arts, Getty dumped the Picture Arts and Comstock brands from gettyimages.com and pulled its Photodisc and Digital Vision brands from representation by Jupiter. In response to a question during the third quarter 2005 conference call Klein made it clear that Getty Images was not interested in helping its competitors and explained his action by saying, "we're not here to serve our competitors," (See story 767) For emphasis he added "we have no wish to generate revenue for our competitors and so we no longer distribute these collections." It will be interesting to see if Klein's philosophy and strategy has now changed, and if they will expand that attitude to the gettyimages.com site once again accepting content from any source in order to get variety.

Business Outlook

For the second quarter of 2007, the company expects revenue of approximately $218 million and diluted earnings per share of $0.58. This guidance includes approximately $0.07 of dilution from the acquisition of WireImage and $0.01 for the costs related to the company's review of its equity compensation grant practices in the second quarter. The company expects this acquisition to be accretive in 2008.

For all of 2007, the company expects revenue of approximately $880 million and earnings per share of approximately $2.47. Earnings per share guidance includes approximately $0.12 of dilution from the acquisition of WireImage and $0.05 for the costs related to the company's review of its equity compensation grant practices and terminated acquisition costs.

Guidance for 2007 assumes just over 60 million fully diluted shares for both the second quarter and for the full year.

Revenue Breakdown

	Q4 2004	Q1 2005	Q2 2005	Q3 2005	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
Rights Managed	45.5%	44.9%	42.5%	42.3%	42.5%	42.9%	40.9%	39.4%	38.3%	38.4%
Royalty Free	33.7%	35.0%	38.1%	38.4%	37.2%	36.6%	38.2%	39.0%	38.9%	39.0%
News/Sports/Entertain/Archival	11.9%	11.6%	11.3%	11.7%	11.9%	11.4%	12.2%	12.8%	13.1%	12.5%
Footage	5.7%	5.7%	5.4%	4.6%	5.1%	5.8%	5.3%	5.0%	5.3%	5.3%
Other (Assignment, etc.)	3.2%	2.8%	2.7%	3.0%	3.3%	3.3%	3.4%	3.8%	4.4%	4.8%
% RF CD Revenue	14.9%	12.6%	10.8%	12.7%	14.0%	15.8%	16.2%	17.3%	19.5%	24.2%

The above percentages translate into the following dollar figures for the last nine quarters (in millions of dollars).

	Q4 2004	Q1 2005	Q2 2005	Q3 2005	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
Gross Revenue	$162.1	$178.1	$185.3	$184.5	$185.8	$200.9	$204.8	$198.1	$203.5	$212.6
Rights Managed	$73.75	$79.97	$78.75	$78.04	$78.96	$86.18	$83.76	$78.05	$77.94	$81.64
Royalty Free	$54.62	$62.34	$70.6	$70.85	$69.12	$73.53	$78.23	$77.25	$79.16	$82.91
News/Sports/Entertain/Archival	$19.29	$20.65	$20.94	$21.59	$22.11	$22.10	$24.98	$25.36	$26.66	$26.56
Footage	$9.24	$10.15	$10.0	$8.49	$9.47	$11.65	$10.85	$9.90	$10.79	$11.27
Other (Assignment, etc.)	$5.19	$4.99	$5.0	$5.53	$6.13	$6.63	$6.96	$7.53	$8.95	$10.20

Stock Revenue As Percentage of Total Revenue

	Q4 2004	Q1 2005	Q2 2005	Q3 2005	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
Stock Photo Percentage	79.2%	79.9%	80.6%	80.7%	80.2%	79.5%	79.1%	78.3%	77.2%	77.4%
Stock Photo Revenue	$128.37	$142.31	$149.35	$148.89	$148.20	$159.71	$161.99	$155.30	$157.10	$164.55

Image Used Chart

	Q4 2004	Q1 2005	Q2 2005	Q3 2005	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
ROYALTY FREE
Gross Revenue (millions)	$54.62	$62.34	$70.6	$70.85	$69.12	$73.53	$78.23	$77.25	$79.16	$82.91
CD, Micro Pay Sales	$8.14	$7.85	$7.62	$9.00	$9.68	$11.62	$12.76	$13.36	$15.43	$20.6
**online sales	$46.48	$54.49	$62.98	$61.85	$59.44	$61.91	$65.56	$63.89	$63.73	$62.85
Price Per Image	$208	$231	$239	$234	$239	$256	$243	$231	$240
Number Images Licensed	223,461	235,887	263,515	264,316	248,703	241,836	269,794	276,580	265,541
RIGHTS MANAGED
Gross Revenue (millions)	$73.75	$79.97	$78.75	$78.04	$78.96	$86.18	$83.76	$78.05	$77.94	$81.64
Price Per Image	$560	$596	$564	$562	$539	$546	$547	$546	$506
Number Images Licensed	131,696	134,178	139,628	138,861	146,493	157,839	153,126	142,948	154,032
Total Images Licensed	355,157	370,065	403,143	403,177	395,196	399,675	422,920	419,060	418,553
Percent RF	63%	64%	66%	66%	63%	61%	64%	66%	64%
Percent RM	37%	36%	34%	34%	37%	39%	36%	34%	36%

** Note: In order to determine the revenue generated by single image RF sales, it is necessary to deduct the amount of RF revenue generated by CDs, DVDs, Virtual CDs, Subscription and Micropayment sales. The numbers in this column reflect total revenue for single image sales. The revenue from "Other RF" (not single image licenses) was 17% of total RF sales in the quarter.

Calculating Number Of Images Licensed

This will be the last time we publish the above chart because Getty Images has decided to stop providing average-price-per image figures that enable us to calculate the number of images licensed.

Klein told investment analysts, "We have decided that (we will no longer provide) the level of granularity that we have historically given around prices and volumes and actual numbers and telling you revenue growth rates for businesses that are less than 4% of our business. And that will give you (analysts) some difficulties with your models. But, over many years it has become very clear that mix has an important impact on all of this. That if we have a large number of big transactions in any quarter it could significantly skewer any trends. If we do a big deal where we give a customer thousands and thousands of images and by definition they come through at a relatively low price, that leads people to conclusions which we think are incorrect. What we will continue to do is give you a lot of color and a lot of qualitative information and some quantitative information about price and volume. In terms of telling you that the average price in the Americas for RF was X and RR was Y and RM was Z, were not going to do that. And the other thing about this is currency. Because currency moves so much, and because so much of our business is outside the U.S. it also leads one to sometimes incorrect conclusions. Sometimes incorrect conclusions that make us look better than we are in this area."

Klein did provide a little information on volumes that allows us to make some rough conclusions. He said, "RF revenue grew 12.7% or 8.9% currency neutral. Volumes for traditional RF grew about 10% with a comparable decrease in the average pricing." This was compared with Q1 2006.

Based on these figures volumes of RF would have been about 266,000 almost flat with the previous quarter. When comparing these volumes with a year ago it is important to recognize that at that time the company did not own Stockbyte, nor benefit from its volumes. A 10% decrease in average pricing would have made the average price about $230. "The decrease was due to mix of different collections with different price points, size or resolution of the image and also the country in which the sale takes place," he continued.

In discussing RM Klein said, "Revenue for RM and RR on a combined basis fell 5.2% or 9.5% on a currency neutral basis. Volumes declined about 6% while average price per image fell just slightly compared to the first quarter of last year." Based on this information, RM volumes would have been about 149,000 compared to the previous quarter of 154,032. The average price per image was probably in the range of $540 up from the previous quarter and about flat with what it had been for all of last year.

This price recovery is good news for the RR model. In Q4 2006 there was a sharp drop in the average price for RM and it appeared that the introduction of the fixed price RR model might have been responsible for the drop. In Q1 the prices for some of the RR uses were adjusted upwards and Klein said that the average price for RR sales are now about equal to the price for RM.

Klein said, "Volumes for RR are exceeding our projections and the average price per images was rather higher than we anticipated due to the enthusiastic reception for this new licensing model. Under this model we are providing customers the best imagery in an easy, simple and accessible way."

The fact that they have RR and RM prices in balance could also explain why they have chosen to move the TIB collection from RM to RR. With RR they have provided a simpler licensing model, that will be less costly for them to administrate, and which will generate the same average revenue per image licensed for Getty Images. It could also mean that more of the RM images from their other brands will be moved to RR in the near future in the continuing drive to simplify the pricing model.

While a win for Getty, it may not work out quite so well for the individual photographer whose images are moved to RR. The photographer will lose those occasional big sales that have occurred in the past, and he may also lose low end sales for editorial and web uses where it is often necessary to negotiate the price lower than the RR price (See Story 954). Each photographer will have to judge this for himself, but there have already been some indications from certain individuals that their gross revenue has dropped after some of their images were moved to RR.

Micropayment Growth

A figure that deserves special note is the percent of RF revenue that came from CDs, DVDs, Virtual CDs, Subscription and Micropayment sales (we'll call it CDMP). This area of the business is growing at a fantastic rate. Total RF revenue including CDMP's in Q1 was $82.91 million, up $3.75 million from the previous quarter. CDMP sales were up $5.17 million meaning that there was actually a $1.42 million loss in traditional RF revenue. It is believed this is the first time there has been a loss in single image RF revenue since Getty purchased Photodisc ten years ago.

iStockphoto had over 3.5 million downloads in Q1 2007. Compare this with 2.5 million in Q3 2006 and 3 million in Q4 2006. Average prices at iStock are increasing as they are adding new file sizes, reducing some of the discounts on volume credit purchases and improving the quality, relevance and range of imagery.

But Klein made the point that, "The growth opportunities of this business outweigh any worry of the cannibalization impact that it could have on traditional stock photography."

When Getty bought iStockphoto they found that 8% of iStock customers were also Getty's customers. Now, according to Klein, that number is about 15%. He said, "The way I look at it is that every single Getty Images customer should be an iStockphoto customer because all of them have the need for that kind of imagery in that way at some point in the workflow process. And that imagery and that model is a valid and viable part of the overall mix. It may sound odd, but we want more and more Getty Images customers to also use iStockphoto. On the other hand, with only 15% of iStockphoto customers using Getty Images we see tremendous opportunity to sell into that customer base."

As a result Getty plans to grow iStockphoto by quadrupling capacity, offering foreign languages and further international expansion and adding product enhancements and additional licensing models.

Challenges For The Future

Klein also took the opportunity to outline some challenges for the future. He said, "There is no doubt at all, that volumes for creative stills imagery, especially in the U.S., remains an area of focus for us. The industry trends that we have talked about for some time provides both challenges and opportunities for us.... There are changes in the purchasing patterns of our customers especially as advertising is being driven by new platforms like the web and mobile where customers are using many more images, but the images are smaller and have a lower average quality compared to the old traditional format like print and television."

"We also know that advertising dollars have shifted quite significantly to text or search based advertising. As you know that (type of ) advertising does not currently use any visual media with the result that a large pool of advertising dollars is being used in a way where there is no opportunity for an image. We believe that will change."

"We all know there has been a significant increase in the sources of imagery. We like change, we recognize change and we are clear that these changes provide some risks, but we believe that the risks are somewhat overstated. There are many opportunities that we see in front of us and we have a number of initiatives that are already underway to build our business and our revenue growth rates to levels that both you and we will find more compelling," he continued.

Initiatives For The Future

Klein outlined some of the key initiatives for the future. First on the list is the new web site that combines editorial and creative and lets the user easily toggle from a creative search to creative plus editorial, or just editorial. For a preview of the site go to: http://editorial.gettyimages.com/Search/Search.aspx

The new site provides better formatting on wider computer screens and has a left-hand column of search options similar to the one JupiterImages recently added to its site. Another welcome feature is the keyword clarification pages which has been made much less intrusive.

Another emphasis is the growth opportunity for editorial imagery into non-English speaking markets. The majority of Getty's editorial revenue is from English speaking world and they are adding coverage, building relationship and as well as sales and marketing capabilities. In addition the new site provides full multi-language capability.

Entertainment Growth

Expanding the entertainment offering is a major initiative and the principle reason they acquired Wireimage, the market leader with a very strong brand in the fastest growing segment of the imaging industry. Klein pointed out that Getty's entertainment sales grew by about 70% in Q1 2007 and they finished last year with growth of about 60% in three consecutive quarters.

Recently, Klein has taken every opportunity to emphasize the growth potential for entertainment imagery. However, this growth never seems to manifest itself in the overall growth for the editorial category of News/ Sports/Entertainment/Archival. In Q1 revenue for this category was down about $100,000 from the previous quarter and up only $4.5 million or 20% from Q1 2006. If entertainment is growing at such a rate then sales of News Sports and Archival imagery must be declining. This would not be surprising given the general declining state of the newspaper industry worldwide.

Wireimage

A few useful bits of information about Wireimage were provided. The company is largely U.S. based so there is a potential for growth internationally. The additional revenue anticipated in Q2 of $218 million compared to the $212.6 for Q1 will be almost entirely the result of two months of Wireimage sales even though Punchstock should contribute something. Extending this out over a full year probably means that Wireimages gross annual revenue was probably something in the range of $30 million or less.

Other Tidbits

In the quarter they introduced "Premium Access", a totally customizable subscription service that connects customers instantly to the content they want to meet their high volume image needs. It simplifies the billing and access to content and gives customers the subscription they want rather than one Getty has put together. It also secures and grows revenue from high volume, high value accounts.

The top 20% of Getty's customers represent 80% of its business. To be counted in the top 20% a customer need only spend $6,000 to $7,000 per year with Getty.

Getty has about 700 people out of approximately 1,900 people worldwide who are assigned to the sales organization in some way. This includes market development executives, key account people, customer service representatives, inbound folks in call centers, and all the support for sales, research and other parts of the selling service.

Getty has named Craig Peters VP of the newly created Footage and Multimedia division and intends to grow this area of the business. For more information see story 755.

They have budgeted $10 million to $11 million this year to shoot wholly owned content.

Royalty Share

Almost the entire "Cost of Revenue" for the company is royalties paid out to image suppliers. Getty reports this cost of revenue as a percentage of total revenue for each line of business. Below I have broken these percentages down into real numbers in millions and also provided an average total royalty in percent.

Image creators should recognize that in some cases this percentage is being paid out to a third party provider and the amount the image creator receives will actually be much lower, minus that 3rd party partner's share. Also, some of the money that Getty reports comes from distributors and delegates. In those cases the distributors has taken a share of the gross sales off the top and the figure Getty reports is not the gross paid by the customer to use the image.

This quarter the percentage of total revenue paid out by Getty in royalties was 25.8%, up from 24.5% in the previous quarter.

	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
Total Photo Revenue	$179.67	$194.27	$197.84	$190.18	$194.95	$202.38
RM	$27.08	$29.21	$28.31	$26.30	$26.18	$26.94
RF	$11.47	$12.57	$11.42	$11.51	$12.90	$14.17
Editorial	$5.15	$5.36	$6.22	$6.80	$7.54	$7.33
Film	$3.07	$3.41	$2.72	$2.79	$3.23	$3.13
Total Royalty	$46.77	$50.55	$48.67	$47.56	$49.88	$51.57
Royalty Percent of Total	26%	26%	24%	25%	24.5%	25.8%

For the year creatives were paid $196.66 million out of the total $807.3 million the company generated. This is 24.4% of total revenue generated

SG&A

Selling, general and administrative expenses (SG&A) were $81.4 million, or 38.3 percent of revenue. Excluding $4.1 million in professional fees associated with the company's review of its equity compensation grant practices and a terminated acquisition, SG&A was $77.3 million, or 36.3 percent of revenue.

Income from operations was $55.6 million, or 26.2 percent of revenue. Excluding the professional fees mentioned above, income from operations was $59.8 million, or 28.1 percent of revenue.

Net income for the first quarter of 2007 was $38.0 million with earnings per diluted share of $0.63. Excluding the professional fees mentioned above, net income was $40.5 million and earnings per diluted share were $0.68.

Cash and cash equivalent balances were $386.5 million at March 31, 2007, an increase of $47 million during the quarter. The acquisition of property and equipment totaled $16.6 million during the first quarter of 2007.

Geographic Breakdown

The percentage of revenue for the Americas was equal with that of EMEA. Revenue in the Americas continues to fall and revenue in EMEA continues to rise. Revenue in Asia/Pacific was about flat.

	Q4 2004	Q1 2005	Q2 2005	Q3 2005	Q4 2005	Q1 2006	Q2 2006	Q3 2006	Q4 2006	Q1 2007
Americas	48.7%	49.6%	47.4%	49.8%	49.0%	49.7%	47.2%	47.8%	46.1%	46.0%
Americas Revenue	$78.94	$88.34	$87.83	$91.88	$91.04	$99.85	$96.67	$94.69	$93.81	$97.80
EMEA	44.1%	43.8%	45.5%	42%	43.1%	42.4%	44.3%	43.7%	45.5%	46.0%
EMEA Revenue	$71.49	$78.01	$84.31	$77.49	$80.10	$85.18	$90.73	$86.57	$92.59	$97.80
Asia/Pacific	7.1%	6.6%	7.1%	8.2%	7.9%	7.9%	8.5%	8.5%	8.4%	8.0%
Asia/Pacific Revenue	$11.67	$11.75	$13.16	$15.13	$14.66	$15.87	$17.40	$16.84	$17.09	$17.01

Restatement of Financial Statements

The financial results and outlook set forth in this press release do not take into account any adjustments for additional expenses that may be required in connection with the ongoing review of the company's historical equity compensation grant practices, as more fully discussed in the company's Current Report on Form 8-K dated April 16, 2007 and other filings with the SEC. (See Story 951)

The company is in the process of finalizing its accounting for any adjustments for additional expenses that may be required in connection with the ongoing review of the company's historical equity compensation grant practices including the tax impact and other related issues. Based on the company's current knowledge, management believes that the restatement will likely involve total pre-tax, non-cash equity-based compensation expense of approximately $28 million to $32 million, of which management expects approximately 95% to be expensed in 2002 and earlier fiscal years. As announced on April 16, 2007, the special committee concluded that the evidence obtained and reviewed in its investigation did not establish any intentional wrongdoing by current employees, officers or directors of the company, and the special committee continues to have confidence in the integrity of current management.

The company's management has determined that, due to errors in the accounting for equity based compensation, the company's previously filed financial statements for the fiscal years ended 1998 to 2005, the interim periods contained therein, the quarters ended March 31, 2006 and June 30, 2006, together with all earnings and other press releases containing company financial information for those periods and the earnings releases for the quarters ended September 30, 2006 and December 31, 2006, respectively, should no longer be relied upon and will require restatement. The company's Board of Directors concurred with management's determination.

The company intends to provide audited, restated financial statements and related disclosures in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006, to be filed as soon as possible with the SEC, and otherwise to become current in its reporting obligations under the Securities Exchange Act of 1934, as amended. Other than the results for the quarter ended March 31, 2007, and the revenue comparables for the quarter ended March 31, 2006, the company has not included any historical results herein because, as noted above, management has determined, and the company's Board of Directors has concurred, that certain of the company's previously filed financial statements and earnings and other press releases containing company financial statements should no longer be relied upon.