Getty Q1 2006 Revenue $200.9 Million

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April 22, 2006

Getty Images reported record revenue for Q1 2006 of $200.9 million compared to $178.1 million for Q1 2005 and $185.8 million for Q4 2005. But, for the second quarter in a row investors punished the stock for not meeting market expectations. In the first day of trading the stock price dropped 13.75 percent to a closing price of $65.66, down 30 percent from its high last November.

Revenue grew 13 percent over the first quarter of 2005 and 17 percent on a currency-neutral basis. Cost of revenue of $52.3 million improved to 26.0 percent of revenue compared to 28.8 percent in the prior year.

Income from operations was $59.1 million, which includes $3.3 million of stock-based compensation expense. Excluding stock-based compensation, income from operations grew 16.1 percent to $62.4 million, or 31.1 percent of revenue, compared to $53.8 million or 30.2 percent of revenue in the same quarter last year.

Net income for the first quarter was $39.3 million, which includes $2.1 million, or $0.03 per diluted share, of stock-based compensation expense. Excluding stock-based compensation, net income grew 20.8 percent to $41.4 million, and earnings per diluted share grew 18.5 percent to $0.64 compared to the first quarter of 2005. Earnings per share on a currency-neutral basis grew approximately 26 percent over 2005.

"Revenue for the quarter surpassed $200 million for the first time in our history," said Jonathan Klein, Getty Images' co-founder and Chief Executive Officer. "Record results in our largest business, rights-managed imagery and strength in international regions contributed to this quarter's strong results with growth rates in non-English speaking countries far exceeding our overall growth rate. We are also delighted to have recently acquired the leading social media provider of imagery, istockphoto.com, as well as our largest image partner, Stockbyte, whose fast growing royalty-free collections are entirely wholly-owned. Looking ahead, we are as confident as ever in our ability to continue to grow the market and take share."

Cash and short-term investment balances were $522.5 million at March 31, 2006, up from $518.3 million at December 31, 2005. Net cash spent on acquisitions within the quarter was $49.1 million.

Net cash provided by operating activities rose 21.9 percent to $66.0 million in the first quarter of 2006 compared to $54.1 million for the same period of 2005.

Business Outlook

For the second quarter of 2006, the company expects to report revenue in the range of $205 million to $210 million and earnings per diluted share of $0.64 to $0.66. Second quarter diluted earnings per share guidance excludes approximately $0.04 related to expected stock-based compensation expense.

For 2006, the company is raising revenue guidance to a range of $830 million to $850 million, (up from $820 to $840 at the beginning of the year) and narrowing the range of expected diluted earnings per share to between $2.70 and $2.80. Both revenue and earnings per share guidance for 2006 include the impact of year over year currency variations. Excluding this impact, or on a currency-neutral basis, revenue is expected to grow 15 to 18 percent and earnings per diluted share are expected to grow 23 to 27 percent in 2006. Full year earnings per share guidance excludes stock-based compensation expense of approximately $0.14 to $0.17.

Based on historical figures it is a little hard to see where this revenue growth will come from. In the past few years the company has always experienced a big jump in revenue in Q1 compared to Q4 of the previous year. There seem to be two major factors that have accounted for this. First, there are more business days in Q1 than in any other quarter and second the company usually institutes price increases at the beginning of the year (more about price increases later). After that first quarter jump, revenue tends to be flat for each of the remaining quarters resulting in annual revenue being close to four times first quarter revenue (2005 was a slight exception).

In Q1 2004 there was a 16.4% revenue jump, in 2005 it was an 8.1% jump and this year the jump was 9.9%.

Revenue Breakdown

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

Stock Revenue As Percentage of Total Revenue

Image Used Chart

** 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 15.8% of total RF sales in the quarter.

**** Note: The average price per image data is global as of Q1 2004. Prior to Q1 2004, the PPI data reflects the total Americas and EMEA only

Micro Payment Sites

In the quarterly conference call some interesting granular detail on various aspects of the business were made available. Klein said that in comparing customer lists between iStockphoto and Getty Images only 8% of the iStockphoto customers were on the Getty Images list. This supports the claim many industry leaders have been making that micro payment customers are an entirely different group from the traditional stock photo customers. It also indicates that there might be a great opportunity for Getty Images to up-sell to the iStockphoto customers. However, it may be a real challenge to get someone with a budget that allows payment of $1 to $5 per picture to start paying $254 (the average price of a RF image) for their images. Nevertheless, theoretically it is possible.

On this aspect of the business it would seem that Jupiterimages might still be better positioned because they have a number of different subscription collections at various price points below the traditional RF prices. They can upsell to a slightly higher priced subscription service without requiring the customer to make the huge jump to single image RR.

It would also appear, at first glance, that there might be very little cannibalization (a worry many have pointed out) if such a small percentage of customers source their images from both types of services. However, it should be pointed out that if many of that 8% are among Getty's largest pictures users (an IBM for example who it has been said uses RM, RF and Micopayment/Subscription images) the impact might be greater than the percentages would indicate.

I would also point out that as of Q1 2006 the "% of RF revenue from Other RF" was 15.8% as opposed to 13% in the previous quarter. This looks like an important jump, but in real dollars it is $1.78 million, the difference between $61.91 million in Q1 2006 and $60.13 in Q4 2005. As of Q1 2006 "Other RF" includes licensing from CDs and VCDs, subscription (Creative Express) and micropayment (iStockphoto). In the previous quarter RF only included licensing from CDs and VCDs.

If we assume that there was no growth in sales of CDs and VCDs in the quarter then the sum total of the revenue from a full quarter of Creative Express sales and one-and-a-half months of iStockphoto sales was $1.78 million. Extended out over a full year this micropayment area of the business could be expected to generate something in the range of $11 to $12 million, or about 1.5% of Getty's anticipated gross revenue for the year. And if there was growth in CD and VCD revenue for the quarter the micropayment revenue could be even less.

RF and RM

Gross RM revenue for the quarter was $86.18 million with approximately 149,000 images licensed, up significantly from the previous quarter. This is good news. But while RF revenue was also up, the number of RF images licensed was down almost 10,000 from 253,713 to 243,740. This resulted in total images licensed for the quarter of approximately 392,740, fewer than the number licensed in any of the last three quarters.

To me, this is not a picture of growing demand.

It is also interesting that they did raise the price of RF significantly in the first quarter from an average of $237 in Q4 2005 to $254 in Q1 2006. Is it possible that the lackluster interest in buying RF image in the quarter was due to the high price, and not so much to lack of marketing and other factors as Klein indicates? Have we hit a price ceiling for RF? Only time will tell.

As I noted before, Getty made similar large RF price increases in Q1 2004 and 2005, and then the average price remained relatively stable throughout each of those years. In 2005 the price increase did not result in a drop of units licensed. In fact there was a significant increase in Q1 2005 compared to Q4 2004. In Q1 2004 there was a drop in units licensed and Getty didn't achieve Q4 2003 unit levels again until Q3 2004. The percentage increase in the average price-per-image at the beginning of 2004 was almost 18%. The increase in 2005 was about 9% and 7.6% in 2006. It certainly appears that tolerance for RF price increases is declining.

I also find it interesting to contemplate what would have happened if Getty had only licensed the Q1 number of RF images, but at the Q4 price. That would have resulted in over a $4 million less RF revenue for the quarter. Keep in mind that anticipated single image RF revenue for the year might be expected to be in the range of $248 million.

Klein expressed disappointment in RF sales in the Americas (the most mature market for RF) where RF represents 75% of total images licensed. In Europe and Asia single image RF revenue grew 20% with approximately half of the European growth and substantially all of the Asian growth being volume driven. Klein did not give a figure for the relative percentage of RF units compared to RM licensed in Europe, but previously he has said it was up to about 56% and that he expected it to eventually reach the 75% level as is the case in the U.S.

Stockbyte Acquisition

Klein discussed the Stockbyte purchase, but did not reveal gross revenue for the company. However, very reliable sources tell me that Stockbytes fiscal year ended in April 2005 and for that year they earned 8.4 million Euros. At that time they were projecting 18 million Euros, or a little over $22 million for the year that ended in April 2006. Thus, the $135 million paid for the company is more than 6 times annual earnings.

It is believed that about 80% of this revenue came from sales through Getty Images and Getty may have paid Stockbyte as much as 40% of gross sales, although probably less.
Getty also plans to forego Stockbyte's distribution deals with Corbis and Jupiter which will reduce substantially the estimated $4.4 million from distributors. Klein has said that Getty got about 75,000 images in the deal.

Footage

The average price-for-footage for the quarter was $664, the same as the previous quarter and down slightly from $681 a year ago. The number of units licensed in Q4 2005 was 14,262 and the units licensed in Q1 2006 was 17,545, a 23% increase for the quarter.

Royalty Share

Almost the entire "Cost of Revenue" for the company is royalties paid out to image suppliers. Recently Getty decided to report 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.

Photographers should recognize that if this percent is being paid out to a third party provider that amount the photographer receives will actually be much lower, minus the distributors share. Likewise, this is a percentage of the revenue Getty receives, not necessarily of the licensing price of the image. When Getty sells through a distributor the selling price of the image will actually be higher than the number on which Getty calculates what it pays out in royalties.

SG&A

Selling, general and administrative expenses (SG&A) were $74.3 million,including $3.3 million in stock-based compensation. Excluding stock-based compensation, SG&A of $71.0 million was 35.3 percent of revenue compared to 33.6 percent in the prior year.

Geographic Breakdown

The percentage of revenue from EMEA (Europe, the Middle East and Africa) was down in the quarter while the percentage of revenues for the Americas was up slightly. It is interesting that this shift is exactly opposite of what happened in the pervious quarter and if you go back two quarters the proportional share is very flat. The proportional share of Asia/Pacific was flat with the previous quarter and down slightly from two quarters ago.