43
GETTY SECOND QUARTER 2005
July 28, 2005
Getty Images reported record revenue for Q2 of 2005 of $185.3 million compared to $150.3 million for Q1 of 2004 and $178.1 million in the first quarter of this year. Excluding the effects of changes in currency exchange rates, revenue grew 19.3 percent. Operating income for the second quarter of 2005 grew 39.3 percent to $55.5 million, or 30 percent of revenue, compared to $39.8 million, or 26.5 percent of revenue in the same quarter last year.
Net income for the second quarter was $34.0 million, or $0.53 per diluted share compared to $25.2 million, or $0.41 per diluted share the prior year.
Cash and short-term investment balances decreased to $418.8 million at June 30, 2005, from $572.7 million at March 31, 2005. The decrease reflects the cash payments within the quarter of approximately $214 million related to the Digital Vision and Photonica acquisitions.
Business Outlook
For the third quarter of 2005 the company expects to report revenue in the range of $180 million to $184 million and earnings per diluted share of $0.56 to $0.58. For 2005, the company is increasing guidance and expects revenue in the range of $728 million to $735 million and earnings per diluted share of $2.20 to $2.26 due to the improving strength of the dollar. The number of fully diluted shares assumed in the earnings per share guidance is approximately 65 million.
Revenue Breakdown
|
Q3 2003
|
Q4 2003
|
Q1 2004
|
Q2 2004
|
Q3 2004
|
Q4 2004
|
Q1 2005
|
Q2 2005
|
Rights Managed
|
50%
|
51%
|
51%
|
49%
|
46%
|
45.5%
|
44.9%
|
42.5% |
Royalty Free
|
32.6%
|
31.6%
|
32%
|
31.9%
|
33.8%
|
33.7%
|
35%
|
38.1% |
News/Sports/Entertain/Archival
|
10.6% |
10.4%
|
10.3%
|
11.7%
|
12.4%
|
11.9%
|
11.6%
|
11.3% |
Footage
|
5.3% |
5.5%
|
5.2%
|
5.4%
|
5.5%
|
5.7
|
5.7%
|
5.4% |
Other (Assignment, etc.)
|
1.5 |
1.5%
|
1.5%
|
2%
|
2.3%
|
3.2%
|
2.8%
|
2.7% |
|
|
|
|
|
|
|
|
|
|
| % RF CD Revenue |
17.4% |
17.5% |
18.8% |
17% |
15.8% |
14.9% |
12.6% |
10.8% |
The above percentages translate into the following dollar figures for the last eight quarters (in millions of dollars).
|
Q3 2003
|
Q4 2003
|
Q1 2004
|
Q2 2004
|
Q3 2004
|
Q4 2004
|
Q1 2005
|
Q2 2005
|
Gross Revenue |
$130.8 |
$134.4 |
$156.5 |
$150.3 |
$153.5 |
$162.1 |
$178.1 |
$185.3 |
|
|
|
|
|
|
|
|
|
|
Rights Managed |
$65.4 |
$68.5 |
$79.3 |
$73.65 |
$70.6 |
$73.75 |
$79.97 |
$78.75 |
Royalty Free |
$42.64 |
$42.47 |
$50.08 |
$47.95 |
$51.88 |
$54.62 |
$62.34 |
$70.6 |
News/Sports/Entertain/Archival |
$13.86 |
$13.98 |
$16.12 |
$15.48 |
$17.96 |
$19.29 |
$20.65 |
$20.94 |
Footage |
$6.93 |
$7.39 |
$8.14 |
$8.12 |
$8.44 |
$9.24 |
$10.15 |
$10.0 |
Other (Assignment, etc.) |
$1.96 |
$2.02 |
$2.35 |
$3 |
$3.53 |
$5.19 |
$4.99 |
$5.0 |
Stock Revenue As Percentage of Total Revenue
|
Q3 2003 |
Q4 2003 |
Q1 2004 |
Q2 2004 |
Q3 2004 |
Q4 2004 |
Q1 2005 |
Q2 2005 |
Stock Photo Percentage |
82.6% |
82.6% |
83% |
80.9% |
79.8% |
79.2% |
79.9% |
80.6%
|
Stock Photo Revenue |
$108.04 |
$110.97 |
$129.38 |
$121.60 |
$122.48 |
$128.37 |
$142.31 |
$149.35 |
Image Used Chart
|
Q3 2003 |
Q4 2003 |
Q1 2004 |
Q2 2004 |
Q3 2004 |
Q4 2004 |
Q1 2005 |
Q2 2005 |
ROYALTY FREE |
|
|
|
|
|
|
|
|
Gross Revenue (millions) |
$42.64 |
$42.47 |
$50.08 |
$47.95 |
$51.88 |
$54.62 |
$62.34 |
$70.6 |
**online sales |
$35.22 |
$35.04 |
$40.67 |
$39.8 |
$43.68 |
$46.48 |
$54.49 |
$62.98 |
Price Per Image |
$157 |
$165 |
$194 |
$193 |
$200 |
$208 |
$229 |
$238 |
Number Images Licensed |
224,331 |
212,363 |
209,639 |
206,218 |
218,400 |
223,461 |
237,948 |
264,622 |
|
|
|
|
|
|
|
|
|
RIGHTS MANAGED |
|
|
|
|
|
|
|
|
Gross Revenue (millions) |
$65.4 |
$68.5 |
$79.3 |
$73.65 |
$70.6 |
$73.75 |
$79.97 |
$78.75 |
Price Per Image**** |
$576 |
$552 |
$589 |
$560 |
$567 |
$560 |
$616 |
$582 |
Number Images Licensed |
113,542 |
124,094 |
134,635 |
131,518 |
124,515 |
131,696 |
129,821 |
135,309 |
|
|
|
|
|
|
|
|
|
|
Total Images Licensed |
337,873 |
336,451 |
344,274 |
337,736 |
342,915 |
355,157 |
367,769 |
399,931 |
Percent RF |
66% |
63% |
61% |
61% |
64% |
63% |
65% |
66% |
Percent RM |
34% |
37% |
39% |
39% |
36% |
37% |
35% |
34% |
** Note: The number of people buying CD's compared to single images is declining rapidly. In the quarter about 10.8% of the RF revenue, down from 12.6% in the previous quarter, came from the sale of CD's and Virtual CD's.
**** Note: The avert price per image data is global as of Q1 2004. Prior to Q1 2004, the PPI data reflects the total Americas and EMEA only
RF Improvements
Royalty Free showed significant growth in the quarter with over 53,000 additional images licensed compared with the year ago quarter and an approximately 26,000 increase from Q1 2005. Close to 17,000 of these sales can be accounted for by that portion of Digital Vision's customers who were dealing direct with DV or through its distributors prior to the acquisition. The revenue in the quarter from these former Digital Vision properties represented about $4 million of Getty's total. It should be noted that Getty acquired Digital Vision on April 20th so they didn't benefit from a full quarter of revenue.
Even without Digital Vision, Getty had a significant increase in the number of RF images licensed compared to the previous quarter. If we look at the above chart there has been a steady trend upward in RF images licensed since the low point in Q2 2004. This coincides with the addition of a number of image partners to Getty's site. However, when considering industry growth it should not be forgotten that in Q3 2003 Getty licensed rights to approximately 247,449 RF images, and only in this quarter have we moved slightly ahead of that number.
Much of this growth appears to be coming from Europe where an "extraordinary change in buying habits" is occurring leading to greatly increased interest in using RF images. One of the interesting questions that will need answering as we move ahead is whether RM use will begin to decline in Europe as buyers switch to RF, or whether, in fact, there will really be a significant growth in the way stock images are used in that part of the world.
It should also be noted that due to a recent change in Getty policy Comstock an Thinkstock will be taken off the site in the near future because they are owned by competitors and Brand X and Image 100 may also come down because they have been recently acquired by competitors. This could result in a loss of over 53,000 images or about 15% of the total RF images currently on the site. Klein contends that this will make no difference because Getty's customers will choose from what is left and not go searching for a specific brand.
RM Volumes
RM volumes improved during the quarter, but only because the average price per usage dropped. During the conference call Klein placed great emphasis on the fact that overall the number of units licensed is increasing. But, that is not necessarily good news if it is achieved at the expense of falling prices. Total revenue for RM sales was actually down slightly even though there has been a significant increase on the number of RM images on the site in the last six months. In November of 2004 I determined that there were 434,346 RM images on the creative section of the Getty site. Earlier this month, after the addition of a number of new image partners and the Photonica/Amana images, I did the count again and there were 663,912 images, a 52% increase in images added. Clearly additional images do not translate into additional revenue and it would appear that there has been a dramatic decrease in the odds of any particular RM image being licensed.
Customer Focus
During the conference call Jonathan Klein, CEO and co-founder of Getty Images said the most important ingredient in the success of Getty Images has been its relentless focus on the customers. "We create and manage our products and services in a way that is intended to delight customers, grow the market and take share. Customers do not search for imagery by collection, they seldom even search by licensing model." (He later expanded on this point and said that almost 100% of the searches are across the entire collection. Sometimes customers will go to the RF Zone due to the intensive marketing of this product, but they almost never choose a particular collection.)
He continued, "Our partner program has added to our depth and breath, but no one collection is driving customers to our web site. Our customers require compelling images to enable them to do their jobs. We have always been successful by focusing on meeting the needs of our customers and insuring that we have the imagery that they need when they need it, with the best service. ... It's all about the customers."
Expanded Presence In China
Getty has launched Getty Images China, a local operation based in Beijing. Beginning next month all collections and local content will be available through gettyimages.cn, an all-Chinese Getty Images website with full Chinese language search capabilities. Chinese creative professionals will be able to search, download and license imagery from all of Getty Images' collections as well as culturally-relevant local content developed specifically for the Chinese market.
Klein said, "China is currently the fifth largest market in terms of advertising spending, and is poised to surpass Japan, and become one of the world's largest advertising markets. As the Chinese economy continues to grow, and with it, awareness of intellectual property rights, it's clear that China's strategic importance and potential is a significant long-term opportunity for Getty Images. With a respected and experienced news photography team already in place, this is the time to reinforce our position in China as the leading global force for both creative and editorial imagery."
Getty Images China will license all Getty Images creative stills collections as well as its image partners' collections, including both rights-managed and royalty-free images. As many as 37 collections are now available to communications professionals in China. Getty Images China also includes the assets of a joint venture partner, Unisun Group, Inc., which brings proven industry expertise, deep customer relationships and an understanding of local culture.
To meet the strong demand for culturally-relevant content, a team of local and international photographers will shoot a broad range of subjects and will be supported by local creative research and art direction.
Getty Images China is overseen at its Beijing headquarters by Yu Li, Director of Greater China, formerly of Reuters. Sales offices have been established in Shanghai and Guangzhou and staff and freelance photographers will also cover Hong Kong and Taiwan as well as China.
Editorial and Film
Editorial revenue was up 19% over Q2 2004. The revenue from film was up nearly 24%. The average price for a film clip for the quarter was $645, down from $681 in the previous quarter but up from $624 in Q2 2004. Klein pointed out that the stock footage from Universal Studios is now fully available on the site and he expects other film studios and TV networks to make their content available through Getty Images in the future. He also noted that with the expansion of cable there is an increasing opportunity to license footage for usage for very localized marketing where budgets don't normally support creating new footage.
Where Imagery Comes From
Getty now has over 60 image partners on the site and about 42% of the imagery on the Creative section of the site comes from these partners. Getty also has about 2,000 active producing photographers under contract and 120 staff photographers. The staff primarily produces for the editorial side of the business.
Gross Margins
|
|
Q1 2004
|
Q2 2004
|
Q3 2004
|
Q4 2004
|
Q1 2005
|
Q2 2005
|
Overall Gross Margin
|
72%
|
72.2%
|
72.4%
|
72.4%
|
71.2%
|
73.3%
|
CFO Liz Huebner said the increase is the result of no longer incurring royalty payments to Digital Vision and she expects the margin to rise to 73.5% to 74% for the rest of the year.
SG&A
Selling, general & administrative expenses (SG&A) totaled $64.9 million, up from $54.4 million in the second quarter of 2004. Ms. Huebner said the increases from the $60.1 million in the previous quarter were due largely to the acquisitions of Digital Vision and Photonica and can be expected to trend downward as the cost efficiencies from integration are realized. As a percentage of revenue, SG&A declined to 35.0 percent in the second quarter of 2005, compared to 36.2 percent in the same quarter last year.
Geographic Breakdown
The revenues from EMEA (Europe, the Middle East and Africa) were strongly up in the quarter resulting in a continued downward trend in the percent of overall revenue coming from the Americas.
|
Q3 2003
|
Q4 2003
|
Q1 2004
|
Q2 2004
|
Q3 2004
|
Q4 2004
|
Q1 2005
|
Q2 2005
|
Americas
|
52.1%
|
51.1%
|
50%
|
50.8%
|
51.2%
|
48.7%
|
49.6%
|
47.4% |
EMEA
|
40.8%
|
41.8%
|
43.5%
|
42%
|
41.3%
|
44.1%
|
43.8
|
45.5% |
Asia/Pacific
|
7.1%
|
7.1%
|
6.5%
|
7.2%
|
7.5%
|
7.1% |
6.6% |
7.1% |