Getty Acquires Digital Vision

Getty Images has announced that it has acquired Digital Vision for $165 million in cash - the largest acquisition Getty has made in five years. The acquisition is expected to increase the revenue Getty Images generates from royalty-free content, and will do so at significantly higher margins due to the collection's large proportion of wholly-owned content.

Getty Images CEO Jonathan Klein said, "This transaction gives us a wealth of wholly-owned content, which will allow us to explore innovative offerings such as subscription licensing models and content for emerging broadband-enabled platforms, such as wireless." The majority of Digital Vision's current image collection is already available at gettyimages.com through Getty Images' Image Partner program.

The company expects to increase investment in digital Vision content to broaden the collection in terms of number of images, depth and geography and has allotted $5 million for this purpose for the rest of 2005.

First Quarter Report

In a separate release the company reported record revenue for Q1 of 2005 of $178.1 million. This was right in the middle of the $175 to $180 million guidance they gave in January and a 13.8 percent increase over the Q1 2004. Excluding the effects of currency exchange rates, revenue grew 11.1 percent.

Operating income for the quarter grew 24.7 percent to $53.5 million, or 30.1 percent of revenue, compared to $42.9 million, or 27.4 percent of revenue, in the same quarter last year. Net income grew 30.8 percent to $34.1 million in the quarter compared with $26.1 million in the prior year. Earning per diluted share grew 25.6 percent to $0.54 from $0.43 in the prior year.

Business Outlook

For the 2nd quarter of 2005 the company expects to report revenue in the range of $178 million to $183 million and earnings per diluted share of $0.51 to $0.54. For all of 2005 the company expects revenue in the range of $720 million to $730 million and earnings per diluted share of $2.17 to $2.30. Guidance includes estimated amortization of intangibles related to the Dgital Vision acquisition of approximately $1.5 million for the second quarter (or $0.01 per dilute share after tax) and $5.3 million for the full year (or $0.05 per diluted share after tax). The number of fully diluted shares assumed in the earning per share guidance is approximately 65 million.

Revenue Breakdown

	Q2 2003	Q3 2003	Q4 2003	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
Rights Managed	52%	50%	51%	51%	49%	46%	46%	45%
Royalty Free	31%	33%	32%	32%	32%	34%	34%	35%
News/Sports/Entertain/Archival			10.5%	10.3%	12%	12%	12%	12%
Footage			5.5%	5.2%	5%	5.5%	6%	6%
Other (Assignment, etc.)			1%	1.5%	2%	2.5%	2%	2%

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

	Q2 2003	Q3 2003	Q4 2003	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
Gross Revenue	$127.7	$130.8	$134.4	$156.5	$150.3	$153.5	$162.1	$178.1
Rights Managed	$66.4	$65.4	$68.5	$79.3	$73.65	$70.6	$74.5	$80.15
Royalty Free	$39.59	$43.16	$43	$50.1	$48.1	$52.1	$55.1	$62.34
News/Sports/Entertain/Archival	$12.4	$13	$14.1	$16.35	$18	$18.42	$19.4	$21.37
Footage	$6.9	$7.23	$7.4	$8.6	$7.5	$8.4	$9.3	$10.69
Other (Assignment, etc.)	$1.65	$2	$1.4	$2.15	$3	$3.8	$3.8	$3.56

Stock Revenue As Percentage of Total Revenue

	Q2 2003	Q3 2003	Q4 2003	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
Stock Photo Percentage	83%	83%	83%	83%	82%	80%	80%	80%
Stock Photo Revenue	$105.99	$108.56	$111.5	$129.9	$121.75	$122.7	$129.68	$142.48

Average Price Per Usage

The worldwide average price-per-image (ppi) for RM rose in the quarter to $616 from $585 the previous quarter. For RF the average ppi rose to $229 from $210 the previous quarter.

Image Used Chart

	Q2 2003	Q3 2003	Q4 2003	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
ROYALTY FREE
Gross Revenue (millions)	$39.59	$43.16	$43	$50.1	$48.1	$52.1	$55.1	$62.34
****online sales	$31.67	$34.89	$35.16	$40.93	$40.4	$44.3	$46.9	$54.49
Price Per Image	$142	$157	$165	$193	$194	$202	$208	$229
Number Images Licensed	223,028	222,256	213,128	212,072	208,247	219,306	225,481	237,948
RIGHTS MANAGED
Gross Revenue (millions)	$66.4	$65.4	$68.5	$79.8	$73.65	$70.6	$74.5	$80.15
Price Per Image	$570	$576	$552	$589	$581	$591	$560	$616
Number Images Licensed	116,491	113,542	124,094	135,484	126,764	119,458	133,036	130,114
Total Images Licensed	339,519	335,798	332,578	347,556	335,011	338,764	358,517	368.062
Percent RF	67%	63%	62%	63%	65%	64%	63%	65%
Percent RM	34%	33%	37%	38%	37%	35%	36%	35%

**** Note: The number of people buying CD's compared to single images is steadily declining. In the quarter about 12.6% of the RF revenue, or $7.85 million came from the sale of CD's and Virtual CD's. This compares with 14.9% or $8.25 million from CD's in Q4 2004, and not so long ago the percentage of RF revenue from CD sales was around 20%. CFO Liz Huebner said, "We are working to implement a point of purchase promotion intended to stimulate CD sales."

RF Improvements

In Royalty Free there was a revenue growth of 24.7% compared with Q1 of 2004 and this was driven by Europe's continued adoption of the RF licensing model, growth in the U.S. and sustained success of the Royalty Free Zone.

They sold almost 26,000 more RF images in the quarter than in Q1 2004. This was a 12.7% increase in the number of images sold in Q1 2004. They also had a 6% increase in the number of images licensed compared to the previous quarter.

One of the big reasons for the RF growth was the extraordinary change in buying habits in Europe during the quarter. In the U.S. RF single image volumes as a proportion of total creative volumes have stayed relatively unchanged at about 75%. This means that about three-quarters of the images that Getty sells in the U.S. are RF. In Europe, a year ago, RF volumes accounted for 46% of total volume, but in Q1 that proportion grew to approximately 54%. Klein said, "We believe, over time, Europe will continue to embrace the RF license model and grow to more closely resemble the volume proportions in the United States."

It also should be noted that Getty recent emphasis on the credit card sale portion of their business has borne fruit, but not at the expense not at the expense of a lower average price-per-image as some had predicted.

RM Volumes

The RF improvements are impressive, but they may be at the expense of declining interest in RM images and for many that could be a serious problem. First quarter volumes in the RM collection were down about 4.5% compared with the first quarter of 2004. The fact that the Easter holidays came in March this year reduced the number of selling days in the quarter by 2 and this accounts for about 1% of the reduction. The rapid rise in the adoption of RF by European buyers accounted for the rest.

Editorial and Film

Editorial revenue was up 28.2% over Q1 2004. The revenue from film was up nearly 23%. Due to selective price increases late last year the average price for a film clip for the quarter was $681, up from $575 in the previous quarter and $622 in Q1 2004.

Image Partners

Getty added a total of 8 image partners to its site during the quarter and now has a total of 53 on the site.

Gross Margins

	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
Overall Gross Margin	72%	72.2%	72.4%	72.4%	71.2%

CFO Liz Huebner said the company expects the gross margin to be in the range of 71.5% and 72% for the rest of the year excluding the impact of Digital Vision which will add about two points to the overall gross margin.

SG&A

Selling, general & administrative expenses (SG&A) totaled $60.1 million, compared to $54.8 million in the year ago quarter. However because of weakness of the dollar, on a currency neutral basis SG&A only increased 7.7% from Q1 2004. As a percentage of revenue SG&A was 34% for Q1, an all time low.

Geographic Breakdown

The percentage of revenues from the various geographic areas remained the same as last quarter.

	Q2 2003	Q3 2003	Q4 2003	Q1 2004	Q2 2004	Q3 2004	Q4 2004	Q1 2005
Americas	54%	52%	51%	50%	51%	51%	49%	49%
Europe	40%	41%	42%	43.5%	42%	41%	44%	44%
Asia/Pacific	6%	7%	7%	6.5%	7%	8%	7%	7%

Back To Digital Vision

As might be expected, much of the quarterly conference call was devoted to
discussing the future impact of the Digtial Vision acquisition.

Klein refused to provide specifics of Digital Vision's gross annual sales. However, based on the amount Getty has increased its guidance for 2005 it appears that they expect to add about $15 million to their revenue from sales made directly by DV offices or through DV distributors other than Getty. Since this is for 8 months the actual revenue generated by DV from these sources would probably be between $20 and $22 million annually.

The next big question is the amount of revenue Getty generates for DV. Klein confirmed that Getty was paying DV a royalty of 40%. There is a general conscious among sever sources I contacted that DV probably received between $30 and $40 million from Getty in 2004, with most favoring the lower end of this range. That would put DV's total 2004 revenue at something in the range of $50 and $62 million.

These numbers need careful examination. If DV received $30 million and that's 40% of the gross then actual gross sales of those images would have been $75 million. If DV received $40 million the gross sales would have been $100 million. But, Getty's gross revenue from RF in 2004 was only $205.4 million.

It is hard to imagine that half of that number was for DV and that the other half was for all the revenue from PhotoDisc sales plus the other 13 RF suppliers on
www.gettyimages.com. Consequently, I'm inclined to believe that $75 million is gross sales ($30 million for DV), or maybe even a little less, is about right.

It is also interesting to note that for the last year or so Getty has been focusing on getting almost all of their new images from Image Partners rather than producing them themselves. This strategy has enabled Getty to cut their costs dramatically and thus generate more profit. With the acquisition of Digital Vision Getty is shifting back in the direction of image creation (with an emphasis on wholly owned) in order to expand the DV offering and maintain the quality level. Getty has set aside $5 million for the rest of calendar 2005 in order to accelerate the creation of "relevant, high quality, wholly owned imagery" to add to the DV collection.

Klein also indicated that DV currently has a staff of 135 to 140, but that once the integration is complete there will be less than 30 employees responsible for the DV operation. While he did not outline specify which jobs would be eliminated, it would seem likely that all the sales and administrative people will be gone and that only those intimately involved with the production and editing processes might remain.

Finally, for the DV photographers receiving royalties there is the interesting question of how royalties will be calculated in the future. In the past, if the sale was made by Getty, the company would retain 60% of the fee, remit 40% to DV and the photographer's royalty would be calculated on DV's share giving the photographer 10% or less of the gross sale. Now that Getty owns DV will the photographer's royalty share be calculated on the actual gross sale price, or will there continue to be a double cut? For example, if the photographer's contract says "20% of net" will the photographer who has been getting 8% of the gross sale in the past, now get 20%. This could be very good news for photographers. Getty would undoubtedly prefer to pay the photographers 8% rather than 20% of the gross sale, but can they do that according to contract despite what photographers have become used to. I haven't read any of the contracts, and I'm sure Getty will abide by what the existing contracts say, however many photographers will be waiting anxiously to learn how their contracts will be interpreted.