Getty Images On Track For Best Year Ever

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July 25, 2003

Getty Images, Inc. reported second quarter 2003 revenue of $127.7 million, down slightly
from the $130.3 million in first quarter 2003, but up 12.7 percent over the $113.3 in
revenue in the second quarter of 2002. This included a 6.9% benefit from foreign currency
translation as the dollar remained weak. Net income was $0.23 per diluted share, compared
to $0.08 per diluted share in second quarter 2002. The net income for first quarter 2003
was also $0.23 per share.

For the third quarter of 2003, the company expects to report revenue in the range of $127
million to $131 million. For the third quarter of 2003, excluding debt extinguishment
costs of $0.12, the company expects to report third quarter diluted earnings per share of
$0.24 to $0.26. For all of 2003, the company expects revenue in the range of $505 million
to $515 million and earnings per share, excluding debt extinguishment costs of $0.12, of
$0.90 to $0.97 per share

Shift Toward Royalty Free

The most significant trend in the quarter was a marked drop in Rights Managed revenue
and volumes and a corresponding increase in Royalty Free revenue. CEO, Jonathan Klein spent
a great deal of time on the conference call explaining why this happened and what
Gettyimages intends to do about it. He said, "We saw growth in volumes in some parts of the
business, but not in others. Stock photography was marked by a very significant shift from
Rights Managed to Royalty Free in the quarter." That shift is, "being driven by our
success in revitalizing our RF business which saw dramatic growth in revenues for single
images of 38% over the second quarter of 2002."

Later in this report, I will explore Klein's comments in more detail, but in order to fully
understand them it will be helpful to review some of the other numbers first.

Percent Of Revenue

Stock photography (a combination of RM and RF image licensing) was 83% of total sales for
the quarter, down from 84% in the previous quarter. However, there was a dramatic rise in
the percent of RF revenue from 28% to 31% of total revenue, and a corresponding fall off in
RM sales from 56% to 52% when compared to the previous quarter. The chart below outlines
the trend for the last six quarters. While the shift from RM to RF seems very significant
if we only compare it with the previous quarter, it does not appear to be quite so out of
line with overall movements over the past six quarters, particularly when we take into
consideration the increased total revenue. Nevertheless, the direction is bound to cause
concern for Rights Managed photo suppliers.

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

Average Price Per Usage

CFO Liz Huebner said, "The average price per image (ppi), worldwide, for Rights Managed
Images was $567 up from $546 in the 1st quarter of 2003 and for the Royalty Free collection
the average price for single images was $139 up from $127 in the 1st Quarter."

Huebner pointed out in the past that the revenues for RF collections include CD sales
which are usually in the ranges of 20% to 22% of total RF revenue. The ppi numbers that
Getty provides are for single images only and as a result take no account at all of CD
sales. I have deducted 20% of the RF revenue before doing my number of images licensed
calculations, but if the
percentage of CD sales varied somewhat from quarter to quarter that would throw off my
"Number of Images Licensed" figures. The revenue figures below are in millions of dollars.

It should be noted that the wide variations in the average ppi for RM sales are probably
the result of a few big sales. Thus, the trend in this figure may not be as important as
the number of images licensed.

It should also be noted that Gettyimages has seen a very steady decline in the total volume
of images purchased in the last six quarters with the exception of a slight improvement in
the first quarter of 2003.

In his presentation Klein made the point that, the RF increase was driven largely by
increases in the average price-per-image while volumes remained flat. It is worth noting
that while RF volumes were flat compared to the previous quarter they are down
significantly from a year ago.

RM/RF Sales Shift

Klein told analysts that this shift away from RM is not driven by price, "rather it is
prominence and weight in the search results." He indicated that they currently order the
images in the search results so the newer images come up first and they put one image from
every brand that has
an appropriate image before they put up a second image from that brand. This would mean
that if the customer was searching for both RM and RF, and if every brand had an
appropriate image the first brand would have image number 1 and image 22.

Customers have the option of just searching for RM only, RF only or for searching just
particular brands. Klein did not indicate whether customers tend to use this option
frequently. However, the general thrust of his responses and the trends of the numbers
tends to indicate that most of the searches are global across all brands being offered, and
for both RM and RF, rather than for one or a few specific brands.

Klein attributed the rise in RF revenue to increased 3rd party participation on the site
and said, "If we go back 18 months we probably had 6 or 7 collections and they were
predominately RM. At that time they were Stone, Taxi, The Image Bank, PhotoDisc was just
one, and we didn't have 3rd parties at that point to any significant degree. Those that we
did have were RM like National Geographic. Over the last year we've added significant
numbers of 3rd parties, almost all of them have been RF so there are now 18 different
collections on the Creative site of Getty Images and each one of those gets equal
prominence provided it has a relevant and recent image in the search results. The result is
that today you get probably 5 or 6 RM images in the first 18 and the balance will be RF.
In the next several weeks we will be changing that. We will certainly redress this odd
imbalance where all collections are treated equally. That will no longer be the case."

I count 14 RM brands and 7 RF brands on the site for a total of 21. Six of the RM brands
and 4 of the RF brands are 3rd parties. In pure numbers it doesn't seem that the RF brands
should be dominant although some of the 3rd party RF brands may offer many more images that
are appropriate to many of the advertising searches than is the case for many of the 3rd
party RM brands. Nevertheless, it is hard to see how this is a 3rd party issue at all.

To provide a little more illustration of the problem, I did a search of "man (or men) with
phone" on the Creative section of the site. Of the 21 brands only 14 had anything on this
subject matter. This points up the fact that a number of the RM brands are very specialized
and may not have imagery that fits some of the more common search requests made by
advertising buyers. The 14 brands in order of appearance were: Stone, Photodisc-Red, Taxi,
The Image Bank, Photodisc-Green, Digital Vision, Brand X, Photographer's Choice, Hulton
Archive, Time Life Pictures, Illustration Works, Thinkstock, Photodisc-Blue and Rubberball.
Half of these are RF and half are RM - and the first 14 images as well as the first 90
images were split exactly 50/50 RF and RM. If the buyer happened to be looking for
contemporary photographs the Hulton Archive and Illustration works image would not be
appropriate and that would increase the dominance of the RF images for this particular search.

At one point in his explanation Klein told the analysts, "Put simply there are
significantly more RF images in the search results than was previously the case." While
this may be true, it does not seem to be a problem created by 3rd party
providers, rather it is a result of splitting Photodisc into three brands. Now the
Gettyimages.com site shows three times as many Photodisc RF images as the images of any
other brand - RM or RF. In the search above, by the time the buyer had reviewed 90 images
Photodisc had shown 20 and Stone had only shown 7. Digital Vision also got to show 7
images, but some of the other brands at the bottom of the list only got to show 6 in the
first 90. It would seem to me that this is not a 3rd party problem, but an accidental, and
probably wholly unintended, favoritism that Getty has given to its own RF brand when it
divided it into three parts.

While Klein may have placed the emphasis for the problem in slightly the wrong direction he
said, "This is not difficult to fix. Over the next few weeks we will be making changes to
the search tools and content mix to insure that we are providing customers with exactly the
images they need, at the right price point. There is nothing more important in our industry
than providing the customer with the right image, at the right time, at the right price
with the appropriate level of customer service."

One analyst asked for more specifics as to how they intend to adjust the search. Klein
said, "We would never move away from two absolutely significant issues. When the customer
searches for images the search engine must throw up the most relevant images to their
search first. Within that sub-category showing the most recent ones first is absolutely
critical. However, what we want to do is redress the balance in relation to the real estate
on the site."

Klein said, "It goes without saying that the success of the RF has had an impact on our RM
photography portfolio, which grew revenues by about 3% over the 2nd quarter of last year on
the back of higher average price per image, but declined in volume." (There was also a
significant 9% decline in RM revenue from its first quarter high.) It is interesting to
review the RM volumes for the past six quarters. The volumes were steady for five quarters
and in this quarter they dropped a significant 12%.

These facts tend to support the theory that the big shift from RM to RF might have more to
do with the introduction of three brands of Photodisc at the end of the first quarter of
2003 than with 3rd party suppliers that have been added over the past year.

One analyst asked Klein if sales volumes related to the number of RM and RF images on the site.
Klein emphasized that the number of images on the site is not the determining factor,
rather it is the number of images, and the order in which they come up, in any given
search. On the site I did separate searches for horizontal, vertical, square and panoramic
for both RM and RF. This gave me 346,091 RM images and 189,523 RF images. That means that
65% of all the "Creative" images on the site are RM and 35% are RF. It is interesting to
note that this is exactly the reverse of the number of images licensed in the 2nd quarter.
66% of the images licensed were RF and 34% were RM.

Klein also pointed out that another partial factor for the RF growth was that RF sales in
Europe were particularly strong this quarter. He said the RF segment overall has been under
penetrated in Europe and in the last 12 months Gettyimages has put more relevant European
content on the web site. "The result is that European customers are for the first time
seeing very high quality RF imagery that hasn't been seen or used much so what tends to
happen in the early days when that imagery hits the market is that customers are willing to
use it for higher profile usages because they know it hasn't been ubiquitous at that
point."

Finally, Klein cautioned analysts not to think that search criteria alone would change the
revenue mix. He said Gettyimages will be making changes in licensing, pricing and marketing that
will benefit RM and acknowledged, "Most of our focus in the last three years has been on
the RF segment and we have pretty much revitalized and revolutionized that, now we are just
beginning to turn our focus to the next stage of RM. There are a number of factors of which
search order is just one."

Understanding The Market

During the conference call Klein made a number of other comments that provide useful
insights not only into Gettyimages operation, but the market in general. He made the point
that the sale of 3rd party products has provided Getty with a much better understanding of
the market and customer behavior in this new, wholly web based work environment. Among the
things he said he has learned are:

• "First, we learned that customers appreciate choice and the ability to select the right
  image for their work across a wide array of collections on GettyImages.com. Customers are
  very attracted by the fact that they have on one site the most important collections in the
  industry and can search, purchase and download seamlessly."

• "Secondly, we've learned that search order has a big influence on customer licensing
  decisions. As a result we are beginning to learn about merchandizing the real estate on the
  site in order to drive both the sales and the customer experience thereby improving
  revenues.

Klein said, "Our mantra at Gettyimages for everything we do is relevance, accessibility,
service, innovation, and creativity, all based on a passion for pictures and delighting our
customers."

Terms vs. Credit Card Customers

Klein made the following point in relation to credit card sales. "Another important factor
is that the overall volume figures both in RM and RF do not take into account some
important and very positive shifts we have noticed in the mix of our customers. Our
customers are either terms customers, or they buy on a credit card. The higher value
customers are terms customers who buy more frequently at higher values and across all
categories of content and across all collections. On the other hand, for the most part
credit card customers are occasional licensors of imagery, produce much lower volumes of
revenue than terms customers and almost exclusively buy RF. Recently we have seen a
softening in volumes from credit card customers for RF imagery at the same time as
significant growth in volumes from terms customers, also for RF imagery. This growth in
volume from higher value customers has also been seen in RM imagery. For example, in the
Americas although overall volumes for RM images were down, RM volumes from terms customers
were up more than 5%. What this tells us is that we are continuing to make very strong
progress with the higher value, higher revenue generating customers, but are seeing less
business from credit card customers which characteristically means that they have a much
lower revenue potential. We believe that many of these credit card customers have simply
gone out of business. Many of those that have survived are doing less business overall and
licensing fewer images. It should also be noted that we have done no prospecting or
marketing into this segment and at this point they are not aware of the breath and depth of
our offering."

Price

In answering a question about pricing Klein said, "We don't subscribe to the notion of
across the board price increases." He said that the key to their price optimization
strategy is in the detailed information their fully integrated Alliant accounting system
allows them to collect and review. He pointed out that, "it is possible that in certain
categories (Publishing is an example) we may have been too aggressive in price, yet in
other categories we've not been. In the 2nd quarter in the RM direct mail category in the
U.S. for licenses over $1500 per image we were up more than 30% in volume terms, with
significant increases in price." On the other hand the number of smaller uses in the direct
mail category where the fee is under $500 are down significantly. "That tells me that for
those lower uses in direct mail our pricing is slightly too high and it is forcing
customers to move to RF."

Klein also acknowledged that they are seeing across the board reductions in the number of
RM uses where the price per image is $500, or less, which would indicate that "at the lower
price points, lower budgets, there is probably some migration from RM to RF." At the same
time they are seeing significant volume growth for RM images in the higher priced areas. He
also said that volumes in the book cover market were extremely healthy and prices in this
category are up significantly, despite the fact that the lower end uses in the book
publishing market are very price sensitive. Being able to analyze this data enables Getty to
adjust price for each usage type and market segment as demand requires.

CFO, Liz Huebner also pointed out, "After separating our RF collection into three
categories, each with a different price point, customers continue to license a greater
percentage of higher priced RF images than we had planned which continues to reinforce our
contention that there is little price sensitivity for most of our customers."

According to Klein the company expects to increase price between 3% and 5% per annum in the
next couple of years and expects the rest of their growth to come from volume.

Publishing and Editorial Markets

The Publishing and Editorial Markets are a high priority for Gettyimages right now. In the
past this market was not a major focus for Gettyimages because it was labor intensive due
to its being wholly analog and generating a relatively small return. As the publishing
market has become wholly digital, Gettyimages is pursuing it aggressively. But Klein
pointed out that their "pricing in this market is lower and more flexible" than in other
markets.

News, Sports and Film

It should be noted that the News and Sports revenue was down for the quarter despite the
acquisition of two new celebrity and entertainment brands and the continued high need for
coverage of Iraq. Early in the year Getty acquired Image Direct that specializes in
celebrity coverage in the U.S. and they have just completed a deal with Mission Studios in
the UK, an agency that specializes in entertainment photography.

There association with AFP was launched at the end of the quarter so it is too soon to
determine what effect that relationship may have on future revenue.

The Film division reports its highest quarterly earnings in more than two years. The
launched their new film offering at the end of the first quarter after digitizing the core
collection and completely revamping the customer interface and received very positive
customers response to the new offering.

Market Outlook

Klein said, "Our customers have not seen a sustained improvement in their businesses. This
view is not just our's, it is shared by many companies serving the marketing and
communications industries. Key advertising industry analysts have recently brought down
their growth expectations for 2003 and the advertising agencies and most publishers remain
very cautious indeed. Recently a major publisher was quoted as saying the economy remains
tentative and we would concur. In addition, after averaging 4.8% growth year over year from
November to May, advertising pages in magazine actually fell 3.2% in June from the prior
year."

Geographic Breakdown

The spite in revenues between the Americas and Europe were about the same as the previous
quarter, but this spite is currently being significantly affected by the currency conversion
factors if we compare it to the 2002 percentages and the currency conversion rates then.

Gross Margins

The gross margin for the quarter was 71.6% down from 73.5% in the second quarter of 2002
and relatively unchanged from 71.4% in the first quarter of 2003. The lower average gross
margin is due to the increasing use of 3rd party suppliers most of whom receive 40% of
sales leaving 60% for Gettyimages. They expect the gross margin to remain in the 71.5%
range for the rest of 2003.