Jupiter Announces Q1 2006 Results

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May 11, 2006

Jupitermedia Corporation has reported revenues for the quarter ended March 30, 2006 of
$33.9 million compared to revenues of $19.7 million for the same period last year, an increase of 72%.

However, this year-over-year growth says nothing about organic revenue growth because Jupiter has acquired 18 companies in the year and several of them have provided significant revenue streams for almost the entire year.

More important than year-over-year figures is to compare revenue with Jupiter's guidance and to the pervious quarter. The online image division which is 78% of their business generated $26,565,000 in Q1. The revenue was up $1,812,000 from $24,753,000 in Q4 2005. While this was an improvement one might have expected more since they had a full quarter of revenue from Banana Stock, acquired last October 2005, PR Direct acquired in November and two months from Stock Image acquired in early February 2006. In addition to these rather significant revenue generators, they acquired a number of smaller companies in this time period that should have been adding something to revenue.

The following are the gross Jupitermedia numbers for the last two quarters and the Jupiterimages division which now represents 78% of gross revenue. (For more on previous acquisitions see Story 809.) The numbers are in millions of dollars. I have also listed the acquisitions made be Jupiter in each quarter.

It should also be taken into account that Q1 has more business days than any other quarter and in the stock photo industry that usually means a significant bump in revenue. Granted, as of January 15th Jupiter lost Brand X revenue when Getty Images ceased representing that brand, but during the last quarterly conference call Meckler said that the revenue from Getty in Q4 was only about $2 million. Assuming all this is lost, it still doesn't seem to account for the relatively flat showing of the other properties.

In March Jupitermedia said it expected Q1 revenues to be between $35.5 and $36 million. While the $33.9 appears to be below the bottom estimate part of the drop is because the revenue from Jupiter Research, which was sold in March, is not included in the figures. Nevertheless, it seems clear that many of the recent acquisitions are adding very little to overall revenue.

Business Outlook

In March the company said it expected revenues between $166 and $170 million for all of 2006. However, after seeing the results of this quarter Jupiter has decided that in the future they will provide a new rolling 12 months' guidance. The new guidance will cover the period April 1, 2006 through March 31, 2007 and the figure for this period is $156 to $161 million in revenues and $54 to $58 million in EBITDA. No figure was given for 2006 overall, but it appears that they now expect, as a result of selling the Research division at the end of March, that their gross revenue will be down from previous predictions by at least $2.5 million per quarter.

Micro Payments

Micro-payments were a concern of investment analysts on the conference call and one questioner pointed out that there are reports that micro-payment sales are taking off . He asked they see any evidence that the sales are coming out of the higher end RF?

Meckler answered by pointing out that Photos.com and Clipart.com are essentially micro-payment sites because with all micro-payments there is a minimum buy in (a subscription) and then the value of the units purchased are deducted from the total credit remaining in the account. He estimated that the average initial buy in is in the range of $70 to $100. Photos.com does not host a "community for contributors" as other micro-payment sites do, but Meckler's online media division has a number of separate sites designed to supply information and build community among art buyers and these sites push buyers toward Photos.com when they need pictures.

Meckler went on to say, "In terms of what's happening we know from Photos.com that the number of higher level large media and advertising companies that are starting to use subscriptions from Photos.com has grown markedly over the last year. That is obviously a bellwether of what the future brings and the fact of the creative destruction that is going to happen."

"While I do not believe that high end RF and RM photography is in danger of going the way of the horse and carriage after the introduction of the car there is no question that these lower priced properties are definitely going to take market share from the high end."

[Editors Note: I agree with the above. But then Meckler went on to make a long statement of where he thinks the industry is headed and I would like to parse that statement a little.]

He said, "What I think happens is not that the (RF and RM) business evaporates, but that whatever anyone wants to factor into the growth of that business in coming years, I believe it is at best a single digit growth industry instead of the 10% to 15% numbers we've seen out there."

[I agree that if there is growth it will be no better than single digits, but I also think it is entirely possible that enough RF and RM sales will be lost to micro-payments that gross revenue will actually decline.]

"In terms of our company we believe we are better positioned than anybody else because not only are we in the high end, but we have a very small part of it and any share we get is a bonus. At the same time the fastest growing part of our company always has been and continues to be our subscription properties.

[Earlier in the call Chris Cardell said that approximately 35% of revenue, or $9,297,750 for the quarter, is from subscription. I accept that this is the fastest growing part of the company. In addition Jupiter is clearly better positioned than Getty or Corbis to grow this low end of the business because they have a lesser portion of high end sales and thus are less vulnerable to the loss of the high end.]

"We feel we are well suited and flexible and we'll be able to handle any direction that the pricing goes and/or trends in terms of buyers buying images from the micro-payment sites."

"The last piece is that we are also seeing a new type of image buyer that previously did not exist. Unfortunately there are no metrics on this because the business has spring up so quickly, but I do believe it is involved in and around web sites. I can't prove it but I believe the fastest growing part of the image and digital content business in the next 5 to 10 years will be from web designers who up until now were not image buyers. With the millions and millions of web sites that are being created every month this is where the great growth will be. This is where the lower level pricing will become dominant.

[I can agree that there will be tremendous growth in this area. But as we all become more dependent on the web there is likely to be less print advertising and direct mail and it is these users that have paid the high rates for images. Many of these web designers will also use digital cameras to create their own pictures and manipulate them in Photoshop rather buying images. Web designers have also shown a great propensity to appropriate images off of other web sites without paying anything for them. And they have the option of using Google and Yahoo image searches to find many more images than any of the professional sites have to offer.]

"In 5 to 10 years this business will be a many times bigger business overall than the present $2 billion a year market overall that is often quoted."

[Many times bigger than present in gross revenue is very wishful thinking. There may be more images used, but the key question is how much the users will pay for the images. Consider, that the average license fee for RF and RM combined at Getty Images in Q1 was $406.66. If the average price on a subscription or micro-site image is $5 (and we know it will be lower for many of the images used online because they don't need big files) the subscription sites would have to make 81 sales for every one traditional sale lost. At this rate it is possible to sell 'many more images' and still have a substantial decline in gross revenue.]

Who Uses Micro-Payment Sites

A key question is who is using the micro-payment sites? Getty says that only 8% of the
iStockphoto customers are Getty Images customers. However, we don't know how many customers iStockphoto has so we can't put a number on that 8%. Fotolia, iStockphoto's competitor, say they have 74,153 customers and 8% of that would be 5,932. Meckler says there are 4,000 major buyers in the world.

If we assume that iStockphoto has as many customers as Fotolia and Meckler's figure is correct then the two obvious questions are:

What portion of the total stock photography revenue is represented by those major buyers?


How many of those major buyers are in Getty's 8%"

My gut feeling is that most of the major buyers will get some images from subscription and micro-payment sites depending on the project and the particular image they need.

Another interesting statistic is that according to a Communications Arts survey 61% of creative buyers already go to 2 to 3 sites before making a decision as to what image to buy and an additional 25% go to 4 to 5 sites. Only 7% confine their searches to only one site. If we assume that Getty is the first site are the 2nd or 3rd sites a subscription or micro-payment site, or will it be soon?

Other

Meckler said that they have a worldwide sales staff of about 150 up from 70 a year ago. Thirty of these employees were hired in Q1. Many of the sales people have come from their competitors. They expect to add an additional 5 to 10 sales people in the U.S., but due the personnel that have joined Jupiter as a result of recent acquisitions they believe they have about what they need in the rest of the world. By comparison Corbis has reported that they have over 400 and Getty has said they are up to about 700.

Cardell said RF represents 80% to 85% of their gross revenue and that about 80% of their revenue comes from the U.S., but sales in the rest of the world are growing.

New Online Images Offerings

Jupitermedia continued to expand and strengthen its world-class proprietary
Jupiterimages offerings with the addition of the following:

In January 2006, Jupitermedia announced an exclusive worldwide partnership with Photographic Youth Music Culture Archive (PYMCA), a rights-managed image company based in London, U.K. The PYMCA collection is available at www.jupiterimages.com.

In February 2006, Jupitermedia announced the launch of FlashKit's FlashFoundry.com (www.flashfoundry.com), a new paid subscription service offering over 100,000 professional-quality Flash components, video, buttons, animations and templates. Web designers and PowerPoint users can easily add Flash content to their Web sites and presentations in just minutes, rather than creating it from scratch.

In March 2006, Jupitermedia announced the launch of Photostock.jp (www.photostock.jpwww.photos.com)
subscription service. Operated by a team in Japan, Photostock.jp is modeled after Photos.com and was specifically built for the Japanese marketplace.

Acquisitions

In January 2006, Jupitermedia purchased a 49.7% equity investment in HAAP Media Ltd., based in Budapest, Hungary. HAAP Media operates two stock photo related Web sites: Stock.xchng (www.sxc.huwww.stockxpert.com). Financial terms of the transaction were not disclosed.

In February 2006, Jupitermedia acquired all of the shares of Stock Image S.A.S (www.stockimage.fr)for approximately U.S. $11.1 million in cash. Located in Paris, France, Stock Image is a leading resource for rights-managed images through its Stock Image brand and royalty-free images through its Pixland (www.pixland.fr) brand.

In February 2006, Jupitermedia acquired the assets of The Beauty Archive (www.thebeautyarchive.com). The Beauty Archive is a leading provider of rights-managed images for business users and creative professionals in the editorial, advertising and design industries. Terms of the acquisition were not disclosed.

In March 2006, Jupitermedia acquired the assets of Crank City Music, which includes a wholly-owned music library of over 1,300 royalty-free music tracks and its Web site (www.crankcity.com). Crank City Music provides royalty-free CD collections in a variety of themes and styles for a wide range of product applications, and MP3 downloads with a simple e-commerce process. Terms of the acquisition were not disclosed.

In April 2006, Jupitermedia acquired certain assets of Steve Shapiro Music, including a wholly-owned music library of over 2,200 royalty-free music tracks with a wide selection of tracks offering moods, themes and instrumentation ranging from hip-hop to classical styles. Terms of the acquisition were not disclosed.

In May 2006, Jupitermedia acquired all of the shares of IFA Bilderteam GmbH (www.ifa-bilderteam.com). IFA Bilderteam is headquartered in Munich, Germany and has an office in Dusseldorf, Germany. IFA Bilderteam is a leading resource for rights-
managed images. Terms of the acquisition were not disclosed.