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GETTY AND THE INVESTMENT COMMUNITY
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November 26, 1999
Getty Images has finally convinced the investment community that their company
should be treated like other hot internet stocks.
Their recent stock offering to raise the capital to purchase The Image Bank was
managed by Morgan Stanley & Co. Inc. The prestige of this investment banking firm, plus the
story Getty had to tell to the investment community seems to have turned the trick
with investors.
When the intent to acquire was announced in September, Getty's stock was selling at
$23 per share. Their announced intent was to sell five million shares to raise part
of the funds to pay the $183 million acquisition cost for The Image Bank. They
predicted at
the time that the rest of the money, needed for the all cash sale, would come from
their current cash.
After going on the road to explain the value of their company to major wall street
investors, they were able to sell six million shares at $39 per share and raise more
than enough to pay for the entire acquisition. The stock is now trading at around
$43 per share. The investment bankers also exercised their option to buy an
addition 900,000 shares at the offering price. These 6,900,000 shares raised Getty's
total shares outstanding to 43,968,658.
After the offering Getty ended up with extra cash of something in excess of $50
million in cash in addition to The Image Bank.
Third Quarter
Getty reported third quarter 1999 sales at $60.8 million and total sales in the
first nine months of 1999 of $167.9 million.
Sales were up $5.8 million over the previous quarter, or about an 11% growth
quarter-to-quarter. However, during the quarter Getty had new acquisitions of
EyeWire and Online USA. The income of these two companies combined was probably in
the range
of $2.8 million (this is an estimate, not a publicly reported number) and thus the
real quarter-to-quarter growth of the Getty business that existed on July 1 was
probably more in the range of $3 million, or 5% over the previous quarter.
Meanwhile, late last month at Photo Expo in New York, John Hallberg, President of
TSI and Hutton Getty, was telling photographers in private meetings that TSI had 25%
growth in the previous quarter and was forecasting 40% growth in the final quarter
of 1999.
E-commerce sales
Getty's e-commerce sales for the third quarter of 1999 were $19.4 million, or about
32% of sales. This was up from 25% of gross sale in the second quarter.
Year-to-date e-commerce are $43.4 million or 26% of all sales year-to-date.
Road Show
The following are some of the points Getty made to the investment community in
making their case for a greater valuation of their company.
BancBoston Robertson Stephens, the leading underwriter of Getty before Morgan Stanley
took over, and
the preparer of much of the written material provided investors said, "Getty is
delivering on its consolidation strategy in a substantial vertical (market) which is
estimated to be in the $35-$45 billion range."
We have no idea what market they are talking about. There was no further
explanation of these numbers and presumably, investors took them on faith and didn't
ask.
When investors asked in-house people at Getty about the current size of the stock
photo market they were told that it is between $4 and $5 billion. (I have estimated
the current stock photo market worldwide in the range of 1.25 billion, not 5 billion. Corbis
was using this same 1.25 billion number in talks they gave at the recent PACA
conference.)
If the market were 5 billion, Getty and TIB combined would only control 6% of it.
If it is in the range of 1.25 billion as I estimate Getty already controls 24% of
the market.
In its report to investors BancBoston Robertson Stephens highlights the following reasons why
e-commerce introduces significant benefits to the Getty Images business model:
Higher margins - lower distribution costs and fewer salespeople
Greater tranaction volume - from 310 to 1,520 tranactions per day
Higher average sale - 1.8 to 2.1 images per transaction
Lower transaction time - 7 weeks to 20 minutes
Increased selection and improved customer service
Lower inventory costs - from $238/image to $45/image
These points are worth some examination.
Higher margins - lower distribution costs and fewer salespeople
There is no indication that there has been a reduction in the number of salespeople
or
in the number of Getty's staff. In fact, in April they were reporting a staff of
1,300, now they are saying it is 1,600 and with the completion of The Image Bank
acquisition that number should jump to about 2075. There may be a sales staff
reduction in inhouse picture researchers, but these people will be replaced by other
worker categories such as keyworders and people to manage the on-line database.
There are also indications that Getty may be losing
ground in certain segments of the business, noteably textbooks, due to a change in
focus away from picture research. This market segment may eventually be lost to
other suppliers in the industry who continue to operate in a more traditional manner.
Greater tranaction volume - from 310 to 1,520 tranactions per day
They don't specify the period in which these numbers were collected, or tell the
investor enough about how they were collected to make reasonable judgements about
what they mean.
There is at least one scenario where these numbers tend to look more negative
than positive.
Assume that the 310 were when there were no e-commerce sales and that the average
sale
was $400. That would be $124,000 per day. If the average sale was $300 it would be
$93,000 per day. Now, assume that a high percentage of the 1,520 sales are individual
PhotoDisc images sold online at an average price of $75 per transaction, or lower.
That works out to $114,000 per day. At the rates PhotoDisc is charging for single
image uses compared to what they were charging for discs, or traditional analog
prices the 5 times growth in transactions is not necessarily all that impressive.
The 1,520 transactions is probably only the e-commerce transactions, and doesn't take
into account, in any way, other analog transactions that are taking place. One
major factor to consider is the number former analog buyers who are now paying less
money for their imagery because they can get it online.
At one point Getty says they are generating $250,000 per day in e-commerce revenues.
If there are 1,520 transactions that would produce an average transaction price for
a 365 day year of $684.93. This fits nicely with the 2.1 images per transaction which
makes the average fee per image $326.16.
If they continually producing $250,000 per day in e-commerce revenue that would make
annual e-commerce revenue for 260 days (a 5 day week) $65 million, or over $91
million for a 365 day year. By their own admission they aren't there yet. Thus, the
$250,000 is probably the best day they have had so far and the big question is what is
lost on the analog side of the business when that $250,000 becomes the average on an
annual basis.
Higher average sale - 1.8 to 2.1 images per transaction
If the average number of images licensed per transaction was 1.8 when they were
making analog sales and is now 2.1 on the web, this is not particularly encouraging,
if average rates per transaction on the web are significantly lower.
Lower transaction time - 7 weeks to 20 minutes
This implies major collection problems (7 weeks) with all clients using the
traditional analog system. Most agencies don't have collection problems of this
magnitude although collections, industry wide, is a problem. On the other hand the 20
minutes implies that everyone using e-commerce is paying by credit card. That certainly is not the
case. Getty conveniently fails to tell us what percentage of the on-line sales they invoice
in the traditional manner. Certainly, e-commerce has done absolutely nothing to
encourage large companies to change their payment policies on invoices. Collecting
on these invoices is going to require a lot of time of a lot of sales people whether
the sale is made on-line or not.
Increased selection and improved customer service
Online sales are not offering increased selection. Just the opposite. Getty, and
all the other sellers, have no plans to make every image in their files available
on-line. The cost of scanning and keywording make this prohibitive. Getty's
current editing process, and their focus of moving to 100% e-commerce, is limiting the options
available to the consumer, not increasing them. This is opening opportunities for
specialist agencies that are prepared to maintain and update files with a greater
depth of coverage, and who are prepared to do more research for the customers.
Lower inventory costs - from $238/image to $45/image
This is a very interesting set of numbers. If they are achieving such savings in
inventory costs why are the photographers -- the creators of this inventory --
getting a lower percentage (40% instead of 50% at TSI and below 20% at PhotoDisc) of
the gross sale? Certainly the lower cost is partially achieved because they are now
paying less to the suppliers for their inventory. The story they tell the image
suppliers and the story they tell investors don't quite mesh.
Another factor that may have a lot to do with the lower cost is that a higher
percentage of the e-commerce sales are coming from PhotoDisc and Eyewire who are
paying 20% of less for their inventory rather than the 40% TSI pays.
Getty says that in the 2nd quarter 25% of TSI's sales were generarted on-line, but
45% of PhotoDisc's sales were generated in this manner. One thing we don't
know is the percentage of PhotoDisc's online sales that were for individual images
and the percentage that were for discs. The disc sales probably generate on average
around $250 per disc, but it is likely that the single image sales generate one-third
or less of the $250 figure.
Other Points
Quoting from their press release, "Registered users on all Getty Images websites
reached
almost 440,000 at the end of the quarter." This was certainly due in large part to
the acquisition of Eyewire which has a large database of registered users, not all
them purchasers of still images. Eyewire sells Adobe software, among other
products.
In addition it is not clear that Getty has a single consolidated database across all
brands. If there is no such database a user who has purchased a product from
PhotoDisc, one from TSI and one from Eyewire could be counted three times, not once.
Market Capitalization
Getty has a current Market Capitalization (shares X share price) of about $1.8
billion which is about six times their gross annual sales. It should be noted that
in addition to the 43,968,658 shares outstanding Getty has convertible shares and
options which raise the total market value of their shares.
Shares outstanding after deal
|
43,968,658
|
Shares from convertible
|
2,600,000
|
Options outstanding at $15
|
7,819,264
|
Total Shares
|
54,387,922
|
|
|
Stock Price
|
$ 42
|
Taking into account the debt reduction from conversion, the cash proceeds from
option coversion, the excess net cash from the recent offering, and the cash on hand
as of September 30, 1999 Getty has a current market value of their shares of about
$2,284,292,724, over seven times their annual earnings.
Summary
Jonathan Klein and his team must be given tremendous credit for convincing the stock
market to invest more than $234 million in Getty Images. But some experienced
individuals within the stock photo industry who have a solid understanding of the
photo buyers, and what motivates them, question the wisdom
of the investors.