Getty Images Reports $21.5 Million Profit In 2002

Posted on 2/6/2003 by Jim Pickerell | Printable Version | Comments (0)

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GETTY IMAGES REPORTS $21.5 MILLION PROFIT IN 2002



February 6, 2003

Getty Images, Inc. reported 4th quarter 2002 revenue of
$117.7 million, down just slightly from the $118.2 million in the 3rd quarter, and a
15.5 percent increase over revenue of $101.8 million in the 4th quarter of 2001.


Getty has definitely turned the corner on the profit picture. After many years of
investing in the growth of the company it moved from a loss to earnings per share of
$0.39. The company had net income of $7.5 million, or $0.13 per diluted share, for the
4th quarter, compared to a net loss of $38.8 million, or a loss of $0.75 per diluted
share, for the same period in 2001. For all of 2002, net income was $21.5 million, or
$0.39 per diluted share, compared to a net loss of $95.3 million, or loss of $1.84 per
diluted share, in 2001.


The company which will be eight years old next month had total revenue for 2002 of
$463.0 million, up 2.7 percent compared to $451.0 million in 2001, but still 4 percent
below the 2000 revenue of $484.8 million. Nevertheless, CEO Jonathan Klein pointed out,
"the fact that they were able to grow revenue on a like-for-like basis by of more than
4% in the worst market in decades for our customers is a demonstration of the quality of
our imagery, our strong, but still expanding leadership position in the market, the
strength of our platform, and our pricing power."


In the past eight years Getty has moved the business from an analog, expensive to
operate and labor intestive business model to an all digital, e-commerce operation.


Milestones For 2002


In his conference call to investment analysts Klein emphasized that the 2002 financial
growth was achieved while still growing the company. He outlined some of the 2002 growth
and development milestones. They have:


  • Completed the final steps in the digital migration they began five years ago and
    now have a unified and integrated platform from web site to supporting back office
    systems.


  • Successfully re-invigorated both TIB and Taxi (VCG) and got them growing. The
    turnaround in both these companies has exceeded expectations.


  • Completed the digital transformation of the news and sports business which is now
    wholly digital from the point of capture to the point of distribution.


  • Implemented their brand unification strategy by making Gettyimages.com the clear and
    primary source for visual content. Every day the Gettyimages name and brand is promoted
    worldwide in numerous newspapers and magazines.


  • Agressively rolled out their third party distribution strategy which has also
    exceeded expectations. Getty intends to expand its relationships with 3rd party
    suppliers as a way of leveraging its dominant distribution platform and model. This is
    beneficial to the company because there are virtually no incremental operating costs
    despite the somewhat higher percentage of gross sales paid to the supplier.


    Klein also mentioned that an important factor contributing to their current success has
    been getting staffing to the right size for an all digital business. In March 2000,
    Getty Images had 3,200 employees. They ended 2002 with just under 1,700 people and
    believe they will not need to add people, at all, to grow their revenue. "Quite simply
    we can now add significant incremental revenue against a largely fixed cost base and
    declining capital expenditure," Klein explained. They have also reduced their offices
    around the world from 88 to 44 according to a London Sunday Times interview with Mark
    Getty.


    Business Outlook


    For the first quarter of 2003, the company expects to report revenue in the range of
    $120 to $124 million and diluted earnings per share of $0.15 to $0.19.


    The company has established "agressive, yet achieveable goals" for 2003 according to Klein
    and expects to report revenue in the range of $485 million to $515 million. This
    would be between a 5% and an 11% growth for the year. It is worth noting that at the
    beginning of 2002 Getty Images estimated that their revenue for the year would be
    between $430 and $460 million and their actual revenue at the end of the year exceeded
    the top end estimate by $3 million. They expect diluted earnings per share for 2003 to
    be between $0.70 to $0.90.


    Gross Margins


    Gross Margins essentially consist of Getty's share of revenue after they pay royalties
    to photographers and 3rd party vendors, plus the costs associated with the sale of
    CD-ROM discs. Getty's share was 70.6% of total revenue collected in Q4 2002 and this was
    down from 71.7% in Q3 2002. The decline is primarily attributed to increased sales of
    material from 3rd party vendors. Some of the 3rd party vendors receive 50% of sales, but
    due to contractual changes most will be getting no more than 40% in 2003 and beyond.
    This should cause Getty's margins to rise despite expected increases in 3rd party sales.
    Getty's goal is to reach 75% gross margin for the company in 2004.


    Percent Of Revenue


    In the 4th quarter stock photography (a combination of RM and RF image licensing) was
    84% of total sales, the same as Q3 2002.
    However, the RF proportion rose to 30%, up from 28% in Q3, and RM revenue was
    down to 54% from 56% in Q3. The majority of the rise in RF sales was from 3rd party
    content (read Digital Vision). The trend for the entire year is as follows.






















         

    Q1 2002   

    Q2 2002   

    Q3 2002   

    Q4 2002   

    Rights Managed   

    56%   

    57%   

    56%   

    54%   

    Royalty Free   

    26%   

    26%   

    28%   

    30%   

    News & Sports   

    9%   

    9%   

    8%   

    7%   

    Archival & Footage   

    9%   

    8%   

    8%   

    9%   



    It should be noted that there has been a steady rise in the RF share and a steady decline
    in the RM share for the year. This difference may be accentuated in 2003 given the
    added marketing push and the price restructuring Getty intends to give to RF in 2003.
    Another factor that makes RF sales attractive for Getty is that according to Klein
    "85% of all RF sales occur on the web, at list price, unassisted by a human being."


    The above percentages translate into the following dollar figures for the 2nd, 3rd and
    4th quarters.

















         

    Q2 2002   

    Q3 2002   

    Q4 2002   

    Rights Managed   

    $64.58   

    $66.192   

    $63.56   

    Royalty Free   

    $29.46   

    $33.096   

    $35.31   

    News & Sports   

    $10.20   

    $9.456   

    $8.24   

    Archival & Footage   

    $9.06

    $9.456

    $10.59



    Average Price Per Usage


    The average price per image, worldwide, for Rights Managed Images was $539 in the 4th
    quarter a drop from the $560 in Q3 2002 but still well ahead of the $500 for Q2 2002 and
    $490 for Q1 2002. One of the reasons for these big jumps is that this average figure
    can be very heavily influenced by a few large sales. A more interesting figure, we believe,
    is the actual number of units sold which can be easily calculated by dividing the
    average price into gross revenue. We have provided that analysis below.


    The average price of an RF image in the Q4 2002 was $120, up from $103 in Q3 2002 and
    $99 in Q2 2002. This was due to selected price increases and the strength of sales of
    the 3rd party content (mostly Digital Vision images) that are priced higher than those of
    PhotoDisc. Despite this price increase RF volumes were down about 10% sequentially when
    compared to the previous quarter. This was attributed to an expected seasonial slowdown.


    CFO, Liz Huebner said, "Bear in mind that our reported revenues for Royalty Free
    collections include CD sales which represent about 20% of our RF revenue. The
    price-per-image numbers that we provide are for single images only and as a result take
    no account at all of CD sales so it is not possible to get a 'precise' measure of overall
    Royalty Free volume using price-per-image data."


    Selling Stock believes that while we can not determine a "precise" number of single
    images sold by deducting 20% of revenue for CD sales we should be able to get a ballpark
    figure which we believe provides useful trend information.














    <

















































      

    Q2 2002

    Q3 2002

    Q4 2002

    ROYALTY FREE

      

      

      

    Gross Revenue

    $29.46

    $33.096

    $35.31

    80% - online sales

    $23.568

    $26.477

    $28.25

    Price Per Image

    $99

    $103

    $120

    Number Images Licensed

    238,060

    257,058

    235,400

      

      

      

      

    RIGHTS MANAGED

      

      

      

    Gross Revenue

    $64.58

    $66.192

    $63.56

    Price Per Image

    $500

    $560

    $539

    Number Images Licensed

    129,160

    118,200

    117,922

      

      

      

      

    Total Images Licensed

    367,220

    375,258

    353,322

    Percent RF

    65%

    69%

    67%

    Percent RM

    35%

    31%

    33%




    By setting aside 20% of the RF revenue for CD sales (close to $7 million in the Q4)
    for the last three quarters we have made some estimates of the total number of
    images licenced and the percentage of these images that were RF or RM. While the
    RF numbers may not be as "precise" as some others in this report they may
    provide useful trend information. According to these figures the number of RF
    images licensed is about double the number of RM and clearly RF use is rising
    while RM use is falling. A very high percentage of customers are finding what
    they need in RF imagery.

    Geographic Breakdown

    The geographic breakdown of sales worldwide remained roughly the same as the previous
    quarter, with the Asia/Pacific region showing the strongest upward trend for the
    entire year. The numbers were:














      

    Q2 2002

    Q3 2002

    Q4 2002

    North America

    58%

    57%

    56%

    Europe

    37%

    37%

    37%

    Asia/Pacific

    5%

    6%

    7%



    Goals for 2003

    The top priority for 2003 is to grow revenues according to Klein. With high gross margins
    and relatively fixed costs most of the increased revenue can drop to the bottom line as
    profits. Revenue growth will come from a broad range of initiatives aimed at maximizing
    the current business opportunities as well as expansion. Six key areas of focus in 2003 are:

  • Near the end of the first quarter all RF offerings will be consolidated under the PhotoDisc
    name with a new brand and logo, new imagery, differentiated pricing and an innovative
    approach to marketing the collection. They will also be a new segmenting of categories and
    re-pricing some of the categories at both the high and low end.

    Klein points out that RF has been slow to be exported to Europe and he believes that is mostly
    because of the lack of relevant content. Getty will be adding much more content designed
    specifically for the European market as they believe the split of the RF business between
    North America and Europe has for some time been a function of focus and content. In order
    to get appropriate European content the research staff that determines what the customers
    want is being beefed up in Europe and art directors to work with European photographers
    are being added.

  • To leverage their distribution system Getty has always focused on offering a full
    range of the products and services their customers need and value. They will be augmenting
    the range of content on their site by adding more 3rd party image providers. 3rd party
    providers are responsible for all the sourcing of the imagery, the digitization and
    preparation of the images for online and CD delivery, and most of the marketing. Digital Vision,
    the 2nd largest seller of RF images in the world is already making significant sales on
    Gettyimages.com and Getty has signed up many more 3rd party image providers whose work
    will soon be infront of there customers. These providers range from additional
    RF collections, to film partners to other 3rd party relationships like Time-Life.

    Getty expects 3rd part sales to go from approximately $20 million in 2002 to around
    $40 million in 2003.

  • In the 4th quarter they began a film digitization project that will revitalize the
    film business. The entire core collection is now digitized. It will be available for
    customer search and download by the end of March and a new marketing campaign for film
    called "No Compromise" will be launched. This greatly enhances the customer experience
    because they will be able to view footage online and make immediate buying decisions,
    rather than being faced with the current system of having a tape shipped to them for
    their review. At the moment 15% of final fulfillment of motion picture footage is being
    done online.

  • There will be new product offerings for editorial customers to drive the News,
    Sports and Entertainment business. The recently acquired a small Entertainment photography
    business.

  • They will leverage the data and knowledge that the new back office and tracking
    systems now offer. They now have a full year of data on customers and sales and can
    leverage the current customer base as well as identify new customers and business
    opportunities. Klein said they are already seeing how this can help Getty "better optimize
    pricing, increase efficiencies and provide better customer service."

  • They will begin to develop two new revenue sources designed to enhance their partnership
    with their customers. These are:

    • Hosted media asset management services. These are a natural extension of Getty's
      core capabilites. Some examples are the hosting of Boeing's Photo Store and an agreement with
      FIFA (the governing body of World Cup Soccor) for Getty Images to host their digital assets
      including all logos, marks, photography and video clips for all events through 2006.

    • Assignment services. When customers need to hire a photographer they want them to
      come to Getty Images to fulfill that need. There will be a simple directory of assignment
      photographers and in some cases Getty will directly manage assignment shoots for their
      customers.

    They do not expect significant revenue from either of these sources in 2003, but believe
    they will grow as lines of business.


  • Copyright © 2003 Jim Pickerell. The above article may not be copied, reproduced, excerpted or distributed in any manner without written permission from the author. All requests should be submitted to Selling Stock at 10319 Westlake Drive, Suite 162, Bethesda, MD 20817, phone 301-251-0720, e-mail: wvz@fpcubgbf.pbz

    Jim Pickerell is founder of www.selling-stock.com, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to: http://www.jimpickerell.com/Curriculum-Vitae.aspx.  

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