Getty Reports 2006 Results

Posted on 1/31/2007 by Jim Pickerell | Printable Version | Comments (0)

Stock Price Rises

Getty Images reported revenue for Q4 2006 of $203.5 million up 9.5 percent from
$185.8 million in Q4 2005 and up from $198.1 million in Q3 2006. However, profit declined as a result of restructuring and other costs. The company earned $30.3 million, or $.50 per share, down from $42.5 million, or $.64 per share, during the same period in 2005.

Excluding the effects of changes in currency exchange rates, revenue grew 6.5 percent. As a percentage of revenue, cost of revenue was 26.3 percent consistent with the fourth quarter of the prior year.

At the end of the third quarter Getty had estimated that revenue for the fourth quarter would be $196 million making the $203.5 million a substantial increase over that estimate. Nevertheless, the company was cautious in its expectations for all of 2007.

Investors seemed to like what they heard as the share price went up $3.93 or 8.84% by the end of the day from its previous close. However, part of the enthusiasm may have been the result of Blum Capital Partners announcement that they had acquired a 5.8% stake in the company. Blum said it might seek a place on the Getty Board of Directors and could seek changes in Getty's management.

"Our fourth quarter and full year 2006 results demonstrate Getty Images' continuing leadership of our dynamic industry," said Jonathan Klein, co-founder and chief executive officer. "Continuous and relentless innovation is our overriding objective for 2007. In this changing environment, we remain very well positioned to create and deliver the broadest range of visual content to our customers in all segments and markets, at every price point and on all platforms."

For the fourth quarter, net cash provided by operating activities was $87.2 million, compared to $75.9 million for the same quarter last year. The acquisition of property and equipment was $11.9 million for the quarter compared to $13.0 million in the fourth quarter of 2005.

Full Year

For 2006, revenue grew 10 percent to $807.3 million compared to $733.7 million in the prior year. This beat the estimate at the end of Q3 of approximately $800 million, but was down significantly from estimates earlier in 2006. In the first quarter the company estimated revenue of $830 million to $850 million for the year and in the second quarter dropped that estimate to $820 million to $830 million.
(See Story 858).

Royalty-free imagery revenue grew 13 percent compared to 2005. It should be noted that an estimated $20 million in revenue from iStockphoto and revenue from Stockbyte contributed to this increase. Editorial imagery revenue grew 17 percent led by entertainment imagery that grew more than 50% per quarter for three consecutive quarters.

As a percentage of revenue, cost of revenue for all of 2006 was 25.6 percent compared to 26.8 percent in the prior year. Earnings per diluted share were $2.10. Excluding stock-based compensation, restructuring charges and loss on the sale of short-term investments earnings per diluted share were $2.62.

For the full year, the company generated a record amount of cash provided by operating activities of $268.7 million, compared to $257.3 million in 2005. Significant uses of cash during the year included $198.3 million for acquisitions, $207.7 million for share repurchases and $61.5 million for the acquisition of property and equipment. The company finished the year with a cash balance of $339 million.

Business Outlook

For the first quarter of 2007, the company expects to report revenue of approximately $210 million and earnings per diluted share of approximately $0.61. For full year 2007, the company expects percentage revenue growth in the mid-single digit range and percentage growth in earnings per share of at least one and one-half times the revenue growth rate.

Company guidance for 2007 includes the impact of stock-based compensation and assumes just over 60 million fully diluted shares for both the first quarter and for the full year.

For 2007, the company expects percentage revenue growth in the mid-single digit range and percentage growth in earnings per share of at least one and one-half times the revenue growth rate. Expectations for 2007 are currency neutral and exclude any revenue and expenses that would be obtained through acquisitions should they occur during 2007.

Revenue Breakdown

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Rights Managed










Royalty Free






























Other (Assignment, etc.)










% RF CD Revenue










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

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Gross Revenue










Rights Managed










Royalty Free






























Other (Assignment, etc.)










Stock Revenue As Percentage of Total Revenue

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Stock Photo Percentage










Stock Photo Revenue










Image Used Chart

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006


Gross Revenue (millions)










CD, Micro Pay Sales










**online sales










Price Per Image










Number Images Licensed











Gross Revenue (millions)










Price Per Image










Number Images Licensed










Total Images Licensed










Percent RF










Percent RM










    ** Note: In order to determine the revenue generated by single image RF sales, it is necessary to deduct the amount of RF revenue generated by CDs, DVDs, Virtual CDs, Subscription and Micropayment sales. The numbers in this column reflect total revenue for single image sales. The revenue from "Other RF" (not single image licenses) was 17% of total RF sales in the quarter.

CD, DVD, Subscription And Micropayment Revenue

Readers should also make particular note of the growth in CD, DVD, Virtual CD, Subscription and Micropayment sales. I believe there is strong evidence that this growth comes almost entirely from Micropayment and not from any of the other licensing models. Klein said that iStockphoto had over 3 million downloads in Q4. In October in an interview in Seattle Klein and Bruce Livingstone told two bloggers that the average price-per-download was $1.85. (This figure was denied by Getty Public Relations shortly after the interview, but I suspect it is somewhere in that ballpark. I have also heard a figure of $2.00 recently.)

Thus, 3 million times $1.85 would be $5,550,000 in revenue for Q4. In has also been reported that iStock had over 11 million downloads in 2006. Eleven million times $1.85 would be over $20 million in annual revenue. The total from CD, DVD, Virtual CD, Subscription in 2005 before Getty owned iStock, and had any micropayment income, was $34.15 million. The 2206 total from all these plus iStock was $53.38 million. If iStock contributed $20 million of that, then the total for all the rest is down a little for 2006 compared to 2005.

Total RF revenue in 2005 was $272.91 million. Total in 2006 was $308.17 million. If iStock contributed $20 million of that in 2006 then the real growth of regular RF was $16.59 million or about 6% -- and we need to consider Stockbyte's contribution to that 6%.

In discussing RF and Micropayment Jonathan Klein made the following points during the
conference call. "Some people are concerned about the future of Royalty Free given the advent and momentum of the micropayment model. There were many people who had similar concerns about RM imagery in the early years of the RF model. We know. We were there. We also know that user generated content and the micropayment model introduces both a broad selection of content and image makers as well as new qualified customers to the imagery market place. We also know that certain uses of micropayment will, of course, turn out to be in substitution of RF product. This was also what happened in the early days of RF. You had new content, you brought in new buyers and there was some substitution.

"Way back when, we embraced that change confident in the knowledge that the existing model would not go away; would in fact evolve, and was here to stay. We were 100% correct. We feel equally confident that RF imagery is here to stay. And in the fourth quarter we saw double digit revenue growth in RF which also included some encouraging signs of improvement in some important geographical markets. Customers will continue to want imagery at many different price points from different sources and on all platforms. We are, and intend to continue to be, the company that provides the broadest and deepest imagery collections at all price points and for all platforms. In fact we are busy exploring other new products to bring to the marketplace, in many areas including, of course, RF imagery," Klein continued.

Those of use who are "concerned about the future of Royalty Free" do not dispute that it is "here to stay" at some level. The question is to what extent volumes, and thus revenue, of the higher priced RF will decline and be cannibalized by the lower priced micropayment market. The availability of many different price points gives customers the opportunity to find more of what they need at lower price points.

In his discussion of micropayment Klein also said, "Eventually we expect that every customer will use it in some part of their business." But he also pointed out that, "It will be some time before it is even 10% of our business."

Rights Ready

In the first full quarter of the availability Rights Ready there are strong indications that it may be cannibalizing RM as many predicted (See Stories 865, 866 and 869). The average price per RM image had been around $546 all year and it was $565 in 2005. In Q4 after RR was introduced the average price of RM (combined with RR) was $506. Will it stay there, or go lower as Getty adds more images to the RR offering and makes it a more attractive model for the customers?

There was a significant increase in the combined number of RM/RR images licensed in Q4, up over 11,000 images. But actual RM revenue in Q4 grew hardly at all, and as a percentage of total revenue, it declined. It appears that while more customers are purchasing RM/RR they are getting what they need at lower prices.

New Licensing Models

As Getty adds new licensing models it is becoming harder and harder for investor to get a sense of what impact each may have on the overall business because they are being lumped into old lines items rather than treated separately.

Micropayment should really be reported separately from RF. The price point is dramatically different. And a significant percentage of the micropayment buyer will never be able to afford the much higher priced traditional RF. Lumping them together gives a false impression of the degree of growth of high priced RF and one can only guess at the amount of revenue micropayment contributes. It won't be long until micropayment, by itself, will generate more revenue than Getty's "Other" category.

Rights Ready is more like RF than RM. By lumping it into the RM category there is no good indication as to how successful it is becoming, or how it may be affecting the demand for RM. If RR were reported as a separate line item rather than being lumped with RM we would probably have seen that the average price of RM did not fall between Q3 and Q4 and that the average price of RR was much lower than $506.

Another metric that is needed with RM is the median price, as well as the average price. Many investors believe that the advantage of RM is that it is priced HIGHER than RF. In fact, I believe that only a very small proportion of the sales are for higher dollar figures and that the vast majority of sales are for prices LOWER than RF. To the degree that this is true it dramatically changes the logic about selling an image as RF or RM.

However, it is probably to Getty's advantage to keep investors and suppliers in the dark on these issues so don't expect any changes in reporting in the near future.

Photographer's Portal

In an effort to find new and better ways to injest imagery Klein said, "We have started work on creating a photographer's portal so we can injest imagery on in a more seamless and expeditious manner, similar to the iStockphoto model. We are already implementing some of this technology, we have launched Lifesize, we expect to roll out the portal in 2007. Why? Quite simply to upload much more imagery, much more quickly, at a significantly lower cost."

2007 Objectives

Klein closed off the conference call with a long list of things the company will be working on in 2007 and said:

"I want to focus on our overriding objective for 2007. It's one which has been very exciting for everybody in the company. It's been well received and is exactly what our people are interested in, and hopefully you'll all be positive about it. The overriding objective is to continuously innovate:

  • in the way we serve customers,
  • the way we operate, and
  • the way we grow.

"I cannot overstate the importance of innovation to our company and for our industry. We have driven almost every innovation in the history of this business. Innovation remains key to our leadership in the marketplace and will help us to maintain and expand our lead. Now, 2006 was a good year of innovation, and I expect in 2007 to be significantly stronger. I'd just like to give you some examples of how and where we are innovating.

  • In the products area, we are looking at new ways to monetize our assets and our traffic. We are looking at a couple of new licensing models.

  • In the footage area, we are looking at a new licensing model for footage and film, creating a new site for our footage customers, and new types of footage or film content.
  • We will further develop the open concept as initially demonstrated through LifeSize.

  • We are quietly working away on a number of multimedia offerings. You might enjoy to see some of our photographers' work and to hear their voices and to sometimes see some video together with the stills with their voices as well as the voices of the people they are talking to.

  • At the moment our asset management offerings only covers still imagery, there is clearly a hint inherent in that.

  • We will further embrace the user generated content model beyond just where we are today.

  • We are very interested in entertainment footage or video, not just stills.

  • In mobile, we have too many initiatives to mention, but we will continue partnering with mobile application developers, and our editorial clients to power the image content behind their applications.

"So: innovation in products.

"On the sales side, we are rolling out innovative programs that allow us to develop deeper relationships with our biggest and best customers. We also have for the first time, loyalty programs offering incentives for our best customers, and they will soon be rolled out.

" and technology, it's not over when we launch the site. We will continue to include ongoing search refinement, community spaces, and other enhancements.

"We are looking at new types of partnerships with owners of content who wish to utilize either our distribution -- and we know about that through the image partner world -- or our technology. There's lots of new technologies coming from our little group called Getty Images Labs, I'm proud of that team.

Getty images live; a photographer portal; and, very innovative already, but the best is yet to come.

"So that's a pretty long list the exciting thing is that the list is not exhaustive. I just want to give you a sense of how focused we are on innovating both for our industry and in our business. And I will report on this progress whenever I speak to you. Also, please rest assured that we are all focused and energized and as committed as we have ever been. We are very lucky to be in this business. We're very lucky to lead it. With that, thanks so much. Thank you for your continuing interest in Getty images."

Royalty Share

Almost the entire "Cost of Revenue" for the company is royalties paid out to image suppliers. Getty reports this cost of revenue as a percentage of total revenue for each line of business. Below I have broken these percentages down into real numbers in millions and also provided an average total royalty in percent.

Image creators should recognize that in some cases this percentage is being paid out to a third party provider and the amount the image creator receives will actually be much lower, minus that 3rd party partner's share. Also, some of the money that Getty reports comes from distributors and delegates. In those cases the distributors has taken a share of the gross sales off the top and the figure Getty reports is not the gross paid by the customer to use the image.

This quarter the percentage of total revenue paid out by Getty in royalties was 25%, up from 24% in the previous quarter.

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Total Photo Revenue






























Total Royalty






Royalty Percent of Total






For the year creatives were paid $196.66 million out of the total $807.3 million the company generated. This is 24.4% of total revenue generated


For the fourth quarter, selling, general and administrative expenses (SG&A) were $77.0 million, including stock-based compensation of $3.6 million. Excluding stock-based compensation, SG&A was $73.4 million or 36.0 percent of revenue compared to $63.5 million or 34.2 percent in the prior year.

Including restructuring charges of $10.8 million and stock-based compensation of $3.6 million, income from operations was $43.1 million in the fourth quarter compared to $58.2 million in the fourth quarter last year. Excluding these charges, income from operations was $57.5 million compared to $58.5 million in the fourth quarter of 2005.

Including the restructuring charges and stock-based compensation noted above, net income for the fourth quarter was $30.3 million, or $0.50 per diluted share, compared to $42.5 million, or $0.64 per diluted share, in the fourth quarter last year. Excluding these charges, net income was $39.5 million compared to $42.8 million in the fourth quarter of 2005. Earnings per diluted share, excluding these charges, were $0.66 compared to $0.65 a year earlier.

For all of 2006, selling, general and administrative expenses (SG&A) were $302.7 million, including stock-based compensation of $15.1 million. Excluding stock- based compensation, SG&A was $287.7 million or 35.6 percent of revenue 2006 compared to $250.8 million or 34.2 percent in the prior year.

Geographic Breakdown

The percentage of revenue for the Americas continued to fall in Q4 while the percentage for EMEA with EMEA now generating the same volume of revenue as the Americas. In addition to percentage we have also supplied dollar figures.

Q4 2004

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006











Americas Revenue




















EMEA Revenue




















Asia/Pacific Revenue










Stock Option Review

Unlike previous quarters, the figures reported are preliminary because, as announced on November 9, 2006, the company's historic stock option grant practices and related accounting are under review by the SEC. The board of directors established a special committee to conduct an internal review and until it is complete the company will not know if it needs to record any non-cash adjustments to compensation expenses related to prior stock option grants. The company expects to file its Quarterly Report on Form 10-Q for the period ended September 30, 2006 and its Annual Report on Form 10-K for the year ended December 31, 2006 as soon as practicable after the completion of the special committee's review.

Copyright © 2007 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, 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:  


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