Getty, Second Quarter 2004

649

July 24, 2004

Getty Images has reported that second quarter revenue grew 17.7 percent to $150.3 million compared to $127.7 million in the second quarter of 2003. This included a 6.0 percent benefit from foreign currency translation. Operating income for the second quarter of 2004 grew 67.6 percent to $39.8 million, or 26.5 percent of revenue, compared to $23.8 million, or 18.6 percent of revenue, in the same quarter last year. Net income for the second quarter was up 91.0 percent to $25.2 million or $0.41 per diluted share, compared to $13.2 million, or $0.23 per diluted share, for the same quarter in 2003.

"The positive momentum we experienced in the first quarter continued into the second quarter, resulting in revenue growth of nearly 18 percent," said Jonathan Klein, Getty Images' co-founder and CEO. "During the quarter, we added e-commerce functionality to the editorial section of our site, launched our Japanese website and continued to cement our position as the de facto home page for creative and publishing professionals by adding content and growing our assignment, asset management and related services. Our leadership in the visual content market continues to grow in all segments."

Business Outlook

The company remains positive about business conditions, and expects continued strength in financial results in the second half or 2004. For the third quarter of 2004, the company expects to report revenue in the range of $152 million to $155 million and earnings per diluted share of $0.40 to $0.42.

The company has raised its revenue guidance for 2004 slightly and expects revenue in the range of $605 million to $615 million and earnings per diluted share of $1.60 to $1.70. (The revenue guidance at the end of the Q1 2004 was $600 million to $610 million for the full year.)

Klein added, "Recent feedback from customers indicates that they are still feeling cautiously optimistic about the advertising recovery. As we had anticipated the advertising market is stronger than it has been in several years, but the tight budget controls that corporate marketers implemented during the down years are still in place. For the first time in many years advertising pages showed year-on-year growth in both May and June. Although these are lagging indicators for our business this is never-the-less a good sign."

Revenue Breakdown

Stock Photography sales (the Creative and Royalty Free sections of the site) represented 81% of the gross revenue for the quarter. In the previous five quarters these business segments represented 83% of the gross revenue and for two quarters before that it was 84%. This is a sign that editorial and footage are slowly becoming a larger portion of the business, although their importance is still miniscule compared to the major revenue drivers.

Average Price Per Usage

The worldwide average price-per-image (ppi) rose significantly in the quarter. For RM the average ppi was $581 compared with $570 for Q2 2003 and $605 for Q1 2004. For RF the average ppi was $194 compared with $142 for Q2 2003 and $193 for Q1 2004.

CFO Liz Huebner said, "There was a modest sequential decrease in the (RM) price per image due primarily to mix as we saw more growth in some of the lower priced usages within the brochure and print ad categories. This is an especially positive trend as the lower end brochure market was particularly hard hit during the advertising and marketing recession."

The ppi was affected somewhat by the sale of Flexible license packs. Huebner said, "Flexible license packs make up just a little bit over 1% of the RM revenue (about $800,000 for the quarter). It makes the volume look low by about 1%.... (Also) It obviously inflates the average price just slightly.... Customers really like it. It was obviously put in place so that customers who are buying or licensing images for more than one usage at a time have that flexibility. The feedback is very good. It is going as we expected."

The average price for a film clip for the quarter was $612, down from $627 in Q1 2004 and from $641 in Q4 2003.

There was an 82% growth in revenue generated from Assignments when compared to Q2 2003.

Image Used Chart

**** Note:The RF revenue from CD's and Virtual CD's varies from quarter to quarter and this affects the total revenue from single image sales. For a long time we were told that the CD revenue was "about 20%" of the total RF revenue. This year they have started being more specific and this quarter we were told that CD and Virtual CD revenue represented 16% of the total RF revenue. Given the imprecision of the earlier figures there may be inaccuracies in the earlier numbers and the trends indicated should not be considered precise.

It should also be noted that frequently when Getty gives us an average-price figure for the current quarter and compares it to the previous year's average-price figure, that earlier figure is often slightly different from the number they initially reported. I assume this results from more careful auditing of the data, or cancellations after the initial numbers were reported, but it also means that numbers I have generated by dividing total revenue, by the average-price-per-image may not be totally accurate. I try to make adjustments when new numbers are provided, but I do not have up-to-date numbers for all categories.

Despite these problems, it would seem that we may still draw some reasonable conclusions from the numbers. While income is going up, the number of units licensed appears to be on a slight decline. This is happening despite the fact that Klein says the customers are "cautiously optimistic" about the future of the economy and that they seem to be making longer term decisions.

Revenue Growth

RM revenues were Up almost 11% and RF revenues were Up more than 21% when compared with Q2 2003. However, on a sequential basis, compared with the previous quarter - the best quarter ever for the company - RM revenues were Down 7.7% and RF revenues were Down 3.8%. Klein said the RF growth was in large part due to the success of their higher production value PhotoDisc Red and Digital Vision RF collections.