Jupitermedia Announces Q2 2006 Results

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August 10, 2006

Jupitermedia Corporation has reported revenues for the quarter ended June 30, 2006 of
$35 million up from $33.9 million in the previous quarter and compared to revenues of $29.1 million for the same period last year, an increase of 20%. The image division revenues were up only $242,000 from the previous quarter.

The company's stock ended the day after the announcement at $6.59, down almost 30% for the day, and almost 65% from its high of $18.95 in April.

Jupitermedia's Chairman and CEO Alan M. Meckler acknowledged that, "We did not have a stellar financial quarter for our last guidance estimates, but we did continue to make progress in building a stellar company out of our various and world leading digital asset collections, developing our new image search engine, and melding together many acquisitions and increasing the penetration of mind share of image buyers in the United States and around the world."

Beginning on January 1, 2006, Jupitermedia began expensing stock-based compensation. The results of the second quarter of 2006 include non-cash stock-based compensation expense of $906,000. The provision for income taxes for the second quarter of 2006 was $88,000, which was net of a $1.5 million benefit from the reversal of the valuation allowance related to deferred income tax assets.

Net income for the second quarter of 2006 was $2.4 million, or $0.07 per diluted share, down from $9.2 million or $0.25 per diluted income in the previous quarter and compared to net income of $7.0 million, or $0.19 per diluted share, for the same period last year. Net income for the second quarter of 2006 included a loss of $718,000, net of income taxes, related to the sale of Jupitermedia's Research business.

Chris Baudouin, CFO said, "Our Q2 actual EPS from continuing operations was $0.09 per share which included a $0.04 per share benefit from evaluation alliance reversal for deferred income taxes. Excluding this benefit our EPS would have been $0.05 per share. Our published guidance at the end of Q1 2006 projected Q2 EPS at $0.12 per share. This figure did not included and estimated $0.02 charge related to stock option expense. Therefore, including the stock option expense our guidance was $0.10 per share.

Meckler indicated that one reason for their poor performance is that they may have moved "a bit too fast" in ramping up the image sales force before the new web site was ready for launch. They had hoped to launch the site in late March or early April, but it wasn't ready until the end of June. As a result the sales force was "working with one hand tied behind its back", as agency image buyers were apprehensive about using a existing web site inherited from previous acquisitions that had some serious flaws in terms of speed of search. He said, "Now that the new web site has been launched we are seeing much more positive sales results."

Business Outlook

For Q3 2006 they expect total revenues of $35.8 to $36.8 million, or a 2% to 5% growth over the previous quarter, and diluted EPS to be approximately $0.09 per share. Looking forward for the 12 months from July 1, 2006 through June 30, 2007 they expect to see revenues of $151 to $156 million which would represent a growth of 1% to 2% per quarter, or about 7% per year assuming they hit the bottom number. After seeing the results of Q1 Jupiter decided to provide a rolling 12 months' guidance rather than guidance for the calendar year as most other companies do.

The following are the gross Jupitermedia numbers for the last three quarters and the numbers for the Jupiterimages division which now represents 76% of gross revenue. (For more on previous acquisitions see Story 835.) The numbers are in millions of dollars.

During the conference call the first question set the tone. Steve Frankel of Canaccord Adams pointed out that both Getty Images and Jupitermedia have "stumbled badly" in the last couple of quarters, but both have blamed it on "internal problems" such as: execution issues, search engine not being ready, or early hiring of sales staff. Frankel and other analysts wanted to know if, "in addition to the internal problems, is there something going on in the marketplace that is impacting both of you? (Italics mine) . How should we think about the competitive environment?"

After acknowledging that he could not speak for Getty, Meckler said, "We do not see anything out there other than our internal problems which have been solved. July bookings were up significantly over June. We attribute that to the fact that the search engine went live. We have several levels of businesses. We have high-end images that we sell to the large ad agencies and large corporate buyers. We have lower end products - subscription and the micro payment business. There is no question that the micro payment business is going to take part of the RF market. We have not been impacted in a significant way. In the subscription area we continue to see growth in our subscription services. We certainly can see in the subscription side that we would probably have grown even faster in subscriptions if micro payments weren't out there, but that's a reality and we're in the micro payment business also. I do believe that given the cross platform that we are building -- the different areas that we're in -- that we are insulated if there is going to be any larger issue out there or trend, but we haven't seen it. In terms of marketing we are not spending any more than we have been spending. We don't think we have to increase our marketing. We attribute 80% to 90% of the shortfall to our search engine."

A Closer Look

I want to take a closer look at the breakdown of various segments of the Online Images segment of Jupiter's business because I think I can see some things going on in the marketplace that are having an impact.

Single image and CD revenue (traditional RF and RM revenue combined) has grown $3,625,000 compared to the same quarter a year ago. While this represents a 34% growth in this sector a year ago the company did not have any revenue from Picture Arts, Banana Stock, Stock Image, Pixland, The Beauty Archive, Agency Images, IFA Bilderteam and Workbookstock (the last two acquired this quarter). One would have expected the combined revenue from the addition of these brands to be more than $3,625,000 ($14.5 million on an annual basis).

Granted that a lot of the revenue that Picture Arts, Comstock and Thinkstock had been earning was given up when Getty Images dropped representation of these brands, and JupiteImages also lost ground when Getty no longer allowed Jupiter to represent its Photodisc, Digital Vision and Stockbyte brands. Nevertheless, taking all these things into consideration $3,625,000 doesn't seem like much growth compared to the same quarter a year ago.

When we look at the comparison with the previous quarter, after most of the Getty disruption, had taken place the $956,000 increase only represents about 7% growth from this sector. In this quarter they acquired IFA Bilderteam and Workbookstock and I would have expected the combined revenue generated by a partial quarter for these two companies to have been between $300,000 and $400,000. Meckler did indicate that as a result of Getty's termination of Jupiter's representation of Stockbyte and Stockdisc (due to Getty's acquisition of the brands) Jupiter lost about $300,000 in revenue during the quarter. Thus, the loses compared to the gains may have been a wash.

However compared to Subscriptions the Single Image and CD revenue is the good news.
Subscriptions actually lost 2%, or $154,000 compared to the previous quarter and were up $768,000 or 14% compared to the same quarter in the previous year. But we also need to keep in mind that in going back a year we must take into account that Jupiter has added subscription brands including Bigshot Media, BBM, HAAP Media, Stockxpert.com, www.sxc.hu and Animation Factory. I suspect that revenue from brands like Media Builder, Crank City Music and Steve Shapiro Music are also included.

This indicates to me that Subscription revenue may have reached a plateau and as we move ahead there may be very few new subscription buyers. It may also be an indicator that for many subscription buyers the micro payment offerings may be a much more attractive option. For example consider the customer who needs a few images for a web site, but who doesn't know how many images are going to needed in the future. This customer is not really interested in an annual subscription.

If this person goes to Photos.com she can get a one month subscription for $139.95. But, if she can find images on iStockphoto to satisfy her needs she can get them for $1 each. So if she needs less than 140 images iStockphoto is the better deal. In addition iStock may have more selection. I did a search for "people" and found that Photos.com had 48,955 images, but iStock has 92,968. Also by going the micro payment route, if the customer finds some of the images she needs on several different micro payment sites she is not charged a subscription fee for each site, but only for the images she actually downloads.

It is my belief that many of the customers who have purchased subscriptions are web developers who need a lot of images, but as they discover the advantages of micro payment they will migrate to that model. Such migration may hurt Jupiter because they don't have a strong micro payment option at the moment, but it may also lead to a decline in overall industry revenue because it seems likely that micro payment will cannibalize higher priced options to some degree.

Before I leave this section it should be pointed out that sales by distributors rose $2,441,000 year over year, but declined $1,044,000 from Q1 2006. Distributors sell all the products including RM, RF and Subscription. If the applicable portions of these distributor numbers were included in the other categories it might give us a different picture of Subscription sales vs. Single Image sales.

Some of the analysts have indicated that they would like to see more granularity in the Single Image and CD number so they could track the changes in RF sales compared to RM and so they can separate out CD sales. Getty Images breaks out these number and Jupiter indicated that they are considering such a move in the future.

In summary, I think we are seeing the beginnings of micro payments cannibalizing Subscription as well as RF. And in answer to Mr. Frankel's question, that's what is going on in the marketplace that is impacting both companies. The questions remaining are how fast is it likely to occur, and how much will it cannibalize revenue.

Meckler pointed out that, "There isn't any research that would allow us to have a true understanding of this [micro payment] business. While the micro payment model is gaining market share it will not replace high end sales nor will it replace low end sales. However, it certainly is going to be a solid part of the image market in the future. My guess is that in the coming years micro payment will be 10% to 20% of the market. However, the prices have increased. I would also warn anybody who thinks it is going to be a killer application and destroy RF and RM that it will not, but it will have its place. I think micro payment is an extremely interesting business. I think it will be a part of the RF market, but I don't think it is a threat to overtake the whole market."

Acquisitions

During the quarter the company acquired: certain assets of Steve Shapiro Music, including a wholly-owned music library of over 2,200 royalty-free music tracks, IFA Bilderteam GmbH (www.ifa-bilderteam.com a leading resource for rights-managed images and (www.workbookstock.com) another seller of high-end rights-managed images.