Jupitermedia Has Disappointing Q3 2006

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November 10, 2006

Jupitermedia Corporation had disappointing quarter with revenues of $33.8 million for the period ending September 30, 2006. This was down $1.2 million from $35 million in Q2 2006. Revenues for Q3 2005 were $31.8 million making this quarter only a $2 million improvement over the same period a year ago, despite significant acquisitions during the year (See Story 835). Revenues for the image division were $26.177 million down $630,000 from the previous quarter.

On Wednesday, JUPM closed its regular trading session at $9.10. By the close of business on Thursday the shares were at $5.82 for a 36% drop in 24 hours. In April the company's stock was $18.81, a 52 week high.

Jupitermedia's Chairman and CEO Alan M. Meckler blamed part of the problem on a "softness with distributor sales" which he said were $1.1 million below expectations. About 23% of Jupiter's total image revenue or $6.235 million results from sales made by 320 distributors. Meckler acknowledged that they hadn't been focused on this problem until after the end of the quarter because distributors report long after the sale is actually made and there had been no problem with distributor sales previously

A Closer Look

A closer look at the breakdown of various segments of the Online Images reported on the 10-K seems to give a slightly different picture of what may be happening in the marketplace.

While distributor sales went down after Q1 2006 they seem to be flat in the next two quarter and considering that there were vacations in Q3 that doesn't seem too bad. On the other hand there seems to be a decline in the sales of single images and CD's, the company's principal line of business, which made up 51% of Jupiterimages sales in Q3. This segment represented 69% of revenue in Q4 2005.

It is also worth noting that Subscription sales have been flat for the year. This may be an indication that this segment of the market has matured and may experience little growth in the future considering that for many customers the micro payment sector offers an even more attractive price option.

New Web Site and Enlarged Sales Staff

The promise last quarter that the new web site and enlarged sales team would lead to expanded revenue has yet to bear fruit. There are also indications from staff and image suppliers that the integration of all the brands acquired in the last year or so may not be going as smoothly as hoped.

Beginning on January 1, 2006, Jupitermedia began expensing stock-based compensation. The results of the third quarter of 2006 include non-cash stock-based compensation expense of $1.2 million. Net income for the third quarter of 2006 was $1million, or $0.03 per diluted share, down from $9.2 million or $0.25 per diluted income in the previous quarter and compared to net income of $60.4 million, or $1.62 per diluted share, for the same period last year. Net income for the third quarter of 2005 included a gain of $29.1 million, net of income taxes, related to the sale of Jupitermedia's Search Engine Strategies events and ClickZ.com Network, as well as a $23.5 million benefit from the reversal of the valuation allowance related to deferred income tax assets.

Business Outlook

The company expects fourth quarter revenue to be between $33 and $34 million and earnings per share about $0.06. Analysts had been expecting the company to announce that it would earn about $0.10 per share on revenue of $38.07 million for the fourth quarter.

Jupiter gave no prediction for the next twelve months. At the beginning of 2006 they estimated that revenues for the year would be between $166 and $170 million. At that time Meckler was telling investors that they should expect Q1 and Q2 to be slow, but things were supposed to pick up in the latter half of the year. In May, after the first quarter the company began to give "rolling" guidance estimating revenue for the following twelve months revenue. At that time they said revenue would be between $156 and $161. When it came time for the Q2 report their guidance was dropped $151 to $156 for the twelve months going forward. Now, after the disappointing Q3 results, they have dropped all attempts to give any long term guidance beyond the next quarter.

The following are the gross Jupitermedia numbers for the last four quarters and the numbers for the Jupiterimages division which now represents 77% of gross revenue. (For more on acquisitions during this period see Story 835.) The numbers are in millions of dollars.

What's Happening In The Marketplace

It is worth noting that according to public figures reported and anecdotal information from other industry sources July was a very weak month for everyone (compared to traditional July's) for some unexplained reason. August, normally the slowest month, was better than July and about what would normally have been expected. September was OK for September, but not strong enough to offset the weak July.

Meckler had no explanation as to what might have caused this problem except to say that given the power of the Internet JupiterImages might be making more direct sales and taking sales away from its 320 distributors. Officials at the company polled 20 to 30 of their distributors and across the board they all confirmed that the quarter was soft.

It seems to me unlikely that Jupiter is the beneficiary of the distributor's lost sales. If customers were bypassing the distributors to go directly to Jupiter the company's revenue should have risen since it would be receiving 100% of the fee charged instead of approximately 60% after the distributor deducts its commission. The big two (Getty and Corbis) might have been taking share from Jupiter and Jupiter's distributors, but when Getty reported their numbers there was no indication that their sales were increasing either.

More likely, I believe, is that the micro payment sites are the beneficiaries and they are taking sales from everyone. Part of the huge growth in number of units downloaded from micro payment sites may be the result of customers who might previously have purchased from Getty, Corbis, Jupiter or the distributors turning to the new option.

[In light of the problems Jupiter is having with distributors it is interesting to consider Story
883 and the problems RF production companies are having with many of these same distributors. Many producers suspect that some distributors are making sales, but not paying them. The problem may be that distributors are just making many fewer sales than they used to. This could be the early signs of a much more serious problem.]

New Online Images Offerings

Since the beginning of Q3 Jupitermedia has continued to expand its international presence and strengthen its image offerings with the addition of:

In July 2006, Jupitermedia launched its new Jupiterimages Web site (www.jupiterimages.com). The search engine includes the ability to find images with and without people and by gender, age and ethnicity. It also enables search by the subjects' emotions (i.e., subject is angry, content, frustrated, happy, laughing, sad, serious or worried) and by the subject looking at or away from the camera and includes many other requested search features.

In July 2006, Jupitermedia announced the launch of photos.jp (www.photos.jp), the first micropayment stock photography Web site based in Japan. Photos.jp was developed and built in Japan with Jupitermedia's partner Aeria, Inc. and utilizes software based on Jupiterimages' partner Stockxpert.com (www.stockxpert.com).

In September 2006, Jupitermedia announced the launch of Comstock Complete (www.comstockcomplete.com), a subscription service offering with over 100,000 royalty-free images, including the complete collections from Comstock Images and Thinkstock Images. Comstock Complete responds to the demands of creative professionals who need Comstock-quality, high resolution images at an affordable price. Comstock Complete offers two subscription levels: Print-resolution with images up to 14MB and Web-resolution with images up to 1.7MB.

In October 2006, Jupitermedia announced the launch of JupiterGreetings.com, a new paid subscription service for animated online greeting cards, 3D films and cartoons, online photo albums and more. By combining some of the 400,000 high-quality 3D animations and movies from Animation Factory (www.animationfactory.com) with music and sound effects from RoyaltyFreeMusic.com (www.royaltyfreemusic.com), Jupiterimages has efficiently and rapidly created a new line of business.