552 MAY 2003 SELLING STOCK
Volume 13, Number 5
©2003 Jim Pickerell - SELLING STOCK is written and
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co-owner of Stock Connection, a stock agency. In addition, he is co-author
with Cheryl Pickerell of Negotiating Stock Photo Prices, a guide to pricing
stock photo usages.
Thought For The Month
What produces the greatest revenue for the photographer -RF or RM? Tom Grill shoots
both and says, "from my recent experience the financial outcome per chrome is THE
SAME." See an indepth interview with Grill online: Story 548 .
GETTY IMAGES Q1 REPORT
Significant Revenue/Earnings Growth
April 25, 2003 (Story 551) - Getty Images, Inc. reported first quarter 2003
revenue of $130.3 million up from $117.7 million in fourth quarter 2002 and a 14.5
percent increase over revenue of $113.9 million in first quarter 2002. Over $4 million
of the revenue rise was attributed to foreign currency translation as the dollar has
weakened considerably from the first quarter of 2002 .
This was well above Getty's expectations for the first quarter which had been revenue in
the range of $120 to $124 million and diluted earnings per share of $0.15 to $0.19. Net
income for the first quarter was $13.2 million, or $0.23 per diluted share, compared to
$2.7 million, or $0.05 per diluted share, for the same quarter in 2002. Operating income
for the first quarter of 2003 improved to $23.9 million, or 18.4 percent of revenue,
compared to $8.4 million, or 7.4 percent of revenue, in the same quarter last year.
"We are pleased to announce the best quarter in our history, with significant revenue
and earnings growth," said Jonathan Klein, Getty Images' co-founder and CEO. "We
achieved these results notwithstanding a challenging economic and geo-political
environment, while also making significant progress on our key strategic initiatives for
the year. The results for the first quarter provide an excellent start towards achieving
our key objective for 2003, which is to grow our revenue. Due to the strength and
quality of our business model, the quarter demonstrated that revenue growth leads to
significant and meaningful increases in margins, earnings and free cash flow."
For the second quarter of 2003, the company expects to report revenue in the range of
$125 million to $130 million and diluted earnings per share of $0.19 to $0.23. For all
of 2003, the company expects revenue in the range of $495 million to $515 million and
earnings per share of $0.75 to $0.95. In this forward looking outlook they raised their
expectations on the bottom end from the $485 they announced three months ago, but they
did not adjust their top end $515 prediction that they announced at the start of the
year. Cash and short-term investment balances increased to $133.6 million at March 31, 2003,
up from $116.8 million at the end of 2002. Free cash flow from operations (net cash
provided by operating activities minus acquisition of property and equipment) for the
quarter was $13.8 million.
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. The gross margin for the quarter was 71.4% down from 73.6% in Q1 2002 but
up sequentially from 70.6% in Q4 2002. The year-over-year decrease was due primarily to
the increase in revenue from 3rd parties which carries a lower gross margin. Getty's
goal is to reach 75% gross margin for the company in 2004.
Percent Of Revenue
Stock photography (a combination of RM and RF image licensing) was 84% of total sales for
the quarter. However, there was a rise in the RM percentage to 56% and a decline in the RF
percentage to 28% when compared to the previous quarter and this was a shift in a trend that
had developed over the last few quarters. CFO, Liz Huebner said the shift was partially the
result of reduced discounting of RM images and was also effected by the currency translations,
but that it did not evidence a shift in customer buying habits.
News & Sports
Archival & Footage
The above percentages translate into the following dollar figures for the last
News & Sports
Archival & Footage
During the quarter over $1 million of the RM revenue was for Photographer's Choice
images. This strategy was launched by Getty in September of 2002 when they agreed to
accept up to 2,000 images from their RM photographers. The offering was quickly over
subscribed and closed. Getty may have actually accepted more than 2000 images. If the
$1 million in sales was from 2,000 images then the average return per image for the
quarter would have been about $500.
It is interesting to compare this number with the return from the over 300,000 other RM
images on the gettyone.com site. If we divide the 300,000 into the total RM
revenue for the quarter we get something in the range of $240 per image indicating that
the average return for each of the Photographer's Choice images is much higher than the
average for all images on the site.
News and Sports
News and Sports showed some growth, although not as a percent of total revenue, despite
the Iraq war. Klein said, "We had 19 photographers in strategic spots in Iraq, Kuwait
and throughout the region. Eleven are full time Getty employees and the rest are
freelance who work with us on a regular basis. The coverage of the war did not provide a
revenue windfall for the company. As a global news photography business covering the
war is a net cost for us, but it is also part of our commitment to build this part of
our business into a market segment leader." Relative to the cost Huebner added, "We
estimate that the war over the year will be about a $750,000 expense. We plan to have
more people (covering the activities) than we would typically have for the remainder
of the year." (Editor's note: They probably won't have 19 photographers there
for the full year, but if that were the case the average cost per photographer would
be $39,000 for salary, benefits, equipment and other expenses -- a very reasonable
price for editorial coverage.)
During the conference call Klein provided some detail on the Getty/AFP agreement that
will launch in June. He said, "AFP's strengths are in the production and
distribution of imagery in certain geographical markets and in those markets we will
give them all of our global imagery to distribute." Getty will utilize AFP's strength in
the newspaper business and AFP will add Getty's images to their offering. "As far as
newspapers are concerned in certain geographical markets they (AFP) will have exclusive
distribution of our imagery to the newspapers," Klein added.
He continued, "On the other hand in the United States and the UK we are particularly
strong in both the production and distribution end and in those markets we will have
their (AFP's) global imagery that we will exclusively distribute for them, not just to
newspapers, but to all media."
In outlining the advantages Klein said, "We are able to get extensive, deep, high
quality global coverage and distribution and they are able to get very strong
distribution and coverage in certain markets with neither party having to incur the
costs and the risks of having to build up their operations in countries where they are
relatively less strong. And the second issue, of course, is that they are a highly
established organization and have tremendous access to various government and
quasi-government pools and other areas that take years for relative newcomers like
ourselves in the news business to get into."
Average Price Per Usage
Huebner said, "The average price per image (ppi), worldwide, for Rights Managed Images was $546,
up from $479 in the 4th quarter of 2002. The price increases in Q1 were very minor and the
majority of this increase is a combination of usage mix and reduced discounting to our
customers. The reduced discounting is made possible by several initiatives within sales
including the ability to measure and monitor discounting and also working more closely
with our customers on appropriate levels of discounting. The volumes were up about 3%
"For the Royalty Free collection the average price for single images was $127, about
flat with the fourth quarter. RF volumes were up more than 7% sequentially."
In the past several quarters Selling Stock has tried to use the ppi numbers provided
to determine the number of images sold. Recently we learned that ppi numbers Getty had been
reporting were based on gross sales, while the revenue was on a net basis. Thus an
"apples to apples" comparison was not possible. Getty is now providing the average
price on a net basis so we have restated the numbers in the chart below.
What happended in the case of the gross ppi is that in some cases a sale for several
images would be booked, and later the sale would be cancelled, or the price
re-negotiated (usually downward). When calculating the gross ppi both numbers for a
single sale, and the numbers for the cancelled sales, would be included in the calculation.
This produced a skewed number. In all cases the revenue numbers were net and accurate,
but the averages were not based on this net numbers.
As Getty has been able to bring more of the features of their new accounting system
(Revenue Figures below are in Millions of Dollars)
online they are now able to provide better average ppi's based on the net revenue alone.
However, it should be noted that the ppi numbers include sales in the Americas and Europe,
but they still do not include Asia/Pacific. Thus, there is still some inaccuracy in
my interpolations, but I believe the number is still useful and helps to give a better
understanding of trends.
Gross Revenue (millions)
80% - online sales
Price Per Image
Number Images Licensed
Gross Revenue (millions)
Price Per Image
Number Images Licensed
Total Images Licensed
It should be noted that the wide variations in the average ppi for
RM sales are probably the result of a few big sales. Thus, the trend in this
figure may not be as important as the number of images licensed. For example,
Klein reported that on the day of the conference call (April 23rd) Getty had made
the largest sale in its history for a single image. It was for $170,000 and the
image was licensed in Germany. This number does not appear in the first quarter
figures above, but it is likely to play a role in skewing the averages for Q2
figures when they are released in July.
Huebner has also pointed out that the revenues for RF collections include CD
sales which are usually in the ranges of 20% to 22% of total RF revenue. The
ppi numbers that Getty provides are for single images only and as a result take
no account at all of CD sales. I have deducted 20% of the RF revenue before doing my ppi
calculations, but if percentage of CD sales varied somewhat from quarter to quarter
that would throw off my "Number of Images Licensed" calculations.
These factors should be taken into consideration as you review the numbers in the
chart above. If you want to review the comparision chart from last quarter you
can find it in Story 535 .
Toward the end of the quarter Getty re-launched PhotoDisc with a new three-tiered
pricing structure. Analysts asked if that was bearing fruit. Klein said, "The datapoint
which gives us encouragement is that we had sequential volume growth and that is
important to us. The issue for us now is that we launched the new site late in the
quarter. It is way too early to say whether it has been unbelievably successful,
moderately successful, or not successful at all. It is important to us that we are
seeing some traction." The Q2 results will provide a much better view of the relative
success of this initiative.
Revenues from the Americas continued to decline and they increased in Europe, but the
currency conversion factors had a great deal to do with this.
3rd Party Image Providers
Getty currently has "18 high quality, highly complimentary 3rd party image and
illustration providers," according to Jonathan Klein. At the beginning of the year Getty
estimated that it would generate $40 million from 3rd party providers in 2003 and after
one quarter Klein says, "We're extremely comfortable
with that number." Revenues from the RM 3rd party providers were double in Q1 2003 what they
were in Q1 of 2002 and "revenues from the RF providers continued to be strong with Digital
Vision and some of the recent contributors making an important contribution."
(Editors note: Industry sources have estimated that in 2002 Getty's sales of Digital Vision
images alone were between $20 and $25 million netting DV in excess of $8 million. DV's
images were only on Gettyone.com for 6 months of 2002).
The way Getty's software works they only add new 3rd party suppliers when they do an
upgrade to the software. Klein said, "The next release (in the summer) will have many more
3rd parties and they'll cover the gamut of types of imagery, from RM to RF to geographical
specializations, to content types, to illustration, to film and of course to editorial."
One conference call participant asked if Getty sees any strengthening or weakening
among its competitors and what impact Getty's 3rd party strategy is having on competitors.
Klein said, "the competitors environment has not changed in the last three months. It differs
between RF and RM and of course it is completely different in the news, sports and
entertainment area. I think you're probably focusing more on stock photography, but
what is essentially happening is that the rush of new entrants into the market, and
particularly in RF that we saw a few years ago has pretty much stopped; the 3rd party
strategy is proving very successful.
"There was a recent get together of the photo industry and we are literally inundated
with requests from our competitors to come onto Gettyimages.com. What will happen over
time as a result is that the industry will divide between production companies, if you
like, who do not have distribution and those like us who both produce and distribute and
then one or two others who simply distribute. That is already beginning to shake out.
Clearly the production companies will want to be distributed by us given the power of
the site and of the platform. From an overall competitive environment that's the trend
that is beginning to happen in the industry.
"The fact that this industry has aggregated around ourselves, and I suppose to a
significantly lesser extent PictureQuest, who are a pure distributor and in fact
distribute PhotoDisc for us, and to a lesser extent as well around Corbis is in some
sense predictable and that trend will continue. So that would be the only industry trend
that we are beginning to see more of.
"I have no doubt that others in the industry who have a platform will seek to encourage
3rd parties to come onto their platform. I do think that at the end of the day this
business is about whether or not we have the right image to fulfill the customers brief.
So it is about relevant, salable, accessible content and we clearly have a significant
lead there driven by the power of our creative research as well as the quality of the
photography," Klein continued.
Klein pointed out that when they do agreements with 3rd parties for the representation
of RM images the producer may also sell the work directly, but they may not distribute
the images through any other portal. This is necessary "because it is impossible for us
to guarantee to the customer that they are getting protected rights if the image is
being sold through 100 different outlets."
On the other hand, "As far as the RF is concerned we started off wanting complete
exclusivity because we were a little insecure about the power of our platform, we are
now so powerful that we are more than comfortable with 3rd parties putting their content
with many distributors because we know that we will significantly outsell them and that
they will put their marketing dollars behind driving business to our platform rather
than the 50 other platforms or distributors they may be on," he continued.
Another analyst asked, "Do you think the market is growing or is this
more of a phenomenon of you bringing in 3rd party content and taking market share?"
Klein said, "Our view at this point is that the market is not growing. This is best
evidenced by the fact that the increases in volume are up slightly in the U.S.
and down a couple of points in Europe against the prior year. Our current view is that
market conditions are stable, and that the decline in
the market which we saw in a fairly material way in 2001 and 2002 has stopped, but we do
not think the overall demand, in particular for stock photography, is growing at this
"As far as News is concerned there is no question that after 50 or 60 years of Reuters,
AP and AFP dominating the wire services there is a new character on the block and that
character is making a big noise and proving extremely successful and he has gone into
partnership with AFP. So it is a different competitive environment, but it is a part or
the industry where our model is proving very successful -- all digital, all the imagery
owned by us and focusing on just the key stories and shooting them with a different
Plans For Japan
One analyst asked about Getty's plans for the Japan market and Klein gave the
He said, "Japan is a very important initiative for us in 2003 which you will see nothing of at
all (in 2003) because we will spend the time, the money and the investment this year and
it will see the light of day in 2004. What we are essentially doing in Japan --and we've
started the work. In fact, we have a team out in Japan at the moment shooting Japanese
imagery for the collection, and we have a different team in Japan working with customers
on usability around the design of the web site. So we are essentially doing two major
things: we are putting our web site in Japanese all the way from back end right through
to customer facing and the second thing we are doing is building the content and
marketing to make our offering truly relevant to Japanese customers.
"As we've said in the past the Japanese advertising market is the second largest in the
world and therefore the stock photography market is also the second largest in the
world. And at this point in time we have fewer than 20 employees in our office in Tokyo.
The majority of our content is not handled by us; it is handled by
agents which we've had for many, many years and our revenues in that market are about $5
million (per quarter). So we see this as one of the biggest and easiest areas for us to
generate incremental revenues going forward, and the company now is so stable that we're
able to take on this initiative."
In a follow-up question another analyst said, "Japan looks like a really fragmented
market. What would you do to duplicate what you have done in North America and Europe?
Do you envision a situation in which Getty holds a very solid market share in Japan. It
seems a natural place to devote more capital and what would that capital be?"
Klein responded, "I think our approach in Japan reflects the fact that to all intents
and purposes we have not really yet entered the market. The first thing one needs to do
is to take back distribution from the agents and, one at a time, we are doing that. By the
end of this year we expect that in all material respects we will be distributing our own
product. The second issue in Japan which is so fundamental that it almost stops all
conversation -- we're in the world a 100% web based business, yet our site in Japan today
is wholly useless because it is in English. So that is the absolute priority, to move
the site into Japanese. The third issue is that our ability to be as successful in
Japan as we've been in any other country in the world where we're number one is
partially driven by local content. So we will never be the dominant player in Japan
unless we devote the same kind of time, effort and resources to local content as we've
done say in the UK or the US. That will take time. Our view has always been that as an
international provider of photography to the Japanese market there is a ceiling on our
growth, in other words if we were only supplying international as opposed to Japanese
imagery. We've taken the view that we wish to be more than just the international
provider which is why we will be investing in Japanese content.
"At this point in time we are not planning any acquisitions, but it certainly possible
over the next several years that there could be acquisitions which would either help us
with content or with people. There will not be anything that will help us with
distribution because our web site will do that for us.
"In terms of the amount of capital, it's not a capital intensive business for us over
there. Once we've spent the money on the web site, which is a couple million dollars, it
is your classic Getty Images business with tightly controlled SGNA, which is largely
people, a modest amount of marketing and the characteristically high gross margin. The
one thing I would say to everybody about the Japanese market is you can bet that we will
be the dominant player in that market, but you can also bet that it will take time.
Patience is extremely important in that market, in particular, and we have to proceed
cautiously and sensitively over time. We're taking a five to ten year view on this