613
GETTY 2003 SUMMARY
February 7, 2004
Another Record Quarter For All Metrics
Getty Images, Inc. reported fourth quarter revenue of $134.4 million up from $130.8
million in the third quarter of 2003. Total revenue for 2003 was $523.2 million a 13%
increase over the $463 million in revenue for 2002. Fourth quarter 2003 revenue was up 14.2%
compared to $117.2 million in the fourth quarter of 2002, but included a 6.7% benefit
from foreign currency translation.
(For those of us not trained in economics, it is worth recognizing that the "6.7% foreign
currency benefit" represents about $7.9 million. Thus, if the exchange rate for euro, and
pound in dollars were still at 2002 levels [something not likely to happen again soon],
Getty's Q4 revenue would only be $126.5 million, a 7.5% growth in revenue for the year
rather than a 13% increase.)
The quarter-by-quarter figures (outlined below) indicate that the economic recovery,
first noticed in September, is picking up some momentum. It also shows that the radical
adjustment Getty made in search weight results last August (see Story
578 ) in an
effort to increase sales of RM images relative to RF is bearing fruit and bringing some
balance back into the picture.
Net income for the quarter was $28.2 million, or $0.48 per diluted share, compared to
$7.5 million, or $0.13 per diluted share, for the fourth quarter of 2002. Excluding the
effect of the reduction in the valuation allowance, fourth quarter net income totaled
$17.9 million and diluted EPS (earnings per share) was $0.30.
"The record results we achieved in the fourth quarter culminate a year of very strong
financial performance for the company," said CEO Jonathan Klein. "In 2003, we reached a
number of key milestones, including exceeding half a billion dollars in sales, producing
$100 million in operating income and achieving an operating margin of 20 percent. In the
fourth quarter, we began to see signs of recovery in the market for visual content which,
in addition to our planned industry sector and geographical expansion, is expected to
drive continued solid revenue and earnings growth in the year ahead." They also ended the
year with more than $300 million in cash.
Business Outlook
For the 1st quarter of 2004, the company expects to report revenue in the range of $141
million to $146 million and earnings per diluted share of $0.33 to $0.36. For 2004, the
company expects revenue in the range of $560 million to $580 million and earnings per
diluted share of $1.35 to $1.50.
Breakdown Of Revenue By Business Segment
As the company places more emphasis on Editorial sales, they have adjusted the lines
of business categories they've been reporting for the last two years by moving the
Archive sales out of "Archive & Footage" and including it in the
"News/Sports/Entertainment" category. Going forward this makes a lot of sense because Archive
sales are chiefly in the Editorial environment. However, it becomes a challenge
to understand the historical trends of these two new categories. As a result I have
revised my charts to include the old and new categories.
CFO Liz Huebner provided percentage figures for Q4 2003, and she also provided
percentage-of-growth figures for Q4 2003 compared with Q4 2002. These numbers allowed
me to calculate the actual revenue for the new categories in both Q4 2003 and Q4 2002.
By subtracting the Film revenue from the Q4 2002 "Archive & Footage" category I was able to determine
the probable Archival revenue during this quarter and add that to the old "News & Sports"
category.
The challenge is to determine the revenue for each of these new categories
in Q1, Q2 and Q3 of 2003. Since Archive was 39% of the "Archive & Footage" category in
Q4 2002, I made the assumption that it was about the same for each of the following
three quarters. This is probably not totally accurate, but it should be in the ballpark.
I placed these figures in parenthesis to indicate that they are guesses. I attempted
to confirm these figures with Getty, but they didn't respond. Thus my estimates for
2003 are $56.65 million for "News/Sports/Entertainment/Archive" and $26.63 million
for "Film".
Finally, we have a totally new category that I call "Other" that makes up about 1% of
total revenue and covers such things as Assignment Photography, Media Asset Management
and other revenue sources that don't fall into the stock photo categories.
|
Q3 2002
|
Q4 2002
|
Q1 2003
|
Q2 2003
|
Q3 2003
|
Q4 2003
|
Rights Managed
|
56%
|
54%
|
55.9%
|
52%
|
50%
|
51%
|
Royalty Free
|
28%
|
30%
|
27.7%
|
31%
|
33%
|
32%
|
News & Sports
|
8%
|
7%
|
7%
|
7%
|
8%
|
|
Archival & Footage
|
8%
|
9%
|
9.4%
|
10%
|
9%
|
|
New - Replace 2 Category Above
|
|
|
|
|
|
|
News/Sports/Entertain/Archival
|
|
9.3%
|
9.6%
|
|
|
10.5%
|
Film
|
|
5.5%
|
5.8%
|
|
|
5.5%
|
Other (Assignment, etc.)
|
|
1.2%
|
1%
|
|
|
1%
|
Among the advantages of the new divisions are that it will be much
easier to track Footage growth in the future, and we now have some idea
of the percentage of Editorial sales that are archival.
It should also be noted that "Creative" revenue (RM and RF) is 83% of total
revenue as it has been consistantly for most of 2003. The other
categories remain at about 17% of total revenue.
The above percentages translate into the following dollar figures for the last
six quarters (in millions of dollars).
|
Q3 2002 |
Q4 2002 |
Q1 2003 |
Q2 2003 |
Q3 2003 |
Q4 2003 |
Gross Revenue |
$118.2 |
$117.7 |
$130.3 |
$127.7 |
$130.8 |
$134.4 |
|
|
|
|
|
|
|
Rights Managed |
$66.192 |
$63.56 |
$72.83 |
$66.4 |
$65.4 |
$68.5 |
Royalty Free |
$33.096 |
$35.31 |
$36.09 |
$39.59 |
$43.16 |
$43 |
News & Sports |
$9.456 |
|
$9.12 |
$8.94 |
$10.46 |
|
Archival & Footage |
$9.456 |
|
$11.73 |
$12.77 |
$11.77 |
|
New - Replace 2 Categories Above |
|
|
|
|
|
|
News/Sports/Entertain/Archival |
|
$11 |
$13.75 |
($13.8) |
($15) |
$14.1 |
Film |
|
$6.5 |
$6.1 |
($6.9) |
($6.23) |
$7.4 |
Other (Assignment, etc.) |
|
$1.33 |
$1.33 |
($1) |
($1) |
$1.4 |
Average Price Per Usage
CFO Liz Huebner said, the average price per image (ppi), worldwide, for Rights Managed Images
was $552 down from $574 in the 3rd quarter of 2003. This decline was caused by product mix and
the more favorable pricing that is being offered in the Publishing sector. The average price for
single RF images was $165 up from $152 in the 3rd quarter. The chart below looks at the number
of images used.
|
Q3 2002 |
Q4 2002 |
Q1 2003 |
Q2 2003 |
Q3 2003 |
Q4 2003 |
ROYALTY FREE |
|
|
|
|
|
|
Gross Revenue (millions) |
$33.096 |
$35.31 |
$36.09 |
$39.59 |
$43.16 |
$43 |
80% - online sales |
$26.477 |
$28.25 |
$28.87 |
$31.67 |
$34.53 |
$34.4 |
Price Per Image |
$107 |
$132 |
$127 |
$139 |
$152 |
$165 |
Number Images Licensed |
247,449 |
214,015 |
227,322 |
227,842 |
227,171 |
208,484 |
|
|
|
|
|
|
|
RIGHTS MANAGED |
|
|
|
|
|
|
Gross Revenue (millions) |
$66.192 |
$63.56 |
$72.83 |
$66.4 |
$65.4 |
$68.5 |
Price Per Image |
$509 |
$479 |
$546 |
$567 |
$574 |
$552 |
Number Images Licensed |
130,043 |
132,693 |
133,388 |
117,108 |
113,937 |
124,094 |
|
|
|
|
|
|
|
Total Images Licensed |
377,492 |
346,708 |
360,710 |
344,950 |
341,108 |
332,578 |
Percent RF |
66% |
62% |
63% |
66% |
67% |
63% |
Percent RM |
34% |
38% |
37% |
34% |
33% |
37% |
Rights Managed vs Royalty Free
The total number of images licensed is still on the decline, although the number of
RM images licensed went up this quarter compared with the previous quarter. It should
also be noted that while RF revenue stayed about the same the number of images
licensed dropped about 8% from the previous quarter according to my figures.
However, in the conference call Huebner said "RF volumes were up slightly" comparing Q4 2003
with Q4 2002. According to my calculations the number of images licensed in Q4 2002 was
214,014 and the 208,484 in Q4 2003 would represent about a 2.5% decline. This difference can be
explained if fewer CD's are being licensed now than was the case in the past. In previous
quarters Huebner has indicated that about 20% of revenue came from CD sales. No mention of
this was made in this conference call and I used the same 20% number before calculating the
number of single images licensed. Analyst Christopher Rowen of SunTrust Robinson Humphrey
pointed out in his report that, "Virtual CD sales accounted for roughly 18.5% of 4Q RF
revenue, which is at the low end of its historical range of 18% to 23%. Therefore, this
skews any attempt at a calculate RF volume comparison. As a result, we have to take
management's word on the RF segment, and Getty Images said volumes were roughly flat."
Whether RF units licensed are flat or decling it is interesting that Getty introduced an
approximate 5% price increase on RF imagery in January. They don't seem to feel that
price is having any effect on usage volume.
2003 Initiatives
In the conference call with analysts Jonathan Klein reviewed the company's
accomplishments relative to its stated goals at the beginning of 2003 and outlined the
goals for 2004. In 2003:
- They completely overhauled the RF collections in 2003 and generated almost 30%
revenue growth year over year.
- At the end of 2002 Getty completed a large scale digitization of its film library
and according to Klein saw growth in the film business in 2003 for the first time in more
than 2 years with Q4 2003 sales being 14% higher than Q4 2002.
Given that they have now identified Film as its own revenue division, instead of grouping
it with other things, it is hard to determine the total revenue for film sales for 2003,
but I estimate it at about $26.63 million. At the Analysts Day in December Getty said
Film clips generated 6% of its revenue in 2002 which would be about $27.78 million. While
sales may be higher in Q4 2003 when compared to the same quarter a year earlier, sales for the year may
not. On the other hand, my estimates of the Archive share of the old "Archive and Film"
category may be too high. I could not get clarification from Getty on this point. As we
see sales in these new categories in future quarters we will have a better understanding
of these trends.
Klein said, "that film or moving imagery over the medium and long term will be the
biggest growth business at Getty Images."
- They expanded their editorial business with a partnership with AFP, and the
acquisition of two small, but important companies in the entertainment sector to build
coverage, expertise and connections in the U.S. and the UK. Klein said, "The
complementary strengths of Getty Images and AFP make us the 3rd largest wire service
worldwide (after AP and Reuters), and we remain both focused and very aggressive in this
area."
They also substantially expanded their archival offering through an agreement with
Time-Life Pictures. Their Editorial business grew by more than 15% in 2003 with the
second half being much stronger than the first.
Given the new way of breaking out Editorial revenue with the addition of Archive to the
mix, it is difficult to be precise about the total revenue for this division in 2003, but
I estimate it to be about $56.65 million.
Getty estimates that it has just 10% market share in the editorial space.
- Getty continued to expand its distribution strategy and in 2003 added 13 new
collections including: RF, RM, Editorial and Film. Klein said, "It is very important to
put this part of our business in context. It's success means that we have certainly
created the de facto home page for our industry. We are inundated with requests from many
companies in the industry to distribute their content through Gettyimages.com. You will
see a great deal more from us in this area in 2004 and beyond. Not only will these
revenues be largely incremental, but please remember that they take place at very
attractive margins and furthermore cement our position as the place for imagery of all
kinds, worldwide."
- In their quest for new revenue opportunities Getty's most successful venture was
their Custom Image Services (CIS), also known as Assignment Photography. At
their Analyst Day in December they reported that they expected to earn over $3 million
from CIS in 2003. (This, along with certain other income, is accounted for in the "Other"
category in the charts above.)
At the Analyst Day it was pointed out that the Discovery Channel paid Getty $30,000 for
assignment photography in 2003, but will likely do $350,000 in 2004, and that it will
continue to grow. Assignment photography is also popular with corporate customers and
often acts as a lead-in to other services.
Getty has just begun to grow this line of business and believes it can get significantly
larger. However, one thing that has not been explained are the costs related to this
business, and thus the margins that can be achieved. Normally in assignment work, a
significant portion of the revenue generated is eaten up in expenses of the operation.
For individual photographers it is not uncommon for operating expenses to exceed 50% of
the gross revenue collected, not counting any fee for the photographer's time.
Getty may benefit by using its staff photographers on many of these projects because the
salaries the company pays them are much lower than freelance photographers would need to
earn for doing such assignments. Nevertheless, the costs of this line of business are
probably much greater that the costs of licensing stock imagery. As this line of business
grows in importance it seems likely that the gross margins for the company will begin to
decline.
Goals and Objectives for 2004
Klein outlined five key initiatives for 2004. Getty's goals and objectives for 2004 are:
(1) Grow revenues, (2) increase penetration of the Editorial market, (3) establish larger
presence in Japan, (4) continue to develop new revenue streams, and (5) achieve a 25%
EBIT margin.
- As with 2003 the company's primary objective is to grow revenue. According to
Klein they will seek to do this by becoming even more focused "on understanding our
customers expectations and exceeding them".
Getty recently commissioned an independent study of over 300 creative professionals at
advertising agencies and corporations to benchmark its performance and perceptions.
Initial results showed that 77% of customers go to Getty Images first for their imagery
needs. In addition over 90% of respondents were "highly satisfied" with Getty's performance in
the areas of: (1) ease of use of the web site, (2) quality and variety of imagery and (3)
timeliness of getting the right image.
Two recently launched initiatives in response to customer requests are:
- Virtual CD's so RF collections can be downloaded instanteously.
- Flexible License Packs (FLP's) bundle multiple uses into one licensing package. (See
Story 610 for more
information on FLP's.)
- The next most important goal is to significantly increase the company's
penetration into the Editorial and Publishing markets.
Klein said, "Editorial Customers - Book Publishers, Magazines, Newspapers - make up a
large part of the markets we serve and we know we are currently under penetrated in
servicing this customer base. Furthermore, this market is a natural extension of our
News/Sports/Entertainment/Archival photography which has been growing at a very good
clip."
They have recently streamlined the search process for editorial images, simplified
licensing categories, and established new price points specifically targeted to the
editorial market which is more price sensitive segment than are advertising customers.
Klein gave some examples of situations where their National Account Managers have been able to
negotiate deals that will generate significant increases in revenue. One large UK
publisher spent only 700 pounds with Getty in 2002. They have been able to negotiate an
agreement for 2004 with that publisher for a minimum guarantee of 200,000 pounds that will
not only involve the licensing of substantially more images, but also doing photo
assignments.
In the U.S. a major global publisher increased their purchase of Getty images by 40% in
Q4 of 2003. During the Analyst Day in December the company mentioned another
customer in Europe that did $7,000 of business with Getty Images in 2003, but expects to
do $200,000 in 2004.
It was also pointed out at the Analyst Day that many large book publishers are trying to
dramatically reduce the number of vendors they deal with while at the same time using
more images and diagrams in their books. Pictures and diagrams are now filling roughly
50% of textbook page space. Despite the increased use, Harcourt has set a goal for 2004
to get down to 20 to 30 image vendors with two to four providing the bulk of the images.
- Getty will continue to establish its presence in Japan
as that country is the 2nd largest advertising market after the U.S. Klein said, "We have an
intense ongoing effort to insure the launch of our Japanese fully e-commerce enabled
Japanese language website in the 2nd quarter of this year." Getty is the number one
provider of Creative imagery in all the world's major markets with the exception of
Japan.
At the Analyst Day in December Getty estimated that it's Japan revenue would be about $5
million in 2003. Sources in Japan say the market for stock images in Japan has become
smaller in the last few years and they estimate it at between $210 and $220 million.
Getty has estimated it at $250 million.
Getty's two biggest competitors in Japan are Orion and Amana. U.S. analysts have
estimated that these companies generate about $50 million each in revenue. I believe
these figures are high and about 70% of Amana's revenue comes from doing advertising
assignments, not library sales.
The Japanese say Getty has asked foreign photographers to shoot some Japanese subjects in
order to have content suitable for the launch of their Japanese language web site in the
Q2 or 2004. People familiar with the market point out that Japanese photographers have a
very unique way of approaching Japanese subject matter. These sources feel it is questionable
whether "foreign" photographers can produce the type of local imagery Japanese editors
will want to buy. This is part of the reason why Western produced photography has never
been a strong seller in Japan.
Getty forecasts that its Japan revenue will grow to $8 million in 2004. The Japanese I
talked with are skeptical that Getty will reach that number and don't seem to be overly
concerned with Getty as a threat to their market.
It is not clear whether Getty intends to hire Japanese photographers and attempt to get
involved in the assignment business in Japan as Amana has done.
- Very little was said about new revenue streams other than the assignment
photography that I discussed earlier. However, along these lines a comment made by an AOL
representative who was one of the presenters at Getty's 2003 Analyst Day is worth
considering. He said that "pictures drive people" and that a promotion with a picture
gets a 17% click-through whereas less than 1% of viewers click on promotions that do not
have pictures. As a result, AOL's image licensing activity climbed from 10 pictures per
month six years ago to 10,000 to 12,000 pictures per month today.
While the Internet would certainly appear to be an emerging market, the question remains as
to where they are getting this volume of imagery and what rates they are paying for it.
Geographic Breakdown
The percentage of revenues from the Americas continued to decline and that from Europe and
Asia/Pacific increased. However, these changes were probably due more to the continued weakness
of the dollar, relative to the euro rather than a change in buying habits.
|
Q3 2002 |
Q4 2002 |
Q1 2003 |
Q2 2003 |
Q3 2003 |
Q4 2003 |
Americas |
57% |
56% |
53% |
54% |
52% |
51% |
Europe |
37% |
37% |
41% |
40% |
41% |
42% |
Asia/Pacific |
6% |
7% |
6% |
6% |
7% |
7% |
Gross Margins and SGNA
The gross margin for the quarter was 72% up from 71.7% in the 3rd quarter, and 70.6% in the
fourth quarter of 2002. CFO Huebner said, "Selling general administrative expenses for
the quarter were %53.3 million up about $1.8
million over the fourth quarter of 2002. The increase in SGNA for the quarter was due
entirely to currency. As a percentage of revenue SGNA was about 40% in the fourth quarter
down substantially from 44% of revenue in the fourth quarter of 2002. For all of 2003
SGNA was $210 million compared with $208.5 million in 2002. Taking into account the
negative currency impact in 2003 of over $8 million there was a material reduction in
SGNA which again demonstrates our ability to grow revenue without adding any costs."