Getty Revenue Up - Investors Unhappy

Getty Images reported revenue for Q4 of 2005 of $185.8 million compared to $162.1 million for Q4 of 2004 and $184.5 million in the previous quarter. Excluding the effects of changes in currency exchange rates, revenue grew 16.1 percent.

Operating income for the fourth quarter of 2005 grew 32.9 percent to $58.2 million, or 31.3 percent of revenue, compared to $43.8 million, or 27 percent of revenue in the same quarter last year. Cost of revenue for the quarter was $48.6 million. Cost of revenue as a percentage of revenue declined to 26.2 percent from 27.6 percent in the fourth quarter of 2004.

Net income for the fourth quarter was $42.5 million, or $0.64 per diluted share compared to $28.7 million, or $0.46 per diluted share a year earlier.

Despite this record quarter, the stock market punished Getty for missing street estimates and the share price dropped almost 6% on Friday to $84.54.

For the full year cash and short-term investment balances increased to $518.3 million after spending $234.4 million on business acquisitions. The acquisition of property and equipment in 2005 was $57.8 million compared to $36.7 million in the prior year.

For all of 2005, revenue grew 17.9 percent to $733.7 million compared to $622.4 million in the prior year. Excluding the effects of changes in currency exchange rates, revenue rose 16.6 percent compared to 2004. Operating income for the full year of 2005 rose 34.3 percent to $225.9 million, or 30.8 percent of revenue. In 2004, operating income totaled $168.3 million, or 27 percent of revenue.

Cost of revenue for the year was $196.9 million. Cost of revenue as a percentage of revenue declined to 26.8 percent from 27.7 percent in 2004.

Business Outlook

For the first quarter of 2006 the company expects to report revenue in the range of $196 million to $201 million and earnings per diluted share of $0.62 to $0.66. For all of 2006 the company expects to report revenue in the range of $820 million to $840 million and earnings per diluted share of $2.70 to $2.85. Both revenue and earnings per share guidance for 2006 include the impact of year over year currency variations.

Revenue Breakdown

Stock Revenue As Percentage of Total Revenue

Image Used Chart

** Note: In order to determine the revenue generated by single image RF sales, it is necessary to deduct the amount of RF revenue generated by CD's, DVD's and Subscription sales. The numbers in this column reflect total revenue for single image sales. The revenue from people buying CD's and Virtual CD's compared to single images was 13% for the quarter. All subscription revenue will be included as part of this percentage number.

**** Note: The average price per image data is global as of Q1 2004. Prior to Q1 2004, the PPI data reflects the total Americas and EMEA only

Industry Growth

Given the detailed information provided only a month ago in the Analysts Day presentation in December (See Story 785) there was very little new background offered in the conference call.

CEO Jonathan Klein continues to claim that this is a growth industry. I appreciate his optimism, but I just don't see it. See the chart above and go back to Story 613 for 2002 and 2003 figures. In these periods the total images licensed were.

Sure the number went down in Q3 2002 and it has come back up which is a good thing. But it has only grown about 4.7% in over three years. If we look at Q4 2003, the low point in this period, then the growth was 18.3% in two years, but most of that was making up for the bad period in late 2002 and early 2003. This doesn't seem to me to be evidence of a growing industry. We also need to recognize that after a big jump between Q1 and Q2 of 2005 the total number of images licensed has been very flat for the last three quarters.

It is also significant that during the year Getty acquired Digital Vision, Photonica and Iconica. All these brands were - and still are - making sales through distributors around the world to customers who were - and still are - going to web sites other than gettyimages.com to purchase their images. Now Getty gets to claim all these sales as "units licensed". The company has not provided us with a breakdown of how many of the units licensed were found on web sites other than gettyimages.com, but I believe it may represent a significant share of the increased units licensed in the last three quarters.

Revenue is certainly up significantly over the last three years, but most of that resulted from price increases, not increased units licensed. At some point it will no longer be possible to continue raising prices. In fact if we look at the RF prices over the past three years the rate of increase has slowed remarkably on a quarterly basis from what it was in 2003. If we compare Q4 2005 to the year earlier quarter the price increase averaged almost 14%. For RM the average price is about level with a year ago but it has been falling since a high in Q1 2005. Part of the reason for this fall is that Getty has been selling more units to publishers at lower prices rather than the advertising industry. But if publishers are buying more units and the overall units aren't increasing it begs the question as to what is happening in the advertising market.

For a more complete explanation of why growth in units licensed seems unlikely to me see Stories 790 and 603.

Klein also talked about growth in sales for the quarter in Germany, Spain, Italy and Brazil and acknowledged that sales in the UK had been soft. That may have been compared to a year-ago quarter, but when compared to the previous quarter revenue was slightly lower in the Americas and in Asia/Pacific. If the price per unit licensed is flat and the overall revenue is down in a particular area of the world, it seems to me that the number of units licensed is off. And when total units licensed is flat if we see increased units licensed in one area it seems likely that there is a corresponding decreases somewhere else.

Editorial

One interesting figure that came out of the call was that last year Getty Images added almost 1,000,000 new editorial images to its site. Gross editorial revenue for the year was $85,290,000. Thus the average return for each image produced was about $85. We have no idea how many customers used any one of these images, or the average number of images produced by a photographer on each shoot, but it is an interesting figure to contemplate.

Footage

The volumes of footage sales were down by 11% while the average price per unit licensed rose 16% to $664, from $575 in Q4 2004.

Risks Going Forward

After the conference call Citigroup Investment Research analysts outlined some of the risks facing Getty Images as the company moves forward in 2006:

(1) "deployment of cash including either acquisition beyond their core or returning money to shareholders through dividends or repurchases, which may call into question the GYI's lofty trading multiples,


(2) destabilization of the competitive balance in stock imaging caused by either Jupitermedia or Corbis competing more aggressively on pricing or Bill Gates deciding to take Corbis public,

(3) growing to the point where Getty has trouble handling its image library or to a point where it begins to alienate one or more of its constituencies, fueling demand for alternatives in the market,

(4) Adobe becoming a more powerful channel for imagery and either siphoning off more of Getty's profit or exclusively partnering with Jupiter and shutting Getty out of a key market, and


(5) commodization of timely imagery due to the ubiquitous nature of camera phones and the increasing ease with which pictures can be instantly uploaded to the internet."

Royalty Share

Almost the entire "Cost of Revenue" for the company is royalties paid out to image suppliers and Getty has decided to report this cost of revenue number on its balance sheet. For the quarter they paid out $48.627 million or 26.2% or total revenue. This compared with $44.745 million or 27.6% of revenue in the fourth quarter of 2004. Thus, the image providers share of total revenue is down slightly. For the entire year Getty paid out $196.887 million as compared with $172.684 million in 2004. The percentage share of gross revenue that these numbers represent is 26.8% for 2005 and 27.7% for 2004.

SG&A

Selling, general & administrative expenses (SG&A) totaled $63.8 million for the quarter. As a percentage of revenue, SG&A declined to 34.3 percent from 37.8 percent in the fourth quarter of 2004.

Geographic Breakdown

The revenues from EMEA (Europe, the Middle East and Africa) were up in the quarter while the percentage of revenues for the Americas and Asia/Pacific were down slightly.