Getty Images 2001Financial Results

Posted on 2/8/2002 by Jim Pickerell | Printable Version | Comments (0)



February 8, 2002

Getty Images, Inc. has reported better than expected fourth quarter 2001 revenue of $101.8
million. This compares to $129.4 million in the fourth quarter of 2000. Total revenue for 2001

was $451 million, down 7% from $484.8 million in 2000.

Anecdotal information from other agencies in the industry indicate that most suffered a greater
percentage loss in 2001. (Because most agencies are privately held, no other company in the
industry is required to publicly report the kind of information the SEC requires of Getty.)


E-commerce revenues for the 4th quarter provided the biggest surprise with $62 million (61% of
sales). This compared to $51.5 million, or 48 percent of sales, in the 3rd quarter of 2001 and
$49.3 million or 38 percent of sales in the 4th quarter of 2000. For the full year, e-commerce
revenues increased from $165 million in 2000 to $219 million in 2001, a 33 percent increase.

This major jump occurred after rather modest increases quarter-to-quarter for several quarters.
The introduction of in October 2001, with full functionality for purchasing on
account was undoubtedly responsible for some of the growth, particularly in the U.S.

Klein reported that customers are using the online site in increasing numbers. In January 2002
Getty Images had the first day where they made over $1 million in sales through the site. At the beginning of 2001 only 5% of their sports imagery was delivered
online but by December that had jumped to 90%. In the 4th quarter 75% of Stone's business was
e-commerce and 60% of VCG's business in Europe was e-commerce.

Sixty-one percent is all the more remarkable when it is recognized that certain segments of the
Getty Images business have zero e-commerce sales. Getty receives about 8% of its revenue from
agents and none of that is included in the e-commerce figure, even if the agent happens to make
the sale digitally. In addition none of the footage sales are e-commerce because the band
widths are not sufficient at the current time to deliver footage online. While footage sales
were probably off in 2001, due to the fact that a large percentage of footage uses are for
television advertising, I estimate that between 7% and 9% of Getty's gross revenue comes from
footage sales.

Finally, the other segment of Getty's sales that are digital, but not counted as e-commerce,
are the sales of CD-ROM discs. This is an important segment of the RF business. All these
non-e-commerce sales may account for something in the range of 20% of Getty's total business.
Thus the 61% is out of a possible total of 80%.

In Europe it was possible, late in the 4th quarter, to search in German, French and UK English
as well as U.S. English, but that didn't seem to lead to a significant growth in sales. The
only way a European customer could complete an online purchase was to use a credit card. Before
the end of this quarter European customers will have full functionality and be able to purchase
images on account. Once that is introduced it is expected that there will be increased
purchased of images online in Europe.

During the conference call Klein made the point that many in the industry have argued that
Europeans are far behind the U.S. in their use of the internet for photo search. He said that
Getty's data indicates that it is more a matter of the available functionality than an
unwillingness to use the internet. "Give Europeans the functionality and they move online as
rapidly as customers in the U.S.," he said.

"The results for the fourth quarter demonstrated a number of key inflection points in our
business," Klein continued. "The migration of our sales from labor-intensive analog delivery to
highly efficient e-commerce and digital delivery accelerated substantially over the third
quarter as a result of the success of, which was launched at the beginning of
October. We have begun the year well, with January sales on track."

The price per transaction remains roughly the same on the web as it is for sales made offline.
However the number of images licensed per transaction remains higher off-line than on-line due
to the increased ability to up-sell.

2002 Outlook

While the first quarter of the year is normally a strong quarter, and Klein is encouraged by
January sales, the company does not expect much improvement in 1st quarter revenue over what
they earned in the 4th quarter 2001. They expects to report revenue of between $102 million and
$106 million for the first quarter of 2002. For all of 2002, the company is estimating revenue
to be between $430 million and $460 million, or between a 5% decline and a 2% gain over 2001.


By obtaining their images on more favorable terms Getty has been steadily improving their gross
margin, or the amount of the total revenue collected that they retain after paying royalties.
When they went public in 1997 their gross margin was 62% of revenue. In 2000 it was 71% of
sales. In the first half of 2001 it was 73% and it jumped to 75% of sales in the 2nd half of
2001. The gross margin is expected to be approximately 74 percent for all of 2002.

Producing Stock Images

In a presentation to stock analysts on January 9th, Klein gave an example of what is possible
when the company carefully analyzes customer needs and works with a photographer to produce
images that will fulfill those needs. He said Getty will profit in the future by getting
content at very low cost and, "It doesn't cost us anything to expand our content. We get
photographers to shoot on their time and their dollar."

He illustrated this with an example of a shoot by German photographer, Erik Dreyer who is
contracted to Stone. The three images shown were numbers 827372-007, 827374-016 and 827371-002.
Klein said the cost of the shoot that produced these images was under $10,000 and from it 21
images were accepted for marketing on the site and in their catalogs. From June
1999 through September 2001 there were more than 1,300 sales of these 21 images for a gross
revenue in excess of $600,000.

There was no indication as to what, if any, royalty was paid to the photographer over and above
the $10,000. Selling Stock was able to determine that Dreyer has several different percentage
arrangements with Getty, depending on the project, and that in all cases there is some level of
royalty paid.

Dreyer's contemporary style is very interesting. He has a total of 297 images on the site and they can be viewed by going to the site and searching on "Dreyer".

Free Cash Flow

A nagging investor concern has always been whether Getty's transition from an analog to a
digital business would ever turn Getty from a "cash eater" into a "cash generator". Getty
achieved positive free cash flow (an estimated $5 to $7 million) at least one quarter ahead of

Getty has estimated $11.5 million in free cash flow in 2001 and an estimated $45 million for
2002. Most of the major infrastructure expenses have now been completed. Thus, any significant
improvement in market conditions has the potential to drop significant cash to the bottom line
without any significant increase in capital expenditures. This probably accounts for the almost
25% rise in the stock price on the day after the announcement.

According to Klein, "One of the important developments this quarter was the realization of
positive and sustainable free cash flow. This demonstrates the company's tight discipline
around expenses, and more importantly, confirms that our vision for the business and the
industry is correct and that we have executed our strategies effectively."

"The results of the fourth quarter clearly demonstrate that the major capital investments and
the consolidation decisions we made in 2001 have begun to impact the bottom line very
positively," said Liz Huebner, senior vice president and chief financial officer.


EBITDA (one way of measuring profit) for the fourth quarter of 2001 was $20.8 million,
representing an EBITDA margin of 20.4 percent, above the guidance provided for the quarter and
ahead of the margin in the third quarter. In the fourth quarter of 2000, the EBITDA margin was
23.7 percent. Notwithstanding the lower revenues in 2001, the EBITDA margin was 20.8 percent,
compared to an EBITDA margin of 19.5 percent in 2000.

"We reported a strong gross margin, up 1.5 points over the fourth quarter of 2000, and our
solid fourth quarter EBITDA margin exceeded both the third quarter and fiscal 2000, despite
revenues, and is proof of the leverage in our business model,"
said Huebner.

The EBITDA margin is anticipated to be approximately 22 percent in the first quarter, and the
company expects to record a loss per share of approximately $.05 per share. The company has
raised its guidance for EBITDA margin for all of 2002 to between 24 and 27 percent.

Four Objectives For 2001

Klein said the company had four key objectives for 2001 and they accomplished or exceeded their
expectations in all of them. The objectives were:

    (1) to complete the integration of our acquired businesses,

    (2) to continue to drive
    our business to the Web,

    (3) to complete the heavy capital expenditure program that we embarked upon in 1999, and
    substantially reduce our cost base and,

    (4) finally, to validate the power of our business model.

The integration has been substantially completed, although there are still a few problems with
getting photographers paid on time as reported in Story
446 . Klein reported that the worldwide
staff has been reduced to less than 1900 people and that as a result of the new accounting
software they have already been able to reduce the accounting staff by 30%.

Discussed earlier was the increasing use of the web and its efficiencies over an analog sales
operation. Klein said that the company is no longer sending out dupe images in either North
America or Europe, meaning that the only way a customer can get image is to obtain it as a
digital file. The company expects capital expenditures for 2002 to be about $45 million.

Catalog Expenses

At the beginning of the fourth quarter, Getty began to write off catalog production costs as
incurred, instead of capitalizing them over three years as they had in the past. Part of the
argument for this is that current catalogs have a shorter useful life. This also simplifies
their accounting procedures.

Total amortization for the fourth quarter was $25.0 million, including $6.7 million for
amortization of deferred catalog costs.
There is expected to be additional catch up amortization of deferred catalog costs in the next
three quarters of approximately $4 million (Q1), $3 million (Q2) and $1.5 million (Q3).

Net Loss

The net loss for the quarter was $38.8 million, or 75 cents per share, compared to a net loss
of $80.4 million, or $1.57 per share, for the same period in 2000. Excluding all one-time
charges, primarily related to a loss on excess office space and severance costs, the net loss
per share for the quarter was 50 cents. For 2001, the net loss was $95.3 million, or $1.84 per
share, compared to a net loss of $169.3 million, or $3.40 per share in 2000.
Excluding all one-time charges, the loss for 2001 was $1.30 per share, compared to a loss of
$2.00 per share in 2000.

After-tax cash flow for the fourth quarter was 32 cents per share compared with the First Call
estimate of 29 cents per share, and with 44 cents per share in the fourth quarter of 2000.
After-tax cash flow per share for the year was $1.42, compared with $1.39 per share in 2000.



Getty sends dupes out for fulfillment, but not for selections. All selections are now
happening digitally (or from catalogs). The client still gets whatever he/she wants as
a final reproduction-quality product -- either film or digital files.

Copyright © 2002 Jim Pickerell. The above article may not be copied, reproduced, excerpted or distributed in any manner without written permission from the author. All requests should be submitted to Selling Stock at 10319 Westlake Drive, Suite 162, Bethesda, MD 20817, phone 301-461-7627, e-mail: wvz@fpcubgbf.pbz

Jim Pickerell is founder of, an online newsletter that publishes daily. He is also available for personal telephone consultations on pricing and other matters related to stock photography. He occasionally acts as an expert witness on matters related to stock photography. For his current curriculum vitae go to:  


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