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Getty releases Q4 2005 numbers

By Chris Ferrone January 27, 2006

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Yesterday, Getty Images reported it’s 4th Quarter, 2005 and FYE12/31/05 results.  CEO Jonathan Klein and CFO Liz Huebner hosted a conference call with analysts to discuss the results.   Click here for a look at Getty’s financial report for 2005 4Q and Full Year.
 
Year over year, the company achieved it’s projected 13% organic, currency neutral growth (“organic" meaning not including growth from acquisitions and "currency neutral" meaning not including the effects of currency valuation fluctuations on overseas revenue.)  The actual sales figure for 2005 of US$733.7MM represents an increase of 18% over 2004.  According to Mr. Klein the increase in revenue came from all sectors of the company.
 
The most intriguing part of the results to this writer concerns the company’s improved operating margins and its projected continued improvement in 2006.  The operating margin reflects the profit the company makes after paying royalties to contributors, selling general and administrative expenses, and depreciation and amortization.   Getty posted the following improvement in operating profit margins during the past four years: 
2002      11%
2003      20%
2004      27%
2005      31%
 
The improvement from 2004 to 2005 came in the form of a 1.9 percentage point reduction in SG&A expenses as a percentage of revenue (from 36.2% in ’04 to 34.3% in ’05) and a 0.9 percentage point reduction in “cost of revenue” (which we take to mean royalties to contributors) from 27.7% in ’04 to 26.8% in ’05.  Getty attributes the reduction in cost of revenue to the addition of wholly owned content to their collection upon the acquisition of several contributor companies, most notably, DigitalVision.   
 
For 2006, Getty projects a 34-35% operating margin!  Management acknowledged that S,G&A should remain flat for the year, however, so we must assume this significant improvement in operating margin will come from a further and more drastic reduction in “cost of revenue.” This is likely to come from a combination of three possible sources:
 
1)     Sales of wholly-owned content growing as a percentage of total sales;
2)     Improved average margins after removing all the Jupiter content from their collection, which they did in December of 2005; and
3)     Reduced commissions to photographers.
 
Other highlights of the conference call:
 

• RM sales grew by 7% from 4Q04 to 4Q05 while RF sales increased by 26% over the same period.
• So called Creative sales (RF and RM combined) account for about 80% of the company’s revenue.
• Management sees exceptional growth opportunity in 2006 through expansion of market share in non-English speaking markets as well as in the Editorial sector which includes Sports, Entertainment and Archival imagery.
• The company projects 15% to 17% growth in 2006 revenue over 2005 to between $820MM and $840MM.
• The company has seen the proportions in the numbers of RF vs. RM images sold level off at about 75% RF and 25%RM in the US market.  It expects the European market, where the proportions are currently 60% RF and 40% RM to reach the US levels within the next two years.
• Getty views the market in China as having huge potential in the long-term but only slight potential in the near term.  China is the only market Getty has entered by way of a joint venture with a local company, which reflects their sensitivity to the local conditions in the area of copyright enforcement.

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