Getty 2Q07 – core creative stills business down

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Getty 2Q07 – core creative stills business down

By Chris Ferrone August 02, 2007

In a conference call with analysts yesterday to discuss Getty’s 2nd quarter 2007 results, CEO Jonathan Klein painted a picture of a company whose core business is contracting while it reaches for new businesses for long-term growth. Decreasing creative stills sales, which comprised 75% of the company’s total revenue of $218MM for the quarter, resulted in a currency neutral decrease in revenue of 2%, year-over-year. The company’s stock closed slightly down at the end of the day, at $44.84.

Klein explained the decline in creative stills sales resulted from decreasing RM prices and volume and decreasing RF volume which was partially offset by increasing average prices. He said the declines in volume results primarily from lower demand from ad agency clients whose business is changing as more ad dollars go on-line. He also said the company has seen a significant drop in small file on-line sales implying clients are finding other sources for images for on-line uses.

Net profit suffered from a combination of higher commissions paid on content from newly acquired companies, and relatively higher SG&A, depreciation, interest and income tax expenses. The numbers below illustrate Getty’s declining profitability from 2Q06 to 2Q07.
                    2Q06       margins    2Q07      margins    % change
Revenue       $204MM   100%       $217MM   100%           +7%
Gross Profit   $154MM     75%       $160MM     73%           +4%
EBITDA         $ 76MM     37%      $ 76MM     35%            -1%
Net Income* $ 40MM     19%       $ 34MM     15%           -15%

(* Net income excludes a one-time restructuring charge of $16MM in 2Q06.)

Klein mentioned the recent head-count reduction is one way the company is addressing the declining profitability. The lay-offs announced yesterday will result in a $4mm one-time charge in 3Q07, but will reduce staff and staff-related costs by $20MM per year. He pointed out, however, that due to the company’s acquisitions this year, its over-all head-count at the end of 2007 will nearly equal that at the beginning of 2007.

While asserting the company’s top priority is to “reinvigorate” creative stills sales, Klein also promised to find growth in other businesses. He cited Getty’s three acquisitions this year as indicators of where the company sees opportunity; WireImage in the editorial entertainment imagery segment, Punchstock for value-conscious clients, and Pump Audio in the music licensing business.

Klein also discussed other ways the company plans to diversify revenue streams. One in particular will be a consumer-facing business which will take advantage of the huge volume of traffic to Getty’s web-sites of 8MM visitors per month. Klein says he expects to generate both ad-revenue and commercial product revenue form this traffic. Naturally, he did not reveal any more detail about this new business. He did, however, say that this consumer business model will be up and running “sooner than you think.”

Nonetheless, Klein says the revenue outlook is lower due to declines in the traditional part of the business, while it will take a few more quarters to see results from current initiatives. As a result, the company has reduced its full-year revenue outlook by $25MM.

Other salient points that came out of the call:

iStock continues to show strong momentum with about 4.25MM downloads in the second quarter. Klein says average price per image and average spend per client have increased at iStock, as well.
RF overall grew 1% currency neutral while RM declined 4.7% currency neutral in the 2nd quarter of 2007.
The US and the UK markets lead the declines in creative stills volume.
The volume declines in RM and RR, for which usage details are known, came from print brochures and print advertising. The company expects these usages to continue to decline as more advertising shifts on-line, though RR licenses are mitigating this pressure, to some degree.
Ad agencies make up the customer segment showing most of the creative stills decline while business from Media and Corporate customers remains steady.
Editorial sales grew 40% year-over-year and represented 17% of revenue in 2Q07.
Paid search on-line currently does not permit the use of images, which has also hurt the creative stills business. The search companies recognize, however, that on-line ads with images in them generate higher click-through rates than those without. Getty is working with these companies to develop paid search technology that can include images, but the process is slow.
Another reason for the creative stills decline is the increasing amount of content and content providers.
Launching the new Gettyimages web-site, which will take place this quarter, is key to the reinvigoration of the creative stills business.
The three web-sites, gettyimages, punchstock and iStockphoto represent Getty’s multi-site strategy for reaching all levels of image customers.
The company is still adjusting its face-to-face customer contact strategy, announced last fall, but its sales department remains much more out-bound focused.
Getty will hire a new SVP of Marketing who will begin working with the company in September of this year. He or she will work out of Getty’s New York offices.
Klein states that his own move to New York City, where he plans to stay for one year, is tied to the fact that the company maintains its principal sales office there. He wants to get closer to customers and partners. New York’s time zone also offers ease of communications with Europe. He dismissed the suggestion that NYC provides a more convenient locale for mergers and acquisitions, saying Getty managed to acquire plenty of businesses form Seattle over the years.
As demand for multi-media content grows rapidly, Getty has made aggressive moves into multi-media, video and sound. Getty’s new footage web-site, launched in 2Q07, has vastly improved customer experience but the segment lost $1.5MM due to a technical glitch on the site which has now been corrected.
The company continues to add new collections to its footage archives and expects footage to become a larger part of revenue.
The Pump Audio acquisition will help Getty do for the music licensing business what they did for the then scattered stock photo industry, twelve years ago. Research tells them the market for the segment of the music licensing business Getty will engage in is over $3billion.
Getty generated 46% of its revenue in the Americas, 45% in Europe, the Middle East and Africa (EMEA) and 9% the Asia Pacific region in 2Q07.
Royalty rates increased on average, year-over-year, because the acquired companies pay higher average royalties than does Getty. The average royalty rate for footage was 30%.
The company generated $48.8MM cash in 2Q07.