JupiterMedia Corporation Q1 2006 Earnings Conference Call Transcript (JUPM)

JupiterMedia Corporation (JUPM)
Q1 2006 Earnings Conference Call
May 10, 2006 11:00 a.m. EST

Executives

Alan Meckler - Chairman and CEO
Christopher Baudouin - CFO
Chris Cardell - President and COO

Analysts

Matthew Troy - Citigroup
Fred Searby - JPMorgan
Kit Spring - Stifel Nicolaus
Aaron Kessler - Piper Jaffray
Jim Friedland - SG Cowen & Co.
Joe Maxa - Dougherty & Co.
Jeff Shelton - Bleichroeder
Steve Frankel - Canaccord Adams
Herman Leone - Deutsche Bank
Brian Stansky - Integral Capital
Peter Treadway - Tracer Capital

Presentation

Operator

Good day, everyone and welcome to Jupitermedia’s first quarter 2006 financial results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Alan Meckler, Chairman and CEO of Jupitermedia. Please go ahead, sir.

Alan Meckler

Thank you very much for joining us today. I am here at our headquarters in Darien, Connecticut with Chris Baudouin, who is our CFO; as well as Christopher Cardell, who is the President and Chief Operating Officer.

Before I give some introductory remarks, I am going to turn the call over to Chris Baudouin.

Chris Baudouin

Before we begin our formal comments, I would like to remind you that in our financial earnings announcement released yesterday, and also on this call, Jupitermedia is providing specific forward-looking statements, including guidance related to our expectations of our future financial performance.

Any forward-looking statements made as part of our call today are subject to risk and uncertainties that could cause actual or predicted results to differ materially. These are outlined in our earnings announcement, as well as in our SEC filings, including our most recently filed 10-K, which can be obtained from the SEC’s website or directly from our investor relations website. With that, I will turn the call back to Alan.

Alan Meckler

Thank you, Chris. As our Company continues to rapidly evolve as the largest owner of digitized assets for designers and creative professionals in the world, it brought us interpretive dilemmas for both management and of course, you investors. Therefore we remind investors to be extremely careful in examining our financials and to remember that we have divested two major divisions in less than one year, and at the same time we continue to make acquisitions and add new business lines around the world.

The first quarter witnessed the sale of yet another division. Our Jupiter Research Division, at the end of March, was sold to Jupiter Communications Research. We also made three more acquisitions: Stock Image in France; The Beauty Archive, from England; and Crank City Music. In addition, we made an equity investment in HAP Media which is based in Budapest, Hungary which is a leader in a rapidly developing micro payment area of stock photography.

We also had our usual seasonal fall off in revenues from our online media division. To remind listeners, historically online media has weak first and third quarters and strong second and fourth quarters. There was no moving off of this historical plan or historical lines in terms of how our revenues have changed there. Obviously Chris Baudouin will take you through on the effect of online media on overall margins, as it does have a great effect from quarter to quarter.

The first quarter also saw our Jupiter Images division hire about 30 new employees. The quarter also saw a ramping up in the development of our royalty-free music operations, with more acquisitions and hiring of staff. We are starting to see a ramping up of revenues of the music operations, but we do not expect to see this business really ready for prime time until the late summer.

We are also producing more flash movie clips from our Big Shot media division, and we will roll out a totally new website and business plan for this business, also in the early fall.

The launch of the new subscription business, Flash Foundry, also took place in the first quarter. With the launch of FlashFoundry.com we now have 11 online subscription offerings related to the sale of digital assets.

Our Animation Factory business, based in Sioux Falls, South Dakota which we acquired right at the end of '05 is busily developing an entire new business line that we will announce and launch in early summer and possibly as early as late June of this year.

Moving around the world, we launched a new subscription version of Photos.com in Japan in the quarter, and we plan to inaugurate yet another new service in the image area in Japan next month.

Finally, we continue to produce large quantities of high quality, rights managed and royalty-free images and stock footage across all of our brands.

With all of this investment we continue to grow revenues and maintain a strong bottom line. We believe that we are still early in the integration of all of our digital asset businesses, and believe the various economies of scale will become more and more evident in coming quarters.

I wanted to spend a bit of time on our equity investment, dealing with HAP Media in Hungary. HAP Media has two websites, a community site known as Stock Exchange, the url being SXC.hu, and StockExpert.com, which is where images are now sold. We will shortly make announcements about new and exciting developments with StockExpert.com.

I can tell listeners and investors that the HAP Media/Jupitermedia relationship appears, at this point, to be the best of all possible worlds. HAP was created by two brilliant young programmers in Hungary with few financial assets to market the service. Of course, Jupitermedia has the ingredients that HAP was missing, including millions of page views, email newsletter readers, and the marketing; when mixed together is rapidly starting to produce a valuable business model.

We will keep the investment community apprised of our progress in the micro payment arena in quarters to come.

In conclusion, Jupitermedia is devoted to building out its leading position in many different areas dealing with digital assets for marketers and designers in all mediums, but particularly on websites. Many of our philosophies are becoming the standard of the digital asset business world as competitors seem to be mimicking Jupitermedia's every move.

We also are committed to our goal and will always choose what is best for long-term targets versus short-term economic quarterly results. Thank you, and now going back to Chris Baudouin to give you some more financial details.

Christopher Baudouin

Thanks, Alan. Before I begin, I want to highlight that due to the sales of our JupiterResearch and JupiterEvents businesses, the results of JupiterResearch and JupiterEvents are shown as discontinued operations in our financial statements. Prior period information has been restated to show both these businesses as discontinued operations.

Turning to revenues, for the first quarter of 2006 we reported revenues of $33.9 million which represents a $19.7 million or 72% increase over our Q1 2005 results. On a sequential quarterly basis, revenues increased $800,000 due primarily to an increase in revenues from our online images business of approximately $1.8 million offset by the expected seasonal decrease in our online media business of $1 million. Organic growth for the online images business from Q1 2005 to Q1 2006 was approximately 12%.

A sequential decrease in online media revenues was expected due to the traditional first quarter seasonal decrease in advertising revenues. As a reminder, our online media revenues are traditionally lower during the first and third fiscal quarters while the second and fourth quarters are usually our stronger quarters.

On a year-over-year basis, our online media revenues decreased by $100,000 from $7.5 million to $7.4 million. This decrease is due primarily to the inclusion of $750,000 in revenues in Q1 2005 from our ClickZ property that was sold in August of 2005. Excluding the revenues from ClickZ in 1Q05, our online media revenues grew $580,000 on an annual basis.

Turning to cost of revenues, as a percentage of our revenues our cost increased sequentially from 30% in Q4 2005 to 35% in Q1 2006. This increase was due primarily to increased costs for content and IT personnel as we continue to invest in our images business as well as an increase in the royalty expenses for our licensed images due to a change in the mix of images sold.

Advertising promotion and selling expense increased in Q1 2006 from Q4 2006 due primarily to the hiring of additional sales personnel for our images business.

As noted in our press release, beginning on January 1st, 2006 we began expensing stock-based compensation. The result of the first quarter 2006 include non-cash stock-based compensation expense of $761,000. Our provision for income taxes for the first quarter was $1.7 million which equates to a 38% effective tax rate. The decrease from our effective rate during 4Q05 is due primarily to a change in the mix of our U.S. and foreign-based income. We are modeling our effective rate to be approximately 40% respectively.

Turning to our balance sheet we had $26.6 million in cash and $73.2 million in debt at March 31st. Our DSOs were 62 days as of March 31st, 2006.

Turning to guidance, you'll note that we have changed the presentation for our guidance to a rolling 12-month format. We believe this provides a better presentation of our Company due to the frequency of our acquisitions.

For the second quarter of 2006 we expect revenues to be in the range of $37 million to $38 million and diluted earnings per share to be approximately $0.12 per share.

For the 12-month period from April 1st, 2006 to March 31st, 2007, we expect revenues to be in the range of $156 million to $161 million and diluted earnings per share to be $0.63 to $0.68 per share.

These earnings per share estimates do not include the share-based compensation expenses. The impact of these non-cash expenses is expected to reduce EPS by $0.02 in the second quarter and $0.08 for the upcoming 12-month period.

I'd like to remind everyone that this guidance reflects preliminary estimates for depreciation and amortization related to certain of our acquisitions and these are subject to change pending final appraisals and reviews by our auditors.

From an EBITDA perspective we are expecting approximately $11.5 million for the second quarter and $54 million to $58 million for the 12-month period ending March 31st, 2007.

The guidance assumes fully diluted shares of approximately $36.9 million for the second quarter and $37.2 million for the 12-month period ending March 31st, 2007.

With that, I'll turn the call back over to Alan.

Alan Meckler

Thank you very much, Chris. At this time we welcome your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew Troy, Citigroup.

Matthew Troy - Citigroup

Good morning, guys. A couple of questions if I could. One on the hiring of an additional 30 people which I believe you said was related to the imaging business. If you could just talk to me about the distribution strategy. Specifically what your sales force looks like now versus 12 months ago? What it might look like 12 months from now? Do you feel that the platform is there? And how your go-to-market strategy has changed and how it might change? I've got one follow-up.

Alan Meckler

We are essentially staffed at this point and this is with the backup personnel around world not just in the United States, with about 150 people. About a year ago we were probably at 70.

Now in terms of the future, obviously the pace will slow to a trickle. We feel that we are in very good shape in terms of the buildup that we've had. We're about to physically open a Chicago office although we have 8 people working there right now; they are all working in their homes because we didn't have an office. June 1st or so they should be in the space in the heart of Chicago. There will be selected additions and hirings not only here but around the world. I would say that the heavy-duty lifting in terms of the mass of hires is over for now.

Matthew Troy - Citigroup

So the investments largely have been made. If I then think about pricing strategies going forward, how you've tinkered with those, do you feel like you've got the table set? How successful have you been in some of your pricing initiatives recently? Also integrating the content to that new Jupiter site? Thanks.

Alan Meckler

The pricing is ongoing. Don't forget of course we have a very large subscription business which has a whole other model for pricing, almost similar to a magazine in terms of enticing first-time subscribers in on discounts. Fortunately we have very high renewal rates much better than the magazine business, which I used to be with. We have a little bit of the magazine business now but it's not really based on paid subscribers. So we're constantly tinkering with that.

I think that it would be a hard to say that we have the perfect model because I think it constantly evolves. Certainly we feel that we're not at the top of the game in analyzing the different tests that are constantly being done and the offers that are being done.

Of course, from time to time I know that you may be alluding to a discount for the month of April when we matched another company that had come out with one. We have to do that to protect our turf. But certainly we feel that we're competitive from the lowest part of this business up to the highest end, and that we have a lot of ammunition because we have so many different product lines.

Matthew Troy - Citigroup

Great. Thanks, guys.

Operator

Our next question comes from Fred Searby, JPMorgan.

Fred Searby - JP Morgan

Good morning, Alan. A couple of questions. We're trying to piece together micro payments. One of your competitors has talked about alternative payments taking off. I wonder if you could talk about end-users? Is that really coming out of even the higher end royalty free and more expensive?

Are you seeing agencies actually that were in the past using rights manage or royalty free and paying $400 or $500 an image actually now going to micro payments where they can pay $4.00 to $5.00 an image?

If you could talk about I guess this trend has been more pronounced in the U.S., are you seeing catch on internationally as well or do you expect it to? Thank you.

Alan Meckler

Well, first of all I'd like to just do a little history here. Before the term micro payments came along we were in the micro payment business, we just didn't know we were in it because no one had used the term before. Photos.com and Clipart.com are essentially a micro payment site. I think many of you out there are under the misconception that you can just go to one of these sites, open it up and all of a sudden see an image and buy it for $4.00. That is not the case. There are various models.

But in most cases you do have to buy; here in New York we have metro cards and easy pass cards. You load up your card and then as you use it for a trip or a segment -- or in this case an image -- it gets depleted and then you load up again.

So while I don't think anyone in the industry is now publishing information nor are we what the average buy in is, you just can't go to a site and buy a $4 or a $1 or a $10 or $20 image. My guess is that the average person is loading up for $70 or $100. In many ways it's really like a subscription even though some people claim they are not in the subscription business, it really is very close to it.

Now Photos.com interestingly, which is all professionally shot photos, has for the period of your subscription, which can range from a month up to a year or two years, you can take up to 250 images a day downloading -- and nobody does that, but you could -- on low resolution. If you do the math that is probably a micro, micro, micro payment site if you really think about it.

So to me it is ironic and a little odd that we really invented the micro payment business. The micro payment business being referred to today of course is a little different, because while some of the photographs are from professionals, a lot of them are from amateur professionals or amateurs, however you want to look at them. It's a different model and it is true you can buy as described, images for a very low cost.

Now in terms of what is happening, we of course have only been in the "micro payment" business for three months. We do know anecdotally from Photos.com, which was distained by the community and some of our competitors verbally several times over the last year, that the number of higher level large media or advertising companies using and starting to use subscriptions for Photos.com -- we're not going to break out the numbers for this call or anytime -- has grown markedly over the last year.

That is obviously a bellwether of what the future brings and the fact that the creative destruction that is going to happen here; while high-end photography of rights, royalty free and rights managed I do not believe it's in danger of going the way of the horse and carriage to the car.

There is no question that these lower-priced properties -- subscription, micro payments, whatever you want to call them -- are definitely going to take market share from the high end.

So what I think happens is it's not like that business evaporates but that whatever anyone wants to factor in to the growth of that business in the coming years, I believe it's at best a single-digit growth industry instead of some of the 10% to 15% numbers that we've seen out there.

Now in terms of our Company, we believe we're positioned better than anybody else because not only are we in the high-end but we have a very small part of it so any share we get is a bonus.

At the same time, the fastest-growing part of our Company always has been and continues to be our subscription properties and now we do have micro payment investment. We feel that we are well-suited and flexible and we will be able to handle any direction that the pricing goes and/or trends in terms of the buyers buying images on a lower end or from these micro payment sites.

The last piece is that I think that we also are seeing a new type of image buyer that never existed before. Unfortunately there are no metrics on this because this business has sprung up so quickly. But I do believe it is involved in and around web sites and I have alluded to that in my introductory comments. I can't prove it but I believe that the fastest-growing part of the image and digital content, digital asset business in the next five to ten years will be from web designers who up until now were not image buyers, were not royalty free music buyers or not any type of buyers because they weren't designers or whatever. But as these designers -- or designer I should say -- who are buying images, as these people move into strength positions on web sites with the millions and millions of websites that are still be created every month, that is where the great growth will be. This is where the lower level pricing and subscription pricing will become dominant.

Five to 10 years this will be many times bigger business overall than the present $2 million, to $2.5 billion dollar market that is quoted all the time. So hopefully you picked up all that I was saying there. I thought I had to get that out.

Fred Searby - JP Morgan

Great, thank you very much.

Operator

Kit Spring, Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

I think Getty mentioned on its conference call that they have really ramped up their marketing spend for industry magazines advertising, Google keywords, that type of stuff. How is that impacting your costs? What do you think the long-term growth rate of your business or the industry might be after this year, after all the consolidation has occurred?

Alan Meckler

From a marketing viewpoint we haven't increased our marketing other than what we had planned on even six months ago, because we were already marketing probably at a higher level relative to our size than Getty was. I can't answer why Getty wasn't marketing before. But obviously you can ask them.

In terms of growth rates I think that again we're in uncharted territory because of what I call the these new image buyers or new digital asset content buyers. Nobody has any research on it. I know of nobody who plots it. We probably are the biggest in the world in supplying these types of people. So we see our metrics, we see very positive numbers developing.

My guess is over the next five years that the higher end of the business is a low single-digit growth business but that the purchase of images and other types of digital content for websites is going to grow by certainly 40%, 50% a year if not more for many years to come.

Kit Spring - Stifel Nicolaus

Thank you.

Operator

Our next question comes from Aaron Kessler, Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hi Alan and Chris and Chris. A couple of questions here. First on the COGS, can you explain a little more the increase in the quarter and what we should expect going forward?

Second, the guidance implies pretty back-end weighted numbers only from the bottom line. What type of confidence do we have at this point that we're starting to see some traction to reach those numbers?

Third, I might have missed it but you might have given some organic growth numbers on the quarter. If so, if you have those, that would be great. Thank you.

Alan Meckler

I'll answer the third one and Chris Cardell will answer the first two. We continue to not give quarterly organic growth numbers. We started this three quarters ago but we believe on the number, in terms of the way we projected our numbers and what would happen in this quarter and through the first quarter of '07 that 15% is a reasonably conservative number of organic growth across our digital content, digital asset businesses.

Chris Cardell

Aaron, this is Chris Cardell. In terms of increased cost that we saw in the first quarter and that we're factoring in as we go forward. as we stated we have hired additional personnel, primarily in the sales area. We've expanded the direct sales force. We've had great success there with many people from other significant competitors wanting to come to work for JupiterImages. We've done all the sales recruiting, interestingly, without any third-party recruiters. So there has been a real desire for other people in the industry to join JupiterImages.

We've also expanded the technology staff adding more technology people to add further enhancements to JupiterImages.com and other websites that we have to help sell images. Those are probably the two larger drivers of the cost increase, being driven by personnel in the first quarter.

Chris Baudouin also mentioned somewhat of a shift in the mix of images sold in a quarter. This is an area that is difficult to predict with certainty as we go forward over time we would expect to sell more and more of our own wholly-owned images. This helps to improve margins because we're not paying out royalties to third parties.

But some of our collections, even our own directly-owned brand collections like FoodPix; within FoodPix, while we own the collection we don't own all the rights managed images within the collection. That is a collection as an example that our sales team has been very effective selling in the first quarter.

Going back a couple of quarters ago Getty was the exclusive distributor, we didn't have access to it, so this is something that our team has only recently had access to. But as sales of a brand collection like FoodPix have picked up there are still some third-party royalties related to those sales. Over time we would hope again that even the mix within FoodPix would include more wholly-owned images. So there can be a little bit of a change from quarter to quarter based on the mix of images sold -- wholly-owned versus third-party trade -- but going forward we would expect improvement there.

So these are some of the types of costs that are factored in as we go forward. I do believe that there is some conservatism in the model. We have not fully modeled costs that I would expect to be rationalized. With the many acquisitions that we have done, you can imagine that there are different technology systems, there are different accounting systems, different fulfillment and distribution systems.

We've been, I think, pretty efficiently and rapidly consolidating all these but it doesn't happen overnight. So there are other costs to come out of the model that we would expect to come to fruition in coming quarters here.

Your second question, Alan answered the third, I answered the first. I'm sorry I've now forgotten your second question.

Aaron Kessler - Piper Jaffray

Second question, the guidance still appears to be back-end weighted here. What is the confidence level at this point that we can get to those higher type of margin levels?

Chris Cardell

That is a correct statement. The guidance certainly contemplates growth as we go forward. We're in business to grow. If not I don't think we'd be here. We are confident with these numbers. We just published them and again the revenues are always more difficult to predict with certainty. As I just went through giving some of the examples on the cost side, I do believe that those are our costs if we execute properly and I believe we have in the past, and we will continue to. We will prove to be conservative on the cost side here.

Chris Baudouin

Let me add a little color too on the back end and if you check you'll see I believe I said the same thing at the last conference call. That is obviously Getty images was a distributor of many of our products and no longer is, but they all fell off or were withdrawn at various periods of time. Effectively as of the 15th of January of this year Getty was no longer selling any of our content.

But from our experience from the middle of last year to the end of last year where various royalty-free product lines were withdrawn from Getty at various times, it takes about five to six months for our sales team and our direct sales to equal if not surpass the Getty numbers. That is the reason why we're particularly back-end loaded.

The rights managed, particularly the rights managed properties and one royalty-free line called Brand X which we bought from PictureArts wound down with Getty as of January 15th. So obviously we take a hit for early on. Then as the market becomes more and more aware of these great brands are only available, in most cases, from JupiterImages directly and the word gets out with the sales team, with the promotions, we more than make up the Getty shortfall.

We may not sell as many units, but of course in many cases we're getting a much bigger percentage on each sale. So that is the reason why it is loaded into the second half.

Aaron Kessler - Piper Jaffray

Great. And can you clarify on that COGS line, is the direct sales force being recognized under COGS or sales and marketing? I thought it would be sales and marketing.

Chris Baudouin

Sales and marketing.

Aaron Kessler - Piper Jaffray

Its sales and marketing you said?

Chris Baudouin

Yes, the sales and marketing and the sales staff are in the advertising promotion and selling line.

Aaron Kessler - Piper Jaffray

Okay, thank you.

Operator

Our next question comes from Jim Friedland, Cowen & Company.

Jim Friedland - Cowen & Co.

Thanks. First question is just on the image library. About what percentage of your images revenues are coming from owned images versus distribution?

The second question is related to acquisitions. It seems like the majority of acquisitions you are making now are incremental to just invest in new areas and beef up some existing areas.

Are there any other, is there potential that there are any big acquisitions on the horizon or is it really going to be organic revenue that we're going to see become more and more of the incremental growth for the Company at this point?

Alan Meckler

I don't believe we have broken out at tip of our tongue here the answer to your first question. I apologize on that. In terms of acquisitions you are correct but there are opportunities still.- I'm not sure how we would define large in our history over the last three years. Our acquisitions have ranged from a few hundred thousand dollars to roughly $65 million. Obviously I don't think there are a lot of $65 million properties out there right now that we would be interested in. But there are certainly a reasonable number of content buys that we could make. But certainly the number will slow down. We're always looking for an opportunity and don't forget we aren't just images, so I'll just leave you hanging on that.

Jim Friedland - Cowen & Co.

Okay, sure. Thanks.

Operator

Our next question comes from Joe Maxa, Dougherty & Company.

Joe Maxa - Dougherty & Co.

Thanks, my questions are also on the operating line here. Chris, can you give us a breakdown -- I think it would be in the 10-K -- of where the stock-based compensation expenses break out?

Chris Baudouin

It will be in the Q, but roughly, I don't have the numbers in front of me, but roughly 761; its 400 to 500 in the G&A and its equally split among sales and ad promo for the remainder.

Joe Maxa - Dougherty & Co.

Okay, that is helpful. The effective tax rate you are modeling 40%. Is that going to be both before and after stock-based comp?

Chris Baudouin

Yes.

Joe Maxa - Dougherty & Co.

Then lastly, I just wanted to talk on the subscription revenue. How much was that during the quarter?

Alan Meckler

I'm not sure we have the specific answer but I think we've been saying on an annualized basis our subscription business is around 35%, probably going north.

Joe Maxa - Dougherty & Co.

Any sense on what percent of your images revenue is directly related to online websites?

Alan Meckler

No, and we don't do that. Also particularly in the rights managed in the higher level royalty-free oftentimes buyers come in, do all they are work online and then still want to talk to a salesperson; whether the sale ultimately is verbally done or online sort of clouds the issues. So I don't know if that is really a valid point in terms of what you are angling at.

Although I would say this, that the subscription business and the micro payment business is virtually 99% or higher totally frictionless and that is why we think we are poised better than anybody else as the online age gets more and more steam to really benefit in those businesses where the gross margins are much higher and where we're probably growing faster than any other part of our business.

Joe Maxa - Dougherty & Co.

Right, right. And the last thing on the margins again. What are your expectations, how do you see your gross margins ramping as well as your operating margins? I think they're in the numbers but --?

Alan Meckler

You know, I presume you are really talking about images and not the whole company because obviously we do have another division here. So I presume you're only talking about images or I should say the digital content, is that correct?

Joe Maxa - Dougherty & Co.

Yes.

Alan Meckler

I mean we did say that in the last quarter and quarter before that, but I know on the last conference call I brought up the fact that in the first and second quarter, particularly the first quarter, that while we had moved up on the operating margin side that we would take a step backwards. Particularly because of the number of people the total of 30, that obviously operating margins for this division would be impacted and they were.

Operating margins, we do believe over a number of quarters they will continue but they will go up; with a quarter here and there where they either stay constant or go backwards. But certainly for the period ending March 2007, first quarter of next year, we believe that it is something in that mid-40s is certainly a reasonable number going north.

Joe Maxa - Dougherty & Co.

Okay, thanks a lot.

Operator

Our next question comes from Jeff Shelton, Bleichroeder.

Jeff Shelton - Bleichroeder

Another question on the gross margins. If I heard you correctly, Chris, in the first quarter the sequential decrease was due mostly to mix rather than pricing? I just wanted to verify that.

Chris Baudouin

It was due to the additional IT and content personnel costs as well as mix. Those were the two primary components.

Jeff Shelton - Bleichroeder

And in the second quarter you mentioned you matched some pricing, so we could see a little bit of a squeeze on that in the second quarter, is that correct?

Chris Baudouin

I didn't say that. I'm not sure.

Alan Meckler

No, I wouldn't suggest that.

Jeff Shelton - Bleichroeder

The 12-month forward guidance is an interesting concept. Can you help us with the transition in understanding how things have changed for full year '06? Has your thinking on the core business changed at all and what affect does Stockbyte represent there? Thanks.

Alan Meckler

There are a whole bunch of things there. Stockbyte is an excellent brand. We congratulate Getty on acquiring it. Obviously we no longer sell it. It was one of our better sellers. We were certainly one of the bigger, we believe, the second biggest distributor after Getty in the world. So it definitely is something we wouldn't have minded continuing to sell, but we don't have it anymore.

On the other hand, it represents certainly in the first quarter a little bit and certainly in the second quarter, several hundred thousand dollars of revenue which we believe will make up with our own brands as we move them higher up in the search rankings. Again these are brands that are royalty-free that we own, for the most part, 100%.

So it's certainly a modest speed bump but nothing that impacts us greatly beyond a quarter. But certainly in the second quarter we would certainly have to make up several hundred thousand dollars of net revenue to us. What were the other parts of the question?

Jeff Shelton - Bleichroeder

Sure. Just has your thinking on the core business changed at all for full year 2006?

Alan Meckler

No, not at all. In fact we are getting more and more aggressive, obviously, beyond just images. And as I say, I alluded to several announcements that will be coming in June through September. Investors and competitors will see these and I believe they will be definitely received well.

We are very, very excited by what we're building here. We think we have not only a great, great business line with a lot of dynamics, a lot of levels to serve all markets but also we have put together a fabulous team worldwide. So I think not only do we see very positive results for growth on the revenue side, but the integration is still early in the game.

You've seen one little tidbit today of how we've improved our tax rate. I think we can even do better on that. But we still see millions of dollars of integration costs that we can take out over the next 12 to 15 or 18 months. We see a lot opportunities not only on operations but also on the revenue side.

Jeff Shelton - Bleichroeder

Is it possible to get a number of subscribers that you have on your various web sites?

Alan Meckler

That is something we don't do. I want to stay away from that because the opportunity for misinterpretation depending on periods of the year, renewals and whatever and then you and up spending hours talking about that you're 50 here too high or too low or whatever. So unless mandated by our auditors, we are not going to get into our subscription counts.

Jeff Shelton - Bleichroeder

Perhaps some qualitative indications on which segments are doing the best?

Alan Meckler

I know of no subscription property that we have that is not significantly larger in the of subscribers today than it was a quarter ago or a year ago. I know of none

Jeff Shelton - Bleichroeder

All right, thank you.

Operator

Our next question comes from Steve Frankel from Canaccord Adams.

Steve Frankel - Canaccord Adams

Good morning. I wonder if you might tell us what the mix is between royalty-free and rights managed? And also between U.S. and international for overall revenue?

Alan Meckler

Steve, we're new to the rights managed game and I know competitive companies break those details out. I'm sure we will probably get to that but right now we don't do it. Mainly because we're still sort of growing and learning that part of the business. We're just not prepared to break that out yet. But I would say in round figures that royalty free probably 80% to 85%.

Steve Frankel - Canaccord Adams

Great. And revenue overall between international and domestic?

Alan Meckler

Probably about the same, but certainly international is growing in a very rapid clip. So I think at this time next year international will be a bigger piece.

Steve Frankel - Canaccord Adams

When you talked about on the images side having your organization fully staffed. Is that again focused mostly domestically or have you already put the bodies overseas so that you can grow that international piece faster going forward?

Alan Meckler

No, that is included. We grew out, we've added several people in Australia and in England. With the acquisition we made in France and Germany recently they came staffed, fully staffed. So we're in very good shape in France and Germany where we have obviously offices. Australia is pretty much fully staffed; if we're short, it's one person. In the U.S. I would think that we would add over the rest of the year as many as five to 10 more salespeople. We still are adding some IT people. I think over the last six months we've added 10 IT people. I would imagine we will add another 10 to 12 over the course of the year.

Steve Frankel - Canaccord Adams

Great, thank you.

Operator

Herman Leone, Deutsche Bank.

Herman Leone - Deutsche Bank

Hey, guys. Hi Alan. Thanks for taking my call. Just a quick question on how much share you think overall the subscription in micro payments business will take in terms of overall industry-wise?

Secondly, you didn't break out the mix between wholly-owned images and third party. Just trying to get a sense of that, is that typically more than half or is there a target mix that you guys are kind of going after?

Lastly, I think the previous caller asked about this. The trends that you are specifically seeing in terms of RF in North America in terms of the volume in pricing base? Thanks.

Alan Meckler

I can take the first and the third and -- if we remember all this -- Chris will take the second one. The first question you're asking is extremely difficult to answer because again it is uncharted waters. I do think that there is danger to the higher end of the market, though there is no question about it. Because I think that not only is there a whole new type of buyer that is coming in, as I mentioned on the web, but clearly you are seeing a dabbling of some of these types of properties; whether they be defined as subscription or micro payment by the biggest and largest image buyers. I think I hopefully have answered that. If not, let me know.

On the third question, I do believe that the ability to create royalty free photography today, well any type of photography, is so minimal and so easy that the number of images that will be coming into the marketplace and perhaps even in ways that we don't know yet today, but I try to think out five years, it has to have a major impact on the higher end of the business just for sheer volume.

I mean ultimately if you had 10 million new photos that came out on a variety of websites it would be a lot of really bad stuff. But if someone can wade through with the right kind of search, there could be some real gems. If just 1%, 2% of 10 million are really good, you can see what the affect would be if on average they cost $20 or $2 or $3 whatever it might be.

Don't forget too that these prices we're throwing out are based on resolution. You can't do very much with a 1 MB resolution image except use it on a websites. Certainly you start have to get up to 28 MB or more before it starts to be interesting in print.

So there are a lot of nuances here. But the implications are enormous to any company that doesn't know how to move with the speed of the PT boat.

Chris Cardell

In terms of your other question on the mix of images between wholly-owned and third party, I would suggest that the wholly-owned sales are probably in the range of 65% to 70%. Again, wholly-owned would be manifested within subscription sales, with indirect sales by our own sales team, and as well as third-party distributors selling our own wholly-owned images. The remainder, approximately 30%, 35% would be sales by our sales team of third-party collections.

Herman Leone - Deutsche Bank

Great, thank you.

Operator

Our next question comes from Brian Stansky, Integral Capital.

Brian Stansky - Integral Capital

Alan, can you talk about pricing and what that is like year-over-year when you look at kind of the same business, same images?

Alan Meckler

Pricing, again, it's hard to have a blanket statement. Right now trends on the higher end images, prices have gone up over the last few years. I'm not sure that is going to continue much longer.

But again there is a constant tinkering that takes place. Our model is a lot different than our competitors. We're not married to any segment. We have tremendous flexibility to go in a lot of different directions.

For example, we have a subscription program called JupiterImages Unlimited that is unlike any program anybody has in the world. These are the highest resolution images, most are wholly-owned, and JupiterImages Unlimited right now there are close to 450,000 wholly-owned, high-level top-of-the-line, royalty-free digitized images. That product alone has more wholly-owned than our competitors combined own as far as I know.

But one can subscribe to that at high resolution for a $10,000 seat license and then additional seat licenses are offered at lower levels. You can get it at a medium resolution or a lower resolution. As far as my thinking, this may be the future of royalty free, high-level sales. Maybe there will be a day where there won't be any single image, that everything will go subscription.

If it goes that way, we are poised, we are ready to handle it. If single image is still a very vibrant and valid business, and I'm not suggesting it won't be, then we're very strong there too. If it ultimately goes the way of everybody buying images for $5, well everybody's going to be impacted but we think we will be least impacted than anybody else in the world.

Brian Stansky - Integral Capital

Just one follow-up. The sequential drop in the margins in the imaging division, can you attribute how much of that again is mix versus cost that were added in so are now effectively part of the new fixed level of cost? Because it's a meaningful jump relative to what we've seen in the past and I don't know how much acquisitions or anything else added into that also.

Chris Cardell

This is Chris Cardell. Certainly acquisitions added a modest amount. The biggest driver would have been personnel that we proactively hired to, particularly on the technology side, to help build out and improve our systems. To a lesser extent something like the mix would have impacted it.

Again that is the harder item to predict. We can predict when we hire people. We can't predict selling one image versus the other image. So we're not breaking it out specifically, but the largest part of what we described would be personnel for technology.

Brian Stansky - Integral Capital

Okay, thank you.

Operator

Our next question comes from Matthew Troy, Citigroup.

Matthew Troy - Citigroup

All my questions have been answered. Thanks, guys.

Operator

Our next question comes from Peter Treadway, Tracer Capital.

Peter Treadway - Tracer Capital

Hi guys. One question for you. Do you have any sense as to whether large agency buyers are coming to your site via Google or via Yahoo!? Are they starting with a search there and then going to a site? Or are people coming directly to your site? Just to get a sense as to how reliant the image business is on the search engines.

Alan Meckler

I don't believe that high-level image buyers of which what's been bandied about to me -- again, I've only been in the business three years -- is that there are 4,000 large image buyers around the world. I don't think any of them find us or anybody through -- I don't think they search on Google and Yahoo! or anyplace else. They certainly know the larger brands in different countries. They may have different distributors that they go to rather than directly to a company's web sites. So hopefully I have answered that part.

As to coming to JupiterImages.com, again I think that if you look at they way we're constructed, JupiterImages.com, the best way to understand it in terms of the industry is the equivalent of let's say Gettyimages.com. It's the highest level of imagery that we have. We don't offer clipart there, we don't offer flash movies there, we don't offer flash components, we don't offer royalty-free music. You won't to find that. In fact there aren't any links to it.

But what we also are building out, and you'll see soon, is another portal through our Graphics.com which right now is not eCommerce enabled, where one really will be able to buy anything they want from the lowest level to the highest level. That is where search, either for the specific brands or specific divisions which will stand by themselves.

If you want to all of a sudden find royalty free music or if you wanted to find flash movies or if you wanted to find clipart, or if you wanted to find animations and other things that we're moving into, that is where Getty and Yahoo! and other search engines are incredibly valuable. That is what we think we're better in organizing and attracting than anyone in the industry.

That is one of the reasons why we are so bullish and excited about our future because we think that a lot of those other properties beyond just the higher level images is where the greatest growth is going to come from.

Peter Treadway - Tracer Capital

Thank you.

Operator

Gentlemen, there are no further questions at this time.

Alan Meckler

Thank you very much for your questions, for following our Company. We look forward to seeing you in about three months.

Operator

That does conclude our today's conference call. Thank you for your participation. You may now disconnect.

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