Getty Images Q3 2006 Earnings Call Transcript

Getty Images, Inc. (GYI)
Q3 2006 Earnings Call
October 24, 2006 5:00 pm ET

Executives

Alan Pickerill - Director, Investor Relations
Jonathan D. Klein - Chief Executive Officer, Director
Thomas W. Oberdorf - Chief Financial Officer, Senior Vice President

Analysts

Troy Mastin - William Blair & Company
Peter Appert - Goldman Sachs
Steven Ashley - Robert W. Baird & Co.
Aaron Kessler - Piper Jaffray
Christa Quarles - Thomas Weisel Partners
Frederick Searby - JP Morgan
Stanford Nishikawa - Citigroup

Presentation

Operator

Good day, and welcome, everyone, to the Getty Images third quarter 2006 earnings 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 Director of Investor Relations, Mr. Alan Pickerill. Please go ahead, sir.

Alan Pickerill

Thank you, and welcome, everyone. Following this call, a telephone replay as well as a webcast will be made available. Information on both is available on our website.

As always, some of the statements made on today’s call are forward-looking and are based on our best view of the world, and our business as we see it today. Of course, those statements can change as the environment in which we do business changes, and we would ask that you view all of our comments in that light.

For more information on factors that may affect our future performance, please review our filings with the SEC. In particular, our annual report on Form 10-K for 2005, and our quarterly reports on Form 10-Q.

We currently do not intend to update or revise these forward-looking statements until our next quarterly conference call.

As always, we will allow time at the end of the call for questions, and in order to cover as many questions as possible, we ask that you limit yourself to just one question. If you have additional questions, we are happy to follow-up with you after the call.

Joining us we have Jonathan Klein, Getty Images' co-founder and Chief Executive Officer; and Tom Oberdorf, the company’s Chief Financial Officer.

I will now turn the call over to Jonathan Klein.

Jonathan Klein

Thanks a lot, Alan, and good afternoon, everyone, and thank you for joining us on the call today. It is clear that 2006 has been disappointing, and the third quarter is no exception. I am going to spend more time than usual on the call today.

I will discuss the changes in the media, advertising, and publishing industries -- that is our customer base, after all -- and the impact of these changes on the visual content industry.

We have spent most of this year looking very closely at two matters -- the impact on our customers over these industry changes and the different ways and places in which imagery is increasingly being used.

As a result, it has become clear that now is the moment to embark on the next generation of Getty Images. We have always anticipated change and led. Getty Images is not shy in staying ahead of and exploiting change. Our history is proof of this -- the future will be no different.

Of course, I will begin the call by talking about our results. I will then spend the rest of the call on the future, how we are organizing around our vision, and where we are making investments for the long-term health and growth of this business.

Let’s kick off with the quarter. In the third quarter, revenues grew 5% on a currency neutral basis. A decline in volumes for our creative stills products was the chief cause of this pedestrian growth rate. Our other products all did great. However, let’s not fool ourselves, and remember that creative stills accounts for 79% of total revenues, with a result that our focus is on this area of our business.

I will touch briefly on editorial imagery, film, iStockphoto, and some of our newer products and services, all of which are doing very well. But you do not want to hear about that, so let me dive straight into creative stills.

Creative stills revenue grew 2.5% on a currency neutral basis in the quarter. We had year-over-year decreases in volume for both rights-managed and royalty free, with volumes of single images -- that is from our company-owned offices on the channel -- declining about 1% for rights-managed imagery, and 4% for royalty-free imagery. The average price for our rights-managed imagery was down about 3%, and this was primarily due to mix, while the average price for our single image royalty-free imagery was up over 6%, as the quality of our royalty-free imagery continues to improve.

It is worth stressing very clearly that price is not the issue today and price has not been the issue throughout the year for both our rights-managed and royalty-free products. It is volume that is the issue.

This is certainly not the first time in our history that we have seen volume declines for either royalty-free or rights-managed imagery, or both, for that matter. For example, in 2004, our royalty-free volumes were down year over year for three full quarters, and also for the full year. We have also seen many, many periods in the past where rights-managed volumes were down for long periods of time.

In the quarter, single image volumes -- and in fact, throughout the year, single image volumes have been suffering for three main reasons. Firstly, there are more alternative licensing models and more sources of imagery than ever before.

Second, the image purchasing patterns of our customers are changing. Look no further than iStockphoto for evidence. Volumes for our user-generated content business have been extremely strong, and higher than even we had anticipated.

The third factor, which explains the volume declines, is that the business of our main customers, advertising agencies, corporations -- in other words, advertisers -- publishers and the media are all in transition due to the advent of the digital economy, whereby the Internet and other digital platforms are providing advertisers and communicators with new and varied ways to do what they have always done -- advertise and communicate.

These factors, as well as an increase in traditional competition, are driving the trends in our creative stills business today.

We have a plan to exploit these trends and benefit over the long-term. Further good news is that these changes provide ample growth opportunities for the use of visual content in new and interesting ways.

Now, even in an environment with lower volumes and slower revenue growth, we are going to make the investments required to grow the business. However, we can make these investments extremely efficiently, thus keeping expenses very tight in this period of slower growth. Remember, we have done this in the past.

So how will we do it now? Firstly, by reallocating resources so that we are investing more in areas that have the highest opportunity for growth. Secondly, by doing something we have always been very good at -- being extremely cost-efficient and ensuring that our expense run-rates are appropriate, given the top-line growth rate of the business.

Now, there has been some speculation in the last few days about the scale of recent staffing reductions. I want to say that these reports are inaccurate and exaggerated -- so exaggerated that it was reported somewhere that we have abolished our sales force in New York. New York is an extremely important market for us, one where many of our customers are located -- in fact, the third largest of all of our offices, and of course we will continue to have a very significant sales presence in New York.

With all the investments that I am going to describe to you, we still expect SG&A to be about the same level in 2007 as in 2006. This business remains highly scalable, with a wonderful business model, and intrinsically strong operating margins.

As you know, we also have high gross margins and we expect this to continue. This is important, as we want to set the table for strong results once the revenue growth rates return to higher levels, and they will.

Time does not allow me to get into too much detail, but I think it is important for me to point out a few of the initiatives that we know will assist in growing volumes and our overall revenues. Some of these will have an impact in the short-term, others in the medium-term, and some in the longer term.

To begin with, we are about to launch our dynamic new website. This is huge. More on it in a moment.

Moving on, there are going to be changes to the sales force, and let me go through these.

A key initiative at Getty Images in 2006 was and remains to build a world-class selling organization. This requires change to align ourselves with how our customers’ worlds are changing, so we are assigning specific sales representation to every customer account that is included in the top 80% of our revenue.

The more business customers come to rely on the web for transactions, the more they want to have a specific account representative. This may be different in the consumer space, but in our world, the web provides extraordinary operating leverage, yet at the same time, requires a good degree of touch with the most important customers.

As you know, significant amounts of our business and our revenue will remain totally unassisted by salespeople.

Furthermore in sales, we are increasing the number of market development executives. These are what we call feet-on-the-street. We plan to increase this number significantly. We will be there for our customers, and physically closer. More feet-on-the-street in more cities and more countries will improve relationships and bring us closer to the customer.

Again, notwithstanding these changes, we are able to continue to drive high margins in what is a business, and a business model, with very high operating leverage.

Also in the sales area, we will redouble our efforts in the sales creative partnership, which has proven highly effective in reaching customers. This is an approach that we think we are uniquely positioned to use.

Finally, under the heading of sales, we have already underway a major and aggressive new approach to gaining much more share from our most important customers. This approach involves many different components, features, and offers. However, given the open nature of this call, I will limit my remarks in this area.

We are also making changes in marketing. Marketing will, like sales, be aligned to customer segments to ensure that customer needs are driving our product, our marketing, and our communications plans and decisions. This is the first time in our history that marketing and sales are both aligned in this way.

Marketing will also move one more step closer to regionalization, with more budget and autonomy sitting in local markets. That is also where the customers are.

Paid search works. We will spend much more next year on paid search.

On the product side, we are planning a major increase in product enhancements and product development. You saw that we launched a new licensing model during the third quarter. It is called rights-ready. Rights-ready and its first collection, Riser, was based on feedback from our customers, and has been received enthusiastically by them, with revenue expectations being exceeded.

We will continue to evolve licensing models, and have plans for at least two more licensing models to be launched in 2007.

On the new product side, we have many in the works. A number of new products will be coming out. I will touch on some of them later in the call, but again, given the open nature of this call, I will limit my remarks in this area.

Another important thing in order to address what is happening in our business is the matter of international growth. We continue to do very well in our quest to get more of our business outside the United States. People sometimes think that I am only referring to our editorial imagery business in this regard -- far from it. There will be a further major push internationally in the creative stills business, both through company-owned offices as well as through indirect sales, and remember, we sell indirectly through delegate agents as well as the channel.

The final initiative, which encompasses many others, is content and sources of content. I will cover this in much more detail in a moment.

When I kicked off and talked about the reasons for the slowdown in our creative stills business, the first thing I mentioned was alternative models for licensing and creating content. We are extremely fortunate to own the market segment leader and inventor of the micro-payment model. iStockphoto is doing just great. Customers downloaded 2.5 million images during the quarter. We launched three new language versions of the website. We also incorporated the industry-leading Getty Images meta data and search into iStockphoto and, just for good measure, also launched our film product, iStockvideo.

The business is exceeding our expectations, and what I am most excited about is that we have not even really got started, as we only bought iStockphoto eight months ago.

To touch on some of the other parts of our business, just to remind you, to date I have basically focused on creative stills and touched on iStockphoto. I want to talk a little bit, very briefly, about the other parts of our business.

Our editorial imagery product, news, sport, entertainment, and archive imagery grew 15% currency neutral in the quarter. It represented 13% of total revenue. This percentage will grow and grow over time, as we see opportunity and potential here. There continues to be wonderful execution and impressive growth in this relatively new area of our business. Within this segment, or within this area, entertainment continues to lead the charge, with currency neutral growth of more than 50%.

In film, we continued to build out the content offering and added three significant content partners during the quarter, including Dick Clark Productions, Discovery Footage Source, and AP Archive. Film grew 15% currency neutral, and represented 5% of our total revenue in the quarter.

Finally, the newer products, like asset management, assignment services, our exclusive offering, and also our publicity distribution platform, all did very well.

In the interest of time, I will leave expenses to Tom, but just two points here. Our gross margin improved over Q3 of last year, and SG&A expenses decreased significantly compared to the second quarter of this year. We told you last quarter that these expenses would go down, and we had a very good performance here. Tom will address all the details in his comments.

That is a very quick review of the business in the quarter, and some of the actions that we are taking to reinvigorate our business.

Now, I would like to talk to you about the vision for the future.

Our industry is in a state of transition, much in the same way as it was when we founded Getty Images in 1995. Eleven years ago, we anticipated change at a time when few saw it coming, or few were prepared to recognize it. We backed our conviction and thereby created a business and a model that truly revolutionized our business, the workflow of our customers, and the entire visual content industry.

Today, I am excited to unveil our new vision for the future. This vision is as exciting, as innovative, and as bold as anything that we have done in the past. Our financial objectives are to manage aggressively through this transformation, minimizing expenses, thus setting the foundation for a new stage of growth. I can speak for my colleagues when I say that we are all excited, energized, and driven to execute this vision.

The changes are being driven by two major factors -- technology and a marked shift, or marked shifts, in fact, in customer behavior. These factors apply to some degree both generally and in the use of imagery. They are beginning to change our industry and, more importantly, are beginning to change the way the customer segments we serve work.

For the last year to 18 months, I have given a number of talks, internally and externally, about four key trends that are driving these changes. I do not expect you to have memorized them, so here is a quick reminder:

1. Broadband and other key technology adoption is driving the growth of new communications platforms. This trend can only go in one direction -- faster;
2. The advertising, publishing, and media businesses are changing; once again, the pace of change is accelerating. Remember, this is our customer base;
3. Imagery will surpass the written word as globalization transforms the way the world communicates, yet again a trend which is accelerating; and
4. We live in a novelty-driven economy, like it or not.

What is important for us and you to note is that all of these trends contribute to an overall greater use of imagery, and create new models of image consumption. Ultimately, this represents long-term opportunity for us and our industry.

What is also important is that some new trends are beginning to emerge. Some of these are at relatively early stages, but we feel that now is the time for us to take action in relation to these trends.

In our industry, market power is shifting from control of content to control of distribution. I could speak for a very long time about this issue, but will be pretty brief now.

The first thing I need to assure you is that the market for quality imagery, high-end imagery, high production value industry, is not going away -- far from it. However, we need to recognize that much of today’s volume growth is driven by the advent of the web and other platforms, and also by the fact that customers have many choices as to how to source and buy their imagery.

The second important trend, again in the relatively early stages, is that images are being used differently. We live in an increasingly digital world, and the eyeballs are increasingly on digital devices of all types. It is inevitable that imagery will over time be used more and more on the devices where the eyeballs are -- in other words, on these digital devices.

We also need to recognize that the volume and the value of images on the web and other digital devices are significantly different from similar images in print.

The third trend, which applies to all industries, but is very significant to us, is that customers or consumers have much more power than ever before, and they will demand still more in the future. We are living in the age of co-creation. The digital revolution has shifted information as well as, in our industry, and many others, some content creation, to customers. Once this occurs, there is an inexorable and irreversible shift of power towards customers.

The fourth trend is that regionalization is becoming increasingly more important than centralization. Let’s look at that in our industry. We are already the global leader in imagery. We have been for a very long time, but our strategy has always been to go further. We not only want to lead globally -- we want to lead at every price point on every platform and to be the leader in every geographical market. The overall trends towards regionalization and the enormous opportunity here makes it essential for us to accelerate our existing assets in non-English speaking markets.

These are all important trends driving changes in our industry and our business, and our strategy exploits these trends in order to continue to lead the market.

As I said right at the beginning, our strategy divides into two areas: an obsessive focus on customers and innovation. On the customer side, remember they have the power, and our complete focus will be to give customers the right imagery at the right price with the maximum convenience, flexibility, and value, and of course, the service and solutions that they demand.

All the changes we are now making, some of them are far too detailed to talk about on this call, but all the changes bring us closer to our customers. All the changes bring our customers closer to the content they need and of course, offer that content in ways that work best for them.

It will also be increasingly important to source and produce imagery in ways which reflect the speed of this new world. Stellar distribution, which we already have, combined with solution-based approach and strong relationships with customers will be the key to the future.

Our new website, as well as the changes to sales and marketing that I have already discussed, and some that I will touch on in other areas of the business in a moment, goes a long way to achieving these objectives.

As I pointed out at the beginning of this talk, which probably feels like a long time ago, the future will be characterized by growth -- growth through a continuous innovation and growth by being customer-centric.

At the end of each year, we look forward by setting our key initiatives for the next year. We normally do that at a leisurely pace in December. We outline for those of you at analyst day. This year, I want to share these with you now, as they point to what we are doing and what we think is most important.

Our key initiatives for 2007 have been set, and they are as follows:

• Exceed customer expectations with the new gettyimages.com;
• Drive extensions and enhancements to current products and services;
• Drive our film product;
• Monetize our significant assets and traffic beyond the pure image licensing business; and in no particular order, but finally
• Evolve and grow iStockphoto aggressively.

Let’s spend a few moments talking specifically what we intend to do under each of these initiatives.

The first one was, and is, to exceed customer expectations with the new gettyimages.com. Our new website will be released in a public beta version very soon. We have long been the leader in technology and tools that help our customers find images that they need. Any searches, any discussions, any focus groups with any group of customers will tell you today that our site leads the industry. We are way more excited about our new site, which will further extend that leadership position.

I want to stress that from a technological perspective, the new website is the foundation for many, many future innovations, which of course I will not share with you today.

What we do look forward to doing is showing you the website very soon. We know that the many customers who have helped us develop it and looked at it are completely blown away by it, and we know that the customers who get to see it soon will feel the same way.

We also know, as we know a thing or two about this business, that this will in turn lead to higher revenues.

The second key initiative I mentioned was to drive extensions and enhancements to current products and services. This really entails much of what I went through earlier in some detail, in regard to reinvigorating our creative stills product, but it also has relevance for specific activities which expand our editorial imagery and film businesses.

These include innovations in new products, new licensing models, special offers and services for certain customers, partnerships, which we are in the middle of discussing and negotiating, and also additional international offerings, both through our company-owned offices and through the channel.

In addition, there are a number of things that we are going to do to add to the value proposition for our customers. I do not want to give too much away, but to give you an example, this may include the creation of pre-designed templates that customers use quickly and easily to create still and moving advertising content. We see opportunity for these in visual web advertising, print advertising, as well as in multimedia applications for the web.

Customers will be able to license these templates and then add specific business related content for quick, easy, and cost affordable creation of advertisements. That is just a taster.

The third key initiative is to grow our film business. Film carries enormous opportunities for future growth, but let’s not forget in all the noise that we are by far the leader in the stock footage market segment, and we have plans to extend that lead. Today, we are formally announcing that we will significantly increase the investments that we are making in our film business in three main areas to drive growth much more aggressively.

First, we will move to a purely digital workflow. Today, many customers search online for our film clips, and upon purchase, receive those clips on hard goods, tapes or CDs. In fact, a tiny fraction of what we have available is even on our website, and we know that as more and more video production goes purely digital, and as the bandwidth for delivery continues to expand, as well as the software for working with film, the workflow for our film clips will get better and better, making the use of film clips a quick, seamless, and easy process.

Let’s remember that we invented this workflow process for still imagery. We were the first people to sell an image on the Internet, and we will do something very similar with film. We will get thousands of new clips onto the site every week.

Secondly, we will continue to build our content. You saw the three significant content deals that we signed for film this quarter. In addition, we added three royalty-free film collections to the site just this last weekend. You should expect us to continue to build out this content, so that we have a broad, deep, and extremely high quality offering for our customers and, of course, our prospective customers.

Thirdly, we will continue to educate the market and prospective customers about how the use of pre-shot film clips can save them time and money for their projects.

The fourth key initiative is to monetize our assets and traffic beyond the image licensing business. Getty Images is a respected brand and a trusted partner, and this represents significant opportunities to align in many ways with other respected brands. We are going to staff and fund our business development team to ensure that we can leverage these opportunities, and you will hear more about this over time.

The fifth key initiative, and this may or may not surprise you, is to evolve and grow iStockphoto aggressively. It is my belief that the imagery market is underestimating and certain competitors are ignoring the potential of the micro-payment model and the user-generated content for commercial use. Consumer or user-generated content is extremely important. What we can do, better than anyone else, is to make the user-generated content available and easy to access for business users and safe for commercial use.

Remember, with iStockphoto, we have taken social media or user-generated content and given it an e-commerce face. That is where our revenues come from, not from advertising.

Volumes are strong and growing for iStockphoto, and we are expanding the business every day. I talked earlier about everything we have done in the short eight months since we have owned the business. We have so many opportunities to evolve this business over time, and you may have to wait to find out a bit more, but what we have done in the eight months so far is an indication of how we feel about this business and the fact that, as I said a moment ago, we have not really started.

So all these changes clearly require reallocation of resources out of certain areas and into others. This is already underway. We are ahead of the curve and the company is in the right shape and the right size for this new, evolving world. The strategic shift in our business will allow us to remain on the top of our industry, but importantly, will also position ourselves for higher growth over time.

I make no apology for the fact that these changes are comprehensive and significant. I also know that the end result will be a company that looks much different, and positioned to achieve much more than we have today. This is no different from the fact that Getty Images today is much different from the way it was five years ago and 10 years ago.

For some, change is quite scary. Not for us. We have profited from change in the past, and will do so again.

With that, I will turn the call over to Tom to discuss the quarterly results and to give you some guidance in more detail.

Thomas W. Oberdorf

Thanks, Jonathan. For the third quarter, we reported revenue of $198 million, up 7.4% over the third quarter of 2005, or 5.3% on a currency neutral basis. This quarter, 79% of revenue came from our creative stills imagery, which grew about 4.5% in total.

Rights-managed revenue, which represents approximately half of our creative stills revenue, was essentially flat year over year. Royalty-free represented the other half of creative stills revenue, and grew 9.1% in the quarter.

Rights-managed volumes for our company-owned offices and channel partners were down about 1%, while average prices were off about 3% compared to last year. These decreases in volume and price were offset by growth in rights-managed revenue, generated by delegates operating in countries where we do not have company-owned offices.

Single image royalty-free volumes for company-owned offices and channel partners were down about 4% compared to last year, with average price increases of about 6%. Royalty-free revenue also benefited from an increase in RF revenue generated by our delegates.

Revenues from what we call other royalty-free grew 46%, and represented 17% of total royalty-free revenue, compared to 13% last year. This includes revenue from CDs, VCDs, subscriptions, and micro-payment revenue.

Editorial imagery, comprised of news, sports, entertainment and archival imagery, grew 17%, or 15% on a currency neutral basis. Editorial imagery represented about 13% of third quarter revenue.

Film comprised about 5% of total revenue, and grew 17% during the quarter, and 15% on a currency neutral basis.

For Getty Images overall, about 48% of the sales were in the Americas, 44% in EMEA, and 8% in Asia-Pacific.

The average royalty rate for rights-managed imagery was unchanged at 34%. For royalty-free imagery, it was 15%, an improvement from 18% a year ago, primarily as a result of the acquisition of Stockbyte earlier this year.

For editorial imagery, the royalty rate increased to 27%, compared to 21% in the prior year, primarily as a result of lower margins on some of our newer editorial products. For film, the average royalty rate was 28%, relatively consistent with 27% a year ago.

Selling, general and administrative expenses for the quarter were $73.6 million, which includes $4.2 million of stock-based compensation expense. Excluding stock-based compensation, SG&A was $59.4 million, representing a decline of $4.6 million from the second quarter this year. We told you last quarter that these expenses would decline from Q2 to Q3, and indeed they did. The decline from last quarter represented reductions in almost every expense line, with the only notable exception being marketing, which we consider to be an investment opportunity.

Depreciation was $13.9 million for the quarter, compared to $11.8 million last year. The increase is primarily due to depreciation associated with wholly-owned imagery that we acquired recently.

Amortization of intangible assets was $5.5 million, increasing from $2.7 million. This increase is due to the amortization of intangible assets associated with recent acquisitions.

In the third quarter, excluding stock-based compensation of $4.2 million, we reported operating income of $59 million, representing an operating margin of 30%, compared to $59.1 million, or 32% in the third quarter of 2005. We recognize the need to aggressively manage our expenses in times of lower revenue growth rates. In what we consider to be a disappointing quarter, we still achieved a 30% operating margin, which proves the strength of the business model.

Our effective income tax rate was just under 34%, which is lower than our effective rate in Q1 and Q2 of this year. This was driven principally by the settlement of certain tax audits and the release of the related reserves. In addition, the tax rate was also favorably impacted by an increase in foreign income, earned in lower tax jurisdictions.

Excluding stock-based compensation, net income was $40.5 million, growing 3% from the third quarter of last year.

EPS was $0.62, which included $0.05 per share for stock-based compensation. Excluding stock-based compensation, EPS was $0.67 per share, and grew 11.7% compared to the third quarter of 2005.

Cash provided by operations for the third quarter was $60.1 million. As indicated when we spoke to you last, capital expenditures have come down from Q2 and were $14.5 million in the third quarter. As a result, we generated $45.6 million of free cash flow, which is defined as net cash provided by operating activities, minus capital expenditures.

Remember, we became a U.S. federal cash taxpayer in 2006, and in Q3 alone, we paid about $14 million in cash taxes. Year-to-date, we have paid cash taxes of $51.7 million, compared to $12.5 million in the same period last year.

Year-to-date in 2006, cash provided by operations is $181.5 million, and free cash flow is $131.9 million. For the full year, we expect capital expenditures to be approximately $65 million, and we expect to generate approximately $170 million of free cash flow from operations.

Before I discuss guidance for the fourth quarter, I want to remind you that these forward-looking statements reflect our expectations as of October 24, 2006. They are subject to change and to risk, as mentioned by Alan at the beginning of the call.

For the fourth quarter of 2006, we expect revenue of approximately $196 million, and diluted earnings per share of approximately $0.60, excluding approximately $0.04 of expected stock-based compensation.

For full year fiscal 2006, we expect to report revenue of approximately $800 million, and diluted earnings per share of approximately $2.57. Full year earnings per share guidance excludes approximately $0.16 per share for stock-based compensation, and a total of approximately $0.25 per share for the loss on sub-leased property in New York and the loss on the sale of short-term investments, both announced in the second quarter of 2006.

As a result of the realignment of resources, we expect a charge of approximately $5 million in the fourth quarter for employee related costs, and a possible additional charge for consolidating certain office space of approximately $4 million. Full-year and fourth quarter guidance excludes these charges.

Company guidance assumes approximately 60.6 million fully diluted shares in the fourth quarter, and 61.7 million fully diluted shares for the full year.

We have not yet completed our budgets for 2007, and plan to give you more information about our view for 2007 on our analyst day in February. For now, I would like to give you some of our preliminary views.

Clearly the trends in the industry were having an impact on our business in the near-term growth projections, and as such, we are forecasting slower growth in 2007. For 2007, the company expects revenue growth in the mid-single-digit range, and growing in earnings per share of at least 1.5 times the revenue growth rate.

Expectations for 2007 are currency neutral and exclude any revenue and expenses that would be obtained through acquisitions, should they occur.

In times of lower top-line growth, we must actively manage our expenses so that we can deliver appropriate returns to our shareholders. At this level of revenue growth, we would not expect any increase in SG&A.

With that, I will turn it back to Jonathan to wrap up.

Jonathan Klein

Thanks, Tom. I had actually drafted a few comments to wrap up the call with, but in the interest of time, what I would like to do is turn the call over now to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will take our first question from Troy Mastin from William Blair and Company.

Troy Mastin - William Blair & Company

Good afternoon, thank you. I am curious about your guidance. You have not been particularly good lately in hitting your targets, and you have brought down your outlook for the fourth quarter pretty substantially, and ’07 looks quite a bit below where we have seen in the past, so I am curious how you have approached the guidance process differently, if at all, and what you could maybe tell us that might make us feel that there is a little more conviction -- maybe not conviction, but you might feel better about those targets than you have in the past?

Jonathan Klein

Troy, that was a characteristic, masterful understatement in the way you characterized our performance against guidance during 2006. I would put it rather strongly. I would say that our performance against our expectations in 2006 was extremely disappointing, and the third quarter was no exception.

What we have done in relation to the fourth quarter, and this is the only period where we are actually giving you guidance. What we are giving you for 2007 is an early preliminary view, rather than what you would call technically guidance, but what we have done for the quarter is we have had a look out there. We have looked at September. September, as it happens, was a strong month, as many industry commentators have said in the last few weeks, based on their channel checks and talking to various folks, it was not as strong as people might have hoped. But it was a strong month. We have looked at our business in October. We have looked at trends in terms of price and volume. We have also factored into account that these changes are significant and will cause disruption in the business for a short period of time.

On the back of that, we have given what we think is our best view for the fourth quarter. As you also know, having covered our business for some time, that December is always a bit of a wildcard. By that I mean that certain years, business in December is very, very strong and in other years, people kind of go home in the middle of December and stop purchasing and things slow to something of a crawl.

Really, what we have done is we have looked at the business and we have given it our best view the way we see things today. You, everybody else, and in particular us would clearly like us to achieve this number. We have not had a good year in that regard, but we cannot see the future. It is our best view today in relation to guidance and the preliminary view which we have given you for 2007 is also the best view today.

Troy Mastin - William Blair & Company

How have you approached December, given its uncertainty or volatility versus past years?

Jonathan Klein

What we have not done is done this in granular detail month by month. I think what we do, as we always do in our business, is we look at run-rates. We look at run-rates per business day. We look at that by geography and by market. We compare it with prior periods, not so much prior years, because I think if anything is clear from my talk today, it should be that the market is changing. To look at prior years is not necessarily a clear indicator, maybe directionally correct.

I do not think we have taken a heroic view. I think that would be imprudent, but it is very hard to say at this point exactly how it is going to turn out. It is just, really, our very best view today.

Understanding that although the company is very excited and energized by what is ahead, in fact, I think there is a significant lease of life as we have been working on the strategy plan for the last several weeks, and unveiled it to employees last week. There is a significant energy behind that, but it is still disruptive, and we need to take that into account.

Troy Mastin - William Blair & Company

I will let someone else ask a question. Thank you.

Operator

We will take our next question from Peter Appert from Goldman Sachs.

Peter Appert - Goldman Sachs

Thank you. Jonathan, I think you mentioned today, or perhaps I have seen this in some of the press reporting about two things. One, new contracts potentially with photographers, and specifically strategy focused on more owned content. If you could just expand a little bit on that. Specifically, might you be rethinking royalty rates in the context of this changed business strategy? Could that be a source of some margin leverage for you?

Then, just refer to the economics of owned content. Does this portend, perhaps, a step up in the level of capital spending near-term? Thank you.

Jonathan Klein

Thank you for the question, Peter. I was hoping it would be asked, as I did not have time to cover content in much detail during the call.

I think the first thing I would like to say is please pay very little attention to the press reports which have appeared before today. I think now that we have outlined everything and things are not based on rumor or speculation, there will be some accuracy.

What I think is most important for people to recognize, and this may not be exactly what you are wanting for your modeling, is to understand that the day is coming soon when we will be able to get a creative image from a photographer’s camera to our sites with the same speed and efficiency that we do with editorial.

In addition to that, what we will be able to do and are beginning to do right now is to significantly reduce our costs involved in getting content, while increasing the value we add to the offering. We are planning to open our content caps very broadly to get much more imagery in with much more flexibility. We are building a new creative workflow where we use, the code word we are using it inside the company is called open.

The new system will be easy and efficient. We will open our system to all professional photographers who meet the criteria. This will give us access to masses of content and provide the ability to shape and mold our collections instantly by opening or closing the taps as needed.

Our content will always be much more fresh. It will not be based around legacy models. The inherent flexibility of this system will enable us to create collections of brands and product and distinguish content almost on the fly.

This is not based on something we are smoking. This is something we are already doing at iStockphoto, and we plan to use those tools, techniques and approaches in our core stock photography business.

At the same time as that, we are changing our approach to photographers who contribute photos to Getty Images under the old system. This may be controversial, but it needs to be said -- in the future, our main relationship with the thousands of photographers who are not employees of the company will largely be as a distributor for them. Be under no illusion -- photographers are clamoring to give us more content, not less, and they will embrace this.

The current system of photographers contracted to individual brands, submitting images where we carry the entire cost of handling the images, will be completely re-worked.

Peter, you mentioned new contracts. We will, over time, be entering into new contracts with photographers. The key approach with these new contracts is greater flexibility to enable images to go into the right collections, thereby optimizing their salability.

At this point, we have no intention of changing royalty rates with photographers. However, we do intend to continue to invest aggressively in shooting wholly-owned imagery. We find it a phenomenal use of our cash.

In light of that, you then asked a question about our capital expenditure. Our capital expenditure we expect to be lower in 2007 than it was in 2006, notwithstanding investments in wholly-owned content, and something I alluded to very directly, but is worth putting in front of you again, and that is a plan to have a significant increase of investment in our film business, so that we can ingest film content extremely quickly.

If an image is on the website, it will sell. If a film clip is on the website, it will sell. It is incumbent on us to get more images much more quickly onto our site. That is why when I talked about change during my prepared remarks, I damn well meant it.

Peter Appert - Goldman Sachs

Thank you.

Operator

We will take our next question from Steve Ashley from Robert Baird.

Steven Ashley - Robert W. Baird & Co.

-- photo which to date, has kind of been compartmentalized and really not heavily trafficked by your traditional advertising/publishing/media customers. Is that something you see changing in the future? Do you see more broad mainstream adoption of the micro-payments business by those types of customers going forward?

Jonathan Klein

We had a slight snafu on the audio at the beginning, but I think you summarized and I think I am answering the correct question. If not, I am sure it fits for a different question.

The micro-payment business is going to get much bigger over time. Let’s be clear that the overlap between a micro-payment customer and a traditional customer will continue to grow. One, because the model is going to bring completely new customers to the industry. They were licensed to begin with in the micro-payment model, and then over time, they will license other imagery.

We also know that existing customers will use iStockphoto. More often than not, they are using iStockphoto at times when they would not have licensed the traditional image at all, and sometimes they are using it when they would have done, and that is that big cannibalization word.

Now, what we have decided with our fifth key initiative this year is to evolve and grow the iStock business, but I have to stress very strongly -- although micro-payment and iStock can be a big business and will be a big business, it will still take some considerable time, a very long time, for it to even be 10% of our overall business in revenue terms. We plan to push it as fast as we can.

There are many, many different things which we have not even done with this business yet. A word about one thing, which just immediately springs to mind -- if you are a business customer, you typically do not want to buy on a credit card. You want to have terms. The only way to buy from iStockphoto is with a credit card. We can change that. We can change all sorts of things around it, from content to sub-collections, to pricing, to search, to other media types (we have only just launched video), to more countries (we have only just launched internationally) to more types of customers, as you touched upon in your question, to many more content providers, to different and more revenue streams.

We have many, many more ideas about this business, and I think what we learned from royalty-free, and let’s just go back in history a little, we went into the royalty-free market in February 1998, and we decided to embrace the business, because that is what customers were doing. We taught that business all the tricks that we had learnt. Over time, we told people that it would not be a tsunami that would wash away rights-managed images, and that has proven correct, even almost 10 years later.

We say the same thing about iStockphoto and the micro-payment model. It is not going to wash away professionally produced, high-quality, high production based images and imagery, but what it will do is be a terrific growth engine for us. Inherent in that, yes, there will be some substitution, but that is life.

We are really very excited eight months in with it, and we see it as growing. But as I would like to stress, when we do back of the envelope numbers, we cannot see it getting to even 10% of our overall business in revenue terms for some time.

Steven Ashley - Robert W. Baird & Co.

Thanks so much.

Operator

We will take our next question from Aaron Kessler from Piper Jaffray.

Aaron Kessler - Piper Jaffray

Thank you. A couple of questions here. First, could you give us a sense, do you think the overall market has really slowed here or is it more you are losing share to some of the competitors out there? We recently had a call with a few agency buyers who do indicate over the last year, they have reduced their usage of Getty. I am just wondering if the other competitors have stepped up with their game as well as increased their image libraries, or is it really just the overall market is seeing a decline here? Thank you.

Jonathan Klein

That is a very good question. I think what I said was there are basically four reasons which have led to the factors that we are seeing in our creative stills business. More alternative licensing models and sources of imagery than ever before, that has nothing to do with the traditional competitors.

Image purchasing patterns of our customers is changing -- nothing to do with our existing competitors.

The business of our main customer is in transition due to the advent of the digital economy, whereby the Internet and other digital platforms are providing advertisers with new and varied ways to do what they do -- also not much to do with our competitors.

The fourth issue is yes, there has been an increase in traditional competition, but I still feel very strongly, based on all the channel checks we do and all of the conversations that we have, that is having less of an impact than these overall seismic industry shifts, in particular the shifts which are occurring in their own businesses and the increasing use of imagery on the web and on other digital devices.

You are correct that there is a greater awareness of a couple of our traditional competitors due to very high levels of marketing spend, and we do look at those numbers pretty closely, but let’s remember that we are significantly larger, about 3.5 times larger than our biggest competitor, and that biggest competitor is private, so it is very hard to have a very clear view on what is happening there.

Suffice to say that in the first-half of the year, which is the last period we have figures for that private company, their revenue growth rate in percentage terms, organic, currency neutral, was the same as ours.

Aaron Kessler - Piper Jaffray

A follow-up, I saw on the rights-managed pricing, is there any seasonality to that? It seems like it has been all over the place the last few quarters here. How should we model that going forward?

Jonathan Klein

Rights-managed pricing is driven, at this point, primarily by mix. Much depends on how the mix operates, between whether we have periods with a lot of sales to the advertising or agency segment, which are at higher price points, versus a lot of sales to the publishing or editorial, which are at lower price points.

It is also affected by how many big deals we have in a period. If we license an image for $30,000 or $40,000, euros or pounds, that has a significant impact on the overall price per image for the company.

In terms of trends, we think that mix will be the primary factor in relation to rights-managed.

I want to just point, which I probably can’t resist and I should resist, I would not draw conclusions about the overall imagery market by speaking to three advertising customers in the United States.

Aaron Kessler - Piper Jaffray

I do not think we are. I think we have heard it from a lot of people, though. Great, thank you.

Jonathan Klein

Thanks so much, Aaron.

Operator

We will take our next question from Christa Quarles from Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi, just one quick housekeeping, and then a question. It looks like the average price per image has changed historically. I was just wondering if you could communicate exactly what happened there.

Then, the real question I guess is as you think about your marketing spend in 2007, relative to what you could spend on sales force and adding feet to the street, how are you approaching that continuum in the sense that it sounds like you are getting more efficient, maybe, with your ad spend, you are using paid search more. Should we expect the marketing to increase at a greater rate than any sales force increases that you would consider?

How much savings are you really getting, or can you communicate you are getting from the improved website, i.e. more self-service as opposed to using sales people as order takers? Thanks.

Alan Pickerill

On your initial question, just on the average price per image, what we do is if we add an office that we previously did not own, so Italy is a good example of that, where we acquired Italy, when we add that, we go ahead and restate the historical average price per image so that it is comparable on an apples-to-apples basis, as if we had owned Italy last year. That is why those numbers do look different periodically.

Christa Quarles - Thomas Weisel Partners
Okay, thank you.

Jonathan Klein

I will have a go at the other two parts of the question. Tom, if I am struggling, jump in.

Marketing spend -- I think what has basically happened in relation to our marketing spend is that in 2005, our discretionary marketing spend was about $11 million or $12 million, partially as a reaction to two things. One, increased competition, and two, the fact that we were able, because of our systems and things like promotional code functionality, as well as because of the fact we were finding paid search, which is very successful, we were able to find more and more of our marketing spend, which was totally measurable, which we could turn up and down.

As a result of those two factors, measurable marketing spend plus an increase in noise in the market, in particular in the United States, we decided to increase our marketing spend in 2007, and we will spend very high-teens in discretionary marketing dollars this year.

Marketing spend in 2007, and as Tom said, our budgets are not complete, but in 2007, will be in excess of $20 million for Getty Images. Now, how do we balance that with sales force investment? The way we balance that with sales force investment is the much-discussed in the media rebalancing, shall we say, or re-organization of our cost base and where we allocate resources.

So we have fewer folks waiting for the phone to ring, in terms of order taking. We have many, many more feet on the street, and we have allocated every single customer who falls into 80% of our total revenues, every single customer with an assigned account executive, and yes, we launched our CRM system in the summer, which is working extremely well, to give them additional tools in working with those customers.

So really, we are doing all of this within the overall context of expecting no increase in SG&A year over year, and that is what Tom talked about and I talked about earlier, about the fact that you manage your expenses more tightly in periods of lower revenue growth, and in addition to that, you put your money where you can get an above average return. We think that we can do that with our marketing, with what we are doing with the sales force, as well as in some of the other areas we have talked about.

We have not quantified what savings we will get from the launch of the website as a result of more self-service as a specific item, but it is included in everything we have talked about.

Christa Quarles - Thomas Weisel Partners

Thank you. Is there any just sales force efficiency measurement that you can communicate, or something that we could sort of chart over time, as you do see an improvement?

Jonathan Klein

I can tell you the sales per salesperson in every single country and every single market, but I am not going to.

Christa Quarles - Thomas Weisel Partners

Has it improved?

Jonathan Klein

Absolutely, and it will improve still further. Now, of course, those figures always look a lot better in periods where prices are rising because you do not need any extra sales people to sell a picture at a higher price. You do need extra sales people to sell more pictures.

Yes, it has improved, and it is a very enviable model, but as I said, and I think it is very, very important, it is quite subtle but it is very important. What we have discovered is that customers who we are close to buy much more from us. In 1997, when we were very early in launching e-commerce for this industry, a book called Customers.com wrote a chapter about us. Patty Seybold wrote this book, and our thesis then is the same as our thesis now, and that is that in the business-to-business market, when a customer is licensing or acquiring something critical for their end use product, you have to give them a voice, a face, and a relationship, even in cyberspace.

That is what we have discovered over the years, and that has not changed. What I want to do now and what I am doing now is reinvigorating that even more aggressively in terms of assigned account executives to those key customers, as well as an increase in the number of feet on the street by many-fold -- many, many-fold over the next several months.

Christa Quarles - Thomas Weisel Partners

Thank you.

Jonathan Klein

Thank you.

Operator

We will take our next question from Frederick Searby from JP Morgan.

Frederick Searby - JP Morgan

Thank you. A couple of questions. On the issue of price, it sounds like mix was strong and pricing improved, but given the decline in volumes you are seeing in creative imagery, what would be the outlook and what are you baking in to that mid-single-digit top-line number in terms of price increases? Can you increase prices selectively in markets where you are still seeing strong volumes? What is the potential that you actually have to start reducing prices?

Just a very quick follow-up, again on guidance. It looks like in the fourth quarter, you are assuming no share repurchase. What is the outlook for share repurchase, and why aren’t you assuming share repurchase in the fourth quarter?

Thomas W. Oberdorf

Let me do the share repurchase first. We are not assuming -- particularly, we do not during guidance give projections of whether we are going to have share repurchase or not. What we would be doing if we did that, we would be taking down our interest income, so we are not saying we will or we will not, but we just do not give it into our guidance. If we do, two things would go in different directions. The shares will go down and interest income will go down.

There was something you mentioned about reducing prices, and obviously you were asking about what is the outlook even going further into next year. You said reducing prices. We do not plan on reducing prices.

Frederick Searby - JP Morgan

I actually said are you planning on raising prices in flexible markets.

Thomas W. Oberdorf

And the answer is yes, we do. Systematically, we will increase prices over time in certain areas in certain markets. We know in certain markets there are instances where we have -- I will not say lots of room, but room for improving our price.

Every year, what we do is we look at across the board, whether it be geographic location or whether it be in certain of our portfolios, and we do increase price. We do that very systematically with the data that we have in-house.

As far as what we have assumed as far as price increases for 2007, again I am just going to reiterate that this is preliminary views. We do not want to get into the details of how we came up with our projections. We will unfold that in February.

Jonathan Klein

I would just stress one thing, which I said in the call, and I am more and more certain of this as we get more and more data and talk to more people. Pricing is still not the main driver for image purchasing decisions for the overwhelming majority of our customers.

We do not believe that there is anything like a price war. Price is not the issue in our creative stills business. It is volume. You might say well, there is a relationship between volume and price. Of course there is, but having said that, we are not out of kilter on our pricing such that it is having an impact on the volumes.

I think Tom answered the question spot-on in terms of what our approach and strategy is for raising prices. It is surgical and it is very specific. In certain segments and for certain usages, we may even reduce prices, and in others, we will go up. We look very closely at what is happening.

Frederick Searby - JP Morgan

Jonathan, just one question. Given what has happened to your share price, would you expect to be an aggressive buyer if the stock continues to come under pressure?

Jonathan Klein

You know, it is very hard for me to answer that question. You would expect me to duck the question, so I will duck the question. We bought a significant amount of stock in the second quarter. We spent $175 million. Our authorization is $250 million. We have $75 million therefore still available. We will see what happens. We are keeping a close eye on this. We will do what we have to do, and that is tell the market as and when we have to what we have purchased.

Frederick Searby - JP Morgan

Thank you.

Jonathan Klein

You’re welcome.

Operator

We have time now for one more question, from Matthew Troy from Citigroup.

Stanford Nishikawa - Citigroup

Hi, this is actually Stanford subbing in for Matt who had to jump on another call. My question is video seems to be kind of controversial right now, in as much as no one seems to understand the size or potential of the market. What do you see as the market size or opportunity today? What do you see it growing to going forward? You mentioned that you have quite a few ideas on that. If you could just add some color there.

Jonathan Klein

It is very difficult to size the market. Video is not controversial in the least, because it is only controversial for those who have copyright issues around the video which they are putting on their sites. All the video that we put on our site, we have no copyright issues at all, so it is not controversial.

What is exciting about the video business is a number of things. Firstly, the fact that the software is now possible to enable folks to use film on the Internet, or rather to work with film on the desktop in a way which is, if you like, a full workflow product on the web. We are seeing film utilized in new places for the first time as well, like web and mobile. Bandwidth is no longer an issue. The tools to manipulate film or to work with film, which used to cost $100,000 for high-end avid equipment, you can now get for sub $5,000, Final Cut Pro and various other products. We also know that people are attracted to the moving image.

We just see tremendous opportunity from non-traditional purchases. In the past, it is fair to say that with our film business, we largely marketed and produced film imagery for traditional use -- TVs, movies, long-form documentaries, in a trade show, a sales conference. In the future, film will be a component of multimedia on the web and many other platforms.

How big is the market? We are really not sure, but what we do absolutely know from our experience with stills is that once something is on the site, easy for someone to get a hold of, they can download it into their workflow tools, they will use more and more of it. There is definitely a significant long-tail opportunity in film, as folks will be able to use film extremely cheaply, commercials will be produced very, very cheaply. In fact, we already work with a company producing commercials where the customer is paying less than $1,000 for a television commercial, including the content and everything.

We do feel that it is a very big opportunity, and we feel that 2007 is the year in which we should make those investments, which we know will not return in the year, but over time, will have proved to be a very good investment.

Stanford Nishikawa - Citigroup

Thank you.

Operator

That concludes our question-and-answer session for today. I will turn things back over to our host for any additional or closing remarks.

Jonathan Klein

I will be very brief, because it has been a long call. I want to thank you for your interest. Today what I have done with you is shared our vision for the future of the industry and our business. We are totally convinced that we are making the right investments and are totally focused on the right opportunities for our business.

We have a very strong leadership position in this industry, and I know that the things we are doing today will lead to strong, continued success. We are disappointed our top-line growth rates are now what we expected when we began the year, but we also remind ourselves and remind you that we continue to have a very attractive, market-leading media business, with a strong business model that generates high operating margins and strong cash flows.

What we also know, because we have seen it in the past, is it is a particularly compelling model when revenues grow. It is clear that we must innovate brilliantly and continuously in how we serve customers, operate, and how we grow our business. We must also do this with greater speed, agility, and flexibility.

We are 11 years old. We have been through all kinds of market conditions, changes, adjustments, transitions, share price movements, you name it. We have always been able to innovate and lead the industry through these periods, and we have total confidence that our vision for the future is sound, our business model is excellent, and we know how to execute. We will do all of that, whilst at the same time recognizing that we have had a disappointing year and we are eager to put it behind us.

Thanks so much. Bye-bye.

Operator

That does conclude today’s conference call. Thank you very much for your participation and have a wonderful day.

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