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Getty Images, Inc. (GYI)

Q4 2006 Earnings Call

January 29, 2007 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

Christa Sober Quarles - Thomas Weisel Partners

Peter Appert - Goldman Sachs

Troy Mastin - William Blair & Company

Matthew Troy - Citigroup

Aaron Kessler - Piper Jaffray

Steven Ashley - Robert W. Baird & Co.

Brandon Dobell - Credit Suisse Securities

Presentation

Operator

Good day, everyone, and welcome to the Getty Images fourth 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 the 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’d 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 we previously announced, our Board of Directors established a special committee to conduct an internal review of our historic stock option grant practices and the related accounting. Because this review is ongoing, we have not yet determined if we will need to record any non-cash adjustments to compensation expenses related to prior stock option grants, making today’s results preliminary. If any such charges are required, they might affect the preliminary financial results that we will be discussing on this call and might require us to restate previously issued financial statements.

Joining us we have Jonathan Klein, Getty Images’ co-founded and Chief Executive Officer; and Tom Oberdorf, the company’s Chief Financial Officer. I’ll now turn the call over to Jonathan Klein.

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Jonathan D. Klein

Thanks so much, Alan, and good afternoon, this time from Seattle, and welcome to our 2006 fourth quarter and year-end conference call.

Our results in the fourth quarter were rather better than we had anticipated. We exceeded our own expectations for both revenue and earnings per share and had record cash flow generation in the quarter.

With revenue of almost $204 million in the fourth quarter, we had revenue growth of 9.5% and currency neutral revenue growth of 6.5%. Let me give you a quick breakdown:

  • Currency neutral growth of 3% in Creative Stills, which accounts for about 78% of our revenue;
  • 18% growth in Editorial Imagery, which is 13% of our revenue;
  • 11% growth -- once again, currency neutral -- in Footage or Film, which is about 5% of our revenue in the quarter; and
  • 42% growth in other areas of our business.

This other revenue, which represented 4% of total revenue in the quarter, consists largely of photo assignments and asset management.

The year-over-year growth in Creative Stills imagery in the fourth quarter was driven by 12% currency neutral revenue growth in royalty-free imagery. This was offset by a 4% decline -- once again, currency neutral -- in rights-managed revenue during the quarter. This includes the new Rights Ready product.

The decline in rights-managed, including Rights Ready, was driven by a decline in the average price per image, offset by some volume growth. In royalty-free, we saw modest growth in our single image sales from our company-owned offices and indirect sales channels, and very strong growth from our agents and delegates.

Our other royalty-free revenues, which includes revenue from CDs and virtual CDs, micropayment revenue from iStockphoto, and subscription revenue from Creative Express, grew significantly in the quarter.

You’ll get more information on all these numbers in a moment from Tom.

Some people are concerned about the future of royalty-free, given the advent and momentum of the micropayment model. There were many people who had similar concerns about rights-managed imagery in the early years of the royalty-free model. We know. We were there. We also know that user-generated content and the micropayment model introduces both a broad selection of content and image-makers as well as new, qualified customers to the imagery marketplace.

We also know that certain uses of micropayment will of course turn out to be in substitution of royalty-free product. This was also what happened in the early days of royalty-free. You had new content. You brought in new buyers and there was some substitution.

Way back when, we embraced that change, confident in the knowledge that the existing model would not go away, would in fact evolve and was here to stay. We were 100% correct.

We feel equally confident that royalty-free imagery is here to stay, and in the fourth quarter we saw double-digit revenue growth in royalty-free, which also included some encouraging signs of improvement in some important geographical markets.

Customer will continue to want imagery at many different price points, from different sources and on all platforms. We are and intend to continue to be the company that provides the broadest and deepest imagery collections at all price points and for all platforms.

In fact, we are busy exploring other new products to bring to the marketplace in many areas including, of course, royalty-free imagery.

Turning to our Editorial Imagery business which, as you know, is news, sport, entertainment and archival imagery, we had another very good quarter and grew 18% year over year on a currency-neutral basis. All parts of this business did well, but entertainment led the charge. Growth in revenues was more than 50% in the quarter. This is the third consecutive quarter of growth in entertainment imagery in excess of 50%.

Our world-leading sports photography business goes from [strength to strength], and we continue to be delighted by our news business. More importantly, the customers are very happy with a product and service which, of course, we know will move to an altogether new level with the launch of the new website, but more on that later.

Footage or Film continues to represent what we think is one of our best and biggest growth opportunities. In the quarter, we grew film sales about 11% on a currency-neutral basis. We’re adding content, continuing to enhance the digital workflow for film, educating customers and potential customers about the advantages of using pre-shot film clips for their project. We will continue to invest in this product line to drive growth. In fact, 2007 will be a very big year for film and is one of our five key initiatives.

Back to numbers for a moment, excluding some specifically identified charges which were, of course, outlined in the press release, our operating margin was 28.2% for the fourth quarter of 2006, compared to 31.5% in the year-ago quarter. We have moved resources to higher innovative growth areas and have already been successful in reducing our costs.

Now, in addition to the numbers, we had a very busy quarter with many noteworthy milestones and achievements. I don’t have time to cover them all here, but here is a small selection:

  • It was a breakthrough for us to launch the public beta version of the editorial part of our new website at gettyimages.com. This is extremely important and we continue to focus and on creating and launching fantastic technology that optimizes our customers’ experiences. The formal launch of the new website is imminent;
  • Also in the quarter, we expanded our Rights Ready offering. We added some great collections, including Altrendo, Blend, Iconica, Panoramic Images, Photographer’s Choice, and Stock Food.

    We also introduced our collection called Lifesize, which is part of the open strategy that we unveiled in the last conference call with you in October. We get imagery from new photographers under a pay-for-placement model, thereby opening up our extraordinary site, our unrivaled traffic, our very big customer base, to qualified photographers around the world.

    Open will be very successful. The Rights Ready model is already getting strong feedback from our customers. The volumes, as well as the average price per image so far for Rights Ready, have exceeded our expectations.

  • International expansion continues to be a priority, both organically -- and I’ll discuss that later -- as well as by acquisition. In the quarter, we bought our delegate in Portugal. Growth in non-English speaking markets as we expand to have a fully integrated Getty Images product and service, offering everything everywhere, will be a theme for some time to come in these calls.
  • We saw continued success and growth at iStockphoto in the quarter. During the quarter, 3 million images were downloaded, compared to 2.5 million in the third quarter. Just to give you an idea of our momentum here, in just over a year, iStockphoto has increased the number of members from 500,000 to 1.2 million. We have doubled the number of new members added to the site each month. We’ve doubled the number of images available on the site, and we have greatly increased the number of contributors.

    We launched video in the third quarter, and have already added 12,000 clips in the short period since launch. Revenue, as you would expect for video, is still modest but is ahead of our plans. We also launched the iStockphoto site in French, German and Spanish.

    In the latest Alexa rankings, we noted that iStockphoto was one of the top 250 most visited sites on the Internet. The growth potential for this business continues to be extremely compelling and very exciting to us all.

As you may remember, in our last conference call we described several key activities that we believe are important to help us grow our rights-managed, Rights Ready, and royalty-free imagery revenues. There were many, and I would refer you to the last call for a refresher.

But what I would like to do is just report the progress that we’ve made on those initiatives since the end of October:

  1. We said that we would assign specific account representation to an expanded list of top customers in order to drive better relationships and to continue to provide the best customer service in the industry. We’ve already assigned the majority of those customers and are in the process of finishing the remaining assignments. I expect that all the assignments will be completed in the first quarter of 2007. the work associated with these accounts will be ongoing, as the objective here is to continue to build stronger and deeper relationships. In fact, already in North America, we’ve assigned 90%, and in all other regions, we have exceeded our goal and have assigned a higher number of accounts than originally anticipated.
  2. Second on our progress report, we said that we were planning to significantly grow the number of market development executives in major metropolitan areas on the street, sometimes in places where we don’t have an office. When finished, we expect to have market development executives in over two dozen cities around the world, and we are well on our way. We continue to recruit and expect to have the majority of these positions filled by the end of the second quarter;
  3. Marketing -- we are working hard to make sure our marketing initiatives continue to be aligned with our sales initiatives and that of course we have the right marketing dollars and resources spent in the right markets. We also for the first time have both our sales teams and our marketing teams aligned and organized across customer segments rather than, as was historically the case, purely along product lines. The marketing plans associated with the launch of the new website will we know drive additional traffic and revenues;

One of the things which we talked about at length at the last call was creating new and better ways to ingest imagery. We have started work on creating a photographer’s portal, so that we can ingest imagery on gettyimages.com in a more seamless and expeditious manner, similar to the iStockphoto model. We are already implementing some of this technology. We’ve launched Lifesize. We expect to roll out the portal in 2007. Why? Quite simply, to upload much more imagery, much more quickly at a significantly lower cost.

As I mentioned a second ago, we’re ingesting our creative imagery differently. I talked earlier about Lifesize and open, and we are already busy qualifying new photographers who will submit imagery under this new model and pay a fee for placement.

In footage, we’re working hard to add content, enhance the digital workflow, and market the product effectively. We’re in the process of signing up a number of new and exciting new content partners. This business is being driven aggressively and as a result, we will be investing a significant amount -- and you’re bound to ask Tom what that amount is and he’ll tell you -- in capital expenditure in building our footage digital workflow, as well as our new website for footage.

Finally, in terms of catching up, we’ve never been busier in business development, as we’re engaging in many meaningful partnership and strategic customer relationships, and yes, before you ask, of course we’re looking actively at a number of acquisitions.

So we had a good fourth quarter. We had solid financial results and evidence of some momentum.

The strategic realignment we announced last quarter, which was dubbed by one of the investment analysts, Getty Images 3.0, positions us well to succeed in this new environment. The broader issues around imagery, the use of imagery, advertising and the media environment, remain largely unchanged since October. In the short-term, these issues or trends require us to be as nimble and as innovative as ever, in order to provide the right product to the right customers.

This is in fact energizing and enjoyable for us all at Getty Images, and we know that in the medium and long-term, they provide us with some exciting opportunities, and it is unarguable that we are better positioned than anyone else to excel in this new environment. We remain focused and committed to executing well against our plan in order to, we hope, return to higher growth rates in the future.

This call is always a little longer because we have to cover Q4 as well as 2006, and I’d like to quickly turn to 2006. For the whole year, we reported revenue of $807 million. That represented year-over-year growth 10%. For the full year, reported growth rates are almost identical as currency-neutral growth rates, so from now on, we can talk in reported growth rates for the full-year numbers. As I said, it’s pretty much the same number on a currency-neutral basis.

From a product line perspective, growth in: Creative Stills, the revenue level was 8%; Editorial Imagery, 17%; Film or Footage, 13%; and 43% in the area of other revenue.

From a geographical perspective, again to remind you I’m talking about 2006, we grew: 7% in the Americas; 11% in Europe; and 22% in Asia. Again, to remind you, the numbers are pretty much the same on a currency-neutral or reported basis for the full year.

You know we have an objective to grow faster in non-English speaking markets, and it was good to see that for the year, most of those non-English speaking markets exhibited higher percentage revenue growth than the total company’s revenue growth rates.

Earnings per share, excluding stock-based compensation and the items that don’t relate to ongoing operations, specifically the restructuring charges and the loss on investments, our earnings per share were $2.62, representing growth of 12% over the prior year. We know that this was not the growth rate that we had hoped for. However, we still delivered very attractive margins and record cash flows.

The operating margin, let me talk about that for a moment: operating margin was 11% in 2002; 20% in 2003; 27% in 2004; and 31% in 2005. When I exclude the items I mentioned above, the operating margin for 2006 was 30%. For 2006, we generated cash flow from operations of $269 million, and free cash flow of $207 million.

We ended the year with $339 million in cash, despite spending $408 million on share repurchases and acquisitions during the year. Also, keep in mind that we became a U.S. federal cash taxpayer for the first time this year and paid out around $50 million in cash taxes during the year.

I think that the cash flow generated this year is a particularly strong testament to the strength of our business model, and in fact, we ended up exceeding the free cash flow target that we gave to you even before 2006 began.

As always, I will spend a few minutes giving you my view or report card on how we did on our key initiatives for the year. In the interests of time, I’m going to do this very briefly, somewhat in a bullet point format.

First, accelerate non-English market growth, both in editorial and creative:

  • We acquired and integrated the operations of our largest delegate, Laura Ronchi in Italy, and our Portuguese delegate;
  • We began rolling out our editorial imagery business worldwide in additional languages;
  • We expanded iStockphoto website outside North America;
  • We had growth in almost all international markets above the overall company growth rate;
  • We had very strong growth rates for delegates in Europe and Asia, which were also higher than the total company growth rate; and
  • We had strong growth and activity in China, albeit off a relatively small base.

The second key initiative was to continue to build a world-class selling organization which is customer-centric. You are aware that we realigned our U.S. sales force by customer type back in the first quarter of the year. You’re also aware that it took us longer than we had hoped, and was more disruptive than we had hoped. The good news is that is now all behind us:

  • We began the process of assigning specific account representation to a massively expanded list of our customer base. I told you about our progress on that earlier;

  • We also accelerated the hiring of market development executives;
  • We created the important position of Senior Vice President of Customer Experience, the customer-facing parts of our technology, the change in our structure in technology is working well and is ahead of our expectations;
  • We accelerated the sales creative partnership, as it is proving so successful. That is where our sales and creative people work together on customer accounts;
  • We undertook a record number of customer visits;
  • We hosted more major events for customers than we’ve ever done in any other year; and

  • In the case of a lot of companies, the last point I’m going to make would be a big deal, but we just see it as business as usual -- we actually implemented flawlessly CRM.

The third key initiative, to innovate with product, services, platforms and markets. So how did we do here?

  • Product -- we launched the Rights Ready licensing model. High-quality imagery that works with the rights-managed portfolio but uses a more simplified licensing model. Volumes and prices, as I said earlier, have exceeded our expectations for this product. We are very excited about its prospects;
  • Also in the product area, entertainment -- I talked about our strong sales performance for entertainment across all segments of entertainment imagery, and the record revenues from our exclusive celebrity specials, which I have just mentioned now for the first time. We are capturing images from high-profile events all over the world and helping our media customers serve their customers better. We’ve got a deep roster of great entertainment photographers based in all major fashion and entertainment markets around the world -- we don’t have anyone in Seattle. There are too many examples to mention here, but we’re very proud of the exclusive images of Brad Pitt and Angelina Jolie’s daughter, and pleased that all the proceeds from that record-making shoot are going to charity. Do expect to hear more from us in entertainment imagery over the next several years;
  • Products and markets -- it would be odd talking about innovation not to talk about iStockphoto. iStockphoto is the pioneer and leader in the micropayment market. We acquired this business in February. We’ve rolled out user-generated video. We’ve implemented sophisticated key wording and meta data into iStockphoto. We’ve launched internationally and we’ve secured some very important partnerships;
  • We also acquired and seamlessly integrated Stockbyte, our largest image partner and one of the leading royalty-free collections, boosting wholly-owned content;
  • We did many innovative things around the services space, but I like to talk about the things which are most recent and I’m most excited about, and that is the Getty Images Live Desktop tool. Try it out. It’s a lot of fun;
  • On the platforms space, our mobile business -- in the first quarter of the year, we launched PictureCast, which is a browsable, news, sport and entertainment service. We significantly exceeded our expectations and, more importantly, our partner’s subscriber expectations. We are currently working on additional distribution by additional U.S. operators as well as international operators and, of course, handset manufacturers;
  • As far as international markets are concerned, we have expanded into many new countries with company-owned offices, and have also significantly grown our channel and delegate or agent business.

And the last key initiative for 2006 was around a new gettyimages.com:

  • We completed the substantial work on the backbone of our new site;
  • We launched a beta editorial site in the year;
  • We are now setting the stage for ongoing innovation. The public beta was launched in 2006;
  • As I said earlier, I am pleased to announce that the full launch of the editorial site is imminent, and to let you know that we are on track with a full all-singing, all-dancing new gettyimages.com launch in the second quarter.

Overall, we’ve been very busy during the year. We’ve made some excellent progress on a number of our initiatives. Those who work with me know that I’m very seldom satisfied, and I know that there is so much more that we can and will do. We did not have a great year, let’s be clear. But we have emerged in good shape, but at the same time as that, we do not underestimate the work ahead.

With that, I am going to stop talking and hand over the phone to Tom.

Thomas W. Oberdorf

Thanks, Jonathan. For the fourth quarter, we reported revenues of $203.5 million, up 9.5% over the fourth quarter of 2005. Excluding the effects of currency, growth was 6.5%. For the full year, we reported revenue of $807.3 million, representing 10% growth.

We acquired iStockphoto and Stockbyte during the year, and each provided some revenue growth for the business. Given how quickly we integrate our acquisitions, it’s not possible to know exactly how much each contributed incrementally, but we estimate that our organic, currency-neutral growth rate was approximately 6% for 2006.

Including our newly launched Rights-Ready product, rights-managed revenue declined 1% during the quarter on a reported basis, driven by slightly higher volume, offset by a decline in average pricing of about 6%.

For the full year, rights-managed growth was 3%. The full year growth came from volume, offset by year-over-year declines in achieved price per image. The change in the average price per image was driven primarily by mix changes.

Royalty-free revenue grew 15% in the fourth quarter and 13% for the year. Our single image royalty-free revenue grew almost 7% in the fourth quarter and for the full year. In the quarter, growth came from primarily volume, with only a slight increase in price per image. For the year, the increase came from small increases in volume and average price per image. Additionally, RF growth through our delegates was strong for both the quarter and the year. The average price per image for our traditional single image royalty-free product was $240, which is consistent with the average price in the fourth quarter of last year.

Other royalty-free revenue consists of revenue from CDs, virtual CDs, iStockphoto’s micropayment images, and our subscription product, Creative Express. Our royalty-free revenue grew 65% in the fourth quarter compared to 2005. It represents 20% of our total RF revenue, compared to 14% a year ago.

Our editorial imagery, comprised of news, sports, entertainment and archival imagery, represented about 13% of revenue for the quarter and 12% for the full year. Sales of our editorial imagery grew by 20% in the quarter and 17% for the year, driven by growth in all areas, with particular strong performance in entertainment imagery.

Footage or Film comprised about 5% of our total revenue in the quarter as well as the full year. The growth was 13% in the fourth quarter and the full fiscal year.

In total, for the fourth quarter, about 46% of sales were in the Americas; 46% were in EMEA; and 8% were in Asia-Pacific. We’re making great progress in our international markets.

Our cost of revenue consists primarily of royalties that we pay contributing photographers and our content partners. For the fourth quarter, the average royalty rate for the entire business was just over 26%, consistent with the fourth quarter of 2005.

For the fourth quarter, the average royalty rate for rights-managed imagery was unchanged at 34%. For royalty-free imagery, it was 16%, an improvement from 17% a year ago, primarily as a result of the acquisition of Stockbyte. For editorial imagery, the royalty rate was 28% compared to 23% in the fourth quarter of 2005, primarily as a result of higher royalties on assignment and exclusive offerings. For Footage or Film, the average royalty rate was 30%, an improvement from 33% a year ago.

For the year, the combined rate was 25.6% of revenue, an improvement from 26.8% for 2005. The improvement can be attributed primarily to our acquisition of Stockbyte, with wholly-owned imagery which drove down our average royalty rate for our RF images. This improvement was somewhat offset by higher average rates for some other products.

SG&A expenses were $77 million in the quarter. Excluding stock-based compensation of $3.6 million, SG&A of $73.4 million grew 15.5% and represented 36% of revenue compared to 34.2% in the fourth quarter of 2005.

For the full year, SG&A expenses were $302.7 million. Excluding stock-based compensation of $15 million, SG&A of $287.7 million grew 14.7% and represented 35.6% of revenue compared to 35.2% for 2005.

Growth of SG&A in 2006 came from higher staff related costs and expenses associated with acquired companies, such as iStockphoto. We also had higher professional fees in 2006 related to our efforts to streamline our international sales operations, as well as the stock option review.

I want to emphasize that we’re committed to strong management of our SG&A expenses at all times, but especially in times with lower top-line growth. We began this process with our strategic realignment and we’ll continue to work hard to manage these expenses appropriately. However, we will always invest where we see opportunity.

In the fourth quarter, depreciation was $13.8 million and amortization of intangible assets was $5.3 million. For the full year, depreciation was $53.3 million and amortization was $19.7 million. These increases over 2005 are clearly a result of our acquisitions, with depreciation increasing further as a result of capital expenditures primarily associated with the creation and acquisition of imagery.

As we discussed during our earnings call in October, we expected restructuring costs for severance and lease loss. During the quarter, the employee severance charge was $5.6 million and the lease loss charge associated with consolidating our Seattle office space, was $5.2 million.

As a reminder, for the year, we had some other identified charges which we exclude when analyzing our profitability in order to compare our results to the prior year. In the second quarter of this year, we had a lease loss charge from some of our New York facilities in the amount of $18.6 million.

In the same quarter, we sold some short-term investments that were in a loss position and recorded a loss on the sale of these investments of $4 million. Stock-based compensation was $3.6 million for the fourth quarter, and $15.1 million for the year.

Excluding the charges I just discussed, operating income was $57.5 million, or 28.2% of revenue, compared to $58.5 million and 31.5% last year. For the full year, excluding charges, the operating margin was 30% compared to 31% in 2005.

Also excluding the separately identified charges, our earnings per share was $0.66 compared to $0.65 in the fourth quarter of last year. Earnings per share for the year on this basis were $2.62, for full 2006, growing 12% from 2005.

We generated record cash flow from operations for the full year of fiscal 2006. Cash provided by operations for the fourth quarter was $87.2 million, up from $75.9 million last year.

Capital expenditures for the quarter were $11.9 million, bringing the full year capital expenditures to approximately $62 million, which is slightly lower than the guidance we gave last quarter of $65 million.

For the full year, cash flow from operations was $269 million and free cash flow, defined as cash from operations less capital expenditures, was $207 million. I’ll just reiterate Jonathan’s point that this is higher than the level of cash that we guided to at the very beginning of the year.

Our focus for uses of cash include acquisitions, share repurchase, and capital expenditures. This year we spent a total of $198 million on acquisitions, $208 million on share repurchase, and $62 million on cap-ex. Again, reiterating another point that Jonathan made, this year we became a U.S. cash taxpayer, and we paid approximately $50 million of cash taxes.

Even with all these expenditures, we ended the year with $339 million in cash.

Looking specifically at share repurchase, in the fourth quarter, we repurchased 757,000 shares for $33 million. For the full year, we purchased just under 3.5 million shares of stock, for a total of $208 million. This leaves about $42 million available for share repurchase under our existing authorization.

Before I discuss guidance, I want to reiterate that the following forward-looking statements reflect our expectations as of today, January 29, 2007, and they are subject to the factors that may affect our performance as outlined by Alan at the beginning of the call. In addition, this guidance excludes any adjustments that could arise as a result of our ongoing stock option review.

I also want to mention that since we now have a full year of comparable stock-based compensation expense for 2006, we will no longer exclude this item from our guidance. All earnings guidance I will mention today for 2007 will include stock-based compensation.

For the first quarter of 2007, the company expects to report revenue of approximately $210 million, and earnings per diluted share of approximately $0.61. For the full year 2007, the company expects percentage revenue growth in the mid-single digit range, and percentage growth in earnings per share of at least 1.5 times the revenue growth rate.

Company guidance for 2007 assumes just over $60 million fully diluted shares for both the first quarter and the full year. We expect SG&A expenses, including stock-based compensation, to be just a little bit higher than those expenses in 2006. SG&A should be higher in Q1 and Q2, due to the timing of the stock option review and the marketing expenses associated with the launch of our new website. We’re expecting SG&A to decline sequentially in Q3 and Q4.

We expect depreciation expense to increase to about $61 million for the year, as we begin depreciating the cost associated with our new website, and we expect amortization to be relatively consistent with 2006.

We expect approximately $60 million in cap-ex for the year.

With that, I would like to turn this back over to Jonathan.

Jonathan D. Klein

Thanks so much, Tom. I’m going to hold my concluding remarks until after the Q&A. I have prepared some comments for then, but I think we should get on to the Q&A now, and if you have nothing better to do, listen to my concluding remarks after the Q&A.

With that, I would like to turn the call over to the Operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question today comes from Christa Quarles with Thomas Weisel Partners.

Christa Sober Quarles - Thomas Weisel Partners

Hi, a couple questions. First, I was wondering if you could highlight the impact of micropayments outside the U.S., particularly in the U.K., and what impact that may have had in some of your markets?

Then also, you kept mentioning very strong delegate growth, so I was wondering if you could get more specific in terms of which countries you have there.

The final’s just a quick housekeeping -- what currency expectation are you using in your outlook for Q1? Thanks.

Jonathan D. Klein

I thought it was one question. Okay, here we go with the three questions. I’m going to take the micropayment question and I think Tom will give a little bit of color around delegate growth, and will also give you some idea of delegates as an overall piece of our business. Just to remind people, delegates or agents operate in those areas where we do not have a company-owned office. The overwhelming majority of our business, of course, is in the company-owned space.

The impact of micropayment outside the U.S., I think the best thing I can say about that, and the most instructive thing, is that just like royalty-free 10 years ago, royalty-free began in the U.S. and slowly over time expanded internationally. As far as royalty-free today, about 75% of our volumes in the U.S. are royalty-free and 25% rights-managed. That split, 75-25, has remained largely unchanged for the last three years in the U.S.

The split outside of the U.S., or in Europe, rather, on RF/RM, is moving towards the same level, 75% or so. It’s less now but moving in that direction. Royalty-free hit a ceiling in terms of the mix between royalty-free and rights-managed. It is still way too early in the evolution of micropayment for us to be able to quantify the impact.

What I can tell you is that most of iStockphoto’s business remains in the U.S. and Canada. There has been obviously ability to access the site, if you speak English, for some time -- the ability to access the site for some time if you speak English, and we’re now rolling that site out internationally.

I think it’s fair to say that the growth potential of the micropayment model is extremely great, both in the U.S. and elsewhere. It’s at an earlier phase elsewhere, and we plan to significantly accelerate its growth internationally. We would hope that our micropayment business has a similar profile over time to our overall business in terms of U.S./non-U.S., but that requires localization of the sites, recruiting contributors, and marketing out there.

But it is really very difficult for me to put a number in terms of what impact it’s having. In fact, it’s difficult to put a number in terms of what impact it’s having overall, let alone in international markets.

Do you want to touch on the delegates, Tom?

Thomas W. Oberdorf

Sure. For delegates, we had 21% growth rates both in the fourth quarter and for the full year, so that tells you a little bit about the growth rate there.

One of the interesting things about the delegates that we have to understand is that certainly as we look at these, we purchased two of these this year. We purchased our Italian delegate, we purchased our Portuguese delegate, so this is a refinement of finding places where we can use delegates in certain times when it’s opportune, you know, we look to purchase these.

On your other question, which is FX, I need you to repeat the question. I’m not going to give you the foreign exchange rates we assumed for our projections, but certainly we are looking at mid-single digit growth rates for 2007, and we’re looking that those growth rates would be less due to foreign exchange than just to real growth.

Christa Sober Quarles - Thomas Weisel Partners

Okay, thanks.

Operator

Our next question will come from Peter Appert, Goldman Sachs.

Peter Appert - Goldman Sachs

Hey, Jonathan. I was hoping you might just give us some more color on how you’re feeling about the evolution of the micropayment business, now that you’re another quarter into it, in terms of just anything you can share with us on who the users are, what the average buy rates are, what the average order size is, how you’re feeling about the competitive dynamics, specifically in that market -- things along those lines. Thank you.

Jonathan D. Klein

That’s a big question. That’s only one. Actually, not -- how you are feeling in this market and those -- no, look, the bottom line is that we are extremely excited about the micropayment business. We believe that we were early, we were astute in acquiring by far the best, biggest, and most well-known in the micropayment market. We have a terrific management up there and we’ve been very -- I always say up there because we’re in Seattle and they’re in Calgary. We have also been able to do a lot very quickly with the business. So overall, we think that micropayment has a tremendous future.

What I’d like to stress is that it will be improved and developed in many ways, and just let me give you some examples. Content; secondly, sub-collections -- at this point in time, we don’t have any such thing as an image partner program or sub-collections; differentiated levels of quality, pricing, exclusivity still not yet introduced. Search is in the early days on that site. The innovations which we’re putting through in the new site on search at gettyimages.com will be over there pretty soon.

Other media types -- at the moment, we just have photography and, as of a few months ago, we added film.

More countries -- at this point in time, the site is only available in three languages other than English. That will change in a big way this year.

More different types of customers -- bear in mind that the focus and the targeting of the micropayment business has largely been at the small designer. You asked about customers -- it’s a design community, it’s an occasional user, it’s a SOHO customer, some ad agencies, but at the end of the day, we expect that every customer of every size in every segment will use micropayment at some time and for some parts of their business.

In addition to that, there are many more content providers we can get, and being in the top 250 most visited websites on the Internet gives us opportunities for different and more revenue streams.

So we have many ideas about this business and its product and how it will evolve over time. We know it will be a big business, but let me also stress: in our modeling, it will still take some time for iStockphoto to even be 10% of the overall Getty Images. And although it is having an early impact, we do not believe for one moment that it represents a tsunami that in any way will wash away professionally produced, high-quality, high-production values based imagery.

So really, it’s still early days. It’s having an impact, and there’s no question in my mind at all it’s something which we’ve been consistent in through most of 2006, and increasingly definitive in our consistency as we’ve had more and more visibility into our iStockphoto business, that it is a micropayment model and the new way of getting and bringing content to the market that is responsible for the under-performance last year rather than traditional me-too competition.

Peter Appert - Goldman Sachs

Okay, but it looks like the unit growth in the royalty-free business, as you reported, relatively healthy in the fourth quarter, suggesting perhaps that the substitution effect from micropayment maybe isn’t as great as some folks had thought. Your though on that?

Jonathan D. Klein

Well, you know, that’s possible but I don’t think one should extrapolate from one quarter something much greater than that. What I do think you can pull out of the fourth quarter which I thought was interesting was I read on blogs and various other places about how there’s price pressure in royalty-free. I’ve said for some time we don’t see significant price pressure in royalty-free.

The average price per image for our single-image royalty-free product in the fourth quarter was $240, and the average price per image for our royalty-free product in the fourth quarter of the prior year was also $240.

I do not see that as significant price pressure on royalty-free, or a price war. I think there are a couple of perceptions out there where a lot of people, and I don’t blame them, not surprisingly are swinging the pendulum to either end rather too quickly, either in terms of the pricing issues or the substitution effects.

I think it will take some time to play out, and as I’ve said in my prepared remarks, have a look at the history of royalty-free and how it evolved and how it related to rights-managed and you may have something of a proxy there.

Peter Appert - Goldman Sachs

Great, thanks, Jonathan.

Operator

William Blair & Company’s Troy Mastin has a question.

Troy Mastin - William Blair & Company

Good afternoon, thank you. I wanted to ask first about the quarter. You said that you seemed to gain a little momentum in the quarter. You came in a little better than expected. I wonder what you might be able to attribute that to. I think you actually saw a flat to slight increase in your organic growth relative to last quarter. So have you maybe found a bottom there? Do you have a sense that you found a bottom? December end of quarter is usually a trick month for you. I’m curious what insight you can give in December -- and that was one question with three parts to it, thanks.

Jonathan D. Klein

Troy, I very much hope that we found a bottom, and I think if you look at our guidance for Q1 and for 2007, inherent in that guidance is the assumption that we have found a bottom.

I also think that it’s worth pointing out that with the exception of rights-managed, pretty much our whole portfolio did pretty well in the quarter. Royalty-free imagery grew 15%. We were happy with the 20% growth in Editorial Imagery. Footage made great progress. The new products are doing well. We’ve talked about micropayment. International is looking better. So look -- overall progress.

We are being cautious. The trends, the broader opportunities as well as the challenges that I spent a lot of time on the Q3 conference call discussing, are really no different from them. I think what has changed is that we’re addressing them very, very quickly, we’re being a lot more innovative in a lot more places, and we are being a little braver about investing in some other initiative which we might have been slower at investing in when the rights-managed and royalty-free business was growing the way it was in ’02, ’03, ’04 and ’05.

So I think we’re balancing our portfolio, we’re moving resources to some other areas, and as you said, December can be a bit of a wildcard every year. We had a reasonable December. We had a reasonable quarter, actually. It wasn’t one month being particularly better or worse than the other. It was a good quarter.

Troy Mastin - William Blair & Company

Is there anything in particular you can point to that led to your out-performing your expectations a little bit?

Jonathan D. Klein

Well, not really. It was kind of across the board. I mean, I don’t want to get into minute detail, but we did have a very good piece of business where we were photographing the Asian Games in the fourth quarter. That was pretty much in our guidance. We’re not going to get that kind of money in the fourth quarter of next year. And we did better on the revenues over there as well.

I think we also found that our U.S. operations, which are so important to us which, as you know, we had a difficult time in sales in the U.S. in the first quarter and into the second quarter. That’s running much more smoothly, and when we’re doing a good job in the U.S., it really does help us tremendously.

Troy Mastin - William Blair & Company

Thank you, Jonathan.

Operator

The next question comes from Matthew Troy, Citigroup.

Matthew Troy - Citigroup

Good evening. I’ll circle in and take a question I asked a quarter or two ago from a different angle, and that’s on incremental return on image added. We recently polled a bunch of photographers and one of the tough points was the whole pay-for-placement model. I guess a testament to your success, people are excited about the ability to get more imagery on your shelf space, given the eyeballs, but I’m wondering how you reconcile one, pulling that lever, which is obviously a good cash flow driver and can fall from a margin perspective directly to the bottom line, versus not diluting the quality or over-saturating the content. Specifically, you talked about your investments in ingest, making it faster and lower cost, a good thing.

I’m just wondering how you balance pay-for-placement, positive financial benefits with image quality and not diluting the quality of the content that’s returned [via the first search]. Thanks.

Jonathan D. Klein

That’s an excellent question, and I’ll do my best, because it’s the sort of question that I actually give long and quite tedious speeches about, but I’ll try and keep it quite brief on this call.

You’re absolutely right. I think that the power of our distribution and the insatiable desire of photographers, whether they’re the best photographers in the world or folks who are just starting off to try and get real estate on our site and on our various sites is great. As you said correctly, this model has been extremely well-received by the photographers, albeit in an environment where photographers are seeing their returns per image going down, across anybody’s site. It’s not a Getty Images issue.

The key really to prevent over-saturation on the one hand -- in other words, just too many images -- and secondly, a dilution in quality, is two-fold. The first is that not everybody qualifies for Lifesize or open. Photographers have to reach a certain level and we have to be comfortable with that level of both creative as well as technical quality. So there are certainly filters in that.

There are further filters behind that around hygiene -- by that I mean model releases, appropriate file size and all the rest of it. So we do that.

The second piece around that relates to two issues, two sub-points. The one is search. We are continuing to evolve search and we’re continuing to customize search in more and more ways, so that we are able to highlight imagery which is relevant to customers and to put the imagery in an order which suits the customer. If customers want to see the newest first, they can do that. If customers over time will want to search by all different kinds of things, like newness, price point, we’ll be able to do all of that.

We also are in the early stages of looking at having different places for customers to go. So for example, we have an RF zone on gettyimages.com. If you want royalty-free, you go there and your search is cleaner. You don’t get that many images.

So it’s a constant challenge for anybody who has a business on the Internet, that as you have more and more data, and in our case, imagery, you want the search results to be more and more relevant and more and more customized.

We continue to work with it but we still feel that it is our job firstly to find the very best images; secondly, at every price point; and thirdly, we need to serve up those images in a way that makes it easy for the customer.

So it’s an ongoing challenge. It’s also an exciting opportunity. But at the other end of the scale, if you’re in the imagery business, the ability to get more and more images from more and more viewpoints from more and more contributors, and to get that up to your customers more quickly and significantly more cheaply to us than in the past, it’s got to be net net, a very good thing.

Matthew Troy - Citigroup

Right -- go ahead, I’m sorry.

Jonathan D. Klein

No, you were going to do a follow-up?

Matthew Troy - Citigroup

Well, on the return part of the question, and maybe it’s a question for another time, but any sense in terms of what the incremental contribution from the growth in that business was? Obviously it’s a good margin business. How much should that help? Was it material in the fourth quarter?

Jonathan D. Klein

Lifesize is our first open product. It was launched in the middle of the fourth quarter. It’s a subset of the Rights-Ready model, and it’s very, very early days around that. Now of course, the iStockphoto business is essentially based on a user-generated content model, so it’s a bit like open or Lifesize. I mean, all the content through that business comes through that kind of system.

But for the Getty Images business, it’s early days around that.

Matthew Troy - Citigroup

Thanks for the time and insight, Jonathan.

Operator

Aaron Kessler from Piper Jaffray, please go ahead with your question.

Aaron Kessler - Piper Jaffray

Great, thanks and good to see the improvement sequentially there. A couple of questions. One, our survey indicated there is demand for other licensing models. Could you talk about, besides the Rights-Ready model, if you are looking at other licensing models for your customers?

Also, on the micropayment side, are you looking at pricing models there to potentially raise prices, and I have one follow-up question on the model.

Jonathan D. Klein

Yes and yes. Other licensing models, we are looking at them. We are appropriately, I feel, being very customer-driven here. Most customers are very excited about the advent of Rights-Ready. We do not want to throw a plethora of licensing choices which are going to become so confusing.

The good thing though, and it’s something which we often need to remind ourselves about, and it’s a good opportunity to remind you folks about this, is that customers are looking for the right picture. That’s what they do. They do not begin the day saying “What I really need today is a Rights-Ready picture” or “what I really need today is a royalty-free picture.”

Their business is always about the right picture, so what we’re trying to do is first focus on the right picture and then make sure that it’s a licensing model and a breadth, depth and quality of imagery that suits them.

We are looking at other licensing models, but don’t expect hundreds of them. That just wouldn’t be in anybody’s interest.

On the micropayment side, you asked about price, will we increase price. Yes, we have already, not so long ago. Will we look at other pricing models? Yes, we will look at other pricing models and other sub-collections. Just remember, when royalty-free started, invented by us, there was one brand and one model and one price point with different digital file sizes.

Today, just on our side alone, we have 10s of royalty-free collections, with different levels of quality, different specializations, different price points, different regionalization, and there is absolutely no reason why that wouldn’t be the same for the micropayment segment in the coming years, and we’re working actively on a number of those ideas. It’s very exciting and very, very customer friendly, as well as contributor friendly, somewhat to address the previous question that if you have specialist collections, it’s a lot easier for the customer to see exactly what they’re interested in, and it’s also easier for the photographer to get real estate and search results.

Aaron Kessler - Piper Jaffray

Great, and if you could just provide some tax rate guidance for 2007. I don’t believe we got that on the call.

Thomas W. Oberdorf

No, you’re right, you didn’t get tax guidance. We had previously said that because of our initiatives to get closer to the customer to give our international customers better service and we realigned our business, is that we would see improvements in the tax rate. We are not giving guidance on the tax rate. We do expect to see improvements over time, so I’ll just leave it at that, that we will see improvements over time.

Aaron Kessler - Piper Jaffray

Would it be similar to Q4 at 34%? I would expect it to be higher than that, though. Would that be correct?

Thomas W. Oberdorf

Yes.

Aaron Kessler - Piper Jaffray

Okay, great. Thank you.

Operator

The next question is Robert Baird’s Steven Ashley.

Steven Ashley - Robert W. Baird & Co.

Jonathan, on the last call, we talked about the fact that your traditional agency and corporate customers really are not set up to be able to buy and purchase on a micropayment site. It’s set up for credit card usage. It’s not for accounts payable and trade payable, something you said that you could consider and maybe facilitate.

So I guess first of all, is that something we could see here in the future, to make it easier under an existing account to be able to purchase on iStock, for the traditional customers? What kind of timing might that come under?

Then, what gives you confidence that if indeed you do that and open the door for them, that they will shift only a small amount of their RF unit consumption down to micropayments? Thanks.

Jonathan D. Klein

Yes, Steve, we have begun to provide certain customers in the agency and corporate segment with the ability to buy on terms. We have built up slightly our business development capability at iStock and we’re having more conversations as well as more transactions with larger, high-volume customers. We will over time certainly do that.

Of course, one of the beauties of the iStock model is its simplicity. When you have an all credit card business where the transactions are just happening all the time in a very easy, simple way, it’s very good and you fiddle with it at one’s peril.

We however feel that there’s significant demand for this. We know that customers would like us to do that. I’m sure we’ll do that. We’re beginning to look at doing it more broadly as well. As you point out, inherent in your question is this correct assumption that businesses don’t really like buying on credit card.

Now, what is the level of confidence that if we allow them to do that, might there be an acceleration in taking business from a different part of our portfolio? Let me tell you the way we look at our world and our business. We never stand in the way of what a customer might want. If we think that customers are best served by making it easier and easier for us to get a certain product or service, we’ll do that for them.

I was famously quoted in Wired magazine on the subject of cannibalization and I have not changed my view since then: do not get in the way of the market. Do not get in the way of customers. Don’t artificially make it harder for them.

With royalty-free when it first came on board, a number of people said to us, do you really need to keep the pictures to be of lower quality, and you need -- don’t put it into foreign countries and don’t put it into your international operations because that will protect rights-managed longer. That was wrong-headed, and I think that if we were to artificially slow down the promotion of iStockphoto, that would also be wrong-headed.

One of our five key initiatives for 2007 for Getty Images as an overall company is to aggressively grow iStockphoto wherever and wherever we can, and that will include making it easier for customers to get it, no matter what segment they’re in.

Does it increase the risk that they will swap? Yes, it does, slightly, but that’s okay because that customer becomes more valuable to us as they buy more and more of our products and services at all those different price points.

Steven Ashley - Robert W. Baird & Co.

Can you maybe just quickly say what you’ve experienced or seen with the few customers that you have enabled this for?

Jonathan D. Klein

Well, we haven’t got a long enough period with them. You know, you’re talking about five or six weeks in some cases, just under a quarter in others. So I couldn’t really quantify how it’s gone against a comparable period where they didn’t have terms accounts.

But what we do know is that customers welcome it. I think what customers have often said to us is things like well, you know, “We know you own iStockphoto. We’re using iStockphoto already. Make it easier for us”, and it’s very hard to stand in the way of that.

We’re also, remember, we’re in the relationship business too. We’re seeking all the time to take a bigger and bigger percentage of our customers image buying wallet. We have, fortunately, a broader array of products and services at a broader range of price points with the very best technology available, and we need to make that all available.

That’s very compelling to a big customer, all of whom are trying to save money. Remember who our customers are. None of them are immune from the changes in the digital media environment.

Steven Ashley - Robert W. Baird & Co.

Great, thanks so much.

Operator

We’ll go to Credit Suisse and Brandon Dobell.

Brandon Dobell - Credit Suisse Securities

Thanks. Just one kind of broader question, Jonathan. If you look back at let’s say the same stage when royalty-free was just starting up, relative to rights-managed, did the trajectory for royalty-free play out like you thought it would back then, if you transport yourself back in time 10 years? Just trying to get an idea of your level of comfort or confidence with where you stand right now, thinking about micro as an impact of royalty-free, trying to put it in the context of where you were when royalty-free was just starting out, and if it played out like you thought it would.

Jonathan D. Klein

In some ways, yes, and in some ways, no. On the positive side, had you said to me that the average price per picture for royalty free for the fourth quarter of 2006 was going to be $240, and had you said to me that in that environment, at a $240 average price point for royalty-free, that people were concerned about pricing in the royalty-free segment, I would have said no. That’s a major surprise.

The way we’ve improved the product, the service, the breadth and the depth in royalty-free has surprised me. We’ve done it more quickly than we thought. We’ve been able to become more efficient in that regard than we thought. We’ve been able to attract not every single photographer, but most photographers are quite happy to shoot for royalty-free.

So essentially, the size of the model, the price points, the quality of imagery in there, I could not have predicted this eight or so years ago. In fact, it’s almost now nine years since we acquired PhotoDisk. Nine years on February 8th.

So that I couldn’t have predicted. I think it’s rate of -- let me change that. It’s co-existence with rights-managed, we were always totally convinced, and that hasn’t surprised me. The rate of growth also hasn’t particularly surprised me.

Internationally, it’s probably spread a little slower than I’ve anticipated. It’s taken longer to have as significant a piece of the market outside the U.S. than we would have anticipated.

But overall, I think we can say that what the trajectory has been better for the company than we had anticipated by a significant margin.

The other piece about it is the substitution from a primarily CD business years and years ago to a single-image download business also was what we expected. We expected that once customers could buy the picture they wanted, rather than having to buy 100 images on a disc, only one or two of them that they wanted, they’d move very much more quickly to the single-image model. We’ve tried to mitigate the pressure on the CD models by inventing virtual CDs, which are very effective and customers like them.

But basically, customers like the image they want, which is one of the reasons I’ve always said that subscription is an important part of anybody’s mix in our business, but it’s only a fill-in. It’s not going to be the bulk of our business, because we’re filling or licensing a creative product where people want to choose what they want.

So I think overall -- does that help you, Brandon?

Brandon Dobell - Credit Suisse Securities

Yes, I’m just trying to get some sense of context, the different transitions, so yes, appreciate it. Thank you.

Operator

That is all the time that we have for questions today. Mr. Klein, I would like to turn the call back over to you for any additional or closing remarks.

Jonathan D. Klein

Sure. In our October conference call, we talked about the 2007 key initiatives for the first time. I’m not going to go through all of them now, but I want to focus on our overriding objective for 2007. It’s one which has been very exciting for everybody at the company. It’s been well-received and it’s exactly what our people are interested in, and hopefully you’ll be positive about it.

The overriding objective is to continuously innovate in the way we serve customers, the way we operate, and the way we grow. I cannot overstate the importance of innovation to our company and for our industry. We have driven almost every innovation in the history of this business. Innovation remains key to our leadership in the marketplace and will help us to maintain and expand our lead.

Now, 2006 was a good year of innovation, and I expect 2007 to be significantly stronger. I would just like to give you some examples of how and where we are innovating. If I’ve touched on these by accident during the Q&A, you’ll excuse me, I hope, for the repetition.

In the products area, we are looking at new ways to monetize our assets and our traffic. We are looking at a couple of new licensing models.

In the footage area, we’re looking at a new licensing model for footage or film, creating a new site for our footage customers, and new types of footage or film content.

We will further develop the open concept as initially demonstrated through Lifesize. We are quietly working away on a number of multimedia offerings. You might enjoy digitaljournalist.com to see some of our photographers’ work and hear their voices, and sometimes see some video together with the stills and their voices, as well as the voices of the people they’re talking too.

At the moment, our asset management offering only covers still imagery. There’s clearly a hint inherent in that.

We will further embrace the user-generated content model beyond just where we are today.

We are very interested in entertainment footage or video, not just stills.

In mobile, we have too many initiatives to mention, but we will continue partnering with mobile application developers and our editorial clients to power the image content behind their applications. So innovation in products.

On the sales side, we’re rolling out innovative programs that allow us to develop deeper relationships with our biggest and best customers. We also have for the first time loyalty programs providing incentives for our best customers, and they will soon be rolled out.

gettyimages.com and technology -- it’s not over when we launch the site. We will continue to include ongoing search refinements, community spaces and other enhancements. We’re looking at new types of partnerships with owners of content who wish to utilize either our distribution -- and we know about that through the image partner world -- or our technology.

There are lots of new technologies coming out of our little group called Getty Images Labs. I’m proud of that team. Getty Images Live, the photographer portal, many of the things I’ve mentioned earlier, and istockphoto.com -- very innovative already, but the best is yet to come.

That’s a pretty long list. The exciting thing is the list is not exhaustive. I just want to give you a sense of how focused we are on innovating both for our industry and our business. I will report on this progress whenever I speak to you.

Also, please rest assured that we’re all focused and energized and as committed as we have ever been. We’re very lucky to be in this business. We’re very lucky to lead it.

With that, thanks so much for your continuing interest in Getty Images.

Operator

Thank you all very much for joining us today. That does conclude the presentation. Have a great afternoon.

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