Getty Images: No Compelling Argument for Rich Valuation

I listened over the internet to the Getty Images Inc. (GYI) presentation at the Thomas Weisel Partners Conference. If you are at all interested in Getty Images, I recommend listening to the conference yourself. For the next several days, you can find the relevant links on the Getty Images Investor website.

Most of the information was generic in nature. While it was somewhat helpful, I was listening intently for how Getty Images differentiates itself and how it is building a moat to protect its business in the future. Most of what I heard was that Getty Images is the largest and most reputable stock agency, and thus it is best able to serve the needs of its customers. Moreover, the company discussed that by revamping its sales force, the company has improved significantly.

And the company discussed that it has processes and procedures in place to ensure that the archived media has the proper documentation in place — that is, model, building, and other releases. That information is all well and good, but it did not fully address how the company will be able to thwart off new entrants.

As I mentioned recently, Flickr could become a new entrant and cause considerable chaos in the stock photo market industry. Before Flickr could enter that market, however, it would need to educate its users on the use of various releases and to ensure that the users accepted the responsibility for the releases. Because the digital photography is exploding with new content — lots of new enthusiasts with different digital cameras and Adobe (ADBE) Photoshop — my belief is that there will be continued pressure on the photo stock agencies. How do they differentiate themselves and add significant value?

For example, if a customer wants a picture related to dentists or dentistry, Flickr has about 10,000 photos related to dentistry. I am sure that only a small percentage have the required releases, but if users were able to readily derive income from their photos, I suspect that many users would obtain the necessary releases.

In summary, I did not learn of a compelling argument for a strong valuation of Getty Images. Instead, I got the impression that Getty Images was working its way through some transitory issues — revamping its sales force, for example — and was focused on purchasing those companies that could add more arrows to its quiver.

I remain cautious because I think a new entrant, such as Flickr, could change the entire game for everyone. Or perhaps it will be Google Inc. (GOOG) with its image indexing that will be a game changer. Although I do not know how the industry will change in the future, I am not confident that simply having a large library of images guarantees future success. It is interesting to note that on a day when the S&P does extremely well, up about 1.55%, Getty Images was down $0.43 to $50.62, for a loss of about 0.8%.

Incidentally, another excellent weblog for the stock photography business is StockPhotoTalk ¦ Special Interest Blog by Andy Goetze.

Disclosure: I hold no positions in Getty Images.

GYI 1-yr chart

Comments

[MichaelDemaray]

Yes, GYI faces growing competition from online alternatives. However, these alternatives face a few potential barriers: 1.) rights management -- how will the collect and enforce on behalf of the photographer? 2.) quality consistency -- if I were to go to Flickr, each image I would receive would not be standardized as to quality, size, etc. This may not be a big deal for web based image use, but when you move to the print side, it becomes more of an issue. Nonetheless, and to your point, these barriers aren't terribly high.

Lastly, don't rule out Getty's iStockPhoto.com which is addressing the very challenge it is facing, namely user generated content. Additionally, the content here is more professional. If you peruse Flickr you end up with an amalgam of pictures of random people on vacation, pets, etc. IStockphoto is geared more to the design side.

[Kevin Stecyk]

<blockquote cite="Michael Demaray">Yes, GYI faces growing competition from online alternatives. However, these alternatives face a few potential barriers: 1.) rights management -- how will the collect and enforce on behalf of the photographer? 2.) quality consistency -- if I were to go to Flickr, each image I would receive would not be standardized as to quality, size, etc. This may not be a big deal for web based image use, but when you move to the print side, it becomes more of an issue. Nonetheless, and to your point, these barriers aren't terribly high.

My fear is that Flickr provides a tutorial for its users. If you the user want your photo eligible for our new stock photography selection, you are required to have the following conditions met: 1) required releases; 2) sufficient resolution/pixels defined as blah blah, 3) whatever; and 4) more whatever. With just a bit of coaching, Flickr can unleash a new army of picture snapping enthusiasts, who, unlike their professional counterparts, would be happy just to get published and recognized for a good photo.

<blockquote cite="Michael Demaray">Lastl... don't rule out Getty's iStockPhoto.com which is addressing the very challenge it is facing, namely user generated content. Additionally, the content here is more professional. If you peruse Flickr you end up with an amalgam of pictures of random people on vacation, pets, etc. IStockphoto is geared more to the design side.</blockquote&g...

Not being intimate with the stock photography business, my simple question is what does a stock photography business bring to the table? Just guessing aloud: 1) better content; 2) better organization; 3) proper releases; 4) more professionalism; and 5)a slicker website? Let's look at each point.

<b>Better content</b>

Can Flickr develop algorithms to surface the better content more quickly? Can it develop algorithms to highlight more skilled photographers? Can it highlight photographers that were skilled but previously unknown because they live in Eastern Europe, Africa, or South America, away from the large traditional media buyers? I think the answers to all questions is a resounding <b>yes</b>...

The other question is, do buyers also want the slick professional photo. Or do they often want a photo with its rough edges, the one that looks more like a snapshot than a photo?

I am by no means a strong photography critic, but it seems to me that photography is somewhat fashionable. Some things go in and out of style.

The largest differentiators, in my opinion, between amateurs and pros is that pros know how to make effective use of light, know how to make effective use of their equipment, and know how to shoot for a consistent stream of quality photos.

That doesn't rule out, however, that an amateur might have 5-10 exceptional photos per year.

<b>Resolution/Pi...

Users will have to let the Flickr software the largest hi-res image available. Not a big deal.

<b>Proper Releases</b>

I am sure Flickr could provide a set of standard releases for its users. Or perhaps users will create their own releases. As long as there is a bona fide release, there shouldn't be any worries. I don't think this issue is a significance hurdle.

<b>Professionali...

I am not sure exactly what that means. Perhaps Flickr creates "tiers" of users to provide more professionalism. I am not sure how it does that or what it would be striving to achieve. But I am sure Flickr could, without too much effort, create a more professional environment.

<b>Slicker site</b>

Same comments as those for Professionalism.

In my view, the biggest factor is that millions of snap happy photographers are being unleashed. Many of them will be happy just to show their friends and relatives that they have the creative and artistic skills to get published. Many members now are content to show their friends and relatives their photos. Anything beyond that would be icing on the cake. If getting a few releases and specifying the resolution is all that is required to get published, then many will leap at the opportunity.

This should be an interesting story to follow.

Thank you for your comment.

[MichaelDemaray]

All good thoughts Kevin..

the Flickr discussion warrants another question -- Yahoo! owns Flickr. Is this a strategic path they would lead Flickr down. Nonetheless, regardless of Flickr, the same questions applies to any other photo sharing sight. Just today we have word of another site, Imagekind getting an investment from noneother than a Getty co-founder.

All that said, before GYI's recent buying spree -- they had a ton of cash on the balance sheet. I'm guessing this is why Blum Capital got involved -- perhaps for a recapitalization. Certainly the market assumed something of th sort when it was announced in Barron's. I would not be surprised if the recent moves by Getty (acquiring a few other sites) have been contrary to what any activist sharehholder would want (signaling a potential poor use of cash). In light of this, I view the called off talks with JUPM to be a positive. It will be interesting to see if Blum and other invested hedge funds (Riverpark, etc.) continue to build their position and translate that into pressure on management for value realizing change, or will they blow out of their positions given Getty's recent buying spree? My guess is they will apply pressure.

[Kevin Stecyk]

Thank you for your comments Michael.

<blockquote>the Flickr discussion warrants another question -- Yahoo! owns Flickr. Is this a strategic path they would lead Flickr down. Nonetheless, regardless of Flickr, the same questions applies to any other photo sharing sight. Just today we have word of another site, Imagekind getting an investment from noneother than a Getty co-founder.</blockq...

Yes, I understand that Yahoo! owns Flickr. Is this a strategic path that they would lead Flickr down? Why not? Flickr currently receives $25 per user per year. Imagine the positive impact to Flickr if it can raise its revenue per user by $5+ per user per year. Perhaps it charges those users more who want to be able to sell their images? And Flickr takes a healthy cut from each sale? One of the biggest problems for most companies is customer acquisition. Flickr already has the customers who might jump at the opportunity (read, pay money) for the potential to earn money by selling their pictures. Just a thought.

<blockquote>All that said, before GYI's recent buying spree -- they had a ton of cash on the balance sheet. I'm guessing this is why Blum Capital got involved -- perhaps for a recapitalization. Certainly the market assumed something of th sort when it was announced in Barron's. I would not be surprised if the recent moves by Getty (acquiring a few other sites) have been contrary to what any activist sharehholder would want (signaling a potential poor use of cash). In light of this, I view the called off talks with JUPM to be a positive. It will be interesting to see if Blum and other invested hedge funds (Riverpark, etc.) continue to build their position and translate that into pressure on management for value realizing change, or will they blow out of their positions given Getty's recent buying spree? My guess is they will apply pressure.</blockquo...

In all sincerity Michael, you follow this industry more closely than I do. Let's take look at some quick data from Yahoo! financial for both GYI and JUPM.

GYI


- PEG Ratio (5 yr expected): 1.42 (a bit high)
- Enterprise Value/EBITDA (ttm): 9.328 (a bit rich)
- Return on Assets (ttm): 8.92% (nothing exciting)
- Return on Equity (ttm): 10.40% (okay)
- Qtrly Revenue Growth (yoy): 9.50% (good, strong)
- Qtrly Earnings Growth (yoy): -28.80% (stumbled somewhere)


JUPM


- PEG Ratio (5 yr expected): 1.98 (high)
- Enterprise Value/EBITDA (ttm): 9.422 (a bit rich)
- Return on Assets (ttm): 5.54% (poor)
- Return on Equity (ttm): 6.08% (poor)
- Qtrly Revenue Growth (yoy): 6.30% (okay, but not great)
- Qtrly Earnings Growth (yoy): -98.30% (stumbled somewhere)


Without knowing anything more, I am not excited by either company. Not being an industry insider, my intuitive thoughts are that a stock agency should be an intellectual play. That is, there shouldn't be a lot of infrastructure and capital. Yes, computers and servers are required. But I don't believe that stock photo industry is a capital intensive industry. Yet, when I look at the returns on assets, I don't see high values. Given that assets should low and that they are in the denominator, I would expect a high return on assets. Looking at the PEG and Enterprise Values to EBITDA, I see rich valuations for both companies. I look at the growth in revenues. That metric is strong for GYI, but low for JUPM. And earnings have not been good for either company. I don't see anything exciting for either company.

As I look at it, the future is highly uncertain with Flickr, Google, and and other potential heavyweights entering the space. There doesn't seem to be a large barrier to entry. There are more and more photographers with better and more sophisticated cameras and equipment coming on the market each year.

Again, I don't follow this industry closely. If the stock photo agencies are counting on traditional media of newspapers and magazines, then they are in for more pain. Traditional media is having a difficult time itself. The traditional media companies will force their pain onto their suppliers.

Bottom line: I am struggling to understand why stock photo agencies are a compelling buy. Where is the strong growth? Where is the opportunity to reduce costs? How do they differentiate themselves? In short, I see more negatives than positives. I think consumers win at the expense of the stock photo agencies.

[MichaelDemaray]

Kevin, I think all of the issues you've raised are important and valid. I would also say that both management and (one would hope) investors are already aware of them. In the last conference call, the company discussed the future of the business being in user generated content. They also discussed a move away from photo stills to video and other design elements. The big question is whether management can successfully transition the company into this next iteration of business and whether the stock is properly priced given the risks and opportunities. The company is not dirt cheap but it does offer a 7% free cash flow yield on EV and has a strong balance sheet. To date it has enjoyed all but a virtual oligopoly in its space. But as you've pointed out -- is that sustainable and is the stock appropriately reflecting such risks? Only time will tell. Cheers and good luck...

[Kevin Stecyk]

Thank you for your comments Michael. :-)

Dan Heller provided some interesting comments today: The myth that microstock agencies hurt stock photo pricing.