Jupitermedia Q4 2006 Earnings Call Transcript

TRANSCRIPT SPONSOR

Jupitermedia Corporation (JUPM)
Q4 2006 Earnings Call
March 15, 2007 11:00 am ET

Executives

Alan Meckler - Chairman of the Board, Chief Executive Officer
Chris Cardell - President, Interim Chief Financial Officer, Chief Operating Officer

Analysts

Kit Spring - Stifel Nicolaus
Chris Rowen - Soleil Securities
Jeff Shelton - Bleichroeder
Joe Maxa - Dougherty & Company
Aaron Kessler - Piper Jaffray
Robert Haley - Gabelli
Jim Pickerell - Selling Stock Newsletter
Christa Quarles - Thomas Weisel Partners
Jeff Graf - Springhouse Capital
Paolo Pascal - Canaccord Adams

Presentation

Operator

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

Alan Meckler

Thank you very much, Sean. We are very happy to have you with us today. I'm here at our headquarters in Darien, Connecticut along with Chris Cardell, who is our Chief Operating Officer, President and Acting Chief Financial Officer.

Obviously we have lots to report today. I'm sure many on this call want to discuss the discussions that were recently terminated with Getty Images, and we will be pleased to answer questions as we can on this matter later in the call.

We're very pleased with our fourth quarter results. Our top line growth in images was reasonably strong. But before I get to that, what I wanted to do was just read the Safe Harbor, which I'm being reminded about, thank you.

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Chris Cardell

Before Alan continues with formal comments, I would just like to remind everyone that in our financial earnings announcement released yesterday and on this call today, Jupitermedia is providing specific forward-looking statements, including guidance related to our expectation of future financial performance. Any forward-looking statements made as part of our call today are subject to risks and uncertainties that could cause actual or predicted results to differ materially.

These risks are outlined in our earnings announcement as well as in our SEC filings, including our most recently filed Form 10-K which can be obtained from the SEC's website or directly from our investor relations website.

I'll now turn the call back to Alan for his comments.

Alan Meckler

Thanks, Chris. Just as an aside, I always find these things sort of humorous that we have to read these things, and I was quite excited yesterday to read that Alan Greenspan, whom we all know, in a major summit in Washington two days ago said that in terms of Sarbanes-Oxley, that the only thing he thought that was of value in Sarbanes-Oxley is that the officers should sign the financials and guarantee that they are accurate. I think we need more of that in this country.

Anyway, we're very pleased with our fourth quarter results. Our top line growth in images was reasonably strong. While the road has been somewhat bumpy in this division, we now see several strong silos of growth. Particular strength going forward will be found with our very popular Jupiterimages Unlimited high-level subscription plan, which is growing rapidly because of its high-quality images and unique benefits to customers. No other company has a program like Jupiterimages Unlimited and it's extremely successful.

We can also report that this product is now in its first renewal cycle and we're seeing over 90% renewal success. Our micropayment division, Stockxpert.com, is thriving. We gained control of 90% interest late in 2006. We're just starting an active promotion campaign to go along with a server conversion from Hungary, where the site was created, to our facility in Peoria, Illinois. These two projects, plus the worldwide reception we're getting with this product bodes well for very strong growth in 2007 and beyond.

Our direct sales operations are also thriving. We have experienced both year over year and sequential quarterly growth with our direct sales teams in United States, Canada, Australia, Britain, France and Germany and we see continued strength here in the first quarter of 2007.

Elsewhere in images, our distribution business is at breakeven from a growth standpoint, but even with this flat news the progress we're making with direct sales and subscription sales should enable us to continue to show overall growth for our images division.

Our images division also includes royalty free and rights managed music. We completed the acquisition of StudioCutz in early January, and this deal gave us the critical mass we needed to make our music business meaningful. Adding to this is the launch three weeks ago of our subscription service offering more than 7,100 royalty free music tracks for either a one-month or one-year period, at prices ranging from $1.99 to $9.95 per year, respectively.

We believe at this time we're the only company offering royalty free music by subscription. This new service is off to a strong start. We're very optimistic that we're onto a growth opportunity and mean to aggressively grow this division. I would also point out that because all of our music is wholly-owned, we have the opportunity to generate very high margins in our music business.

In the coming weeks, our Animation Factory subscription service will be adding a new offer featuring a higher level content for presentations by business professionals. Animation Factory, which was acquired in late 2005 is having a growth year right now and the new service just mentioned should further stimulate sales.

On the integration front, we're continuing to make progress and reduce costs. We still are faced with the big task in getting all of our image properties and divisions onto our Oracle financial system. We believe that we will make significant progress on this front during this year.

Another project needs to be commented on. This is our superstore approach to selling all types of digitized content in one location. We hope to launch this landmark service early in 2008. We have a team taking all of our diverse product lines and placing them on one e-commerce platform. When this project is completed we believe we have a chance to be the number one resource in the world for designers of any budget level who come to purchase digital content from $1 to $500. Here a digital designer or creative professional will find photos of every resolution: clipart, Flash animations, Flash movies, fonts, music and more.

We believe that in less than ten years, there will be 1 million websites and at least 15% of these sites will be buying anywhere from $300 to $15,000 annually of digitized contents to enhance respective website user experiences. We believe we can be number one in this area. In other words, we plan to be the go-to place for these designers.

We also believe that we're the only company in the world as the various types of wholly-owned content in sufficient numbers to hopefully make this superstore portal concept appealing and financially workable.

I want to turn now to the overhaul of our online media division previously known as JupiterWeb. Shortly this division will be renamed as Internet.com. Many listeners know that from late 2003 until about three months ago, our company did not invest in JupiterWeb. In fact, it is widely known that as we sold our search engine strategy events and companion websites for $43 million and our JupiterResearch division for $11 million that we were considering selling JupiterWeb.

In September this changed and we started to revamp this product line. In the previous three months, we've done the following:

We've hired additional salespeople to enhance our very strong and veteran sales group;

We've created a plan to redesign our popular InternetNews.com and other sites, that should be completed by the end of the second quarter;

We've been redesigning overall search and are replacing our old search engine software with Google Enterprise search software. This project will be completed in the second quarter and should become an important advertising sales stream;

We've launched several new web sites. These are the first new launches in over three years;

We purchased JustTechJobs.com, a business that started to grow as soon as we began to market it through our network of 150 web sites. This marketing effort is just beginning with new initiatives coming in the next few months;

We've researched possible acquisitions, in addition to JustTechJobs. We've been looking for additional content sites and services that we can grow efficiently. Several acquisitions should be announced in the coming quarter;

We bought control of the ISPCON trade shows and announced several new trade shows for 2007. Presently we will be running eight trade shows this year.

Needless to say, we've been busy revamping, oiling and growing old JupiterWeb into the new Internet.com. This division had $12 million of EBITDA in 2006 but growth was flat. We believe that by the end of 2007 we will be able to show reasonable growth for this division, and that numbers could even be better for the new Internet.com division in 2008.

We're very excited about the remainder of this year and the future. We are a strong company with powerful and important content. We have a very experienced group of colleagues that we work with worldwide. Content and colleagues certainly are essential to growth, and we have these in abundance. We're also a resourceful company and a company that will aggressively and creatively work to increase value for our stockholders. We have lots of exciting plans and news to deliver in 2007.

I am now going to turn the call over to Chris Cardell, who will give you more details about our financials and then we will take questions.

Chris Cardell

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

Turning to our fourth quarter, for the fourth quarter we reported revenues of $34.8 million, which represents a $1.6 million or 6% increase over our results for Q4 of 2005. This increase was due to higher online images revenues of approximately $2.3 million, partially offset by a modest decline in online media revenues.

On a sequential quarterly basis, revenues increased $1 million due to an increase in revenues from our online images business. Images revenues increased in part from the acquisition of Cover Images in October of 2006 and from the progress made by our US international direct sales teams as Alan has mentioned, with particular success in sales of our Jupiterimages Unlimited premium subscription offering.

Turning to cost of revenues, as a percentage of revenues, our cost of revenues increased to 40% in Q4 2006 from approximately 36% in Q3 2006, due primarily to higher commissions to third-party image suppliers, partially as a result of the recent acquisition of Cover Images, and also due to an increase in rights managed image sales. We also incurred increased costs for internally produced images, and we incurred higher expenses for customer incentives due to higher sales. While these incentives are marketing in nature, these are classified as cost of sales in accordance with GAAP.

Turning to advertising, promotion and selling, this line item increased in Q4 2006 from Q3 2006 due primarily to severance for terminated employees and the addition of Cover Images.

Turning to general and administrative expenses, we actually experienced a decrease from Q3 to Q4 of approximately 7%. This was primarily due to a decrease in non-cash stock option expense, consulting expenses related to Sarbanes-Oxley and travel expenses, which were partially offset by an increase in one-time fees related to the recent discussions with Getty Images regarding the potential transaction, which were terminated last week on March 7, 2007, and other legal and professional fees.

Our non-cash stock-based compensation expense, and this is noted in our press release, that beginning January 1, 2006, we began expensing stock-based comp expense. Non-cash stock-based comp expense was $800,000 for the three months ended December 31, 2006, and $3.7 million for the full year ended December 31, 2006.

Regarding income taxes, our provision for income taxes for the fourth quarter was approximately $500,000 or an effective tax rate of 55%. This was abnormally high due to U.S. income taxes related to non-deductible stock comp expense and foreign activities. On a go forward basis we're modeling the effective tax rate to be approximately 43%.

Turning to EBITDA, the EBITDA earnings before interest, taxes, depreciation, amortization and non-cash stock comp expense was $7.3 million for the fourth quarter of 2006. Excluding legal and other fees associated with the recently terminated discussions with Getty and one-time charges for severance, legal fees and professional fees associated with abandoned potential acquisitions, EBITDA was $8.2 million for the quarter.

As we turn to our balance sheet, as of December 31, 2006 we had $8.9 million in cash and $65.9 million in debt. Our days sales outstanding for accounts receivable were approximately 64 days as of December 31, 2006.

Turning to the liability side, and this is liability that we always view as positive liability, our deferred revenue which is an indicator of backlog, has increased from $11.9 million at December 31, 2005 to approximately $13.5 million at December 31, 2006, due primarily to increased bookings for our various images subscription offerings.

Turning to guidance, for the first quarter of 2007 we expect revenues to be in the range of $34.5 million to $35.5 million. Due to approximately $2 million in legal and other fees associated with the transaction discussions with Getty Images, which were recently terminated, we expect net income to be approximately breakeven for the first quarter. This net income estimate does not include non-cash stock-based comp expenses. The impact of these non-cash expenses is expected to reduce earnings per share by approximately $0.01 for the first quarter of 2007.

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

Excluding non-cash stock comp expense, again expenses related to the terminated Getty discussions, we're expecting EBITDA of approximately $7.5 million for the first quarter of 2007. This guidance assumes fully diluted shares of approximately 36 million for the first quarter.

Now I will turn the call back to Alan.

Alan Meckler

Thank you, Chris. We're happy to take calls now. Thank you.

Question-and-Answer Session

Operator

Your first question comes from Kit Spring - Stifel.

Kit Spring - Stifel Nicolaus

First for Alan, your latest thoughts on the impact of micropayments on your business and how that's changing, if it's getting smaller on your subscription business.

Chris, can you explain why the change in working capital was so negative in 2006? What would be a good assumption for working capital changes in 2007? In '07, will cash flow from operations be closer to EBITDA? It was about half in 2006.

Alan Meckler

Thanks, Kit. The micropayment situation I think has stabilized. We're seeing growth in our subscriptions for the first time in a while, at least our lower level subscriptions. Jupiterimages Unlimited subscription service seems to be impervious to anything to do with micropayment, and it is our fastest-growing property, so that's very exciting news. We now see micropayment business, now that things have stabilized as net additive to this company.

As you know, many of you may know or may not know, through the end of last year until the last week of the year, we wholly-owned a 47.9% interest in our micropayment business known as Stockxpert.com. At the end of the month of December we were able to raise this position to a 90%; obviously, control. The business has been growing very smartly. In terms of our size, it definitely should have a major and positive impact on our growth for the rest of the year.

So I'm not saying that micropayment couldn't in some form evolve and cause additional problems, but we do think that things have stabilized and that we're definitely seeing an upward tick in our businesses.

Chris Cardell

Kit, regarding your question on working capital, I would explain it with a couple of components. If we compare working capital at December 31, 2005 to December 31, 2006, working capital was actually about $5 million negative at December 31, 2005. But again, embedded in this negative working capital, there was about $11.7 million of deferred revenues as a current liability, which certainly doesn't cost us $11.7 million to fulfill the subscriptions.

As we turn to December 31, 2006, negative working capital has increased to about negative $12 million, and embedded in that is something approaching $14 million of deferred revenues, which again will require $14 million to fulfill. The other factors for the decline is use of cash for acquisitions. As I think most of you know, we've been quite acquisitive, so the other significant change would have been a decline in our cash balance from $18.5 million as of December, 31, 2005 to $8.9 million as of December 31, 2006. Again, that cash went out the door for investments in recent acquisitions.

Kit Spring - Stifel Nicolaus

Do you have an estimate for cash flow from operations for the first quarter? Will it be below the EBITDA?

Chris Cardell

I don't know that I have a specific forecast. There certainly is CapEx that would that we would be investing. Alan mentioned the superstore portal. There certainly have been some expenditures for CapEx that are a little above the norm, but nothing crazy. There's certainly normal CapEx.

We also have certain planned content acquisitions, so I think it's fair to subtract some of those items from EBITDA. We also announced in early January the acquisition of StudioCutz, and also Alan mentioned ISPCON. So there have been some business acquisitions in the first quarter which would require a use of funds.

Kit Spring - Stifel Nicolaus

Thank you.

Operator

Your next question comes from Chris Rowen - Soleil Securities.

Chris Rowen - Soleil Securities

Can you tell us what percent of revenue, or what percent of image revenue this quarter was from subscriptions?

Alan Meckler

On an overall basis for the quarter, this is a format that we include in our 10-Ks and 10-Qs in terms of the components of image revenues. For the fourth quarter we have revenues of $27.1 million in total. The categories that we disclose, single images and CDROMs, these would be sales by our direct sales teams were $14.1 million approximately. Subscriptions accounted for $6.8 million of our fourth quarter revenues.

The third category that we describe is revenues from distributors, third party licensing and other. It's fair to note that within the distributor category, there are sales of subscriptions, not a large number, and then of course are sales of single images and CDROMs. That would be the breakdown of images by how we disclose it.

Chris Rowen - Soleil Securities

Can you give us an outlook in terms of the gross margins for the image segment, going forward -- or for the whole company, for that matter? I think we've come down 9 points year-on-year; where is that headed?

Chris Cardell

We're not giving specific guidance on the margins but my expectation, and Alan described some of our initiatives and products, and the progress that we've made with products like Jupiterimages Unlimited, which is a premium subscription offering and consists of only our wholly-owned content. So the margins on this product are extremely high, and this is perhaps our fastest-growing product right now.

Similarly, in the music business, which is small but we expect it to grow, again all the content is fully owned. That's been a big cornerstone for our strategy is to own our own content and try to exploit it in as many ways as possible, through sales by our sales team, by inclusion in subscription and various product offerings, by sales through third party distributors, through licensing, in non-traditional ways, so that there are many things you can do with the content when you own it. Again that is part of the strategy going forward, the expectation would be for margins to improve.

Chris Rowen - Soleil Securities

The last question is Stockxpert. Has that always been in the revenue line or had that been in other income and if there's a change, when did it happen and what's the impact?

Chris Cardell

Stockxpert, we acquired 49.7% interest, a minority equity interest in January 2006. So we were reporting our pro rata share, the 49% of the net income of that business, in the equity income line in our income statement, right up until mid to late December when we acquired an additional amount.

We now own 90% of Stockxpert, but that only occurred late in December 2006. So from late December forward we're now consolidating the full results of Stockxpert. So there's a very small amount of Stockxpert in our revenues for 2006 and a very small amount of costs in the operating lines, and then a component within equity income.

As we go forward, it's fully consolidated now, although we will have to report the 10% minority interest as a deduction below the line. That will be the reporting going forward.

Chris Rowen - Soleil Securities

Can you give us an order of magnitude of the impact to the '07 top line from having that in-house?

Chris Cardell

We haven't provided guidance for the '07 top line. If we did, we would not breakdown the specificity of how much of that is going to come from Stockxpert.

Chris Rowen - Soleil Securities

Thanks a lot.

Chris Cardell

Just a follow on, for 2006 it was an insignificant number.

Operator

Your next question comes from Jeff Shelton - Bleichroeder.

Jeff Shelton - Bleichroeder

Alan, you when down a path of selling the company. Obviously, it didn't work out at the end. Can you give a little bit of background, maybe talk about why talks broke down? Are there any lessons learned here that you can take with you as you operate the company on a stand-alone basis in '07?

Alan Meckler

First lesson is to try to do a deal without professionals. You save a lot of money if it doesn't work.

First of all, we didn't shop the company; we were approached. Secondly, in terms of the deal, it was a mutual decision. So that's what I would have to say about that.

I'm sorry, is there another part?

Jeff Shelton - Bleichroeder

No, that basically covers it.

Second question, can you talk a little bit more about the gross margins? Even on a sequential basis they were down pretty significantly. I guess there was some talk about specific components in there that may be one-time. What are your expectations for the first quarter?

Chris Cardell

The addition of Cover Images, which was the only acquisition that really had any kind of impact on the fourth quarter, this is an image distributor in Spain. Distributors typically have lower margins, and this one is no different than other distributors. A lot of the business is of editorial content, so the margins in this distributor business are lower than even our other distributor businesses.

Strategically, this gives us a base of ownership, and it controls our distribution outlet in Spain. We believe that going forward, that Cover will sell more of our wholly-owned imagery, which they're selling very little of right now, which will help improve the margins there. That certainly was a factor in increasing cost of sales as a percentage of revenues in Q4.

We've also had extremely good success selling the various brands, rights managed brands that we acquired from Picture Arts. This was an acquisition in mid 2005 and it's taken some time for our sales teams to really gain momentum. But some of the brands that we acquired from Picture Arts are absolutely among our top sellers, brands like FoodPix, Non-Stock and Botanica. Some of the highest quality rights managed brands in the world, which really give our sales team a differentiating factor when they go in and talk to large agencies or creative buyers.

So it's a great hook to get into business that we weren't getting into before. They're top sellers, but the margins are lower in these collections. As we gain momentum there, that has changed the cost of revenue mix.

I also mentioned in the earlier comments, it's a little bit of an anomaly when we offer customer incentives based on sales. While I would really view them as marketing in nature, under GAAP, they get recorded in the cost of sales line. Offsetting some of what we see here in the fourth quarter, we do believe that the wholly-owned content strategy, particularly with products like Jupiterimages Unlimited and other products will help to improve these margins going forward.

Alan commented on the initiatives to further integrate the businesses. Certainly we have not fully integrated all of these many recent acquisitions, and there are very good opportunities to streamline what we're doing and take out a lot of cost this year.

Jeff Shelton - Bleichroeder

What was the contribution on the revenue side for Cover Images in the fourth quarter?

Chris Cardell

Approximately $600,000.

Jeff Shelton - Bleichroeder

Do you have a breakout as to what percentage of your single image sales is now rights managed versus royalty free?

Chris Cardell

We don't break that out. This is off the top of my head. In terms of our total image business, I'd say it's going to be in the range of 15%, 15% plus. That's a ballpark. It's certainly been growing. Two years ago that would've been something like zero. Last year, maybe it would've been 10%. I don't know that it's going to grow in the same percentage, but as I say, we have these really wonderful, world-class collections, and that's been, I think, a significant factor in why our sales teams have been as effective as they have been.

Jeff Shelton - Bleichroeder

The acquisitions you've made this past quarter or the quarter before, are those dilutive to the EBITDA line in '07, or would you say they're accretive?

Chris Cardell

In Q4?

Jeff Shelton - Bleichroeder

Just going forward into 2007.

Chris Cardell

The recent acquisition of Cover I would view as neutral. That's how we're planning it right now, but if we make the progress that we're hoping to make on selling more of our content there, it can certainly become accretive.

Jeff Shelton - Bleichroeder

Thank you.

Operator

Your next question comes from Joe Maxa - Dougherty.

Joe Maxa - Dougherty

That was my question too, on the acquisitions. I have been noticed your costs are growing faster than your revenues, at least on a percentage basis. Do you expect that to be more in line in '07?

Chris Cardell

Joe, you know the pace of acquisitions has been pretty serious here. It's slowed, but that is certainly not to suggest that we are not going to do other acquisitions. I think we have acquired and assembled some of the great collections and sales teams in the business, and we've been working to integrate them. There's more progress that we expect to make this year in integration, which my expectation is that stable would be a conservative comment.

Certainly, there's going to be an ability to streamline costs, and remove expenses from the business. As I would turn to something like the music business, which is small, the recent business acquisition of StudioCutz; that's absolutely a business it's going to be accretive. It's very high profit margins there, and we took on one employee with this business and it came with a very nice book of business. So I would expect it will become more efficient as we go forward here.

Joe Maxa - Dougherty

How should we look at your media business now going forward through the year? It looks like Q4 was pretty much flat with Q3, and it's normally a strong quarter. First can you address that?

Secondly, how should we look at it through '07, as you mix in the events and some other things?

Alan Meckler

The online media business, you're correct, Joe. We're sort of paying the price of three years, three-and-a-half years of not investing in it. As I indicated, we thought during '06 that we would sell it and then had a change of heart at the end of September, but we have paid a price.

Nonetheless, it's still a business that is very strong, the readership has held in there, we have 15 million unique visitors, content obviously remains strong. With all of that, it's a great base to build on. So I liken it to a car that stood idle for a while, and we have to check the tires and change the oil, but we also need to buy a few parts, both in terms of software and if this had been our only business, as for the most part it had been up until three or four years ago, you would've seen nothing of a blockbuster nature, but you would've seen us buying perhaps one or two properties every quarter. We obviously got away from that. We're not buying our way to success here, but it's definitely part of the plan.

In terms of what we have, there are very few properties that have 15 million unique visitors. So look to us to buy services like JustTechJobs, for example. That's a perfect way to leverage the traffic that we have. This is a service that requires a very few employees. The main thing it needs is traffic. The previous owner didn't have that ability to generate traffic, nor did they have the budget to be able to promote it. Fortunately, we don't have to spend much money on promoting it, because we have excess ad inventory where we can promote it quite aggressively to those 15 million monthly readers.

So look for us to do more types of deals like JustTechJobs, not necessarily another job site, but other types of services.

In the event business, I think some of you know, I've had pretty good success over the last ten or 15 years thinking up events and creating events. Hopefully I can still do that. But we certainly jumpstarted that business by buying the 50.1% of ISPCON that we did not own. ISPCON is a show that goes back to the mid-1990s, had some rough spots in the early part of this decade, but is coming on strong. We feel it's going to be a great adjunct business for us.

The asset came along with the other small show that deals with the technology of e-mail marketing, running e-mail operations. But in addition to that, we have announced and will be running several new shows starting in May through the end of the year. We believe that that business will be definitely a thriving business for us.

Obviously, new shows are a bit of a crapshoot, because you don't know if they will work. But the downside on starting a new show is not that significant. Based on the track record of this organization, we think one out of four, one out of five should be reasonably successful to very successful within a year, which would more than justify the investment. So we're very excited by what we're doing there.

In addition, we have brought in some new ad salespeople, which we hadn't done for over three years. So all-in-all, I would suggest that by the end of the year we will be running at reasonable to nice growth again. But again, we paid the price and now we're turning it around.

Chris Cardell

But I just want to add, in terms of seasonality for both the media business and the events business, typically for the media business, Q1 is a soft quarter, Q2 gets stronger, Q3 it dips off a little and typically Q4 is the strongest. You commented that it was a little unusual this year that we didn't have the growth to Q4. I think Alan has explained why.

As we model forward from 4Q06, Q1 2007, in the guidance that we've put out, we are contemplating the typical seasonal dip. As you might model going forward, I know we did not provide guidance for the remainder of the year, but again that same seasonal pattern, usually a little bit of an uptick for Q2, a little down from Q3 for media, and Q4 typically being stronger.

In terms of the events, there are no events scheduled for the first quarter. There are a number of events, several events scheduled for Q2. You can find these on our website, JupiterEvents.com. So there will be revenues and costs associated with those events in Q2. I don't believe there's anything currently scheduled for Q3, and then there are some for Q4. So the timing of these events can also cause some seasonality in fluctuation to the numbers that we'll report.

Joe Maxa - Dougherty

Lastly, do you have an organic growth number for your images segment? Maybe year-over-year or sequentially?

Chris Cardell

It's modest. I think the best way to look at it is on a sequential basis, so it's apples-to-apples. Excluding the recent acquisition of Cover, so that it's truly apples-to-apples, it's just about 5%.

Joe Maxa - Dougherty

Is that a good number to think about for '07, a number you're comfortable with?

Chris Cardell

It would certainly be a number that I would be disappointed if we did not achieve.

Operator

Your next question comes from Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

I don't know if you went over the reasons for the termination of the acquisition, but I don't know if you want ago into that. Also, has there been any impact to either employee morale or employee retention because of that? Finally can you give us any sense for the organic revenue assumption of at least 5% of what you would expect.

Chris Cardell

Yes Aaron, we touched on the termination; it was a mutual situation. In terms of employees, we're very fortunate. A few people did resign to go to a competitor, but they have come back. So that appears to be no problem at all.

Aaron Kessler - Piper Jaffray

The gross margins I think it's been touched on. It was that more of a mix shift, it sounds like, in the quarter, rather than a deterioration in any of the current margins in the business? Is that how you would characterize this?

Chris Cardell

Yes. Particularly with the success that we have had with the lower margin rights managed business and the addition of Cover Images.

Aaron Kessler - Piper Jaffray

Should we expect the 10-K out later today as well, or is that going to be in the next couple of weeks?

Chris Cardell

The deadline is tomorrow, so we're working on it.

Aaron Kessler - Piper Jaffray

Thank you.

Operator

Your next question comes from Robert Haley - Gabelli.

Robert Haley - Gabelli

Looking at images, your single images looked like it had about 4% sequential growth. I was wondering if you could just break that down between growth from volume versus price?

Chris Cardell

I would suggest that it's primarily volume. Some of the volume would be the Cover acquisition that I referred to. Pricing would be stable.

Alan Meckler

One of the great myths out there that continues, and even our competitors have mentioned this, we don't have price pressure. Everybody on Wall Street keeps talking about this, but I don't know where you guys get it from. It's just a bunch of garbage. The high-end part of the business is a solid business. Maybe not as dramatic and dynamic in growth as micropayment, but these high-end organizations want high-quality images. That business isn't going away. But for some reason there seems to be a myth out there that that business is over and there's no future to it. There's a very solid future, and we're not getting any price pressure there.

Operator

Your next question comes from Jim Pickerell - Selling Stock Newsletter.

Jim Pickerell - Selling Stock Newsletter

Thank you.

Alan Meckler

Hey Jim, this is Alan. You scared the heck out of my children. You put out a note that I am terminally ill? I just want to say, to quote Mark Twain, I'm still around. I'm in pretty good shape. I've lost a little bit of weight, watching my diet, but I am here to fight. So please, next time you say that I am about to leave this good Earth, that you check with me first.

Jim Pickerell - Selling Stock Newsletter

All right, well, I am glad to hear that you're doing well. I'm looking at your revenues for the fourth quarter of 2005, which in March of 2006 you reported as $36.1 million. Today you're saying it was $33.2 million. I don't quite understand why the difference.

Chris Cardell

In March of 2006 we sold our research business. Because that was accounted for as a separate segment, when you sell a business that constitutes a segment, it gets treated as a discontinued operation for accounting purposes. So we restated all years as if the research revenues had never been included.

So I think if you look at the components of what was in that number last year, there would be a couple million dollars for research. That's not included in the numbers that we report this year.

Jim Pickerell - Selling Stock Newsletter

Thank you very much.

Operator

Your next question comes from Christa Quarles - Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi, I just want to see if you could clarify the organic growth numbers. Were you talking about sequential growth to get to that 5%? I just can't seem to make those numbers work. And also, going back to the whole substitution question, as you look at your total imagery collection and seeing some of the stuff that is cropping up on micropayments, is there a number that you could put out there in terms of what you think could be substitutable in terms of looking at the quality of the overall collection?

Chris Cardell

Regarding the organic growth, that's a sequential number. The 5% that I quoted is an annualized number. So taking the actual percentage growth for one quarter, multiply it times 4, comes to approximately 5% for images.

Christa Quarles - Thomas Weisel Partners

That make more sense.

Alan Meckler

In terms of the second question, could you ask that again? I'm sorry.

Christa Quarles - Thomas Weisel Partners

I guess what we keep scratching our head around on the total imagery business is put the micropayments business sort of in a box in the sense that how much of the imagery that is currently within RF is substitutable by micropayments? i.e. the quality is sufficient or not as sufficient, for example, versus stuff that, for example, has models that require releases and props in their higher-end shoots, if you will. I'm just trying to get a sense of the proportion.

Alan Meckler

That's a tough one to quantify, because first of all, nobody has done research on it. So you sort of have to put your finger up to the wind and catch the breeze to try to answer that. But I'll tackle a few points.

First of all, as I mentioned earlier, on the high end, your bigger agencies, bigger media companies and other organizations it doesn't mean that they couldn't use micropayment. Doesn't mean that micropayment couldn't evolve and have lots of sophisticated shoots, but that's unlikely. So from a protection viewpoint and every other viewpoint, I believe that the higher end of the market is where obviously where the biggest dollars are spent, is not going to jump amass to buying micropayment.

Obviously, micropayment imagery, some of it is excellent. There's just no question about it. But for the most part, the types of images that are purchased are very low resolution, which means that it's probably being used on web sites and in lower type print campaigns.

It's definitely a growth business. After all, we have invested in it, Getty's invested in it, Corbis has indicated they are getting into it. So it's just part of the mix now of royalty free. I think the best way for those on The Street to look at this business is that it's a part of the royalty free business. Where it's going to settle in, in terms of the overall percentage of what it represents, my guess is that it could be 20% to 25%.

The part that makes it difficult is -- I've used the term before -- it's net additive. There are thousands upon thousands, and as my guess is millions, of buyers that are going to use micropayment sites that have never before purchased imagery. So if you look at it in a vacuum, as only it's taking away the traditional business, then you're missing the point, that it's going to stabilize in terms of what it's taken away and it has hurt our growth, but we're still we think a very solid company with great EBITDA and we're going to increase that.

I would also suggest that those who are in the business now have tremendous platform and opportunity to grow those businesses, not only to a degree at the expense of traditional royalty free, but really because it's net additive. That's what I cannot answer. But I would suggest there are potentially hundreds of thousands, if not millions, of new purchasers that are using micropayment. So I think it's very positive for a company like ours to be in the business.

Christa Quarles - Thomas Weisel Partners

That's helpful, thank you.

Operator

Your next question comes from Jeff Graf - Springhouse Capital.

Jeff Graf - Springhouse Capital

Could you walk through the impact on EBITDA in the quarter from one-time costs for the Getty transaction and severance?

Chris Cardell

From a disclosure standpoint, we're not specifically breaking out the dollar amount. In the press release, there is a blurb that talks about the non-cash, stock-based comp expense, and then the legal and other fees associated with Getty and then one-time charges for severance, legal fees and non-cash venture investment writedowns. Those items amounted to about $0.03 a share in total, and our bifurcate that, the non-cash stock comp was a little under $0.015, and the other items, including Getty were a little more than $0.015.

Jeff Graf - Springhouse Capital

Did you mention what the impact was going to be on your first quarter guidance?

Chris Cardell

Yes. If you look on the guidance page, we're including about $2 million in legal and other fees associated with those terminated discussions. So about $2 million will hit the first quarter. That's reflected in the guidance.

Operator

Your next question comes from Paolo Pascal - Canaccord Adams.

Paolo Pascal - Canaccord Adams

Did I hear you right? You said a 43% tax rate in Q1?

Chris Cardell

Yes.

Paolo Pascal - Canaccord Adams

Last quarter, the distributor results were just a little weaker and led to basically a miss on the quarter. Have you kind of dived into that, and you're able now to see where the shortfall was coming from? I know you guys were assuming that that weakness was going to continue, so did this essentially beat your estimates?

Alan Meckler

The third quarter, it appears that there was one month that was an aberration in terms of the miss that we had. But nonetheless, as I said in my preamble to this conference call, that we are essentially flat in distribution, and modeling forward, we believe that we cannot count on this necessarily as a growth business.

On the other hand, the plus to this is we believe that we can overcome this with the strength of our subscription businesses, the strength of our micropayment business, and particularly the wonderful direct sales team that we have around the world and across the United States and Canada. This team is doing great work, and what I believe is happening in the Internet age, and obviously this is an industry that is certainly been disrupted by the Internet, is that with the ability to make web sites better and better and translating the websites into multiple languages, and the fact that we have on the ground teams in key countries, and we may even add some more. That some of those distribution sales, it's needless for people to go to distributors, and they can come directly to us.

So I believe that over time, while that is a big part of our business and certainly I'd love to see it grow, we have to plan that the direct sales are going to more than make up for the falloff there, plus the other parts of our business.

Paolo Pascal - Canaccord Adams

Thanks very much.

Operator

We have no further questions.

Alan Meckler

Thank you very much for the call today, and the excellent questions. One thing that I would like to leave you with is that regardless of the outcome of the discussions with Getty, Wall Street and others would be making a big mistake to suggest that there is any sign of weakness in this company. We feel we have fabulous content, we feel that we're original thinkers, we have a lot of plans; some of them we've gone over with you and others that we're going to keep to ourselves right now.

We believe that our team has been very supportive, our employees very supportive, through the trying experience of knowing possibly that the company might be sold. So we look forward to our next quarterly call, and we think you'll be pleased and we will be pleased with the way things are going. Thank you very much.

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