Getty Images Q1 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

Getty Images, Inc. (GYI)
Q1 2007 Earnings Call
May 1, 2007 5:00 pm ET

Executives

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

Analysts

Christa Sober Quarles - Thomas Weisel Partners
Matthew Troy - Citigroup
Peter Appert - Goldman Sachs
Aaron Kessler - Piper Jaffray
Steven Ashley - Robert W. Baird
Frederick Searby - J.P. Morgan

Presentation

Operator

Good day and welcome, everyone, to the Getty Images first quarter 2007 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 of those is available on our website.

Some of the statements made on today’s call are forward-looking and involve risks and uncertainties concerning our expected financial performance, as well as our strategic and operational plan. Such statements are based on our best view of the world and our business as we see it today.

Of course, the environment in which we do business changes rapidly and our future results may differ materially from our current expectations. We would ask that you view all of our comments in that light.

For more information on factors that may affect our future performance, please review our filings with the SEC, in particular our annual report on Form 10-K for 2005 and our quarterly reports on Form 10-Q. We currently do not intend to update or revise these forward-looking statements until our next quarterly conference call.

With the exception of the results for the quarter ended March 31, 2007 and a year-over-year comparison of revenue, we are not including historical results or comparisons in the earnings release or conference call today, given that the company’s previously filed financial statements and earnings and other press releases containing company financial statements should no longer be relied upon.

Based on the company’s current knowledge, management believes that the restatement will likely involve total pretax non-cash equity-based compensation expense of approximately $28 million to $32 million, of which management expects approximately 95% to be expensed in 2002 and earlier fiscal years. We believe that any impact of the restatement on our prior financial statements on the results for the quarter ended March 31, 2006, will not be material.

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

TRANSCRIPT SPONSOR Want to understand the future of human resources software? Cornerstone OnDemand is the leading provider of SaaS solutions for integrated talent management, covering the human capital life cycle from hire to retire. We offer over 30,000 online training titles and performance tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence. Learn about talent management and our industry leading products for learning management, corporate social networking, onboarding, compensation, compliance, employee performance management and succession planning at CornerstoneOndemand.com. To sponsor a Seeking Alpha transcript click here.

Jonathan D. Klein

Thanks a lot, Alan. Good afternoon from Seattle and welcome to the first quarter conference call for 2007. Our first quarter was busy, productive and eventful. We are pleased with what we achieved in the quarter.

The results of the first quarter of 2007 were better than we expected. Revenues were above our original estimates and as a result, we are pleased to report earnings per share of $0.63. Excluding professional fees associated with our stock option review, and also the cost of a terminated acquisition, we produced earnings per share of $0.68.

Revenue for the quarter was $213 million, representing growth of 5.8% or 1.6% on a currency-neutral basis compared to the first quarter of 2006. We were pleased with the sequential growth over the fourth quarter of last year.

The growth in revenue in the first quarter came from strong results in entertainment and news, excellent growth in services, and that includes Media Manager, photo assignments, and Image Net, and particularly strong momentum at iStockphoto.

While I am talking about revenue growth, I should mention that we are particularly pleased with the growth in our Entertainment Imagery business, especially in light of the opportunities for further growth and innovation provided by our recent acquisition of WireImage. Of course I will be talking more about these later in the call.

Turning to royalty-free revenue, royalty-free revenue grew 12.7%, or 8.9% currency neutral. Volumes for traditional single image royalty-free grew about 10%, with a comparable decrease in the average pricing.

When I refer to the word traditional, I am excluding of course iStockphoto and the newer forms of licensing content in the royalty-free model. To repeat, volumes for this category, traditional single-image royalty-free grew 10%, with a comparable decrease in the average pricing.

The decrease in average pricing compared to the first quarter of last year was due to mix. This is the mix between different collections which have different price points, the size or resolution of the image, and also the geography or country in which the sale takes place.

As it happens, sequentially against Q4, average prices for royalty-free or traditional royalty-free were broadly in line with the two quarters sequentially.

Moving to rights-managed and rights-ready, revenue for these on a combined basis fell 5.2%, or 9.5% on a currency neutral basis. In this area, it was volumes that declined about 6%, while average price per image fell just slightly compared to the first quarter of last year. Again, and I guess you are seeing a bit of a theme now, on a sequential basis, price increased for rights-managed and rights-ready.

Volumes for rights-ready are exceeding our projections and the average price per image for rights-ready was rather higher than we had anticipated, due to the enthusiastic reception for this new licensing model.

Under this model, we are providing customers the best imagery in an easy, simple and accessible way. Of course, you can tell by the tone of my voice that we are very pleased with rights-ready and are rapidly adding content and collections.

Turning to price for a moment, on a sequential basis, average prices for rights-managed, including rights-ready, increased, and those for royalty-free were broadly in line with the fourth quarter of 2006. This may sound like something of a broken record but we have been consistent in our view that price is not an issue for us. The quarter once again validated this view.

There is not a price war in this industry. The trend for pricing in these key and large parts of our business, that is rights-managed, rights-ready and royalty-free, is not unfavorable. Mix does of course have an impact and so you should expect some movement between quarters.

High-quality imagery and the budgets to support these products and services are certainly not going away, and so when I do lie awake at night, it is not thinking about price.

iStockphoto continues to perform very well -- and for those of you up in Calgary who are keeping count, it’s two so far. So iStockphoto continues to perform very well and there were over 3.5 million images downloaded in the first quarter. As a reminder, there were 2.5 million downloads in the third quarter of last year and over 3 million in the fourth quarter.

The video product which we launched late last year, iStockvideo, is doing extremely well and is exceeding our expectations. Average prices at iStock are increasing as we are adding new file sizes, reducing some of the discounts offered on volume credit purchases, and we are also of course improving the quality, relevance, and range of imagery.

I would like to stress that we are only just getting started with a business and a business model that is ripe with opportunity. The growth opportunities for this business over time outweigh any worry about the cannibalization impact that it could have on traditional stock photography.

Moving to Editorial Imagery, growth of 16.3%, or just over 11% on a currency-neutral basis in Editorial Imagery was driven by stellar growth of more than 70% currency-neutral in entertainment, with strength across all geographies.

The recent acquisition of WireImage, which closed just a few days ago, provides additional scale and opportunity for us as we add their world-class content to our extensive coverage, our strong relationships, and our unsurpassed global distribution system.

We are all excited about the opportunity in Entertainment Imagery and with all that WireImage brings to Getty Images and our customers. The modest dilution in earnings per share in the current year as a result of this transaction does not bother us in the least, both due to the great growth opportunity in this area of the business and the fact that we are confident that it will be accretive to earnings in 2008.

It is worth remembering that not very long ago, we had no Entertainment Imagery business at all and we are now seeing great growth.

Until recently, we had no category called other revenue. In this quarter, this category grew more than 35% on a currency-neutral basis. We are pleased with these businesses, which include: Orchard, our photo assignment business; Media Manager, our asset management service; and Image Net.

What is also gratifying is to see that these new products and services are being acclaimed by customers and analysts alike. Media Manager has this week been given the Market Share Leader Award from Frost & Sullivan.

We are making great progress with our objective of growing revenue in non-English speaking markets. Just to remind you that we use this phrase, non-English speaking markets, rather than the more generic international to indicate our precise area of focus and revenue growth.

In the quarter, we saw very healthy revenue growth in many countries and I won’t mention them all, but it is worth pointing out just a few. There was excellent growth in Japan, Italy, The Netherlands, Finland, Portugal, United Arab Emirates, and Russia.

We know that there are significant growth opportunities worldwide for our business.

I would like to just step back from the detail of the quarter for a moment and spend a little time looking forward. There is no doubt at all that volume for creative stills imagery, especially in the United States, remains an area of focus for us. The industry trends that we have talked about for some time provide both challenges and opportunities for us.

I spent a considerable amount of time on the October conference call talking about these trends but very briefly, and I stress the word very, I would like to just remind you of them.

There are changes in the purchasing patterns of our customers, especially as advertising is being driven by new platforms like the web and mobile where customers are using many, many more images but the images are smaller and they have a lower average quality compared to the old traditional formats like print and television.

We also know that advertising dollars have shifted quite significantly to text or search based advertising. As you know, that advertising does not currently use any visual media with the result that a large pool of advertising dollars is being used in a way where there is no opportunity for an image. We believe that will change.

Thirdly, we all know that there has been a significant increase in the sources of imagery.

We like change, we recognize change, and we are clear that these changes provide some risk, but we believe that the risks are somewhat overstated. There are many opportunities that we see in front of us and we have a number of initiatives that are already underway to build our business and our revenue growth rates to levels that both you and we will find more compelling.

I cannot cover all those initiatives today but I want to touch on a few of them. I will list them quickly and then I will go through them in a little more detail.

First, the new gettyimages.com. Another area is the growth opportunity for editorial imagery. Expansion of our entertainment offerings. We see potential in new licensing models and services. We are making progress in improving the frequency of contact with our customers and the quality of those relationships. We announced today a multi-site strategy. We announced yesterday significant developments in footage and we see aggressive growth in iStockphoto. Let me touch on each of these one at a time.

We have been working for some time on the new gettyimages.com. We are now getting rave reviews for all the innovative and customer-friendly features of the editorial site that we launched some time ago, a few months ago, in fact.

We continued to work on the launch of the all-encompassing site, which combines editorial and creative together. The creative part of this site is in preview at the moment and we are delighted with what we are being told about the site. We hear lots of great things about it, but more importantly we are listening very carefully to customer feedback so that we can continue to develop the site.

Getty Images remains synonymous with the best experience for search, purchase and download of imagery globally. The impact on our business and on our customers’ work of this new site will be significant and will further increase our already substantial lead in our industry and in this area of our business.

Turning to Editorial Imagery, we have had considerable success growing our Editorial Imagery from our original base in the U.S. and the U.K., and now into non-English speaking markets. My view remains that we are just getting started. The overwhelming majority of our Editorial Imagery revenue is still from the major English speaking markets.

We have been adding coverage in many more countries. We have been building relationships and we are making sure that we have the appropriate sales and marketing capability. Importantly, the new site, already launched, provides full multi-language capability for Editorial Imagery customers with localized sites for the key markets.

We are confident of the impact that the new gettyimages.com will have on editorial sales as the user experience has been significantly enhanced.

We are also ensuring that we are providing our customers with the full suite of Editorial Imagery in all the major markets in the world. Excellent progress has already been made in Germany and China in this regard, and we are making major moves in other countries at the moment.

I guess you would find it odd if I didn’t talk a little bit about entertainment. As I mentioned earlier, we saw strong growth of above 70% in entertainment in the first quarter. This came on the heels of a very successful 2006 where we finished the year with three consecutive quarters of growth of approximately 60%.

Results from entertainment, which we set up only a few years ago, encouraged us to further grow this area of our business. As a result, we acquired WireImage. Back in October, we told you from a Getty Images perspective, that we would invest in areas with above average growth potential. With the acquisition of WireImage, we have done just that. This acquisition will enable us to grow the entertainment and celebrity imagery business even more by combining the two companies’ respected photographers, entertainment and event innovation, and very valuable customer relationships.

The increased scope of capabilities that comes with this acquisition will provide customers with more choice and with richer and more accessible entertainment content.

What is exciting to us is that -- sorry about that. I lost my headset in the excitement. I really need to take a cold shower. What is exciting to us is that this is truly a combination of innovators. Getty Images has made entertainment and celebrity imagery accessible, with single image e-commerce to a growing global entertainment market place through our industry leading site. This site features search in local languages and purchase in local currencies, and we already lead the industry in delivery speed, service and of course, international distribution.

WireImage has built a reputation for depth and breadth of entertainment coverage and also offers wonderful innovative products like podcasts, audio and video. It will take us some time to get all the benefits of the acquisition from both a revenue and a cost perspective, but I know that you will bear with us as we build this business in an accretive way.

Our focus on this part of the business, entertainment, made the acquisition of the Michael Oaks archive a total no-brainer. We are very bullish about our opportunities in entertainment, in Editorial Imagery overall and you should expect us to continue to invest aggressively in this space.

In line with our focus on innovation, we launched a new product last August, rights-ready. Also, in line with our focus on customers, rights-ready was a result of feedback that we received from our customers, who made it very clear to us that they absolutely love the high-quality imagery in the rights-managed model but wanted a simpler, quicker, and more straightforward way to license this imagery.

So we came up with a plan and launched the rights-ready licensing model. We began with one small collection and since then, in the last only six or eight months, we have added many, many collections and tens of thousands of images.

In the first quarter, we took the bold step of moving one of our larger collections, Iconica, into rights-ready. The success has emboldened us and we have recently announced that we will be adding the Image Bank collection into rights-ready.

We are pleased with volumes. We are particularly pleased with pricing. In fact, you might be surprised to know that the average price on rights-ready in the first quarter was essentially comparable to the average price for rights-managed. Partners, photographers, and customers are excited about this new licensing model.

In the quarter, we also launched another service. This is called Premium Access. We have many plans in place for further innovation with Premium Access, but just to tell you briefly, Premium Access is a totally customizable subscription service that connects customers instantly to the content that they want to meet their very high volume image needs.

It is designed for many purposes but what it does do is it secures and grows revenue from high-value, high-volume accounts by not only simplifying the licensing, the billing and the access to content but by giving them the subscription that they want rather than one that we may put together in the hope that they like it. We are very excited about that too.

Moving on to a big one, the heading I have on my bit of paper here says improving the frequency of contact with our customers and the quality of those relationships. It is a big heading, because it goes to what this business is all about -- delighting our customers.

I have talked a lot in the past about how industry changes were impacting our customers and the fact that it was more important than ever to be close to key customers, to understand their work flow and to have the right relationships with them.

What we told you in October last year was that we didn’t have enough sales people assigned or connected with our customers. What we did was we moved things around and what we aimed to do by doing that was to improve customer contact and relationships. There were two major efforts in the sales organization. The first was to make sure that a customer service professional was assigned with each of our top 20% of our customers. This group is important because, funnily enough, we do have the 80-20 rule here at Getty Images and they do account for about 80% of our revenue.

We also announced a significant expansion in customer touches with a hiring of 40 to 50 market development executives to go and call on customers in the major metropolitan areas worldwide.

So where are we so far? The top accounts have all been assigned. In fact, we are above 20% in those markets. We have now hired about 85% of the market development executives and they are ramping up. We have also provided them with the tools that they need to do their job. We have begun to see promising results and we continue to monitor the impact that these new positions are having on our revenue.

What is good about this is it is one initiative that can be measured fairly closely, because we can see the specific results in the areas where we have placed a market development executive. It is early days but results are encouraging.

Let me move on to something which you expected me to talk about before now, and that was the multi-site strategy which we have led our press release with today. It has long been our strategy to offer all of our products to all customers on whichever platform they wish to use the product and at every price point.

In order to accelerate the key parts of the strategy, we announced today our acquisition of PunchStock, a leading aggregator and distributor of stock photography, which has been particularly successful with design and communication firms.

As a result of this acquisition, we now have three websites that address the different needs of the very broad, creative customer base that we serve. Let me run through them: gettyimages.com is the de facto homepage for creative and publishing professionals. This site has unparalleled breadth and depth, the highest quality imagery and world-class technology. We will continue to offer best-in-class products and services on the site, and the site will continue to have many leading collections which can simply not be found anywhere else.

Punchstock.com offers high-quality, value-priced imagery coupled with simplified search and licensing. Under our ownership, innovation will include expanded license options, additional language capabilities, and many new products and services.

iStockphoto.com is the inventor and clear leader in community-based stock photography, showcasing the world’s best, freshest, commercially viable user-generated content, while making imagery affordable to businesses that may not have licensed imagery other ways. Don’t worry -- I’ll talk more about this later. Back to PunchStock, it is our intention to continue to offer a wide variety of content from different providers at PunchStock, as we believe that having a broad range of imagery is an integral part of a value proposition for our new site.

Our unrivaled knowledge of the industry makes us certain that there is a wide array of projects that require the use of visual content with various requirements for both a type and quality of that content.

In addition, it is clear to us that some image buyers like to have more than one place to look at and license imagery, so we’ve been working for some time now on this concept of creating a multiple site experience for our customers and prospects, and the acquisition of PunchStock accelerates and expedites these efforts.

We will also use the PunchStock site to offer some special promotions and to experiment a little with some new products and license models.

Moving to footage, you may have seen our press release yesterday announcing changes that we are making in order to accelerate growth in our stock and archival footage business. Craig Peters, who joined us from WireImage, has been appointed as the Vice President of a newly created footage and multimedia division. Craig and the team will be responsible for growing footage collection, attracting new customers, driving the development of a new website, and advancing other technological improvements, and of course, developing new business models and improving the overall customer experience.

Our top priority here is to deliver the very best content, the best online experience and great customer service -- quite simple, really. Our market-leading collections, together with those of our many footage partners, are now being coupled with the editorial video offerings from WireImage to provide both new customers and existing customers with all of their footage needs.

We understand our businesses can help unleash creativity and innovation and Craig’s experience in leading teams and implementing strategic partnerships makes him a good choice for leading the next phase of growth in our recently enlarged footage business.

In creating this footage and multimedia division, we are devoting fresh resources to one of the most dynamic areas of our business. As customers continue the transition to an all-digital workflow, we have just completed a conversion to 100% digital ingestion and distribution system, and we then increased our weekly footage intake capability by 400%.

Now, with dedicated sales, marketing and technology resources, the new division will roll out additional back-end enhancements and customer facing initiatives in the coming months.

As the shift to digital makes footage and multimedia workflows even faster, we offer our customers all the services that they need to deliver on time, under budget and of course with the proper clearances necessary for their project. This of course includes the right in clearances services team which determines what properties and personalities have protectable rights and provides customers indemnification for all clearance work and licensing agreements.

Our focus going forward is to capitalize on the worldwide opportunity presented by the exponential growth of multimedia content for online and mobile platforms. Leveraging our comprehensive and largely wholly-owned editorial photography to new and existing partners, we already offer mobile device applications, content licensing to media partners and device manufacturers, and information service applications to carriers and recently added WireImage’s editorial footage services.

Moving to iStockphoto, we are pleased with the results from iStockphoto. In fact, we still feel that we are just getting started. We have begun the process of upgrading the iStockphoto technology infrastructure and we have plans relatively soon to quadruple our capacity. This should be yet another indicator of our optimism for this business.

iStockphoto started as an English-only site and it has significant growth opportunity around the world. We began offering the service and the site in foreign languages late in 2006 and we are continuing with this expansion in 2007.

We have a number of other initiatives underway at iStock which I am just not going to talk about now. Okay, I’ll give you a hint; they include product enhancements, additional licensing models, and further international expansion. After all, why would we just stop with still imagery and video? We also have plans to increase marketing for iStock as the year progresses.

I hope I sound pleased and excited about this business because if I don’t, I’ve not done a good job of communicating with you.

I am going to stop now. I’ve covered the highlights. It has clearly been an extraordinarily busy quarter. The list I’ve gone through is far from exhaustive, but I would like to hand it over to Tom to walk through the financial results in a little more detail. Tom.

Thomas W. Oberdorf

Thanks, Jonathon. For the first quarter, we reported revenue of $212.7 million, up 5.8% over the first quarter of 2006, or a 1.6% on currency-neutral basis. This quarter, 78% of our revenue came from our Creative Stills imagery, which grew about 3.5% in total, essentially flat on a currency-neutral basis.

Rights-managed revenue, including rights-ready, represented approximately one-half of our total Creative Stills revenue, and declined 5.2%, or 9.5% on a currency-neutral basis. Royalty-free represented the other half of Creative Stills revenue, and grew 12.7%, or 8.9% currency-neutral in the quarter.

Rights-managed volumes for our company-owned offices and channel partners were down about 7%, while average prices were off about 2% compared to last year. We are pleased to see that average prices for RM increased sequentially by almost 7%.

Single image royalty-free volumes for company-owned offices and channel partners grew to just over 10% compared to last year, with average prices declining by a like amount, due to the factors Jonathan discussed a moment ago relating to mix.

Royalty-free revenue also benefits from an increase in RF revenue generated by our delegates. Revenue from what we call other royalty-free grew 72% and represented 24% of total royalty-free revenue, compared to 16% last year. This includes revenue from iStockphoto, CDs, VCDs, and subscriptions.

Editorial Imagery revenue grew 16% or 11% on a currency-neutral basis. Editorial Imagery represents about 13% of first quarter revenue. For Getty Images overall, about 47% of sales were in Americas, 45% in EMEA, and 8% in Asia Pacific.

The average royalty rate for rights-managed imagery was 33% compared to 34% last year. For royalty-free imagery, it was 17%, unchanged from a year ago. For Editorial Imagery, the royalty rate increased to 28% compared to 23% in the prior year, primarily as a result of revenue growth for some of our lower margin editorial products and a couple of one-off deals. Some exclusive shoots, for example, have lowered average royalty rates and/or revenue guarantees.

For footage, average royalty rates were 28%, relatively consistent with 29% a year ago.

Selling, general and administrative expenses for the quarter were $81.4 million, including $4.1 million of professional fees associated with our stock option review and the cost of a terminated transaction.

Depreciation was $14.5 million and amortization was $5.2 million for the quarter.

In the first quarter, we reported operating income of $55.6 million, representing an operating margin of 26%. Excluding the $4.1 million in fees I just mentioned, our operating margin was $59.7 million, or 28%.

Our effective income tax rate was 34.2%, driven principally by higher income and lower tax jurisdictions. Net income was $38 million and EPS was $0.63 per share. Excluding the costs already mentioned, EPS was $0.68 per share.

Cash balances increased $47 million during the quarter to $387 million, and acquisition of property and equipment totaled $16.6 million.

The following forward-looking statements reflect Getty Images’ expectations as of May 1, 2007. Currently the company does not intend to update these forward-looking statements until the next quarter’s results announcement. The company guidance for the second quarter of 2007 and for the full year does not include any amounts which may arise as a result of the matters described in the restatement of financial statements section of our press release.

For the second quarter of 2007, the company expects revenue of approximately $218 million and diluted earnings per share of $0.58. The guidance includes dilution from the acquisition of WireImage of approximately $0.07 in the second quarter and $0.01 for the company’s review of its equity compensation grant practices. We expect the WireImage acquisition to be accretive in 2008.

For the full year 2007, the company expects revenue of approximately $880 million and earnings per share of approximately $2.47. Earnings per share guidance includes $0.12 of dilution from the acquisition of WireImage and $0.05 for the costs related to the review of our equity compensation grant practices and terminated acquisition costs.

I would like to take this moment to emphasize that the main change from our previously provided guidance is the impact of the acquisition of WireImage. To give you more context, the additional depreciation and amortization for WireImage is estimated to be about $9 million dollars. Excluding this additional depreciation and amortization, WireImage is accretive to EBITDA for the year.

Guidance for 2007 assumes just over 60 million fully diluted shares for both the second quarter and the full year.

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

Jonathan D. Klein

Thanks a lot, Tom. The last few months have been exciting, busy and energizing at Getty Images. The recognition of changes in the marketplace has created enormous energy, innovation, focus, and of course commitment at the company. We know that there are challenges but we have never been busier with some very exciting new opportunities, as well as executing on what is in front of us.

At the end of October, we gave you a clear and candid view of the industry and how we thought the market would evolve over the next several years. We also set out some objectives and I am pleased to report that we have executed well against those.

I think I will stop now, as I am sure that there are many questions. So let’s do some Q&A and we will do the best we can in answering your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We’ll start with Christa Sober Quarles of Thomas Weisel Partners.

Christa Sober Quarles - Thomas Weisel Partners

First question is just related to the guidance. I was wondering if you could highlight specifically, if I take your prior guidance of single digit growth, it looks like it is an incremental $32 million. I was just wondering if that was all WireImage revenue on the top line, and then I was just wondering if you could try and give us an organic currency-neutral growth. It looks like the delegates did continue to add a decent amount, so I was just wondering if you could highlight that.

And then the other question is just on Asia. It looks like it slowed down somewhat, although you mentioned Japan being strong. I’m trying to come to terms with that.

Jonathan D. Klein

There are three questions there -- guidance, Asia, and organic currency-neutral growth. Okay. I think I will do them, if that’s okay, Tom, because I’m on a roll.

I think the thing to focus on is that we provided guidance for the second quarter and for 2007. The guidance includes the impact of both acquisitions. PunchStock is a very small transaction and is immaterial in the guidance and immaterial to earnings per share. If you are trying to compare previous guidance to current guidance, the way we see it is that the main change from the previous guidance is simply the acquisition of WireImage.

The way we look at it is that the business is doing broadly what we expected it to do and we have added WireImage. Now, as we go forward, I think that it is going to be harder to ground ourselves but we are not coming off what we said earlier. I think that’s the point to make about the business.

We have not really broken up organic currency-neutral growth, but I have and Tom has been at pains during this call to give you a little more sequential color because that removes both acquisitions. Between Q4 and Q1, there weren’t really any acquisitions and currency was broadly the same.

Asia, most of our business in what we characterize as Asia still comes from Australia and from Japan. We are continuing to make progress in both areas. We made some management changes in Australia a few months ago and they are working out well. We continue to see growth in Japan and believe that Japan is one of the bigger markets, the second-largest advertising market in the world, where there is significant growth potential.

When we look across the world, it is one of the few major economies where Getty Images is not number one. That therefore means that there is upside.

Christa Sober Quarles - Thomas Weisel Partners

So the 7% growth there is just related to I guess other countries in the region, that means China or is it just in China?

Jonathan D. Klein

I didn’t catch what you said about --

Christa Sober Quarles - Thomas Weisel Partners

The 7% growth in the Asian region. It was a pretty stark deceleration. I was just trying to figure out if there is any specificity there.

Jonathan D. Klein

No, not really. China is continuing to grow very, very fast but it is a very small base for us. As you are aware, our business in China is quite complex. We have direct sales, we have a joint venture which does the direct sales. We have an agent and we produce content there, so no, China is pretty small. It’s fair to say, to help you out a little bit on this, that the growth rates we saw in Japan in the first quarter of last year are not as high now but we are off of a much larger base. We did grow in Japan for two to three years at 50%-plus. We are not growing at that level now.

Operator

Moving on, we’ll hear from Matthew Troy of Citigroup.

Matthew Troy - Citigroup

Jonathan, I had a broader question, if I could. I wanted to get a sense of mix and turn to a question I asked earlier last year, specifically as it relates to your revenue by age of photo.

I guess for the legacy portfolios, there’s strategic value in that they present formidable barriers to competition and certainly gives Getty a critical mass as a standout in the industry. We hear more and more about the importance of Getty's leadership in generating relevant and fresh content. Could you put some guideposts around your mix of revenues? Is it 80% from content that has been added to the portfolio over the last two years? How do you think about it? How has this mix been shifting let’s call it over the last few years?

Jonathan D. Klein

Wow. That’s a really interesting question, which you’ve asked before. Let’s see if I can help. I think the easiest way to look at it is like this; 78% of our business is stock photography. Some of it is from newer licensing models, older licensing models, but it is stock photography. Over many, many years, both from a real life perspective as well as from an accounting perspective, we know that on average, they have a life of at least four years. The stock photography images sell for at least four years on average and typically longer.

Now, the fresher content that you bring in will either sell more than the older content or not, depending on where it appears in search results. What has changed over the last several years is that the age of the content is not quite as important as its visibility to customers. Because there is so much imagery that we are putting into the system, our search engine shows the most relevant and within the most relevant, the newest first.

So it is self-perpetuating by the search engine in terms of what is going to sell most. So on the stock photography side, the content has to be relevant and fresh but overall, I think a four-year life is extremely conservative, as it happens. So I am very comfortable to say that we are not reliant on new, new, new images, but we are reliant on enough fresh imagery for the market to meet their needs.

On the editorial side, the imagery tends to sell much more when it’s new. Over time, you build your library or your collection and that forms an archive, which has a very long life and sometimes the image, certain images in the archive don’t sell for a while and then an event occurs and they do. So it is really a mix between on the stock photography side and the editorial side.

We don’t look at our business that way. I am not saying that you didn’t ask a good question but we -- that’s not the way we look at our business and it is very much not the way people in our industry look at the business, because what we are really seeking to do is to provide the most relevant, highest quality, most accessible imagery for customers. Sometimes the most relevant image was shot 30 years ago for what they are doing, and sometimes it had to have been shot in the last 10 minutes somewhere, in terms of a new sport or a news event.

So it is very much a mix.

Matthew Troy - Citigroup

Thank you for the thoughtful answer.

Operator

Now we’ll hear from Peter Appert.

Peter Appert - Goldman Sachs

Jonathan, the WireImage acquisition looks like it is quite a bit more dilutive to at least to EPS than some of the prior deals you’ve done. What is the motivation? Is this business growing that fast? Can you tell us specifically what the revenue and earnings for the WireImage are?

Jonathan D. Klein

Peter, you’ve been watching and covering Getty Images for about 12 years, so when I tell you that Getty Images does not pay for acquisitions, you not only know it, you’ve experienced it. We also walk away from more transactions than we actually close. We also have a very strong track record of being careful and judicious with shareholders’ money when it comes to acquisitions. I just want to put that on the record to begin with.

The second point is we know that valuation varies depending on many, many factors, and most of the acquisitions which we have made over the last several years have been businesses which did not have massive growth potential but did give us tremendous integration opportunities in terms of driving bottom line and EBITDA, or taking a market position or doing an add-on in a certain country or in a certain product. But then there are those types of acquisition, and I think WireImage fits very much in that case, where -- and let’s talk about them. We are buying the market leader with a very strong brand in the fastest growing segment of the imagery industry. When we put that company together with us, we have very complementary skills and capabilities.

A very simple example is WireImage has no ability to sell a single image. There is no single image e-commerce on WireImage. That imagery can be significantly better monetized with us. Equally, WireImage is largely U.S. based -- largely. We have that ability too.

So this is an acquisition where we are not going in and integrating and integrating fast. This is an acquisition where we see tremendous value in the brand, in the expertise, in the relationship, in the website and as a result of that, this is one where I am much more focused on driving revenue growth than in removing costs. Of course we will make it more efficient but to me, when I look at it overall, it was in a range of valuation which made sense. We are in a position where it is pretty much neutral this year, excluding amortization and depreciation, we know it will be a positive from an earnings per share, GAAP earnings per share basis in 2008.

To me, it was pretty straightforward, and the fact that it was slightly delayed has had an impact. The regulatory process took some time, which meant that we weren’t able, in the second quarter, to do as much as we otherwise would have done.

We are really very, very pleased about it and we have a lot of respect for that company and I am really delighted that we finally got them into Getty Images. I have been talking to them for a while.

Peter Appert - Goldman Sachs

Maybe sort of a related topic then, could you just talk broadly about the economics of acquiring businesses and acquiring libraries versus the economics of going out, substantially expanding your group of staff photographers to build the imagery, and is there some change in your thinking in that regard?

Jonathan D. Klein

I don’t think there has been a change. The way I put it is this; we seldom go out and buy a collection of pictures. We seldom go and say that’s some nice collection of pictures -- let’s buy it. I can give you a few examples where we have. The Michael Oaks archive, the Princess Diana archive -- there is no major business there but we buy the pictures.

And there are other examples where we buy a business which has a brand, a customer base, and wholly-owned content. The best example of that would be Stockbyte. Another good example of that would be digital vision.

In the context of WireImage, it is not just about the pictures. This is everything that it brings to us across the board. Then you look at a PunchStock where we were buying it to accelerate an existing strategy in terms of creating another site and point of contact with customers, because we know from the market they want that. Could we have done it ourselves? Sure, but we decided to do it this way.

Most of the pictures that PunchStock have, they actually represent other people so again, they were not pictures being bought there.

We continue to shoot our own pictures. On the editorial side, we upload 2,000 to 3,000 images a day. Most of them are ours, some come from our partners. We are spending about $10 million or $11 million this year on the creative side, shooting wholly-owned content, so we continue to have that mix.

We also have embraced more than most companies of our age -- and we’re not that old, 12 years old -- but we have also embraced the user as a provider of imagery, both through the iStockphoto business and through Scoops, which we acquired not so long ago.

I don’t think you can have a general rule, Peter, but I think when we make an acquisition, we try and be very clear in terms of what was the driving factor for that acquisition. We always ask ourselves, could we have done it ourselves? In the case of WireImage, we have done extremely well ourselves. We have sped up our entertainment business. It is doing very, very well, but this was an opportunity to move it all to the next level, as well as add some products and services which we don’t have, like audio, podcast, and entertainment video, all of which come with WireImage.

Operator

From Piper Jaffray, we’ll hear from Aaron Kessler.

Aaron Kessler - Piper Jaffray

A couple of questions. First, on the RM side of the business. I’m trying to understand the decline year over year. Is this the business shrinking or is this more of a mix shift, maybe people going to the royalty-free side? And then I have one follow-up question.

Thomas W. Oberdorf

We’ve said this before, and I think repeatedly, that we will see mix between RM and RF. People -- and RR, for that matter. People will come to the site to look for the right image. They are not coming to the site necessarily to find, to go to the licensing model. So to your point, we will see shifts and we see this in every quarter and every month where we see RM could be down and RF is up. It is really where the customers go to get their imagery. Overall, you will see shifts between the two and it is just a choice of imagery.

Aaron Kessler - Piper Jaffray

Also, on the pricing, I think you have talked about that being down on a mix shift in terms of the pricing. Do you think that is from the newer customers, such as the online purchasers using lower-priced photos? What are you seeing kind of an existing maybe traditional photo buyers, such as the agencies? Is that mix staying the same or is that declining as well? Thank you.

Jonathan D. Klein

I think the pricing is quite straightforward. That is largely mix. I don’t think anything happened in terms of how you framed your question between Q1 last year and Q1 this year, and if it did, then why was there sequential growth in pricing between Q4 and Q1?

So I don’t think it’s that. I think what’s really happening is that the market is bifurcating and by that I mean that the micropayment model and the availability of significant amounts of content is certainly feeding a certain segment of the market, but it is very seldom that a customer has a choice of buying an image for $520 or buying one of $2, and says to us I want the $520 image but you have to give it to me for $350. It’s a different part of the market. It’s a different part of the work process.

So overall, you are directionally correct in your question. Over time, the web and mobile devices will be populated by very, very, very large numbers of images which people will not spend hundreds of dollars for.

Aaron Kessler - Piper Jaffray

Just a final quick question; on the tax rate, I think a couple of years ago you indicated, maybe a year ago, the tax rate would go down by 5% or 6% over the next several years. What is your current update on getting the tax rate down? Thank you.

Thomas W. Oberdorf

Aaron, I’m not going to project out going out years, but we do expect our tax rate to continue to improve. We are not backing away from the statement, it’s just --

Aaron Kessler - Piper Jaffray

Right, that’s fine. Thank you.

Operator

Steven Ashley with Robert W. Baird.

Steven Ashley - Robert W. Baird

Were there any professional service expense assumptions in the original first quarter guidance you had given?

Thomas W. Oberdorf

Yes, there were. I don’t have the number but it was much smaller than what actually happened. Certainly the terminated transaction cost was not contemplated and for the professional fees, there was an amount contemplated but this was back a while ago and it was a much smaller number.

Steven Ashley - Robert W. Baird

So there was a number but it was just less than the 4.1?

Thomas W. Oberdorf

A lot less because of the 4.1, a good piece of that was the terminated transaction cost, which was not contemplated, and then the other piece, we thought it was a much smaller number.

Steven Ashley - Robert W. Baird

Can you say qualitatively whether WireImage would be negative to the EBITDA line in the second quarter?

Jonathan D. Klein

Qualitatively. You are asking Tom a qualitative question. Great. Have at it, Tom.

Thomas W. Oberdorf

Rather than flipping right through my pages here, I think for the year, yes, it is going to be positive to EBITDA. Can I get away with the year?

Steven Ashley - Robert W. Baird

Okay, no, that’s fine.

Jonathan D. Klein

I would say that on balance -- this is not qualitative, this is quantitative -- I would say on balance in the second quarter it is negative to the EBITDA. We just acquired it. Any changes in relation to the cost base will not occur in the second quarter and it is like a --

Thomas W. Oberdorf

Without getting into quarter-on-quarter-on-quarter comparisons, we see WireImage getting better each quarter pretty significantly, quarter two to three to four. Again, we only have two months worth of revenue in the second quarter. We will have full revenue in the third and fourth, and to Jonathan’s point, there is costs that will come out of the business but we will not get the full impact until more towards the end of the year.

Steven Ashley - Robert W. Baird

And then on ASPs, I was wondering if you could give us the actual number for ASPs for RF and RM, and then secondly, you talked about them flattening out sequentially. Is that a reasonable expectation for us to have going forward?

Jonathan D. Klein

What we have decided to do will not fill you with glee or enthusiasm. We have decided that the level of granularity that we have historically given around prices and volumes and actual numbers and telling you revenue growth rates for businesses which are less than 4% of our business, we are no longer going to do that. I think that will give you some difficulties with your models, but over many years it has been very clear that mix has an important impact on all of this. That if we have a large number of big transactions in a quarter, it could significantly skewer any trends. If we do a big deal where we give a customer thousands and thousands of images and by definition, they come through at a relatively low price, and that leads people to conclusions which we think are incorrect.

What we will continue to do is give you a lot of color and a lot of qualitative information and some quantitative information about price and volume. We are not going away from that. But in terms of being able to tell you that the average price per image for royalty-free in the Americas in Q1 was X, and then for rights-ready it was Y and for rights-managed it was Z and for rights-ready and rights-managed combined it was whatever, we are not going to do that.

The other thing about this which we are pretty firm about is that there is a significant understanding of currency, but because currency moves so much and because so much of our business is outside the U.S., it also leads one to what I would say is sometimes incorrect conclusions, sometimes incorrect conclusions which make us look better than we are in this area.

I hope that you folks will adjust to the new reality.

Steven Ashley - Robert W. Baird

Just lastly, I wonder if you could tell us how many account reps you ended the fourth quarter and then how many you ended this period with. Thank you.

Jonathan D. Klein

You mean account reps in terms of the number of people assigned to accounts?

Steven Ashley - Robert W. Baird

Yes.

Jonathan D. Klein

I don’t know that, but what I can tell you is that our target was that we would have a customer service representative assigned to that 20% of the customer base that accounted for 80% of the revenue. In most of the countries where we operate, we now have more than 30% or about 30% of the customer base assigned.

Secondly, as you may recall from way back when, to get into that top 20%, in other words, the 80% of our revenue, a customer needs to spend only $6,000 or $7,000 a year with us, and that was that group of customers who we simply weren’t talking to yet were in our most important customers.

We have pretty much covered them now. So the exact number, I couldn’t tell you. We have approximately 700 people out of what is about 1900 people at Getty Images in total, and these are very round numbers. Approximately 700 people are in the sales organization in some way, either market development executives, key account people, customer service representatives, inbound folks in call centers taking the calls, and then all the support for sales around research and other parts of customer service.

Sales is a big piece of our headcount and really validates what we said in 1997, where we said when the world moves to the web, business customers will still want a relationship and they will want a voice and a person, and will not be happy to just deal in the ether or in cyberspace, and that is pretty much what’s happened.

Operator

Our last question of the day will come from Frederick Searby of J.P. Morgan.

Frederick Searby - J.P. Morgan

I made the vaunted list here. Jonathan, can you -- I don’t know if this is part of the information you are no longer disclosing, but can you help us with micropayments, just understanding on iStockphoto? In the past you talked about how much overlap and cannibalization being less than 1%. What the pace of change is there and whether you are seeing any major agencies or customers that are actually using iStockphoto and how much, if there is any real change discernible in the in-house activities of some of the larger agencies? That would be my question. I’ll keep it short and sweet.

Jonathan D. Klein

When we bought the company, soon afterwards we did some customer overlap work and we found that 8% of iStockphoto’s customers were also Getty Images customers. I would say that number now has more or less doubled. It is about 15% or so that are Getty Images customers.

This may surprise you but the way I look at it is that every single Getty Images customer should be an iStockphoto customer because all of them have the need for that kind of imagery in that way at some point in the workflow process. And that imagery and that model is a valid and viable part of the overall mix.

So it may sound odd but we want more and more Getty Images customers to also use iStockphoto.

On the other hand, with only 15% of iStockphoto customers using Getty Images, we see tremendous opportunity to sell into that customer base. Now, for some of them, our price point is going to be too high or -- put it this way, not suiting their budgets and their customers’ budgets, but we see an enormous opportunity there.

Another piece about iStockphoto which is interesting is I was looking at the numbers. In March, iStockphoto had 4.7 million unique visitors. At this point in time, those unique visitors and that very loyal customer base and community, are offered pretty much plain vanilla one collection, iStockphoto, at different price points and iStockvideo. The opportunity to provide other products and services to that customer base in their environment is enormous, as well as the opportunity to upsell to them what we have at Getty Images.

Effective today, we have put in place a site between iStockphoto and Getty Images in the shape of PunchStock, and that is another way in which we can migrate customers as well as products and services between these different places, so that at the end of the day, we very much hope to achieve that overall strategic objective under which any business of whatever size anywhere in the world, whatever their budget, is able to come to one of our sites and get that same first-class experience and the image or the service that they need.

Frederick Searby - J.P. Morgan

Thank you for that. That was interesting. The second point about in-house agencies, has there been any deceleration or acceleration in what you feel is out there in terms of agencies doing in-house, the in-house solution versus using what we think are higher quality images they can buy off Getty Images?

Jonathan D. Klein

You know, it varies. In the 12 years or so I have been doing this, there are periods of time where people are shooting more themselves and then there are periods of time when they are not. Time pressures dictate a lot of that.

Let’s not forget that there is a vast availability of imagery, but the availability of the right quality with all of the legal rights, timely produced, easy to find with customer service behind it is not that great. It is greater than it was a few years ago.

So I would not say that there is a discernible trend for people to do more themselves and less to go outside. I wouldn’t say that at all. I think if anything the fact of the matter is that customers’ timelines are tighter and tighter and tighter. Having weeks on end to produce a brochure is very different from having to refresh a website every minute and you don’t have the time to go and shoot it yourself, and time is money for the agency. That is the key -- how quickly can they get through doing their job and doing it well so that they can focus on the value that they add.

Again, that’s what makes the stock photography model such an attractive solution for our customers.

Operator

Gentlemen, I will turn it back over to you for any closing remarks.

Jonathan D. Klein

We are over an hour already, so I’m just going to jump off now. I just want to thank you again for bearing with us. There’s a lot of information, there’s a lot to absorb. We’ve been extremely busy in the first quarter. I cannot remember a busier time and we have a few more exciting announcements ahead, but at the same time as that, we do not minimize the challenge in particular for volumes for rights-managed and royalty-free, rights-managed and rights-ready, and we are very focused on that.

Thanks so much and talk to you again whenever.

Operator

That does conclude today’s conference. We do thank you for your participation.

TRANSCRIPT SPONSOR Want to understand the future of human resources software? Cornerstone OnDemand is the leading provider of SaaS solutions for integrated talent management, covering the human capital life cycle from hire to retire. We offer over 30,000 online training titles and performance tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence. Learn about talent management and our industry leading products for learning management, corporate social networking, onboarding, compensation, compliance, employee performance management and succession planning at CornerstoneOndemand.com. To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.