Getty Images Q3 2007 Earnings Call Transcript

Getty Images Inc. (GYI)

Q3 2007 Earnings Call

November 1, 2007 5:00 pm ET

Executive

Alan Pickerill - Director of IR

Jonathan Klein - Co-Founder and CEO

David Parker - VP of Finance

Analysts

Troy Mastin - William Blair & Company

Christa Quarles - Thomas Weisel Partners

Peter Appert - Goldman Sachs

Matt Troy - Citigroup

Aaron Kessler - Piper Jaffray

Steve Ashley - Robert Baird

Operator

Good day, and welcome everyone, to the Getty Images' Third Quarter 2007 Earnings Call. Today's call is being recorded. And at this time, for openings remarks and introduction, I would like to turn the program over to the Director of Investor Relations, Mr. Alan Pickerill. Please go ahead, sir.

Alan Pickerill

Thank you, and welcome, everyone. Following this call, a telephone replay as well as a webcast will be made available. Information on both is available on our website. 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, and in particular, our amended annual report on Form 10-Ka for 2006, 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.

Joining us today, we have Jonathan Klein, Getty Images' Co-Founder and Chief Executive Officer, and David Parker, Vice President of Finance. Tom Oberdorf, our Chief Financial Officer is not able to join us today due to a medical procedure.

I'll now turn the call over to Jonathan Klein.

Jonathan Klein

Thank you, Alan. Good afternoon, and welcome to our third quarter conference call. Today, I speak to you from New York City, where I moved a couple of months ago.

Today, I’m going to discuss the third quarter. I am going to provide guidance for the rest of this year and will also give you a first view to 2008. In addition, I will focus on our progress towards our stated growth strategy of becoming a broad-based digital media company.

My overall intention is to convey why we are positive and enthusiastic about the growth prospect of Getty Images, yet also realistic about our and, for that matter, the industry's challenges, in the traditional creative stills business, where nothing has changed significantly since last quarter. We are retaining our leadership position, are very profitable, yet revenues are still down in this area of the business.

I am confident that we are doing the right things with the appropriate level of those focus and resource. And thus far the trends are playing out largely as we expected. Revenue and earnings per share in the quarter were both broadly inline with our guidance at $209 million and $0.47 excluding the restructuring charge of about $0.04.

Reported revenues grew 5.5%, or 2.1% on a currency neutral basis. The contribution to revenue from acquisitions made since the third quarter of last year was under $15 million in the current quarter.

On prior calls, we have explained the key trend in our industry and their impact on the traditional creative stills business. I won't go into them in detail, but in short, the use of and demand for visual content primarily in online usage is exploding.

We are beautifully positioned to [cross] performance the exponential demand and the many opportunities that will stem from it. Due to the increasing shifts to online usage of imagery with requirements for smaller digital file sizes and some times lower levels of quality, yet of course, much higher volumes, we’re seeing pressure on volume in traditional creative stills.

The pressure is a specially felt at lower prices and file sizes in royalty-free and in the brochure, print advertising and print collateral usages for rights-managed. At the same time, we are seeing more favorable trends at some of the higher prices and larger file sizes. Bringing this all together, these trends were responsible for a revenue decline in the single image traditional creative stills business by 2% year-over-year, or 5% on a currency neutral basis, and this is broadly consistent with what we saw last quarter.

Moving on to volumes. As noted last quarter, volumes for single images for traditional creative stills fell in the mid single-digit percentage for rights-managed, including rights-ready, and more than 10% for traditional royalty-free single imagery.

Our subscription products, Creative Express and Premium Access grew over 70% and they are not included in the numbers I just gave to you. No other revenues from iStockphoto or our CD and virtual CD volume is included. The single image data will continue to tell only part of the story and over time increasingly served as imagery license through subscription product all though micro payment will grow and they are not captured in the traditional single image volumes that I have just provided.

Other part of the equation is price. Average achieved prices for rights-managed including rights-ready were down mid single digits year-over-year. The change in price was largely due to the mix between commercial uses and editorial uses, with editorial uses taking a larger share of volume than in the prior year.

For traditional royalty-free single images, achieved prices were up mid-single digits over the prior year. Once again, as you know, mix is the key and the average price for royalty-free is a function of the mix between both the different collections we have and there are different price point and the different file sizes. The growth sale was also due to currency. But that’s very off with our traditional creative stills business, the single images in particular.

You want to know what we are doing. We continue to innovate rapidly by the introduction of new products and services. We continue to get closer to our customers on a segment-by-segment basis. We have launched a new website for Getty Images. We have begun building the multi-site business with a build out of Punchstock. New subscription products have both been launched and are on the way. Assignment of customers has taken place inline with what we indicated across the sales organization and our drive to rebalance the sales force between outbound and inbound is very much on track. We are also beginning to leverage iStockphoto to the broader benefits of other Getty Images products and services.

Now, of course, there is insufficient time today to discuss everything we are doing. Let me highlight a few of the more recent and shall we say more important initiatives. I am going to begin with the new Getty Images web resolution product. Really quite straightforward, we decided to make the best and broadest portfolio of professional imagery in the world available at super-low resolution, in order to capture the exponential demand for imagery of websites and other digital platforms. Customers demand the right pictures, simplicity or, put differently, ease of use and a compelling and appropriate price point. The new product has all three. It consists of a newly created super low-resolution file, which, incidentally, is half the size of the previous smallest file size of Getty Images. It’s available for virtually all of our images whether they are rights-managed, royalty-free, rights-ready or editorial. The product directly addresses a growing and largely incremental opportunity for visual content.

I should have stressed the words growing and incremental. So, let me explain further. I have already covered what we see with the volume pressures in the traditional single image creative stills business. The best collections in the industry with generating little volume for online usage, relative to what we are seeing with downloads of low and super low resolution images of iStockphoto, much of which is [tested] for the same online usage.

In order to capture the online market for imagery, we needed a new product for this new and largely incremental customer base. I think it's best to quote a couple of people. I’ll begin with one of our image partners. Like Getty Images, it is our belief that the large majority of web-only short-term buyers are shopping on the micro transaction side. Getty Images' goal is to migrate these customers from $1, $5 or $10 to rights-managed or royalty-free images at a price point that they can afford.

I think it is reasonable to assume that Getty Images has done their homework and I feel that there is a market opportunity to attract this new buyer at this price point. Our multimedia editor at one of our larger customers in the broadcasting and publishing fields said this, "I bought an image today for web use for $49." Getty Images might be trying to get the micro-stock users to come back to buy licensed photograph, I see it as buyers such as myself saying to our marketing department, "Hey, I found a great picture for only 49 bucks. Do we have the budget for this?" And they say, "Totally, go buy it." That’s exactly what happened to me today. And I still like a new option for stocks that’s opened for me.

We are already few weeks into this new product seeing positive strength. In particular, in the area of new customer acquisition. Another big event for us was the launch of the gettyimages.com. I’ll be brief. Our world-class website research technology has always been the envy of the industry. And we have recently completed a multi-year initiative to further raise the bar by fully redesigning and reengineering gettyimages.com.

We launched the new site in August; just about everything on this site from search functionality to localization has been substantially upgraded. Incidentally, this is the first major upgrade or new site in almost five years. It’s a major milestone for us. The enhancements on the site are a direct reflection of customer feedback. We found out that what our customers were looking for and created the tools to meet their needs.

The new site is also host to catalysts, a first of its kind search tool, which uses interactive tag clouds to produce related concepts. Catalysts, inspires our customers at various stages of the creative brain storming process, by giving them the options to search in a totally different way by a keyword [queue]. The customers' feedback regarding the features of the innovation of this new site is very encouraging. We are very proud of the new site and if you haven’t already done so, go and have a look and see why we are very pleased with what we have, and of course, we’re not done. We continue to evolve the site, improving on a daily basis, and the primary focus of the new site was and continues to be to take search to the next level. I know that we’ve succeed in the subject.

Another thing we are looking at is new subscription products. We’ve been working on new subscription products and we’ll continue to innovate here. Let me stress, and I am talking about subscription in the area of creative imagery. We have significant subscription business and subscription revenues already on the editorial imagery site. On the creative side, we have such a broad and deep offering across all of our websites in content types that we can offer customers subscription services that they absolutely can not find elsewhere. The objective is very simple. Make a compelling offer to our customers and that increases their spent with us.

We have always been of the view that imagery buyers require all types of content delivered in a variety of ways with a range of licensing models and price point. Subscription play a small but important part of the mix and we know that our subscription products will over time turn out to be the largest and best in the market, just like every other product and service that we have, all of whom lead their respective markets and segment. We nearly stayed to the planning in innovative and built new product in this area and will tell you more about it when it's closer to launch.

We are also continuing to adapt how we get a market and serve and sell to customer. When a market changes, we tend to be very close to that change and evolve with it. The last year we told you about our plans to have assigned sales folks working with a top 20% of our account or terms customer. We have exceeded that goal. We are close to just 30%.

We told you about having more feet on the street in outbound people. For example, a year ago, we only had a handful of market development executives on the street and we now have almost 50 worldwide. Our objective is to have about half of our sales and customer support people focus outbound by the end of 2008. We also told you that we would become more efficient in integrating inbound call centers and we have done so in the US and now Chicago is the hot priority in that pool.

We are also well into our plan to do everything that is customer facing in a segmented way. This means that the relationship with Getty Images will be customized by the type of customer you are: agency, corporate, or media. We have already executed this successfully across the sales organization and it has been kicked off in marketing. We aim to have greater differentiation between the business models for high volume low service transactions and of course, lower volume higher service transactions among the various segments. All of which will optimize the overall business model to serve all parts of the market appropriately and I know will benefit our service line.

We had success in getting our multi-site strategy started. Today, we have three separate e-Commerce sites for creative customers, gettyimages.com, punchstock.com and iStockphoto. They offer separate experience shaped by amount, quality and scope of content, licensing models and price points, levels of support from our sales people and of course, different offers and promotion. This strategy is unique within the industry and is something that only we are capable of executing. We have also moved swiftly to align our cost structure with where we expect the best growth opportunity and you will be assured that we will continue to explore areas where cost efficiencies can be realized as well as areas where additional investments is warranted.

Our objective overall is to reduce costs in our traditional creative stills business and at the same time make the appropriate investments in growth areas. We have made solid progress towards achieving this objective. On the subject of investments, we are driving new products and new initiatives that are already providing and will continue to provide excellent opportunities for future growth. I would like to spend a little time on our growth businesses. Some we already have, some we have just launched, and one that will be launched very soon. I would like to remind you that many of the growth businesses that we have today did not even exist a few years ago. Bear in mind that over time, our portfolio businesses will be comprised of a greater percentage of these high growth businesses and opportunities. I often really begin a discussion about growth anywhere else other than micro-payment.

iStockphoto continues to exceed our expectation. As the inventor and leader and what -- in what is the highest growth area of the visual content industry. There is still tremendous potential for this business.

We’re in the early innings and have many ideas that will make the category growth as well as this business over the coming year. Just pay attention now, because you love to scribble down numbers. iStock's iStockphoto at over 4.6 million images downloaded in the third quarter. This is year-over-year volume growth of about 85%. Importantly, we continue to see an increase in the average achieved price per image and this is gone throughout the course of the year it’s gone up.

This growth coupled with approximately 4.7 million unique visitors a month. Why was the communities in growth rates frequently cited by the media for successful social media in community site.

The key difference is iStockphoto's highly profitable e-commerce based business model. Revenues generated here are from the licensing of images through e-commerce not by advertising.

I think this is a very valuable business and it also substantial future growth. In addition we can leverage iStockphoto in other parts of our business. We can use customer list for Getty Images and fund stock marketing activities. And promote our other products and services to the iStockphoto customer base.

By the way, I should mention that iStockphoto has more than 600,000 active customers those are buyers as suppose to simply registered users. Let me be clear, if I have not been clear enough on this or previous call and I’ll keep this brief.

Micro-payment is very good for the visual content industry. Micro-payment is dis-proportionately good for Getty Images due to our position in that market, it has increased dramatically. The number of customer purchasing digital content. The number of opportunities for which they purchase content and has opened up new markets for us, it is also bringing new photographic and video talent to the market.

Another growth area for us is editorial imagery, just to remind you who are new to our story, but why you want to call it you are new to the story but specially reside the editorial comment even though I am talking about editorial imagery. Editorial imagery is news, sport, entertainment and archival imagery. Editorial imagery grew 44% in the quarter and we continue to be very well positioned in each of these areas, in fact so well positioned that we have a leadership position in each.

Acquisition of MediaVast which includes FilmMagic and WireImage made us the clear leader in entertainment photography, enable us to grow the entertainment and celebrity imagery business even more by combining the two companies respected photographers, increasing our coverage capabilities and the amount of owned content we generate. As on the site, this content further fuels our consumer offering, which if I get time, I’ll talked to about.

A distinctive advantage as an environment drive many synergies increased page coverage for event organizers as well as exclusive celebrity content to just name the few advantages. For example, today we have over [thirty] official relationships with entertainment event organizer, no one else is even closer, through the combination of Getty Images and WireImage and containment and celebrity imagery accessible for growing global entertainment marketplace.

These are complete and unique service provided proposition, that ensures our continually leadership of this important growing segments. Leading edge innovative products like broadcast, audio and video provide us with further expansion opportunities here. Much progress is being made on the integration of WireImage and FilmMagic and we expect to see significant synergies overtime as we fully integrate and centralize distribution and other shared backend system.

International expansion also continues to be an excellent opportunity for growing editorial imagery revenue overall. As we have broadened and localize our coverage of news, sport and entertainment, we can drive increased sales of our editorial content internationally.

On the sports side, 2008 should be an exciting year for our editorial business with two very major events, the Beijing Olympic, and European Soccer Championship. On the new side, I understand that there is US presidential election coming up and we enjoy that too from a financial perspective.

A footage, a film or video, picture poison--whichever word you try to use. Footage will become much bigger, bigger business for us in the future. Our overall cost familiar with the increasing demand for digital video, as bandwidth constrains disappear and video finds its way from big screens to smaller screen, and the web and mobile devices. It is often forgotten that we have a largest stock footage and archival footage business in the world and we are now focusing on adding customers in these emerging areas. In order to address this new opportunity, we decided in 2007 to change the structure and management of our footage and multimedia businesses, so we decided to begin a two year investment program into ad content.

We've begun this work with our new footage website, which also has search, purchase, and download for the first time. We converted the licensing from Rights-Managed to Rights-Ready and also have Royalty-free, and we would begun to add content and simplified licensing. There is still some way to go and we will continue to accelerate our ingestion rates further next year by further investment.

We also added multimedia and let me pause for a moment. We did not have multimedia products prior to earlier this year. Now we are able to supply our customer with whatever they need from just still images and raw footage to completed packages containing all aspects still, footage, audio commentary and interviews and of course now music.

Editorial footage is simply and extension of the market leading product that we have in editorial still photography. We had given many of our photographers video cameras and will continue to do so, so they can capture moving imagery, whether its celebrities walking the red carpet or something more serious from war zones around the world. These products are attractive to customers that need an increasing variety of high quality and interesting content. And furthermore the amount of content that they need it so great, that few of our customers can or wish to produce it themselves. Once again a logical extension of what we have always done for our customers.

You will notice on the numbers that it has not been a great year for footage and 2007 has been very much a transition year for our footage business. We do expect double-digit growth in 2008 and beyond.

A few words about music, Getty Images powered the forward momentum of the visual communication industry over the past 12 years. We delivered most of the major innovation and brought new opportunities to both our partners and customers. The market for commercial music licensing is fragmented, inefficient and confusing. No different from how we found the imagery market when we turned up.

We are confident that bringing our digital distribution e-commerce expertise and of course our customer relationship, our trusted brand as well as our understanding of intellectual property to this commercial music industry will have a very positive impact just like it did for imagery.

So where are we? During the quarter we launched the first version of our integrated music offering on www.gettyimages.com, also having a acquired Pump Audio in the second quarter. If you have another chance to see it or should I say listen to it, you should go to our website and see what we have to offer. For the first time, customers can search, purchase and download high quality, pre-cleared music for using any of there project and at appropriate price point. With this launch we provide our customers with a compelling music offer and now beginning to see the results. Should be assure that will be a big area of focus for us as we move forward.

I’ll say few words about consumer. As you know we are a pure b-to-b business and consumer will be a new area for Getty Images. We see it as a tremendous growth opportunity with a very large addressable market.

The great thing is, we already have most of what we need be successful in building and monetizing an online consumer imagery experience. We’ll develop multiple targeted offerings or channels that will showcase our imagery video and multimedia in an interactive leading web 2.0 interface.

Interesting is -- as I said a moment ago--we will do this by leveraging existing asset, including our world class imagery in other rich media. We have a millions of holly, and editorial and creative images that customers want to see and this is not a static collection. We’re adding 8,000 new images everyday. The second thing one needs to be successful in the consumer base is traffic. In September, our various websites had 14.5 million unique visitors, hold it, yes I did say, 14.5 million, as a pure [P2P] imagery company at this point this is a significant amount of unique visitors. And believe me many of them or most of them are not there to license images for professional usage.

The alternate technology, we have the technology we need and are building besides by the same teams that created and built iStockphoto. And finally we have strategic partners lined up for media and content.

We intent to generate revenue, through multiple revenues stream, advertising, sponsorship, subscription and some e-commerce. I am not going to tell you anymore today, we hope to launch this in the not too distant future. It’s important, it’s exiting and we think it holds great volume.

We have other products and services, I wouldn’t cover all of them but, it’s good to know that they are growing very well in the quarter our Media Manager product grew more than 70% and Imagenet was up 30%, to name just two.

You've listen to me for sometime and I am now going to handover to my colleague David Parker, who’ll cover the financial results. I'll then have some closing thoughts; we’ll do a little bit of Q&A, and see how we go. Thanks so much.

David Parker

Thank you, Jonathan. For the third quarter, we reported revenue of $208.9 million up 5.5% over the third quarter of 2006 or 2.1% on a currency-neutral basis. This quarter 74% of revenue came from our Creative Stills Imagery, which was down 1.9% year-over-year or 5.1% on a currency-neutral basis.

Rights-Managed revenue including Rights-Ready represented just under half our total Creative Stills revenue and was down 7.9% for 11.6% on a currency neutral basis. Royalty-free revenue comprised the reminder of our Creative Stills and grew 3.3% or 1% currency-neutral in the quarter compared to prior year.

Other Royalty-free revenue, which includes revenue from iStockphoto, CDs and VCDs and subscriptions grew 86% and represented 31% of total Royalty-free revenue compared to just 17% last year. Growth in this category came largely from iStockphoto and our subscription products.

Editorial imagery grew 44% or 39% currency-neutral and represented of about 17.5% of third quarter revenue. Excluding revenue from the recently acquired MediaVast, our Editorial business experienced double-digit growth year-on-year.

Other revenue which includes Photo Assignments, Image Net and Digital Asset Management, grew 45%, or 40% currency-neutral. Our Getty Images overall, about 45% of our sales were in the Americas, 45% from EMEA, and the remaining 10% from Asia-Pacific.

Overall, average royalty rates increased to 26.9% in the quarter, compared to 25.4% last year, due to changes in the composition of a Royalty-free business. Other Royalty-free is growing and has a lower gross margin than the rest of the Royalty-free portfolio. As a result, the average royalty rate for RF was 20%, up from 15% a year ago. The average Royalty rates for Rights-Managed imagery was 33%, a slight improvement over last year and consistent with the second quarter of 2007.

For editorial imagery, the royalty rate was consistent with last year at 27%, and for footage, the average royalty rate was also consistent with last year at 29%. Selling, general, and administrative expenses grew 14% to $84 million in the quarter and were flat compared to the second quarter of 2007. The year-on-year increase in SG&A is directly attributable to recently acquired companies and the impact of foreign exchange rates, combined with the investments that we are making in the future growth areas that Jonathon just outlined.

Based on these investments and the cost reductions announced this quarter related to our traditional Creative Stills business, we expect SG&A to decline sequentially in dollar terms in the fourth quarter of this year.

As discussed on the second quarter conference call, we reported a restructuring charge of $4.2 million in the third quarter, as shown separately on our P&L. Depreciation was about $16 million and amortization was $8.4 million for the quarter, compared to $13.9 million and $5.5 million in the third quarter of the prior year. These increases are primarily the result of expenses from acquired companies, as well as increased depreciation of our recent capital expenditures. Capital expenditures were just over $14 million in the third quarter and we continue to expect the total to be approximately $65 million for the full year.

In the quarter, operating income was $39.8 million representing an operating margin of 19%. Excluding the restructuring charge of $4.2 million our operating income was $44 million or 21%. Our effective income tax rate was 35.4% for the quarter due to release of certain tax reserves. We continue to expect an effective tax rate of approximately 36.5%for the entire year. Net income was $25.7 million and earnings per share $0.43 per share, excluding restructuring charge, earnings per share was $0.47 per share.

Cash generated from operations was $56.9 million in the third quarter and cash at the end of the quarter was $303 million after paying down $40 million on our senior credit facility during the quarter leaving only $80 million outstanding. As a reminder our convertible debt was reclassified as short-term on our balance sheet in the second quarter of this year. This is because the debt holders can require us to redeem the debt in June of 2008. In this regard we are reviewing our long-term debt and capital structure option.

The following forward-looking statements reflect Getty Images expectations as of today November 1st, 2007. Currently the company does not intend to update these forward-looking statements until the next quarterly results announced. Our full year 2007 revenue is expected to be approximately $850 million. This implies revenue of approximately $210 million for the fourth quarter of 2007. Our full year earnings per share is expected to be $2.10 which includes about $0.10 per share from non-recurring items comprised of the cost associated with non-recurring professional fees and the restructuring charge.

Assuming fully diluted shares of approximately

and the restructuring charge. Assuming forward diluted shares are approximately 60 million for the fourth quarter and the full year. The implied earnings per diluted share for the fourth quarter is $0.48. We’ve not yet completed our budget process for 2008.

However our current view is that we expect revenue in 2008 of approximately 900 million. Representing growth, of about 5%. We expect a slightly lower gross margin in 2008, as recent trends in product mix are expected to continue. We expect SG&A in 2008 to be slightly higher than 2007, with percentage growth in the low single-digit. We will continue to manage expenses out of the creative traditional Creative Stills business and into investments and growth areas. Such investments will include but not be limited to the hiring of additional technology resources, to help us successfully execute on a broad digital media strategy. Interest expense will increase in 2008 for two reasons. The new accounting standard which if finalized would require us to record the market rate of interest on our convertible debt. As early as the beginning of the year.

Secondly we will refinance our current debt which is likely to result in a higher overall interest rate. We expect capital expenditures to be relatively consistent with 2007.

With that I’ll turn the call back to Jonathan to ramp up.

Jonathan Klein

Thanks a lot, David. I'm going to stress a few points which I think are what I was thinking about and get to Q&A as soon as possible. Firstly we have a very high level of confidence that we will continue to succeed in growth as a global leading digital media provider. We have been and continue to be the clear market leader in our industry. None of the competition is making headway in eroding our leadership in revenues, products, services, distribution, technology or for that matter profitability.

Quality imagery is not going away. And at the same time there is exponential growth in online usage of inventory. We’re a strong established brand in collections, across all products and in all customer segments, and we have the best-of-breed content worldwide in all category.

Technology is driving this exponential demand for imagery and for other digital content, and we will continue to do so. With industry leading technology and search capability, in fact we were ranked 7^th in information Week's 'Top 500' uses of innovative technology.

Our customer base is the envy of the industry. Our business model is highly profitable and cash generative and we have numerous opportunities to apply this model to these other digital content types. The growth we are seeing in our established editorial and service businesses is exceeding our expectation. We’re already seeing significant growth from microstock and I believe that we are in the second inning of this business. And our footage businesses will grow over the coming years.

Our view on B2B music, having been in it for a very short while, is that the opportunity is probably greater than we had anticipated. We will however need to invest and it will take sometime.

Hard for me to comment on our consumer business, as if we not launch this Greenfield opportunity yet, but the work we’re doing suggests that this will be an important revenue stream for us over time. If you remember, we’ve have a great track record of innovation, we’ve always managed our business through transition and we've built new and profitable revenue streams frequently. In fact, [the reason we are] -- it our heritage and is unrivaled.

In short, sure we had a tough three months since we spoke to you last. We’re strong, well positioned with excellent long-term growth in profitability prospect. We are very excited about the opportunity but we are also realistic about the challenges. Getty Images is 12 years old and it has always handled and prospered by and through its change in transition. [Disparage] which we sometimes call Getty Images 3.0 is no exception.

With that I am sure you got a question or two, so, I will stop talking and do a little bit of listening. So, back to the operator for questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Troy Mastin with William Blair & Company. Please go ahead.

Troy Mastin - William Blair & Company

Hi. Good afternoon, thank you. Wanted to, may be try to nail down your growth numbers a little bit more in the quarter, you said, I think less than $15 million from acquisitions, if that is a pretty close number then looks like you benefited by about 7% from acquisition, 3.4% from currency which would imply organic down about 5%, are my numbers directionally correct?

Jonathan Klein

No. I would like some help. No. Our calculation is different. If we look at last year's Q3 and the reported number, you take this year's Q3 and you take out the less than $15 million, that gets you to an organic growth rate. As far as organic currency neutral is concerned, most of the revenue within that $15 million was in the US. So, there would be no currency impact around that because the dollars are always the dollars, they don't need to be translated. So, we don't calculate it that way. Your number, we don't get there.

Troy Mastin - William Blair & Company

Do you have a number that you would care to share?

Jonathan Klein

Well, we have given you the 15, you know the reported number from last year and you know the reported number from this year. So, if I was to share a number, it would be simply taking both numbers out. So we think that the business is probably up a point or so, organic. And the difference between currency neutral and non is small or immaterial, because that extra revenue of $15 million was largely dollar denominated.

Troy Mastin - William Blair & Company

Okay. Maybe I will dig in more and then circle back. Wanted to ask a question about your outlook for the fourth quarter $211 million in revenue implies 3.5% or so growth. Can you give us some idea how you expect, or how you modeled in currencies and acquisitions to impact fourth quarter?

Jonathan Klein

As far as acquisitions are concerned, we never give guidance based on acquisitions that we haven’t made. So what we have in there is simply the business as we entered the fourth quarter a month ago. So there is nothing there on acquisitions. As far as currency is concerned, we take the current currency rate and assume that they stay the same. We don’t speculate that if the dollar is going to weaken or strengthen beyond where it is today. So we take the numbers through up further, which we kind of know, given that it's November, and then we look at our outlook for November and December at today's currency rates.

Troy Mastin - William Blair & Company

So I would assume that there is a currency benefit in the fourth quarter contemplated in your guidance.

Jonathan Klein

Compared to last year, yes.

Troy Mastin - William Blair & Company

And I thought there would be some WireImage revenue contributing to the fourth quarter?

Jonathan Klein

There is.

Troy Mastin - William Blair & Company

Okay.

Jonathan Klein

That there is absolutely. As well as the other two acquisitions, if it will help you a little bit, the $15 million or less than $15 million that I mentioned for the recent acquisitions, Wire, PunchStock and Pump Audio.

Troy Mastin - William Blair & Company

Okay.

Jonathan Klein

Clearly, Wire or MediaVast is the overwhelming majority in revenues of that.

Troy Mastin - William Blair & Company

Okay. And then, it looks like, right now you are using your free cash flow and your cash balance to lower your debt levels. I am curious what your current thinking is towards share repurchases I don't think you buy any for a few quarters now?

Jonathan Klein

Yeah. As far as that is concerned you are right. We repaid $40 million of our debt, so we now have $80 million of term debt and we at the moment as you know we have Board authorization to purchase a total of $250 million. We've completed $208 million, there is $40 million for additional share repurchase and of course we'll let you know when we do it. But I should remind you that at as of now we have $80 million of term debt, which falls due in the short-term and we also told you during the prepared remarks that our convertible is non-classified to short-term because it falls due in June unless it converts and so therefore we have about $345 million of debt remaining that matures during the first half of 2008.

We think the right thing to do and the Board thinks that the right thing is to evaluate the options with regards to overall capital structure and we prefer not to repurchase a significant amount of stock until we have that in place. And in any case we wouldn't use short-term debt to execute on a long-term capital structure. So I think it’s a short-term nature of the debt and that's the key factor here and the debt market is not been entirely helpful over the last several months in terms of getting the sort of terms which we deserve.

Troy Mastin - William Blair & Company

Okay. Thanks a lot, somebody else is up.

Jonathan Klein

No problem.

Operator

Our next question will come from Christa Quarles with Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi I wanted to focus a little bit on the growth businesses I guess first on iStock we can model out some pretty exciting revenue opportunities in 2008 based on some of the volume numbers that you've been giving us but how do you kind of measure the certain growth of the business versus monetizing potentially too quickly. And then also on the footage side as it relates to the Internet, we are seeing perhaps what is a tipping point in terms of the consumption of video, video related ads, what are doing to embed your product in the creative process such that it's Getty footage that shows up in some of these automated creatives that's out there. And then I was just also wondering if you could give us an update on Japan? Thanks.

Jonathan Klein

Wow, I am [simply being down sided] to get them. Hold on, here we go. Let’s start with iStockphoto with micro-payment, this is interesting because implicit in your question was a suggestion that we might not want to drive this business fast. Or that be might not want to quote you monetize too quickly. And that is certainly not the way we see the world. The way we see the world is that iStockphoto through the community and through customer acceptance is providing a product, which is much in demand. The notion of monetizing too quickly it doesn’t enter our mind, what we have done so far with iStockphoto in the coming up to 18 months or actually longer since we bought it, is we are providing iStock with our knowledge expertise and assets to enable it to grow faster.

By that I mean it has our patented key wording infrastructure so the searches are better. In addition to that, we've helped it grow internationally. We have made sure that we got into the iStock video business very quickly and we are feeling that the next stage is probably right -- ripe for us to launch some other products services through iStock. I won't say too much about them at this point and you know as far as we are concerned the international opportunity is fairly been touched.

So when I look at this as a total parallel to what happened with Royalty-free. When we got into Royalty-free, it was very early, it was very disruptive, it was at a fraction of the price point for rights managed and what we did over time is we developed that business and over time the product got better. It was product content, deeper content, the greater value proposition for the customer, more international and we will do all of that with iStock and there was no notion in my mind of monetizing it too quickly.

The exploding market, at the moment, is for online usage. In order to address that we have two key products, we have the iStock product and we have a new web resolution product from Getty Images and we think and we know that that's the way to go after those markets. So we will continue to drive our iStock very aggressively. In fact it's one of our five key initiatives for 2007 and I think it will be one of our five key initiatives for 2008 as well.

As far as footage is concerned, I think you are right. I think we are not quite at a tipping point, but we are moving in that direction. There is enormous demand for video, but at this point in time a video is not as easy to work with and is not as [stream less] still. What we need to do is we need to make it easy for customers to use our video. We need to make it easy for them to use it within the workflow and like still business it has to have the three attributes content, ease of use and the appropriate price point depending on the usage. You mentioned embedding it in the creative process and we feel very successful with that already at iStock. iStock already has more than 5% of it's revenue coming from video and that is exciting given how early in the day it is. And what we are doing with the core Getty Images video product is as follows.

One: more content, either directly, or through partnerships. Two: accelerate ingestion, the biggest challenge in the footage business or the video business is to ingest large amounts of content in multiple formats for international markets quickly. And the investment that we have planned to make in that this year is not as great as we did at the end of the day, we have to search some of that for next year, when not yet at the rate of ingestion that we would like. As far as simplicity is concerned, we have moved from rights-managed completely away to rights ready and royalty-free in video, and we are continuing to drive that part of the model, and of course with pricing we are also doing it in an appropriate way. It’s not inconceivable that we might have a simple offer for video pricing in much the same way as we have our new web-resolution product for stills. As far as automated and dropping into creative, we have been working with a number of those smaller companies who are creating ad cost effectively for a myriad of smaller advertisers, right from the inception of those businesses and we're definitely continuing to do that.

At the end of the day, we have the content with significantly larger than anybody else in this market in some of the content revenues reach, and we think of this new market is very important, so I thank you for asking the question and giving me an opportunity to talk about it.

As far as Japan is concerned, we had a very strong quarter in Japan. We talk about the challenges that we are having with our traditional Creative Stills business, but it gives me an opportunity to let you know that, that business is actually growing in certain geographies and Japan is a very good example of that. Our growth in Japan is in excess of 20%, and we are continuing to do well in that market. And it's the only market, incidentally we are not number one, and as a result of that we are very restless, mostly satisfied but we are patient a little like the Japanese are.

Christa Quarles - Thomas Weisel Partners

One, just one quick follow-up based on your comments about monetization and then estimating iStock could be as much as 30% of your single image RF. The size of your single image RF business in 2008, is that some aggressive or?

Jonathan Klein

Well, at the moment, we divide royalty-free between two buckets, traditional single image royalty-free which does not include iStock.

Christa Quarles - Thomas Weisel Partners

Right.

Jonathan Klein

And other royalty-free which are those categories of CDs, virtual CDs and iStock, and that we just reported with 31%. So iStock and these other products are 31% of royalty-free now.

Christa Quarles - Thomas Weisel Partners

Also a factor on from coming out with my numbers, but thanks for the explanations.

Jonathan Klein

No problem.

Operator

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

Peter Appert - Goldman Sachs

Thank you. Jonathan. I was just hoping to understand better the dynamic driving the decline in gross margins in the royalty-free business. I had thought that the royalty rate you paid on the micro-payment content was quite similar to what you paid on traditional royalty-free. Is that not the case?

Jonathan Klein

No. We haven't been fair enough from that and you -- it's a good opportunity for me to be clear on that. And paradoxically enough, the contributors to iStock, who are amateur photographers and members of the community, they get higher royalty rates than the professional photographers who are contracted with the royalty-free business, and the royalty rates vary in the micro-payment market, dependent on how many downloads the photographers had, and also on whether the photographer is exclusive or not.

And the highest royalty rate we pay in royalty-free, traditional royalty-free is 20% and the highest we pay in micro-payment is 40%. So the blended rate between the different royalty rates we pay in micro-stock is higher. In other words: the gross margin is lower, traditional royalty-free.

Peter Appert - Goldman Sachs

Right that explains the trend in the gross margin and I understand that iStock’s royalty payments might actually be somewhat lower than some of the competitors in the business. So is that a continuing pressure point?

Jonathan Klein

It's not a pressure point, we are inundated with imagery and we get about in round numbers 45,000 images submitted to us at iStock every week. Through our inspection process we make sure that every image which we accept is appropriate, legal as their required model in property releases. It’s technically the way it needs to be and on the back of that we upload about 25,000 images a week from iStock, so we are more than comfortable about that. And strategically at iStock we like to have exclusive photographers because in the micro-payment model a photographer can have an identical image with more than one distributor and that's different of course in traditional Creative Stills. However, exclusive photographers have to be as the word implies exclusive and on back of that we pay them a high royalty rate.

Peter Appert - Goldman Sachs

All right, okay, very good, thanks Jonathan.

Jonathan Klein

No problem.

Peter Appert - Goldman Sachs

And one other thing the $900 million in preliminary revenues for next year again that assumes no additional acquisitions correct?

Jonathan Klein

Correct.

Peter Appert - Goldman Sachs

Okay and one of the observations some investors have made is that in the last couple of years, you have been doing fairly heavy level of acquisitions to sustain the revenue growth. Is your expectation that on a go-forward basis, you will continue to be as active from an acquisition standpoint as you have been in the last couple of years?

Jonathan Klein

I am forced to comment we have never made acquisitions to sustain the revenue growth. We are so open about how much of the acquisitions contribution, even today I gave you a dollar number for what the acquisition is contributing in Q3. We don't count that as real revenue growth. Real revenue growth is organic revenue growth, so we don't make acquisitions to sustain the revenue growth. We make acquisitions because they commercially and strategically, and financially make sense and all of them have. In terms of the future, I would say that at this point in time we still find certain acquisitions compelling, it's hard for me to guess what's going to come along, but I think it's fair to say that we are very, very focused on stabilizing the traditional Creative Stills business that is not an issue related to acquisition. And in addition to that building out these growth businesses, so, I don't expect for acquisitions the future is permanent, the next year or so as it did in the last 18 months.

Peter Appert - Goldman Sachs

Great, thank you and then just one last thing, the guidance for '07 Jonathan is just fractionally below what you had said last quarter, any particular areas where the fourth quarter is looking a little bit weaker than what you'd seen here today?

Jonathan Klein

Yeah, and by the way Peter I am not going to ever trust your numbers, because you said one last thing three times.

Peter Appert - Goldman Sachs

That was the real last thing.

Jonathan Klein

No, I think it's fair to say that we've decided on the investment side that we want put a little more investment behind things, which are showing momentum and therefore I suspect that you might have had a lower implied SG&A number for Q4 than is implied in our guidance.

I think on the gross margin side, your question helped me to a very succinct explanation of what's happening there. Looking at the revenue side and, December is always a difficult month to predict. Some years it is a very busy month, some years it just shuts down. There are holidays in November and I think it makes sense for us to be cautious. But there is no particular thing pointing to the very modest difference in revenue, if you look at the size of the revenues and how much they've changed, implied in the current guidance. It's very modest. Even as a couple of business days.

Peter Appert - Goldman Sachs

All right. Great. Thanks, Jonathan.

Operator

Matt Troy with Citigroup. Your line is open.

Matt Troy - Citigroup

Thank you. I was wondering, if you could talk to us about the web-res products, certainly announced the intention of creating a splash or some tends there downstream on the customer side, but obviously some public reaction from the supply side, the photographers. I would think, a very challenging exercise and dialoguing what those folks, it seems to me to be the exercise of immovable object was here as it did before. So, there it needs to be lower pricing to cultivate this market. But lower pricing is hard to swallow, as a supplier. Can you talk about the dialogue with photographers, what that learning curve was like, when that was announced and the health of the relationship on a go forward basis. How you maintain that?

Jonathan Klein

Yeah. Absolutely: It's is a very good question. Let me hit this in two or three ways: Firstly, with my characteristic openness, I think it's fair to say, that the way we communicated, the web-res product, the photographers were somewhat lacking. And we were on the back foot as a result of the way it was communicated, where enormous focus on communicating to the customers and our communication with the photographers didn't clearly enough outlined what we had in mind. For example, the idea that our licensing an image of $49 was somehow new it wasn’t -- it was somehow got into the market not new we’ve licensed rights-managed images for $49 and less for a very long time, big projects for book publishing, for other publishing ventures, when somebody has a volume deal, we’ve done that for a very long time, and I think that's photographic community I was very comfortable now where we are on that matter.

The second issue around, once you’ve licensed something at $49, you can't then license the same picture at a higher price. They are also comfortable with the fact that it’s a super, super low resolution image, cannot be used in any other way, so that protect it from an unauthorized used at the higher resolution as of we.

And secondly: what's very important is we have always licensed the same image at different prices in rights-managed dependent on usage, the price would vary and it royalty for you dependent on false site. So I think that's another matter where we’ve made a lot of progress. We’ve had very positive dialogue with a number of the photographer bodies, and I think its fair to state that if you look at the blogs, the forms and everything else it is been pretty silent for the last several weeks, and I think the photographers now understand given that we shared some information with them for example, and the largest market there was a volume growth is the online market, yet Getty Images rights-managed and royalty free licensed fewer than 20,000 images to that market for web used in the second quarter. Before web use fewer than 20,000 images from the best, broadest, and deepest collections of image were in the market, rights-managed and royalty free. The same quarter we had over 4 million downloads of iStockphoto many, many of which -- most of which for web usages. So, when we explain that to them, they were much more comfortable. When we explain that the area of our business through we're seeing a largest declines in volume was royalty free, lower file sizes. Is that we're something counter into you think that royalty free, file sizes, would it be exploiting this growing market?

But it wasn't. And that the reason why was that overall offer was too complex. Secondly, we didn't have a compelling price point for that market, so we created a brand new product for brand new market, and they are feeling much more confident and comfortable about it. And where we are so far on this, is that we have already in this very early day, reached the same volume levels that we had in Q4 last year for this category of the market. In other words, low risk and super low risk royalty free, volume levels have already recovered to the Q4 levels of last year. And we have only been marketing this and out there for a small matter of weeks, but we've also found is that the overwhelming majority of usages of these -- of this new product or either lapsed customers although its folks who were customers and are not now and we are getting them back or completely new customer.

Our idea of using this to get after a new market, using this as a customer acquisition to or to revive lapsed customer it’s far too early to declare a victory. But it is certainly and giving us a lot of confidence that was absolutely the right thing. It's off the point, is that if you do customer service, there were some folks not many was that Getty Images is expensive. Not true, we have pictures at every price points, but that expensive perception, is somewhat washed away, in light of this new product. So, there’re a lot of positives about it. But you are right to raise the point about the photographic community. And I think we are in a good place within at the moment and I think they understand where we are. And frankly, we had very little push back from those photographers, who we work closely with. And, some of the push back, which folks who never had any relationship with us, but felt that it was an opportunity. They make a point and we respect them. So we respect that. I hope that helps give more than just what you asked about the photographers.

Matt Troy - Citigroup

No. I appreciate it. I got more questions, but since we are running along, I will save those for later. Thanks, Jonathon.

Operator

We go now to Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hey, guys. Couple of questions: First, can you give us, on your new website, it sounds like there was some technology integration issues with that. Can you just update us some of these helping address in terms of the speed of the site? Now from the microstock side, it looks like you are clearly dominating the microstock industry right now with iStockphoto. Do you expect a lot of increased competition there and, or should we expect more of a network effect, where the leading player may get 70% of the market? Thank you.

Jonathan Klein

Firstly, thank you for your survey. It was useful.

Aaron Kessler - Piper Jaffray

Actually, we are publishing some additional stuff and that stuff got cut off, so, can you give some additional stuff to look for.

Jonathan Klein

I appreciate it. Thanks. Yes, you are correct, the site was launched and there was an enormous amount new in the site, much of the code had been rewritten. As the first new gettyimages.com in about five years, and we certainly had some issues around speed. And what we have done since is: we've had two releases in order to do various upgrades and we are finding already significantly improved performance.

The most important thing, as far as we are concerned, is that the customer should have a good experience on our site. And we have basically focused resources on making sure that that happens. The site is significantly more stable at the moment and the bottom-line is that when the site is stable and fast, customers are ecstatic, with all it does put them in the functionality and if it's not stable and fast the functionality frankly doesn't matter.

So, it's been a big area for us and we've seen tremendous progress and we'll continue to do that, to see that with each additional release, we expect to have it pretty much the way we want it and within the next couple of months, although you have never done on these things.

As far as your second question, our view is that the microstock business we have, iStockphoto, will show many other characteristics of other community based site in the sense that the leader tends to get a tremendous amount of velocity and something of a network effect. And I wouldn't be at all surprised if iStock does get to the sort of market share that you just mentioned.

Very hard for us to validate that as we don't know the size of the market and you don't know what iStock's revenues are, so you don't either have the numerator nor the denominator and I have one of those. But, I think your point is correct. I think that there is a network effect. I think they are “leader” and “innovator”, especially in the community space, if they do the right things and do not take the communities for granted, are able to do that.

On the face of it, therefore, given how well the business is going and people are looking at it, you could expect some entrants to the market. But, the reality is that it may not be difficult to enter the market. It is extremely difficult to have an impact on the market. The share number of contributors and members, as well the share number of customers, as I mentioned 600,000 customers, means that people who want to submit their imagery as amateurs to a site, we'll go the site where the action is and customers who are looking for imagery and looking for a community, we'll go to that place where the product is. So, I think you are right. I think….

Aaron Kessler - Piper Jaffray

Yeah, but not certainly about over 50% of people who are using yours iStockphoto were I think 15% for the next closer site, so clearly you are in lead today and I don't think it will continue.

Jonathan Klein

Yeah. It definitely looks like that, but like anything else, in order to stay ahead of the competition, you have to continue to innovate. And its very important to us that the innovation continues and that we are very, very focused on that. So, we're going to be innovating with a new product within still imagery and we're going to be innovating with another digital media type as well both at iStock.

Aaron Kessler - Piper Jaffray

Okay, thank you.

Operator

We'll go next to Steve Ashley with Robert Baird.

Steve Ashley - Robert Baird

Great. I was wondering if you might be able to provide a few qualitative comments regarding the 2008 revenue guidance. What you're assuming or looking for in kind of the core Creative Stills business of the Rights-managed and the traditional RF businesses?

Jonathan Klein

Yeah. I think a couple of things: firstly, typically we wouldn't be giving any thing that's early. As David said, we are not quite done with our budget and so we ourselves don't have every last dot and comma in play. But with that caveat and given that you were thinking qualitatively not quantitatively. I think the way we are thinking about it, is that a single image traditional Creative Stills business is showing the declines we talked about and we don't expect that to turn around today. And that is implied in our guidance.

Steve Ashley - Robert Baird

Great. I would just like to ask a macro question about non-web based ad spending, kind of your traditional business. Is there have been any change, I think you mentioned maybe some softness related to the [buffer] business and just looking for kind of a high-level of view of how you think overall spending patterns are out there?

Jonathan Klein

Well, this may sound like a contradiction, but when we look at the big numbers from all the industry surveys, and all the folks have looked hard at the advertising industry, both online and offline. We do know that the online piece of advertising is still a very small percentage of the total in terms of the spending. But, what we are seeing, most definitely, is that the amount of print material is definitely slowing down, and the amount of online is growing exponentially. So, if you think about it and the various a folks you look at and the various communications that you are getting, there is less print. And that the collateral material, the below the line marketing material in print has always been the bread-and-butter of our “Rights-Managed” business. The largest category in revenue, historically. When we look at revenue by usage, and of course, in Rights-managed we know exactly what the usage is. The largest category was brochures and print collateral. And that category is still the largest, but it is a lot smaller than it was. And we expect that to continue.

The same time is that we are still finding that customers are spending a lot of money on their marketing and the pictures are key part of it. And the overall view that we always had and continue to have by advertisers, is that the picture is and remains a relatively insignificant part of the overall cost of the project. And that is why we believe we are still seeing positive trend of flat, either flat to slightly up in the higher price point within Rights-managed. The customers who are doing bigger things, where they are using to be saying multimedia, and I don't mean by that video and stills. I mean, they are doing something in prints, something on the web. They doing maybe something on television, as well as other kinds of marketing, and are still wanting the best images with the appropriate rights. And just the other day we sold, I think it was six images for a $150,000. That's definitely not going away, but it's a smaller part of the pie. That's all.

Steve Ashley - Robert Baird

Great. Thank you.

Operator

And that would conclude our question and answer session. At this time, I would like to turn the program back to our Speakers for any additional or closing comments.

Jonathan Klein

Well, it's been a very long call. I wanted to thank you for your time, your interest and attention in Getty Images and I hope that I was able to convey what was my overall intention from this call. Both the excitements about the growth prospects of the company, as well as the realism about our industry challenge, as well our own in traditional Creative Stills. With that I am sure I'll talk to some of you, probably in the next half and hour, and others of you in the not so distant future. So, thanks so much and I would just say bye.

Operator

Thank you, everyone for your participation in today's conference. And you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of 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.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!