Getty Images Q4 2007 Earnings Call Transcript

Getty Images (GYI)

Q4 2007 Earnings Call

February 1, 2008 5:00 pm ET

Executives

Alan Pickerill - Director, Investor Relations

Jonathan Klein - Co-Founder and Chief Executive Officer

Tom Oberdorf - Senior Vice President and Chief Financial Officer

Analysts

Fred Searby – JP Morgan

Peter Salkowski - Goldman Sachs

Troy Mastin -William Blair

[Ashlyn Discreshin] for Christa Quarles - Thomas Weisel Partners

Presentation

Operator

Good day, everyone and welcome to the Getty Images fourth quarter and full year 2007 earnings conference call. 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.

Alan Pickerill

Thank you, and welcome, everybody. 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’d ask that you view all of our comments in that light.

For more information on factors that may affect our future performance, please review our filings with the SEC, in particular our annual report on Form 10-K/A 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 Tom Oberdorf, our Chief Financial Officer. And now, I’d like to turn the call over to Jonathan.

Jonathan Klein

Thank you very much, Alan, and good afternoon from New York and welcome to our fourth-quarter conference call. The year ended well, and the results for the fourth quarter were better than we expected. We continue to be enthusiastic about our opportunities and also realistic about the challenges that we and the industry face in the traditional creative stills business. I’m very pleased with the progress that we’ve made in the last several months towards our stated goal of stabilizing our creative stills business.

It is important to note that all product lines showed revenue growth on a sequential basis. We are most encouraged by the trends that we have seen in the last several months, in particular since the launch of the new gettyimages.com website, the enthusiastic adoption of our revolutionary Web-resolution product, the success we are experiencing with our market development executives in the sales organization, and the great traction that Premium Access is already getting.

The first quarter also saw continued strong growth for most of the other businesses of Getty Images, which are rapidly accounting for an ever-growing part of our overall revenue. The investments that we have made over the years and recently in editorial imagery, assignment, asset management, and micro payment are beginning to bear fruit and hold great promise for the future, as do our early investments into music and consumer.

In the fourth quarter, in addition to progress we made on our strategic and operational initiatives, we generated record revenue. It is important to mark achievements of this nature and to note that revenues grew on a sequential basis 4.4% over the prior quarter. We experienced sequential growth in all areas of the business, including rights-managed, rights-ready, and royalty-free.

Revenue for the fourth quarter grew 7.1% or 1% on a currency-neutral basis compared to the fourth quarter of the prior year. For the full year, revenue was $857.6 million and grew just over 6% or almost 2% currency-neutral. The contribution to revenue from acquisitions was less than $15 million in the quarter.

The fourth quarter also saw strong cash flow, and we ended the quarter and the year with over $364 million in cash and short-term investments, representing an increase of over $60 million from the prior quarter. Our overall creative stills business, which includes all stock photography products and licensing models, was up modestly year-over-year for both the fourth quarter and the full year. We were very pleased to see sequential growth in revenues in the fourth quarter for creative stills of about 4% over the third quarter. This rate of sequential growth is more than double the rate we saw in the same period of 2006.

We are certainly not declaring victory. However, we are pleased to see that the efforts and initiatives are already beginning to work. Our rights-managed and rights-ready products made up about 45% of creative stills revenue and grew modestly on a sequential basis, just under 1%, and declined about 7% over the fourth quarter of last year. For the full year of 2007, rights-managed and rights-ready revenue was just under half of our creative stills revenue and was down about 6%.

We were pleased with progress of volume for rights-managed and rights-ready, in particular in the fourth quarter. These volumes for rights-managed and rights-ready grew 10% sequentially over the third quarter, and this is a much higher rate of growth than the sequential growth between the third and fourth quarter of 2006.

Now for the full year, volumes for rights-managed and rights-ready were down just under 5%. With the progress we are making on our many initiatives, we are pleased that volumes were down just over 1% for the fourth quarter compared to the prior year. I’ve now touched on volumes for rights-managed and rights-ready, and I’d like to turn to pricing.

The situation with rights-managed and rights-ready pricing is exactly as you and, frankly, we would expect. Average prices are unsurprisingly down, both sequentially about 10% and on the fourth quarter and also the full year. This decline in average prices is not due to price pressure. It is also not due to our reducing prices for most usages. In fact, we are seeing strength at some of the higher price levels as well as with many of the editorial usages.

What is happening is that we are seeing a volume pressure with certain usages, in particular those that involve print collateral, brochures, and print advertising. The volumes for these usages are going down as customers are quite simply doing less of that kind of work. They are simply moving these marketing dollars to other areas, including online and paid search, which as we all know is text-based and has no pictures. This is one factor that is having an impact on average price per image for rights-managed and rights-ready. There are also two others.

The first is that we are seeing a significant increase in volumes for editorial usages in the rights-managed and rights-ready category. Our focus on these customers and these usages is paying off, and we are seeing very healthy volume increases there. And of course as these are editorial usages, they’re at lower price points than the commercial advertising brochure and other marketing collateral. So overall, this increase in volume for these usages results in a lower average price per image.

Finally, the Web-resolution product is adding significant incremental volume to rights-managed and rights-ready. And as this is at a price of $49, or ₤39, or €49 by definition it is having an impact on the overall average price per image for rights-managed and right-ready. I hope that wasn’t too complicated. It was for me.

Turning now to royalty-free revenues, royalty-free revenues grew sequentially about 5% in the fourth quarter. This is roughly double the sequential rate of growth between the third and fourth quarters of 2006. On a year-over-year basis, royalty-free revenues in the fourth quarter also grew about 5% and were about flat on a currency-neutral basis.

Turning to the full year, royalty-free grew about 6% or just over 2% currency-neutral. It will come as no surprise that the growth in our royalty-free business is due to significant growth in revenues for iStockphoto and declines in our traditional single-image royalty-free revenues. Let’s talk a little bit about volumes for traditional single image royalty-free. Volumes for traditional single image royalty-free declined high single-digits for the full year.

Now for some good news, sequentially the volume picture for traditional royalty-free was encouraging with royalty-free volume about flat between the third and fourth quarter. Incidentally, this compares to a decline in volume for the same period of 2006, in other words between the third and fourth quarter of that year of about 5%. Each region, which is the Americas, Europe, and Asia-Pacific, all outperformed the 2006 Q3 to Q4 sequential volume trend.

Another piece of good news in traditional royalty-free is that price remains very stable, both in the fourth quarter and for the whole year. Again, we are not reducing prices, we are not seeing price pressure, and this is once again a function of mix in terms of where the average price lands up. In the case of royalty-free, average price is impacted by the mix of file sizes more than anything else. Other royalty-free, as you will recall from prior calls, consist of revenues from CDs and virtual CDs, iStockphoto, and our subscription product, Creative Express.

Other royalty-free revenue had a very good quarter and year. Growth here for the fourth quarter was 94% and for the year was 81% over 2006. We always tell you the percentage of total royalty-free, so for the quarter other royalty-free was 36% of total royalty-free revenue. This compares to 20% in the fourth quarter of the prior year and 31% in the third quarter of this year.

iStockphoto licensed over 5.2 million photos in the quarter, and this represents volume growth of over 70% year-over-year. These numbers which I just mentioned for photo download clearly did not include the iStockvideo business, which is also showing explosive growth.

Turning now to editorial imagery products and services, again, to remind you that’s our news, sport, entertainment, and archival products, we continue to be particularly happy with these businesses. Growth here was 44% in the fourth quarter and 38% for the full year. Of course this is not an organic growth number, as we acquired MediaVast in the second quarter of 2007. The growth of 5% sequentially between the third and fourth quarter is of course all organic.

Editorial imagery revenues made up 18% of our revenue in the fourth quarter. Revenue from footage, or film or video, was relatively flat year-over-year, and we’re delighted to see sequential growth between Q3 and Q4 of just under 8%. Just to remind you that we lead the stock footage and archival footage business worldwide, and we’re focusing on adding new customers, improving the technology with added management, and we’re also adding content.

In 2007, we changed the structure and management of footage and added multimedia, and we also began a two-year investment program in addition to adding content. We launched a new footage website in 2007, which offered pure search, purchase, and downloads, in other words full e-commerce for the first time ever.

We also decided to convert all of the licensing away from rights-managed to rights-ready and royalty-free. We also continued to accelerate our ingestion rates, which by the way doubled over the year in 2007 by further investment in 2008. 2007 was a building and transition year for footage, and we expect double-digit growth in 2008 and beyond for our footage and multimedia products.

Finally, other revenue, which includes assignment, asset management, and our publicity distribution products, grew 28% in the quarter over the prior year and more than 5% sequentially. By virtue of investing in these businesses over the years, we now have other revenues in excess of $30 million, and they grew for the full year more than 40% over 2006. So overall, we’re pleased with our fourth quarter revenues of $218.1 million, the 7% growth over the prior year, and particularly the more than 4% growth sequentially.

As it’s the end of the year, I’d like to take a brief moment to look back at 2007. Of course, it was a year that saw challenges for our traditional creative stills business, but it also saw significant expansion in editorial imagery revenues and great growth for iStockphoto. This has occupied us operationally.

From a strategic perspective, it was an excellent year. We experienced no disappointment. In fact, quite the contrary. We made great strides towards our strategic objective of building a complete digital media company for business customers and broadening our offering into the consumer market.

Of course, we will not be satisfied until we see further improvement in our overall revenue growth rate. In 2007, we made great progress on our key initiatives and on our objective of becoming a world-class digital media company. We also maintained our lead in the industry and gained momentum in a number of key areas. I’d like to touch on some of those.

Stabilizing the traditional creative stills business has been and continues to be our number one priority. We made significant ground here by identifying and understanding the volume declines in creative stills and working to improving this part of the business. Our reorganization of marketing along customer segment lines, increased focus on proactive outbound sales efforts, the launch of new products like our revolutionary Web-resolution product, and the many other key initiatives were are all major steps forward that have already began to bear fruit.

There is no doubt in our minds that the much-improved performance in the fourth quarter evidence of the progress that we are making. We’re certainly not where we want to be yet, but we are making progress, and it is very gratifying to see so many of our initiatives working.

I’d like to talk about some of them, and these were initiatives and products that we created specifically to address the industry trends. Let me begin with the new gettyimages.com.

In the middle of the year, we took our world-class site to an entirely new level by launching the new gettyimages.com. You are never done on the launch of a website, and we are continuing to do work here, constantly evolving, adding new features, and redesigning the site according to comments and feedback that we get from our thousands of customers.

We make no secret of the fact that soon after launch, we were not happy with its performance. We have no doubt that those issues did have a negative impact on revenue. We equally make no secret of the fact that these challenges are now behind us. We reacted quickly and decisively, and the site is now impacting revenue, but in a very positive way.

We lead the industry in every single area, and our website and technology is no exception. If you haven’t seen it yet, I encourage you to visit gettyimages.com and play with it and see how we have taken search to a brand new level.

In 2007, we began to drive our multi-site strategy for creative customers. We now offer three sites for our customers: gettyimages.com, punchstock.com, and istockphoto.com. On these sites, they can find everything they need for whatever project, in any geography, and whatever price point they have available. We are continuing to launch new products, we have a new subscription offering coming out this year, and there are new services on all three sites.

In September, we launched a revolutionary new online product. It allows our customers to use any image from any collection in their online media and advertising project with a minimum of hassle. As we know customers are using imagery differently these today. An enormous amount is moving online.

Customers need many, many more images, they need them at smaller file sizes, but they still want great images. Customers still care about the images that they associate with their brand. This new product enables them to do all of this. I can categorically state that the success of this product has exceeded our expectations.

We are finding thousands of new customers for Getty Images. They are coming in and licensing this product, and then they are buying other products of ours. The degree of cannibalization has been less than we had thought, and in fact in the rights-managed and rights-ready area has been negligible. We are recapturing sales at the lower-resolution file sizes for royalty-free, and photographers are very comfortable with the product, and we continue to hear very positive feedback from our customers as well as our partners.

Overall, it has been a wonderful success, and we will continue to build on it. In fact, one of the best measures of its success is that we have already recovered the volumes at the lowest resolutions in royalty-free that prior to the launch of this product were in some markets down as much as 50%. Run rates for low-resolution and super low-resolution file sizes in royalty-free are back where they were at the beginning of 2007.

And in addition we are adding thousands of rights-managed and rights-ready licenses for this product, but as I said a moment ago, close to no cannibalization in the existing Web usages in the rights-managed and rights-ready licensing model. Furthermore, we are keeping a close track on what these new customers purchase after their first purchase of a low-resolution product. We are seeing significant revenues from these new customers across all of our other products and services.

Last year we focused significantly more on internationalization, and there’s more to come. In a very short period of time, we have been successful in building the leading editorial imagery business in the world. From our stock photography roots, we have achieved this status in editorial imagery.

Yet I stress on all of these calls that we are still largely English language centric. In the last year or so, we’ve expanded into Germany, and our success there has encouraged us to be much more aggressive this year in other markets where we know that we will quickly become a market leader in editorial imagery.

Additional focus on internationalization doesn’t just apply to editorial imagery. In all of our product lines, we are continuing to drive our business internationally. This includes iStockphoto, where we are seeing growth in markets such as Austria, Spain, Germany, Japan, and the UK. We also have localized the new gettyimages.com in more and more languages, and we’ve now added Italian and Portuguese.

Finding and downloading our creative and editorial imagery is much easier now for non-English speaking customers. I expect more progress here this year, as we know that there is significant opportunity in these countries across all product lines.

A very big focus for us as a company is to move from less of a product-centric approach to customer segments. We are continuing to increase the number of feet on the street in the sales team. Marketing and sales are now completely aligned by customer segment, and we have also at the same time become more efficient in integrating our inbound call centers in the United States. We set up segment teams in the summer and have had great success already in all three segments.

We see considerable growth opportunities across all customer segments, but in particular in media and corporate. You will see and hear much more from me in 2008 on this subject.

We believe that the key is to continue to innovate. And our new products and licensing models offer our customers a chance to increase their spend with us while reducing their overall cost and the time that they spend on getting their imagery and working through the different licensing models.

We’ve spent a lot of time lately creating new offerings, including Premium Access. As a reminder, Premium Access is an “all you can eat” offer that allows large customers access to virtually the entire collection. We do not decide what they want; they do. We’re the only company in the industry by a significant margin that can provide the breadth, depth, and quality of content together with all the service these customers need, and we give them a great opportunity to get more of their images more effectively while spending more money with us.

Premium Access is already doing great. We’ve seen some very big customer wins, and a very healthy pipeline for the product is in place worldwide. There are more exciting and unique products coming soon, but there will be time enough to talk to you about those on future calls.

Last year, we also made major progress in driving extensions and enhancements to both current and new products and services. Let me name a few very quickly, music. We acquired Pump Audio, and very soon thereafter launched an online music licensing service, Soundtrack.

This gives our customers access to thousands of original tracks by some of the best independent artists and bands. There is no doubt at all that we will be successful in licensing music. It may take some time, but we already know that we have a product and a service that is attractive to customers, and we are already revolutionizing the way customers license music in much the same way as we did with imagery through our history. We have high expectations for this latest edition to our product portfolio.

Let’s talk a little bit about multimedia, and editorial, and editorial footage. I’ve spoken to you at length previously about the excellent acquisition of MediaVast last spring. That acquisition made us the worldwide leader in entertainment photography. We continue to integrate WireImage and are very happy with the results.

The business is now very profitable, which it was not at the time of the acquisition. And we are fortunate to have brought on board some great people, wonderful content, and a great brand in the entertainment industry.

In addition, during the year, we added even more multimedia products and editorial footage to our offering. We have improved the quality of production, and we now deliver across news, sports, celebrity, and fashion. At times, these pieces are created just moments after events take place, and this is extremely useful for our customers.

In terms of enhancements and new products and services, it would be remiss of me not to mention iStock. Our user-generated micro payment site continues to defy expectations, expand the market, find new customers, launch new products, develop wonderful photography, and of course, grow our revenues. iStockphoto had a stellar year in 2007. We’re expecting another great year in 2008.

The new footage website I mentioned a moment ago has made searching, purchasing, and downloading online even easier for our customers. As I said earlier on, there is much to do, and we will make more investments in footage in 2008. We are pleased with our 2007 finish, and there is no doubt at all that we are very well positioned here for 2008.

I haven’t spoken much about consumer, and I don’t plan to on this call. Suffice to say that our consumer business will leverage our existing world-class content, our already huge traffic, by offering a separately branded site where people can come to browse, enjoy, relish, and play with stellar moving imagery while interacting with each other.

Existing content in our commercial licensing business has huge consumer appeal. We know that from the traffic. Plus we have massive depth of rich content in our archive. Traffic and content are two of the primary building blocks for a great consumer site, and we already have them. We are working on the right strategic partnerships and will continue to build out the site with our technology team.

So in short, what we’re doing is leveraging our existing core assets for our consumer business. What are those assets, world-class imagery, and other rich media? We have millions of imagery, of editorial and creative images that consumers want to see. Equally important, we add 8,000 new images every day.

Secondly, traffic, our high volume of qualified site traffic is very unusual, especially for a business-to-business company. We have about 14 million cumulative, unique visitors a month across our site. We have a pilot site, which we just threw up as a test, called ViewImages. This site garnered 4.7 million unique visitors last month, all without any marketing at all.

The third key part one needs is technology. We have absolutely no doubt that our technology team, which built and created iStockphoto, has created something very enticing and attractive to consumers. And we’re also in discussions with many strategic partners sometimes for media and content.

In fact, we just finished beta testing our new consumer site. It’s called Jamd, jamd.com, and we’re learning a tremendous amount. We’re continuing to add enhancements to take the site to a new level. We will generate revenue from the site through advertising, sponsorships, subscription, and even some e-commerce.

But with that, I’d like to stop, hand the call over to Tom, who’s going to run through the financials in more detail.

Tom Oberdorf

Thanks, Jonathan. For the fourth quarter, we reported revenues of $218.1 million, up 7.1% over the fourth quarter of 2006. Excluding the effects of currency, growth was 1%. For the full year, we reported revenue of $857.6 million, representing 6.3% growth. We acquired MediaVast, Pump Audio, and PunchStock during the year, and each provided some revenue growth for the business.

Given how quickly we integrate these acquisitions, it’s not possible to know exactly how much each contributed incrementally, but we estimate that on an organic currency-neutral basis, our revenue declined about 3% for the entire year. In total, for the fourth quarter, about 45% of sales were in Americas, 45% were in EMEA, and 10% in Asia-Pacific.

Jonathan discussed revenues, price, and volume in great detail, so I’ll move to the rest of the financials. Our cost of revenue consists primarily of royalties that we pay to contributing photographers and our content partners. For the fourth quarter, the average royalty rate for the entire business was 27%, compared to 26.3% in the prior year.

As discussed last quarter, some of our higher growth products carry slightly lower gross margins than our historic rates, which have had an impact on our overall rates. Despite this mix shift, contracted rates with contributors and partners are stable.

For the fourth quarter, the average royalty rates for rights-managed imagery was 33%, down from 34% last year. For royalty-free inventory, it was 21%, up from 16% last year. As we have discussed previously, this change is driven primarily by the relative strength of our micro payment product compared to traditional royalty-fee, which carries a slightly higher average royalty rate.

For editorial imagery, the royalty rate was 28%, and for footage, it was 31%, both essentially consistent with last year. For the full year, the combined royalty rate was 26.6% of revenue, compared to 25.6% last year, again impacted by micro payments and some of our newer products that carry a higher average royalty rate.

SG&A expenses were $86.4 million, or 39.6% of revenue in the quarter compared to $77 million or 37.8% last year. This quarter, we had over $600,000 in professional fees for the review of our strategic alternatives included in SG&A. For the full year, SG&A expenses were $335.9 million, or 39.2% of revenue, compared to $302.7 million, or 37.5% for last year.

For the full year, we had approximately $6 million in professional fees associated with the stock option review and a terminated acquisition, as well as the professional fees I mentioned earlier. Excluding these expenses, SG&A would have been $329.9 million, or 38.5% of revenues. For comparative purposes, in 2006, we had $1.6 million in expenses for the stock option review.

The increase in SG&A for the quarter and for the full year were due primarily to expenses associated with acquired companies over the course of last year, investments we’re making in new products where we see opportunities for growth, and the impact of foreign exchange rates.

In the fourth quarter, we saw an increase in SG&A of just under 3% compared to the third quarter of 2007. This was due in part to the impact of foreign currency and in part to professional fees associated with the recently announced review of strategic alternatives.

And lastly, but maybe most importantly, we’re making investments in areas like technology, editorial imagery, iStockphoto, music and consumer, which we think is important for the future growth of the company.

In the fourth quarter, depreciation was $16 million compared to $13.8 million last year. Amortization of intangible assets was $8.5 million, compared to $5.3 million last year. For the full year, depreciation was $61.6 million, compared to $53.3 million last year. Amortization was $29.2 million compared to $19.7 million. These increases over 2006 are results of our acquisitions, with deprecation increasing further as a result of current capital expenditures. Capital expenditures were $13.7 million for the quarter and $62.9 million for the full year, in line with our guidance.

For the fourth quarter of 2007, operating income was $47.8 million or 21.9% of revenue, compared to $44.1 million or 21.7% last year. For the full year, operating income was $196.3 million or 22.9% of revenue, compared to $198.1 million or 24.6% in 2006. Excluding the charges I mentioned above, operating income was $48.9 million or 22.4% of revenue in the fourth quarter. For the full year of 2007, excluding these charges, operating income was $207.6 million or 24.2% of revenue.

Income taxes in the fourth quarter was 43% of pretax income, which is higher than we anticipated coming into the quarter. This was driven principally by a change in the mix of income, resulting in less income in low tax jurisdictions and more income in higher tax jurisdictions. In addition, we experienced a higher amount of non-deductible expenses in the fourth quarter. Looking ahead, we expect taxes as a percentage of pre-tax income to be approximately 38% for 2008.

Earnings per share were $0.48 for the fourth quarter, compared to $0.51 last year. Excluding the items I mentioned above, EPS would have been $0.49 per share for the fourth quarter of 2007 compared to $0.63 per share in the fourth quarter of 2006. For the full year 2007, EPS was $2.10 compared to $2.11 in 2006. Again, items described above, EPS would have been $2.22 in 2007 compared to $2.46 in 2006.

We had a strong cash flow in the fourth quarter and the full year. Cash provided by operations for the fourth quarter was $78.7 million compared to $87.6 million last year. Capital expenditures for the quarter were $13.7 million, bringing the full-year capital expenditures to approximately $62.9 million. We had $80 million remaining on our short-term revolving credit facility at December 31, which we have since reduced to $40 million in January. We have a convertible note outstanding in the amount of $265 million.

For the full year, cash flow from operations was $249.3 million and free cash flow, defined as cash from operations less capital expenditures, was $186.5 million. This year we spent a total of $254.7 million on acquisitions. Total cash and short-term investments increased to $364 million at the end of 2007 compared to $303 million at the end of the third quarter.

Before I discuss guidance, I want to reiterate the following forward-looking statements, reflect our expectations as of today January 31, 2008, and that they are subject to the factors that may affect our performance as outlined by Alan at the beginning of the call.

For the first quarter of 2008, the company expects to report revenue of approximately $220 million and earnings per diluted share of approximately $0.45. The earnings per share reflect the current estimate of professional fees associated with the review of the strategic alternatives and also upfront investments in a number of growth areas of the business, including micro payment, editorial imagery, multimedia and footage, music and consumer.

For the full year 2008, the company expects revenues of approximately $900 million and EPS of $2 to $2.10. This is in line with the earnings per share we reported today for 2007. The earnings per share guidance reflects the current estimate of professional fees mentioned a moment ago, a slightly lower gross margin in 2008 compared to 2007, a lower rate of SG&A spend in the second half of the year, that’s of 2008.

The guidance also assumes a refinancing of our long-term debt. Interest will be at market’s rates for this type of debt, and as such will be substantially higher than what we paid in 2007. We expect depreciation and amortization expense to total about $100 million for all of 2008, up from about $90 million in 2007.

As I just mentioned, we expect taxes to be about 38% of pre-tax income for 2008. As usual, there will be some variability quarter-to-quarter. Company guidance for 2008 assumes $60 million fully diluted shares for both the first quarter and the full year. We expect capital expenditures to be consistent with 2007 at about $60-65 million.

With that, I’ll turn it back to Jonathan.

Jonathan Klein

Thanks a lot, Tom. I’m going to be very brief. Because I’m sure there are some questions.

As you are aware, we announced recently that we are reviewing strategic alternatives. We will update you as and when we are able. It should, however, be stressed that this review is against the background of a record quarter and a record year for revenues, the generation of significant cash flow, an unrivaled leadership position in all areas of the industry, and a management team and employee that are as excited and energized about our business as we have ever been.

We have some challenges, but we have many more opportunities ahead of us, and we are focused on both stabilizing the traditional creative stills business, where we are already seeing progress, and driving forward with those new products and services which are providing significant growth.

I’d now like to stop and take as many questions as I am able to.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Fred Searby – JP Morgan.

Fred Searby – JP Morgan

Hi, thank you. Jonathan, first touching upon exploring sale. It looks like the business is stable, clearly not the growth you had a couple years ago. But the hyperbolic growth is gone, but it’s more or less stable, which begs the question of why now?

Now that you could have a year ago probably taken this private or sold private equity at a much higher multiple in valuation and just, why would it now that we have a credit freeze and that results are still fine and you’re generating fairly substantial free cash flow, would it make sense in this environment?

Will you be able to get a reasonable price, and the valuation that was talked about in the press looked, again, somewhat disappointing and not like a [inaudible]? What’s the logic for now?

Jonathan Klein

I think I chose my words very carefully, where I said I will answer as many questions as I am able to. And the very first question is one which I’m not really at liberty to answer.

Suffice to say at no point has Getty Images talked about sale. We’ve talked about strategic alternatives. I need to stress that we will always do what is best for the shareholders in the long term, and you can rest assured that we are exploring all of the alternative whilst being very mindful of the fact that our primary obligation is to drive shareholder value for the shareholders of Getty Images. We have been very successful at that since we founded the company 12 years ago, and we intend to continue to do that.

Fred Searby – JP Morgan

All right, I understanding you can’t, maybe could you give some more detail, two questions. Video has been a disappointment. You’ve had obviously some successes in your diversification, but video looked like really the most promising and really and I thought you said it was flat. Maybe you said flat sequentially, I don’t even, I haven’t looked.

Jonathan Klein

It was flat year-over-year, and 8% sequentially.

Fred Searby – JP Morgan

Okay. So flat year-over-year, and given everything that seems to be happening, you’re not gaining traction there. I wondered if you could elaborate on that. And then just secondly, organic growth, mid-single digit down, is that more or less the right calculation?

Jonathan Klein

Let’s touch on video. I think it’s fair to say that 2007 was very much a transition year. We decided at the beginning of the year that we would create a new website which is fully e-commerce. We decided that we would accelerate our ingestion rate to get more footage onto to the site more quickly.

We also, for the first time, created a new management structure under which we have discrete leadership for all aspects of our footage operation. And that’s not what we typically do. We typically have a matrix structure.

In addition to that we took the bold move of moving away from rights-managed in footage. And when I look back over the year, it’s fair to say that the management changes have been successful. We doubled the rate of ingestion of footage. We had hoped to do better than that but decided to defer some of the expenditure into 2008.

The launch of the site, we had a six-week period where we had some difficulties with the footage part of the site, and I estimate it cost us at least $2 million of revenue. And it also took us some time to habituate customers to not having rights-managed and to get the pricing right for rights-ready.

So when I look at the year I agree with you, it’s not what we had hoped. I take considerable comfort by how the second part of the year, in particular Q4, was strong. And I also remind people, and myself every now and then, that in the stock footage world, as well as in the archival footage world, we have a very significant leadership over anyone else in terms of revenues, geographical spread, content, customer base, and product.

I do think that footage will be a double-digit grower in 2008 and thereafter, and I think running it and operating it together with the new editorial footage as well as with our multimedia product gives us additional traction.

So I do agree it wasn’t what we had hoped, but we were trying and doing some very new radical things like the e-commerce, like rights-ready. And I’m pleased with how we exited the year for footage, the fourth quarter and into this year.

Your other question, I think, I’m looking at Tom, was to do with growth rates.

Tom Oberdorf

Right, I think you were talking about organic growth rates. Did we calculate it right, and I think we’ve said on every call, it’s a very difficult thing to do because we do integrate these businesses fairly quickly into our business. But we said that for the full year we think organic growth currently, neutral. We’re down about 3%, and we do think that’s the right number.

Fred Searby – JP Morgan

Is mid-single for the quarter about right?

Tom Oberdorf

Yes.

Operator

Our next question today will come from Peter Salkowski - Goldman Sachs.

Peter Salkowski - Goldman Sachs

Gentlemen, quick question about the advertising environment now that you’re located in New York, been there for a little while, the center of advertising for the universe here, as far as the United States is concerned. Just kind of wondering what you are hearing with regards to the ad environment as we go into 2008 with your customers. And then maybe think a little bit about what you think that might have in terms of pricing pressure broadly across the rights-managed business. And then I have a follow-up.

Jonathan Klein

Wow, that’s a big question and you have a follow-up. Okay. Let me step back a moment and say the following. The issues which are impacting Getty Images in the traditional creative stills business have had little to do with the macro economic environment.

The drivers in our creative stills business have been at the supply end the increasing supply of imagery, and at the usage end the fact that customers are spending less of their budget on print and print related collateral, and in addition to that they have moved some of their budget to marketing spend where there are no pictures, ad words, text search.0 And furthermore they have moved some of their budget to online spending, where the pictures are at lower resolution and as a result of that at lower price points.

For us, the ad agency segment has been difficult for about 18 months in light of changes to that business and the way that business is done: the proliferation of interactive agencies; smaller online agencies; more work being done by boutique firms; more work being done, if you like, in an online environment. So that’s what we’ve had to deal with for the last actually more than two years. I first started talking about this in October 2005.

As far as the environment at the moment, we ended the year more strongly than we had anticipated. And what we have typically found in the 12 years that we’ve been doing this is that if advertisers are concerned about the economy, they tend to make sure that the marketing budgets are not spent.

And as a result of that one tends to get very, very soft or quiet ends to the year in those years. For the years in which the economy is weak, we tend to see the year ending very quietly. People are not just in the office as opposed to people spending their budgets.

In light of the strength in which we ended the year, and I would say globally, we do not feel at this stage that we are in a difficult macro economic environment. We do, however, read the newspapers, and we are certainly being alert and alive to that.

We also know, and I’ve said this again for two years, that the customer base that we serve has had their own particular challenges, and you cover a lot of them in your coverage universe. And those issues around what’s happening with publishers and media companies, as well as with ad agencies, have been going on for some time.

So we have certainly put our guidance together with a view to a macro economic outlook, but we certainly haven’t built into that some major recession, because we’re not seeing that at the moment.

Peter Salkowski - Goldman Sachs

All right. But you’re seeing a move, and as you’ve said before whether it’s across the iStockphoto or the $49 Web-only use imageries, that you’re in a way seeing a run towards a lower-priced product?

Jonathan Klein

But it’s much more complicated than that. And if you give me two minutes I think I can bring it together.

In the rights-managed and rights-ready categories, customers are licensing an image for a particular usage. And what we are finding is in absolute numbers the usages for print advertising, brochures, junk mail, print collateral, are simply going down. That means that we’re licensing fewer images for those usages. That doesn’t mean that customers are buying a cheaper image for that usage or going somewhere else for that image, they’re just doing less of that.

So what we are finding is that when customers do have the budget, because they are doing a project where a cost of the image is irrelevant in the overall cost, we are doing very well. The net result is that pricing is holding up very well in each of those categories. And pricing for higher-priced usages remains strong, and volume for some of those higher-priced usages remains strong.

So, that’s pretty much what’s happening there. We’re not having folks swapping out because they’re now still doing a print brochure or they’re still doing a print ad, but they want to spend less on the picture. Because once they decide to print something or mail something, the cost of the image is irrelevant.

In the royalty-free space, a similar dynamic applies. The higher-resolution images, remember we have the same pictures at all resolutions, but the higher-resolution images by definition are being used for print and not on the Web, and those volumes are lower. So, again we’re not seeing a lot of swapping out.

Where there is explosive growth is for online usage, which is why the $49 offer, which is more than $49 in other countries, that product is enabling us to find new customers. Half of the people who are buying the $49 product are brand new customers. Therefore by definition there’s no cannibalization.

And in the rights-managed and rights-ready part of it, the number of $49 licenses is going up. Yet at the same time the web usage, the old web usage for rights-managed, which is at $500 or so per image, is also going up in volume. So the plan for that was to capture those volumes across the board and to find a new customer acquisition tool by using this product. And that’s what we’ve done.

So, yes, our average price per picture is going down in rights-managed and rights-ready, and that’s because of mix. The average price per picture in royalty-free has remained remarkably stable. And that was because in 2007, the bulk of the decline, in particular in the first three quarters, were very low-resolution images. So we were losing at that point the lowest-priced images, which is why the price points were remaining stable. We’re now recovering those, and some of it is additive, which is why we’re still remaining stable on price.

It was more than two minutes; it was more complicated than I’d hoped. I’m obviously not articulate enough.

Peter Salkowski - Goldman Sachs

I understand. The quick follow-up then is, as the average price per image changes because of the mix situation that you described, and maybe Tom is better to be asked this, but you mentioned in the guidance that the expectation’s that the gross margin will be down in 2008. If there’d be a sense of magnitude there, or does it really kind of play it out with regards to a mix situation.

Jonathan Klein

Okay, I will let Tom answer the magnitude issue, but let’s remember, our gross margin percentage has got absolutely nothing to do with the price of the picture. The gross margin percentage at Getty Images is purely based on what percentage we pay the content owner. And the reason why there’s a move in gross margin percentage is because our fastest-growing product line, micro payment, has a lower gross margin than the average of the rest of Getty Images.

It has a significantly higher EBITDA margin, but it has a lower gross margin. So it’s all about mix. If we sell more wholly-owned editorial content, the gross margin goes up; if we sell more assignment services, the gross margin goes down. It’s got nothing to do with the price.

But in terms of quantum, Tom can help you on that.

Tom Oberdorf

I don’t want the comments, for you to think that the gross margin is going to tank because of anything that we just discussed. It’s just that we do see as we talked about the mix of new products and growth of iStock, does affect the margins. But when you look at what we did last year versus this year, I think you could expect that same type of trend, ‘06 to ‘07 and ‘07 to ‘08.

Operator

We’ll move to Troy Mastin -William Blair.

Troy Mastin -William Blair

Hi. I’m trying to reconcile your optimism regarding the fourth quarter with my calculation organic growth deteriorated slightly on a year-over-year basis from Q3 to Q4. Maybe it’s trajectory within the quarter, maybe it has to do with mix or some other form of seasonality, but it looks like comparatively the fourth quarter was a little bit softer than third quarter organically. So can you help me understand that a little bit, why you’re so optimistic about where things sit today?

Jonathan Klein

I’ll try. So the first thing that we’ve focused on, as you can tell throughout this release, is sequential growth rather than year-over-year. And the reason for that is there was not only a shift in our industry 2007, but we did many, many things in the second half of the year which had an impact: the various products, the new website, the $49. So when we looked at it sequentially, the first thing we said is, okay we’ve done better sequentially for the first time in a very long time. Is it just because of seasonality?

And as I pointed out during my prepared remarks, we had better sequential growth Q3 to Q4 this year, in 2007, than we did the prior year, just to remind you of some of those numbers. Let me tell you a couple of them from the script, and I’m now looking for them. But it was double the rate of growth sequentially in most categories for the prior year. When it comes to single-image royalty-free, sequentially single-image royalty-free was flat Q3 to Q4 of ‘07. Single-image royalty-free volume, this is volumes I’m talking about, declined 5% Q4 to Q3 in 2006.

So, in that area, that’s one very clear example of that, there haven’t really been any acquisitions to speak of in royalty-free sequentially. The PunchStock acquisition was absolutely tiny and meaningless in terms of trend.

Now of course, what we also found in the rights-managed and rights-ready space was we saw better sequential growth Q4 to Q3 in ‘07 to ‘06. And, overall for the whole company, we’d also saw that. So I’m struggling a little bit. We saw 10% sequential volume growth Q4 to Q3 for rights-managed and rights-ready volumes ‘07, which is much higher than the sequential growth rate for those same volumes and same products in the third and fourth quarter of ‘06, when there were no acquisitions.

Troy Mastin -William Blair

Okay. I guess it’s just a couple different ways to look at it. I’m not trying to suggest that you’re not seeing a bottom or turnaround at all. I’m trying to understand with the organic growth still kind of going a little bit more negative, but it feels like you’re picking up some trajectory in the right direction, so I don’t want to…

Jonathan Klein

Well, I think what we’re saying, and I will pick my words carefully, is that the trends are very much better. We’re certainly not declaring victory. We have seen some signs of stability. The biggest area of volume decline by miles was the very low resolution royalty-free across all collections. Whatever the lowest-resolution product was in royalty-free was showing the biggest decline, and we even had a very significant turnaround there, and that’s clearly helping us.

I’ve also made it very clear, I hope, that those brochure usages, those print ad usages in rights-managed and rights-ready, are not going to change overnight. That is a secular shift which will bottom out at some point. But we’ve got a very big share in that market, and those folks that do have budgets are spending good money, and they’re largely spending it with us.

So I don’t want to give a misleading picture at all. I think the key thing is that things did get much better between Q4 and Q3, but we’re still down year-over-year.

Troy Mastin -William Blair

That’s okay. Now, I haven’t run the numbers on ‘08, but I’m just guessing that your guidance is going to imply less negative organic growth in the early parts of the year and then positive organic growth in the latter parts of the year on a year-over-year basis. Is that correct? I’m curious what gives you the confidence that you can achieve that, and maybe you’re modeling the business out a bit more on a sequential basis than I would have expected, so any thoughts there?

Tom Oberdorf

I was just going to say, I don’t want to get into organic growth rates by quarter for 2008, but I would say, Troy, to the extent that we gave a $220 number based on a $900 full year, we’re going to see revenue grow over the year. So I would say that we’re going to see better organic growth rate in the latter half year than in the first quarter. So I would put it that way, I mean, we do see revenue growing.

We’re seeing significant revenue. We’re just seeing growth quarter-on-quarter in 2008, and it’s from the new products, it’s from iStock, it’s from everything we’ve mentioned. And we actually have a higher number of business days in the second, third, and fourth quarter versus the first as well.

Jonathan Klein

Yeah, Easter falls in the first quarter in Europe so that we lose business days. So if you look across our whole portfolio, you can see a lot of reasons why the revenues should build.

One, we’ve talked about the increasing stability in creative stills, which makes the year-on-year comps going to be better for us. Secondly, this is a big year for sport, and as you know our sports business tends to do better in Olympics years. And the Olympics is in the second half of the year, we get some of the revenue earlier on.

We also get a boost this year from news. The presidential elections in the U.S. give us some incremental revenue. It’s not a lot, but when you add up those two, we then have an asset management business which grew more than 40% last year, and is doing rather well and is growing each quarter sequentially as well.

Last year, we were flat in footage, up 8% sequentially Q3 to Q4. We see growth for footage this year. We also have some benefit from a full year of MediaVast, and that’s the only piece of it of the year that’s not organic, because the revenues from Punch and Pump, which were our other two acquisitions last year, are relatively small.

And finally, we expect exponential growth again from iStockphoto, and that growth is happening year-over-year as well as month-over-month sequentially, which helps explain what Tom said in terms of this is going to build during the year. We’re not going to hit a Q1 number and be landlocked at that number.

Troy Mastin -William Blair

That makes sense. And how meaningful is the iStock price increase that you’ve taken in? Can you just review what you’ve done there?

Jonathan Klein

What we’ve basically done is there are a number of components of iStock pricing, and we have different price levers which we can pull. At iStockphoto, the customer buys credits. So the first metric you need to look at is what are we achieving per credit. The price for a credit is at $1.30 in the United States.

So what is the achieved price per credit, because we give discounts on big packs of credits and we also give credits away for free in order to get traffic to the site either through OEM deals or individuals who have business cards which give away credits. So your first metric is what’s the price per credit, and we have not increased the price per credit this year. We increased it in August last year to $1.30.

The second issue is how many credits do you have to exchange as a customer for a download, and that is the price rise that we put through earlier in January, where we charge a different number of credits for each download depending on the file size.

In addition to that, the mix of the business which is video is a key component because the price per credit is the same, whether you’re buying video or stills. But the point there is that the lowest file size for a video file cost 10 credits whereas the lowest for a photo is one credit.

So those are really the factors that move, and we are very strategic in changing pricing, and we are very focused on adding better content, higher levels of high-g for the content. The site is the best in the industry because it has all of Getty Images’ metadata and search technology.

And on the back of that, we’ve added more and better content, more relevant content, a better site, more internationalization, and we’re having tremendous success from a volume perspective notwithstanding the modest increase in price.

Troy Mastin -William Blair

You mean you haven’t seen any real negative effect to volume from the price increase yet?

Jonathan Klein

No.

Operator

Our next question today will come from Jennifer Wang - Thomas Weisel Partners.

[Ashlyn Discreshin] for Christa Quarles - Thomas Weisel Partners

Oh, hi. Actually, I’m [Ashlyn Discreshin] on behalf of Christa Quarles. I know you answered a question about advertising budget for ‘08. Can you just give a little bit more color on which category and which countries you may see there’s some weakness or straw heading to 2008? Thank you.

Jonathan Klein

Do you mean from a macro economic perspective?

[Ashlyn Discreshin] for Christa Quarles - Thomas Weisel Partners

Yes.

Jonathan Klein

Well, it’s very early in the year. And as I said earlier on, we’re not seeing any particular weakness or action from any particular country. Do remember that we will see a slowdown earlier than most because we provide a product certainly for a commercial usage where the spend is discretionary. So if advertisers decide to pull back on their spend, we will see that relatively soon.

Now, we have not seen it at this point, but we are certainly being cautious in light of what we’re reading. So I really couldn’t say based on any experience that we have it at the sharp end with customers that we are seeing anything untoward in any particular country.

Operator

Ladies and gentlemen, thank you very much for your questions. Mr. Klein, I will turn the call back over to you for any closing or additional remarks.

Jonathan Klein

I’ll be extremely brief, all right? I want to thank you very much for being patient with us. Due to something appearing in the press, we did make an announcement and we are as focused as you are on giving you as much information on what is going to happen as and when it does happen.

But until then, I would just remind you that the company did have a very strong quarter, a very strong business. We generated terrific cash flow, and we’re energized, excited and moving forward. And we will keep you posted on any and all developments. Thanks so much. Bye.

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