Getty Images, Inc. Q1 2006 Earnings Conference Call Transcript (GYI)

Getty Images, Inc. (GYI)
Q1 2006 Earnings Conference Call
April 20th 2006, 5:00 PM EST

Executives

David Parker - VP of IR
Jonathan Klein - Co-founder, CEO
Liz Huebner - CFO

Analysts

Troy Mastin - William Blair & Company
Frederick Searby - J.P. Morgan
Peter Appert - Goldman Sachs
Jim Ballan - Bear Stearns
Christa Quarles - Thomas Weisel Partners
Aaron Kessler - Piper Jaffray
Matthew Troy - Citigroup
Brandon Dobell - Credit Suisse

Presentation

Operator

Welcome, everyone, to the Getty Images first quarter 2006 earnings conference call. Today's program is being recorded.

At this time for opening remarks and introductions, I’d like the turn the conference over to the Vice President of Investor Relations, Mr. David Parker. Please go ahead, sir.

David Parker

Thank you, Kelly, and welcome everyone. Following this call, a telephone replay, as well as a web cast, will be made available. Information on both is available on our website.

As always, some of the statements made on today's call are forward-looking and are based on our best view of the world and our business as we see it as of today. Of course, those statements can change as the environment in which we do business changes, and 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, and in particular our annual report on form 10-K for 2005. We currently do not intend to update or revise these forward-looking statements until our next quarterly conference call.

As ever, we'll allow time at the end of the call for questions, and in order to cover as many questions as possible, we ask that you limit yourself to one question. As always, we're more than happy to follow-up with you after the call.

Joining us, we have: Jonathan Klein, Getty Images Co-founder and Chief Executive Officer; and Liz Huebner, the Company's Chief Financial Officer. I'm now going turn the call over to Jonathan Klein.

Jonathan Klein - Getty Images Inc.

Thanks a lot, David. Good afternoon, everyone, from Seattle and welcome to Getty Images First Quarter 2006 Conference Call.

We were very pleased to report record revenue of about $201 million in the first quarter. On a currency neutral basis, our revenue grew 17%. Earnings per share, excluding share-based compensation, was $0.64 and represents approximately 26% currency neutral growth in EPS.

As always, year over year currency variations impact both our revenue and earnings per share growth rates. It is very important to understand that during the first quarter, unlike the last few years, this impact understates the real growth of the business and of our earnings. The real growth rate for revenue in the quarter was four percentage points higher than reported growth.

Overall, we were very pleased with the quarter. Exceeding $200 million in revenue in a quarter is a milestone, and one that we're very proud of -- and one we could not have imagined when we started this business about a decade ago.

As has been the case for many quarters now, 80% of our revenue is derived from licensing creative imagery. This important part of our business grew approximately 16% on a currency neutral basis.

Representing 54% of creative imagery revenue, our rights-managed business grew 8% over the prior year on a reported basis, and obviously more than that on a currency neutral basis.

The growth here was driven by what we all love more than anything else, and that's selling more images. The quarter was far and away a record quarter for our rights-managed business, driven by volume growth of 11%.

We've always felt that talk about the decline, or even demise, of rights-managed imagery was totally ill-informed. There are, of course, alternative licensing models. Let's remember who invented -- and has by far the largest of them (royalty free) and who has the newest and fastest growing alternative model (micro payments) -- yep, to remind you, that would be us, Getty Images.

When all is said and done, rights-managed imagery remains robust.

Royalty-free images represented 46% of creative imagery revenues in the quarter, and it posted impressive growth of 18%. Again, this number is for reported growth, and currency neutral growth is materially higher.

We achieved the strong overall revenue growth in our royalty-free business even though our largest region, the Americas, posted less than expected volume and revenue growth. As you can expect, I will go into this in more detail in just a moment. It was the part of our business that we were certainly not pleased about in the quarter.

The good news is that we are confident in our ability to improve performance here and on this call, I will outline some of our plans to do this.

In the rest of the world, royalty-free continued to be strong. In Europe and Asia Pacific, we grew single image royalty-free revenue by 20%, and by very much more on a currency neutral basis.

Approximately half of Europe's growth, and substantially all of the single image royalty-free growth in Asia Pacific, was volume driven. Such growth confirms the increasing global demand for royalty-free imagery. It also shows yet again that our strategy of aggressive growth outside the English-speaking countries is working very well in all parts of our business, both creative and editorial.

Turning briefly to our next largest business, our editorial imagery business grew 15% in the quarter on a currency neutral basis. This represents solid growth over the same quarter last year.

Our long-term approach, focus on our customers and partners, and the inspiration we share that stems from our passion for imagery differentiates the level of relationship and the opportunities we have in this industry. This applies to absolutely everything we do and wherever we do it -- editorial imagery, creative imagery, film, and all of our other products and services.

I would now like to spend a few moments on a key differentiator that I think is common to most market leaders in most industries, and that is innovation leadership -- not just here or there or in one part of the business or another -- but everywhere in our business.

That is why a key initiative for this year -- and every year, for that matter -- is to innovate: new products, new platforms, new services and new markets. I would like to cover a couple of examples of this.

Let's begin with mobile. It is a good example of the progress we are making on this initiative. We are leading the way on what is becoming a new platform for imagery.

Over the last nine months, a small team here has worked closely with customers and partners to launch some exciting and innovative products for the mobile platform.

For example, we helped both msnbc.com and usatoday.com launch their mobile applications. You may ask yourself, why did they turn to us?

Well, for starters, we have the content and we are experts in the issues around intellectual property rights. Unlike others in our industry, we are more than just a vendor of a bunch of pictures -- we are the imagery experts across all categories in all segments and in all geographies. We also happen to be the largest creator, or producer, of imagery as well.

We also launched our own new sport and entertainment mobile application, which we call PictureCast. That's now available for both Sprint Nextel and Cingular Wireless subscribers. With close to 100 million subscribers between them, they represent almost 50% of mobile phone users in North America.

In light of time constraints, I will end on mobile by saying that we are in the pioneering days of what promises to be a visually rich and popular platform for all our visual content. I am confident that we will lead on this platform as we do on all others.

We announced in February that we had acquired iStockphoto for $50 million. I haven't spoken to you since then, so I’ll spend a few moments on this.

This investment is forward-thinking and represents our commitment to driving new innovation in our industry.

So what is iStockphoto? iStockphoto introduced or invented the micro payment phenomenon for the imagery industry. Customers can license an image for as little as $1. It’s a new model that we believe expands the market and expands the customer base for imagery licensing.

Additionally, and very important to us, this business represents social media or user-generated content, which as many of you know is fast becoming the fabric of the web.

The difference between iStockphoto and many other community sites is that iStock has turned community into commerce, transforming digital imagery by encouraging passionate dialog and education.

As the leader in the industry, we have been behind the major innovations in photography and recognize this community-driven value segment is a key component in our strategy, which is to remind you to serve all markets at all price points.

iStockphoto will keep their name, their brand and their great website. We will be two separate operations. We will of course look to work together to cross-pollinate each other with best practices, and learn and help each other grow in all the ways available to us.

Another area we're beginning -- where we are beginning quietly but determinedly -- to increase investment and to continue to innovate is film. Our film business delivered solid results during the quarter, posting year on year currency neutral growth of about 17%.

I have said to you for many years that we think that film represents one of the best opportunities for future growth. We continue to have this view. The time is now. And we look forward to sharing exciting developments in the coming quarters.

In the past couple of years, our innovative approach has seen us launch other new parts of our business. In the quarter, these other businesses -- which comprise photo assignments and various digital asset management products and services -- posted 48% growth.

They only represent 3% of our revenues today, but let's not forget that there was a time not that long ago when editorial imagery was also a very much smaller part of our business than it is today.

As you are aware, accelerating our growth in non-English speaking markets is a key initiative of ours in 2006, and is a very significant opportunity for us. We are very pleased with our progress.

Just let me throw out some currency neutral growth numbers for you.

Agent revenues were up 28%.

Our largest agent, Italy, grew 31%.

Our Asia Pacific region grew revenues 40%.

Once again, Japan grew in excess of 50%.

The whole of Europe combined grew by 17%.

Spain, Germany and France all grew in excess of 20%.

So this is definitely working and meeting -- and in many cases, actually exceeding -- our expectations.

Let me move now to royalty-free imagery. Single image royalty-free revenue grew 14% on a reported basis. On the face of it, this is acceptable, particularly in light of the currency impact -- but we are far from satisfied.

Both Europe and Asia Pacific regions posted currency neutral growth of approximately 30%, and of course, we are very pleased with the performance in those regions.

However, in the Americas, single image royalty-free license revenue grew about 4% over the prior year, and we are disappointed to tell you that volume was down 6%.

Now, the good news is that we've had challenges in various parts of our business in the past and we have always overcome them. This will be no exception.

Furthermore, we have always felt it’s a priority of ours to communicate clearly, transparently, and openly to you when a product, service, or region underperforms versus our expectations.

In this case, there is no one single reason for the performance of single image royalty-free imagery in the U.S. in the first quarter. What I can tell you, though, is that the overwhelming majority of factors are largely in our control and are already being addressed.

For example, in the first quarter, we reorganized the U.S. sales organization following a change in overall sales leadership. We did this to better align ourselves with customers.

Rather than be arranged or aligned by products, our sales organization in the U.S, in common with other countries, is now aligned by customer type. This may sound obvious because it helps better understand the business needs of our customers, the licensing models, content, pricing, what promotions work best, and so on.

This segmented approach to customers is just one of the many actions we are taking this year to achieve our 2006 key initiative of continuing to build a world-class selling organization. This is not new. We have done it already in many other parts of the world, and in all cases, there was a period of disruption followed by a major improvement in performance.

The situation in the U.S. is no different from other countries in this regard.

Another impact of what we're doing here is that the hiring for 2006 is front-loaded, as many of the incremental hits for our 2006 overall budget are in sales. The short-term disruptive impact of the reorganization was of course felt in the quarter, and was exacerbated by high levels of promotional activity from others.

We are confident that this reorganization and our additional investment in the sales organization will improve the situation.

To support these sales efforts, we've also launched a comprehensive marketing plan -- increased and innovative promotions, broad-reaching customer contact, new and more flexible licensing offers are just a few components of our overall plan.

Yep, and before you ask, we will be spending more money on marketing.

As we told you previously at the beginning of the year, we had planned to increase our discretionary marketing spend by 50% over 2005. By definition, the actions that we are taking now means that the increase will be even greater than that. We know how and where to spend this money, and can also largely measure the return.

We are also making what we believe to be the right investments: investments in technology -- just you wait until we unveil the new website; in wholly-owned content production -- just the other day we bought the biggest and best collection of this category of content; and in fact, we've doubled the size of our creative teams in the last twelve or so months; and investment in tons of innovative new products, services, and even another new licensing model for both traditional and new imagery platforms.

Finally, we never lose sight of what this industry is really all about -- pictures. We unarguably have the best, the most relevant, and the most accessible imagery -- and we have it at every price point.

Just as our 2005 acquisitions helped expand our lead in offering customers unmatched access to imagery at all price points in all markets and all platforms, Stockbyte will do the same.

Earlier this month, we closed the acquisition of Stockbyte, which is the owner of two popular and wholly-owned, royalty-free collections, Stockbyte and StockDisk. The price was $135 million.

Stockbyte also happened to be our largest image partner. Well, if you think it sounds similar to Digital Vision, you're right -- it is. There are some differences, one notable one is that Stockbyte imagery is 100% wholly-owned.

Commercially, the deal is significant. The wholly-owned nature of the content allows for unlimited licensing flexibility. This is increasingly important in light of the growing opportunities we see emerging on new image rich platforms like mobile, and in new licensing models, like subscription.

Operationally, wide-range synergies between our two businesses already exist, and as we proved last year with Photonica and Digital Vision, this speeds up the integration process and significantly reduces the risk.
The Stockbyte operations will be fully integrated by the end of this quarter. However, we will of course carry the cost of this business for the quarter.

Stockbyte is also we believe a very sensible use of our cash. By eliminating the previously royalty paid to Stockbyte and integrating the business very quickly, we expect the deal to be break-even to 2006 earnings after the amortization of intangibles is taken into account. We also expect it to be accretive to cash flow this year.

So once again, we are doing a great deal commercially, strategically, financially, and of course competitively. Our competitors would love to be able to continue to distribute this important and highly saleable and desirable content.

We of course, as ever, will honour existing contracts. But after a transitional period, Stockbyte and StockDisk will be offered exclusively through gettyimages.com and our distribution network of partners.

Going forward, acquisitions are and will continue to be an important part of our business strategy. We think the market is still highly fragmented and we believe opportunities will continue to exist for us to grow the business, both organically as well as through strategic acquisitions.

I am now going to pause for breath, turn the call over to Liz who will run through the quarterly financials in detail and then provide our up-to-date financial guidance.

Liz Huebner

Thanks, Jonathan. For the first quarter, we reported revenue of $200.9 million, up 13% over the first quarter of 2005. Currency neutral revenue growth was 17%.

Just so we're not confused, unless otherwise noted, all the numbers in growth rates I will share going forward are on an as-reported basis.

As Jonathan mentioned, 80% of the first quarter revenue came from creative stills, of which rights-managed imagery represented 54%. This compares to 56% a year ago. Broad success of the royalty-free model, especially in Europe, influences this slight mix shift.

Rights-managed revenue increased 8% compared to the prior year. The increase was driven by 11% higher volume, offset somewhat by lower average prices. The average price per single image was $578, down from $616 in the first quarter of 2005, but up from $558 in the fourth quarter.

The year over year change in price per image for rights-managed reflects a combination of both mix and currency, and approximately 25% of the decline came from currency…$25, excuse me.

The mix impact comes from the fact that we are successfully penetrating the editorial segments who are licensing many more RM images than in past, but at slightly lower prices, given the usage.

The remaining creative stills revenue, or 46%, came from royalty-free imagery license. Total royalty-free revenue grew 18% over the prior year. Single image royalty-free revenue grew 14% year-over-year. Volume was essentially flat.

Excluding the Americas, total single image volumes were up 12% as compared to last year. Just to reiterate Jonathan's comments, global demand for royalty-free imagery continues to grow at a healthy pace. We are directly addressing the challenge we have identified in the Americas, as this is our largest region and it is important that we do so.

The average price per single image, royalty-free, was $254, up 11% from $229 in the first quarter of 2005, and 7% from $237 in the fourth quarter. Price increases can be directly tied to the increasing quality and investment we put into royalty-free.

Revenue from what we are now calling other royalty-free, or non-traditional, single image royalty-free, which includes CD's and virtual CD licenses, subscription licenses, and micro payment revenue, represented 16% of total royalty-free revenue.

Our editorial business, comprising news, sports, entertainment and archival imagery, grew 10% and represented about 11% of first quarter revenues. On a currency neutral basis, this business grew 15%.

Film comprised about 6% of total revenue and increased 15% from the first quarter of 2005.

For Getty Images overall, about 50% of sales were in the Americas, 42% were in EMEA, and 8% were in Asia Pacific. This is relatively consistent with the fourth quarter.

Now turning to royalty rates. As we indicated in January on our 2005 earnings call, we have made a format change to our income statement and no longer report gross margin. As promised, we will continue to provide average royalty rates by portfolio, and they were as follows for the first quarter: the average royalty rate for rights-managed imagery was 34%; for royalty-free imagery, it was 17%; for editorial imagery, it was 23%; and for film, it was 29%. While overall average royalty rates have declined year over year, the royalty rates paid to our contributing photographers have remained unchanged.

These first quarter average rates were in line with our expectations and relatively consistent with the average royalty rates in the fourth quarter of 2005.

The average royalty rate for royalty-free imagery was 8 percentage points lower than it was in the first quarter of last year. This improvement is due in large part to our acquisition last year of Digital Vision, and our successful efforts to build-out more wholly-owned content.

Selling, general and administrative expenses for the quarter were $74.3 million, which included about $3.3 million of stock-based compensation expense. Excluding stock-based compensation, SG&A of $71 million was 35% of revenue in the first quarter. This compares with 34% of revenue in both the first and fourth quarters of 2005.

The increase in SG&A in dollar terms and as a percentage of revenue is not a long-term trend, but rather the result of several actions.

Firstly, we made a conscious decision to front-load our hiring this year in order to support the increased revenue expectations later in the year.

In addition, discretionary marketing has increased, as have professional fees related to our intellectual property migration project that I discussed at analyst day.

For the second quarter, we will be carrying the full expenses related to the Stockbyte acquisition, as the integration will not be completed until the end of the quarter, so therefore, we expect SG&A to increase in Q2 and then gradually decline in the second half of the year.

Depreciation was $12.3 million for the quarter, relatively consistent with depreciation of $12 million in the year ago quarter.

Amortization of intangible assets was $3.7 million, increasing substantially from the $1.2 million recorded in the year ago quarter. This is due, of course, to the acquisitions we have made over the course of the last year.

In the first quarter, we generated $59.1 million of income from operations. Excluding stock-based compensation expense of $3.3 million, income from operations was $62.4 million, representing an operating margin of 31.1%. This is up from $53.8 million and a 30.2% operating margin in the first quarter of 2005.

Our 2006 operating margin goal is clearly impacted by the recent acquisitions, both their margin characteristics and associated amortization charges. There is also the challenge in the U.S. related to royalty-free revenue.

Amortization from the recent acquisitions is approximately $10 million for 2006. Excluding this incremental amortization, we are targeting a full-year operating margin of 33% to 34%.

Net income for the quarter was $39.3 million, or $0.61 per share. Excluding stock-based compensation expense, net income was $41.4 million, or $0.64 per share, reflecting a 21% and a 19% increase respectively over the first quarter of 2005.

Excluding stock-based compensation and currency, earnings per share grew 26% over 2005.

Cash provided by operations for the quarter was $66 million, up from $54.1 million in the first quarter of last year. For the quarter, we generated $51.4 million of free cash flow, which is defined as net cash provided by operating activities minus capital expenditures.

Capital expenditures for the first quarter were $14.6 million. We expect capital expenditures for the year to be approximately $60 million, slightly higher than previously indicated due to recent acquisitions. We still expect to generate in excess of $200 million in free cash flow from operations in 2006.

Cash and short-term investments at March 31 were $522.5 million. This represents an increase of approximately $4.2 million from December 31st, and reflects the fact that we spent $50 million in cash to purchase iStockphoto.

DSO's were 52 days in the quarter, which is relatively consistent with the 51 days in the year ago quarter and 53 days in the December quarter.

Before I discuss our guidance for the second quarter and full year, I want to remind you that the following forward-looking statements reflect our expectations as of April 20, 2006, and that they are subject to change and risk, as mentioned by David at the beginning of the call.

I also want to mention, just as it was with Digital Vision, the incremental reported revenue from Stockbyte will significantly understate the collection's true sales. Like Digital Vision, Stockbyte was our largest image partner at the time we acquired them, and as such, we were already recognizing a significant amount of its revenue.

Incremental revenue are also further impacted by our decision to make these collections exclusively available at gettyimages.com and through our partner network.

Factoring in the seasonally lower sales typically experienced in the second quarter, and the partial impact of the acquisitions, we expect revenue between $205 and $210 million, and diluted earnings per share between $0.64 and $0.66 for the second quarter. Note that earnings per share excludes stock-based compensation expense of approximately $0.04 for the quarter.

For 2006, we are raising our revenue guidance to the range of $830 to $850 million, and narrowing the range of expected diluted earnings per share to between $2.70 and $2.80. Full-year EPS guidance excludes the stock-based compensation expense of approximately $0.14 to $0.17 for the year.

Excluding the impact of currency, our full-year revenue guidance implies 15% to 18% growth, and our earnings per share guidance implies 23 to 27% growth, and this guidance assumes fully diluted shares of approximately $65 million.

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

Jonathan Klein

Great, Liz. Thanks so much. I’m going to keep these closing comments very brief, because I expect there’ll be some questions.

I’d just like to reiterate how pleased we are about our overall performance for the quarter. This is a company in particularly good shape with an enviable position and a stunning business model.

We are confident in our ability to capture the many growth opportunities we have in front of us, and also in our ability to overcome challenges. We have forward momentum in our core business and are making great progress on all of our key initiatives in all of our businesses. We're also happy with the progress of some of our new businesses.

We continue to believe that 2006 will be an excellent year for us. With that, Liz and I would welcome any questions you have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Troy Mastin with William Blair & Company.

Troy Mastin - William Blair & Company

Hi. Good afternoon.

Jonathan Klein

Hey, Troy.

Troy Mastin - William Blair & Company

I wanted to ask, first just get some context on your guidance. You took off the top end of the range. I saw your share count expectations a little bit lower, so I guess what's implied in here would be the mid point of your guidance lower on a net income or operating income basis. I think this has to do probably solely with investments in marketing and in head count additions earlier in the year.

I wanted to understand if you've incorporated much of a positive revenue impact from those investments in the first half of the year.

Liz Huebner

In terms of the core business, is that what you're talking about?

Troy Mastin - William Blair & Company

Just in terms of your revenue guidance. It seems like you're incrementally deciding to invest a little bit more in people and in marketing. I just want to understand if you've incorporated much return from that this year into your top line guidance.

Liz Huebner

The investment in people was always planned. We make sure we tell you that because we always expected that the SG&A in the first quarter would be higher. I think we said that at the end of, actually the end of the year, so that was always planned because, as you know, the revenue increases throughout the year, so we need to be sure we're in a position to support that revenue.

The increased marketing is a couple of things. One is there is no question that there’s been more promotional activity in the marketplace, and we feel that we need to make sure that our customers are hearing from Getty Images also.

We talked in the call, Jonathan did, about the challenges that we're seeing in the royalty-free market in the U.S. and we want to make sure that we are proactively addressing those through increased marketing.

Troy Mastin - William Blair & Company

Could you maybe remind us on how you see seasonality between Q1 and Q2, given the shift in the Easter holiday and the business days? If you have any way to quantify that for us, it would be helpful, and the amount of contribution you see through the year from the acquisition on the top line, if you can give a little more detail.

Liz Huebner

I think because we've done several acquisitions now, and we may do more in the future, I think it’s becoming very difficult to quantify the amount from the acquisitions, so we're going to stay away from that.

As far as seasonality goes, the seasonality stays pretty consistent regardless of where the Easter holiday falls. The first quarter obviously being a big increase over the fourth quarter, which it was again this year; the second and third quarters maybe being a slight step up, and then sometimes the fourth quarter being slightly lower.

It’s a little different this year because we are investing pretty heavily in things. We do expect to get some increased revenue in the back half of the year through a lot of the initiatives -- higher growth outside the English-speaking markets, everything we're doing in the editorial business -- so that's why we felt comfortable that the seasonality this year, with having it a bit higher. It’s not substantially higher, but a bit higher revenue growth in the third and fourth quarters made sense.

Jonathan Klein

Troy, I would just add one thing in relation to the acquisitions. The acquisitions which we've made are not primarily in order to add revenue. The Stockbyte acquisition is very similar to the Digital Vision acquisition. As you’ll remember, at the time we added very little incremental revenue because we already represented so much of the imagery and already had so much of their revenue going through our site.

However, from a profit perspective, from a commercial perspective and from a strategic perspective, I described the Digital Vision deal at that time as a home run. The Stockbyte deal is also a particularly good deal.

Troy Mastin - William Blair & Company

Okay. Thanks. I’ll let someone else on.

Operator

We'll go next to Frederick Searby with J.P. Morgan.

Frederick Searby - JP Morgan

Thank you, a couple questions. One, I was just trying to understand. You obviously had exceptional results overall, but you've talked about the slow down in royalty-free and the initiatives, including increased marketing, so that makes it sound like perhaps it’s a competitive issue or market share issue. Or is it just there’s been a generalized slow down in the market? I wonder if you could just help me understand why now. What's changing that you’re seeing the slow down in royalty-free in the U.S?

Secondly, you may have kind of answered this, but I’m trying to understand the share buyback. In thinking about the rate share buyback, is that simply because your shares have come under a bit of pressure recently and you see them as a better investment? You increased the share buyback it looks like with the share count down from 68 to 65. Thank you.

Liz Huebner

Let me take that last question first. The share counts, because we have convertible debt, is driven by the stock price. So as the stock price increases, we pick up more shares in our diluted share count. As the stock prices come down over the last quarter, we factor that in. So we're using a lower stock price, as it is lower than it was when we gave our guidance originally.

So it has absolutely nothing to do with the share buyback.

Jonathan Klein

As to the first part of your question, I would agree with your characterizations of the quarter. I think it was an exceptionally good quarter with one area of weakness -- royalty-free single image sales in the U.S.

The reasons for that I think are manyfold.

Let's kick off with one, and that was that which was of our own making, and that was the reorganization of our sales in the U.S. We had previously arranged ourselves at long product centric lines. In other words, sales people were responsible for products, and they sold those products to whichever customer segment came along, whether it was an ad agency, a solo client, a publisher.

Much like we did those changes last year and the year before in other countries with particular success but with short-term disruption, the same thing happened in the U.S. So that was one part of it.

Let's acknowledge the second factor, and that is the competitive landscape has become significantly noisier. The level of promotional activity from competitors, the level of touches, the level of advertising -- I can pick up certain magazines which some of our customers will subscribe to where between a quarter and a third of all ad pages are taken by a competitor.

By way of comparison, we're not advertising at all in those magazines.

Frederick Searby - JP Morgan

Is that from the Corbis and the usual suspects, or is it even the nichier players, the smaller ones?

Jonathan Klein

I think it’s fair to say that the nichier smaller players don't really have the money to do this blanket high-touch promotional activity, so it tends to be the larger players. So what's happening is that customers are certainly hearing more from the competitors.

During the period, we were quiet. We were quiet for a number of reasons. One, we were reorganizing our sales force. Two, we were getting our plans in place. You don't increase your marketing spend year on year by 50% without being very deliberate and intentional about it, and we are pretty measurement driven over here.

So I would say the second piece about that was definitely competitor activity. I think it’s fair to say, and that's the best kind of activity to counter.

The third piece of it is another factor within the industry, and that's a factor we like, but it does have an impact, and that's alternative licensing models.

Now let me be a bit more specific. The big question in our industry around new licensing models has always been the same for many years, and that is basically how much do those models grow the market and how much do they cannibalize image sales from other existing models.

Now of course we're in a good position to know more about this than anybody else. Why? We have more experience in it. We're the largest in all of these categories, and we see what happens when a new model comes along.

Years ago, there was no such thing as royalty-free. We invented it, and over time, royalty-free now accounts for 75% of single image volume in the U.S., and it will account for a similar amount in Europe soon.

To begin with, it opened new market segments, created additional demand, and over time as the product was improved, the service was improved, the experience was improved, it did of course begin to take share from rights-managed imagery.

As you can see from our results from rights-managed in the quarter, our best ever quarter in volume and revenues, so it’s clearly stabilized. Now, I think you and we can expect similar trends and patterns with other new models over time.

Of course, the “new