Getty Images Inc Q4 2005 Earnings Conference Call Transcript (GYI)

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Getty Images Inc. (GYI)

Q4 2005 Earnings Conference Call

January 26th 2006, 5:00 PM.

Executives

David Parker, Vice President of Investor Relation

Jonathan D. Klein, Co Founder, Chief Executive Officer

Elizabeth Huebner, Chief Financial Officer

Analysts

Christa Quarles, Thomas Weisel Partners

Peter Appert, Goldman Sachs

Troy Mastin, William Blair & Company

Jeetil Patel, Deutsche Bank

Brandon Dobell, Credit Suisse

Jim Ballan, Bear Stearns

Matthew Troy, CitiGroup.

Operator

Hello everyone and welcome to the Getty Images Fourth Quarter 2005 Earnings Conference Call. Today’s call is being recorded, at this time for opening remarks and introduction I would like to turn the call over to the Vice President of Investor Relation, David Parker please go ahead sir.

David Parker, Vice President of Investor Relations

Thanks Ruby. Good afternoon everyone and welcome to the Getty Images conference call to discuss our financial results for the fourth quarter and year-ended December 31, 2005. Following the call a telephone replay as well as the webcast will be made available. Information on the replay and the webcast is currently available at our website. I want to remind everyone that certain supplemental financial and fiscal information located in the Investors section of Getty Images 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 today.

Of course those statements can change due in the environment, which we do business changes, and we ask that you interpret all of our comments in that light. For more information on factors that may affect our feature performance, please review our filings with the SEC, in particular our Annual Report on Form 10-K and our quarterly report on Form10-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 and Co-Founder and Chief Executive Officer; and Elizabeth Huebner, the Company’s Chief Financial Officer. I will now turn the call over to Jonathan.

Jonathan D. Klein, Co Founder, Chief Executive Officer

Thanks a lot David. Good afternoon and welcome to our fourth quarter and yearend Conference Call. During 2005 we celebrated our 10th anniversary. Our 2005 results are a wonderful way to begin the next decade for Getty Images. 2005 was by far the best year in our history, we’ve built a very good business. However, we believe very strongly that this is only the beginning. The opportunities that lie ahead invigorate and excite us now more than ever, and I am delighted to report that your company is in great shape, and we are dedicated to making it even better. Okay that’s it for the commercial and all the sound bites. Let’s get into the detail.

I am going to begin with some milestones about our results for the fourth quarter, then I will come back to what makes 2005 such a special milestone year, and of course at the end of the call I will talk about growth opportunities and our key initiatives for 2006. With revenues of $185.8 million in the fourth quarter, we achieved currency neutral top-line growth of 16%. Due to the dollar strengthening year-over-year, this is slightly higher than our reported revenue growth. As you know by now, we really do care about operating margin at Getty Images and this important metrics showed an increase from 27% in the fourth quarter of 2004 to slightly more than 31% in the fourth quarter of 2005. So that’s the 430 basis points increase and a record fourth quarter.

Net the income rose 48% and earnings per share grew 39% to $0.64. Creative Imagery represented 80% of the quarter’s total revenue. Revenue growth for Creative Imagery was 15% in the fourth quarter. So for the second quarter consecutive quarter, our largest and most importance business was very strong indeed and drove our excellent results. This also should be stressed that within the segment of our business Creative Imagery both are Rights Managed and the Royalty Free collection posted impressive numbers.

Growing volumes was our top priority in 2005. In the fourth quarter, total Creative single image volumes were up 9%. This is the big deal as it marks the fifth consecutive quarter of increasing year-on-year volume growth. And you may recall that the situation was fundamentally different in 2004 and indeed in 2003, and we have been very successful in completely turning around this important metric. Royalty Free volumes were up double-digit and Rights Managed volumes were up 6% both of these numbers over the fourth quarter 2004. We were also very successful average price per image. Average price per image Royalty Free was up 14% in the quarter and for Rights Managed imagery, it was essentially flat due to the strength of our sales to the publishing segment.

So as you can deduce overall the vast majority of revenue growth in the Creative Imagery business was due to volume growth, in other words selling more images. Overall revenues for Rights Managed imagery grew 7% during the quarter, as I pointed out essentially all the growth driven by year-over-year increases in volume. As for Royalty Free imagery revenues grew 26%. Royalty Free remains the most popular licensing model in the industry. The simplicity, value, higher quality and the emerging demand for imagery on the web and other evolving platforms will continue this model’s popularity in 2006 and well beyond.

Moving briefly to our editorial business we remind you that news, sports, entertainment and archival imagery, we really did have a wonderful year.

In the fourth quarter revenue grew 15%, and that was an excellent performance across all regions but I would like to draw lessons to the United States which posted more than 20% growth. It’s the highest growth rate of the year. Worldwide News had a particularly strong quarter, and the world’s insatiable appetite for Entertainment imagery had a major positive impact, with the Entertainment imagery revenues growing more than 40% in the fourth quarter. Also we are pointing out that Archival imagery had a terrific quarter and a wonderful year. We have very many reasons to be optimistic about Editorial imagery in 2006 and just for starters it is big year for sports. We will capture and benefit from what assured to be best imagery of the Torino Olympics, the Soccer World Cup in Germany in the summer and a number of other important events. Our editorial imaginary business is and continues to be one of our most exciting and fast growing businesses.

Let me turn backward for a moment to 2005 overall. As you know we run our business within annual focus and a very long-term focus. So with that lets look at how we did in 2005. For those of you know us well you know that we begin each year with a set of simple and effective business priorities for the coming year. We communicate these two to you at Analyst Day in December and then we do our best to deliver. So I would like to review our results for 2005 in the context of what we told you that we would do way back in December 2004 at Analyst Day in New York.

So for 2005 we told you, before the year began that we expected about $695 million of revenue that would imply an organic currency neutral growth rate of 13%. We also talked about our long-term aim to grow our revenues at 15% per annum. Again let me stress, organic and currency neutral basis. By way of reference in the prior year 2004, we did achieve record sales and our revenue growth on the same basis organic currency neutral was 11%. Today we are reporting 2005 revenues were up about $734 million, that’s 18% reported growth. If we exclude acquisitions and make the numbers currency neutral you will see that our growth rate was just over 13% in 2005. As you are aware strong revenue growth at Getty Images is key to our overall financial performance.

Given our outlook for 2006, we are tracking well against what is now a near-term goal of 15% per annum real organic currency neutral revenue growth. As it happens this year’s growth was across the board and that’s wonderful. It was from old lines of business and old geography. From stock photography whether it was Royalty Free, Rights Managed or Subscription, the editorial imagery: the news, sports, entertainment and archive, its down to the new products and services like assignment, asset management and publicity distribution, everything contributed.

Moving to earnings per share. The end of 2004 we made it clear that we had an objective over three years to grow earnings per share by 25% per annum. We remain comfortable with that objective. In 2005 net income grew by 40% and earnings per share grew by 33% to $2.28. For those of you who don’t remember, the initial guidance was $2.10. We are confident that we are on track to meet the 25% per annum objective and as you saw in the press release our guidance for the current year implies another year of impressive growth in earnings per share.

Operating margin, for 2005 we set up yet again to increase our operating margin. By way of reference operating margin was 11% in 2002, 20% in 2003, 27% in 2004 and our key financial objective for 2005 was to achieve 30%. We raised this target to 31% in April and I am pleased to report that we met this revised and increased objective for the year. Our 2005 operating margin was 31% and we have set of targets for 2006 of 34% to 35% operating margin and we pause for a moment. I just hope that you understand our business model’s unrivaled ability to deliver efficiency and value for both our customers and our shareholders. We are fortunate to have such a wonderful business model in the growth industry where we have a clear leadership position.

Lets remember who changed this industry and the fact that we did and we created this very attractive model. Operating margins over the last few years of 11% then 20%, then 27%, then 31% and the target now is 34% to 35%. We don’t think it is too bad but we prioritized margin improvements as a key goal. It doesn’t just happen. In fact so much so that all non-sales employees, in other words employees did not directly in sale have bonuses that are based on the achievement of these operating margin goals.

And in 2005 our employees here delivered and we are confident that they will do so again. So a big thanks due to them all not just from me but from you as well. For 2005 we said we would spend approximately $40 million on capital expenditure and that we would generate free cash flow of $200 million. Due to the acquisition of wholly-owned content that was not budgeted, I don’t believe in budgeting for acquisition and an acceleration of some other investments, we did not do what we said we would do, in fact we spent more than what we said we would, but we make no apologies for this outcome and I’ve kept you fully informed at every stage throughout the year. The increase of capital expenditure during the year was directly tied to increased production and sometimes acquisition of high quality wholly owned content. Nevertheless notwithstanding spending in this way we delivered the $200 million of free cash flow just as we said we would in 2005.

Operations generated $257million during the year. We ended the year with about the same cash in short-term investments as we ended the prior year over $0.5 billion. Even after we had spent $58 million on capital and over $230 million on business acquisitions, I wonder if I mentioned that we have a very good business, I think I did. As most of you know owning the content not only implies a higher margin but also the flexibility when it come to licensing it. It is especially important as we continue to explore various licensing models and as we look at merging new platforms for imagery like Mobile and the Web.

In the latter half of the year we created a big active results the mobile strategy, which will enable us to capitalize on what is sure to be a popular and visually rich communication platform in the future. Many of you in attendance at Analyst Day caught a glimpse of what we are doing in this area and of course you should expect more news from us on the subject throughout the year. I can’t let the call go by by mentioning that we did happen to make two very important acquisitions during the year: Digital Vision and Photonica both of them were seamlessly integrated, they are both performing ahead of expectations and are making a very important contribution.

We also launched a brand new product: Creative Express. Creative Express is our first offering in the burgeoning Creative subscription business. We are as committed as ever to addressing all the visual content needs of Creative professional regardless of price point or platform.

So as you can see we exceeded the aggressive targets that we set for ourselves in 2005, I’ve already demonstrated this from a financial perspective but I think it makes sense to draw your attention to how we execute in on our key initiative as it is added together with the number that makes this the best year in our history.

So in 2005, one of our key initiatives was to accelerate international growth, we did, we launched Getty Images China, we made available a fully functional Chinese language website, the first of its kind. Not so far from China, in Japan, growth continued by another 50%, Spain, Italy and Brazil all of those countries grew more than 30%. Even Germany grew 25%, we established the presence in India. International result were strong but more importantly we are just scratching the surface in terms of capturing the growth opportunity of further expansion. But we look to the future we see ourselves having the same position that we currently enjoy in all products and services in the English-speaking world being replicated in every major market worldwide, its got tons of scope for future growth. In 2005 another key initiative was around www.gettymages.com, we began to revolutionize this site but this means in very brief term is making our site, our search, our functionality and the localization and personalization right to the next level. We completed the multi-year roadmap last year of how we will get there and we started building it. We know what is going to take, we are keeping the details closed to the best for obvious reasons, but many customers are in the nerve and they are very eager to get to see it and we will begin to implement very soon. Those who attended Analyst Day got a little view of this.

Another key initiative for 2005 was in relation to the editorial imagery business where we plan to continue to grow and extend our lead. 2005 revenue growth for this area was 18%, the businesses result, which are important, are exceeded only by the perception and respect that we have gained. The intangible branding value that this brings, the accolades and acknowledgments that we got in 2005 are remarkable. Then the Photo Editor, one of the largest and most influential newspapers in the world called our editorial business, the gold standard in news photography, certainly means that we are doing something right. We expect continued double-digit growth and a big year in 2006 for editorial imagery.

And of course I couldn’t close 2005 without speaking again about our No.1 priority for the year: growing volumes. Total Creative volumes of single images increased 12%. Put that into numbers, we’ve licensed a 150,000 more images in 2005 than in 2004. For the full year we licensed about $1.5million Creative Images. Both Rights Managed and Royalty Free volumes were up. In fact Royalty Free was up about 17% in volume turn. This is a very big deal we made growing volumes our No.1 priority for the whole business in 2005.

In the year or so ago, things were really not going very well in relation to volumes and we didn’t hide, we told you all about it. In fact we made a big deal about it then, so I hope that you understand why we are very pleased, that we delivered on volume growth in a very material way in that part of our business, which let me remind you accounts were 80% of our revenues.

On the editorial imagery side, we added about 1 million images to our site in 2005. In other words every week we added about 20,000 images to our editorial business. Now most of these were received directly from Getty Images employee or staff photographers. The numbers are even greater when you consider the content from our editorial image partner. So that was bearing in mind that over half of the images that we added to our site on the editorial side came in directly to one of our picture discs, and were made available to our customers by way of direct feeds into their work flow in real-time. Do not underestimate how important the services to our customers especially when you bear in mind but it is not just any pictures, these are the best and most relevant images in the industry.

Our 2005 results are clear and direct reflection of our long-term approach to running this business and our ability to execute in a focused manner. The positive metrics I have run through are a clear indicator of how we did against what we had promised. Our leadership team takes an enormous amount of pride in our track record and the fact that we have established this over the year. We look forward to continuing this in 2006 and beyond. I am now going to turn the call over to Liz for a more detailed review of the numbers, when I come back there will be a quick peek at 2006 initiatives before of course doing some question and answers. Liz.

Elizabeth Huebner, Chief Financial Officer

Thanks Jonathan. For the fourth quarter we reported revenues of $185.8 million, up 15% from the fourth quarter 2004 excluding the effect of currency growth of 16%, for the full year we are pleased to report revenue of $733.7 million representing 18% reported growth and slightly more than 16% currency neutral growth over 2004. Importantly when Jonathan spoke to earlier our organic currency neutral growth rate grew by approximately 200 basis points over 2004. Given how quickly we integrate our acquisitions its not possible to know exactly how much each contributed incrementally but we estimate that our organic currency neutral growth rate was just over 13% for 2005.

Rights Managed revenue was stronger in the quarter posting 7% growth over the prior year, substantially all of this growth is attributable to volume. More Rights Managed imagery is being licensed then in the fourth quarter of 2004. For the full year Rights Managed growth was 6%, the full year growth was derived equally from price and volume growth. The average price per image in Rights Managed collection was 558 in the fourth quarter, this is essentially flat with the fourth quarter a year ago resulting from strength in the publishing sector where average prices tend to be lower, kept the fourth quarter year-over-year about flat.

Royalty Free revenues grew an impressive 26% in the quarter and 33% for the year. The growth in each period came from double digit increases in both price and volume. The average price per single image Royalty Free was $237, up 14 % from $208 in the fourth quarter of 2004. The increase in the achieved price per image was due to mix and some price increases. Our ability to raise prices has directly targeted the increasing quality and investment going into the creation of new and exciting Royalty Free content.

Our editorial business comprising news, sports, entertainment and archival imagery represented about 12% of revenues for the quarter and for the full year. Sales of editorial imagery grew 15% and 18% for the quarter and year respectively. Film comprised about 5% of the total revenue in the quarter as well as for the full year while film sales grew at a double digit rate sequentially from the third quarter, year-over-year revenue growth per film was a modest 2% in the fourth quarter and was 12 % for the full year. For Getty Images overall sales in the fourth quarter about 49% of sales where in the Americas 43% EMEA and 8% were in Asia Pacific.

Moving down the income statement as you probably you from your earnings release issued earlier today we had elected to make a format change that how we present our income statement. Given so much of how we run and measure our success is tied to operating margin we will no longer be reporting a gross margin as we have historically. As you know our cost of revenue is almost entirely comprised of royalties. Going forward we will report this cost of revenue as the separate operating expense line item.

Thus costs were inline with our expectations for the fourth quarter and full year and the derived gross margin for both the fourth quarter and the full year was 74% and 73% respectively.

We will continue to report on our average royalty rate by portfolio by Rights Managed Royalty Free editorial and film. As expected Selling, General, Administrative expenses in the quarter were $63.8 million essentially flat on a sequential basis. As a percentage of revenue we continue to bring down SG&A to percentage of revenue. In the fourth quarter SG&A was 34.3% of revenue versus 37.8% of revenue in the fourth quarter 2004. This is where the inherent leveraging our business model is the greatest, we drive to increase sales, control cost and execute well, provided we continue to do this and I am surely well we will continue to generate substantial operating expense leverage in the future just as we have done for the past several years.

In the fourth quarter depreciation was $12 5 million, depreciation was down for full year of 2004. Amortization of intangible assets was $3.1 million in the fourth quarter a slight increase sequentially and $1.9 million greater than in the fourth quarter 2004 due to the two acquisitions of Digital Vision and Photonica during the year.

In the fourth quarter we grew operating income by 33% to $58.2 million and the achieved an operating margin of 31% for both the quarter and the full year. This compares to a 27% operating margin of 2004. As Jonathan mentioned we began 2005 with the goal of reaching 30% and we revised that goal upwards to 31% and we are very pleased to have met our revised target.

As Jonathan also mentioned our 2006 key financial objective is to achieve a 34% to 35% operating margin. We continue to have business model that allows revenue to increase without a corresponding increase in expenses. As a date of point we expect at about 50 incremental people in 2006 in order to generate in excess of $100 million of incremental revenue. Not having to add very many people enables us to increase our marketing expense, our marketing expense in 2006 by almost 50% and still achieve increasing operating margin.

Net income for the quarter was up 48%, its $42.5 million or $0.64 per diluted share compared to $28.7 million or $0.46 per diluted share in the fourth quarter of 2004. Net income in earnings per diluted share growth of the full year were 40% and 33% respectively. Earnings per share for the full year were $228.

As I mentioned at the Analyst Day in December we are currently working to migrate portion of our intellectual property offshore to better serve our non-US customers. One of the results for this migration will be a lower effective tax rate overtime. We will not however see any significant reduction in our effective tax rate in 06, but the implementation of the strategy allowed us to utilize some foreign tax credits in the fourth quarter, which reduce our effective rate this quarter.

In addition we realized the favorable development related to our tax audit, together these discreet items had an approximate $0.05 favorable impact to our fourth quarter and full year earnings per share. As you already know the full year also reflects the acceleration of unamortization debt issuance cost that we charged earnings in the second quarter. This item have a $0.04 unfavorable impact to the full year earnings per share.

For 2006 we do expect an effective cash rate of approximately 37% cash provided by the operations during the fourth quarter was $75.9 million up from $63.8 million in the year ago period. Capital expenditures for the quarter were $13 million brining full year capital expenditures to approximately $58 million. We need to subtract the total capital expenditure from the full year cash provided by operations we generated approximately $200 million of free cash flow in 2005, this was consistent with our expectations.

As you recall our capital expenditure expectations were raised throughout the year as we invested more heavily in the creation of high quality wholly-owned content and or acquired such content outright.

Quickly on the balance sheet cash issued to short-term investment at December 31 were $518 million, this represents an increase of approximately $66.7 million from September 30th and DSOs in the quarter were 53 days.

Before I discuss guidance I want to reiterate the following forward-looking statements reflect our expectations as of today January 26th, 2006 and that they are subject to the factors that may effect our performance, which was outlined by David at the beginning of the call.

For the first quarter of 2006 we expect revenues between $196 million and $201 million and diluted earnings per share $0.62 to $0.66. Our first quarter diluted earnings per share guidance exclude approximately $0.04 related to expected share based compensation expense. Throughout 2006 we will report diluted earnings per share both including and excluding share based compensation expense in order to provide incomparables for 2005.

We are also reiterating our guidance for the full year of revenue in a range of $820 to $840 million with diluted earnings per share of $270 to $285. Both revenue and earnings per share guidance for 2006 include the impact of year-over-year currency variation. Excluding this impact or on a currency neutral basis revenue is expected to grow 15% to 17% and earnings per diluted share are expected to grow 23% to 29% in 2006.

Our full year diluted earnings per share guidance excludes the impact of share based compensation expense of approximately $0.14 to $0.20. Our guidance also seems slightly less than $67 million fully diluted shares in the first quarter and approximately 68 million shares for the full year. And with that I will turn back to Jonathan to wrap up.

Jonathan D Klein, Co Founder and Chief Executive Officer

Thanks so much Liz. I hope that by now you agree with us 2005 was a milestone year in many regards but that was the last year. As you know we run this company with the view to the long term and this approach enabled us to be very successful today and I know that it will serve us very well for decades to come. Did you step back for momentum and digest all that has contributed to us to accelerating our revenue growth in 2005 and hitting our margin target. I think that you will appreciate when you look at Gettyimages it is not just above one thing. When we look at where different things come from our business there are lot of different factor. You would expect me to use a sporting analogy and I normally use baseball but it may not have escaped your attention that Seattle is going to the super bowl for the first time. So let me give it a try with a football analogy for the first time. Forgive me if I get it wrong, I only learn that football had this kind of shape all quite recently.

Bottom line is we did not rely on one specific area. I believe we have a balanced attack. I believe we have strong defense, we try not to make mistakes with so many interceptions and are very good in the ways there.

Yep it helps the set mark the record and it does help to have some of the best in the business. But it really is never just one item, which moves the needle for Gettyimages. When I look at growth or higher margins I like to draw your attention to a number of different areas that will drive an acceleration of growth both in 2006 and thereafter. This is just a list, it is not exhausted, but a few things for you to think about.

Firstly, we are in growth industry and this helps, if you are interested in growth, being in the right industry helps. We are the leader in this growth industry, this also helps. There are the opportunities in new and under-penetrated geographic market across the world for all our businesses. There are also opportunities for certain product line where we are under-penetrated and as we pointed out in some detail on Analyst Day, there are also customer segment that are only just beginning that we are only just beginning to get very serious about it and focused upon. There had been lot of discussions about new and visually rich platforms for visual content. We are very confident that will help accelerate our growth. We will also add growth by continuing to improve our size. Growth will come from more personal and geographic context to our offerings. We will also have enormous creative advantages, like our ability to continually produce relevant highly saleable, high quality content. Our creative research our work with photographers our relationships are in all direction, this will continue.

We have a wonderful global distribution, not just from www.gettyimages.com, but our company-owned offices around and world and our network of distribution partners. We also continue to make the most of our network of image partner. We will also in a very big way begin to utilize and continue to invest in the Getty Images brand. We believe it is one of our most valuable assets. We will also think that our ability to execute better than the competition and build upon the strong culture we have build over the last ten years will help drive growth. And finally, we will continue to run this business always with the view to the long-term. So many factors to consider, when there are so many factors to consider it is all the more important for us to remain focused. In focus if I think a good translation where I can just tell you where we will be focusing in 2006.

2006 key priorities are as you would expect focused on those areas that will enable us to achieve what is now our near term goal of 15% organic currency neutral revenue growth. Our other near term goals and marginal expansion and earnings growth becomes certainties with achievements of this revenue growth. Our run rate is very quickly I shared them with you an great detail at Analyst Day I will also be discussing them with you each quarter throughout the year. We set ourselves an overriding objective at Getty Images and for third straight year, we have decided that it is always about the customer. It is our relentless focus on execution around the liaising customers but feeds our increasing differentiation from other participants in this business. We will always try to be better here and I will never be able to tell you that we have achieved our goals yet. One can always get better.

For 2006 key initiative under the subject are:

1. Accelerates non English market growth both editorial and creative.
2. Continue to build the world class selling organization which is customer centric.
3. Innovate with product, services, platforms and markets.
4. Launch the new gettyimages.com. We also have a key financial objective and we’ve probably mentioned it too many times, you are probably bored a bit. But just to remind you its to achieve a 34% to 35% operating margin. Yes it’s a high bar, but we believe it is achievable. I would like to give as much time as possible to answer questions so with that Liz and I will wait for your questions.

Questions-and-Answer Session

Operator

Operator Instructions We’ll take our first question today from Christa Quarles with Thomas Weisel Partners.

Q - Christa Quarles

Hi, couple of questions. First, if I even give the pro-rata share of the decline on the currency, it looks like Europe was up about 15%, and I was just wondering if you could give more color on either the specific countries or what may have happened there. And then also if you could give currency organic, currency mutual growth for the fourth quarter. And then the third question is just on Creative Express, just wondering if you can give an indication of how that is doing or alternatively give us a percentage of wholly-owned sales as alternative RS in this quarter? Thanks.

A - Jonathan Klein

Wow, that’s a lot of questions. I will touch on one of them or maybe two depending whether the mood takes me and Liz will cover a couple of the other. Let me begin with Europe, as I pointed out in my prepared remarks, there were certain countries in Europe which had particularly strong growth, I think if I remember correctly, I pointed in particular to Italy and Germany. And I think it’s fair to say that in the fourth quarter growth across Europe was strong in all areas. The area which couldn’t grow as much as the others was the UK, that’s not entirely unexpected but we were happy with our performance there. As far as Creative Express is concerned, Creative Express has been extremely well received by the market and I think, the most important which we’ve learnt from it is that there is definitely a market there for lower price product and we have a significant amount of it both wholly-owned and not. So it’s certainly emboldened us in terms of continuing to accelerate the offering in Creative Express, there will be enhancements to it and additional imagery as well as continuing to look at other areas where we can cover all markets at all price points. As far as, I think Liz, can tell you the currency neutral growth.

A - Elizabeth Huebner

I think, you asked for current neutral revenue growth in the fourth quarter, it’s 16%.

Q - Christa Quarles

No, no, the organic currency?

A - Elizabeth Huebner

It’s about 13%.

A - Jonathan Klein

And part of your last question which was a sort of corollary which you added on to Create Express about wholly-owned content?

Q - Christa Quarles

Correct

A - Jonathan Klein

Did you want to know what percentage of the revenue comes from wholly-owned content?

Q - Christa Quarles

Yeah, just it and what the change would have been?

A - Jonathan Klein

We don’t really look at that metric.

A - Elizabeth Huebner

We don’t and I would say, certainly in the fourth quarter, it hasn’t moved substantially when we have been adding wholly-owned content as you know throughout the year but it takes a while to sort of build up more and more revenues coming from that. So it’s not a big change in the fourth quarter over any other previous quarters.

A - Jonathan Klein

Just one thing, which does help of course is that significant driver to gross margins in 2005 and one of the reasons why we raised our operating margin goal from 30% to 31% was the improved gross margin that the company got by the acquisition of Digital Vision which itself had a fair amount of wholly-owned content. The two collections, which we bought late in the year which were totally wholly-owned, Media Images and Rubberball, we would not have got a major benefit from that given, that they were bought late in the year and they are not fully in the system yet.

Q - Christa Quarles

That is helpful. Thank you.

Operator

The next question for today will go to Peter Appert with Goldman Sachs.

Q - Peter Appert

Thanks, Jonathan, to the extent that the EPS came in, sort of the low end of the guidance range as you advised that’s in December. Does that suggest then that the December results were relatively sloppy and then sort of, follow on to that, what is January looking like?

A - Jonathan Klein

It has got 31 days like last January, I am sorry, it set it up for me. As far as December is concerned, we planned for a good December and we had a good December, in fact I never give you monthly growth rate but we are making exception, currency neutral, December sales were up 18% over pretty strong year-over-year comparison. So we really did have a strong December. We said to you at Analyst Day that the quarter kicks off slowly but we were happy with December and as a result of that we feel we have tremendous momentum going into 2006. And that’s why, we are reiterating the 2006 guidance with so much guidance today, both on the our revenue front, which as we said currently neutral, 15%-17% growth in EPS, currency neutral 23 to 29. So yeah, December was really good.

A - Elizabeth Huebner

Yeah and I would probably add to that, we came in just a fraction of 1% under the revenue that we had said in December. And we’ve said before but we do about $3 million a day or thousand of transactions and so any little thing can make it so that you can come in just slightly light and I don’t want it to be a excuse or anything but it may sound very strange but there was a 3-day transit strike in New York. And during those three days it wasn’t quite a shock. So without that we would have I am probably quite sure been right at what we had said. So I don’t think it speaks to December, the December shop has been said that the transit strike notwithstanding while pretty much as we expected, we expected to have pretty good momentum coming out of December and I think we have got that.

Q - Peter Appert

Got it. And Liz, one of the question that, this is the question that is causing you to retire early, that’s the type of question’s that causing you?

A - Elizabeth Huebner

I am ready now.

Q - Peter Appert

First the 23% to 29% growth target for ’06, I think that’s slightly below what you’ve said previously and I am wondering what I should be?

A - Elizabeth Huebner

It is only because we were slightly above what we produced for this year. It’s purely a matter of the math, that’s all it is.

Q - Peter Appert

Thank you, and secondly on the, Patrick, do you have you any thoughts on where it could go over a couple of years?

A - Elizabeth Huebner

Yeah, that’s a very good question, I figured, I would get that question. It’s a long-term process and we are hoping that overtime and I would say really over the next 5 years, that we reduce our tax rate up to 5% or 6%. So it’s a meaningful number overtime.

Q - Peter Appert

Great and this will be the real last question. Any news on the Liz’s replacement?

A - Jonathan D. Klein

The search is underway and we are beginning to interview people. W expect to see many more candidates, once all the CFOs in the US, many of whom have December yearend are actually open and available to take the calls from the headhunters. But, we are on our way and Peter, you know better than anybody else, you can talk back to follow but I am confident we’ll get somebody in that.

Q - Peter Appert

Just replying, I am hoping the self analysts who are begging gravel, asks us to reconsider-

A - Jonathan Klein

Your questions like the ones you ask, not entirely helpful. So they were actually pretty going forward.

Q - Peter Appert

Great, thanks.

Operator

And our next question goes to Troy Mastin with William Blair & Company.

Q - Troy Mastin

Yes, thank you. Liz, please stick around, that’s my graveling. For the first quarter in a while, there seems to be stability between Rights Managed and Royalty Free as a share revenue for two three quarters in a row now, even though the year-over-year growth is very different. Is there something you think might persist going forward that we’ve seen maybe leveling out in the share between these two licensing models?

A - Jonathan Klein

Yes, I think so, it’s fascinating to me that, every few quarters, there’s a feeling out there that it’s all over for Rights Managed. And then a few quarters later, it’s Royalty Free it’s all over. What we said throughout is that the position in terms of share of volume has been stable in the US for sometime. If we look at the Creative Imagery volumes about 75% of the volume in the US is Royalty Free and has been for quite a long time. And what we have been saying for probably year or so is that the share in Europe will get to the same point. It’s approaching about 60 odd percent now but a year or so ago, it was in the mid-40. So I think, you are right in how you phrase the question, I think we are going to get to a position where the two will co-exist with about 75% of the volume being Royalty Free in whichever market you are and the balance being Rights Managed with the same kind of pricing, a cheap pricing metrics that one saw last year was about double digits price improvements for Royalty Free as we significantly improve the products and the service around us. And low single digit price rises for Rights Managed. So yeah I think we are getting to that position which we very much like. Of course overtime we think that subscription will become a factor as well.

Q - Troy Mastin

Second on to the film business, I know that, sequentially, you saw growth but for a couple of quarters in a row now, I would characterize it is relatively lackluster, any inside as to why that might be happening and you expect that reverse soon or is that going to later in 2006?

A - Jonathan Klein

I think that, I would categorize the second half of last year’s film is lackluster as well. So we certainly agreed on that. And films tends to have the same dynamics that it suffered for the last year or two. If the Dynamics are won, it’s not an online process from beginning to end for as per the customer. And we will be making investments to enable customer’s to get a high resolution film which can they can download, because when we did this the broadband scenario was different. Secondly, people who look for still imagery think of pre-shot or stock-still imagery very early in the process. It’s still 8 or 9 out of 10 people who are searching for film, they don’t even think of pre-shot. So there is marketing challenge and we just have launched a new marketing campaign called Next Big Idea, it’s great awareness there, we brought tremendous amount of interest an now it’s the question of turning that interest into revenues. We think that film will still be higher growth business in the medium term. But don’t expect anything significant for the first half of this year that we are pretty modest in our expectations for film. It is a very defined number of customers and as more and more people view film on the web and on mobile devices that increases the customer universe. But you have to be in the online environment all the time to do this, it is as being with the still. So its a very long answer but in short, we still are very confident in the film’s growth but don’t expect to see a radical turnaround in the next couple of quarters.

Q - Troy Mastin

Is high resolution film online, something that will be tied to the reworking of gettyimages.com?

A - Jonathan Klein

Exactly, we could launch this as well as some other changes to film early on but we don’t want to do that on the current platform in architecture and infrastructure. So when we launch the new site by definition, we will begin with those parts of the business which are most important in terms of percentage, film is important but it’s 5.5% or 6% of our revenue and then we will certainly layer on film.

Q - Troy Mastin

Okay and then finally, I know the answer to this, but I’ll ask anyway. How would you characterize the industry conditions today relative to 3 months ago or 6 months ago? Thanks.

A - Jonathan Klein

The industry conditions from demand and given the advertising and cooperative publishing industry or you talking about the picture industry and the competitive dynamics?

Q - Troy Mastin

I am talking about your customers, demand for your business?

A - Jonathan Klein

I think our customers are in pretty good shape.

Q - Troy Mastin

And would you characterize it as similar to where it has been in the last 3 or 6 months?

A - Jonathan D. Klein

I would say it depends geographically, I think in the US it’s similar, I think in Europe it depends where you are. And one of the biggest surprises to me of a positive nature was is Germany has a pretty miserable economy and we grew 25% last year. No we clearly share and made a lot of progress but the Germany economy still isn’t great. But, I would say that overall the customer universe is in reasonably good shape and hasn’t radically changed in the last 6 months.

Q - Troy Mastin

Okay, thank you very much.

Operator

We will take our next question for today is from Jeetil Patel with Deutsche Bank

Q - Jeetil Patel

Great, thank you guys, couple of questions on. Jonathan, can you, I guess following up on Peter’s question but, can you give us a sense of how the trends have looked in January, have you seen a lot of pent-up demand from our customer’s standpoint, as you come into New Year and budgets are, yeah, ready to Rock and roll. Second, can you talk about typically what kind of impact an Olympics event or a year have in the business in terms of volume growth, kind of impacting the business from a revenue standpoint? And then I have a quick a follow-up

A - Jonathan Klein

Okay, December ended well, we enter January with pretty strong momentum. It’s looking like a typical January at this point. For those who don’t know that well and the key month of the quarter and the key month of the year is March. Every year, March is either our biggest or our second biggest month of the year by a significant margin. And the way we went to January makes us feel pretty comfortable with how we are going forward. So yeah, I think it’s typical January entered with good momentum and we are not concerned with the beginning of the year. You asked about the Olympics. We’ve actually quantified in the past the incremental revenue from Olympics but it doesn’t always fall into one quarter and the good thing that I can say that is anecdotal rather than empirical is that, although the media over here seems to barely realize that there is an Olympics beginning quite soon, we have found that we are reasonably busy on the back of the Olympics, we are doing lots of deals, we are busy, we are getting good revenue and at this point we are pretty confident that our internal numbers for the Olympics will be met and perhaps exceeded.

Q - Jeetil Patel

So, is it fair to maybe characterize as maybe like 1 percentage point growth rate type of business in terms of when you have an Olympics here, that’s kind of the impact it has broadly on a given year or is there anyway to kind of frame that number?

A - Elizabeth Huebner

No, it will be less than a $1 million of incremental revenue in any quarter because some of it, because the Olympics is right in the middle of the first quarter. We have generated revenue in the fourth quarter related to the Olympics, we generated revenue in the first quarter and the second quarter. But overall, the summer Olympics are typically quite a bit bigger than winter Olympics. So, it just doesn’t move the needle, what we have always said is, it’s obviously great because of the incremental revenue but its far more about the credit and the pictures and what people see the coverage that we have of the Olympics that continues to just solidify our leadership position of the editorial world.

A - Jonathan Klein

And the same principles and points apply identically to the World Cup in Germany from early June to early July. Except if England win that would a boost to our revenue so get praying.

Q - Jeetil Patel

Question on just Europe in general but you saw pretty decent trends in Germany, UK, you know kind of inline or software, I mean, would you kind of say as a balance, your kind of, was your expectation in Europe, bigger or slightly worse I mean give the surprising strength you saw in Germany?

A - Elizabeth Huebner

I think it pretty much came in exactly where we expected it to.

Q - Jeetil Patel

Thanks.

Operator

The next question comes from Brandon Dobell with Credit Suisse

Q -Brandon Dobell

Thanks. John, kind of leveraging up to a real question. In the editorial market, as you think about market share opportunities, competitive positioning, geographies where you think there is more room or less room to take share, or if there is technologies or process, that can help you out. Trying to get a sense, where you think you are relative to the other players that you think there’s that big strike that you can make?

A - Jonathan Klein

In the editorial market overall, I would use a different adjective, I think they are massive strides ahead. We entered this market very very late in our history. Remember until 5 years ago, we didn’t film these images or shoot them. Until 2.5 years ago, we weren’t in the entertainment imagery market. We are now in News Sports and entertainment but still we are primarily or largely confined to the English speaking markets. We have a significant and robust sports business. But it’s basically strong and powerful in three countries. Only in the last year or so, have we, began to even cover local domestic sports in Germany. We don’t local cover domestic sports in big countries where sports important like Italy, France, Spain, Japan. So we have a long way to go geographically, we also have a long way go in terms of the amount of coverage we do.

We are increasing our coverage and we are covering certain things more deeply for example, three years ago, we didn’t cover the New York Fashion Week at all for entertainment. This year, last of 2005, we had 25 photographers and we were the leading players there. So, there’s tremendous amount of growth. I still think, that it’s interesting to note that even in the English speaking markets like the US. And we have now overtaken Reuters in terms of number of newspaper subscribers we have in the United States. But we still got some way to go against the key old established wire services and we think we have tremendous advantage of in terms of taking market share. We sever different business models, as you know.

Compared to some of our competitors, there are some competitors in the editorial image market who don’t any pictures at all. It’s extremely difficult for them to seek subscriptions, package deals, and we own a significant number of images. So, I would say that we have a way to go in terms of market share. So for example in the editorial imagery market in Japan, our market share is close to zero, I would say that gives us a long way to go. The same would apply in Spain, France, Italy, Germany where we just got started and then of course there is other parts of Asia and Latin America. As far as technology round there is concern, there is a ton of technology that goes into bringing 20,000 images into the collection of week and half of them being served up in real time to customers. And that’s continuing to evolve we can now, after a few years in this business compete or even beat any competitor in terms of speed. We’ve always been very strong in terms of quality of the imagery.

One of the interesting aspects of technology side of the new gettyimages.com is what we call editorial localization. And what we will be launching for the editorial imagery business, not just local language in many, many countries. But besides we’ll automatically serve up the most locally relative images. So if you did a search on Football in Spain, you wouldn’t get the Mighty Seahawks, you would actually get RealMadrid first. And I think that will make an enormous difference. So there is a lot of technology behind it and but it is all part of the new website. Yeah, editorial imagery really excited about it and as I said, entertainment grew 40%, entertainment imagery grew 40% in the fourth quarter. And News group, very big double digit too so we are very very confident and comfortable in that area.

Q -Brandon Dobell

Okay, another question for Liz, looking at the RF margins in the quarter pretty solid, is that, can you extrapolate that out, looking at ’06, as there were some things in that, that made that a little bit different and one quarter kind of phenomenon trying to gauge how you useful that number is, I think, for the rest for the year?

A - Elizabeth Huebner

Which margin?

Q -Brandon Dobell

RF Royalty rate was below it has been in the recent quarters, trying to gauge is that the trend we should look at?

A - Elizabeth Huebner

I’m sorry, you are talking about the gross margin? I am trying to figure…

Q -Brandon Dobell

Right.

A - Elizabeth J. Huebner

…the growth margin that was higher?

Q -Brandon Dobell

Yeah.

A - Elizabeth J. Huebner

We do expect that, that was we expect, as we mentioned briefly earlier I mean, the acquisition of Digital Vision, the additional wholly-owned content which is mainly in Royalty Free is what is driving that Royalty Rate down so, and therefore the gross margin up so yes we do think it will continue I think we guided when we did the
Analyst Day to 74 to 74.5 for ‘06 and that still the range that we think is reasonable.

Q -Brandon Dobell

Okay thanks a lot.

Operator

The next question comes from Jim Ballan with Bear Stearns.

Q – Jim Ballan

Thanks a lot, I wanted to ask a couple of questions, one is about the SG&A level, it is a little bit higher than what I had anticipate, I thought it might come down some because there were some acquisition integration cost in the previous quarters, could you comment on that, are we at the run rate here?

A - Elizabeth Huebner

Well, the number that we reported for the fourth quarter is what we expected so it was pretty much inline, it is pretty well flat with the third quarter, we don’t necessarily typically see cost coming down, we kept the market and program is going to the fourth quarter and as you would expect we would, so it came inline with what we expected. You will see a pickup, again if you go through the guidance you would further see that we do expect of course the SG&A cost to be up next year, up nowhere near what we expect the revenue to be up of course but the SG&A will go up. There is typically a pretty big increase between Q4 and Q1 just because of things like additional payroll taxes and things like that that happen, so you will see an uptick in the first quarter. And then the SG&A will stay relatively flat through ‘06.

Q – Jim Ballan

Okay and some of that increased marketing image starts on the Analyst Day?

A - Elizabeth Huebner

Increased marketing definitely

Q – Jim Ballan

Okay the other thing I wanted to ask about was the World Cup, we had heard that there were some issues around photographers access to the World Cup and I was wondering it you could just comment on that at all, and if that is an issue, will that have any impact on the year?

A - Jonathan Klein

Yeah there has been a little bit pressure around that. We are pretty confident that there is going to no access issues and if there is only one issue that is still being discussed and we are completely confident about will be resolved and that is how soon after an image is shot will FIFA allow the image to appear on the web and that is a conversation which ask and our competitors are completely united on and in discussion with FIFA which I am sure will prove to be amicably resolved and at the end of the day it's the biggest sporting event on earth and it’s in FIFA’s interest for as many pictures to be seen by as many people as possible. And what we do know is that if they are striving to reduce access and they are looking to reduce the number of photographers or the number of photo agencies involved, we are not going to be one of those, which are called far from it.

Q – Jim Ballan

One last question if I can, the 50% growth rate in Japan, do you think that is a sustainable number, over the next couple of years or do you think it will start to come down?

A - Jonathan Klein

Yes.

Q – Jim Ballan

Yes, it will start to come down?

A - Jonathan D. Klein

No, yes it is sustainable , I am reminded of my three-year-old, when I used to ask him an old question, he’d say yes. We believe we could continue to grow at 50% per annum for the foreseeable future.

Q – Jim Ballan

Alright, thanks and thanks a lot guys.

Operator

We will go next to Matthew Troy with CitiGroup.

Q - Matthew Troy

Good evening. One market we had not talked about yet would be China, I was just wondering if you can give us an update on your efforts there specifically with an eye towards the news on Google having a percentage of some content into that market, wondering how you see that potentially impacting access to your site and just a general update around that market, it will be helpful?

A - Jonathan D. Klein

Yeah sure, absolutely. We basically have three parallel and different tracks in China. The first and the easiest to talk about is our role as a for the journalism organization which has photographers on the ground, all over China documenting what’s happening in China in News, Sports and Entertainment. In that area, we operate that completely, separately and we are very focused on licensing that imagery outside of China. And that means that we can chose any image we want, the images are not interfered with at all by government. And, our editorial integrity is wholly intact as we shoot imagery in China and be distribute it outside of China. And in that sense, the revenues from the imagery didn’t turn up in the China numbers because its being sold outside but the costs are.

The second piece of it is our Creative or photography business we choose to do this by way of joint venture so that we would not make some of the mistakes which some folks have made, some are being more better publicized than others and we have a stock photography business in China in joint venture with some folks we knew well. It’s going entirely inline with our expectations and we think with that overtime will be good size business but we are building it carefully and slowly from the top of the pyramid down. In other words, we are interested in serving the needs of ad agencies and corporations who are the major ones in the big cities operating inline with intellectual property and copyright laws which they would use and which you will be familiar with outside of China.

The third part of our business is the Licensing of our International Imagery on the Editorial side into China, in other words, News, Sports, Entertainment Imagery from all around the world being sold into China. That is done by an agent and that agent operates under the auspices of one of the organs of the Chinese, not government but related to the Chinese government. And as a result of that, they make sure, that agents that they do not pull foul at the authorities because we think that it’s very important to be very sensitive to what’s happening in that market. I mean at the end of the day what speaks most about the Chinese situation is that long-term, it’s going to be very big market for us, short-term it won’t be and it’s the only joint venture we had anywhere in the world and that’s the joint venture on the Creative side and that’s because of sensitivity to the local market and how things are going over there. So yeah we are investing in it and we are pretty confident but don’t expect China to significantly or radically move to get the images numbers in the next several years.

Q - Mathew Troy

Thanks Jon. That’s all.

A - Jonathan D. Klein

Sure.

Operator

And ladies and gentlemen, this does concludes our question and answer period for today. I will now turn the conference back over to our speakers for any closing remarks you may have.

Jonathan D. Klein, Co Founder, Chief Executive Officer

Not really except to say we are over an hour now, I want to thank you very much for your time, interest and support and we look forward to speaking to you, when we announce the results again. So thanks a lot and good bye.

Operator

And ladies and gentlemen, this concludes our conference call. We appreciate your participation, you may disconnect at this time.

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