It's quickly becoming apparent that creative-content distributor Getty Images (NYSE: GYI) is slowing down. The company is currently the leader in a fragmented and appealing industry, but whether that constitutes a defensible economic moat is up for debate -- especially after the recent earnings release.
Getty's second-quarter results were far from picture-perfect as revenue growth continued to slow. Top-line expansion fell into the single digits for the quarter, and the majority of the boost was due to a weak dollar, which plumped up the 54% of revenue earned from overseas. This also included the "important strategic acquisitions" of a number of small competitors, illustrating just how little existing operations are adding to the mix.
In fact, during the earnings conference call, management estimated that the traditional business of supplying "stock" imagery fell a couple of percent. Additionally, most cost categories increased as a percentage of sales, probably because Getty was used to steady revenue growth and was ramping business expenses in sympathy. The end result for the quarter was a fall in continuing operations and bottom-line earnings.
Management expects trends for the rest of the year to remain tough, and lowered its full-year earnings guidance to $2.22. It's also having to resort to restructuring moves and headcount reductions to lower costs until it "reinvigorates" existing business. After the 18% stock drop today, Getty's stock now trades at under 17 times earnings. That sounds reasonable, but is difficult to rely on until the core business stabilizes the "traditional creative stills" business.
Fortunately, Getty's cash flow generation remained stable, and it threw off plenty of free cash flow during the quarter -- excluding capital spent on acquisitions. This is what keeps me hovering around the company. There's plenty of room to benefit shareholders and grow through acquisitions. Additionally, Getty's business model is compelling, representing a highly scalable "toll road."
Getty can reach millions of customers once photographic imagery, moving footage, and multimedia products and packages are posted on one of the company's three key websites. Potential loyal clients include movie studios such as Lions Gate Films (NYSE: LGF) and DreamWorks Animation (NYSE: DWA), advertising firms such as Interpublic (NYSE: IPG) and Omnicom (NYSE: OMC), or any firm or individual with a need for images.
There is even bigger upside in "high-quality audio content" in music licensing, especially since major music labels such as Warner Music Group (NYSE: WMG) struggle with the migration of music to the Internet. Getty recently entered the space through this quarter's acquisition of Pump Audio, competing with smaller firms like Digital Music Group (Nasdaq: DMGI).
But until Getty Images can prove it can successfully balance managing its existing business and investing for the future, its prospects remain fuzzy, at best.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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