Frankly, it is at least refreshing to see a company be honest about the current trends in stock photos.  If they are honest enough, well that is another topic but this at least addresses the compression of the value here and the trends that are coming into play upfront instead of the company trying to explain how it didn’t get it 6-months from now.  This should actually create more and more future writedowns to the value of goodwill and intangibles, and that won’t be good for Jupitermedia with the state of its balance sheet now. 

Getty Images (NYSE:GYI) was the one we felt had the most to lose, partly because they were the largest pure-play in stock photos and partly because the company hasn’t been as forthcoming about the future of these businesses even after it has made recent acquisitions to try to stave off some of the onslaught.  The wiki-model is too powerful here for this sort of business.  It will probably continue to make money and it will have a solid place in many copyright enforced venues, but much of its business will face severe margin compression.  This is an overly simplified explanation for a highly complex issue, but it is what it is.

Here are Alan Meckler’s quotes regarding the trends in the stock photo sector: "Despite a challenging period for the stock photo industry, our Jupiterimages division had some bright spots in the second quarter and for the first six months of 2007. Our Rights Managed category experienced over 30% growth for the first six months of this year compared to the same period of 2006. In addition, our JupiterimagesUnlimited high level royalty-free subscription offering grew over 200% for the first six months of 2007 compared to the same period last year. On a sequential quarterly basis, operating income for our Jupiterimages division increased from $8.6 million for the three months ended March 31, 2007 to $9.2 million for the three months ended June 30, 2007. Due to the evolution taking place in the stock photo industry, we are currently focusing our direct sales team to further emphasize our strengths: sales of Rights Managed images and JupiterimagesUnlimited. We have also initiated a rigorous review of our operating expenses that we expect will result in annual expense reductions of $2.0-$3.0 million on a prospective basis starting in the third quarter of 2007. Additionally, we have also identified opportunities to streamline various capital projects and content production that we expect will result in a reduction of over $3.0 million in annual cash expenditures. Combined, this restructuring is expected to improve our annual after-tax cash flows by approximately $4.0 million and possibly more."

No one is going take this report well in its entirety, and the stock is seeing the punishment for it.  But it is at least a step in the right direction.  This industry is rapidly changing and changing faster than a mere writeup here can address in a few hundred words.  Jupitermedia’s prior 52-week trading range is $5.45 to $10.48.  At least it owns the Internet.com domain name and is entering new operations with venues such as MediaBistro.com.  Things are bad, but they could have been much worse.

Jon C. Ogg
August 9, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Analysts have been somewhat cautious in general and the average target looks very close to the adjusted current price after today’s gains.  The chart has also been closer to the lower-end of a longer-term trading band, but the pre-earnings gain puts this one in a neutral stance with no clearread either way.  Options are hard to read with today’s gain, but it looks like options traders would be expecting a move of up to $0.45 to $0.50 in either direction.  Sorry the actual internals are hard to read today, but that is what the tea leaves are indicating.  Lastly, NASDAQ has its short interest as 2.318 million shares for July, more than 6-days average volume.

This one will be interesting to report because of some overlaps with recent earnings and recent industry changes.  The Jupierimages unit was the likely reason for the buyout offer from Getty Images (NYSE:GYI).  If you subscribe to our special situation newsletter or if you read some exit updates this week regarding what we thought was going to happen to Getty Images and legacy stock photo businesses, then the run in Jupitermedia today will even be more of a headscratcher.  The good news for Jupiter is that it has other operations and has been trying to keep itself diversified in new media areas (see its last acquisition of MediaBistro.com) that will keep that major stock photo business from being such a key factor in the years ahead.

The balance sheet on this one is not one we normally we would want to give a solid evaluation to because of the large goodwill and intangibles, even if it does own the beloved Internet.com domain.  This 10% rise ahead of the numbers is more than puzzling.

Jon C. Ogg
August 8, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.