Getty Images Holdings, Inc. (NYSE:GETY) Q1 2023 Earnings Call Transcript May 11, 2023

Getty Images Holdings, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.04.

Operator: Good afternoon, and welcome to Getty Images First Quarter 2023 Earnings Conference Call. Today’s call is being recorded. We have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Steven Kanner, VP of Investor Relations and Treasury at Getty Images. Thank you. You may begin.

Steven Kanner: Good afternoon and welcome to the Getty Images first quarter 2023 earnings call. Joining me on today’s call are Craig Peters, Chief Executive Officer; and Jen Leyden, Chief Financial Officer. Before we begin, we would like to remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks, uncertainties and assumptions which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are highlighted in the forward-looking statements section of today’s press release and in our filings with the SEC. Links to these filings and today’s press release can be found on our Investor Relations website at investors.gettyimages.com.

During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA less CapEx, free cash flow and currency neutral growth rate. We use non-GAAP measures in some of our financial discussions as we believe they assist investors in understanding the core operating results that management uses to evaluate the business. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure can be found in our filings with the SEC. After our prepared remarks, we’ll open the call for your questions. With that, I will hand the call over to our Chief Executive Officer, Craig Peters.

Craig Peters: Thanks, Steven, and thanks to everyone for joining our Getty Images first quarter 2023 earnings call. I’ll start by addressing the quarter’s business performance and progress at a high level before Jen takes you through the first quarter financial results. First quarter 2023 reported revenue was $235.6 million, representing year-on-year growth of 2% and currency neutral growth of 5.5%. Our adjusted EBITDA finished at just over $76 million for the quarter. This reflects a reported year-on-year decrease of 2% and growth of 2.2% on a currency neutral basis. As accounted for in our guidance, we anticipated currency headwinds through the first half of 2023 to impact our bottom line. However, we anticipate this will significantly prove over the second half of the year.

Top line results reflect continued softness in some parts of our business, notably in Europe and some agency customers, which we believe is due to customers approaching spend more cautiously in the challenging macro environment. Our iStock e-commerce performance continues to perform well and is that thriving engine behind our growth in total purchasing customers with the LTM totaling 69,000 net additions in the quarter. Unsplash+ the paid subscription we launched in Q4 2022 continues to show positive signs with respect to customer acquisition, utilization and renewals. Our total paid downloads increased by 6.6% year-over-year with contributions to growth coming from each of our brands, from creative and editorial and from stills and video. This speaks to the increasing value our customers are deriving from our offerings.

Of course, we believe increased commitment and consumption is underpinned by the uniqueness and quality of our content offering. In the quarter, we were pleased to renew our long-standing exclusive content partnerships with Sky News and Anadolu. The more recent Met Gala and the coordination of Coronation of King Charles III also demonstrate our unique coverage capabilities and distribution. During the quarter, we were pleased to announce our collaboration with NVIDIA to develop and distribute responsible generative text-to-image and text-to-video offerings. We are committed to building new durable recurring revenue streams with this technology and this collaboration addresses many of the concerns with respect to current generative models and speaks to the uniqueness of Getty Images assets in the context of generative AI.

Getty Images delivers a unique level of quality with respect to the content and metadata, a level of exclusivity and rights and a level of research expertise and ongoing flow of high quality contemporary content to maintain and improve these models over time. In collaboration with NVIDIA, we look forward to commercializing these responsible AI models over the coming quarters to bring new capabilities to our collective customers. Further leveraging responsible AI and building on the core strengths of our pre-shot model, which continues to maintain distinct advantages with respect to quality, time efficiency, resolution, and search costs. In partnership with BRIA, we deployed one-click background removal functionality to all of our iStock subscribers.

We’re seeing strong initial adoption and we’ll be expanding these capabilities to object removal during the second quarter. These integrated capabilities allow our customers to get the exact image they need with increased time and budget efficiency. Following the close of the quarter, we were pleased to close on an amended upsized and extended $150 million revolving credit facility. This facility provides us with increased financial flexibility and as a result we have made a $20 million voluntary repayment on our U.S. dollar term loan. As a company, Getty Images continues to focus on providing meaningful value to our customers by allowing them to elevate their creations and audience connections, saving their precious time and resources and reducing their risk.

We’re focused on expanding our differentiation based on the quality of our offerings, supported by our exclusive contributors, our premium content partners, our event access and rights, and through the depth of our content expertise and archive. We are embracing new capabilities to increase the value we provide to our customers and to create new and recurring revenue streams. We are staying mindful of current near-term economic conditions through discipline cost management, while continuing to invest in long-term across technology, new products and geographic expansion. We see continued momentum highlighted by our growing customer base, growing customer commitment via annual subscriptions, growing customer downloads and video consumption, growing geographic penetration and our ability to attract and retain high quality partners and customers.

And with that, I’ll hand the call over to Jen who will take you through the more detailed financials.

Jen Leyden: Hi, everyone. Our first quarter financial and operational results reflect a solid start to the year in spite of continued uncertainty in the broader macroeconomic environment. We drove currency neutral growth across all of our geography. We continued our strong trajectory across our KPIs and expanded our subscription business and overall we delivered healthy bottom line results and cash flow generations, so a very solid start to 2023. I’ll begin by reviewing some of the key operating metrics or KPIs that underpin our financial performance. Note, today’s press release contains information on all seven of our KPIs, but I’ll touch on just a few here. All KPI metrics are as of the trailing 12 months for LTM period ended March 31, 2023 with comparisons to the LTM period ended March 31, 2022.

As a reminder, beginning with our Q3 2022 results, we made two go-forward changes to our customer data reporting. I’ll highlight the impact of these changes on total active annual subscribers, which was more meaningfully impacted by those changes. Total purchasing customers rose to 829,000 from 825,000, an increase of 0.5% over the comparable 12 month period, a more moderate yet still healthy level of growth given the current macroeconomic environment. On a sequential basis, we did see a slight pullback in total purchasing customers focused in the a la carte part of our e-commerce business. Partially offset by growth in our subscriber base, which drove a sequential pickup in annual revenue per purchasing customer from $1,109 to $1,123. We delivered impressive growth in active annual subscriber counts, adding 69,000 to reach 150,000.

This is an increase of approximately 85% over the corresponding period in 2022. Absent the reporting changes I mentioned earlier, the increase would have still been a robust 66%. This growth is fueled by our e-commerce subscription offerings as well as our largest subscription premium access. Annual subscription revenue made up over 50% of total revenue for the second consecutive quarter. For those customers on annual subscription products, we retained revenue at a strong 99.8% compared to 104.6% in the LTM period ended March 31, 2022, a period which benefited from a COVID impacted year-on-year compare. We grew our paid download volume by approximately 6.6% to 95 million, driven by growth in downloads across both editorial and creative. And last, our video attachment rate, which measures our customer’s engagement with video rose to 13.4% from 12% in Q1 2022.

We believe the investments we are making to improve video awareness through improved search and high value differentiated video content and expansion of video in our subscription offering will drive this metric higher over the coming years. Turning now to our financial performance. As we expected, our results this quarter were impacted by the headwinds in foreign exchange rates, primarily with respect to the euro and the pound, driving a meaningful difference between our reported and our currency neutral year-on-year performance As reflected in our guidance, assuming these rates hold relatively steady to where we see them today, we expect foreign currency headwinds to ease as we move through the year turning to a slight tailwind in the back half of 2023.

Total revenue was $235.6 million, up 2% year-on-year on a reported basis and up 5.5% on a currency neutral basis. We saw growth across all geographies driven by a strong performance in our editorial business, continued demand from our corporate customers and further expansion of our subscription business. Included in these results are certain impacts of the timing of revenue recognition, which contributed approximately 330 basis points to our year-on-year revenue growth in the first quarter. Our annual subscription revenue grew to 50.7% of our total revenue in Q1, up from 48.3% in Q1 2022 and 49% for the full year of 2022. The increase this quarter was led by growth in our premium access and iStock, premium plus video subscription. This momentum points to the opportunity that remains for further expansion of our subscription business, which we can capture by offering the right solutions that provide our customers with access to an unmatched quality, depth, breadth, and unique mix of content across our image, video and music library.

Creative revenue was $146.5 million down 1.3% year-on-year and up 1.9% on a currency neutral basis. Within creative, our annual subscription products were a positive driver growing by 7.9% year-on-year and 10.8% on a currency neutral basis led by our Premium Access and iStock subscription. Within our overall e-commerce business, we saw the strongest means in our iStock subscriptions with customer shifting from monthly or a la carte products into our annual offering, and with conversion of free trial customers to paying customers, which provides us with more stable long-term revenue streams. In addition, our Unsplash+ subscription continued to build momentum, although still off of a relatively small base given we are still in the very early days of this product launch.

Where we continue to see challenges is in our agency business and in Europe where ongoing macro level pressures and a softer ad market impacted our performance. Editorial revenue was $84.6 million in Q1, up 7.5% year-on-year, and 11.3% on a currency neutral basis. This was another excellent performance for our editorial business, led by strong double-digit growth on both reported and currency neutral basis in entertainment. The archive and news verticals were also strong contributors during high single digits on a reported basis and double digits currency neutral. This more than offset a challenging year-on-year compare in sport with the 2022 Beijing Winter Olympics in Q1 of last year. Our revenue grew across all major geographies on a currency neutral basis with year-on-year growth of 6.6% in the Americas, 3.2% in EMEA, and 6.2% in APAC.

Revenue less our cost of revenue as a percentage of revenue remained consistent and strong at 73.1% compared to 73.2% in Q1 2022. Total SG&A expense was $102.4 million in the quarter up $9.2 million year-on-year at 43.5% of our revenue up from 40.3% last year. The higher year-on-year expense largely reflects higher staff costs, which included the initial vesting of employee stock compensation, incremental cost of being a public company and legal expenses partially offset by savings and occupancy. Adjusted EBITDA was $76.1 million for the quarter down 2% or $1.6 million year-on-year. On a currency neutral basis, adjusted EBITDA was up 2.2%. Our adjusted EBITDA margin was 32.3% compared to 33.6% in Q1 2022 with the lower those still very strong margin rate driven by the impact of FX and higher SG&A expense.

CapEx was $15.5 million in Q1, a decrease of $700,000 year-over-year. CapEx as a percentage of revenue was 6.6% down from 7% in the prior year. The decrease spend reflects lower capitalized flavor costs and the timing of equipment purchases partially offset by content acquisitions to fuel our Unsplash+ subscription. Adjusted EBITDA less CapEx was $60.6 million compared to $61.4 million in Q1 of last year, representing a slight decrease of 1.4% and an increase of 3.8% on a currency neutral basis. Our adjusted EBITDA less CapEx margin was 25.7% down from 26.6% and Q1 of 2022. Free cash flow was $16.4 million compared to $33.1 million in Q1 2022. Lower free cash flow primarily reflects working capital adjustments related to timing inclusive of cash interest expense of $37 million in Q1, an increase of $7.9 million over the prior year due in large part the timing of those payments.

Under our term loan, we can elect different payment terms, for example, one, three or six months, which can shift when a payment is due from one quarter to the next, impacting cash flow from one quarter to the next. Cash taxes for the quarter were $3.5 million a slight decrease from $3.8 million in Q1 of 2022. Our ending cash balance on March 31 was $116.8 million, up $18.9 million from the end of 2022 and a decrease of $94 million from our ending balance in Q1 of 2022. That year-over-year decrease in our cash balance reflects total debt pay downs of $310.4 million on our USD term loan inclusive of a $2.6 million repayment in the first quarter of this year. We ended the quarter with a net leverage of 4.4 times unchanged from year end of 2022 and meaningfully down from five times as of March 31, 2022.

As of March 31st, we had total debt outstanding of $1.441 billion, including $300 million of 9.75% senior notes, $684.8 million USD term loan with an applicable interest rate of 9.5%, $456.5 million euro term loan converted using exchange rates as of March 31, 2023 with an applicable interest rate of 8.06%. As Craig noted earlier, just last week, we successfully amended extended and upsized our revolver, increasing our borrowing capacity to $150 million from $80 million and extending the maturity to May of 2028 from February, 2024. This new expanded facility, which continues to remain undrawn, improves our access to liquidity and our ability to operate nimble. Our ability to nearly double the size of our revolver and the underlying support of our banking partners demonstrates the confidence in our business model in our company’s long history of delivering strong execution and financial performance and in the opportunities that lie ahead.

In addition, earlier this week we used $20 million of our balance sheet cash to repay a portion of our USD term loan. A successful repayment demonstrates our commitment to further deleverage the balance sheet with our strong cash flow generation. Based on the foreign exchange rates and applicable interest rates on our debt balance as of March 31 and taking into account $355 million interest rates swap agreements, the undrawn fee on our amended revolver and the $20 million debt repayment in May are 2023 cash interest expense is expected to be approximately $121 million. Of course, our actual interest expense remains subject to changes in the interest rate environment, which we outline in more details within our SEC filing. In summary, this is a strong free cash flow generating business.

We have taken steps to create increased flexibility from both an operational and capital structure standpoint. We have meaningful growth opportunities ahead and we will remain disciplined and focused on execution and on driving long-term shareholder value. Now turning to our guidance for 2023. We continue to expect revenue of $936 million to $963 million representing growth of 1% to 4% year-on-year and currency neutral growth of 1.5% to 4.5%. Assuming current FX rates hold, we estimate an FX headwind on the top-line of about $5 million nets for the full year. This includes the $7.6 million negative impact from Q1 and an estimated headwind of approximately $3.5 million in the second quarter, implying a benefit of about $6 million in the second half of 2023.

Given that we saw the bulk of the adverse impact of FX in the second half of 2022, we would expect the FX impact to shift to a tailwind in the second half of 2023, primarily benefiting the fourth quarter. We expect adjusted EBITDA of $305 million to $315 million up 0.4% to up 3.6% year-over-year, and up 0.7% to 4% currency-neutral, included in the adjusted EBITDA expectation as an approximate $1 million adverse impact from FX in 2023, including the $3.2 million impact in Q1 and a headwind of about $1 million in the second quarter, again, assuming a tailwind of approximately $3 million in the second half of 2023, largely in the fourth quarter. Please note, built into this guidance are the anticipated impacts of macroeconomic pressures as well as incremental cost related to ongoing litigation and cost tied to operating as a public company.

We believe that our proactive approach to cost management and execution against our growth opportunities will position the company to continue to deliver strong financial performance and ongoing operational agility. We will continue to remain disciplined and nimble, deploying our capital to what we believe is its highest and best use with continued emphasis on our balance sheet optimization. With that operator, please open the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Ron Josey of Citi. Please go ahead.

Operator: Thank you. The next question is from Mark Zgutowicz of Benchmark Company. Please go ahead.

Operator: Thank you very much. The next question is from Tim Nollen of Macquarie. Please go ahead.

Operator: Thank you. The next question is from Brett Feldman of Goldman Sachs. Please go ahead.

Operator: Thank you very much. Our next question is from Cory Carpenter of JPMorgan. Please go ahead.