Getty Images Holdings, Inc. (NYSE:GETY) Q2 2023 Earnings Call Transcript August 14, 2023
Operator: Good afternoon, and welcome to Getty Images Second 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, Vice President of Investor Relations and Treasury at Getty Images. Thank you. You may begin.
Steven Kanner: Good afternoon, and welcome to Getty Images Second Quarter 2023 Earnings Call. Joining me on today’s call are Craig Peters, Chief Executive Officer; and Jen Leyden, Chief Financial Officer. As noted in today’s press release, the financial results for the second quarter ended June 30, 2023, and related comparisons to prior periods included in this release are preliminary. The Company expects to file a Form 12b-25 with the Securities and Exchange Commission to disclose that it will not be able to file its Form 10-Q by its due date of August 14, 2023, and may not file within the five-day extension period allowed by the form. The delay in filing 10-Q is due to the Company’s independent auditors requiring additional time for additional audit processes in response to a comment arising from an inspection of the audit work papers of the Company’s 2022 financial statements.
As of this date, we are not aware of, nor has our independent auditor advised us of any material misstatement to the 2022 financial statements. 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 rates.
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 will 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 second quarter 2023 earnings call. I will start by addressing the quarter’s business performance and progress, the high level before Jen takes you through the full second quarter financial results. Second quarter of 2023 reported revenue was $225.7 million, representing a year-on-year decline of 3.3% on a reported basis and a currency-neutral decline of 2%. Our adjusted EBITDA finished at $66.5 million for the quarter. This reflects a reported year-on-year decline of 10.3% and a currency-neutral decline of 8.9% with EBITDA more heavily impacted by legal costs associated with previously disclosed litigation. While we continue to see increased utilization of our content and increased customer commitment overall, these numbers are not what we wanted to finish the quarter.
Macroeconomic conditions are pressuring our agency business. The writer and actor strikes have also impacted our entertainment business and our media and production customers. While these factors are largely outside of our control, we are not happy with our performance and are committed to elevating our sales execution in the face of challenging market conditions. We were pleased to add US Soccer as a new partner in a multiyear agreement and renew our agreements with Major League Baseball and the Tribeca Film Festival. It has also been great to see the stellar execution of our world-class editorial team on the ground in Australia and New Zealand, covering the FIFA Women’s World Cup as the competition’s authorized photographic agency. It’s a designation Getty Images has held since 2009.
On the AI front, we continue to play to the long term, and I’m pleased with the progress we are making in partnership with NVIDIA to build and launch a high-quality, commercially viable, fully indemnified, creator-responsible generative AI service that gets set alongside our other highly differentiated industry-leading services. We are now in limited alpha and expect to launch later this quarter. We’re also excited to expand the deployment of our Natural Language search to better surface our pre-shot content in response to customer needs. Our pre-shot content continues to offer a compelling customer value as it’s free to search, substantially more time efficient, and provides for a unique level of creativity, authenticity and quality.
Using Natural Language processing, we now return a much broader set of high-quality results even against the most complex search terms. For those at a browser, to see this in action, I would encourage you to go to istock.com and search “Colorful umbrellas seen from below hanging over a street” and wait to see the results. Then try the same at other content providers. When asked about what keeps me up at night, my answer is always the same, execution. It is entirely within our control. It is a more difficult environment and our execution needs to match it head on. My colleagues and I are committed to elevating our performance throughout the second half, and we remain focused on building for the long term through differentiated and high-quality offerings required by our customers and through the preservation of our extremely unique assets.
With that, I’ll hand the call over to Jen, who will take you through the more detailed financials.
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Jen Leyden: As Craig mentioned, our second quarter results were disappointing, with revenue impacted by ongoing macroeconomic pressures, challenges in our agency business and adverse impact from the actors and writers strike and with adjusted EBITDA also impacted by ongoing litigation costs. I’ll begin by reviewing some of the key operating metrics or KPIs. Note, today’s press release contains information on all 7 of our KPIs. All KPI metrics are as of the trailing 12 months or LTM period ended June 30, 2023, with comparison to the LTM period ended June 30, 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 and on total purchasing customers, which are the KPIs more meaningfully impacted by those changes.
We will anniversary these changes in the third quarter and will have like-for-like comparisons thereafter. Total purchasing customers were 830,000 compared to 843,000 in the comparable 12-month period due in large part to the changes to previously discussed customer data reporting. Absent the reporting changes, total purchasing customers would have been 839,000. On a sequential basis, total purchasing customers remained steady from Q1 levels. We delivered another quarter of significant growth in active annual subscribers, adding 93,000 to reach 182,000 or growth of approximately 104% over the corresponding period in 2022. Absent the customer data reporting changes noted a moment ago, the increase would have still been strong at 82% or 73,000 subscribers added.
The strength in annual subscribers was driven by e-commerce offerings, including growth of our smaller iStock annual sub and the newer Unsplash+ subscription as well as steady growth in our premium access subscriptions. Notably, we are pleased to see substantial progress in our efforts to expand our geographic footprint in various markets leveraging our e-commerce subscription offering to attract over 23,000 new annual subscribers across our growth markets in LATAM, APAC and EMEA, and over 40,000 new annual subscribers in our core markets, which include the U.S., Canada, France, Germany, the UK, Japan and Australia. Our growing mix of revenue from subscription products exceeded 50% for the third straight quarter and grew to 51.8%, up from 50.7% in Q1 and from 48.2% as of Q2 2022.
Our revenue retention rate for our annual subscriber customers was a healthy 98.5% compared to 101.9% in the LTM period ended June 30, 2022. The slight decline in our revenue retention rate was primarily driven by lower revenue retention rates on some of our smaller e-commerce subscription customers. Paid download volume rose by 1.1% to 94 million year-over-year, speaking to the continued customer value being delivered through our offerings. And last, our video attachment rate rose to 13.5% from 12.2% in Q2 2022. While we continue to see steady growth in this metric, it remains a key growth opportunity for us as we continue to focus on executing across increased customer awareness of our video offering, improved search and site prominence for our video content and upselling a video into subscription.
Turning to our financial performance. In addition to some of the adverse revenue impact from macro, agency and the U.S. Hollywood strikes previously mentioned, our Q2 results were also impacted by foreign currency headwinds from a stronger U.S. dollar, primarily with respect to the euro and the pound. These headwinds drove differences between reported and currency-neutral performance, although more moderate than the prior few quarters. Assuming rates hold relatively steady to where we see them today, we expect foreign currency to turn to a slight tailwind in the back half of 2023. Total revenue was down 3.3% year-on-year on a reported basis and 2% on a currency-neutral basis. While we have commented on some of our revenue headwinds this quarter, I’d be remiss to not also highlight continued positive momentum across our subscription business, our new customer acquisition growth, the tenth consecutive quarter of growth in our corporate sector and healthy performance across our KPIs. Our annual subscription revenue as a percentage of total revenue rose to 51.8% in Q2, up from 48.2% in Q2 of 2022.
This equates to year-on-year growth of 4% on a reported basis and 5.5% on a currency-neutral basis, driven by further gains across our premium access and e-commerce offering. Creative revenue was $141.3 million, down 3.7% year-on-year and 2.3% on a currency-neutral basis. Our agency business, which sits entirely within creative, was down double digits this quarter due to macro conditions and a softer ad market, and is the primary driver of the declines in creative. Annual subscription products within creative grew 6.5% year-on-year and 8% on a currency-neutral basis. Within our e-commerce business, we had strong gains in our annual iStock subscription offerings, which grew by 16.9% on a reported basis and 15.7% currency-neutral. The gains were driven by the success of our customer acquisition efforts across core and growth markets, coupled with some contributions from upsizing our existing monthly or à la carte customers into annual offerings.
Custom content, which leverages Getty Images’ global network of contributors to create cost-effective, customized and exclusive content to meet specific customer needs, grew 8.4% year-on-year, or 10.8% currency-neutral. Q2 editorial revenue was $80.3 million, down 3.2% year-on-year and 2% on a currency-neutral basis, driven by results across our sports, news and archive verticals. The largest decline was in sports, where we have seen reduced activity in the crypto and NFT space as well as challenging year-on-year compares due to one-off events in 2022. Breaking down our performance across our major geographies, we posted year-on-year currency-neutral growth of 4.5% in APAC and 0.3% in EMEA, while the Americas were down 4.5%. Revenue less our cost of revenue as a percentage of revenue remained consistent and strong at 71.9% in Q2 compared with 72.1% in Q2 of 2022, with a slight decrease driven primarily by variations in product mix.
Total SG&A expense of $107.7 million was up $12.2 million this quarter with our expense rate increasing to 47.7% of our revenue, up from 40.9% last year. The higher year-on-year expense was primarily due to higher legal expenses tied to our previously disclosed and our ongoing litigation, largely expected to be concentrated in the first half of the year and also due to higher staff costs, which this year included $11.9 million of stock-based compensation related to the vesting of employee restricted stock units and earn-out shares compared to $1.4 million of equity-based comp in Q2 of 2022 prior to our return to the public markets. Excluding stock-based compensation, SG&A was 42.5% of revenue compared to 40.3% in the prior year. Further excluding the litigation expense, which totaled $7 million in the quarter or 310 basis points of revenue, SG&A would have declined in both dollars and as a percentage of revenue from the prior year.
That is a result of proactive cost management measures executed towards the start of Q2. Earlier in the quarter, we proactively executed a plan to slow down our rate of spend to better position ourselves as we, similar to other global companies, navigate a more challenging macroeconomic backdrop. This plan included a hiring reduction and optimization of our marketing deployment with total marketing spend down $4.2 million and dropping as a percentage of revenue to 4.7% from 6.4% in Q2 of 2022. We anticipate maintaining these plans through to the end of the year. Adjusted EBITDA was $66.5 million, down 10.3% year-over-year. On a currency-neutral basis, adjusted EBITDA was down 8.9%. Our adjusted EBITDA margin was 29.5% compared to 31.7% in Q2 of 2022 with the lower rate driven by the impact of elevated legal costs within SG&A expense.
Excluding the litigation costs, we would have delivered 80 basis points of margin expansion. CapEx was $13.9 million, down from $14.1 million in the prior year period. CapEx as a percentage of revenue was 6.2% versus 6.1% in the prior year. Adjusted EBITDA less CapEx was $52.5 million compared to $59.9 million in Q2 of last year. Adjusted EBITDA less CapEx margin was 23.3% in Q2, down from 25.7% in Q2 of 2022. Free cash flow was $27.9 million, up from $16.8 million in Q2 of 2022. The increase in free cash flow primarily reflects working capital changes related to the timing of receivables. Free cash flow is stated net of cash interest expense of $23.2 million in Q2, an increase of $2.9 million over the prior year. Cash taxes for the quarter came in at $11.8 million, a decrease from $14.7 million in Q2 of 2022.
Our ending cash balance on June 30 was $121.3 million, up $4.5 million from Q1 of 2023 and a decrease of $92.5 million from our ending cash balance in Q2 of 2022. That year-over-year change in our cash balance reflects total debt paydown of $330.4 million on our USD term loan, inclusive of a $22.6 million repayment in the second quarter of this year. We ended the quarter with a net leverage of 4.4 times, unchanged from year-end 2022 and down from 4.8 times as of June 30, 2022, representing nearly 0.5 turn of leverage reduction in a one-year period. As of June 30, we had total debt outstanding of $1.418 billion, which included $300 million of 9.75% senior notes, $662.2 million USD term loan with an applicable interest rate of 9.84%, $456.1 million of euro term loan converted using exchange rates as of June 30, 2023, with an applicable interest rate of 8.625%.
In addition, on August 11, we used $20 million of our balance sheet cash to repay a portion of our USD term loan. Year-to-date, we have applied $45.2 million or over 100% of our free cash flow towards debt paydown, demonstrating our ongoing commitment to further deleverage the balance sheet. Based on the foreign exchange rates and applicable interest rates on our debt balance as of June 30th and taking into account the $355 million of interest rate swap agreements and last week’s $20 million debt repayment, our 2023 cash interest expense is expected to be about $122 million. Now turning to our guidance for 2023. Based on our performance through the first half of this year, ongoing macroeconomic and agency sector pressures, expected impacts from the U.S. Hollywood strike and litigation costs, we are revising our guidance.
We expect revenue of $920 million to $935 million, down 0.7% to up 0.9% year-on-year and on a currency-neutral basis, down 0.7% to up 1%. Assuming current FX rates hold, embedded in this guidance is an expectation that FX will have an overall neutral impact on full year revenue. This includes the $10.7 million negative impact from the first half of 2023, turning to an estimated tailwind of approximately $10.5 million in the second half of 2023. This includes approximately $3 million of benefit in the third quarter. We expect adjusted EBITDA of $292 million to $303 million, down 3.8% to 0.3% year-on-year on a reported basis and on a currency-neutral basis. Included in the adjusted EBITDA expectation is a relatively neutral impact from FX for the full year, including the $4.4 million impact in the first half, again, assuming a tailwind of approximately $4.5 million in the second half.
This includes about $1 million benefit in the third quarter. Please note, built into this guidance are costs related to ongoing litigation and cost to operating as a public company. This includes the litigation cost, which for this year, we expect to largely be concentrated in the first half of 2023. I’ll turn it back over to Craig for some closing comments before we begin our Q&A.
Craig Peters: Thanks, Jen. For over 28 years, Getty Images has thrived in a competitive and ever-changing landscape. Today, we remain the industry leader in this space with content and services our customers trust, rely on and value. We continue to innovate across our content, services and technology to provide our customers with incremental value and at the same time, reward our creative community and partners. We are laser focused on execution and believe we have the strategies and team in place to navigate through the current uncertainty, capture exciting growth opportunities and drive long-term shareholder value. With that, operator, please open the call for questions.
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Q&A Session
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Operator: [Operator Instructions] And our first question comes from the line of Ron Josey with Citibank.
Unidentified Analyst: Hi. This is Jake on for Ron. Thanks for the questions. So first, really, given the agency sector pressures with — you commented revenues down double digits, could you talk to us more about the mix shift to corporate? Because you’re clearly seeing traction in ramping subscriptions. Maybe you could remind us of the percent mix corporate and agency. And then just second, on the writers’ strike, could you talk to us what’s your — like how customers in the media space are responding? And then, how you’re factoring in that slowdown into your guidance given clearly, there’s some uncertainty around how long it will last? Thanks so much.
Craig Peters: Sure. Thanks, Jake. I’ll start and then, Jen, feel free to chime in with anything. So, as Jen noted, the corporate segment has been one that has been delivering growth for us 10 consecutive quarters in a row. That growth, we haven’t disclosed, but is — it obviously doesn’t fully offset for the more recent agency declines, which we think are largely driven by macro pressures. But historically, it has more than offset for kind of, I’d say, the segment declines that have persisted in agency over recent time periods. So, we would say that we’ve seen a more challenged corporate environment in the quarter. We’ve seen some deal time lines shift out. We’ve seen slightly reduced inbound, but it’s a very durable segment.
It’s one that continues to grow. And it’s one that continues to be in subscription, which gives us a lot of forward visibility on it. So, in the short term, it’s kind of net decline relative to the creative shift into the corporate market and away from the agency market. Over the long haul, it has been a net positive to the business, and we expect that to continue to be a net positive going forward. With respect to the strikes in Hollywood, we are seeing that manifest itself as productions are basically put on hold. So, those could be movies. Those could be television shows. Those could be other theatrical productions. Those could be award shows. Those could be red carpet events and such. So, those have kind of had an impact over Q2. We expect that to persist and are largely planning for that to persist in terms of the guidance that we’ve given you through the full calendar year.
So obviously, we’re hopeful that the parties are able to come together and resolve that on a more immediate basis. But right now, the guidance is reflective of a continuation of that strike to the year-end. Jen, anything that you would add?
Jen Leyden: No, I think that’s right. I think we took a conservative view to guidance, as Craig noted, and we are assuming that strike goes through year-end. I mean, we just saw in the past few days, big events like the Emmys have already been pushed out by several months. So, that’s the approach we’ve taken. I think, Jake, on your mix shift question, agency-corporate, you’ve probably heard us speak to agency being roughly 20% of our revenue in recent history. We’re seeing that dip below 20%. So, while we have exposure there, certainly, it is by far not the largest piece of our business.
Operator: Our next question comes from the line of Mark Zgutowicz with The Benchmark Company.
