Getty Images Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to Getty Images First Quarter 20 24 Earnings Conference Call. Today's call is being recorded. We have allocated 1 hour for prepared remarks and Q and A. At this time, I would like to turn the conference over to Stephen Canner, VP of Investor Relations and Treasury at Getty Images. Thank you.

Operator

You may begin.

Speaker 1

Good afternoon, and welcome to the Getty Images First Quarter 2024 Earnings Call. Joining me on today's call are Craig Peters, Chief Executive Officer and Jen Laden, 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.

Speaker 1

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 and free cash flow. We use non GAAP measures in some of our financial discussions as we believe they represent our operational performance and underlying result of our 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.

Speaker 1

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.

Speaker 2

Thanks, Stephen, and thank you to everyone for joining Getty Images' 1st quarter earnings call. I will touch on our performance and progress at a high level before Jen takes you through the full Q1 financial results. As expected, our financial performance in the Q1 was soft due to macroeconomic challenges we outlined in our last call, residual impacts from the Hollywood strikes and the pressured agency business. Within editorial, we also faced a tougher year on year compare with Q1 of 2023 being the only quarter of year over year editorial growth before the strike impacts impacted the balance of the year. For the Q1 2024 revenue was 220 $2,300,000 representing a year on year decrease of 5.7% on a reported and currency neutral basis.

Speaker 2

Adjusted EBITDA came in just over $70,200,000 for the quarter, down 7.9% reported or 7.7% currency neutral and representing 31.6% of revenue. On April 1, we closed on and funded the acquisition of Motorsport Images. Motorsport Images represents a truly iconic archive of automotive imagery and video that augments Getty Images' existing offerings. Motorsport Images also brings deep relationships across racing series such as Formula E, teams such as McLaren Racing, races and sponsors. In combination with Getty Images' established position as the official photographic partner of Formula 1, We are excited for what this addition can offer the growing number of motorsports stakeholders.

Speaker 2

Continuing on the content front, we were pleased to announce renewals with Bloomberg and the English Football Association. Earlier this week, we exclusively covered the Met Gala for a 6th consecutive time. We also added new content partnerships with the Saudi Pro League, Visual Capitalists, FilmPack, Spec T and Niche Sport Media. The Motorsport acquisition and these partners stand as a testament to our continued commitment to deliver the very best visual content to our customers. Looking forward, the Olympic Torch is now lit and on its way to Paris, where we are once again the official photographic agency of the International Olympic Committee.

Speaker 2

But before Paris, we have the upcoming UEFA Euro 20 24 tournament, where we are the official photographer supplier for UEFA. Add in the global election cycle and our teams are busy doing what they do best. On the topic of doing it best, our sport team was recognized by industry peers across a range of categories and award ceremonies during the quarter. This year, our team was honored with over 40 awards of excellence in categories, including news, sport and politics at ceremonies such as the White House News Photographers Association Awards, the SJA British Sports Journalism Awards and the NPPA's Best Photojournalism Awards. We were excited to add Southern University and A&M College in Louisiana, Lincoln University in Pennsylvania and Delaware State University as partners in our Historically Black Colleges and Universities, HBCUs, program that provides funding towards the digitization of HBCUs photographic libraries.

Speaker 2

This program continues to preserve and surface rarely seen archival photography as well as contemporary news, sport and entertainment coverage that is additive to our customers. On the generative AI front, we continue to expand our commercially safe generative AI offerings in partnership with NVIDIA, adding the tool to iStock, launching new capabilities such as in painting and out painting, and we started rolling out generative AI capabilities across our FreeShop creative library, a powerful combination that allows customers to quickly secure the exact imagery to meet their needs while benefiting from the quality, depth, breadth and creativity embedded in our creative library. It is still early days, but we're seeing positive engagement, hearing positive feedback and seeing early signs of how this adds to our business with about half of those purchasing AI plans not having previous spend with the business. At NVIDIA's ETC conference in March, we announced our upcoming custom fine tuning capabilities. Starting this month, we will offer enterprise services to custom fine tune the NVIDIA Edify Foundation model to a company's brand and visual style.

Speaker 2

As a part of custom fine tuning, we will also release a collection of APIs that provide finer control over image output, one of the biggest challenges in generative AI. Our generative API tools are already being used by leading creatives and advertisers at Dentsu, McCann and WPP. We're excited for the balance of the year. And now I'll turn the call over to Jen to take you through the more detailed financials.

Speaker 3

Our Q1 results broadly reflect the slow start to the year that we anticipated and described on our Q4 earnings call. We expected some of our known challenges to be most acute in the Q1 with continued headwinds from the residual effects of last year's Hollywood strikes, ongoing pressures in our agency business and the broader macroeconomic environment. We also had a challenging year on year comp in editorial in Q1, with Q1 of last year being the only quarter of growth for our editorial business as the remainder of 2023 was adversely impacted by the strikes. All of that said, looking ahead, we remain steadfastly confident in our ability to return to growth in 2024 as our headwinds turn into tailwinds and we flipped the calendar to a robust editorial season in the second half of the year. I'll start by highlighting some of our KPIs, which are reported on the trailing 12 month basis or LTM period ended March 31, 2024 with comparisons to the LTM period ended March 31, 2023.

Speaker 3

Total purchasing customers were 769,000, down from 829,000 in the comparable LTM period. This decrease can be attributed to lower a la carte transaction volume primarily due to both the ongoing shift of our customers into more committed annual subscription products and a still pressured agency business, which consumes nearly entirely on an a la carte basis. Importantly, the shift into more committed solutions continues to have a positive impact on annual revenue per purchasing customer, which grew by 4.5 percent to 11.74 from 11 23 in the comparable LTM period. We again saw tremendous growth in our active annual subscribers, up 79% to 262,000 from 147,000 in the 2023 LTM period. This is now the 6th consecutive quarter with growth well in excess of 50%.

Speaker 3

This performance continues to largely be driven by growth of our e commerce subscription, including our Istock Annual and Unsplash Plus subscription. In addition, the growth continued to be fueled by customers brand new to Getty Images. Out of the 262,000 annual subscribers, over 60% were new customers with nearly half of those in our growth markets across LATAM, APAC and EMEA. In a world of ever increasing visual content supply and demand, we continue to reach new customers and tap into new markets with the power of our content. Our annual subscriber revenue retention rate was 90% compared to 99.8% in the 2023 LPM period.

Speaker 3

The decline was due primarily to both expected lower revenue retention rate on some of our smaller e commerce subscribers and also a reduction in incremental a la carte subscriber revenue due to residual Hollywood strike impacts across some of our media, broadcast and production customers as well as a decline related to one time project spend in the prior period from certain corporate customers. Broadly speaking, we believe our subscription business is very healthy with revenue renewal rates generally averaging over 90% and with our enterprise customer subscription generally averaging north of 100%. Paid download volume was flat at 95,000,000 an ever compelling proof point that our content remains relevant and in demand. Our video attachment rate rose to 14% from 13.4% in LTM's Q1 2023, another quarter of steady year over year growth. We continue to see plenty of opportunity to drive more meaningful growth across our video business.

Speaker 3

Turning to our financial performance. Total revenue was 222,300,000 dollars down 5.7 percent on both a reported and a currency neutral basis. Included in these results are certain impacts of the timing of revenue recognition, which reduced year on year growth by approximately 360 basis points. Annual subscription revenue was 55.4 percent of total revenue, up from both 50 0.7% in Q1 2023 and 53.2% for the full year of 2023. In total, subscription revenue increased 3.1% on a reported basis and 3% currency neutral, driven by growth across e commerce subscription solutions.

Speaker 3

Creative revenue was 138 point $9,000,000 down 5.2 percent on both the reported and a currency neutral basis. Agency, which is accounted for entirely within Creative and is largely an a la carte business model, was down double digits, largely due to declines in smaller independent agency customers. Encouragingly, we saw improvements across our larger holding company or network agency customers, which stabilized to flat year on year. Creative a la carte was also pressured by lingering impacts from the Hollywood Strikes. Annual subscription revenue within Creative was up 7.7% on both a reported and a currency neutral basis.

Speaker 3

Our Istock annual subscriptions maintained strong momentum, growing over 27% on both a reported and a currency neutral basis, making this the 11th consecutive quarter of double digit growth. In addition, our Unsplash Plus subscription, the 1st paid subscription for Unsplash delivered another quarter with strong double digit growth. And custom content, which leverages Getty Images global network of contributors to create cost effective, customized and exclusive content to meet specific customer needs grew 11.2% year on year or 11.6% currency neutral. So overall, absent the impacts of agency, we believe our creative business is healthy and our e commerce business is growing. Editorial revenue was $79,400,000 a decrease of 6.2% year on year and 6.4% on a currency neutral basis.

Speaker 3

The decline was driven by results across our news, archive and entertainment verticals, which are up against challenging compares with double digit growth in Q1 of 2023, with offset from a strong Q1 2024 for sports. Again, Q1 of 2023 was the only quarter of growth for editorial in 2023 and over 11% currency neutral growth, with the balance of 2023 being editorial and declined every quarter due to Hollywood strike impacts. Across our major geographies on a currency neutral basis, we saw a year on year decrease of 9.4% in the Americas, 0.2% in EMEA and 2% in APAC. Revenue less our cost of revenue as a percentage of revenue remained consistently strong at 72.9% in Q1 compared with 73 0.1% in Q1 of 2023. Total SG and A expense was $100,900,000 in Q1, down from $102,200,000 in the prior year.

Speaker 3

As a percentage of revenue, our expense rate was 45.4%, up from 43.4% last year. The higher expense rate was driven primarily by lower revenue in the quarter. Excluding stock based compensation, SG and A decreased year on year 4.5 percent to $91,800,000 in the quarter. The decrease reflects our disciplined approach to cost management of lower spend driven primarily by marketing savings. As a percentage of revenue, SG and A excluding stock based comp was 41.3% compared to 40.8% in the prior year period, with the increased rate due primarily to the decrease in revenue.

Speaker 3

Adjusted EBITDA was $70,200,000 for the quarter, down 7.9% year over year and 7.7% on a currency neutral basis. Our adjusted EBITDA margin was 31.6 percent, down from 32.4 percent in Q1 of 2023. CapEx was $14,500,000 in Q1, down $1,100,000 year over year. CapEx as a percentage of revenue was 6.5% compared to 6.6% in the prior year period and well within our expected range of 5% to 7% of revenue. Free cash flow was $7,000,000 in Q1 compared to $16,400,000 in Q1 2023.

Speaker 3

The decline in free cash flow during Q1 was driven by our adjusted EBITDA decline and working capital changes related to the timing of receivables and payables, including our semiannual interest payment on our senior notes, which is due every March September. Free cash flow is dated net of cash interest expense of 39,300,000 and cash taxes paid of $5,000,000 in the first quarter. We finished the quarter with $134,200,000 of balance sheet cash, up $17,400,000 from our ending balance in Q1 of 2023 and down $2,400,000 dollars from the end of 2023. This includes a $2,600,000 voluntary debt repayment in the Q1 of 2024. As of March 31, we had total debt outstanding of $1,386,000,000 which included 300,000,000 dollars of 9.75 percent senior notes, dollars 634,400,000 USD term loan with an applicable interest rate of 9.909 percent, €451,900,000 euro term loan converted using exchange rates as of March 31, 2024 with an applicable rate of 8.875%.

Speaker 3

We also have a $150,000,000 revolver that remains undrawn. Our net leverage was 4.2x at the end of Q1, unchanged from year end 2023. In early May, we used $30,000,000 of our balance sheet cash to repay a portion of our USD term loan. This voluntary repayment demonstrates our ongoing commitment to utilize our cash flow to further deleverage the balance sheet. We also continue to look for the optimal opportunity and market conditions to refinance our debt.

Speaker 3

Based on the foreign exchange rates and applicable interest rates on our debt balance as of March 31, and taking into account the $30,000,000 debt repayment we just made in May, our 2023 cash interest expense is expected to be approximately $131,000,000 Of course, our actual annual interest expense remains subject to changes in the interest rate environment, which we outline in more detail within our SEC filings. In summary, we have navigated through what we expect to be the most challenging quarter of our financial year. We remain fiscally disciplined. We continue to be laser focused on execution and we are well positioned to see a return to top line growth as we navigate through the remainder of 2024. Turning now to our outlook for the full year 2024.

Speaker 3

We continue to expect revenue of $928,000,000 to $947,000,000 representing growth of 1.3% to 3.3% year on year and currency neutral growth of 1% to 3%. This is unchanged from prior guidance. We also continue to expect adjusted EBITDA of 298,000,000 down 1.2% year over year and down 1.5% currency neutral. This is also unchanged from our prior guidance. Please note, we have not updated estimated FX impacts at this time given the recent volatility in the currency market.

Speaker 3

Our guidance continues to assume the euro at 1.09 and the GBP at 1.27. We will keep a close eye on FX rates and if appropriate, we'll provide an update on our next earnings call. With that, operator, please open the call for questions.

Operator

And we'll take our first question from Ron Guisely with Citi. Your line is now open.

Speaker 4

Craig, I wanted to start out with you. I think you talked about some macro challenges in 1Q and listed a few things, but Hollywood Strikes was also in there as those are finished and winding down, I guess. Just can you talk to us about the progress here? When do you think things sort of normalize to a certain extent going forward? Is that going to be 2Q or maybe in the back half?

Speaker 4

And then Jen, I wanted to follow-up. You had some interesting comments on the subscriber retention rate. I think you talked about smaller e commerce subs, lower a la carte, one time spending changes. But maybe if you could unpack those a little bit more to better understand this retention rate? And do you think these can like level off at this 90% level?

Speaker 4

Or should we expect continued declines? Thank you.

Speaker 2

Great. Thanks, Ron. So I'll take first and then defer to Jen on the subretention side

Speaker 5

of things. So macro, I'd say within the production side of things, we continue to see a bit of slowness throughout Q1 as those schedules and try to realign up after the strike. I would say, we probably expect maybe a little bit more of that into Q2 and then we probably expect it to be kind of back at, what I'd say, normal levels within the second half of the year. I don't think we fully expect, given some of the streaming items and such to necessarily come back to where it was fully pre strikes. But in terms of what we expected within our guidance and our budgeting this year, I think we're largely tracking to kind of expectations from a timing standpoint.

Speaker 3

Hi, Ron. So on the revenue retention rate, yes, so there's a few things to unpack in there. I'll start with, I think, the end of your question, which is where do we see this kind of trending to or normalizing back to. And I think the answer there is that we'll start to see this over time start to tick back up into that mid-ninety percent range. And the reason for that is, as we're talking about this really phenomenal subscriber growth, where we're seeing that growth, as we commented on is really in those smaller e commerce subscriptions with a lot of that coming from brand new customers and markets of the world that we're just starting to tap into.

Speaker 3

So with that comes, those are lower commitment, lower price point subscription products, newer customers, as you can imagine, those do come at the start with lower revenue retention rates. Now each and every one of those provides an opportunity for us to upsell and grow with the customer over time as their content needs expands, as their budgets expand. So they start off low, but that is a really nice opportunity for us to grow those customers over time. But that mix to what we're seeing to 90% now, a good chunk of that driver is that mix of growth in those smaller e commerce predominantly new customers. The other thing I commented on there to this metric, as you know, accounts not just the subscription revenue, but revenue that these subscribers are spending outside of their subscription.

Speaker 3

So what we're seeing here is a bit of a contraction in essentially a la carte spend outside of the subscription in this period. And we think that's largely due to some of that residual impact from Hollywood strikes, some macro impacts, just a contraction of budgets related to some of those dynamics. So a little bit less spend outside of subscription, which again, as Craig just commented, we start to see those conditions improve. We'd expect to see that improve as well.

Speaker 4

Great. Thank you, Jen. Thank you, Craig.

Speaker 3

You're welcome.

Speaker 6

You're welcome.

Operator

We'll take our next question from Mark Zegowitz with The Benchmark Company. Your line is open.

Speaker 6

Thank you. Good evening. Jim, maybe just a quick follow-up on when you talk about the subscription and are reverting back up to the mid-90s. Is that something we should expect that's sort of baked into your guidance? Or is that more of a into the 2025 timeframe?

Speaker 6

And then just if you could confirm that enterprise remained at roughly percent NRR in 1Q?

Speaker 3

Yes. So I think that's something that we'd expect to see more of as an exit rate, as we start to come out of 2024 and really start to unwind some of these bigger strike and macro impacts. So I don't think we'd expect to see that really jump right back up in Q2 per se, but something that we start to see start ticking up as we exit the year. And then on enterprise, yes, as we noted, we see the revenue renewal rates for enterprise subscribers still averaging north of 100%.

Speaker 6

Okay, super. And then maybe just a couple quick follow ups. Looking at corporate and agency separately in terms of how they trended in the quarter, corporate reaccelerated in 4Q. I was just curious whether that moderated a bit this quarter. And then agency, which was down mid single digits year over year exiting the year, did that stabilize in 1Q?

Speaker 6

And then one just last one if I could on video attach rate. I noticed that was sort of flattish in the quarter. Just curious, given that's a nice off sell opportunity for you guys, how we should be thinking about that trend line over the next, call it, 2 years or so? Thanks.

Speaker 3

Yes, sure. So on corporate, good memory, Mark. We exited 2023 with Q4 corporate was back in growth. I'm happy to say that Q1 corporate remained in growth, so continuing to see those trend lines. For agency, Q1 was back down low double digit declines again, so more or less in line what we were seeing as we exited the year.

Speaker 3

We saw that improve a bit to higher single digit declines in Q4, But that 11% decline is broadly speaking what we saw. Just remind me again what your other question was.

Speaker 6

Yes, sorry. It's on the video attach rate. Yes. I'm curious that So what are the drivers of that climbing up and over what period of time should we be thinking about maybe milestones of that growing?

Speaker 3

Yes. Yes. So that's one where we have seen pretty much every quarter we've seen that tick up this quarter kind of flattening out a bit. So there's a few things there. When we think about what the opportunities are, I mean, that's really an upsell opportunity, right?

Speaker 3

So it's an upsell opportunity, as you just noted, for us to make sure our customers know we have video, make sure we're merchandising video well, make sure all of our subscription customers know that video is option, be talking about video. When you come to the site, do you see video, do you see imagery, all of those things that just come with sort of packaging up, marketing, upselling, customer conversations. So that continues to be a focus for us. I think when we think about the math that goes into this equation, you have to correlate this back to some of that annual subscriber growth, where we commented, big amount of that growth is new customers, big amount of that growth is sitting in e commerce subscription. Broadly speaking, those smaller e commerce subs don't have video turned on yet, right?

Speaker 3

So there's a bit of a math equation here as you bring in some of those new customers who are just not in video yet within the Getty ecosystem. That plays into the math of that attach rate. And again, that's opportunity for us over time to migrate those customers as they grow in both budget and content needs.

Speaker 6

Got it. Makes sense. Thanks, Jen.

Operator

You're welcome.

Speaker 5

I would just add to that that the Unsplash subscription doesn't have video on an option today on the site. So as to Jen's point, as we continue to grow those subs, we basically don't have current opportunity for attachment. Although we did launch illustrations this week, on as part of that subscription and that initial take up is going well and you can certainly expect video downstream at some point. But those are all opportunities.

Speaker 6

Good to know. Thanks, Craig.

Operator

We have no further questions in the queue at this time. I would like to thank everyone for your participation. You may disconnect at any time. This does conclude today's program.

Speaker 2

Thank you

Speaker 3

all. Thank you.

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