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spk10: Good afternoon and welcome to Getty Images' third quarter of 2023 earnings call. Today's call is being recorded. We have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the call over to Stephen Kerner, Vice President of Investor Relations and Treasury at Getty Images. Thank you. You may begin.
spk09: Good afternoon. And welcome to Getty Images' third quarter 2023 earnings call. Joining me on today's call are Craig Peters, Chief Executive Officer, and Jen Layden, 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 statement section of today's press release and in our filings for 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.
spk04: Thanks, Stephen, and thanks to everyone for joining our Getty Images Third Quarter 2023 Earnings Call. I will start my remarks by addressing the recent court ruling with respect to claims by warrant holders following our D-SPAC. We disagree with the ruling. We believe Getty Images acted in line with our obligations under the warrant agreement and with federal securities laws. We are appealing the portion of the judgment in favor of the plaintiffs. To proceed with the appeal, we are securing a surety bond totaling 111% of the damages award. limiting any impact to our day-to-day operations. We expect to begin amortizing the annual cost of the surety bond in Q4. Jen will take you through the company's full third quarter financial results, but as usual, I will touch on her performance and progress at a high level. Third quarter 2023 reported revenue was $229.3 million. representing a year-on-year decline of 0.5% on a reported basis and a currency neutral decline of 1.3%. Our adjusted EBITDA finished at $80.3 million for the quarter. This reflects a reported year-on-year increase of 3.4% and a currency neutral increase of 2.5%. with EBITDA benefiting from disciplined actions taken and maintained since earlier this year to manage costs in the current environment. While it was good to see the settlement of the writer's strike, the actor's strike continued to equate to significantly reduced content production and PR activities across our media and entertainment customers for the entirety of Q3. While it's difficult to predict how quickly business can ramp up following last week's settlement of the actor strike, we expect to see an adverse impact related to the strike through at least the end of the year. With increased global uncertainty, we saw the U.S. dollar strengthen relative to our expectations, and we continue to see weakness across certain geographic and customer markets. As a result, our reported results lagged our estimates, and we expect the strong dollar to persist through the fourth quarter. We are also facing a tougher Q4 compare due to the unique timing of the 2022 Men's World Cup and the 2022 US elections. As a result of these factors, Jen will take you through updates to our full year guidance. As a company, we have previously seen and navigated similar challenges over our almost 30-year history. We remain focused on our customers on our execution and on investing in the long term, but being cost disciplined in the short term in light of our near-term environment. So with that as a backdrop, I'd like to highlight some of the progress we made within the quarter. In partnership with NVIDIA, we launched our generative AI service at the end of the quarter. The service is truly unique and addresses fundamental customer needs. Our model is trained solely with Getty Images' best-in-class content addressing the legal risk that is pervasive in many other models that are trained with third-party intellectual property scraped from the web. We also believe this equates to higher quality outputs as a cake is only as good as its ingredients. With generative AI by Getty Images, users can be confident that the content they generate is safe to use in commercial settings and will not include any trademark brands, products, characters, or identifiable people. It also does not produce deep fakes or emulate the style of specific artists, which we believe is valued by our editorial and creative customers, respectively. We are rewarding our contributors with an ongoing share of each and every dollar we earn from the service. Last, but certainly not least, the service and all of its outputs come with Getty Images uncapped indemnification. In terms of the economics, customers pay to generate versus download, which better aligns to our costs and recognize the value of ideation. Initial customer feedback and engagement with the service has been really positive. And we have already introduced new features to the service, such as being able to prompt in over 70 languages. And we're engaged with a limited set of customers to custom train models to their IP and brand needs. Alongside our amazing pre-shot offering and custom content, We're excited to offer a complimentary new service that helps our customers elevate their creativity, save them time, save them money, and does not expose them to legal risk. We continue to drive increases in our annual subscriber counts, primarily through iStock and Unsplash. We grew our annual subscribers by more than 88%, and more than 35,000 of those subscribers were from our targeted growth markets outside of North America and Western Europe. We renewed our agreement as the authorized photographic agency with the Rugby World Cup to deliver an industry-leading service in the creation and distribution of world-class sports content. Getty Images is the official photographer or photographic partner to over 120 of the world's leading sports governing bodies, leagues, and clubs who come to us for our industry-leading expertise in editorial operations, award-winning photographic talent, and unrivaled global distribution platform. Also in the quarter, we are pleased to partner with BBC Studios to launch a platform accelerating our archival supply chain. The platform gives our customers the opportunity to search BBC Archive content online and opens up access to more than 57,000 newly digitized programs. The platform is a significant breakthrough in making the BBC Archival content more accessible for our customers around the world and a key progress item within our overall video growth strategy. While it is a constant I would be remiss if I did not call out the efforts of our world-class team and partners who risk and sacrifice to cover events around the globe. Whether these are events and atrocities in the Middle East, the Ukraine, the drama in U.S. Capitol and courts, the extreme weather events or natural disasters, humanitarian and wildlife crises, the list goes on. I'm extremely proud of the work and the important role it plays to engage and inform the public. And with that, I'll hand over to Jen to take you through the more detailed financials.
spk12: As Craig highlighted, during the third quarter, we continued to see pressure on our top-line performance, increased FX volatility, but overall stability in our adjusted EBITDA margin and strength across our underlying operating metrics. I'll start by talking about some of our KPIs. Note, as always, today's press release contains information on all seven of our KPIs, which are reported as of the trailing 12 months for LTM period ended September 30th, 2023, with comparisons to the LTM period ended September 30th, 2022. Total purchasing customers were 826,000 compared to 837,000 in the comparable LTM period. A slight pullback as we see some drop-off in our a la carte purchaser volume as we continue to shift into subscriptions. Our revenue per purchasing customer remains strong at approximately $1,100 per customer. We delivered another quarter of impressive growth in annual subscribers, adding 95,000 to reach 202,000, an increase of approximately 88% over the corresponding period in 2022, fueled primarily by our e-commerce subscriptions, including our iStock Annual and our Unsplash Plus subscriptions. This marks our fourth consecutive quarter of annual subscriber growth in excess of 50%. We continue to execute well against our geographic expansion efforts with approximately 35,000 new annual subscribers in our growth markets across LATAM, APAC, and EMEA. We also continue to see growth in our core markets, which includes the US, Canada, France, Germany, the UK, Japan, and Australia, where we added approximately 60,000 new annual subscribers. Annual subscriber growth continues to expand our mix of revenue from subscription products. which rose to 55.9% in the third quarter, up from 51.8% in Q2, and up from 49.4% as of Q3 2022. Our revenue retention rate for our annual subscribers is 94.5% compared to 103% in the 2022 LTM period. The decline was primarily driven by lower revenue retention rates on some of our smaller e-commerce subscribers and a reduction in a la carte revenue from customers who previously exceeded their subscription download tax. Paid download volume was up approximately 1% at 95 million. Our video attachment rate continues to grow, ending in the quarter at 13.7%, up from 12.7% in Q3 2022. We continue to see opportunities to drive video adoption across our customer base and expect to see this metric continue to tick up. Turning to our financial performance, with revenue results reflecting adverse impacts from the Hollywood strike, ongoing macroeconomic pressures, and a still challenging agency business. Revenue results were also impacted by a more muted year-on-year benefit from FX than we expected due to a strengthening U.S. dollar with respect to the euro and the pound in the second half of the quarter. Assuming rates hold relatively steady to where we see them today, we now expect a more limited foreign currency tailwind in the fourth quarter than previously anticipated. Total revenue was down 0.5% year-on-year on a reported basis and 1.3% on a currency neutral basis. Included in these results are certain impacts of the timing of revenue recognition, which contributed approximately 440 basis points to the year-on-year revenue growth in the quarter. With positive momentum in our subscription business, Annual subscription revenue increased 12.6% on a recorded basis and 11.8% on a current and mutual basis, driven by further gains across our premium access and e-commerce subscription offering. Creative revenue was 145.2 million, flat year on year, and down 0.8% on a current and mutual basis. Creative results reflect pressures in the agency segment, which was down double digits year-on-year, as well as impacts from the Hollywood strike, with production houses largely dormant in the quarter. Creative revenue from annual subscription products grew 16.9% year-on-year and 16% on a currency-neutral basis, led by Premium Access, our largest subscription product. Within our e-commerce business, our successful customer acquisition efforts grow growth in our annual iStock subscription products of 15.2% on a reported basis and 14.2% currency neutral. We also saw 8.1% year-on-year or 8.3% currency neutral growth in our custom content subscription, which provides customers with cost-effective, customized, exclusive, and project-specific content to meet their needs. Editorial revenue was $79.9 million in Q3, a decrease of 2.3% year-on-year and 3.3% on a currency-neutral basis. The decline was driven by archives and entertainment, which were negatively impacted by the Hollywood strike, as well as a challenging year-on-year compare due to 2022 events such as Queen Elizabeth's funeral and the US midterm election. However, we did see gains in sports, which benefited from our team's extraordinary coverage of the 2023 FIFA Women's World Cup. Geographically, we saw year-on-year currency neutral growth of 3.8% in EMEA, while the Americas and APAC were down 3.7% and 3.9% respectively. Revenue less or cost of revenue as a percentage of revenue remains a consistent metric for us, with Q3 at 73.4% compared with 72.2% in Q2 of 2022. Total SG&A expense was $97.3 million, up $5.7 million year on year, with our expense rate increasing to 42.4% of our revenue up from 39.7% last year. The higher year-on-year expense was due to higher staff costs, primarily 9.2 million of stock-based compensation related to the vesting of employee equity awards compared with 2.8 million of equity-based comp in Q3 of 2022. Excluding stock-based compensation, SG&A decreased year-on-year 0.8% to $88.1 million in the quarter. As a percentage of revenue, SG&A including stock-based comp was 38.4% of revenue, roughly flat to 38.5% of revenue in the prior year period. The 0.8% year-on-year decline in spend is largely a result of the proactive cost actions executed earlier this year which remain in place. The larger of these cost actions are across marketing reductions and the hiring freeze. We anticipate maintaining these actions at least through to the end of the year. Adjusted EBITDA was 80.3 million, up 3.4% year-over-year, and up 2.5% on a currency-neutral basis. Our adjusted EBITDA margin was 35% an increase of 130 basis points from 33.7% in Q3 2022. This expansion in EBITDA margin is a testament to our fiscal discipline, implementing cost actions earlier this year at the first indication of top line headwinds. CapEx was 12.4 million, a decrease of 3.3 million from Q3 of last year. Prior year CapEx included costs for our London office relocation and acquisition of imagery related to the Q4 2022 launch of our unsplashed subscription, driving some of this year-on-year decrease. CapEx has a percentage of revenue of 5.4% versus 6.8% in the prior year. Adjusted EBITDA less capex was 67.9 million compared to 62 million in Q3 last year. Adjusted EBITDA less capex margin was 29.6% up from 26.9% in Q3 22. Free cash flow was 12.8 million down from 33.2 million in Q3 2022. The decrease in free cash flow primarily reflects the impact of our year-to-date financial performance and working capital changes related to timing of receivable and payable. Free cash flow is stated net as cash interest expense of $38.3 million in Q3, an increase of $2.6 million over the prior year. Cash taxes for the quarter was $7.6 million, an increase from $4.7 million in Q3 of 2022. Our ending cash balance on September 30th was $113.5 million, down $7.8 million from Q2 2023, and an increase of $41.7 million from our ending cash balance in Q3 of 2022. As of September 30th, we had total outstanding debt of $1.383 billion, which included $300 million of 9.75% senior notes, $639.6 million USD term loans with an applicable interest rate of 9.99%, and $443.6 million of Euro term loans. converted using exchange rates as of September 30th, 2023, with an applicable interest rate of 9%. Year-to-date, we have applied $47.8 million towards debt paydown, including a voluntary $20 million payment in the third quarter. We ended the quarter with a net leverage of 4.2 times, down from 4.4 times at year-end 2022. we will continue to remain disciplined deploying our capital to what we believe is its highest and best use, with a continued emphasis on our balance sheet optimization and further deleveraging. Based on the foreign exchange rates and applicable interest rates on our debt balance as of September 30th, and taking into account $355 million of interest rate swap agreements, our 2023 cash interest expense is expected to be about $122.5 million. Now turning to our guidance. Based on our expectations that the fourth quarter will continue to see top line and FX pressures, we are lowering our 2023 guidance as follows. We expect revenue of $900 million to $910 million. down 2.8% to 1.8% year-over-year, and on a currency-neutral basis, down 2.3% to 1.2%. Assuming current FX rates hold, the revenue guidance includes an overall FX headwind of about $5.4 million in the full year 2023. This includes the $8.5 million negative impact year-to-date and an estimated tailwind of approximately $3.1 million in the fourth quarter of 2023. We expect adjusted EBITDA of $287 million to $295 million, down 5.8% to 3.4% year-over-year on a reported basis, and down 5.4% to 2.9% on a currency-neutral basis. Included in the adjusted EBITDA expectation is an approximate $1.6 million adverse impact from FS, which includes the 2.9 million year-to-date impact and an estimated tailwind of approximately 1.3 million in the fourth quarter of 2023. In addition, the revised adjusted EBITDA guidance reflects the change to how we are classifying legal fees associated with the warrant litigation. The $6.4 million in legal fees incurred year-to-date through Q3 and the $1.1 million incurred in the fourth quarter of 2022 were previously reported within SG&A. These expenses are now included in loss on litigation, which is a below-the-line item and is excluded from adjusted EBITDA. As I just mentioned, this guidance assumes continued macroeconomic pressures, adverse impacts from the Hollywood strike, and pressures on our agency business through Q4. It also assumes costs related to other ongoing litigation and increased costs tied to operating as a public company. We believe that the proactive approach we have taken to control costs and our ability to stay nimble while focusing on improved execution will best position the company to deliver on the updated guidance in the current economic environment. With that, operator, please open the call for questions.
spk10: Thank you, ma'am. Ladies and gentlemen, we will now be conducting the question and answer session. If you'd like to ask a question, please press start in one on your telephone keypad. A confirmation turn will indicate that Ilan is in the question queue. You may press star 2 to leave the question queue. Our first question comes from Ron Gervais of Citi. Please go ahead.
spk14: Great. Thanks for taking the questions. Maybe one for Craig and one for Jen. Craig, on the Hollywood strikes, now that they're close to being done and understood, the impacts continue here in the 4Q. Help us understand a little bit more how this might play out in the 24 as things might normalize going forward. I think that'd be helpful. And then, Jen, on the cost side, with gross margins expanding in the quarter and 35% EBITDA margins, talk to us about the outperformance maybe in gross margins and whether this can continue going forward. Thank you.
spk04: Great. Thanks, Ron, and appreciate you making time for the call and appreciate the questions. On the strike, first let me start off by saying I think the impacts have been a bit more severe than even Jen and I and the management team projected in our last call. So we've seen a softer part of the business within entertainment and in media and production side of things than even we forecast. I think that is a good starting point for context, especially as we look into Q4. We're not expecting any significant reversal of that in Q4. We do expect that we will start to see the reversal of that in Q1. Likely still some ramp as productions come back online. So we probably won't be at full, kind of full back to business across those elements of the business until probably Q2. So that's our best current view based off the conversations that our teams are having across the industry. So I guess what we're saying is it was a little bit more impactful in a full Q3 than what we projected at the end of Q2 or we're seeing at the end of Q2. Q4, we expect that to continue. We expect improvements over Q1, but not fully back to 100% until Q2.
spk12: Yeah, and on the margin side, gross margin, you're right, a slight tick up to the 73% range. We've seen that number before. As you know, we're pretty consistently around 72%. That can swing up or down nearly entirely due to the product mix in the quarter. But as we think about what we'd expect to see that land at, I would still think that'd be in the 72% range. Similar on the EBITDA side, 35% that is higher. We definitely have a history of north of 30%. 35% is a touch higher than certainly what we've been trending to. But as we spoke to in the prepared remarks, we did have a significant amount of very proactive cost measures that we took pretty early on in Q2. at the very first time of what we thought was going to be some top line pressure. So we're seeing the benefits of that margin. But again, if we think about what we'd expect to see that stabilize that, I would, you know, anchor ourselves down to that 32% give or take range of what we'd expect to see normally.
spk14: Okay. Thank you, Craig. Thank you, Jen.
spk00: Thank you.
spk10: Our next question comes from Danny Pfeiffer of J.P. Morgan. Please go ahead.
spk13: Hey, thanks for the questions. I just have two. Can you maybe talk about what you've been seeing from your news or media customers since the start of the Middle East conflict? And then for the second, last quarter you mentioned you saw a corporate customer deal timeline shift and slightly reduced inbounds. Can you maybe speak to what you saw from those customers in 3Q? Thanks.
spk04: Yeah, thanks, Danny. Again, thanks for making time for the call. On the news media side of things, with respect to the Middle East, clearly it's a critical story for our clients to be covering. We are very grateful, not only for the staff that we have in that market covering the crisis, but also for our partners that are investing and risking their staff in those markets. And I would call out specifically Age on Friends Press and Anadolu is two critical partners to our coverage there. So it is something that is consuming a lot of cycles in the media. Therefore, it is something where we're seeing a lot of our imagery be utilized to narrate that story and provide visibility into that story. But I wouldn't expect it to have a financial impact. benefit within the company. Really, it's a shift in the news cycle into that consumption and that consumption actually, from our perspective, can be quite costly to maintain the coverage uh, in order to support it. So, uh, you know, operating in, in, in war zones is, is not something that, that, uh, is without cost. So, um, certainly I think, you know, Getty's playing its normal, uh, important role, uh, within bringing visibility into those events. We don't take that role lightly in any way, shape or form. And we're very proud of our staff and we're proud of our partners, uh, that, that take on that coverage. On the corp side of things, in terms of the corporate segment, I would say that we saw a continuation of what we saw and spoke to in Q2. Again, there were certain parts of the corporate market. We mentioned technology. We mentioned some of the things like the crypto space where that softness carried over and continues. But I don't think it got worse. I did mention, you know, on the media, entertainment and production side of things, that was probably it was worse in Q3 than what we projected and certainly what we saw in Q2. But in the corporate, we're continuing to still see that kind of conservatism and continuing to see that kind of concentrated within certain submarkets admit more. I am hopeful that, you know, we start to see that loosen up a bit. But at this point in time, we didn't see anything really different from Q2 to Q3 in those areas.
spk08: Thanks.
spk06: You got it.
spk10: Our next question comes from Mark of the Benchmark Company. Please go ahead.
spk16: Hi. Good evening, Craig and Jen. Craig, just curious what the pipeline is developing for your Gen AI product and If you could make that tangible in any way in terms of revenue in a rough timeline, that would certainly be helpful. Jen, just a question on the revenue, year-over-year revenue impact from by-stock subscription conversion to or from a la carte. I'm just trying to get a sense of how much of that was in the quarter. And then out of that, if you look at your last 12-month subscription retention, it declined about 400 BIFs quarter-over-quarter to roughly 95%. So I'm just curious what might be driving that. Is that premium access, subscription revenue declining in absolute dollars, or what might be driving that? Thanks.
spk04: Yeah, okay. I'll throw to Jen on the iStock item. I'll handle the REV retention. I'll just reiterate some of Jen's remarks that are up front. which a lot of that is our push into smaller subscriptions, which do have a naturally lower rate of revenue retention. But we've also seen some of our media clients in the premium access side of things not move into overage on their deals. So typically our deals are not unlimited. They carry caps with them. And as the media industry continues to struggle, not only due to the strike, but also due to the macro ad landscape, we've seen some pullback on those, as Jen mentioned in her remarks. On the Gen AI side of things, I'm not going to be able to, Mark, give you any specifics at this time. What I can tell you is what we said in the prepared remarks, which is We're seeing really good engagement with the customers. We're hearing really good feedback. I spent a good chunk of the quarter actually engaged with our customers. In fact, today Omnicom put out a press release of their own about how they were engaged with us in the early stages of the development process and moving in now into the commercial side of things. But it's one that we are selling a service that is fully indemnified and legally clear. So it is one that goes through the hoops that you would expect in terms of the corporate contracting side of things, whether that's legal or sourcing, et cetera, to make sure that these technologies are as clean and as advertised. So we're still working through our pipelines, but the good news is those pipelines are growing. I still would set the expectation that we don't expect any material revenues in this calendar year. And we'll start to probably try to give you a better visibility of how that's progressing in 2024. But I would still expect it to be a fairly limited amount of revenue to the company overall in 2024.
spk05: John, do you want to take that talk?
spk12: Yeah, on the subscriptions piece, I think, Craig, you touched on their revenue retention, but more broadly, you know, that growth in annual subscribers is actually something we feel really good about. We mentioned the prepared remarks. It's the fourth straight quarter where we've seen the year-on-year growth in that count be north of 50%. And at its base value, that's a great metric, but when you pull that apart, you know, at least 50% in the quarter of the new annual subscribers that we've taken on are new customers to Getty Images. We touched on the prepared remarks that these are customers who, you know, a good portion of them exist in some of the growth markets that we've very deliberately been trying to tap into. And then we're also seeing customers move into subscriptions in the core markets. So, you know, the mix of where we're seeing that growth is really positive for us over the long term. You know, as Craig noted, we do see a step back in the revenue retention rate as a result of some of these subscribers being on, you know, those smaller e-commerce subscriptions. But when we look at, you know, a broader metric, which is just revenue per purchasing customer, that remains fairly consistently north of $1,100. So, you know, overall, it's a good metric for us. And, you know, we're excited to see where that continues to go.
spk04: Yeah, and I would just add to that, Jen. Mark, I think one of the things that we haven't talked about that we actually feel pretty good about in the business, we know that there's a lot of impact, strike, and currency in items, but we're seeing paid download growth within the business. We're seeing customer counts and volumes hold up quite well. We're seeing good, solid renewals across the mix. And I think what we're seeing when we look and watch what we're seeing elsewhere in the marketplace of which you cover some of those, we're not seeing the same levels of decline across our licensing business. And our creative business is actually holding up quite well. As Jen mentioned, our revenues are down more in the editorial side of things for the reasons we referenced earlier. But We are seeing really good, durable kind of customer commitment into the business across creative. We're seeing that across our e-commerce business holding up on a relative basis quite well. So those are some areas that we feel good about where I can point to, you know, some strength and hopefully so we'll get to add back some things in the coming quarters as the markets normalize a bit.
spk15: Oh, that's so helpful. Maybe I could squeeze one last one in on the agency business.
spk16: Just curious how that pays on a quarter-over-quarter basis in terms of revenue growth, and are we starting to see that sort of baseline concentration there has obviously come down. Just curious if we've kind of seen the trough there. Thanks.
spk04: We were in Q3, we did not see the drop. As Jen mentioned, we were continuing to be down double digits in that segment of the business. I would say it was a little bit more uneven. So there is some good news in there combined with some bad news. But so I hope that some of the activities that we're taking on and engagement with those agency clients around things like generative AI are going to bode well going out into the future. But in Q3, we were down kind of consistent to where we were in Q2. But hopefully, again, we'll see some benefits of that going forward.
spk02: Got it. All right. Thanks very much. Appreciate it.
spk10: Thank you. Ladies and gentlemen, just a reminder, if you have a question, you're welcome to raise a star and then 1 to place itself in the question queue. Our next question comes from Tim Nullen of Macquarie. Please go ahead.
spk03: Hi, thanks very much. Could I ask for some follow-up on the warrant situation, please? Just if you could help explain a bit more what the financial impact to you is, if it's $88 million or so of damages. you have $60 million of insurance, I guess, against that, then do we need to worry about that net difference there as a potential payout that you're going to have to make? And if you could explain how the surety bond works, please. You mentioned the amortization of it. If you could give the terms or just how that works in general, they're very helpful. Thanks.
spk04: I'll pass the gen on the bond side of things. I'll do my best to cover off on the initial parts of the judgment and the exposure with respect to the warrant. So first off, I'll reiterate, we disagree with the ruling, and we have every intent to appeal. And we think the facts are in our favor. And we think we did everything right under the warrant agreement, as well as with securities law. So that's first and foremost. I think that this is not something that we view as settled. With respect to the warrant, I think you largely got it right, Tim. You know, there's insurance up to that 60. There's, you know, underneath that is covered legal costs plus judgment. There will be an inflator on the judgment as we appeal if it were to ultimately come to that. So that's why we're taking a bond that's greater than ultimately the judgment itself in order to cover that. And so, yeah, I mean, the exposure, if we were, in fact, to lose on appeal and exhaust our options of continuing to take this forward, you would basically be looking at those net amounts.
spk03: Right, so around $30 million or so difference.
spk12: Tim, you probably haven't had a chance to come through the filings yet, but what you'll see on there is we've booked a loss on litigation of about $112.5 million, and then netted against that is the insurance recoverable of $60 million. So in that loss on litigation is going to be damages, interest, pre- and post-judgment, and then legal fees. And then as we obtain the bond, we will start to amortize the cost of that bond from the time we place the bond through to however long the bond is in place to that same loss on litigation account.
spk04: Okay. And the cost of that bond is roughly in between the 1% and 2% range.
spk12: Yeah, it's hovering around the 1.5% range. Okay.
spk03: Okay. I think I get the principles there. Thanks very much. Okay. Thanks, Tim.
spk10: Thank you. Ladies and gentlemen, that was the final question.
spk04: Great. Well, thank you all for making time. Very much appreciated. Appreciate the questions and look forward to the next call. Thank you.
spk10: Thank you. Thank you. Ladies and gentlemen, that concludes today's event. Thank you for joining us.
spk08: and you may now disconnect your lines. Thank you. Music Music Music Thank you. Thank you. music music © transcript Emily Beynon you Thank you. Thank you. Thank you.
spk10: Good afternoon and welcome to Getty Images' third quarter of 2023 earnings call. Today's call is being recorded. We have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the call over to Stephen Cunner, Vice President of Investor Relations and Treasury at Getty Images. Thank you. You may begin.
spk09: Good afternoon. And welcome to Getty Images' third quarter 2023 earnings call. Joining me on today's call are Craig Peters, Chief Executive Officer, and Jen Layden, 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 statement section of today's press release and in our filings for 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.
spk04: Thanks, Stephen, and thanks to everyone for joining our Getty Images Third Quarter 2023 Earnings Call. I will start my remarks by addressing the recent court ruling with respect to claims by warrant holders following our D-SPAC. We disagree with the ruling. We believe Getty Images acted in line with our obligations under the warrant agreement and with federal securities laws. We are appealing the portion of the judgment in favor of the plaintiffs. To proceed with the appeal, we are securing a surety bond totaling 111% of the damages award. limiting any impact to our day-to-day operations. We expect to begin amortizing the annual cost of the surety bond in Q4. Jen will take you through the company's full third quarter financial results, but as usual, I will touch on her performance and progress at a high level. Third quarter 2023 reported revenue was $229.3 million. representing a year-on-year decline of 0.5% on a reported basis and a currency neutral decline of 1.3%. Our adjusted EBITDA finished at $80.3 million for the quarter. This reflects a reported year-on-year increase of 3.4% and a currency neutral increase of 2.5%. with EBITDA benefiting from disciplined actions taken and maintained since earlier this year to manage costs in the current environment. While it was good to see the settlement of the writer's strike, the actor's strike continued to equate to significantly reduced content production and PR activities across our media and entertainment customers for the entirety of Q3. While difficult to predict how quickly business can ramp up following last week's settlement of the after strike, we expect to see an adverse impact related to the strike through at least the end of the year. With increased global uncertainty, we saw the U.S. dollar strengthen relative to our expectations, and we continue to see weakness across certain geographic and customer markets. As a result, our reported results lagged our estimates, and we expect the strong dollar to persist through the fourth quarter. We are also facing a tougher Q4 compare due to the unique timing of the 2022 Men's World Cup and the 2022 U.S. elections. As a result of these factors, Jen will take you through updates to our full year guidance. As a company, we have previously seen and navigated similar challenges over our almost 30 year history. We remain focused on our customers on our execution and on investing in the long term, but being cost disciplined in the short term in light of our near-term environment. So with that as a backdrop, I'd like to highlight some of the progress we made within the quarter. In partnership with NVIDIA, we launched our generative AI service at the end of the quarter. The service is truly unique and addresses fundamental customer needs. Our model is trained solely with Getty Images' best-in-class content addressing the legal risk that is pervasive in many other models that are trained with third-party intellectual property scraped from the web. We also believe this equates to higher quality outputs as a cake is only as good as its ingredients. With generative AI by Getty Images, users can be confident that the content they generate is safe to use in commercial settings and will not include any trademark brands, products, characters, or identifiable people. It also does not produce deep fakes or emulate the style of specific artists, which we believe is valued by our editorial and creative customers, respectively. We are rewarding our contributors with an ongoing share of each and every dollar we earn from the service. Last, but certainly not least, the service and all of its outputs come with Getty Images uncapped indemnification. In terms of the economics, customers pay to generate versus download, which better aligns to our costs and recognize the value of ideation. Initial customer feedback and engagement with the service has been really positive, and we have already introduced new features to the service, such as being able to prompt in over 70 languages. And we're engaged with a limited set of customers to custom train models to their IP and brand needs. Alongside our amazing pre-shot offering and custom content, We're excited to offer a complimentary new service that helps our customers elevate their creativity, save them time, save them money, and does not expose them to legal risk. We continue to drive increases in our annual subscriber counts, primarily through iStock and Unsplash. We grew our annual subscribers by more than 88%, and more than 35,000 of those subscribers were from our targeted growth markets outside of North America and Western Europe. We renewed our agreement as the authorized photographic agency with the Rugby World Cup to deliver an industry-leading service in the creation and distribution of world-class sports content. Getty Images is the official photographer or photographic partner to over 120 of the world's leading sports governing bodies, leagues, and clubs who come to us for our industry-leading expertise in editorial operations, award-winning photographic talent, and unrivaled global distribution platform. Also in the quarter, we are pleased to partner with BBC Studios to launch a platform accelerating our archival supply chain. platform gives our customers the opportunity to search bbc archive content online and opens up access to more than 57 000 newly digitized programs the platform is a significant breakthrough making the bbc archival content more accessible for our customers around the world and a key progress item with our within our overall video growth strategy while it is a constant I would be remiss if I did not call out the efforts of our world-class team and partners who risk and sacrifice to cover events around the globe. Whether these are events and atrocities in the Middle East, the Ukraine, the drama in U.S. Capitol and courts, the extreme weather events or natural disasters, humanitarian and wildlife crises, the list goes on. I'm extremely proud of the work and the important role it plays to engage and inform the public. And with that, I'll hand over to Jen to take you through the more detailed financials.
spk12: As Craig highlighted, during the third quarter, we continued to see pressure on our top-line performance, increased FX volatility, but overall stability in our adjusted EBITDA margin and strength across our underlying operating metrics. I'll start by talking about some of our KPIs. Note, as always, today's press release contains information on all seven of our KPIs, which are reported as of the trailing 12 months for LTM period ended September 30th, 2023, with comparisons to the LTM period ended September 30th, 2022. Total purchasing customers were 826,000 compared to 837,000 in the comparable LTM period. A slight pullback as we see some drop-off in our a la carte purchaser volume as we continue to shift into subscriptions. Our revenue per purchasing customer remains strong at approximately $1,100 per customer. We delivered another quarter of impressive growth in annual subscribers, adding 95,000 to reach 202,000, an increase of approximately 88% over the corresponding period in 2022, fueled primarily by our e-commerce subscriptions, including our iStock Annual and our Unsplash Plus subscriptions. This marks our fourth consecutive quarter of annual subscriber growth in excess of 50%. We continue to execute well against our geographic expansion efforts with approximately 35,000 new annual subscribers in our growth markets across LATAM, APAC, and EMEA. We also continue to see growth in our core markets, which includes the US, Canada, France, Germany, the UK, Japan, and Australia, where we added approximately 60,000 new annual subscribers. Annual subscriber growth continues to expand our mix of revenue from subscription products. which rose to 55.9% in the third quarter, up from 51.8% in Q2, and up from 49.4% as of Q3 2022. Our revenue retention rate for our annual subscribers is 94.5% compared to 103% in the 2022 LTM period. The decline was primarily driven by lower revenue retention rates on some of our smaller e-commerce subscribers and a reduction in a la carte revenue from customers who previously exceeded their subscription download tax. Paid download volume was up approximately 1% at 95 million. Our video attachment rate continues to grow, ending in the quarter at 13.7%, up from 12.7% in Q3 2022. We continue to see opportunities to drive video adoption across our customer base and expect to see this metric continue to tick up. Turning to our financial performance, with revenue results reflecting adverse impacts from the Hollywood strike, ongoing macroeconomic pressures, and a still challenging agency business. Revenue results were also impacted by a more muted year-on-year benefit from FX than we expected due to a strengthening U.S. dollar with respect to the euro and the pound in the second half of the quarter. Assuming rates hold relatively steady to where we see them today, we now expect a more limited foreign currency tailwind in the fourth quarter than previously anticipated. Total revenue was down 0.5% year-on-year on a reported basis and 1.3% on a currency neutral basis. Included in these results are certain impacts of the timing of revenue recognition, which contributed approximately 440 basis points to the year-on-year revenue growth in the quarter. With positive momentum in our subscription business, Annual subscription revenue increased 12.6% on a recorded basis and 11.8% on a current and mutual basis, driven by further gains across our premium access and e-commerce subscription offering. Creative revenue was 145.2 million, flat year-on-year, and down 0.8% on a current and mutual basis. Creative results reflect pressures in the agency segment, which was down double digits year-on-year, as well as impacts from the Hollywood strike, with production houses largely dormant in the quarter. Creative revenue from annual subscription products grew 16.9% year-on-year and 16% on a currency-neutral basis, led by Premium Access, our largest subscription product. Within our e-commerce business, our successful customer acquisition efforts grow growth in our annual iStock subscription products of 15.2% on a reported basis and 14.2% currency neutral. We also saw 8.1% year-on-year or 8.3% currency neutral growth in our custom content subscription, which provides customers with cost-effective, customized, exclusive, and project-specific content to meet their needs. Editorial revenue was $79.9 million in Q3, a decrease of 2.3% year-on-year and 3.3% on a currency-neutral basis. The decline was driven by archives and entertainment, which were negatively impacted by the Hollywood strike, as well as a challenging year-on-year compare due to 2022 events such as Queen Elizabeth's funeral and the U.S. midterm elections. However, we did see gains in sports, which benefited from our team's extraordinary coverage of the 2023 FIFA Women's World Cup. Geographically, we saw year-on-year currency neutral growth of 3.8% in EMEA, while the Americas and APAC were down 3.7% and 3.9% respectively. Revenue less or cost of revenue as a percentage of revenue remains a consistent metric for us with Q3 at 73.4% compared with 72.2% in Q2 of 2022. Total SG&A expense was 97.3 million up 5.7 million year on year with our expense rate increasing to 42.4% of our revenue up from 39.7% last year. The higher year-on-year expense was due to higher staff costs, primarily 9.2 million of stock-based compensation related to the vesting of employee equity awards compared with 2.8 million of equity-based comp in Q3 of 2022. Excluding stock-based compensation, SG&A decreased year-on-year 0.8% to $88.1 million in the quarter. As a percentage of revenue, SG&A, including stock-based comp, was 38.4% of revenue, roughly flat to 38.5% of revenue in the prior year period. The 0.8% year-on-year decline in spend is largely a result of the proactive cost actions executed earlier this year which remain in place. The larger of these cost actions are across marketing reductions and the hiring freeze. We anticipate maintaining these actions at least through to the end of the year. Adjusted EBITDA was 80.3 million, up 3.4% year-over-year, and up 2.5% on a currency-neutral basis. Our adjusted EBITDA margin was 35% an increase of 130 basis points from 33.7% in Q3 2022. This expansion in EBITDA margin is a testament to our fiscal discipline, implementing cost actions earlier this year at the first indication of top line headwinds. CapEx was 12.4 million, a decrease of 3.3 million from Q3 of last year. Prior year CapEx included costs for our London office relocation and acquisition of imagery related to the Q4 2022 launch of our unsplashed subscription, driving some of this year-on-year decrease. CapEx has a percentage of revenue of 5.4% versus 6.8% in the prior year. Adjusted EBITDA less capex was 67.9 million compared to 62 million in Q3 last year. Adjusted EBITDA less capex margin was 29.6% up from 26.9% in Q3 22. Free cash flow was 12.8 million down from 33.2 million in Q3 2022. The decrease in free cash flow primarily reflects the impact of our year-to-date financial performance and working capital changes related to timing of receivable and payable. Free cash flow is stated net as cash interest expense of $38.3 million in Q3, an increase of $2.6 million over the prior year. Cash taxes for the quarter was $7.6 million, an increase from $4.7 million in Q3 of 2022. Our ending cash balance on September 30th was $113.5 million, down $7.8 million from Q2 2023, and an increase of $41.7 million from our ending cash balance in Q3 of 2022. As of September 30th, we had total outstanding debt of $1.383 billion, which included $300 million of 9.75% senior notes, $639.6 million USD term loans with an applicable interest rate of 9.99%, and $443.6 million of Euro term loans. converted using exchange rates as of September 30th, 2023, with an applicable interest rate of 9%. Year to date, we have applied $47.8 million towards debt paydown, including a voluntary $20 million payment in the third quarter. We ended the quarter with a net leverage of 4.2 times, down from 4.4 times at year end 2022. we will continue to remain disciplined deploying our capital to what we believe is its highest and best use, with a continued emphasis on our balance sheet optimization and further deleveraging. Based on the foreign exchange rates and applicable interest rates on our debt balance as of September 30th, and taking into account $355 million of interest rate swap agreements, our 2023 cash interest expense is expected to be about $122.5 million. Now turning to our guidance. Based on our expectations that the fourth quarter will continue to see top line and FX pressures, we are lowering our 2023 guidance as follows. We expect revenue of $900 million to $910 million. down 2.8% to 1.8% year-over-year, and on a currency-neutral basis, down 2.3% to 1.2%. Assuming current FX rates hold, the revenue guidance includes an overall FX headwind of about $5.4 million in the full year 2023. This includes the $8.5 million negative impact year-to-date and an estimated tailwind of approximately $3.1 million in the fourth quarter of 2023. We expect adjusted EBITDA of $287 million to $295 million, down 5.8% to 3.4% year-over-year on a reported basis, and down 5.4% to 2.9% on a currency-neutral basis. Included in the adjusted EBITDA expectation is an approximate $1.6 million adverse impact from FS, which includes the 2.9 million year-to-date impact and an estimated tailwind of approximately 1.3 million in the fourth quarter of 2023. In addition, the revised adjusted EBITDA guidance reflects the change to how we are classifying legal fees associated with the warrant litigation. The $6.4 million in legal fees incurred year-to-date through Q3 and the $1.1 million incurred in the fourth quarter of 2022 were previously reported within SG&A. These expenses are now included in loss on litigation, which is a below-the-line item and is excluded from adjusted EBITDA. As I just mentioned, this guidance assumes continued macroeconomic pressures, adverse impacts from the Hollywood strike, and pressures on our agency business through Q4. It also assumes costs related to other ongoing litigation and increased costs tied to operating as a public company. We believe that the proactive approach we have taken to control costs and our ability to stay nimble while focusing on improved execution will best position the company to deliver on the updated guidance in the current economic environment. With that, operator, please open the call for questions.
spk10: Thank you, ma'am. Ladies and gentlemen, we will now be conducting the question and answer session. If you'd like to ask a question, please press start in one on your telephone keypad. A confirmation turn will indicate that Ilan is in the question queue. You may press star 2 to leave the question queue. Our first question comes from Ron Gervais of Citi. Please go ahead.
spk14: Great. Thanks for taking the questions. Maybe one for Craig and one for Jen. Craig, on the Hollywood strikes, now that they're close to being done and understood, the impacts continue here in the 4Q. Help us understand a little bit more how this might play out in the 24 as things might normalize going forward. I think that'd be helpful. And then, Jen, on the cost side, with gross margins expanding in the quarter and 35% EBITDA margins, talk to us about the outperformance maybe in gross margins and whether this can continue going forward. Thank you.
spk04: Great. Thanks, Ron, and appreciate you making time for the call and appreciate the questions. On the strike, first let me start off by saying I think the impacts have been a bit more severe than even Jen and I and the management team projected in our last call. So we've seen a softer part of the business within entertainment and in media and production side of things than even we forecast. I think that is a good starting point for context, especially as we look into Q4. We're not expecting any significant reversal of that in Q4. We do expect that we will start to see the reversal of that in Q1. Likely still some ramp as productions come back online. So we probably won't be at full, kind of full back to business across those elements of the business until probably Q2. So that's our best current view based off the conversations that our teams are having across the industry. So I guess what we're saying is it was a little bit more impactful in a full Q3 than what we projected at the end of Q2 or we're seeing at the end of Q2. Q4, we expect that to continue. We expect improvements over Q1, but not fully back to 100% until Q2.
spk12: Yeah, and on the margin side, gross margin, you're right, a slight tick up, you know, to the 73% range. We've seen that number before. As you know, we're pretty consistently around 72%. That can, you know, swing up or down nearly entirely due to the product mix in the quarter. But, you know, as we think about what we'd expect to see that land, I would still think that'd be in the 72% range. Similar on the EBITDA side, 35%, that is higher. We definitely have a history of north of 30%. 35% is a touch higher than certainly what we've been trending to. But as we spoke to in the prepared remarks, we did have a significant amount of very proactive cost measures that we took pretty early on in Q2. at the very first time of what we thought was going to be some top line pressure. So we're seeing the benefits of that margin. But again, if we think about what we'd expect to see that stabilize that, I would, you know, anchor ourselves down to that 32% give or take range of what we'd expect to see normally.
spk14: Okay. Thank you, Craig. Thank you, Jen.
spk00: Thank you.
spk10: Our next question comes from Danny Pfeiffer of J.P. Morgan. Please go ahead.
spk13: Hey, thanks for the questions. I just have two. Can you maybe talk about what you've been seeing from your news or media customers since the start of the Middle East conflict? And then for the second, last quarter you mentioned you saw a corporate customer deal timeline shift and slightly reduced inbounds. Can you maybe speak to what you saw from those customers in 3Q? Thanks.
spk04: Yeah, thanks, Danny. Again, thanks for making time for the call. On the news media side of things, with respect to the Middle East, clearly it's a critical story for our clients to be covering. We are very grateful, not only for the staff that we have in that market covering the crisis, but also for our partners that are investing and risking their staff in those markets. And I would call out specifically Age on Friends Press and Anadolu is two critical partners to our coverage there. So it is something that is consuming a lot of cycles in the media. Therefore, it is something where we're seeing a lot of our imagery be utilized to narrate that story and provide visibility into that story. But I wouldn't expect it to have a financial impact. benefit within the company. Really, it's a shift in the news cycle into that consumption, and that consumption actually, from our perspective, can be quite costly to maintain the coverage uh, in order to support it. So, uh, you know, operating in, in, in war zones is, is not something that, that, uh, is without cost. So, um, certainly I think, you know, Getty's playing its normal, uh, important role, uh, within bringing visibility into those events. We don't take that role lightly in any way, shape or form. And we're very proud of our staff and we're proud of our partners, uh, that, that take on that coverage. On the corp side of things, in terms of the corporate segment, I would say that we saw a continuation of what we saw and spoke to in Q2. Again, there were certain parts of the corporate market. We mentioned technology. We mentioned some of the things like the crypto space where that softness carried over and continues. But I don't think it got worse. I did mention, you know, on the media, entertainment and production side of things, that was probably, it was worse in Q3 than what we projected and certainly what we saw in Q2. But in the corporate, we're continuing to still see that kind of conservatism and continuing to see that kind of concentrated within certain sub markets a bit more. I am hopeful that, you know, we start to see that loosen up a bit. But at this point in time, we didn't see anything really different from Q2 to Q3 in those areas.
spk08: Thanks.
spk06: You got it.
spk10: Our next question comes from Mark of the Benchmark Company. Please go ahead.
spk16: Hi. Good evening, Craig and Jen. Craig, just curious what the pipeline is developing for your Gen AI product and If you could make that tangible in any way in terms of revenue in a rough timeline, that would certainly be helpful. Jen, just a question on the revenue, year-over-year revenue impact from by-stock subscription conversion to or from a la carte. I'm just trying to get a sense of how much of that was in the quarter. And then out of that, if you look at your last 12-month subscription retention, it declined about 400 bps quarter-over-quarter to roughly 95%. So I'm just curious what might be driving that. Is that premium access, subscription revenue declining in absolute dollars, or what might be driving that? Thanks.
spk04: Yeah, okay. I'll throw to Jen on the iStock item. I'll handle the rev retention. I'll just reiterate some of Jen's remarks that are up front. which a lot of that is our push into smaller subscriptions, which do have a naturally lower rate of revenue retention. But we've also seen some of our media clients in the premium access side of things not move into overage on their deals. So typically our deals are not unlimited. They carry caps with them. And as the media industry continues to struggle, not only due to the strike, but also due to the macro ad landscape, We've seen some pullback on those, as Jen mentioned in her remarks. On the Gen AI side of things, I'm not going to be able to, Mark, give you any specifics at this time. What I can tell you is what we said in the prepared remarks, which is We're seeing really good engagement with the customers. We're hearing really good feedback. I spent a good chunk of the quarter actually engaged with our customers. In fact, today Omnicom put out a press release of their own about how they were engaged with us in the early stages of the development process and moving in now into the commercial side of things. But it's one that we are selling a service that is fully indemnified and legally clear. So it is one that goes through the hoops that you would expect in terms of the corporate contracting side of things, whether that's legal or sourcing, et cetera, to make sure that these technologies are as clean and as advertised. So we're still working through our pipelines, but the good news is those pipelines are growing. I still would set the expectation that we, you know, we don't expect any material revenues in this calendar year. And we'll start to probably try to give you a better visibility of how that's progressing in 2024. But I would still expect it to be a fairly limited amount of revenue to the company overall in 2024.
spk05: John, do you want to take that talk? Yeah.
spk12: Yeah, on the subscriptions piece, I think, Craig, you touched on their revenue retention, but more broadly, you know, that growth in annual subscribers is actually something we feel really good about. We mentioned the prepared remarks. It's the fourth straight quarter where we've seen the year-on-year growth in that count be north of 50%. And at its base value, that's a great metric, but when you pull that apart, you know, at least 50% in the quarter of the new annual subscribers that we've taken on are new customers to Getty Images. We touched on the prepared remarks that these are customers who, you know, a good portion of them exist in some of the growth markets that we've very deliberately been trying to tap into. And then we're also seeing customers move into subscriptions in the core markets. So, you know, the mix of where we're seeing that growth is really positive for us over the long term. You know, as Craig noted, we do see a step back in the revenue retention rate as a result of some of these subscribers being on, you know, those smaller e-commerce subscriptions. But when we look at, you know, a broader metric, which is just revenue per purchasing customer, that remains fairly consistently north of $1,100. So, you know, overall, it's a good metric for us. And, you know, we're excited to see where that continues to go.
spk04: Yeah, and I would just add to that, Jen. Mark, I think one of the things that we haven't talked about that we actually feel pretty good about in the business, we know that there's a lot of impact strike and currency and items, but we're seeing paid download growth within the business. We're seeing customer counts and volumes hold up quite well. We're seeing good, solid renewals across the mix. And I think what we're seeing when we look and watch what we're seeing elsewhere in the marketplace of which you cover some of those, we're not seeing the same levels of decline across our licensing business. And our creative business is actually holding up quite well. As Jen mentioned, our revenues are down more in the editorial side of things for the reasons we referenced earlier. But We are seeing really good, durable kind of customer commitment into the business across creative. We're seeing that across our e-commerce business holding up on a relative basis quite well. So those are some areas that we feel good about where I can point to, you know, some strength and hopefully so we'll get to add back some things in the coming quarters as the markets normalize a bit.
spk15: Oh, that's so helpful. Maybe I could squeeze one last one in on the agency business.
spk16: Just curious how that pays on a quarter-over-quarter basis in terms of revenue growth, and are we starting to see that sort of baseline concentration there has obviously come down? Just curious if we've kind of seen the trough there. Thanks.
spk04: We were in Q3, we did not see the drop. As Jen mentioned, we were continuing to be down double digits in that segment of the business. I would say it was a little bit more uneven. So there is some good news in there combined with some bad news. So I hope that some of the activities that we're taking on and engagement with those agency clients around things like generative AI are going to bode well going out into the future. But in Q3, we were down kind of consistent to where we were in Q2. But hopefully, again, we'll see some benefits of that going forward.
spk02: Got it. All right. Thanks very much. Appreciate it.
spk10: Thank you. Ladies and gentlemen, just a reminder, if you have a question, you're welcome to raise a star and then 1 to place itself in the question queue. Our next question comes from Tim Nolan of Macquarie. Please go ahead.
spk03: Hi, thanks very much. Could I ask for some follow-up on the warrant situation, please? Just if you could help explain a bit more what the financial impact to you is, if it's $88 million or so of damages, you have $60 million of insurance, I guess, against that, then do we need to worry about that net difference there as a potential payout that you're going to have to make? And if you could explain how the surety bond works, please. You mentioned the amortization of it. If you could give the terms or just how that works in general, they're very helpful. Thanks.
spk04: I'll pass the gen on the bond side of things. I'll do my best to cover off on the initial parts of the judgment and the exposure with respect to the warrant. So first off, I'll reiterate, we disagree with the ruling, and we have every intent to appeal. And we think the facts are in our favor. And we think we did everything right under the warrant agreement, as well as with securities law. So that's first and foremost. I think that this is not something that we view as settled. With respect to the warrant, I think you largely got it right, Tim. You know, there's insurance up to that 60. There's, you know, underneath that is covered legal costs plus judgment. There will be an inflator on the judgment as we appeal if it were to ultimately come to that. So that's why we're taking a bond that's greater than ultimately the judgment itself in order to cover that. And so, yeah, I mean, the exposure, if we were, in fact, to lose on appeal and exhaust our options of continuing to take this forward, you would basically be looking at those net amounts.
spk03: Right, so around $30 million or so difference.
spk12: Tim, you probably haven't had a chance to come through the filings yet, but what you'll see on there is we've booked a loss on litigation of about $112.5 million, and then netted against that is the insurance recoverable of $60 million. So in that loss on litigation is going to be damages, interest, pre- and post-judgment, and then legal fees. And then as we obtain the bond, we will start to amortize the cost of that bond from the time we place the bond through to however long the bond is in place to that same loss on litigation account.
spk04: Okay. And the cost of that bond is roughly in between the 1% and 2% range.
spk12: Yeah, it's hovering around the 1.5% range. Okay.
spk03: Okay. I think I get the principles there. Thanks very much. Okay. Thanks, Tim.
spk10: Thank you. Ladies and gentlemen, that was the final question.
spk04: Great. Well, thank you all for making time. Very much appreciated. Appreciate the questions and look forward to the next call. Thank you.
spk10: Thank you. Thank you. Ladies and gentlemen, that concludes today's event. Thank you for joining us. and even they'll disconnect your line.
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