Getty Images Holdings, Inc.

Good afternoon and welcome to Getty Images third quarter 2024 earnings conference 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 conference over to Stephen Kenner, VP of Investor Relations and Treasury at Getty Images. Thank you. You may begin.

Good afternoon and welcome to the Getty Images Third Quarter 2024 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 statements 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, 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 results 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 for the SEC. After our prepared remarks, we'll open the call for your questions.

With that, I will hand the call over to our Chief Executive Officer, Craig Peters. Craig Peters Thanks, Stephen, and thank you to everyone for joining us on today's call.

I will touch on our performance and progress at a high level before Jen takes you through the more complete full third quarter financial results. I am pleased to report we delivered a strong performance in the third quarter with a revenue of $240.5 million, representing a year-on-year increase of 4.9% on a reported basis and 5.4% on a currency-neutral basis. Adjusted EBITDA came in at $80.6 million for the quarter, up 0.4% on a reported basis, and up 0.8% on a currency-neutral basis, with a healthy EBITDA margin of 33.5%. These positive results reflect growth across each of Getty Images, iStock, and Unsplash Plus. Our team continues to execute on the opportunity in front of us, and we were pleased to see improvements with our agency and production customers. In line with these improvements, we drove growth across all customer categories, agency, media, and corporate within the quarter. Our subscription business saw outstanding performance, growing subscribers by nearly 50% versus the comparable LTM period. Powered by our unique and differentiated iStock and Unsplash Plus e-commerce offerings, across a breadth of geographic markets. With subscriptions now accounting for more than 50% of our revenue, and many of these subscriptions including the full breadth of our offering across editorial and creative, we also saw higher download and therefore revenue allocations to editorial content during major events, like the Paris Olympics and the run-up to the U.S. election, as customers consume more content from these events. While product-level revenue attribution can be impacted by this shift in consumption, it really showcases the unique strength of our premium access subscription offering. This product delivers real-time, broad-based, high-quality editorial coverage in combination with our highly differentiated, impactful, pre-shot creative content. This is why we continue to see subscriptions as a core driver of our overall growth, on back of strong demand for these offerings, strong renewals, and the continued opportunity to upsell and cross-sell to these customers. One offering we continue to see success in cross-selling is our custom content offering. In the quarter, we saw brands such as Citi, Mitsubishi Motors, HSBC, Asahi, and 3M trust Getty Images to be the engine of their product and brand-specific content needs via custom content. It was also great to see commercial activations by global brands leveraging our unique historical archive. Prime Video was just one of many examples of that within the quarter. On the AI front, we partnered with Sony Pictures on an activation in support of their latest release of the Venom series. We custom fine-tuned our commercially safe, high-quality generative AI model built with privacy, responsible content use, and brand safety at its core to help launch Venomize My Pet, a promotional consumer activation that allows fans to interact with branded content in a fun, safe, and responsible way. Back to pre-shot, we continue to see strong demand for our creative offerings. This is not only demonstrated by the sustained growth of iStock and Unsplash+, but also through our API integrations. We were pleased to announce our Canva integration renewal in Q2, and continuing on that, we are pleased in Q3 to renew with brands like website builder Squarespace. As we look ahead to closing out the year and into 2025, I'm incredibly confident in our trajectory. Our differentiation, execution, and commitment to providing durable value to our customers through all of our offerings will continue to drive our success. I'm excited to further capitalize on our strengths going forward. And with that, I'll turn it over to Jen.

We continue to build positive momentum, delivering strong revenue growth at an adjusted EBITDA margin north of 33%. As Craig mentioned, all three of our industry categories, corporate, media, and agency, are in growth. Getty Images, iStock, and Unsplash Plus are in growth. Our annual subscription business comprises north of half of our total revenue, with Q3 adding to nine consecutive quarters of high double-digit growth on annual subscriber counts. And our e-commerce business is thriving. Now, it would be easy to misinterpret this quarter's results as being only about the post-Hollywood strike comparison or about a robust editorial event calendar. But the fact is, we have momentum across the business, and this quarter is a testament to the strength of both our creative and our editorial business, and to our ability to execute with our differentiated, high-quality, powerful content with our steadfast customer focus at the very core of our financial performance. Let's dive into those results. Revenue was 240.5 million, growth of 4.9% or 5.4% on a currency-neutral basis. Across our major geographies, on a currency-neutral basis, we saw year-on-year increases of 9.9% in the Americas, our largest region, 1.3% in APEC, and with EMEA down less than 1%. Underpinning this strong revenue growth is continued resiliency and health across many of our KPIs. Our annual subscription revenue was 52.4% of total revenue. We added 96,000 active annual subscribers to reach 298,000, an increase of approximately 48% over the comparable LTM period. Subscriber growth was driven by our e-commerce business, iStock and Unsplash Plus, and we continue to execute on our geographic growth plans with approximately 18,000 brand new customers from our targeted growth markets in EMEA, LATAM, and APAC. Our annual subscription revenue retention rate has begun to stabilize, coming in at 92.2% in LTM Q3-24, down from 94.5% in the corresponding LTM period, but up from 89.4% in the LTM Q2-24 period, and up from 90% in LTM Q1-24. Relative to the LTM Q3-23 period, the decline from 94.5% was primarily driven by growth in our lower retention smaller e-commerce subscribers who tend to start out with lower revenue retention rates. Paid downloads were essentially flat at 94 million, while our video attachment rate rose to 16.4% from 13.7% in the LTM Q3 2023 period. Editorial revenue was 92.8 million, an increase of 16.1% year-on-year and 16.3% on a currency-neutral basis. This is our second straight quarter of a return to year-on-year growth for editorial after four consecutive quarters of decline driven primarily by the Hollywood strike impact. At approximately one-third of our total revenue, editorial returning to growth is a core contributor to our momentum. We've previously described the impact from major events during even years as adding approximately 1% of growth to total company revenue, equating to around a 3% lift to editorial revenue. That is consistent with what we are seeing this year. However, we are reporting a higher lift to editorial given strike comparison, and as Craig mentioned, a large concentration of revenues with our premium access subscription due to a shift in consumption towards editorial content within those fixed value subscriptions as a result of our major editorial event coverage. This consumption shift contributed approximately 10 points of impact to editorial growth in the quarter, with the shift having an inverse impact on creative results, which I will touch on next. Creative revenue was $133.7 million, down 7.9% year-on-year, and 7.4% on a currency-neutral basis, with a decrease largely driven by that shift in premium access revenue allocation I just spoke to, with an adverse impact of 5.4 points. When you account for this impact and some year-over-year revenue recognition differences, creative revenue is actually in growth, with strong signals for sustained growth, which include our agency business, which has been a year-on-year decline for the past 12 consecutive quarters, returned to growth with a 5% year-on-year increase and 5.9% on a currency neutral basis in Q3, driven by good performance across both the network and the independent agencies. Our customer acquisition efforts continue to deliver positive results. with iStock annual subscriptions growing approximately 17% on both a reported and a currency neutral basis. And our Unplash Plus subscription growing triple digits. Our e-commerce business, which represents approximately 25% of total creative revenue, continues to grow and was up 4.5% on a reported basis and 4.9% currency neutral. Other revenue, which is historically a smaller revenue category for us, was $14.1 million, an increase of $9.9 million, or about 240% from Q3 of 23. This growth can be attributed to an expanded five-year creative content deal with an existing customer where we included some level of AI rates, which received accelerated revenue recognition in accordance with ASC 606 guidelines. Despite the heavy upfront revenue recognition, we will see cash flow evenly distributed over the five-year term, very much aligning to our positioning on the importance of longer-term recurring elements for these types of deals. While this is just one of many large commitments we see from our customers, the power of our creative content sits at the very heart of this deal. Revenue, lesser cost of revenue as a percentage of revenue, remained consistently strong at 73.4% in Q3, unchanged from Q3 2023. We have seen this metric be north of 72% for 17 of the last 18 quarters. Indeed, one of the most resilient and compelling components of our business model. Total SG&A expense was $100.1 million in Q3, up from 97.3 million in the prior year. As a percentage of revenue, our expense rate was 41.6% down from 42.4% last year. The lower expense rate was driven primarily by the increase in revenue and lower stock-based compensation in the quarter. Excluding stock-based compensation, SG&A rose to 95.8 million in the quarter or 39.8% of revenue, up from 88.1 million, or 38.4% of revenue in Q3 2023. The increase in spend year-on-year reflects our planned reinvestment in the business as we entered 2024, primarily across staffing and marketing, following a pullback in spend as we navigated the Hollywood strike impact in 2023, as well as higher commissions tied to strong revenue performance this quarter, and the inclusion of operating costs to the recently acquired motorsport images. Adjusted EBITDA was 80.6 million for the quarter, up 0.4% year-over-year and 0.8% on a currency-neutral basis. Adjusted EBITDA margin was 33.5%, down from 35% in Q3 23, but still incredibly strong. CapEx was 12.5 million in Q3, up 0.1 million year over year. CapEx as a percentage of revenue was 5.2% down slightly from 5.4% in the prior year. Free cash flow showed a deficit of 1.8 million in Q3, compared to the 12.8 million generated in Q3 2023. The decrease in free cash flow reflects working capital changes related to the timing of receivables and payables as well as higher cash interest expense and cash taxes paid. Free cash flow is stated net of cash interest expense of $40.8 million, an increase of $2.5 million over the prior year. Cash taxes for the quarter were 10.3 million, an increase of 2.7 million over Q3 2023. We finished the quarter with 109.9 million of balance sheet cash, down 11.8 million from Q2 2024, and down 3.6 million from Q3 2023. The lower cash balance is net of a voluntary $20 million debt repayment in the third quarter. Year to date, we have applied $55.2 million towards voluntary debt pay down, demonstrating our continued commitment to pay down debt and reduce our net leverage. As of September 30th, we had total debt outstanding of $1.35 billion, which included $300 million of 9.75% senior notes, $581.8 million USD term loans, with an applicable rate of 8.85%. 467.6 million of Euro term loan converted using exchange rates as of September 30th, 2024, with an applicable rate of 8.44%. Our $150 million revolver remains unstrung. We ended the quarter with a net leverage of 4.2 times unchanged from Q2. As I mentioned a moment ago, we remain committed to continuing to utilize our strong cash flow generation to further deleverage the balance sheet, and we will continue to explore opportunities to refinance our debt. Based on the foreign exchange rates and applicable interest rates on our debt balance as of September 30th, our 2024 cash interest expense is estimated to be approximately $129 million. Now turning to our outlook for the full year of 2024. Taking into consideration our financial performance year to date and the impact of current FX rates, we are increasing our reported revenue guidance range to $934 million to $943 million, representing year-on-year growth of 1.9% to 2.9%, or 1.6% to 2.6% currency neutral. We are also increasing guidance on our adjusted EBITDA range to 292 million to 294 million, which translates to a year-on-year decrease of 3.1% to 2.5% or 3.4% to 2.8% currency neutral. Please note this includes an assumption that FX rates remain consistent with those as of November 1st, 2024, with the Euro at 1.09 and the GBP at 1.31 for the remainder of the year. In summary, we are committed to strong execution, driving full-year top-line growth, and strategically investing in our business while maintaining fiscal discipline and paying down our debt. As we look ahead, we're excited about our prospects for the fourth quarter of 2024 and beyond. With that, operator, please open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. And your first question comes from Alex Leving from the Benchmark Company. Please go ahead.

Hey, guys. Thanks for taking the question. This is Alex on for Mark. Two quick ones from me. Just curious if you could provide an update on the Gen AI front, whether or not clients broadly remain in the testing phase. and how you see that adoption curve perhaps scaling in 25 alongside revenue. And then separately, curious if you could provide an update just as you think about data licensing opportunities, whether or not the demand is there to take advantage of, balanced against obvious competitive considerations as well. So just curious on those two. Thank you.

Thanks, Alex. Appreciate the question. I'll take those. On the Gen AI front, We continue to integrate the services out into our websites. We've launched, obviously, the standalone generative model, but we've also launched the capabilities to utilize AI in order to modify our existing pre-shot creative. Most recently, we just launched the ability to insert product-based imagery into into our pre-shot imagery using AI. The take-up of these services is incremental to the business. I would say it's still early in its overall take-up. We're in the single digit percentages of customers that are adopting these capabilities. But it is one that we expect to continue to be additive to the business over 2025, and we think we'll start to see that become a more material contributor. It is interesting to note that where we're seeing adoption of the generative AI packages, we're seeing a good demand from that from new customers coming into the business. that haven't been traditional customers of our brands or of our pre-shot offerings, which is nice. And we're seeing that as an opportunity to actually cross-sell to them the pre-shot offerings based off the merits of those products standalone. So I'd say still early days. Clearly, deals like The deal I mentioned on fine-tuning for the Venom movie promotion, those are interesting and more material into the business, but they aren't as recurring in nature. But I do believe there's going to be a lot of those activations out there and where our capabilities, not just in terms of the tool that we've created and offered, but our capabilities as a business and our deep relationships with those companies are going to bring those to bear. So I think we'll see more contribution from AI over 2025 as those types of activations get out and we continue to roll out more and more product features like the insert your product capability that we just rolled out last week. On the data licensing side of things, Jen touched on it. We've done in Q2, we announced some small data licensing with an existing partner. We've done a little bit of data licensing in Q3, again, with an existing longstanding partner of ours. Those are deals where We have a belief that we will do deals that are aligned to the interests of the business and the interests of our creators over the long haul. And that's not every deal that's out there. We have passed on a large number of deals that we don't think align to the long-term interest of this company and to our creators. In many cases, again, we've partnered with companies to develop services jointly and then bring them to market as an alternative. But the world of AI is a big place. And it's not just all about, you know, simple generative models of imagery or video. You know, there's a lot of applications to AI. And our quality content and metadata has relevance to that. So I think you'll see us, you know, continue to expand on the data licensing. But again, continuing to have a very long-term view on that. and one that we think ultimately is highly accretive to the business and aligns to the interests of our creators.

Got it. Thank you very much for the call.

No, thanks, Alec.

At this time, we have no other questions. Ladies and gentlemen, this concludes the conference. You may now disconnect your lines.