Getty Images Holdings, Inc. (NYSE:GETY) Q4 2022 Earnings Call Transcript

Getty Images Holdings, Inc. (NYSE:GETY) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Good afternoon and welcome to the Getty Images Fourth Quarter and Full Year 2022 Earnings Conference Call. Today’s call is being recorded. We have allocated 1 hour for prepared remarks and Q&A. At this time, I’d like to turn the conference over to Steven Kanner, Vice President of Investor Relations and Treasury at Getty Images. Thank you. You may begin.

Steven Kanner: Good afternoon and welcome to the Getty Images fourth quarter and full year 2022 earnings call. Joining me on today’s call are Craig Peters, Chief Executive Officer; and Jen Leyden, Chief Financial Officer. Before we begin, we would like to remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks, uncertainties and assumptions which could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are highlighted in the forward-looking statements section of today’s press release and in our filings with the SEC. Links to these filings and today’s press release can be found on our Investor Relations website at investors.getimages.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 with the SEC. After our prepared remarks, we’ll open the call for your questions. With that, I will hand the call over to our Chief Executive Officer, Craig Peters.

Craig Peters: Thanks, Steven and thanks to everyone for joining Getty Images Fourth Quarter and Full Year 2022 Earnings Call. I will address the full year business performance and progress before Jen takes you through the full fourth quarter financial results and 2023 outlook. I want to start with context on the evolving macroeconomic environment and its impacts on getting images. 2022 was a challenging year, particularly as we move through the second half of the year. As I said last quarter, like other global businesses, the strengthening U.S. dollar relative to foreign currencies negatively impacted our results. We also experienced a slowdown in some parts of our business during the year as businesses exercise caution given the macroeconomic conditions, this being most pronounced in certain parts of Europe and with our agency customers.

For the 2022 fiscal year, Getty Images exceeded $926 million in revenue, representing year-on-year growth of 0.8% and currency-neutral growth of 5.7%. Our adjusted EBITDA finished just shy of $304 million for the full year. This reflects a reported year-on-year decline of 1.7% and currency-neutral growth of 4.8% as our costs are heavily weighted towards the U.S. dollar and we took on new costs as a public entity. While we experienced slowing over the year, Getty Images generated year-on-year currency-neutral growth in each quarter of 2022. We grew our purchasing customers by over 5% year-on-year. We grew our annual subscription customers by more than 50,000 to $129,000. Our paid downloads grew more than 6% to $95 million. Our revenue retention rates for our annual subscribers continued in excess of 100%.

We continue to grow our video attachment rate as the number of customers using our video offering within the period. These metrics speak to the strength of Getty Images offering and how we continue to deliver more value to more customers with those customers increasingly committed. At the core of these customer metrics is our high-quality exclusive and authentic content that is born from our unique expertise, creativity and partnerships. It is incredibly difficult to articulate the uniqueness represented in our more than 500 million visual assets. But I believe it is clearly demonstrated by our unparalleled coverage of world events and comprehensive archives enabling context. Events like the World Cup and Palais passing. Events like the Queen’s Platinum Jubilee in passing.

Events like the U.S. midterm election, the Winter Olympics and the war in Ukraine. It is clearly demonstrated by the organizations that choose to partner with Getty Image. Organizations like, the BBC, Penske Media, Kyodo News and Viacom, all signing or resigning agreements with us over the past year to represent their amazing content. Organizations like New York Fashion Week, the Grammy Awards, Sundance Film Festival, Toronto International Film test, the Met Gala and the British Academy Film Awards, where we serve as the official photographer with unique access. Organizations like, the NBA, the NHL, Major League Baseball, FIFA, the IOC, Formula One, NASCAR and PGA Tour, who entrust us to work so closely with their events, rights partners and sponsors.

It is clearly demonstrated by the honors bestowed on our team. The and World Press Photo just to name 2 awards of the more than 80 received in 2022. Today is Getty Images 28th anniversary. And I believe the strength of our content franchise has never been strong. In 2022, I was also very happy to expand our services to customers. We launched visual GPS Insights, an interactive tool to help our customers choose the right imagery backed by data and visual guidance. We launched Unsplash plus, an unlimited subscription, providing access to unique release content with expanded legal protections and the first paid subscription offered by Unsplash. We invested in and partnered with Brita to bring state-of-the-art AI editing capabilities to optimize visuals for creative needs with speed and efficiency, reducing technical and budget barriers for customers.

At the close of 2022, all iStock annual subscription customers could remove backgrounds from images with a touch of a button as part of their base subscription. We continue to broaden the reach of our custom content offering, leveraging Getty Images global network of photographers and videographers’ to create customized, cost-effective and exclusive project-specific content to meet the specific needs of our customers. IHG and Mars are just a few of the global companies that took advantage of this offering, driving nearly 60% year-on-year currency neutral growth for our custom content business in 2022. In closing, like many companies, we are not immune to macro conditions but our overall operating metrics remain positive and we continue to see opportunity as many of our offerings can be countercyclical, allowing us to help our customers produce creative more efficiently and enhance their offerings.

As a result, we continue to plan for moderate revenue growth in 2023, with the first half more challenged by FX compares and the addition of public company costs. As a company, we are laser-focused on expanding the monetization of the Unsplash, growing our corporate business, driving further video consumption and seizing geographic opportunities. Consistent with our track record, we’ll be prudent in managing our cost base for efficient delivery of across strategies. I am grateful for our teams and all their work in these important areas and the company is excited to enter its 29th year of leadership. With that, I’ll hand the call over to Jen, who will take you through the more detailed financials.

Jennifer Leyden: Our operational performance in the fourth quarter and the full year 2022 is a testament to the resiliency we have built into our business and to the strength of the Getty Images offering. I’ll start off today by reviewing some of the key operating metrics or KPIs that underpin that financial performance. Please note today’s press release contains information on all of our KPIs but I’ll highlight just a few here to further expand on PEG’s comments. All KPI metrics are as of the trailing 12 months or TTM period ended December 31, 2022, with comparison to the comparable TTM period ended December 31, 2021. As discussed in our Q3 earnings call, beginning with those Q3 results, we made 2 go-forward changes to our customer data and reporting.

I will highlight the impact of these changes on total active annual subscribers and annual subscriber revenue retention rate, the 2 KPIs impacted by those changes. I will note that our Q4 KPI metrics point to a healthy, resilient business, even absent these 2 reporting changes. We continue to see growth in customer engagement with our total purchasing customers rising to $835,000 from $794,000, an increase of 5.2% over 2021. This growth is fueled by our ability to consistently produce and deliver the highest quality authentic content that our customers need and demand to tell their visual stories and to amplify their visual presence. We meaningfully grew our active annual subscribers to $129,000 and from 75,000, an increase of approximately 73% over 2021.

Absent the customer data reporting changes, this increase would have still been an impressive 56%. This metric helps the number of customers on one of our annual subscription products which are products with a duration of 12 months or longer and now also includes our Unsplash plus subscription. This growth in annual subscribers’ points to the growing mix of revenue from our annual subscription business which in Q4 surpassed 50% for the first time in our company history. For our customers on those annual subscription products, we retained revenue at 100.1% down from 104.5% in 2021, with 2021 benefiting from the year-on-year compare of a COVID impact in 2020. Excluding the customer data reporting changes I mentioned earlier, our revenue retention rate would still be a very healthy 99.2%.

We increased our paid download volume by approximately 6.1% to $95 million, with growth across both editorial and creative. Looking back at our history at pre-COVID impacted periods, we have seen our paid downloads grew consistently in every single year dating all the way back to 2013. And next, our video attachment rate which measures the percentage of our downloading customers who downloaded video. This was also in growth, rising to 13.1% from 12.1% in Q4 ’22. As Craig mentioned, video is one of our key growth pillars and we expect to see this metric continue to be on a growth trajectory as we move through 2023. Turning now to our financial performance which, of course, is anchored by the strength of those KPIs. Foreign currency remains a significant headwind in the fourth quarter with a stronger U.S. dollar relative to foreign currencies, in particular the euro and the pound, driving a meaningful difference between our reported and our currency neutral performance.

Assuming rates hold relatively steady to where we see them today, we’d expect foreign currency to remain a headwind in the first half of 2023, with comparisons improving as we move into the back half of the year as the FX impact on our business is most pronounced in the second half of 2022. I’ll expand a bit more on this when we touch on our 2023 guidance. Total revenue in the fourth quarter was $231.5 million, down 3.2% on a reported basis year-on-year due in large part to 670 basis points of foreign currency headwinds. Excluding that FX impact, revenue increased 3.5% in the quarter, driven by a solid performance in our editorial business, growth across all of our major geographies and growth in our subscription business. Included in these results are certain impacts of the timing of revenue recognition which reduced revenue growth by approximately 70 basis points in the fourth quarter and by 145 basis points for the full year.

Our annual subscription revenues as a percentage of our total revenue grew to 50.2% in Q4, up from 46.1% in Q4 of 2021. For the full year 2022 annual subscription revenue rose to 49%, up from our 2021 finish of 45.6%; games in our iStock and premium access subscriptions, this continued growth in our subscription business, further bolsters the durability of our financial model, with high revenue retention to driving growth in recurring revenue and better revenue predictability. As we look at 2023 and beyond, we still have plenty of runway to continue to grow that subscription business as we focus on growth in corporate, video, custom content, geographic expansion and the recent launch of our newest subscription Unsplash plus. Creative revenue was $145.1 million, down 6.8% and 0.4% on a currency-neutral basis, respectively.

Within Creative, our annual subscription product delivered a strong performance, rising 5.7% or 12.1% currency-neutral led by our premium access and iStock annual subscription. The strength in our annual subscriptions, including those within our e-commerce business was offset by softer results in our a la carte offerings. First, macro level impact due some revenue deceleration in our agency business which fits largely within creative. Second, as our customers actively moved into more committed higher ARPU subscription products, we’d expect to see some continued contraction in a la carte. Longest can pressure revenue in the near term, we believe in the long term, it provides us with healthier, longer-term revenue stream which will drive greater lifetime customer value.

Our custom content solutions which Craig touched on earlier, continues to be an offering we are very excited about, generating revenue growth of 31.6% or 39.7% currency neutral. We are still in the relatively early days with custom content with room to continue to grow and drive top line performance as our customers increasingly see the benefits of this unique offering. Editorial which benefited from a strong editorial calendar or what we refer to as an even year impact grew revenue to $82.2 million in Q4, up 3.1% year-on-year on a reported basis and up 10.3% on a currency neutral. This result was driven by our sports and new verticals which benefited extraordinary coverage of major editorial events, such as the FIFA World Cup and the U.S. midterm elections.

Revenue grew across all major geographies on a currency neutral basis in Q4 with the year-on-year growth of 3.1% in the Americas, 2.9% in EMEA and 10.5% in APAC. Revenue less our cost of revenue as a percentage of revenue was 72.4% in Q4, down just slightly from 72.8% in Q4 ’21 due largely to product mix. Our total SG&A expense of $96.4 million was up $2.7 million this quarter, with our expense rate increasing to 41.7% of revenue from 39.2% last year. This is largely driven by incremental costs related to our return to the public markets more than offsetting lower marketing and occupancy expense. For the full year, SG&A increased by $9 million to 40.7% of revenues, up slightly from 40% last year, driven by incremental spend on our cloud IT and cloud-based costs which are primarily tied to growth, public company readiness expenses and marketing with some offsetting savings in occupancy and lower compensation expense.

Adjusted EBITDA was $74.5 million for the quarter, down 9.1% or $7.4 million year-over-year. On a currency neutral basis, adjusted EBITDA was essentially flat. Our adjusted EBITDA margin was 32.2%, down from 34.3% in Q4 ’21 due primarily to the impact of FX on the top line with a more limited FX offset to expenses and higher our SG&A expense. For 2022, adjusted EBITDA was $303.9 million or 32.8% of revenue, down 1.7% reported and up 4.8%, absent the impact of FX, highlighting the stability and health of our business. Even with the incremental expense that comes from operating as a public company, this is the fourth straight year with adjusted EBITDA margin north of 30%. CapEx was $13.3 million in Q4, up $700,000 year-over-year. CapEx as a percentage of revenue was 5.7% compared to 5.3% in the prior year period.

For the full year, CapEx was $59.3 million or 6.4% of revenue, up from $49.3 million or 5.4% of revenue in 2021. We continue to paying CapEx within our expected range of 5% to 7% of revenue. Adjusted EBITDA less CapEx was $61.2 million, down $8.1 million year-over-year, representing a decrease of 11.7% or 1.8% on a currency-neutral basis. Adjusted EBITDA less CapEx margin was 26.4% in Q4, down from 29% in Q4 ’21. For the full year, adjusted EBITDA less CapEx was $244.6 million, a decrease of 5.9% recorded and an increase of 0.9% currency neutral. Free cash flow was $22.6 million in Q4 compared to $46.8 million in Q4 2021. The decline in class cash flows during Q4 was largely driven by lower EBITDA and working capital adjustments related to time.

Free cash flow is stated net of cash and interest expense of $25.9 million and cash taxes paid of $7.6 million in the fourth quarter. For the full year, we generated $103.8 million in free cash flow compared to $139.6 million in 2021. And now turning to our balance sheet. We finished the fourth quarter with $97 million of balance sheet cash, up $26 million from the third quarter and a decrease of $88.4 million from Q4 of . That year-over-year decrease in our cash balance reflects total debt paydown of $310.4 million on our USD term loan in 2022, including a $2.6 million repayment in the fourth quarter. That debt pay down earlier this year, of course, drove a significant improvement to our net debt to adjusted EBITDA leverage ratio which was 4.4x as of December 31, down from 5.1% at the end of 2021.

As of December 31, we had total debt outstanding of $1.43 billion. This included $300 million of 9.75% senior notes $687.4 million of our USD term loan with an applicable interest rate of 8.95%. 447 million year on term loan converted using exchange rates as of December 31, with an applicable rate of 7.25%. And we also have an $80 million revolver that continues to remain undrawn. As of December 31, taking into consideration the foreign exchange rate and applicable interest rates on our debt balance at that time and the effects of $355 million of interest rate swap agreements, our annualized estimated cash interest expense is $117 million. That said, of course, our annual interest expense remain subject to changes in the interest rate environment which we outlined in more detail within our SEC filings.

To sum up our progress in 2022, although we experienced a slowdown in parts of our business, due to macroeconomic impact. We ended the year in a solid financial position, rooted in strong operating metrics that continue to be in growth. We returned to the public market and we removed $1.1 billion of obligations from our balance sheet and we are positioned well as we head into 2023. Switching gears to our 2023 guidance. We anticipate revenues of $936 million to $963 million, representing growth of 1% to 4% year-over-year and currency-neutral growth of 1.9% to 4.9%. Embedded within that guidance is an assumption of continued adverse impact of FX on our financial results. Specifically, assuming that current FX rates hold, we’ve estimated an FX headwind on the top line of about $8 million net for the full year with approximately $13 million of headwinds in the first half of 2023, heavily weighted to the first quarter at approximately $8.5 million.

Given that we follow the bulk of the adverse impact of FX in the second half of 2022, we’d expect the FX impact to shift to a tailwind in the second half of 2023, primarily benefiting the fourth quarter. We expect adjusted EBITDA of $305 million to $315 million, up 0.4% to 3.6% year-on-year and up 1.3% to 4.6% currency neutral. Included in our adjusted EBITDA expectation is a similar cadence for foreign currency, with an approximate $3 million adverse impact in fiscal 2023, including a headwind of about $5 million in the first half of the year, of which approximately $3.5 million as expected in the first quarter. Again, turning into a tailwind in the back half of 2023, largely benefiting the fourth quarter. Please note, embedded within this guidance are the anticipated impact of macroeconomic pressures, costs related to ongoing litigation and incremental costs tied to operating as a public company.

While we feel confident in our ability to continue to drive growth, our leadership team will closely monitor business performance as we navigate through the broader economic impact. We will remain fiscally responsible, prudent and nimble, deploying our capital wisely. We will continue to prioritize further balance sheet optimization and deleverage. And with that, operator, we’d love to open up the call for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. And our first question is from Mark Zgutowicz with Benchmark Company.

Mark Zgutowicz: I have a micro one for Jen and then perhaps a bigger picture one for Craig. Jen, if we look at your creative revenue which is down modestly in fourth quarter, year-over-year, I think up about 2.7% is organically in ’22. If we were to hold a la carte growth, the decline that you’re seeing there as we transition to subscription static, what would those organic growth numbers look like? I’m just trying to get a sense of how much weight that has been putting on your creative business growth which is obviously optical here as you move from a la carte to subscription.

Jennifer Leyden: Did you want to get with your second question? Or do you want me to just jump in there.

Mark Zgutowicz: Sure. I’ll save my second question here. It’s maybe a little bit more or but good.

Jennifer Leyden: Yes. So I just want to make sure I’m understanding your question correctly. So I think you’re trying to quantify the impact of some of that a la carte shifting on the creative performance. Am I understanding that correctly?

Mark Zgutowicz: Yes, yes. And I guess maybe more high level, just trying to get a sense of when there’s an inflection perhaps in your growth where that weight of a la carte sort of leading your business is lighter relative to the subscription growth?

Jennifer Leyden: Got it. Okay. Let me tackle that a few different ways and thank you for the question. So I think just to frame up creative, there’s a couple of things happening there with that performance. That is where we are seeing some of that macro headwind certainly in the second half of the year, we’d see that more pronounced in the creative side of the business. That is going to be driven within the creative space by some softness, both in our agency business as well as some softness on the e-commerce side of things. Now within that, I think what you’re pointing to is some RF a la carte decline also sitting within that creative space. Where does that go? When does that transition and, if you will, I think it’s going to go on for a bit.

We’ve quoted — we have not given a goal per se for where we think subscription revenue should be. We think we can get to a place where subscriptions make up roughly 60% of our revenues, so up from 50% now. So there’s still some migration to happen, right, from RF, a la carte or from non-committed solutions into committed solutions. So I think we’re soon going through some of that migration; so we should expect to see that. The other piece is that this business continues to drive massive amounts of new customers coming into this business, right? So as you can imagine, not every new customer starts on a bigger subscription. So there’s always going to be a little bit of a push and pull with a la carte whether that be new customers, pressure from the agency business shift from RF all apart into subscription.

So, I think we still have some of that shift going on from a la carte to subscription. Hopefully, that answered your question. There were a few different answers in there.

Mark Zgutowicz: Yes. Thanks, Jen. That’s super helpful. And Craig, on the top of AI, obviously, something that has been increasingly in the news here and you signed a partnership with BRIA. I just wanted to cover that from both angles sort of how you intend to use AI to your benefit. And then on the flip side, how you protect your existing exclusive IP from the purposing of content that AI models certainly will be used for. Appreciate any thoughts there.

Craig Peters: Well, thanks, Mark, for the question. And I lost the poll, I had the AI questions first. You put them up and I’m on a few dollars. I’m going to come after you for that. Look, I just thought I’d address the AI topic a bit more holistically. First, I think it’s really important to note that while generative models have made quite the Unsplash over recent months, this is something that Getty Images has been tracking closely, both the progress and the potential of these models for many, many years now. We think about generation models really an AI really across 4 dimensions. So for the first dimension, we believe Getty Images represent unique assets and data that is valuable to these generative and other computer vision models, applications, cloud-based services, etcetera.

We see that as a new revenue opportunity that extends far beyond the license imagery space. And our legal action with Stability AI expresses our strong belief that companies need to license those assets. So that’s the first dimension. The second dimension is the degree to which general models threaten our creative existing creative business, okay? Models in current form have some very real limitations and I’ll speak to those a bit more in a second. But we see general models continuing to improve and to where when developed and used responsibly, they will add yet another source of imagery to what is already an ever-expanding fee of Energy. Since the emergence of digital, Getty Images has always competed against what is essentially an unlimited universe of imagery and there are literally trillions of images out there.

And we’ve successfully done that, right? Today is our 25th 28th anniversary and we’ve done that successfully for 28 years. And we will continue to do this by focus on providing content that creates a response. It’s not just a picture. It’s content at its core that is authentic. It is contemporary and it’s built on the understanding of corporative concepts. This content has always been in short supply and we believe there are still human outcomes that drive this content. And we believe that technology is an enabler and not a replacement. So on a whole, we feel very good about our content library and how it stands up relative to these general models. The third dimension is the question of whether, when and how we offer and integrate such models and content.

At Getty Images, we work to deliver the following points of value to our customers. You guys will probably hear this over multiple calls for me in the future because I talk about it all the time with our company. We try to elevate the quality of our customers in work. We try to improve their time and budget efficiency and we try to reduce their risk. We continue to evaluate generative capabilities against these points of value. This is what the decision-making is going on. And from a current risk perspective, there are legal risks with respect to copyright, training data and potential regulatory actions. From a time and quality standpoint, it currently takes around 10 seconds to generate 4 random low-resolution images. In many cases, these outputs carry significant anomalies such as distorted bases, 6 fingers on a hand, random tax, etcetera.

As a result, use of the imagery can often require significant customer effort to upscale and correct anomalies, let alone the time that they’re actually utilizing to actually search against these interfaces. So for these reasons and current form it falls short of what we continue to be a durable and trusted consumer customer solution, delivering the types of imagery our customers request and consume. So as a result, we’ve been focused on producing and providing the highest quality imagery that connects with the end audiences and then offering the AI capabilities to our customers to seamlessly refine it to their exact needs. That’s the BRIA partnership. And this is capabilities like we talked about in the prepared remarks, such as background removal.