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 Steven Kanner, Vice President of Investor Relations and Treasury at Getty Images. Thank you. You may begin.

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 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.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.

Thanks, Steven. 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 days back. 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 their 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 our 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 with 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 Ryder strike, the actors' 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 with the actors' 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 strengthened relative to our expectations and we continue to…

As Craig highlighted, during the third quarter, we continued to see pressure on our top line performance, increased FX volatility with 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 twelve months, or LTM period, ended September 30, 2023 with comparisons to the LTM period ended September 30, 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 subscription. 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 U.S., Canada, France, Germany, the U.K., 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 was 94.5%, compared to 103% in the 2022 LTM period. The decline was primarily driven by…

[Operator Instructions] Our first question comes from Ron Josey of Citi. Please go ahead.

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 into 4Q, help us understand a little bit more how this might play out into '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.

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 it was - 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 on 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 could expect improvements over Q1, but not fully back to 100% until Q2.

Yes. 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, 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 at, I would still think that'd be in the 72% range. Similar on the EBITDA side, 35%, that is higher. You know, 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 sign of what we thought was going to be some top line pressure. So we're seeing the benefits of that margin. But again, as we think about what we'd expect to see that stabilize at, I would you know, anchor ourselves down to that 32% give or take range as what we'd expect to see normally.

Okay. Thank you, Craig. Thank you, Jen.

Thank you.

Our next question comes from Danny Pfeiffer of JPMorgan. Please go ahead.

Hi, 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.

Yes. 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 [indiscernible] and Anadolu as two critical partners to our coverage there. You know, so it an - 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. And - but I wouldn't expect it to have a financial 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 in order to support it. So you know, operating in war zones is not something that is without cost. So certainly I think, you know, Getty is playing its normal important role 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 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, you know, 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 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 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.

Thanks.

You got it.

Our next question comes from Mark of The Benchmark Company. Please go ahead.

Hi. Good evening, Craig and Jen. Craig, just curious what the - how 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 revenue - year-over-year revenue impact from iStock, iStock subscription conversion to or from a la carte. I'm just trying to get a sense of how little that was in the quarter. And then out of that if you look at your last twelve months 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.

Yes. Okay, I'll throw it at Jen on the iStock item. I'll handle the revenue 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, you know, 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, you know, 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. You know, 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. Jen, do you want to take -

Yes, On the subscriptions piece, I think, Craig, you touched on the revenue retention, but more broadly, you know, that growth in annual subscribers is actually - is something we feel really good about. We mentioned in the prepared remarks it's a fourth straight quarter where we've seen the year-on-year growth in that count being North of 50%. And at its face 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 market. 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 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.

Yes. And I would just add to that, Jen, you know, Mark, I think one of the things that we haven't talked about that we're actually feel pretty good about in the business. We know that there's a lot of impacts strike and currency and items, but you know, 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, we'll get to add back some things in the coming quarters as the markets normalize a bit.

That's all helpful. Maybe I could squeeze one last one in on the agency business. Just curious how that paced on a quarter-over-quarter basis in terms of revenue growth and are we starting to see that sort of baseline you know, concentration there has obviously come down? Just curious if we've kind of seen the trough there. Thanks.

We were - in Q3, we did not see the trough. As Jen mentioned, we continue 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, and - but hope again that we'll see some benefits of that going forward.

Got it. All right. Thanks very much. Appreciate it.

[Operator Instructions] Our next question comes from Tim Nollen of Macquarie. Please go ahead.

Hi, thanks very much. Could I ask a - first a 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, you know, potential path that you're going to have to make? And if you could explain how the surety bond works, please, you mentioned amortization of it. I think you have the terms or just how that works in general will be very helpful. Thanks.

Yes. I will pass to Jen 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 warranty - under the warrant agreement as well as with Securities laws. So that's first of all, I think that, you know, 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 is 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, Yes, I mean the exposure, if we were in fact to lose on appeal and exhaust our options and continuing to take this forward you would basically be looking at those net amounts.

Right. So around 30 reported - these 60 - around $30 million or so difference?

Hi, Tim, you probably haven't had a chance to come through the filings yet, but what you'll see on there is with that law firm litigation of about $112.5 million and the netted against that is there an insurance recoverable of $60 million. So in loss on litigation there's 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 placed the bond through to however along the bonds in place to that same loss on litigation account.

Okay.

And the cost of that bond is roughly in between the 1% and 2% range.

Yes, it's hovering around the 1.5% range.

Okay. Okay. I think I get the principles there. Thanks very much.

Okay.

Thanks, Tim.

Thank you. Ladies and gentlemen, that was the final question.

Great. Well, thank you all for making time. Very much appreciated. Appreciate the questions and look forward to the next call. Thank you.

Thank you.

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for joining us, and you may now disconnect your lines.