Getty Images Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company operates Getty Images, iStock and Unsplash, licensing creative and editorial visual content and related services worldwide.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $229.3 million | $230.5 million | $690.6 million | $694.8 million |
| Operating income | $3.9 million | $50.4 million | $86.9 million | $146.4 million |
| Net loss | $18.4 million | $118.1 million | $19.5 million | $54.3 million |
| Adjusted EBITDA | $80.3 million | $77.7 million | $229.3 million | $229.4 million |
| Adjusted EBITDA margin | 35.0% | 33.7% | 33.2% | 33.0% |
| Operating cash flow | — | $99.0 million | $129.2 million |
Q3 gross margin, calculated from revenue less cost of revenue, was approximately 73.4%, versus 72.2% a year earlier; nine-month gross margin was approximately 72.8%, versus 72.5%. Q3 basic and diluted loss per share were each $0.05, compared with $0.47 basic and $0.51 diluted in Q3 2022. Nine-month basic and diluted loss per share were each $0.05, versus $0.52 and $0.59, respectively.
Q3 revenue declined 0.5% reported and 1.3% in constant currency; nine-month revenue declined 0.6% reported but grew 0.7% in constant currency. Q3 operating results included a $106.1 million litigation charge and a $60.0 million insurance recovery, for a net $46.1 million litigation expense. Nine-month operating income also reflects this net charge. Adjusted EBITDA excludes litigation net of recovery and other specified adjustments, so it should not be read as GAAP profit.
Revenue mix and operating indicators
- Q3 Creative revenue was $145.2 million, essentially flat reported and down 0.8% in constant currency. Editorial was $79.9 million, down 2.3% reported; Other was $4.1 million, up 22.2%.
- For nine months, Creative revenue fell 1.7% reported, Editorial grew 0.6%, and Other grew 16.9%.
- Management cited growth in annual subscriptions, partly offset by declines in a la carte and monthly products. LTM annual-subscriber revenue retention was 94.5%, down from 103.0%; active annual subscribers increased to 202,000 from 107,000. Purchasing customers were 826,000 versus 837,000, and paid downloads were 95 million versus 94 million.
Financial position and liquidity
- At September 30, cash and cash equivalents were $113.5 million; restricted cash was $4.3 million. Current assets were $340.9 million and current liabilities $407.6 million.
- Long-term debt, net of issuance costs and discounts, was $1.380 billion, down from $1.429 billion at year-end 2022. Face-value borrowings comprised $300 million of Senior Notes, $639.6 million of USD Term Loans and $443.6 million of EUR Term Loans. The $150 million revolving facility, extended to May 2028, was undrawn. The company reported compliance with debt covenants.
- Cash from operations was $99.0 million for nine months, down 23.4% year over year; capital expenditures were $41.9 million. Cash increased by $15.4 million, to $117.8 million including restricted cash. The company repaid $40 million of USD Term Loans during the period.
- Operating cash flow included significant litigation-related working-capital movements: a $96.7 million increase in litigation reserves and a $60.0 million insurance recovery receivable. These items affect interpretation of the cash-flow comparison.
Developments, outlook and risks
- Warrant-holder litigation: On October 27, 2023, after quarter-end, a court awarded former public warrant holders $36.9 million and $51.0 million, respectively, plus 9% prejudgment interest. The company prevailed on the plaintiffs’ other claims and intends to appeal the contract judgment. It accrued $96.7 million of litigation reserves and recorded a $60.0 million insurance recovery, the stated coverage limit; it received a further $5.0 million of insurance proceeds after quarter-end.
- Tax contingency: A Canadian tax assessment relating to 2015 intercompany transactions is being contested. The company estimated a possible advance payment of up to $19 million in 2023 and a maximum potential outcome of up to $28 million if the tax authority prevails; management believes it is more likely than not to prevail.
- Outlook: No specific numerical revenue or earnings guidance is provided in the filing. Management said existing cash and operating cash flows should fund ordinary operations and planned investing for at least 12 months and thereafter for the foreseeable future. It expects SG&A to rise in dollars but remain relatively stable as a share of revenue in the near term, depreciation to remain stable, and amortization to decline as intangible assets become fully amortized.
- Business and financial risks: Competition, customer retention and subscription revenue retention, foreign-exchange exposure, interest rates and substantial debt, litigation and tax uncertainty, and evolving AI-related legal and ethical issues are among the risks discussed. Getty Images launched its generative AI tool in September 2023, trained on its content and marketed with commercial-use indemnification; it is also pursuing separate copyright and related claims against Stability AI in the U.S. and U.K.
- Management concluded disclosure controls were effective as of September 30, 2023 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, appeal timing, final payment obligations and insurance recoveries in the warrant-holder litigation; compare the recorded reserve with ultimate cash costs.
- Whether subscription growth can offset weaker customer counts and below-100% annual-subscriber revenue retention.
- Operating cash generation excluding litigation-related working-capital movements, and capacity to service debt amid interest-rate and currency exposure.
- Outcome and cash-payment requirements of the Canadian tax dispute, and any developments in the Stability AI proceedings.
- Performance and commercial adoption of the new generative AI offering, including associated legal, contributor-compensation and reputational risks.