Getty Images Holdings Inc (GETY) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to Getty Image's First Quarter 2023 Earnings Conference Call. Today's call is being recorded. We have allocated 1 hour for prepared remarks and Q&A.

At this time, I would like to turn the conference over to Steven Kanner, VP of Investor Relations and Treasury at Getty Images. Thank you. You may begin.

Good afternoon, and welcome to the Getty Images First 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.getyimages.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 rate. 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 First Quarter 2023 Earnings Call. I will start by addressing the quarter's business performance and progress at a high level before Jen takes you through the first quarter financial results.

First quarter 2023 reported revenue was $235.6 million, representing year-on-year growth of 2% and currency-neutral growth of 5.5%. Our adjusted EBITDA finished at just over $76 million for the quarter. This reflects a reported year-on-year decrease of 2% and growth of 2.2% on a currency-neutral basis. As accounted for in our guidance, we anticipated currency headwinds through the first half of 2023 to impact our bottom line. However, we anticipate this will significantly improve over the second half of the year.

Top-line results reflect continued softness in some parts of our business, notably in Europe and some agency customers, which we believe is due to customers approaching spend more cautiously in the challenging macro environment. Our iStock e-commerce performance continues to perform well and is the driving engine behind our growth in total purchasing customers and annual subscribers with the latter totaling 69,000 net additions in the quarter. Unsplash+, the paid subscription we launched in Q4 2022 continues to show positive signs with respect to customer acquisition, utilization, and renewals. Our total paid downloads increased by 6.6% year-over-year, with contributions to growth coming from each of our brands from creative and editorial and from stills and video. This speaks to the increasing value our customers are deriving from our offer.

Of course, we believe increased commitment and consumption is underpinned by the uniqueness and quality of our content. In the quarter, we were pleased to renew our long-standing exclusive content partnerships with Sky News and Angola. The more recent Met Gala and the coordination of King Charles the third also demonstrate our unique coverage capabilities and distribution.

During the quarter, we were pleased to announce our collaboration with NVIDIA to develop and distribute responsible, generative text image and text and video offerings. We are committed to building new, durable recurring revenue streams with this technology, and this collaboration addresses many of the concerns with respect to current generative models and speaks to the uniqueness of getting image assets in the context of generative AI. Getty Images delivers a unique level of quality with respect to the content and metadata, a level of exclusivity and rights, and a level of research expertise and ongoing flow of high-quality contemporary content to maintain and improve these models over time. In collaboration with NVIDIA, we look forward to commercializing these responsible AI models over the coming quarters to bring new capabilities to our collective customers.

Further leveraging responsible AI and building on the core strengths of our pre-shop model, which continues to maintain distinct advantages with respect to quality, time efficiency, resolution and search costs. In partnership with Bria, we deployed one-click background removal functionality to all of our iStock subscribers. We're seeing strong initial adoption, and we'll be expanding these capabilities to object removal during the second quarter. These integrated capabilities allow our customers to get the exact images they need with increased time and budget efficiency.

Following the close of the quarter, we were pleased to close on amended upsized and extended $115 million revolving credit facility. This facility provides us with increased financial flexibility. And as a result, we have made a $20 million voluntary repayment on our U.S. dollar term loan. As a company, Getty Images continues to focus on providing meaningful value to our customers by allowing them to elevate their creations and audience connections, saving their precious time and resources and reducing the risk. We're focused on expanding our differentiation based on the quality of our offerings, supported by our exclusive contributors, our premium content partners, our event access and rights, and through the depth of our content expertise in archive. We are embracing new capabilities to increase the value we provide to our customers and to create new and recurring revenue streams.

We are staying mindful of current near-term economic conditions through disciplined cost management while continuing to invest in long-term across technology, new products and geographic expansion. We see continued momentum highlighted by our growing customer base, growing customer commitment via annual subscriptions, growing customer downloads and video consumption, growing geographic penetration, and our ability to attract and retain high-quality partners and customers. And with that, I'll hand the call over to Jen, who will take you through the more detailed financials.

Hi, everyone. Our first quarter financial and operational results reflect a solid start to the year in spite of continued uncertainty in the broader macroeconomic environment. We drive currency-neutral growth across all of our geographies. We continued our strong trajectory across our KPIs and expanded our subscription business. And overall, we delivered healthy bottom line results and cash flow generation, so a very solid start to 2023. I'll begin by reviewing some of the key operating metrics or KPIs that underpin our financial performance.

Note, today's press release contains information on all 7 of our KPIs, but I'll touch on just a few here. All KPI metrics are as of the trailing 12 months or LTM period ended March 31, 2023, with comparison to the LTM period ended March 31, 2022. As a reminder, beginning with our Q3 '22 results, we made 2 go-forward changes to our customer data reporting. I'll highlight the impact of these changes on total active annual subscribers, which was more meaningfully impacted by those changes.

Total purchasing customers rose to $829,000 from $825,000, an increase of 0.5% over the comparable 12-month period. A more moderate yet still healthy level of growth given the current macroeconomic environment. On a sequential basis, we did see a slight pullback in total purchasing customers, focused in the a la carte part of our e-commerce business, partially offset by growth in our subscriber base, which drove a sequential pickup in annual revenue per purchasing customer from 1,109 to 1,123.

We delivered impressive growth in active annual subscriber count, adding 69,000 to reach 150,000. This is an increase of approximately 85% over the corresponding period in 2022. Absent the reporting changes I mentioned earlier, the increase would have still been a robust 66%. This growth is fueled by our e-commerce subscription offerings as well as our largest subscription premium access. Annual subscription revenue made up over 50% of total revenue for the second consecutive quarter. For those customers on annual subscription products, we retained revenue at a strong 99.8% compared to 104.6% in the LTM period ended March 31, 2022, a period which benefited from a COVID-impacted year-on-year compare.

We grew our paid download volume by approximately 6.6% to $95 million, driven by growth in downloads across both editorial and Citi. And last, our video attachment rate, which measures our customers' engagement with video rose to 13.4% from 12% in Q1 '22. We believe the investments we are making to improve video awareness through improved search and high-value differentiated video content and expansion of video in our subscription offering will drive this metric higher over the coming years.

Turning now to our financial performance. As we expected, our results this quarter were impacted by the headwinds in foreign exchange rates, primarily with respect to the euro and the pound, driving a meaningful difference between our reported and our currency-neutral year-on-year performance. As reflected in our guidance, assuming these rates hold relatively steady to where we see them today, we expect foreign currency headwinds to ease as we move through the year, turning to a slight tailwind in the back half of 2023.

Total revenue was $235.6 million, up 2% year-on-year on a reported basis and up 5.5% on a currency-neutral basis. We saw growth across all geographies, driven by a strong performance in our editorial business, continued demand from our corporate customers, and further expansion of our subscription business. Included in these results are certain impacts of the timing of revenue recognition, which contributed approximately 330 basis points to our year-on-year revenue growth in the first quarter.

Our annual subscription revenue grew to 50.7% of our total revenue in Q1, up from 48.3% in Q1 '22 and 49% for the full year of 2022. The increase this quarter was led by growth in our premium access and iStock premium plus video subscription. This momentum points to the opportunity that remains for further expansion of our subscription business, which we can capture by offering the right solutions that provide our customers with access to an unmatched quality, depth, breadth, and unique mix of content across our image, video and music library.

Creative revenue was $146.5 million, down 1.3% year-on-year and up 1.9% on a currency-neutral basis. Within creative, our annual subscription products were a positive driver, growing by 7.9% year-on-year and 10.8% on a currency-neutral basis, led by our premium access in iStock subscription. Within our overall e-commerce business, we saw the strongest themes in our iStock subscription with customers shifting from monthly or a la carte products into our annual offering and with the conversion of free trial customers to paying customers, which provides us with more stable, long-term revenue stream.

In addition, our Unsplash+ subscription continued to build momentum, although still off of a relatively small base, given we are still in the very early days of this product launch. Where we continue to see challenges is in our agency business and in Europe, where ongoing macro-level pressures and the softer ad market impacted our performance. Editorial revenue was $84.6 million in Q1, up 7.5% year-on-year and 11.3% on a currency-neutral basis. This was another excellent performance for our editorial business, led by strong double-digit growth on both a reported and currency-neutral basis in entertainment.

The archive and used verticals were also strong contributors growing high single digits on a reported basis and double-digit currency neutral. This more than offset a challenging year-on-year compare in sport with the 2022 Beijing Winter Olympics in Q1 of last year. Our revenue grew across all major geographies on a currency-neutral basis with year-on-year growth of 6.6% in the Americas, 3.2% in EMEA, and 6.2% in APAC. Revenue less our cost of revenue as a percentage of revenue remained consistent and strong at 73.1% compared to 73.2% in Q1 2022.

Total SG&A expense was $102.4 million in the quarter, up $9.2 million year-on-year at 43.5% of our revenue, up from 40.3% last year. The higher year-on-year expense largely reflects higher staff costs, which included the initial vesting of employee stock compensation, incremental cost of being a public company, and legal expenses, partially offset by savings in occupancy. Adjusted EBITDA was $76.1 million for the quarter, down 2% or $1.6 million year-on-year. On a currency-neutral basis, adjusted EBITDA was up 2.2%. Our adjusted EBITDA margin was 32.3% compared to 33.6% in Q1 2022, with the lower, though still very strong margin rate driven by the impact of FX and higher SG&A expense.

CapEx was $15.5 million in Q1, a decrease of $700,000 year-over-year. CapEx as a percentage of revenue was 6.6%, down from 7% in the prior year. The decreased spend reflects lower capitalized labor costs and the timing of equipment purchases, partially offset by content acquisition to fuel our Unsplash+ subscription. Adjusted EBITDA less CapEx was $60.6 million compared to $61.4 million in Q1 of last year, representing a slight decrease of 1.4% and an increase of 3.8% on a currency-neutral basis. Our adjusted EBITDA less CapEx margin was 25.7%, down from 26.6% in Q1 of 2022.

Free cash flow was $16.4 million compared to $33.1 million in Q1 '22. Lower free cash flow primarily reflects working capital adjustments related to timing, inclusive of cash interest expense of $37 million in Q1, an increase of $7.9 million over the prior year due in large part to the timing of those payments. Under our term loans, we can elect different payment terms, for example, 1, 3 or 6 months, which can shift when a payment is due from one quarter to the next, impacting cash flow from one quarter to the next. Cash taxes for the quarter were $3.5 million, a slight decrease from $3.8 million in Q1 2022.

Our ending cash balance on March 31 was $116.8 million, up $18.9 million from the end of 2022 and a decrease of $94 million from our ending balance in Q1 of 2022. That year-over-year decrease in our cash balance reflects a total debt paydown of $310.4 million on our USD term loans, inclusive of a $2.6 million repayment in the first quarter of this year. We ended the quarter with a net leverage of 4.4x unchanged from the year-end of 2022 and meaningfully down from 5x as of March 31, 2022.

As of March 31, we had total debt outstanding of $1.441 billion, including $300 million of 9.75% senior notes 84.8 million term loan with an applicable interest rate of 9.5%. $456.5 million term loan converted using exchange rates as of March 31, 2023, with an applicable interest rate of 8.06%. As Craig noted earlier, just last week, we successfully amended the extended pent-up side of our revolver, increasing our borrowing capacity to $150 million from $80 million and extending the maturity to May of 2028 from February 2024. This new expanded facility, which continues to remain undrawn, improves our access to liquidity and our ability to operate nimbly.

Our ability to nearly double the size of our revolver and the underlying support of our banking partners demonstrates the confidence in our business model and our company's long history of delivering strong execution and financial performance and in the opportunities that lie ahead. In addition, earlier this week, we used $20 million of our balance sheet cash to repay a portion of our USD term loan. A successful repayment demonstrates our commitment to further deleverage the balance sheet with our strong cash flow generation. Based on the foreign exchange rates and applicable interest rates on our debt balance as of March 31 and taking into account $355 million interest rate swap agreement, the undrawn fee on our amended revolver, and the $20 million debt repayment in May, our 2023 cash interest expense is expected to be approximately $121 million.

Of course, our actual interest expense remains subject to changes in the interest rate environment, which we outlined in more detail within our SEC filings. In summary, this is a strong free cash flow generating business. We have taken steps to create increased flexibility from both an operational and capital structure standpoint. We have meaningful growth opportunities ahead, and we will remain disciplined and focused on execution and on driving long-term shareholder value.

Now turning to our guidance for 2023. We continue to expect revenue of $936 million to $963 million, representing growth of 1% to 4% year-on-year and currency-neutral growth of 1.5% to 4.5%. Assuming current FX rates hold, we estimate an FX headwind on the top line of about $5 million net for the full year. This includes the $7.6 million negative impact from Q1 and an estimated headwind of approximately $3.5 million in the second quarter, implying a benefit of about $6 million in the second half of 2023. Given that we saw the bulk of the adverse impact of FX in the second half of 2022, we would 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 up 3.6% year-over-year and up 0.7% to 4% currency-neutral. Included in the adjusted EBITDA expectation is an approximate $1 million adverse impact from FX in 2023, including the $3.2 million impact in Q1 and a headwind of about $1 million in the second quarter, again, assuming a tailwind of approximately $3 million in the second half of 2023, largely in the fourth quarter. Please note that built into this guidance are the anticipated impact of macroeconomic pressures as well as incremental costs related to ongoing litigation and costs tied to operating as a public company. We believe that our proactive approach to cost management and execution against our growth opportunities will position the company to continue to deliver strong financial performance and ongoing operational agility.

We will continue to remain disciplined and nimble deploying our capital to what we believe is the highest and best use with continued emphasis on our balance sheet optimization.

With that, operator, please open the call for questions.

(Operator Instructions) Our first question is from Ron Josey of Citi.

I wanted to ask 2, please. The first, and it's going to be on AI, Craig. So the first one just on the NVIDIA partnership and to customize the foundation model using licensed visual content. Help us better understand the partnership here, how it addresses the concerns that we've been talking about in the past. And when do you expect sort of the go live for this partnership? And then the next question is for Jen. Just with subscriber growth accelerating to 150,000 subscribers. Just talk about the drivers here. I think iStock was mentioned, but any insights on the subscriber mix between corporate agency would be helpful.

Great. Thanks for the question. I'm actually going to -- if it's okay, I'll certainly address the NVIDIA question and the go-live timing, but I thought it's just useful because I suspect as it has been across media, generally, AI is going to be a topic of this call, and mas will just kind of address it holistically. So I think, first, I want to kind of start with the core business and get images has been around for 28 years. And throughout those 28 years, the universe of available imagery has grown exponentially. It's driven by a move to digital cameras, then it was driven by a move online, then it was driven by the proliferation of the smartphone, and then ultimately, social media. And it's basically resulted in the university of inventory that's almost infinite. And generative AI is now an additive source to that.

We, as a company, getting is never focused in on competing with nor being a source of the infinite universe of images. Instead, we've always focused on being a solution of our customers that provides tangible value despite the ubiquity of imagery. Within editorial, approximately 1/3 of our business, we provide a timely, reliable, trusted, and comprehensive level of coverage across news, sport, and entertainment met with unique access and rights, exclusive high-quality content partners, and unmatched content. And that's really the value that we're delivering there.

Within creative, our pre-shot solutions provide customers with a selection of high-quality, contemporary, authentic, conceptual imagery that allows our customers to meaningfully engage their end audiences across every geography, across every culture, and every community. We do that through deep research on what is required and what will be required. And we combine that with an experienced and exclusive contributor base that produces a level of imagery that is distinct. Our solutions are incredibly time and budget efficient and substantially reduce the risk of the customer.

So generative AI adds to the university of imagery. But in current form, we see some quality elements issues with that. We see some legal concerns, which I can address. But we do expect those to resolve over time. And even with the resolution of those, we don't see generative models as a real threat to the core value proposition we provide in our services nor are replacements for the types of content our customers consume from Getty Images. In fact, I can actually see a world where our services and our content provide expanded value in the face of a proliferation of generative content.

I think starting there, that's kind of the base of how we look at AI, when we look at it through the lens of our traditional kind of pre-shot core business. We then pair that understanding with a view that there's also a significant opportunity for getting images in generative AI. And we see that across 5 dimensions. We're going to start with really the value contained in our preshow offering and building off of that, we see the opportunity to provide our customers with time and budget-efficient services and allow them to easily transform our inventory to meet the specific needs and projects.

As discussed in my prepared remarks, we've already introduced one-touch background removal, and we will be launching object removal in the near term. That's through a partnership with Bria. It's independent of our NVIDIA relationship, and we're excited about where that can go based again on some of the take-up that we're seeing.

The second element that we see an opportunity of generative AI is in partnership with NVIDIA. And that's introducing generative models to our customers that address the legal risk around much of the current models that exist out there and working hand in hand with our fresh offering. What are those risks? Well, a lot of these models, in fact, most of these models are trained off of intellectual property where they don't have rights to. That brings real questions into play that are unsettled. We have brought a legal challenge against Stability AI to try to get clarity on that. But I think that's one of the primary risks of that. There are also risks though that go beyond intellectual property, and they're into privacy and whether you have rights to the individuals that are portrayed within those images, et cetera.

So we're trying to really bring a solution to the table that addresses those elements in partnership with NVIDIA. And we expect to launch those services over the second half of this year. So that's the second piece in partnership with NVIDIA. And you can think about it as one where we expect to be a distributor of that technology and those services to our customers. And we also expect NVIDIA to be distributing those to some degree through their cloud generative cloud services offering.

The third element that we see is leveraging compliant generative AI as a tool for our creative experts and contributors to efficiently bring new high-quality content and visual concepts to our pre-shot offering. This is no different than the advent of software that allowed our visual artists to create really new interesting concepts or ways to depict concepts in a new way. And so we're excited about that, and we think it can actually add to our pre-shot offering.

The fourth area is creating a new recurring data licensing stream based off our ongoing flow of exclusive high-quality content and metadata that can utilize the train and maintain or models. And so those are conversations that we are having and continue to expect to have and NVIDIA obviously, is one of those partnerships out of the gate. And then lastly, on the cost front, we can see how AI can help us improve our efficiency over time across a variety of processes and functions. And then beyond those specifics, we're also highly engaged to advance frameworks for degenerative AI solutions that respect long-established intellectual property laws and personal privacy and then work to address things like misinformation, bias, and other concerns that could be generated by the models.

And I think actually, today, in the EU, there was some announcements that came in some work that's progressing through the EU legislative side of things, which we think is encouraging. So it is a more winded answer, but hopefully, I addressed kind of how we think about AI in its totality and then specifically how NVIDIA will come to bear and then the timing of when we go live. Jen, do you want to pick up on the sub-growth that we're seeing at iStock and some of the trade-offs we're making to drive ARPU?

Thank you for the question, Ron. I can't promise my answer will be as interesting as Craig's answer was just now. But so yes, tremendous growth in our annual subscriber count. To answer your question, the majority of that is going to be sitting in our corporate space. So that growth is going to be driven by our iStock subscriptions as well as a lot of success we've had just over a year ago, we launched a free trial subscription program, and we've really seen good results from that, good conversion. That's part of our strategy to tap into some of our growth markets. So that free trial and the subsequent conversion really driving some of that growth as well.

So largely sitting in that corporate space. As I think you know, around the agencies, for the most part, don't consume on a subscription basis. So we're seeing our corporate piece of our business approaching nearly 60% of our revenue and certainly some of the subscriber growth is helping that.

The next question is from Mark Zgutowicz of Benchmark Company.

Craig, maybe just a follow-up on the Gen AI in terms of, I guess, near-term economics, sort of how you see those working out, I guess, both for Getty and also to the creators on the generative creator community, if you will. And then if you think about over the next few years or longer term, if you see sort of a dilutive impact of generative AI imaging to actual photocopy and sort of how you manage the net economics both to yourselves and to the creative community. I know that last one is sort of a big question, Mark, but just your initial thoughts there would be helpful.

I think we have a solution that we're working on building with NVIDIA that's going to benefit from the quality of our content and metadata. And we think we can bring that to market in a way that is additive into the business. It is a stand-alone service that I think allows our customers to do some things easier and faster in certain cases. In other cases, not. And we'll be offering that on a stand-alone value basis. And obviously, there are pricing models that are developing around that, but they're pretty nascent. But we think we can get probably some incremental value given the quality of the model and kind some of the assurances that can go along with that model given our customer base. So I expect to start to see those economics come in over the second half as we launch these, ultimately, I don't expect it to be a material contributor to revenue within 2023.

But again, I think it can be a meaningful recurring revenue stream over time. In terms of the economics to our creators, I would expect the margin profile of that revenue stream to look very consistent with our broader pre-shot revenue base. And that's because we are going to be putting compensation pools together for the contributors that created the content and the metadata that these images were trained on and that we're going to do that at a level that's, I'd say, very consistent to our current margin profile.

Over the long term, as I kind of mentioned in the long-winded response I gave to Ron, we know what our content -- the types of content our customers consume from us. And we know the recency of that content. We know how much it needs to be contemporary, even leading in terms of kind of what are the visual trends and where are the cultural trends, et cetera. And we've always competed against what is, in essence, infinite imagery and in many cases, infinite free imaging.

And so we just look at generate as a service that brings unique value, but I don't think it's a fundamental threat to the types of content that we offer. And that's not -- we don't offer the same contract that everyone else does, maybe within our space. An asset is not an asset, it's not an asset. We really do things differently. And that's why we've got that creative team. We're doing deep research. We're working with exclusive contributors. We've built a different model. And that model has always been one that is about what's to come. And AI for all of its power and potential productivity that you can bring, it lacks that. And so we'll continue to be and what I've always kind of considered the business that we're in, which is on the editorial side, it's what's happening now and how do we take you back into a real view of the past through our archive. And in the creative landscape, it's really kind of almost a fast fashion business. How do we create things that are contemporary, how do we bring ideas and concepts to life in new ways?

And that's the value that we really add to the customers. So I don't expect and obviously, we don't all have a crystal wall, but I don't expect to see these. And I think we're not seeing it in any of the metrics that we look at in this business in any way shape or form today nor are we hearing it in the customer conversations that we're having with our customers across agency, media or corporate. In fact, in many cases, we're hearing that the value of our services and the content on the pre-shop side of things probably increases to them as they bear with some of the risks and challenges of kind of generative AI out there.

That's super helpful perspective, Craig. Jen, maybe just if I could ask a question in terms of what's anticipated in your guidance? You mentioned on the ALA carte side and weakness. I'm just curious in terms of just general agency weakness. Is that what direction that's adding? Is that getting, I guess, worth saying some context there and sort of what's controlling your guidance? And then in terms of the retention, obviously, you're coming off a big COVID benefit there, but the retention levels that you're showing now, do you anticipate that level to deteriorate a bit from there? Is that fair? And then maybe one last one, Jen, if I could, just as a side, the percentage of net adds that came from splash if you're prepared to answer that yet.

Sure. So on the flash question, not disclosing that yet, primarily just because as I mentioned in the prepared remarks, it's really early days on that. But we like what we're seeing. We like seeing the unlash customer base engaged with the product. We're seeing a healthy volume of new subscriptions added every day. We're seeing a strong favorable mix to annuals versus monthly. So all good things there, not a material piece of our subscriber count at this point. On the broader revenue retention question, so yes, you're absolutely right. For reference in 2020 from memory, I think our revenue rate dipped down to 89%. So that was a low point, certainly for this company, all entirely due to COVID. So we did get that positive compare as you referenced in 2021.

So us hovering around 100% sounds just fantastic to me. If you look back at our history and you strip out that one COVID-impacted period, we tend to average around 100%. So we would certainly expect to see that stick somewhere around that level. In terms of guidance, I think we set out with our guidance really to try to factor in some level of macroeconomic pressure. Again, for this business, we tend to see that on the agency side of things. So to the extent we know what we know, we have factored what we think that impact could be on our business. Again, the agency is well under 20% of our revenue at this point. So whatever we expect to happen there, we did factor into our guidance coming out of how we ended Q4, a slight improvement in agency performance relative to how we exited the year, but still seeing that side of the business being in decline.

Mark, I would just add on the subs and the revenue retention side of things in some of the alerts I think it's useful context, I think Jen kind of hit on this in our initial kind of remarks. But what we are doing at one level is we are pushing for annual subscriptions more aggressively on the iStock platform. And that means that it has a slight impact in terms of purchasing customers. We're trading off a bit fewer purchasing customers in order to get higher LTV and ARPU from annual customers on iStock. When we add those customers in, they do cohorts for those customers in those product offerings. And these are subscriptions that are like 10 downloads a month, 25 downloads a month, typically within small businesses. Those cohorts do have lower overall revenue retention to the company.

Now again, it's at a highly advantageous kind of ARPU and LTV trade-off to the business. So as we continue to push that. And I think you can see that in the numbers that we are pushing in, and we are getting good outcomes in driving to that. We are going to see that revenue retention slightly weaken over time, just as we push into a new customer base that historically has a higher churn relative to what I would say the enterprise kind of getting images customer base where we see very little to no customer churn at all.

The other thing I'd note there, Craig, is historically, this company does have a good track record of migrating customers up that subscription value chain. So as these customers as Craig notes are coming in, in some of the smaller subscriptions, that creates the opportunity for us to build revenue over time for that same subscriber base.

The next question is from Tim Nollen of Macquarie.

I've got a couple of quick modeling questions, not all AI-related, but your editorial growth was very strong. I wonder is that in some way related to the growth in the annual active subscribers or is that more tied to some specific events that I think you called out in the release? And secondly, just if you could refresh the memory, your purchasing customers were down quarter-over-quarter as was your paid download volume kind of flattish. I wonder if that's the seasonality or if there's anything else in there.

Yes. No, I appreciate it. I'll take this, Jen, and then feel free to add anything. On the editor front, it's not driven by any major events. In fact, on a year-over-year comp last year, there was a Winter Olympics and this year, there wasn't. So we're just seeing really strong performance in the editorial business. It's one that based off what we've seen from some of the kind of editorial services and what they published in terms of their revenue growth within that, we feel really good about our performance.

And I think it just speaks to the value that we're delivering to our customers. And I think we also have to recognize that we're delivering that value and seeing that outcome in a time where our media customers are in a challenged environment. We're seeing advertising declines overall. And they're speaking, I think in volumes through their consumption of our product and their spend with us, how important that is to them having an efficient business.

So no, it's not driven by events. It's driven by, I believe that the fundamentals of a really strong product they getting images put out there that is unique within the space. On the purchasing customer side of things, again, I would highlight some of the comments I was just mentioning to Mark, is that we are somewhat trading off lower purchasing customer quantum in order to get to higher commitment on the annual product. And that's most notable within the stock part of the business.

So we trade off some level of purchasing in order to get higher levels of subscriptions, those subscriptions kind of at a much higher level of spend within the year and at much higher levels of LTV, lifetime value to the business. So that's a trade-off that we are consciously making. Obviously, we continue to monitor that, and we're looking at all the details around that as we make that, and we continue to test it and learn into that trade-off, but it's one that's been very positive to the business over kind of the last -- we really started deploying this about 18 months ago, and we've been ramping it up.

And as we get more confidence and we see more data, we ramped it up a little bit more aggressively, and you're starting to see that come through the numbers.

Yes. And if I could just chime in there on editorial. So you mentioned the -- some of the events you mentioned in the prep remarks, those are actually Q2 events. So as Craig noted, no major events in Q1. But really, we're seeing this growth anchored in entertainment. We saw our strongest quarter in terms of reported revenue for entertainment since 2015. So if you've been following the company since COVID, you've heard us talk a bit about entertainment seeing the lag in terms of full recovery post-COVID.

I mean this, again, is one of the strongest quarters we have seen for entertainment in an 8-year period. So entertainment is back in a very, very big way, add to that double-digit growth in news and archives as well helps really, really solid performance across editorial, but an exclamation point on that editorial results -- excuse me, on that entertainment results.

The next question is from Brett Feldman of Goldman Sachs.

Modeling follow-up and then a follow-up question to that. You reiterated the full-year guidance ranges that was good to see. It certainly looks like there were some areas of the business that performed certainly better than we would have expected. You were just referring to one of them, which is editorial. Obviously, you're showing great traction with subscriptions. I'm wondering if you've made any modifications to the composition of your revenue as you strive towards your guidance for the full year, you don't generally break it down that way. But it would seem like there are certain areas with real tailwinds.

And I was just curious if that's something we should be incorporating into our outlook. And then the other question is, it was good to see you're continuing to boost liquidity. Is that just to be cautious in an uncertain environment? Or should we see that as a signal maybe you're looking to be a bit more acquisitive in an environment where maybe valuations have come down a bit.

Yes. So maintaining guidance for the year, no change in the mix of revenue. And a reminder on the editorial side of the business, we are coming off of that even year in 2022 with the bulk of that event revenue in the editorial business in 2022 and the balance of the year to come. So you're right to call out some stronger performance in some areas, but not anything materially different in terms of competition of guidance that we would call out for modeling.

Yes. And then I think on the capital front, I think we will have our eyes open in the ears of the ground as our opportunities present themselves around M&A. But we've kind of stated before that ultimately, our #1 priority with respect to the balance sheet is to pay down debt, and that continues to be the focus for us. It doesn't mean we will ignore opportunities that, again, might present themselves in a more challenged economic environment or valuations kind of adjust to that environment. But right now, we're kind of focused on the debt paydown side of things and getting that leverage a little bit closer to 2.5 to 3x.

Our next question is from Cory Carpenter of JPMorgan.

Craig, just on the fourth point you made in your opening AI remarks around new recurring data licensing stream. How do you think about the timeline for ramping that up? And also what margins could look like on that part of the business? And then to the extent you're able to, I just would love to hear the latest on the legal front and sort of what the next steps are in some of those cases.

Yes, I obviously can't speak to anything on the legal front on this call, but I can tell you that, ultimately, I think the conversation around the need to compensate IP owners for their material is increasing. I think we're seeing that recognition by some of the key players in terms of the models that are being generated here and the leadership around those. And I think we're seeing that in some of the regulatory and legislative kind of commentary.

And so I think we're heading towards that degree. And obviously, we had conversations with NVIDIA around that, and it was important to them that model or the models that we're going to be launching are based off of IP that they understand the prominence of and we have clear rights to it. So I think that's going to increase importance. I think our legal pursuit is one that will play out over time. I don't expect a resolution of that in the coming quarters. But ultimately, we think that's going to reaffirm that position and reinforce that position.

So I think it's one that -- I don't expect these revenue streams to be significant in the short term. But I do believe that AI is going to be a large marketplace. And I believe our content and the model of bringing in new content at high quality to continually update these models is a material opportunity for this business. But it's going to ultimately, we get to the point where the AI starts getting monetized. And right now, AI is largely not being monetized, but it will be and there will be, I said, significant revenue streams.

And I believe getting this will get its fair cut of those revenue streams over time based off the strength of its assets and ultimately long-standing intellectual property laws. And I think the margin profile, again, like I mentioned, will be very consistent with the current business based off the approach that we intend to put in place. We certainly expect to reward the contributors and our partners that create this content in a way that is consistent with how we reward them when we use content directly.

Thank you very much. Ladies and gentlemen, we have no further questions at this time. And with that, we will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Thank you.