Shutterstock, Inc. (SSTK) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Two 2013 Shutterstock, Incorporated Earnings Conference Call. My name is Jason and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. If at any time you require an operator assistance, please press star followed by zero and we’ll be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Denise Garcia from ICR. Please proceed, ma’am.

Good afternoon and welcome to Shutterstock second quarter 2013 earnings call. Joining me today to discuss our results are Jon Oringer, founder, CEO and chairman; Thilo Semmelbauer, president and chief operating officer; and Tim Bixby, CFO. I would like to remind you that during this call, management may make forward-looking statements subject to risks and uncertainties including predictions, expectations, estimates and other information. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Listeners are referred to the reports and documents filed by us with the Securities and Exchange Commission including the section entitled risk factors in the company’s perspectives filed with the SEC on May 10, 2013. For a discussion of important risk factors that could cause actual results to differ materially from those discussed in forward-looking statements. We will also refer to adjusted EBITDA, non-GAAP, net income and free cash flow which are non-GAAP financial measures. You can find the reconciliation of this item to the most directly comparable GAAP financial measures in our second quarter earnings release which is posted on the Investor Relations section of our website. We believe that the use of these measures provide additional insight for investors. However, these non-GAAP financial measures should not be considered an isolation from or as a substitute for financial information prepared in accordance with GAAP. And now, I’ll turn the call over to Jon Oringer, Shutterstock’s founder, CEO and chairman.

Thanks, Denise, and thank you all for joining us as we discuss our 2013 second quarter results. I’m pleased that Shutterstock delivered another strong quarter exceeding the high end of our expectations as we continue to execute on our growth strategies and attract more customers and contributors to our market place. The powerful network effects of our business model continue to drive advantages for our customers, our contributors and Shutterstock as we grow our share of the multibillion dollar market for commercial imagery. On this call, we will share key operating metrics and financial results for the quarter, update you on progress we are making against key initiative and raise our financial guidance for 2013 based on our strong performance to-date. I’ll start with key operating metrics. In the second quarter, total paid downloads increased 33% year-over-year to a record, $24.3 million. Revenue per download increased to $2.33. And thanks to the continued strength of our contributor community, our collection now stands at more than 28 million images and 1 million video clips, making it one of the largest libraries of its kind. Turning to financial results, second quarter revenue exceeds the high end of our outlook going 40% year-over-year to $56.8 million. In the same period, adjusted EBITDA increased 61% compared to the prior year to $13.4 million. We are very pleased with the performance. Closing out our first full year as a public company and the 10th year since the company was founded, we are confident that our growth strategies are working and are proud of our track record of delivering strong results. As a reminder, our three key growth strategies are, one, increasing penetration to all markets, foreign and domestic; two, developing emerging content types particularly video footage; and three, expanding direct sales to large enterprises. Let’s…

Thanks, Jon. We remained intensely focus on acquiring new customers and adding fresh content in the second quarter as we’ve discussed these two signs of our network, reinforce and drive each other, fueling our growth. Now, starting with the contributors’ side, as in prior quarters, we accepted many new contributors. We saw strong activities from existing contributors and a small number of contributors left us. In total, we added 2.2 million images and 150,000 video clips in Q2 more than in any prior quarter. And the quality and diversity of our collection is now better than ever. As we’ve mentioned, we screen every image before it enters the collection and we reject between a third and a half of the images that are submitted in order to enforce a very high quality standard. We’re also focused on improving the diversity of our collection so we can meet more of our customers’ needs along the dimensions of subject matter, style, culture, geography. In total, our library contains more than 28 million images and more than a million video clips and continues to be one of the fastest growing and largest collections in our space. In Q2, we continued to invest in growth on the contributors’ side making a number of improvements to our review operations and our systems to enable us to continue the scale. Even though we’re receiving and reviewing more content than ever before, our service levels and time from image submission to approval improved significantly in Q2. We also paid out more to contributors than ever before, nearly $16 million in the quarter. Now, on the customer side, in Q2, we continue to acquire more customers while improving efficiency versus the prior year. You may recall, in the first half of 2012, we made changes to our marketing…

Great. Thanks, Thilo. I’ll give a bit more color around our results and expectations and then we’ll turn to questions. To review a bit, the number of paid downloads we delivered in the quarter was $24.3 million. This was up 33% from $18.3 million in the second quarter a year ago. Revenue total was $56.8 million, an increase of 40% compared to the same quarter in the prior year. And there was no significant currency exchange impact on revenue in the quarter. Revenue per download increased to $2.33 and its increase in revenue per download in the quarter was driven primarily by continued makeshift toward on demand, direct sales and footage downloads, all of which carry a higher effective price per download. Adjusted EBITDA grew 60% to $13.4 million for the quarter as compared to $8.3 million in the second quarter a year ago primarily as a result of significant unit growth increase in revenue per download and greater sales and marketing efficiency. Net income was $6.9 million or $0.20 per share compared to $6.1 million in the second quarter of 2012. Net income includes stock-based compensation expense of approximately $1.6 million in the quarter. Non-GAAP net income in the second quarter was $7.8 million or $0.23 per share as compared to $7.5 million or $0.27 per share in the second quarter of 2012. As a reminder, non-GAAP net income excludes the after tax impact of non-cash stock-based compensation expense. And it’s important to note, in the year on your comparison that are tax rate in the quarter, this year was approximately 37% while in the prior year was only 2% as we were not subject to federal and state income tax prior to our reorganization as a public company in October 2012. Shifting to operating expenses for the second…

(Operator instructions) Our first question comes from the line of Brian Fitzgerald with Jefferies. Brian Fitzgerald – Jefferies: Thanks guys. Can you give us an example for how much of the paid download growth was driven by new international market or maybe how much of it was being driven by newer services like Offset and Spectrum or the continued growth and video? Thanks.

So overall, the download growth was pretty consistent in all territories. But in terms of a product line perspective, we do continue to see a higher growth rate from the newer lines of business. So footage particularly, direct sales to large enterprises both in the U.S. and outside the U.S. are continuing to grow at a faster clip than the overall business, and so those tended to drive that number higher. But we do see quite strong growth across all the product lines. Brian Fitzgerald – Jefferies: Okay. And then maybe one derivative or follow up ahead. The revenue per download obviously being driven by video, how is Offset and Spectrum having in the impact on the revenue per download?

So Offset and Spectrum, just sort of a quick reminder, Spectrum is really more of a tool to improve search experience. And so in itself is really more about user experience and not so much about driving incremental revenue. Offset on the other hand is a new highly curated much higher price offering and unique and new with the market for Shutterstock. That is still in private beta, and so that is not yet driving any of the financial results. It’s still in that kind of early phase, so all of the results we’re seeing are coming from the existing parts of the business. Brian Fitzgerald – Jefferies: Great. Thanks, guys.

Your next question comes from the line of Youssef Squali with Cantor Fritzgerald. Youssef Squali – Cantor Fritzgerald: Thank you very much and congratulations in a very nice quarter. A couple of questions, I guess. The first relates to something that Tim talked about a little bit, which is guidance. If I look at the midpoint of your guidance, it effectively assumes really kind of no sequential growth in paid downloads, no sequential growth in average price. It also effectively implies that the business, while continuing to do well on year-on-year basis, is effectively kind of stagnating somewhat on the sequential basis. So I was just trying to understand how much of that is you guys just airing on the side of conservatism. And if that’s the case then, what are you guys seeing in the market that would make you opt to be a little more conservative? Or is there something going on in the makeshift of product or anything else? And second, maybe you can just walk us through or help us again understand the economics of video footage versus image economics to you guys in terms of maybe pricing margins and whatnot.

Sure. So we’ll take those roughly in order. And in terms of the guidance, I think it’s important to note that we do have seasonality in the business, the summer months, particularly in Europe. But essentially in most territories tend to be the slowest months of the year. And so even with that, we expect to see the midpoint of guidance comply the year-on-year growth rate in the mid-30s. Comparing that sequentially to a year ago, we weren’t public, there wasn’t guidance out there. So it’s not really an apple-to-apple comparison. It’s important to note that we do not see anything in the business that is notably different form prior years. If anything, I think we see potentially more strength because our product line base is more diverse. Direct sales is in a much stronger place than it was a year or two ago. Video footage is building off a larger and stronger base than it was a year or two ago. So we feel quite confident in the second half of the year. In terms of the second one video versus images, the price point for video overall averages right around $60. Now it can vary – but that’s roughly the midpoint. So obviously it’s a much higher revenue per download and lower volume combination. But as that piece of the business continues to grow at a much higher rate than the overall business, that’s obviously pushing up the revenue per download. In terms of margins, it’s quite comparable. So we do our best, and I think we’ve done quite a good job at keeping the primary cost line, variable cost line which contribute to royalties in a comparable range so that we’re more or less agnostic in terms of where revenue comes from. So we see a roughly similar margin from video and direct sales as we do from on demand and subscription. Youssef Squali – Cantor Fritzgerald: Great. Thanks.

And your next question comes from the line of Lloyd Walmsley with Deutsche Bank. Lloyd Walmsley – Deutsche Bank: Thanks guys. I’m curious if you could give us an update on when Offset is planning to come out at beta and then how do you guys think about the opportunity there in terms of either penetrating new accounts or upselling this higher quality images into your existing accounts? Which do you expect to kind of drive the uptake of that? And then just on the enterprise side I guess as a follow up, do you feel like this will help you further accelerate penetration in these channels?

So maybe I’ll kick it off. This is Thilo. As Tim mentioned, Offset, what we’re really excited about is it’s a new and unique collection of images kind of at the higher price point. As you know, most of our businesses averaging $2 to $3 per image. Now we are selling our standard collection to large enterprises with special licensing and demonification account services at a higher price point. Offset gives us two large enterprises and agencies another thing to sell, and we’re really looking forward to that being a piece of the future growth. Right now we are making sure that everything is working well. We’re growing the collection. We’re bringing more users to the site in its very early days. But it is very much a part of our enterprise strategy. And on top of that, we think there will also be direct to site purchases off of Offset down the road but still early days. Lloyd Walmsley – Deutsche Bank: Thanks guys.

Your next question comes from the line of Andre Sequin with RBC Capital Markets. Andre Sequin – RBC Capital Markets: Great. Thank you. While we’re on the topic of enterprise client, I was wondering, could you give us a bit of an update on the progress there both maybe in terms of new wins and also maybe the adoption rate you’re seeing at existing clients? And then with the ramp you’ve done in marketing, you noted that you pulled out some underperforming areas of marketing. Could you give us some color on that and maybe in areas where you’re seeing some particular success, whether it’s geographically or with a particular form of marketing? Thank you.

Oh yes, this is Thilo again. I think on the sell side, we don’t really get in the specifics. But we are seeing strong wins across the board in agencies, publishers, large enterprises, companies. As I mentioned that two, three years ago, we might have had a few people with some subscription accounts, we are now turning into very large deals and that’s happening – relative to the whole business condensely [ph] a little bit more in the US and we are, as I mentioned, expanding that worldwide because this model is working. I think most of the growth under direct sales side is really, if you think about it, it’s an upsell because over 70% of the Fortune 500 have, we’ve said that before, have at least one user account somewhere within the organization, so technically, we’re in a lot of these companies. What we’re doing is going in with custom licensing, special needs that they may have in terms of billing and account services and we’re upselling. So all of direct sales to a large degree is upsell but we have a long way to go in terms of upselling our customers and also then continuing to grow those accounts over time, very early days. In terms of marketing, again, it’s hard to go into specifics on channels and regions and probably wouldn’t be that helpful because we’re doing so much testing. One of the exciting things is that we now have dedicated resources working on regional teams. It used to be a year or two ago that everything was centralized and we were using really a common approach across all markets. Now, we have customized approach in regions and that’s one of the things that’s really helping us. In terms of efficiency, there are channels. Search engine marketing is a huge channel for us, as we’ve talked about, there are subsets of that spend that we can optimize much more efficiently now than we were able to do a year or two ago with the kind of tools we have. At a high level, that’s one of the areas where we are seeing growth but we’re also seeing efficiency gains. So that’s hopefully giving you a little bit more color on that topic. Andre Sequin – RBC Capital Markets: Yes, that’s great. Thank you.

(Operator Instruction) The next question comes from the line of Ralph Schackart with William Blair.

Good afternoon. This is Ryan in for Ralph. Looking at the revenue growth from a customer spend standpoint, are you seeing existing customer spend more with Shutterstock or is that revenue retention rate still around 100% and the majority of that growth coming from adding new customers? Thanks.

Yes. Because of our customer-based is so large and there are so many small and mid-size businesses, we have 750,000 paying customers, that retention metric continues to be quite stable. We were able to retain about 100% of revenue from one year to the next from the same group of customers. But if you isolate larger companies, which is really the primary target of our direct sales efforts, we’re definitely seeing – and some of this is anecdotal and tougher to measure, but we’re definitely seeing those kinds of companies opening up a much larger proportion of their spend is potentially going to Shutterstock. Three to five years ago, that percentage might have been zero or quite low, 10% or 15%. Now, we’re seeing a much greater percentages open season [ph] for Shutterstock. That [ph] said, really enables us to push that number even higher. So that’s really our goal is to really be able to address as high a percentage of a large company spend as possible.

And just to add a little bit of color to that – this is Thilo, what we’re seeing is companies are not – they have a certain budget, they want to do more and more with that budget and we fit in very well with that picture because we’re able to give them amazing collection with great tools in search at a price point that, in many cases, is more attractive to what they’ve seen previously with traditional players.

Thanks, and great quarter.

And that was the final question. I would like to thank everyone for joining this conference. You may now disconnect and have a great day.