Shutterstock, Inc. (SSTK) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the 2013 Third Quarter Shutterstock, Inc. Earnings Conference Call. My name is Talisha and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) 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, Mr. [Ed O'Brien] with ICR. Please proceed.

Good afternoon and welcome to Shutterstock’s third quarter 2013 earnings call. Joining me today to discuss the results are Jon Oringer, Founder, CEO and Chairman; Thilo Semmelbauer, President and COO; 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 Form 10-Q filed with the U.S. Securities and Exchange Commission on August 9, 2013 and in the company’s prospectus filed on September 20, 2013. For a discussion of some important risk factors that could cause actual results to differ materially from those discussed in the 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 a reconciliation of these items in the most directly comparable GAAP financial measures in our third quarter earnings release which is posted on the Investor Relations section of our website. We believe that the use of these measures provides additional insights 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, Ed. And thank you all for joining us for our third quarter 2013 earnings call. Shutterstock delivered another strong quarter and exceeded the high-end of our revenue and adjusted EBITDA guidance range. We continue to attract customers and contributors to our global marketplace at a record pace. And the powerful network effects of our business model continue to drive advantages for our customers, our contributors, and Shutterstock. On today’s call we will share key operating metrics and financial results for the quarter, update you on progress we are making against our growth strategies and share details on our financial results, then we’ll open the call to your questions. In the third quarter downloads grew 35% year-over-year reaching a record 25.4 million. Revenue per download increased to $2.35, 4% increase over $2.26 in the same quarter last year. Another good indicator of the health of our marketplace is the size and freshness of our collection. Shutterstock now has more than 30 million images and 1 million video clips making it one of the largest libraries of its kind. This strong operating performance is reflected in our financial results as we continue to invest in growth. Third quarter revenue exceeded the high-end of our outlook growing 41% year-over-year to $59.6 million. In the same period adjusted EBITDA increased 24% compared to the prior year to $12.8 million. More than ever we are biased towards investing where we see opportunity to drive long-term growth. You should expect us to continue to prioritize growth over immediate term profit optimization. We are very pleased with this quarter’s performance. We continue to execute on our three primary growth strategies which are increasing our penetration in all markets foreign and domestic. Investing in emerging content types particularly video footage and bringing Shutterstock to large enterprises through…

Great. Thanks, John. As always in the third quarter we remained focused on two key things acquiring new customers and adding fresh content to our library. And as we’ve discussed these two sides of our marketplace reinforce and drive each other which fuels our growth. So starting with the contributor side we saw record activity in Q3. We added 2.4 million new images and 190,000 new video clips to our collection more than any other quarter. And our library now contains more than 30 million images and more than 1.3 million video clips and we continue to have one of the fastest growing and largest collections on our space. And we’ll continue to focus on aggressively growing our collection not just in quantity and diversity but also in improving quality so we can meet more and more of our customer’s needs over time. On the customer side, in Q3 we were pleased to see an increase in our marketing spend while the cost to acquire new customers stayed well within our target range driving 41% revenue growth year-over-year. Global sales and marketing expenses were $14.9 million or 25% of revenue, an increase of $1.6 million over the prior quarter. We continued to strengthen our regional marketing efforts, increasing spend in new marketing channels around the world and reducing spend in less productive channels. Our marketing approach remains the same. However, in this quarter, we were able to find even more opportunities to invest profitably versus prior quarters. Now we’re highly confident in our marketing investment for two reasons. One, our cost to acquire new customers has remained remarkably consistent, at or below $100 per new customer. Two, the pattern of usage and repeat purchase behavior from new customers is as strong as ever. As John mentioned both new and existing…

Great, thanks, Thilo. I’ll give a bit more color around the results as well as our expectations and we’ll turn to questions. We will also be sharing our current financial expectations for 2014 for the first time. To review briefly the number of paid downloads we delivered in the quarter was $25.4 million, this was up 35% from $18.7 million in the third quarter a year ago. Revenue was $59.6 million, an increase of 41% 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 4% year-on-year to $2.35. And this increase in revenue per download in the quarter was driven primarily by the growing proportion of our revenue that’s derived from video footage downloads. Adjusted EBITDA grew 24% to $12.8 million for the quarter as compared to $10.3 million in the third quarter of 2012 primarily as a result of significant revenue growth and offset somewhat by higher sales and marketing investment and slightly higher G&A expense. Net income was $6.2 million or $0.18 per fully diluted share compared to $8.7 million in the third quarter of the prior year. Net income as a reminder includes the impact of stock-based compensation expense of approximately $1.9 million in the quarter. Non-GAAP net income in the third quarter was $7.3 million or $0.21 per share as compared to $9.4 million or $0.33 per share in the third quarter of 2012. Also as a reminder non-GAAP net income excludes the after-tax impact of non-cash stock based compensation expense. It is also important to note that our tax rate in the quarter was 38% and in the prior year quarter was only 2% as we were not yet subject to federal and state income tax prior to…

Thank you. (Operator Instructions) Your first question comes from the line of Ralph Schackart from Williams Blair. Please proceed.

Good afternoon. Two questions if I could. Showed a lot more upside in the quarter than we had modeled and 2014 revenue outlook was also stronger than we expected. Just curious where the upside is coming from especially given two quarters of accelerated growth? And then a related question is, do you have any thoughts on how much of your growth is coming from market share gains from competitors versus just an overall expanding market, just curious if you get sort of segment that growth as well? Thank you.

Yes, so I’ll take the second one first. I think in terms of market share versus growth I don’t really see much change in that ratio so we do – we’re bringing a lot of new customers. And so that really drives the overall growth, many of those customers are new customers, small and mid size businesses that may not be using imagery, but there are many who are also coming and increasing the amount that they spend with us as compared to other players. Enterprise sales continue to accelerate and grow nicely and that obviously is also a combination of both a growing market and shift of share from other players. But I would tell you that ratio is probably not radically changed from the last several quarters. In terms of the -- what I would call nice over performance, we have seen this in few of the recent quarters over the past couple of years where everything falls into place pretty nicely, we’ve been able to accelerate into the high 30% growth rates and into the 40% growth rates. So we’ve seen that now a little bit Q2 was a nice acceleration from Q1. We saw that last year, this year it’s nice to see but it’s not currency driven because last year we had a couple of nice acceleration quarters but we had a little benefit of currency, we didn’t have any of that in this quarter. So it really speaks to the underlying growth in volume. The other thing, I would note is that a good proportion of the growth was driven by unit volume as opposed to shift in mix and driven by revenue per download and that I think also speaks to the underlying growth -- just absolute growth in the market that we are driving.

Great. Thank you.

Your next question comes from the line of Youssef Squali from Cantor Fitzgerald. Please proceed.

Hi, thank you very much. Two quick questions here as well. Your revenue guidance implied the [inaudible] deceleration and the rates of growth for both paid downloads and revenue per download. I was just trying to understand what’s behind that, if you are conservative on your part as has been historically or are you seeing anything that maybe some of these investments may not be as quick to pay off? And then on the leverage in the model your EBITDA guidance also implies no real improvement in margins now. Can you talk about some increased investments in sales and marketing and G&A et cetera historically you’ve talked about the business potentially supporting 30% plus EBITDA margins over time. Are we in a situation where as top line is accelerating you’re pushing some of these margin improvements out by a little bit just because of the increased maybe ROI?

Yes, so let me sort of break that into two questions. So on the guidance that we gave, the short answer is we do not see anything that is materially deteriorating or worsening, all of our metrics are very strong. The trends in each of the sub parts of the business continue to grow at a very nice rate. I think there is some conservatism obviously built in the numbers and less visibility as you get into 2014. We are at that point of the year very early November where we are now beginning sort of the surge that we saw a year ago when November, December came in quite a bit stronger. So I think if we replicate last year now there is potential upside we are not assuming that we – the pattern we saw last year repeats exactly. It’s more of a -- I would say an acknowledgment of several years of history and what that pattern showed as well as what we are seeing this year. In terms of 2014 there is a little bit of seasonality that you see so the – as this year you see a little bit less growth for example in the summer months. So we are factoring all of that in to the guidance but we are as sort of confident and seeing as many positive things about the coming quarter and the coming years as we ever see in the business. On the second piece on the margin, I think this is kind of according to plan. We’ve said very consistently each quarter that if and when we see the opportunity to increase sales and marketing spend and still maintain our ROI targets within a range that we are comfortable with and within a range that we’ve seen, we’re going to do that. And I think we were more successful doing that in Q3 than we have been in the first couple of quarters of the year which were strong quarters on their own. Now that we are seeing our ability to deploy that money and seeing the return, our plan is to continue to do that if for some reason something changes then obviously we would react to that. But right now we’re able to deploy those higher rates and we are planning on doing that. Our hope and plan is that we would continue to see potential upside from that investment on the revenue line.

Then no change for your long-term margin assumption?

No, we are still as confident as ever in that potential for 30% plus but for now if we can drive that top line growth to a higher percentage, year-on-year percentage growth rate we’re going to continue to do that.

Okay, great. Thank you very much.

Your next question comes from the line of Lloyd Walmsley from Deutsche Bank. Please proceed.

Thanks guys. Wondering if you can just comment a little bit on the Facebook deal in terms of what you are seeing in terms of direct revenue contribution from downloads via Facebook and then to what extent you think you are getting any traffic back to the site to either purchase downloads or subscribe from those customers? And then kind of as a follow-up to that how unique do you see this deal versus is this a template that you can do with other businesses relying on news feed advertising because it would seem like there might be a bigger opportunity but just wanted your perspective on that?

Well, first of, Facebook is still in test phase, so we are still working with them on the integration and it should go live sometime in the near future. For other deals we see this as being able to be replicated in other ways, in other places and it’s a good example of how we can expand the market for where stock imagery was typically not used before. These are 1 million advertisers on Facebook that now will be able to use these and we can see that there are other platforms that we can look at to access our API.

Okay. And then just I guess as a follow-up given its still in testing I think you’ve guided your contributors to expect Facebook revenue per download to be at or better than subscription pricing. Wondering if you can give us a sense of a little more specifics around where the revenue per download is going to come in from deals like this?

Well, we haven’t disclosed particulars on this deal and wouldn’t likely on any one deal. Our goal is to always pay our contributors kind of a stable and predictable level of royalty at the same rate relative to revenue. So as that revenue price point moves up or down depending on volume or depending on a particular deal or purchase plan we would adjust that so that they’re always getting a comparable and fair rate which is right around that 30% rate, 28%, 29%, 30%. So I will leave it at that.

Thanks guys.

(Operator Instructions) Your next question comes from the line of Brian Fitzgerald from Jefferies. Please proceed. Brian Fitzgerald – Jefferies: Thanks guys. I was wondering, could you give a little more color around some of your newer innovations and products Offset and Spectrum. And then maybe a follow-on to Lloyd’s question do you foresee Facebook, if Facebook offering extending into video at some point? Thanks.

Yes, this is Thilo, I take the first part. Offset is sort of again in its very early phases and for those of you not familiar with Offset it’s really a new and unique collection of what high-end images available to a very simple licensing model, it’s an opportunity for us to get into a part of the sort of the higher end market that we haven’t been in, that has now – the usage of Offset, the site has been opened up to the public, we’re starting to get great feedback and it is starting to generate revenue, but like I said very early days but we are excited about what we are seeing so far.

I’ll take the second one as for Facebook with video, yes, it’s definitely a possibility, this is such a new type of integration, these users are just starting to use our images in advertising in this way. So it could work in the future but we don't have any plans right now to do that.

I think Brian you also mentioned Spectrum -- Brian Fitzgerald – Jefferies: Yes.

Spectrum is really some – a discovery tool that we have in our labs part of the site for which we’ve recently improved, it’s a great way to navigate our collection by color, you type in a key word or two and you can literally browse the collection sort of in real-time by moving a color slide or we’ve gotten very positive feedbacks from creatives about that way of navigating the collection is just one of the discovery tools that we have available, but we are excited to continue to sort of develop those types of offerings and improve on them. Brian Fitzgerald – Jefferies: Great. Thanks guys.

Ladies and gentlemen that concludes the call. Please you may now disconnect. Have a great day.