Good day, ladies and gentlemen, and welcome to the Quarter 1 2015 Shutterstock, Inc. Earnings Call. My name is Katherine, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session today’s the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Craig Felenstein, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you, Katherine. Good morning, everyone, and thank you for joining us for Shutterstock's first quarter 2015 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer, and Chairman; and Tim Bixby, our Chief Financial Officer. During this call, management may make forward-looking statements that are subject to risk and uncertainty including predictions, expectations, estimates and other information. These include statements relating to the expansion of our addressable market, the success of new product offerings, including products we recently acquired, revenue growth and the predictability of our revenue, adjusted EBITDA, equity-based compensation, taxes and capital expenditures. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Please refer to today’s press release and the reports and documents filed by us from time-to-time with the U.S. Securities and Exchange Commission including the section entitled Risk Factors in the company's Form 10-K filed on February 27, 2015 for a discussion of important risk factors that could cause actual results to differ materially from those discussed in forward-looking statements. On this call, we will refer to adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and free cash flow, which are non-GAAP financial measures. You can find a description of these items along with a reconciliation of adjusted EBITDA, non-GAAP net income and free cash flow to the most directly comparable GAAP financial measures in today’s earnings release, which is posted on the Investor Relations section of our Web site. We believe that the use of these measures provides additional insight for investors. However, these non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. And with that, I’ll turn the call over to Jon.

Thanks, Craig, and thank you all for joining us this morning. Shutterstock is off to a great start in 2015, as the strong financial results and sustained operating momentum we generated throughout 2014 have continued unabated into this year. Tim will cover our financial results in just a few moments, but before he does let me take a few minutes to highlight the key drivers behind our strong and consistent financial performance, and why we expect to build upon the success moving forward. Shutterstock’s ability to cultivate a healthy and expanding marketplace for both customers and contributors remains a key competitive advantage and a crucial component of our sustained growth. Our primary focus is ensuring we have the most robust platform for creative content worldwide, along with the most advanced search technology and the most suitable purchasing option. This way we can deliver a truly unique experience in each of our new and existing customers whenever they interact with us. Our growing and engaged customer base fuels the demand for content delivering a bigger path for our contributors and encouraging them to provide their best and freshest content to Shutterstock, further facilitating the network effect of our business. This past quarter alone, our content library expanded by nearly 5 million images and now includes more than 53 million photos, vectors and illustrations and 2.5 million video clips. It’s not just the scale of the content library, which attracts customers but equally important is the quality of the content we provide. While we grow our library by over 10% this past quarter, we were selective. An additional 3 million images failed to pass our content team’s rigorous review process. Our customers know that when they come to Shutterstock they are not only getting a largest selection, but also the most suitable…

Thanks, Jon. We are off to a great start this year with strong underlying growth as the marketplace continues to attract more and more customers and contributors. First quarter revenue increased 34% as compared to the prior year, and excluding the impact of currency and the contributions from our PremiumBeat and Rex acquisitions which closed in January, revenue growth was over 30% as we continue to generate strong growth from our traditional ecommerce business combined with significantly increased contributions from our expanding video and enterprise offerings. We continued to see nice growth in both revenue per download, up 17% as well as paid downloads up 12% year-on-year. As in recent quarters, the continuing shift of our product mix to higher priced offerings makes the download metric on its own less indicative of the overall revenue growth of the company than it was in prior years, as you can see in the reported revenue growth this quarter. For example, when an existing subscription customer transitions to become an enterprise account, their price per image is significantly higher but their paid download quantity may actually be lower. And this is because comp images or free images for internal use are included in our enterprise agreements. They can use these images internally and they are not counted as paid downloads. The result in an increase in the revenue per download metric while the paid download number maybe lower when compared to their previous license. This is just one example of how the unit metric alone doesn’t tell the full story of the health of Shutterstock. The addition of Rex and PremiumBeat also add additional upward pressure on revenue per download. They both carry effective prices in the range of $20 to $40 per download. While our traditional ecommerce business continues to make up…

Thank you. [Operator Instructions]. Please stand by for your first question, which is from the line of Youssef Squali from Cantor Fitzgerald.

Good morning, guys, and congrats on a very good quarter. Two quick questions. First, Tim, going back to the metrics, you’re correct that over the last four or five quarters, the paid download and the pay per download have kind of been going in different directions. I guess the first question is, is there a better way for us to track the business that would give us kind of more insight into what’s happening to photos versus video versus enterprise that we should be using – that the street should be using to get a better gauge for the health of the different segments of the business? And I guess, two, within the – let me just switch to another question I guess about competition. Have you seen any positive impact coming from Getty’s recent financial woes and/or any feedback from customers for what Adobe is doing or planning on doing with Fotolia? Thanks.

Sure. So we’ll take the metric first and then switch to competition. So in terms of the metrics, I think the metrics in aggregate are good metrics. So the download metric captures one aspect of the business. The revenue per download I think captures another important aspect. And I think what you’re seeing – it’s important to look at them both in conjunction and look at the patterns we’ve seen, because I think now having many quarters there are patterns that are quite visible. What you’re seeing is really the success of our diversification. So the download metric on its own really tracked our core subscription business nicely when that was the vast majority of the business. As you know, Shutterstock started out as 100% subscription. As we continue to grow significantly outside of subscription; footage, enterprise, now with acquisitions moving into music and editorial, all of which carry multiples of a higher price point per download, we’ll continue to see these trends going forward. So I think in combination, there are good metrics. We’re always looking for other internal metrics that we look at that we think might help investors. But for now, we think in aggregate these do – they really capture the trajectory of the business.

As far as competitive environment goes, the competitive environment does change around us just like it has for the past 13 years. There is a reason why we’re still the leader, why we’re still growing, why we’ve been profitable our entire time as a company. And as we do all this, we continue to invest in the future. The reason for this is we continue to concentrate on what our customers need. We continue to concentrate on having the best content, the best pricing plans that we can find out there, the best algorithmic search we can develop in all 20 languages. In general, it’s the best product in this space.

Okay. Thanks, Tim. Thanks, Jon.

Thank you. The next question is from the line of Ralph Schackart from William Blair. Please go ahead.

Good morning. Tim, I was wondering if you could sort of quantify the incremental FX drag on the outlook versus your prior expectations. And then the second question is, EBITDA was stronger than we had expected in the quarter and Q2 was maybe a little bit lower than where we’re modeling. Just curious if there was any push-out of any planned expenses in Q1 into Q2. Thanks.

Sure. So on the EBITDA metric, I think Q1 no big surprises. In terms of the currency going forward, there’s been minimal move since the end of the quarter to slightly worst but not dramatically as we saw in the first quarter. So that kind of factors within the guidance that we’ve given. In terms of timing, I think we are continuing to aggressively hire particularly in our sales organization early in the year and I think that’s – as we’ve seen in prior years continues to generate a lower EBITDA percentage in the first half of the year. And the historical pattern has been higher in the second half of the year as the revenue growth also falls with a little bit of seasonal uptick in the second half. So that I think is a consistent pattern.

Great. One more if I could. You’ve been fairly inquisitive over the last sort of 6 to 12 months, and just kind of taking a step back and looking at your portfolio today, is there any sort of product gaps that you would recognize that might be sort of interesting or do you think you have sort of a good base to operate from going forward?

We’re always looking at different businesses out there that we can acquire but we believe that there is a lot more organic growth that we have in the business. So we continue to concentrate on that. If there’s something out there that can supplement what we have to grow faster, we seek to find those properties and acquire them. But for now we have the asset types we believe sets us up for a lot of growth. The Rex business was very important for us to expand into editorial. Our enterprise clients need this content. We’re already seeing positive impact from doing this acquisition. The same with music. Footage buyers need music; music buyers need footage; image buyers are continually pressured to move to motion content. So the entire dynamic is supporting that acquisition as well.

Ralph, this is Tim. Just to maybe flesh out, I think I jumped over one of your sub questions. In Q2 – so in Q1 we saw about 4.5% impact of currency on the business, in turn on the revenue line and obviously that – a pretty significant portion of that hits the EBITDA line. Q2, we would expect – while we don’t give specific guidance, we would expect given current currency rates to have a similar impact, perhaps slightly greater given the slight move that’s happened since the end of the first quarter. So, similar to Q1 maybe a slight additional headwind.

Okay, that’s helpful. Thanks a lot.

Thank you. The next question is from the line of Rohit Kulkarni from RBC. Please go ahead.

Good morning. Thank you for taking my questions. A couple on – again on the paid downloads growth, is there a way that you could help us quantify just the downloads growth given that you allow enterprise customers download images and comp them as and when they decide to pay for a certain image. Just to get a sense of the underlying engagement of your users and customers, is there a way to come up with a – just to downloads growth, this would have been the downloads growth of whatever form of media, and then you obviously gave the paid download growth. And the second question, you said you had introduced new pricing plans, one-year pricing plans, unlimited download pricing plans. So can you give some strategic rationale behind that as well as how should we think about the effect of those new pricing plans on these two metrics going forward?

Sure. So we’ll take the download question first and then the pricing strategy second. So on the download growth, I think clearly the download growth tends to be a proxy for the subscription because that’s a vast majority of the downloads. I think one sort of data point that I think might be useful to flesh out the enterprise example, free comps is a pretty standard part of the enterprise business where larger companies are able to use images for internal review use, but they’re not paid licenses. And one good forward indicator of the health of that business is the ratio between comps and actual licensing. So that’s something that we track carefully internally and that’s a good forward indicator. We don’t disclose a specific number, but that number has been growing faster than the enterprise business more than doubling in recent periods. And so that I think is another good indicator of the underlying health that doesn’t show up in paid downloads but it really gives you a feel for another metric that gives you a feel for the health of the enterprise business.

As far as pricing strategy goes, we’ve always experimented. At any time, we could be running several price tests at any time around the world. And so we’re always gathering data. We’re always iterating on this. It’s different for different types of customers. It’s different for different people, different traffic. You may see us combine certain plans together especially as footage and audio are complementary products. Enterprise and WebDAM have national synergies. There’s a lot of different experiments that are going on at any time and we’re constantly innovating on pricing.

One maybe phrase to put on it is customer-driven. So when Shutterstock developed the subscription plan when there really wasn’t such a thing in the market, that was in response and in part – a significant part due to what customers wanted and needed. There are now – subscriptions have been able available from Shutterstock for a long time. We’re still very customer-focused and customer-driven. What they need to support their workflow, that is certainly one of the influences of what we test and then we’ve also got pretty strong views internally of what we think customers will be looking for now and in the coming quarters.

Okay.

Thank you. The next question is from the line of Lloyd Walmsley from Deutsche Bank. Please go ahead.

Hi, guys. Tim, just on the FX, I think you said 4.5% impact on FX isolated, which would imply that 8.5% impact on revenue from acquisitions, if I’m not mistaken. On the EBITDA line, is the delta in the impact from FX and acquisitions greater in part just because of a greater FX impact or are these acquisitions a little bit of a drag. Is that part of it? Can you parse any of that out?

It is a combination of the two, but I would categorize the deal impact on EBITDA as minimal. The acquisitions are both profitable, EBITDA and cash flow positive. A slight negative impact but the most significant impact is the FX impact of the revenue line.

And then just looking at the acquisitions, is there any kind of approximate growth rate that we should be thinking about for those revenues streams this year?

We don’t break out guidance by product or subunit. Both of them are healthy businesses and growing. We’ve got pretty ambitious plans for both. So our expectation is that both of those over the coming couple of years will continue to evolve into significant parts of the business. I’ll just leave it at that.

Okay. And then just lastly kind of housekeeping. Were there any one-time things that impacted your ability to recognize revenue from those, like a deferred – any deferred revenue issues? And kind of related to that, you all had called out in the script that some of the G&A deleverage was related to professional fees. I guess how much of that 2 points of deleverage is kind of one-time fees that won’t recur versus like ongoing cost associated with the acquisitions?

On the first question, minimal impact in terms of the ability to recognize revenue fairly straightforward. On the cost line, I noted $1.5 million that were – I wouldn’t refer it as one-time because we’re – looking at and evaluating transactions is something we do from time to time. But in the quarter, there was a significant amount in that 1.5 billion that was tied to these acquisitions both professional fees as well as some goodwill accounting that hit in the first quarter.

Got it, okay. Thanks, guys.

Thank you. The next question is from the line of Brian Fitzgerald from Jefferies. Please go ahead.

Thanks, guys. Just a little more on the enterprise side. How do you think about the operating leverage opportunity on the enterprise? How do those margins compare versus core ecommerce and video products? And then the second one was around search. Are you continuing to see strong SEM ROI across Google? Are those trends similar in the U.S. versus overseas? And maybe some color around search ROI across the different product lines. Thanks.

Sure. We’ll take those in order, enterprise and then search. So on the enterprise side, the long-term potential margins I think are right in line with our core ecommerce business. There is somewhat of a lag effect which is pretty normal when you develop a direct sales force. You add a new sales rep, it takes them some time to ramp up and become productive. And then once they do so, they tend to generate more revenue in year two than year one and so on each year. And so it tends to scale nicely if you isolate a given rep or a given set of reps. When you’re growing the team as rapidly as we are and that revenue line as a percent of our total revenue is continuing to grow at a quite healthy clip, you see a little bit of deleveraging, which is in the model and the margins are quite nice despite that. So long term, we’re seeing nice progress, good scaling and operations, so we’re very optimistic about the long-term margins from enterprise. Even besides getting sales people more efficient, being a tech company, we can get more efficient through other ways. A lot of those customers that are in the enterprise system today came from our ecommerce system. In our ecommerce world, we do a lot of testing. We can algorithmically improve search, for instance. We can get better at targeting users. We can curate collections. We can get a lot better at marketing to certain users and figuring out certain patterns of image type usage and image amount usage, and we can gain that leverage over time as well. As far as SEM and SEO, we continue to get more efficient and learn more throughout all of our paid campaigns. We’re always concentrating on both organic growth in traffic and paid growth in traffic. We’re always concentrated on iterating all of our creative, all of our pages and every language around the world. We’re always testing and some of that you’ll see in our pricing, some of them that you’ll see in our messaging. It’s really different throughout the world.

Great. Thanks, Jon. Thanks, Tim.

Operator, we have time for one last question please.

Thank you. That’s from the line of Blake Harper from Wunderlich Securities. Please go ahead.

Thanks. I have a question again about the enterprise customers. I believe that at your Investor Day you had said you had over 36,000 and obviously the potential to convert the subscription customers would be able to multiply that by several times. And want to see if you could provide any update of where you are with that? And how many customers do you have?

Yes, we don’t give exact customer accounts, but directionally that’s correct and that’s a mix of customers of all sizes really – even enterprise customers. So we have many of the world’s largest creative agencies under master service agreements with subunits all around the world, all the way down to smaller companies that might look even more like a Shutterstock, for example, but that is still potentially an enterprise account. So that number continues to grow in terms of proportion of revenue. We’re continuing to see consistent growth where above 20% crossed over that line last year. And I think if we look out over the next coming quarters or the rest of this year, we’ll continue to see that enterprise growth tracking nicely, as a proportion of total sales. On an account-by-account basis, there are very few enterprise accounts where we’re even nearly total penetration. Our penetration rate is quite low in nearly every enterprise account. So a significant amount of the enterprise growth is coming from those existing accounts in addition to continuing to add new ones.

Got you. And then just if you could, maybe have an update on the API strategy and the partnerships there and are any of them potentially accelerating or contributing any meaningful revenue or downloads yet?

Yes, the API is an important growth area for us. We continue to look for new partners when it comes to the partnership we have with Facebook. We’re constantly working on that with them. We’re constantly trying to find new partners. We can expand the API in a lot of different ways and it’s really early right now.

I think the key thing on the API is customers have alternatives and we see a nice steady choice of Shutterstock. So whether that’s Facebook or Wix or Constant Contact or others that are not sort of publicly announced, these customers have choices and they choose Shutterstock not just for the API, which works very nicely, but actually for the content and the search they’re getting access to. So it’s a combination of that.

We’ve also heard from clients that use the API – customers that use the API that they prefer our API over our competitors. It’s faster, it’s more efficient, it’s a more streamlined functionality. It has more functionality and it’s faster.

Thanks, Jon and Tim.

Thanks everyone for joining us today. If you have any follow ups, do give us a call.