Good morning. My name is Jake and I'll be your conference operator today. At this time, I would like to welcome everyone to the Shutterstock Q2 2020 Earnings Conference Call. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. At this time, I would like to turn the call over to our first host, Chris Suh, Vice President of Corporate Development and Investor Relations. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock’s second quarter 2020 earnings call. Joining me today is Stan Pavlovsky, our Chief Executive Officer and Jarrod Yahes, our Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the impact of COVID-19 on our business, the long-term effects of our investments in our business, the future success and financial impact of new and existing product, our future growth, margins and profitability, our long-term strategy and our performance targets. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release and the reports we file with the SEC from time-to-time, including the risk factors discussed in our most recently filed quarterly report on Form 10-Q and our annual report on Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on our call. We’ll be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, revenue growth, including by distribution channel, and on a constant currency basis billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with today’s press release and in our Form 10-Q, which are posted on the Investor Relations section of our website. Finally, please refer to the brief information that we posted on our website that contains supporting materials for today's call, as well as the new interactive IR Microsite that is available on the IR section of Shutterstock's website. And now at this time, I'll turn the call over to Stan.

Thanks, Chris, and welcome to Shutterstock. We look forward to your contributions as we continually increase our outreach and communications towards the investment community. Good morning, everyone, and thank you for joining Shutterstock's second quarter earnings call. I wanted to begin by thanking all of our Shutterstock employees who have effectively transitioned to working remotely and have been credibly dedicated and focused during this time to offer continuity of service to our customers. As a result of their efforts, we are making progress on our strategic plan focused on workflow innovation, content services and data and insights, which will deliver strong returns for our shareholders. Shutterstock's revenues proved to be much more resilient in the second quarter as compared to our expectations, as well as relative to how we were trending at the end of April down high single digits. Our second quarter 2020 revenues of $159 million are down 2% from last year, and down 1% on a constant currency basis. Our rest of world region, which includes Asia grew modestly this quarter while the North America and European regions declined 3% consistent with last quarter. In the back half of the year, we are making investments in long-term growth of the company. First, we are redeploying capital into our platform solutions offering and undertaking significant global expansion of our sales and technical integration teams. We believe that this is a key growth area for Shutterstock as our customers look to consume our content services natively within enterprise applications from ad builders to website creation tools and applications. The major investment in our platform solutions offering is mission-critical and highly strategic to Shutterstock and benefits us in several ways. First, because we're accessing our customers' customer, we expect these relationships to effectively open up new market segments for us.…

Thank you, Stan, and good morning, everyone. Let me start by saying we feel quite good about the second quarter and our progress against our goals. When we reported the first quarter, we saw revenue declines of high single digits year-over-year in March and April, which were predominantly attributable to the impact of the pandemic. I am pleased to report that the improved trend we saw in the last couple of weeks of April accelerated into both May and June, resulting in the relative strength we saw in our revenues in the second quarter. Revenue declined 2% in the second quarter compared to the prior year and was down 1% on a constant currency basis. Our e-commerce channel increased 2% to $98.2 million, while our Enterprise channel revenue decreased 6% to $61.1 million. Our e-commerce channel displayed growth in North America and the rest of the world as our customers return to work and the multiple demand tailwinds of digital marketing growth and website proliferation powered our business. As Stan mentioned, the European geography has not yet recovered to 2019 levels. Our Enterprise channel was down largely as a result of lower bookings in prior quarters, and we believe that we are poised to eventually achieve year-over-year growth in billings and deferred revenues. The key sales leadership we need for success is largely in place at this point, and we have an improved product suite and the articulation of our differentiated value proposition. We do believe it will still take several quarters for the revenue growth to shine through in the Enterprise channel. In terms of our margins and profitability in the second quarter, gross margins were 60%, up approximately 200 basis points from 58% in the second quarter of 2019. This improvement is due to a number of factors,…

Thank you. [Operator Instructions] And we have a question from Youssef Squali SunTrust. Please go ahead.

Thank you very much. It's Youssef Squali. Hi guys. Congrats on a very strong quarter. And Jarrod thanks for the additional disclosures on the website, awesome. I guess two questions for us. First just around the outperformance relative to your expectations, I was hoping that maybe you can provide a little more color around maybe product type video versus image versus music that may have contributed. Any -- what kind of surprised you in the quarter that kind of ended up causing the outperformance? And probably even more impressive is the bottom-line. I don't remember or I should say the last time I saw you guys doing 23% EBITDA margin, I think you have to go back to like 2013 2014 which was eons ago. So, -- and I know you guys are going to be kind of doubling down on some of these investments. But as you step back and look at the business based on some of the new changes -- structural changes that you're making, can you comment on the level of kind of the potential for gross margins going forward? And just EBITDA, what's kind of the new long-term EBITDA margin that you think this business can support ex-COVID? Clearly, there were some benefits to you guys from lower T&E et cetera related to COVID. But as you kind of normalize all of that, where do you think we could potentially shake out now relative to maybe where you guys were thinking six months ago? Thanks.

Yes absolutely. So, Youssef, first nice to have you on the call and hope you're staying safe and healthy. Yes. So, from -- I'll take the first question and then Jarrod will talk a little bit about margin and EBITDA going forward. As far as revenue, as we sort of talked about on the call, we definitely have seen a lot of movement particularly in SMB where the need for content and digital assets has increased. We've also started to bring on new products to market, new subscription products like new video subscription product as an example which has taken hold. We've also brought some new smaller image subs, again, to go after the prosumer and small business market. And that has been working really well which is consistent with the trends that are more sort of secular in nature. And then from a revenue perspective, some of the -- we're not completely immune from some of the challenges that are happening from certain customer verticals. Obviously, travel has been hampered significantly, media, et cetera. So, what we're doing in the meantime is really trying to help our customers with new services such as custom and editorial for commercial use products. So we've really been able to pivot and it's really -- particularly as we went into May and June it's really helped us to offset some of the headwinds that are -- that many are facing because of the pandemic. And I'll let Jarrod talk a little bit about the margin and EBITDA trends. A – Jarrod Yahes: Great. Thanks. So Youssef, I think we're quite pleased with our execution year-to-date against our objectives for taking up the profitability of the business. I think there's -- in the past when we spoke last quarter and the quarter before, the…

We have a question from Brad Erickson with Needham & Company. Q – Brad Erickson: Hi, thanks. Just a few. So first when you think about the mix of your content at the moment what sort of drove the higher revenue per download in the quarter? And maybe just if you could just put that in context of the higher portion of subscription revenues and sort of how we should be thinking about that going forward? A – Jarrod Yahes: Sure. So Brad, when you think about the higher revenue per download it's really a function of a reduction in utilization of the business. So as the number of paid downloads decreases because of the subscription nature of a fair amount of our revenues ultimately, we are able to capture those revenue without associated costs. And so if you kind of look at what happened within the quarter, we experienced paid downloads approximately down 5.6% or 6% rounded and we experienced an increase in revenue per download of approximately 5%. So the two effectively mathematically offset each other because of the nature of our revenues. Q – Brad Erickson: Got it. That's great. And then you talked about seeing signals right now that are leading me to put ad dollars back to work in the second half. And I guess the equation of balancing growth versus profitability maybe just talk about your long-term philosophy there? And how you prioritize one over the other?

Yes, I think -- and, Brad, definitely it's -- while it's a balance, I think, from our perspective there's the core categories that we're in and we want to make sure that we're growing at least at the rate of category growth being one of the large players. And then, as we sort of continue to innovate and move into new areas for the business, adjacent areas for the business, that's where we want to focus on growth acceleration. But as Jarrod mentioned, the decisions we're making around increasing margins, we're trying to be very surgical about that. So, for example, some of the changes around content ingestion, leveraging technology, these are investments that have been kind of sometime in the making and really don't impact marketing dollars or other areas of growth, but continue to improve the leverage in the business. And we think that over time we will continue -- that we have continued opportunities to do that, while still being able to invest, both in growth around the core, as well as leveraging our balance sheet for augmenting our business and investing in the future of the business. So we're very excited about the position that we're in, because of the financial stability of the business.

Got it. That's great. And maybe just squeeze one last one in, if I can. Beyond the macro, what needs to happen on the Enterprise side to kind of return to growth? You talked about kind of looking towards the trajectory and maybe towards the end of the year, early next year there? Is it just, I guess, things like more platform solutions partnerships? Is the sales force productivity just picking up as those new folks get ramped? Maybe just talk about the mechanics of what can drive a return to growth on the Enterprise side of the business. Thanks.

Yes. No, absolutely. So, the Enterprise segment is made up of several parts of our business, including platform solutions, as well as SMB and our sort of top-tier clients. And our strategy is, going forward, for the top-tier clients, we are definitely -- have several initiatives to increase the average order value or the size of those deals. And that's through a combination of providing turnkey end-to-end solutions. So you'll see, as we head further into this year that we're continuing to launch new services into the Enterprise. We think we have some tailwinds when it comes to the small and medium segment, particularly because of the trends that exist around the move to digital and the acceleration of e-commerce. And so, we're seeing that, both in our SMB as well as platform solution segment. So, really, I guess, what I would say is, we are in the high end or the top-tier clients. We have a lot of room for penetration into sort of, both landing and expanding those accounts and we're seeing signals of that, as well as taking advantage of some of the more sort of industry trends around SMB. And then, from a platform solutions perspective, we're really excited about that part of our business. And as Jarrod talked about and I talked about in my opening remarks, we're going to continue to invest heavily in that part of our business, because we're adding a lot of value for our partners as well as really creating a network effects in -- from an audience development perspective for the Shutterstock offering. So we'll be continuing to innovate within our API, within platform solutions to bring new products and services to all of our partners.

Got it. That’s great. Thanks.

Thank you. We have a question from Lloyd Walmsley with Deutsche Bank.

Thanks. I have a couple. I guess, firstly, can you talk about changes to the royalty payouts to contributors? And did you have a full quarter benefit from that in gross margin? Or should we expect gross margins to increase in the second half around that? And I guess related to that, are there going to be seasonal variances in gross margin to account for kind of rising payouts over the course of the year to contributors? And then the second one on the Enterprise side. I know you guys have been doing some go-to-market changes on how you kind of source new customers. Can you talk about how that's going and how critical is that to kind of getting the broader Enterprise segment back to growth? Thanks.

Yes, absolutely. So first on the gross margins and the contributor royalty change -- one of the things that I really want to make sure is clear is that there are several things that are impacting gross margins including hosting costs of our data centers, content injection costs, credit card fees, royalties. A big part of a benefit that we experienced this quarter is actually due to lower download activity as well as the automation of the content ingestion process as compared to sort of doing it manually. So when we look at -- there are several variables that are impacting gross margins some of which we expect will continue and others will vary based on what's happening in the business the product mix et cetera. I'll let Jarrod talk about kind of -- I'll let Jarrod talk about, sort of, the longer-term and the rest of the year and then I'll take the Enterprise question.

Sure. So I think, as I mentioned, when I gave the talk over regarding EBITDA margins long-term, we really are focused on making sure that we're able to maintain our gross margins that we have a strong matching between our revenues as well as our cost of goods sold. And most importantly that we're enabling a successful expansion of the subscription offerings in our business. As you would expect subscription offerings tend to come with lower unit prices. They are the way that customers like to consume today in our economy. And we do want to be well-positioned to be able to roll out those subscription offerings, have them be cost-effective solutions for our customers and be able to bring them to market. And we believe that the structure we have in place today enables that. That structure kicked in June so we would get the full three months of it in the third and the fourth quarter. But we don't expect forcibly that structure in and of itself to result in any significant increases in gross margin because keep in mind our pricing to the end market is the other end of that equation and it's important that we're able to basically flex to maintain stability in our gross margins over time. So I think that's the way we're really thinking about our business, which is stable gross margins, leveraging G&A costs that we've talked about over the course of the last several quarters. And we do believe that over time in addition to just being shrewd with respect to our sales and marketing expense because of the increasing subscription nature of our business there is less of a need to bring in net new customers from a subscriber perspective and the challenge really becomes around retention in order to drive subscriber revenue growth. So that's I think where we are today. And I think we feel quite good about the position that we're in for today as well as how the industry is going to continue to evolve towards a subscription model in the years to come.

Thanks, Jarrod. And then your point on Enterprise is a great one in terms of new customers and new logos that we bring into our platform and that's definitely a key KPI that we look at internally as well as kind of the equation of growth for Enterprise is to expand and penetrate existing accounts with new services so that when we look at net retention it is greater than prior year, and then new logos are definitely critical and is from a pipeline perspective something that we look at pretty much on a daily and weekly basis and is a key part of the growth strategy and we're seeing a lot of great traction of that.

Okay. And if I can ask one more just going back to some of the drivers of the subscription number growth versus the revenue growth. How much of the growth in number of subscribers is driven by -- I think you had a new video product this quarter, but is it new products versus maybe -- I guess new format products versus new lower-priced tier products? And what were some of the new -- I guess the new lower priced tiers this quarter?

Sure. So Lloyd, while we don't give out revenue by product, so we're not going to give out kind of the subscriber growth by product. The reason fundamentally why number of subscribers is increasing significantly faster than subscriber revenue growth is because of the success and the tendency for some of this new prosumer segment to consume some of the small subscription products that we have. So we do talk about kind of our existing TAM within the stock market industry and we talk about some of the expansion that we believe that is going to come from some of the casual creatives that are really starting to drive our business. And those casual creatives tend to have a preference for smaller subscription products. They don't need our 750 product. They are more intent to consume say for example 10 assets per month at $30 per month, which is a subscription product that you can see on the homepage of our website. And so where we've seen growth is we've seen growth in some of those smaller subscription products and what I just mentioned is an image product. We put out a press release last quarter about our new footage product. And while that's not as low-cost of a product, its seen meaningful traction and we've seen a number of clients take up that footage subscription product, who were erstwhile by activity or basket buyers of Shutterstock's products. And we also have a new music product in PremiumBeat that's a lower cost product that we've gone to market with that we're going to be supporting with increased sales and marketing. So I think those lower cost subs driven by the prosumer segment are really what is forcibly driving this trend of subscriber growth in excess of subscribe revenue growth.

All right. Thank you guys.

Thanks. Thanks so much, Lloyd.

Thank you. We have a question from Alex Giaimo with Jefferies. Please go ahead, sir.

Okay. Thanks for taking questions guys. A bit of a follow-up to a couple of previous questions. But you had mentioned the goal is to get back to overall revenue growth as a company. And just looking at the addressable market analysis in the slide deck you guys put out, it looks like you're looking at about 7% stock imagery growth, if I'm reading that correctly from an industry standpoint. So should we consider that maybe the North Star where future revenue growth can get to for the company? And what needs to happen to eliminate maybe some of the competitors that are taking share and have Shutterstock participate more in that upside? And then lastly, in 2Q, you were able to dramatically expand margins, while also seeing revenue decline just 1%. So does that give you more confidence in the sustainability of your current revenue levels maybe as a baseline again just given the fact that you raised in spending and top line was still relatively steady? Thanks guys.

Yes. Great question, Alex. And what I would say is the 7% category growth expectation similar to some of the expectations that were had going into this year around advertising, around retail et cetera, a lot of those expectations are no longer true as a result of the pandemic. So you're right that the 7% growth that was expected for this category would be absolutely what we would expect to grow as a key sort of player in this space. Additionally, we believe that there are several adjacent categories that we are looking at that could also help us in the long-term accelerate growth. And so we're pretty actively looking at those categories. Again, these days growth projections are not very accurate and hard to get our hands around. But we definitely believe that we can get more additional growth from being deeper in workflow and really integrating deeper with our customers. And so, we'll continue to look at and investing in that. As far as our margin profile and leverage in the business going forward, we stated -- at the beginning of the year we stated our goal that we were going to start to focus on increasing the margins of the business. We had talked about a 50 basis points improvement, and we're definitely confident that we can meet and exceed that going forward. But, it's definitely something that we think we have room to exceed that expectation, going forward.

Great. Thanks, Stan.

Thank you. [Operator Instructions] We have a follow-up question from Youssef Squali with SunTrust.

Hi. Thank you. Just a follow-up to the M&A reference in your prepared remarks. Can you just again help us kind of frame type of either products technology, just whatever it is that you think could help you either solidify the business as it exists today or to Stan's earlier comments about maybe going into some adjacencies to help accelerate the business? So, any kind of incremental color there would be very helpful. Thanks, guys.

Sure. Youssef, I'll give some comments, and then let's Stan tag on. I think from our perspective there's two types of potential opportunities we're looking at. There are a number of consolidation opportunities in the stock space. We regularly look at them. We're disciplined in our approach. We believe that these are businesses that are often additive from a content type perspective, and may give us a leg up with a specific type of content give us access to a new contributor community. And we typically look at those acquisitions to be accretive either immediately or within a short period of time based on the multiple and based on our opportunity to get cost out of those businesses. We're also looking very actively at strategic opportunities. These are companies that would typically be, on a revenue multiple basis from a transaction perspective, the margin profiles are not yet mature. But we think that with two million customers and over 200 people in terms of our front-end sales apparatus, there's a great channel that we can leverage in order to accelerate the growth of these businesses and take up the margins. There's a few areas that we're looking at and we've been looking at marketing technologies, specifically in terms of creative content workflow is an area that we look at very actively. Tools and utilities with which our creative uses to manipulate content either, image, video, music or other is an area that we look at. And we also, quite frankly, look at AI and machine learning with respect to identification of content looking at the performance of selected content and looking at how to create dynamism in terms of the optimization of content for deployment in marketing use cases as well as on website use cases. So, those are kind of three or four of the strategic areas we look at in addition to the consolidation plays that we regularly look at.

Sounds good. Thanks.

Thank you. So, it appears there are no further questions in the queue.

Great. Well, thank you everybody. I want to take one last opportunity to thank our employees, our customers and our contributors for their support and engagement. I couldn't be more proud of the organization. I'm so excited about our future, and believe that we're very well positioned to take advantage of the opportunities ahead. So please stay safe, and that ends our call for the day.

Thank you. That now concludes the call everyone. You may now disconnect.