Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Shutterstock, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would like to hand the conference over to Chris Suh, Vice President, Investor Relations and Corporate Development. Please go ahead, sir.

Thank you, James and good morning, everyone. Thank you for joining us today for Shutterstock third 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 offerings, 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 10-Q and our annual 10-K for discussions of important risk factors that could cause 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 and adjusted EBITDA margin, adjusted net income, revenue growth, including by distribution channel 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 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. And now at this time, I'll turn the call over to Stan.

Thanks, Chris. Good morning everyone. And thank you for joining Shutterstock's third quarter earnings call. This quarter Shutterstock returned to year-on-year revenue growth, with revenue of $165 million, representing growth of 4% from Q3 of last year, or 3% on a constant currency basis. We saw a year-on-your revenue growth across all regions, especially in North America, which was up 6%, which represented roughly half of the total growth. Europe and rest of the world were each up 3%. Revenue growth across these regions, particularly in North America was driven by our smeller subscription product. To continue to grow revenue, we are very focused on innovating on our product offering. For example, in response to the success of our smaller image subscriptions, we rolled out smaller footage subscriptions with allotments as low as five licenses per month for $99 per month. Through our low-cost subscription model, we've made our professional quality video content accessible to a broader audience, including prosumers and the DIY marketer audience. To help us audience ease into the work -- into working with video content and to expedite the editing process, we include with the subscription a set of free clips that are pre-edited by our in-house creatives, so users can save time on editing and focus on their storytelling. In addition, in October, we launched our first monthly PremiumBeat music stock also with an allotment of five licenses for $64.95 per month on. An annualized basis, we believe that these new subscription products will be accretive to our average revenue per customer. The product innovation we are driving is leading to strong results against the subscription KPIs we introduced last quarter and is attracting a whole new audience for Shutterstock. While our subscription metrics were exceptionally strong this quarter and we're pleased with the results,…

Thank you, Stan and good morning, everyone. In the third quarter, Shutterstock realized the return to revenue growth earlier than we previously expected, driven by the success of our subscription offerings and continued momentum in our enterprise revenue channel. Q3 revenues grew 4% year-on-year, or 3% on a constant currency basis. Growth was led by our e-commerce channel, which grew 7%, representing the fastest growth rate over the past year and a material uptick from last quarter. Our enterprise channel also improved materially, down 6% last quarter to down 1% this quarter, or an improvement of 5%. In our enterprise channel, it's clear that the changes we've implemented are now having a positive impact. By reinvigorating our sales organization, innovating our suite of product offerings and making further platform investments in our API, we're starting to see improvements in both bookings and deferred revenue. We saw $6.4 million sequential increase in deferred revenues, which is indicative of the progress we're making. We believe we are still tracking for the enterprise channel to return to recognize revenue growth in the early part of 2021. From a geographic perspective, we saw return to year-on-year revenue growth and revenue acceleration this quarter across all regions, with particular strength in North America, which was up 6% to $59 million. Europe grew 3% to $53 million. And the rest of the world, including Asia also grew 3% to $53 million. Gross margins were 63.5%, up approximately 350 basis points from the first quarter. While the gross margins were strong, I would note for investors, the part of the gross margin improvement is short-term in nature and driven by the reduction in utilization and paid downloads of 6.2%, which is partially due to the pandemic. As utilization normalizes, we expect our gross margins to decline from…

[Operator Instructions] And our first question comes from the line of Youssef Squali from Truist Securities. Go ahead, please. Your line is open.

Great. Thank you very much. Good morning guys and congrats. Pretty impressive cost containment story there. First question is around just the trends you're seeing posts Q3, I guess in October, just the sustainability of the improvement you're seeing both on the e-commerce and the enterprise and on the cost side and that was a big surprise. Maybe can you unpack the gross margin improvement little bit? I think you talked about lower utilization just because of the pandemic, but there are a whole slew of other things that you guys are doing in terms of rev share to the distributor -- to the contributors and other things. If Jarrod maybe you can just help us kind of parse out the different impact from different components and your Q4 guidance of 20% gross margin seems to be pretty -- I'm sorry -- EBITDA, not gross margin, of 20% seems to be substantially below what you just reported. So, again, maybe if you can just go over the puts and take there, would be super helpful. Thanks.

Hi, Youssef. This is Stan. Thanks so much. I'll touch on the sort of Q4 piece and then let Jarrod talk about the gross margins. So, just real quick, in terms of the momentum heading into Q4, we continue to see the momentum that we saw in Q3 sort of into Q4 and hence, the guidance that we're giving around -- the performance for the quarter, which is continued strength in e-commerce and continued improve momentum in enterprise. I'll let Jarrod touch on the gross margin -- the gross margin piece.

Sure. And -- Youssef, I think we feel good about the gross margins. We feel good about the trajectory of gross margins. And there's a number of reasons why the gross margins are trending in the right direction. I think last quarter we talked a lot about our content ingestion process. I think we're doing a much better job of using AI in technology rather than onshore and offshore people resources in order to manage our content ingestion process that is certainly having a positive impact. As you know, we did make a change to our contributor royalties where there's an annual check as to the payout profile to contributors. And I think that's having an impact at this point in time during the year. I think there's also a significant impact from the change in paid downloads. If you kind of track the paid downloads, they've gone from down 1% to down 5.6% to down 6.2% in this quarter. And that does have a meaningful impact in terms of the cost of goods sold and hence the gross margin profile. So, we don't expect that the gross margins at this level are sustainable. We think they will come back down. We are confident that paid downloads will tick back up as utilization improves. We think that is going to start to happen in the fourth quarter as well as into next year. And so, we think you'll see some of the upside we've experienced in gross margin start to reverse itself. But suffice it to say there's a number of things that we're doing including working on reducing our cost of credit card acceptance, lowering our interchange fees and a number of other things to really work around the edges to keep gross margins as sustainable as possible. But again, we don't think they're going to stay at these levels. We think they will be reverting back on to where they've been historically over the course of the last several quarters.

All right. That's helpful. Thank you.

Our next question comes from the line of Brad Erickson with Needham & Company. Go ahead, please. Your line is open.

Hi. Thanks. Just a couple. So, first on the subscription acceleration. I guess, beyond just broad based recovery and demand you talked about where are you doing anything different there either on performance marketing channels, or is your messaging different in any channels for either new or existing customers? Just curious what may have driven the faster shift over to subscription that we saw in the quarter?

Yeah. So, I'll take this one. One of the big changes we've made is that we've introduced subscriptions that are smaller in nature for smaller businesses, both on the image side as well as footage and then most recently with PremiumBeat. And so, from a marketing perspective, we do address our audiences differently in terms of how we go-to-market. So, the channels that we use, the type of copy that we use, how much we spend to acquire customers relative to the lifetime value, as well as how we communicate with those customers one day -- once they become either subscribers of our emails or subscribers of our product. So, we do have a segmentation approach to acquiring these customers. And that has been very helpful. If you look at the subscriber revenue growth relative to the subscriber growth overall, that's where you can kind of see how the impact of our smaller subscriptions are having on overall revenue relative to the much more accelerated growth in overall subscriber.

Got it. That's helpful. And then just to follow-up on the e-commerce side of the business. I know you said the rebound there was broad-based again. But just curious to get a little bit more sub-sector detail if we could, I imagine advertising and things like digital commerce came back fairly well. Just curious if you can call out any other categories that showed sort of outperformance type of improvement in the quarter. Thanks.

Yeah. So, I think, we continue to see momentum around particularly as companies were getting ready for their Q4 push, both in combination of back-to-school, as well as early holiday, as well as -- you've seen all sorts of movements around things like, Amazon's Prime Day and what that did to be able to through our retail sector as well as some other categories of spend that have started to sort of come back. So, what I would say is this was kind of a little bit more of coming back to -- for several categories, particularly in e-commerce continued growth in the small and medium business segment. We do continue to see softness in some very large categories such as auto, such as travel which continued to be impacted by the pandemic. But we did see some acceleration in some of the categories that we saw growth last quarter as well.

Got it. That's great. Thank you.

[Operator Instructions] And our next question comes from the line of Ron Josey with JMP Securities. Go ahead, please. Your line is open.

Great. Thanks for taking the quarter and taking the question. And Stan, I wanted to talk a little more about subscriptions. You mentioned you're aggressively investing here and understood the lower price plans, but can you talk about the profile those are buying subscriptions? I think you just mentioned SMBs and whatnot. But just curious about those who are buying subscriptions. We mentioned prosumers in the past. And I'm also curious if you can talk a little more about platform solutions and how that might be helping the broader growth, but then also for subscriptions. Thank you.

Yeah. Absolutely. So, today, most of our subscriptions are in our e-commerce area. As we continue to invest, we're going to create more and more subscription products, both in the enterprise, as well as platform solutions. So, today, a lot of the smaller subscriptions are sort of tailored for a customer that needs self-serve capabilities. They are not looking for an account manager to sort of help them. They are looking for -- they know that they are going to develop certain projects over the course of the year and they need a simple way to do that. When we think about investing in subscriptions, the way we think about it is, today our subscriptions are sort of tied to different sets of content that we make available or allotments of content that we make available with price points. One of the things that I talked about on the script as well as previously as a backup, we're going to continue to evolve our subscriptions with services. So, you can imagine as we continue to develop, for example, in the enterprise, our Shutterstock Studios business those types of services will become a part of our overall creative subscriptions. We will start to make workflow services available as part of our subscriptions and those will be targeted at various audience types. So, when we think about our subscription growth, that's something that we're definitely going to look out across all of our channels. But today that is predominantly an e-commerce driven sort of area. With platform solutions, this has been a really successful channel for us and continues to be a really successful channel. We are starting to introduce new products within the channel, so not just content. We are launching services within that channel as well, including editing, including, leveraging our datasets and computer vision. So, we are actively working on sort of developing different subscription product for that channel as well. However, today, the way those contracts are written, but we don't classify most of those at as subscriptions. So, more to come [ph] in terms of how the subscription profile will evolve across all of our channels, but ultimately a lot of that is tied to how our customers purchase and their purchase behavior. And we do see an opportunity to drive subscriptions across all three of our sales channels.

That's great. Thank you.

Our next question comes from the line of John Egbert with Stifel. Go ahead, please. Your line is open.

Great. Congrats on the results, and thanks for taking my question. So, it looks like you had a nice inflection in gross billings and a significant improvement in the enterprise revenue relative to the past few quarters. And that seems like a reasonable timeline for that segment to return to growth. I was wondering if you could talk about the evolution of your enterprise sales strategy as you've evolved the sales organization. I know you've talked about using e-commerce to fuel some enterprise sales, for example. I'm just curious the steps you've taken in the recent last few months.

Yeah. Absolutely. It's interesting, I've been talking about enterprise for several quarters and how our strategy was changing from purely sort of a very transactional approach that we had historically in the enterprise to much more of a strategic partnership approach, that started with a realignment of the team around segmenting our customers. First and foremost, aligning the comp plan to focus on larger average order values, aligned around objectives of creating relationships within the enterprise. And one of the biggest impacts that we've had to the businesses is the team itself. We brought on a new CRO, Jamie Elden, who's done an amazing job. We have an incredible sales operations team. And the go-to-market has changed as we sort of talked about that we needed to. We've launched some new products and services. So, if you think about what we offer today, it's not just creative, it's creative services. It's workflow services and it's working. Our customers particularly today in this environment when you need a global solution to drive your creative needs, we can do that at scale. We can do that very cost effectively. So, what we're finding success is actually -- it's interesting, we're seeing it across all of our enterprise verticals, including media, including agency et cetera, but also within our enterprise, we also have a small and medium business segment and a business team that is entirely focused on both new customers, as well as retention of existing customers and that segment is growing very nicely for us as well as part of enterprise. So, I think, what I would say is our move from sort of a transactional organization to a much more strategic partnership organization is having some success. And I'm very proud of it -- of the team and the results that they are bringing in.

Great. Thanks.

Our next question comes from the line of use of Youssef Squali with Truist Securities. Go ahead, please. Your line is open.

Thank you. I just have a couple of follow-ups, maybe one on -- for you Stan on the last question. You guys have talked about improvement to workflow and innovating that area for the enterprise channel for quite some time now. But it seems like that's renewed interest -- area of interest. Can you maybe just help us how -- what's different now? How are you guys going about it differently this time around? I think you talked about some self-serve capabilities, some data launches, and what's not, so that will be really helpful. And then in the in the presentation that you guys have on the micro-side, you guys highlighted first party data assets as an area of opportunity. Can you flush that out a little bit for us in terms of kind of -- what kind of products you guys are seeing potentially coming out of there? And are you presently in the market with anything for that? Thank you.

Yeah. So, Youssef, as I've talked about before, I believe for our company to be successful, we need the combination of content workflow as well as data assets. And this is where -- what really differentiates us is the fact that we want to bring all of three of those through all of our sales channels. Unlike many of our competitors, we think about ourselves as an open platform. So, when you work, for example -- when we work with our partners in platform solutions and we're leveraging, for example, computer vision internally for how we either ingest content or how we look for content that is brand safe or has certain characteristics, those services we started to make available, for example, through platform solutions, because many of our customers have those needs. They have image recognition needs. They have needs around content that they manage internally. So, when we think about workflow and our seriousness about providing more services, this isn't about sort of us competing on any one tool or monetizing any one tool, it's about -- when we bring collaboration services like with workspaces, right, where we allow customers to ideate, collaborate, share content as part of their initial workflow, that's going to be -- that is a part of our subscription products. That's going to be how we continue to develop retention and engagement around our subscription products. As we start to leverage our first party data more and more for recommendations and more and more for performance, those are going to be part of our subscription products that we bring across all of our sales channels. So, some of these are in market like the computer vision examples that I've just used, some are in beta right now with customers. But as we launch these products and as they become much more widely available, we provide a lot more information as well as usage and sort of how they're impacting our subscription numbers and upcoming quarters. But we just wanted to really let -- the community know that this is an area that we're very serious about while making investments and it's based on research from our customers. The types of workflow services that we're bringing are entirely based on what our customers have asked us to bring them.

Sounds good. Thank you. Thanks.

And there are no further questions in queue at this time. I'd like to turn the call back over to CEO, Stan Pavlovsky.

Thank you so much. I'd like to again say and express my gratitude to our employees, our customers, and our contributors for their support and encouragement. I continue to be so excited for the road ahead, as we continue to take advantage of the opportunities that we have in front of us. And with that, that ends our call for today. Thanks everyone.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.