Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2020 Shutterstock Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to hand the conference over to your host, Mr. Chris Suh, VP of Investor Relations and Corporate Development. You may begin.

Thank you, Julie. Good morning, everyone, and thank you for joining us for Shutterstock's Fourth Quarter 2020 Earnings Call. Joining us today is Stan Pavlovsky, Shutterstock's Chief Executive Officer; and Jarrod Yahes, Shutterstock's Chief Financial Officer. Please note that some of the information you'll 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 investments in our business, the future success and financial impact of new and existing product offerings, the integration of the company's strategic acquisitions, 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 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 this call. We'll be discussing certain non-GAAP financial measures today including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, 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 measures can be found in the financial tables included with today's press release and in our 10-K, which are posted on the IR 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, I'd like to turn the call over to Stan.

Thanks, Chris, and good morning, everyone, and thank you for joining Shutterstock's Fourth Quarter Earnings Call. In the fourth quarter, Shutterstock experienced a sharp acceleration in year-on-year revenue growth to 9%, which caps off a year in which we built tremendous momentum each and every quarter. Our revenue growth and our outperformance in the fourth quarter was broad-based by revenue channel, by geography, by product and content types. Our subscription metrics were exceptionally strong this quarter. We also experienced upside from a desire by our clients to fully utilize budgets before year-end in addition to strong holiday demand, driven in part by increased promotional efforts. We estimate the end-of-the-quarter increase in transactional revenues added between 1% to 2% to our revenues for the quarter. We experienced a return to revenue growth in our enterprise revenue channel earlier than expected and with a stronger velocity than we previously expected on the back of multiple quarters of strong bookings growth. It is clear the changes we have implemented are now having a positive impact, which are translating into our reported results. By reinvigorating our sales organization, innovating our suite of product offerings, and making further platform investments in our API, we are starting to see more consistent and stronger growth in bookings and deferred revenue. Our year-end deferred revenue of 149.8 million has grown 5.6% from December of 2019 on the back of meaningful growth in the third quarter. We believe that our return to year-over-year growth earlier than we expected, coupled with multiple strong quarters of deferred revenue growth, are good leading indicators pointing toward a healthy 2021 for our enterprise revenue channel. In addition, our e-commerce channel ended the year extremely well, driven by overall company subscription growth metrics that meaningfully exceeded our expectations for the quarter, with quarterly year-over-year…

Thank you, Stan, and good morning, everyone. Shutterstock ended the year with exceptionally strong revenue growth, well exceeding our expectations and building off the positive momentum we had in the third quarter. Two areas of surprise to the upside were our enterprise channel, which returned to recognize revenue growth a quarter earlier than we expected and with demand levels that were stronger than we projected. Further, our subscribers and subscriber revenue growth accelerated to record levels as compared to the already strong results in the third quarter, driving outperformance in e-commerce. All of these trends position us extremely well going into 2021. Fourth quarter revenues grew 9% year-over-year or 7% on a constant currency basis. Growth was led by our e-commerce channel, which grew 11%, whereas our enterprise channel ended the year with year-over-year growth of 6%. While our revenue growth for the quarter was extremely strong, as Stan noted, we benefited from an end-of-the-year budget flush at clients combined with a strong holiday demand environment, which positively impacted the quarter. For the full year 2020, revenue growth was 2% with e-commerce growth of 5%, offset by a 2% decline in the enterprise channel. From a geographic perspective on a year-over-year basis, we saw revenue acceleration this quarter across all regions with particular strength in North America, which was up 13%. Europe grew 8%, and the rest of the world, including Asia, grew 5%. Gross margins were 63.4%, consistent with our third quarter margins. While the gross margins were strong, I would note for investors that this is partially due to lower utilization, which we believe will reverse itself over the course of 2021. For the full year 2020, gross margins were 61.1%, up 3.8% from 57.2% in 2019. Sales and marketing expense was 25% of revenue as compared to…

[Operator Instructions] Your first question comes from John Egbert with Stifel.

Great. Thanks for taking my question. Obviously, really strong trends in subscriber revenue during the quarter. Can we unpack that a little bit more? Can you talk about some of the factors influencing net momentum, whether it's the promotions I think that were cited in sales and marketing, maybe merchandising of different price points for subscriptions, maybe evolving the offering in general? What are some of the interesting takeaways from the fourth quarter success there?

Hey, John. Thanks for being on today. A lot of our success is really tied to new subscriptions that we introduced over the course of 2020, which had particular resonance in Q4. These include subscriptions targeted at small and medium businesses around our image products as well as music and footage products that we launched earlier this year. So, what I would say is the growth acceleration has definitely come from the small and medium business sector, and that was even more pronounced in Q4. And then, on the enterprise side, we've continued to see momentum quarter over quarter over quarter. What was interesting in Q4 was the the budget flush that we talked about earlier where we saw a lot of transactional products uplift in Q4 within the enterprises. Marketers were looking to use up budgets more than we expected, and that added about 1% to 2% to our growth.

Thanks.

Your next question comes from Youssef Squali with Truist Securities.

Awesome. Thank you, and good morning, guys. So, congrats on the very solid quarter. So, if I just step back a little bit, look at what you guys have said historically about the organic growth in this industry, I think you've often talked about organic growth around 7%. You just did better, which is awesome. But as I look at 2021 and I look at your guidance of 6% to 8%, so you're targeting exactly kind of the mid-point of the overall industry. But a number of things happened last year. Obviously, you have some really easy comps in Q1 and Q2. You have TurboSquid, which I think, Jarrod, you talked about $20 million contribution and probably on other things. So maybe unpack that 6% to 8% growth in terms of organic versus non-organic and why at least based on that guide you may be growing below your own expectations for the industry. It seems a bit conservative, or maybe just lack of clear visibility into the pandemic and its effect. And the other question I have is on TurboSquid. Maybe, Stan, can you just speak about kind of low-hanging fruit opportunities there from integrating that acquisition into your core products, maybe in terms of cross-selling other things versus kind of the long-term opportunities maybe like moving in into new verticals, new products, new geos, et cetera? That'd be helpful. Thank you.

Yeah. Hey, Youssef. So, in terms of guidance, I think we believe that we're on pretty solid footing in terms of the fundamentals. I think the visibility into guidance is still somewhat challenging. We continue to see uneven performance in certain geographies, for example, because of continued lockdowns. So, some of what you're hearing is that we still have some of the COVID effect that is impacting the business right now. And we definitely plan. As things start to open up and as there becomes more what we call sort of the consistency around our performance and consistency across geographies, we will definitely update our guidance later in the year. As it relates to some of the short-term opportunities with 3D and TurboSquid, we have a couple of immediate opportunities, one of which is the fact that today the business is primarily driven on a self-service model. It's an e-commerce model. But we know that a lot of the users work at large corporate clients. And so, our ability to provide increased service level and provide additional services, such as our studio services or our platform solutions and API services, really present opportunities in the short term that we are looking to take advantage of. So, as we mentioned, in addition to some of the longer-term opportunities from this category and what's happening in social media, what's happening in gaming and some of the verticals that we may have a lower concentration or penetration than TurboSquid, which obviously presents opportunities for us in the short term. It's really about our sales channels. It's really about platform solutions. And it's about enterprise and our ability to take and create a new product offering that includes 3D within those channels.

All right. That's helpful. Thank you.

[Operator Instructions] Your next question comes from Ron Josey with JMP Securities.

Great. Thanks for taking the question, and good to hear from you. So, I wanted to talk maybe a quick follow-up on Youssef's questions and your answer around subscriptions. With subscribers reaccelerating a little bit more, reaccelerating 44% year-over-year and you talked about the benefits and the focus on the prosumer and SMBs, can you help us unpack these verticals a little bit more in terms of what led to this increase? Is it the investment in sales, which I think you just mentioned? But, also, just the tailwinds that we're seeing broadly around e-commerce. You mentioned CTV. Anything more to help unpack what's driving these subscriptions besides just the verticals around prosumer and SMBs? And, Jarrod, you mentioned something pretty interesting on tech debt. I think I heard you talk about paying down tech debt overall. And so, maybe talk about just internally how this has helped change your processes and focus more on innovation and growth and how we see the organization or how you see the organization move forward when we pay down this tech debt. Thank you.

Yeah. Absolutely. So, I'll take the subscription question, and I'll let Jarrod talk a little bit more about R&D expense. As far as subscriptions, you're absolutely right. We definitely made a concerted effort as it relates to sales and marketing to really focus on subscriptions because of consumer behavior both in our category as well as just how consumers really have embraced subscriptions across multiple categories. And in particular when we look at small and medium businesses and digital transformation, this has been a real trend this past year. And so, for us, we've been able to sort of take advantage of that trend across all of our sales channels, whether that's e-commerce where we introduced small subscriptions or smaller priced subscriptions across image, footage, and video, which have been very successful. But also, we have partners in our platform solutions area that have also been very successful during this time. Website builders as an example. Our advertising partners as companies move more of their dollars to digital. That has had an impact on us. Actually, even in our enterprise channel where we have in certain cases small and medium size businesses that like to have a sales-assisted approach. Those have been exceeding our expectations. So, what I would say is the SMB segment across all of our sales channels has definitely outperformed what we call our professional creative segment as well as our sort of high-touch large corporation segment, although we have made significant progress there. But when you think about the fact that advertising categories like auto and travel, some of the largest advertising categories that have been significantly impacted this past year which we're not immune from, the small and medium business segment has really helped us to offset that.

And, Stan, if I could just follow up before Jarrod. You talk about tech debt. I think I heard 2 million e-commerce customers. Any sense on how that's trended, maybe backing up your comments around the SMB? Thanks, guys.

Yeah. I'll let Jarrod. I don't know if, Jarrod, you have the specific growth in customers. Our subscription customer growth was significant in terms of 46%. Overall customer growth, I don't know if we have that right in front of us, but we'll look that up. And then, I'll let Jarrod take the R&D question.

Sure. So, just on our overall customer growth, we ended the quarter with just over 2 million total customers for the company. We were just under 2 million customers for the company as at the end of last year. So modest growth just in terms of total number of customers. And I think part of that is there is a large tail of transactional customers, which come in and out and don't move the revenue as much. So, I think total customer count hasn't been increasing certainly at the same rate as subscription customer growth, which is really what's driving that average revenue per customer up. And I think that's part of our overall strategy. In terms of our technology and how we're thinking about product development costs, I think the team has done a great job in driving down product development costs, particularly as you think about maintenance expenditures. So, product and R&D costs have come down from about 8% of revenues to about 6% of revenues as of the past year. And I think there's a couple of reasons for that. One is, as I mentioned in my prepared remarks, we did have several million dollars of spend in software in 2019 that didn't recur in 2020. Up at the other pieces, we are spending less time and less effort and less resources in terms of remediation of tech debt. And we've reached the conclusion of some large long-term projects that have taken place over the course of the past several years. For example, migration of legacy platforms to new platforms as well as migration to the cloud for our operating infrastructure as well as our internal BI infrastructure. And what the team is really been doing is fundamentally asking a question with regards to maintenance expenditures in product as to whether something ultimately drives revenue or not, whether something is ultimately tied to innovation or not. And we've been reorienting resources toward innovation. And I think the way you can really see that from a P&L perspective is look at the capex line. The capex line is effectively flat year-over-year, while product expenses went down meaningfully. And capex for us is predominantly software development expenditures associated with new product builds and innovation, whereas maintenance needs to be expensed through the P&L. So, I think we feel really good about saving in terms of opex, while continuing to reinvest in the business from a capex perspective in order to build out new products that are really focused on growth and innovation.

Thank you, guys. Appreciate it.

Thanks, Ron.

I'm showing no further questions at this time. I would now like to turn the conference back to Stan, CEO. Actually, yes, we did just have one pop in. You do have a question from Nat Schindler with Bank of America.

Great.

Yes. Hi, guys. Sorry, I had technical difficulties getting the question in. Just wanted to follow up on a point you made during the call. You said you benefited from some end of your budget excess budget. I would imagine that happens every Q4 or often. How much of this is different from normal seasonal growth? So, assume you're upside here, how much that would have been usual or how much of it would be in excess here because of that? And additionally, where does that show up? I would imagine it would come in more on the revenue per download as opposed to subscriptions and people paying more for types of media. But is there some more detail you can talk about that?

Yeah. I'll let Jarrod sort of talk about what happens with pricing as sort of our downloads go up and down and sort of the combination of changes in the product mix. But in terms of what we call the budget flush in Q4, I think we did a great job with with promotions this year in Q4. It definitely exceeded our expectations compared to a year prior, particularly under the circumstances this year and our sales team and our account management team did a really good job in leveraging those with our clients to get as much value from transactional business in Q4. So, you're right. There is definitely kind of the using up of budget on an annual basis. I think this year, we were a little bit more promotional around that and really wanted to see if we could enable our clients and help our clients with year-end and we were successful.

Yeah.

And I would just add in terms of your question on revenue per download and paid downloads and the impact from subscription, we did see a nice tick-up in paid downloads this quarter. We actually saw paid downloads increase about 2.3 million quarter-on-quarter as compared to the third quarter of 2020. And ultimately, that resulted in paid download decline of 4% as compared to the 5%, 6% we've experienced over the course of the past two quarters. So, I think customer engagement coming back and customer utilization coming back is certainly a positive sign for us and something that we expect to continue to take forward into 2021. And what's interesting is when you look at the revenue per download increasing 13.7% as it did in the fourth quarter, that's not just as a mathematical result of paid downloads being down. It's also a result of the increase in subscription as a percentage of our total business. So, fundamentally, subscription products do come with meaningful increases in average revenue per customer. And there are also accretive and support revenue per download. So, I think we feel really good about increases in utilization quarter-on-quarter in terms of paid downloads. And we also feel good about the revenue per download increases, which are really being driven by our subscription products, not necessarily because we're raising unit prices with our business.

Great. Thank you.

Okay. And I'm showing no further questions at this time. I will now like to turn the conference back to Stan, CEO.

All right. Thank you. I'd like to once again convey my gratitude to and appreciation for Shutterstock's employees, customers, and contributors for their support and engagement. I continue to be excited for the road ahead as we continue to take advantage of the opportunities ahead of us. With that, that ends our call for the day. Thank you.

Ladies and gentlemen this concludes today’s conference thank you for your participation and have a wonderful day. You may all disconnect.