Good day and thank you for standing by. Welcome to the Second Quarter 2023 Shutterstock, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Suh, VP, Investor Relations and Corporate Development. Please go ahead.

Thanks Abigail. Good morning, everyone, and thank you for joining us for Shutterstock's second quarter 2023 earnings call. Joining us today is Paul Hennessy, Shutterstock's CEO; and Jarrod Yahes, Shutterstock's CFO. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets, including 2023 guidance, absolute results or trends could differ materially from our forecasts. For more information, please refer to today's press release and the reports we filed with the SEC from time to time, including the risk factors discussed in our most recently filed 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 the 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 tables included with today's press release and in our 10-Q. I'd now like to turn the call over to Paul Hennessy, CEO.

Thank you, Chris. Hello, everyone, and thank you for joining us today. I'm thrilled to walk through Shutterstock's second quarter with you this morning as there are some extremely exciting developments in our business. Before going into the details, I'd like to start by providing a bit of context. Back at our Investor Day in February, we talked in depth about our content, creative and data engines and the massive opportunities we see driven by step change innovations such as generative AI, and we also spoke about the potential for creative and data to become a more important part of our overall revenues. I'm pleased to report that as reflected in our second quarter results and our revised full-year outlook, Shutterstock is not only adapting but it is thriving in this dynamic environment. We are signing industry shaping AI data partnerships, we acquired Giphy to lead the way in moment marketing and conversational content and we are embracing a culture of rapid and iterative experimentation when it comes to managing our content business. At the same time having achieved record revenue in EBITDA on a year-to-date basis, I'm pleased to report that we are increasing our guidance on top and bottom line for the full year 2023. In addition, beginning today we will be breaking out the revenue derived from our data engine. As a reminder, our data offering is driven by our ability to monetize our unique repository of metadata which customers license for model training purposes. This includes our multi-year partnerships with large tech companies such as OpenAI, LG, Meta, NVIDIA and now our newly announced transformational partnership with Google. With this new disclosure, we believe that investors will have greater visibility into the scale and trajectory of a major growth driver of our business. Let's shift gears…

Thank you, Paul, and good morning everyone. The pace of change in our business is clearly accelerating, and we are uniquely capitalizing on some of the demand that generative AI is creating particularly in our data engine. Going forward, beyond some of the new disclosures provided around data revenues, and average deal sizes in bookings, our aim is for our financial disclosures to keep evolving. This will be important, as we expect our creative engine including Giphy, and our data engines to become larger parts of the overall company in the years to come. Overall, revenue growth was muted for the second quarter and foreign currency fluctuations did not have a significant impact on our revenues. Consistent with the past several quarters, we've had significant differences in growth, between our revenue channels. The Enterprise channel was up 22% in the second quarter driven by our revenue from our data engine, which grew to $70 million in Q2, 2023, a record quarter. We are excited to be able to disclose the size and growth of our data business this quarter, announced the recent partnerships with Google and Open AI as well as to start to talk about the significant growth in average deal sizes and bookings for the very first time. Our Enterprise channel growth was also helped by growth in editorial, Shutterstock studios and SMB subscription products which are areas that have consistently grown over the past year. Our E-commerce channel was down 12% in the second quarter, driven primarily by weakness in new customer acquisition. Consistent with past quarters, we've experienced no change in customer attrition across product lines and geographies. Our subscriber counts were stable sequentially indicating, the relative strength in customer retention in our smaller subscription products. However, from a geographic perspective, the U.S. and the rest…

Thank you. [Operator Instructions] Our first question comes from the line of Bernie McTernan with Needham and Company. Your line is open.

Great, thank you for taking the questions, maybe first Jarrod just a clarification on the point you just made that only inked deals are included in the guidance for data. Can you just remind us of the revenue recognition for Computer Vision deals and how much is recurring or deals that have just been signed but have not been recognized yet and more, I guess, specifically is, is it the Google deal the revenue hasn't hit yet even though it's been signed and that's what's driving that second half acceleration revenue?

Sure Bernie. And to take a step back, I think when we first started talking about some of the positive contribution of our data deals. This was a pipeline that we did not have a lot of experience in converting and so, as such, we elected to keep out any deals that were not inked and signed in terms of thinking about our guidance and thinking about our prospects. And we did not effectively include a probability weighted pipeline into our guidance. We're maintaining that same approach. We do now have the Google deal inked. To clarify your question, Google did not contribute to any revenue in the second quarter. So that will help us prospectively as the year goes on. And what we're seeing with these deals is while we're not achieving what you would think of as traditional SaaS revenue recognition, the nature of these deals is recurring in that our customers do expect and we do deliver ongoing data refreshes over the life of these contracts and these are typically three-to five-year contracts, some have been as long as six and seven years. And so we are seeing that that revenue recognition is getting increasingly spread over the life of the deal; however, it is still to some extent front-end loaded and not truly SaaS like in terms of, in terms of its terrific nature.

Understood. And then any early progress to share on conversations with enterprises on the new indemnification product and is that part of the increase of the guide in '23?

No, I would say that those conversations are now underway. We've launched the indemnification product as you know, Bernie, recently and then it takes time for especially over the summer to get to all of the enterprise customers to see what they're thinking, understand exactly what they're looking for and we're optimistic having done the work of surveying them what's most important, this is a critical factor and we think again as photo realistic quality rises and as we've now created a structure where they can create with confidence using our generative AI images, we think that that market picks up, but that's not really part of the guidance for the back-half.

Understood. And then just lastly for me, would love just some more commentary on the decision to lean in on sales and marketing in the second half, it doesn't seem like you guys - it seems like the issue on E-commerce is more of a conversion issue than top of funnel but, or maybe it's getting the right SMBs in that top of funnel but just if there's any further clarification?

Yes, I'll it, look, you heard about our experimentation engine. It is rolling and, and we firmly believe that the way to truly understand what customers are looking for, what their behaviors are, understanding how they want on pricing and packaging, you've got to be, have a platform for experimentation at scale and we've got that now and you heard the, you heard the results. So, as we start to experiment, as we start to drive conversion, we also want to remind customers to come back into the franchise and look at all of the content types that we have, and all the pricing packages that we have, as well as all of the tools that we've now developed over the past couple of years. So, when you put all that together, we think we might have pulled back too far on the marketing lever and we're going to again judiciously expand to make sure that we hit our ROI targets, but, but continue to be top of mind as the place to go as an end-to-end creative platform.

Got it. Thanks, Paul. Thanks Jarrod.

Thank you. [Operator Instructions] Our next question comes from the line of Andrew Boone with JMP Securities. Your line is open.

Good morning, thanks for taking my questions. I wanted to follow up on Bernie's question, it seems like there is going to be about $70 million at least of data revenue in terms of 2023. How do we start to think about net revenue retention of that in '24, right? So, it sounds like you guys are expanding, there seems like you're taking a little bit of price, but is there a way for us to ballpark how we think about that net dollar retention next year?

Boone, so, the first thing I would say is, we are over the moon in terms of the demand that we're seeing for this product offering. I think if you were to kind of think back 12 to 18 months and we would have thought about the evolution of demand for meda data for generative AI model training, I think, one, we wouldn't have understood that the largest technology companies in the world would really all be beating a path to our door. I mean if you start to look at the logos and look at the client list and understand the level of diligence that's being undertaken, we have been sort of anointed as one of their major critical sources of model training data for multimodal generative AI and we're thrilled to be in that position and thrilled to deliver on their behalf. These are also multi-faceted relationships. So if you know a lot of these customers were customers of Shutterstock and our content through both an enterprise relationship or an API relationship prior to engaging with us from a data perspective. So, we're not a new company to many of these customers that we're dealing with, and there are tremendous opportunities to expand in terms of joint product development, which we're already doing with companies like OpenAI and NVIDIA and there are tremendous opportunities to participate in future generative AI model training endeavors, which we're actively undertaking with all these customers. As I've mentioned several times, these are all multi-year relationships. There are no one and done relationships. The revenue recognition is to some extent front-end loaded and so while we're not giving any 2024 guidance either for the company as a whole or specific to our data revenues, our ability to grow this business year-on-year is really going to be a function of our ability to, one, expand our existing relationships and, two, bring new clients into the pipeline. One other things that Paul mentioned that is really both exciting and challenging as we think about next year is the nature of this market will change. This demand is going to move broader into multiple industry segments and it's also going to go deeper in terms of mid-sized corporate. So the way that we deliver is going to change, the modalities are going to change and the offering is going to change along with the pricing and packaging, and I think our ability to adapt to that future expanding pipeline is what's going to really determine our ability to significantly grow this business into next year and beyond. So sorry for not directly answering your question, but wanted to provide as much, as much color as I could.

Thanks Jarrod. I actually want to go back to '24. As we think about Giphy starting to monetize advertising towards the end of this year, is there a way that we should think about the ballpark potential of advertising for that business if you guys put any pen to paper there?

Yes. You said this kind of ad acquisition and we're just kind of dusting off the ad platform that was at one time in place, but what I will tell you is, I think this is a, over time, and I say that thinking, thinking long-term, the advertising opportunity given the size and scale of the Giphy businesses is in the hundreds of millions of dollars, not in the tens of millions of dollars.

And then I'll come back more near-term, it seems like Editorial and Studios were one of the key points of kind of positive traction on the quarter. Can you guys just double click on that and provide any additional details you have there? Thanks so much.

Just with respect to Editorial, Andrew, I think this is an area that we have a strong beachhead in. We've had a historical strength and what you would think of as trending and entertainment content. We doubled down on that with the Splash News acquisition and the Splash News acquisition also gave us a platform to offer for the very first time subscriptions for Editorial content, which as you would understand carry with them a recurring revenue stream and really are a better base on which to build this business. So, we're excited about the traction in Studios. We're continuing to invest in Studios. We announced a new deal with a new football team in Studios this past quarter. So we're excited about that and you should expect to see more news from us with respect to Editorial in the months to come. Paul, anything on Studios you'd call out?

No, it just, you heard the volume, the scale and the differentiated services that we're providing around the globe. Studios becomes the place where leading companies are doing high innovation to bring new creative marketing, advertising and campaigns to their customers. And look, we think it's just the beginning for Studios, not the end. The product is in high demand and diversified demand. So, we're, we're, we're bullish.

Thank you, guys.

Thanks Andrew.

[Operator Instructions] I'm showing no further questions at this time, I would like to turn the call back to Paul Hennessy for closing remarks.

Thank you. We just want to express our gratitude to our customers, contributors and employees and we like to extend a warm welcome to our new Giphy employees and we're over the moon to have them join the Shutterstock community. For those of you on the call, thank you for joining us. This ends our call for today.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.