Q3 2019 Earnings Call
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If you require any further systems. Please press star zero I would now like to hand, the conference over to your speakers today, Heidi Garfield Vice President General Counsel and corporate Secretary. Thank you. Please go ahead man.
Thank you operator, good morning, everyone. Thank you for joining us for Shutterstock third quarter 2019 earnings call. Joining me today as Jon Oringer, Our founder Chief Executive Officer, and Chairman damping Blocky, our president and Chief operating Officer, and Steve cardiac our interim Chief Financial Officer, and Chief Accounting 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 long term effects at our investments in our business the future success and financial impact of new and existing product offerings, our future gross margins and profitability or long term strategy and our twentyth.
18 guidance actual results or trends could differ materially from Africa.
For more information please refer to today's press release and the reports we file with the FCC from time to time, including the risk factors discussed here. Most recently filed annual report on Form 10-K filed with the FTC.
We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA adjusted EBITDA margin adjusted net income revenue growth, including by distribution channels on a constant currency basis and free cash flow reconciliation of these non-GAAP measures to most directly comparable GAAP measures can be.
And in the financial tables included with today's press release, which is posted on the Investor Relations section or 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 will turn the call over to John Thanks, Heidi and thank you everyone for joining us today for sure Soc third quarter 2019 earnings call.
As I mentioned on our last quarter, we're continuing to make operational improvements to further enhance your platform in order to get ahead of our customers ever changing needs.
To provide an update on talent our search process for our next Chief Financial Officer is going well, we're grateful that Steve Party LR, Chief accounting officer husband filling this role in there.
During the third quarter, we continued our effort to best position Shutterstock for sustainable growth.
Then, making steady progress, including our thoughtful and thorough evaluation of our enterprise channel as well as continued strong growth in our E Commerce business.
Revenue in the third quarter of 2019 grew 5% from 2018 on a reported basis revenue from our E. Commerce channel grew 8% to 96.2 million, that's compared to third quarter of 2018 or enterprise shall remain flat $62.8 million adjusted EBITDA was 20.
$1.6 million, a 14% decline from the third quarter of 2018. This decline was driven by increased marketing and customer acquisition costs and initial investment our infrastructure.
As always we won the best in marketing our people and our platform when we see opportunity to drive long term growth in the business.
With that said, we remain on track to me or for your 2019 guidance for both revenue and EBITDA.
Over the last 16 years Shutterstock is built to trustworthy brand and platform Weve capitalize on the world around us which have become increasingly visual with businesses in people communicating more effectively using images video and music.
We know how to and have created innovative solutions to meet the changing needs of our customers.
Our club our cloud based platform, which we continuously enhance it happens is designed to provider customers the ability to seamlessly get the content they need to be successful in their creative projects and business initiatives.
I'd be work, our strategic planning for 2020 and beyond we're confident that we have our finger on the pulse of the ever changing trends that help our business is be more successful and the way that they communicate kind of work.
We remain passionate about our mission.
To provide sustained value for our users prioritizing ease of work flow in collaboration evolving shutterstock offering as a creative platform and delivering a range of solutions. The best suit expanding neither businesses teams creative and marketers around the world.
Before I turn up but before I turn it over just Dan I'd like to thank our investors employees for their continued support of the company. We're excited for what stucco and now I'll turn it is down.
Thanks, John and good morning, everyone.
I've now been at the company for a little over seven months and the work that we started when I first joined as most moving forward I'm excited by the progress that we've made thus far, especially considering the ambitious goals that we have as a company.
As I spoke to last quarter, we are focusing on a set of initiatives to drive our future results, specifically focusing on making enterprise sales improvements, including a new go to market approach with our largest accounts.
Rebuilding our SMB pipeline to bring our offerings to the millions of businesses that can benefit from shutterstock.
Extending our platform and <unk> solutions into the enterprise.
Scaling our custom and editorial offerings.
Continuing the growth in the ecommerce business by focusing on engagement and retention and we'll do this by increasing the mix of subscription products and services and cross selling across asset types.
And lastly, dedicating resources to new business opportunities that take advantage of keep digital trends.
We are being thoughtful and thorough as we delve into areas, where we can drive meaningful improvement.
Some of which we feel we can act on fairly quickly.
And others that we can take more time.
We believe taking such a methodical approach to our analysis and execution will help ensure that we are really getting to the heart of improvements that needs to be made and that we will be able to do to drive greater returns on our investment.
In the third quarter, we made progress against the initiative I just outlined.
An enterprise, we began to make structural changes in our corporate vertical and the go to market approach. We are seeing revenue traction from quarter over quarter perspective. Additionally, we saw stronger demand with our custom product, which saw quarter over quarter growth as well.
As we mentioned last quarter, we're working thoughtfully, but with urgency and these initial steps will drive results into the future.
Our ecommerce business continues to perform and in the third quarter, we saw improved results across all asset types.
Not only that our image business continue to grow we also saw strength in video because our clients used our offering to capitalize on video trends.
We see strong demand for our content and high renewal of our subscription plan. Additionally, monthly active usage downloads and average revenue per download all saw healthy growth.
I would also like to highlight a few notable operational accomplishments in initiatives from the quarter.
As we've mentioned previously our campaign, it's not stock at Shutterstock has evolved and is driving traffic to our platform.
Notably it has won many awards from leading marketing and advertising organizations, including via maybe in the UK. The Telly awards in the U.S. and the W. three awards by the International Academy of Interactive in visual Arts.
These awards demonstrate the positive sentiment the campaign is driving and the conversations it's influencing and generating among our target audience.
We have made a number of technological improvements that consolidate our platforms and enhance our customer experience.
The first time ever our image footage and music self service offerings are all on one front end platform with a with a plan to get enterprise on this platform as well.
On a premiumbeat platform, we made music tracks search improvements improve download speed and now offer a single sign on for customers across Shutterstock and premium beep website.
As part of Shutterstock cost them, we introduced the smart be smart brief platform.
A new streamlined and guided experience to improve the quality and speed of the briefing process.
More than 1 million approved contributors made their images video clips and music tracks available in our collection, which has grown to approximately 297 million images and approximately 16 million video clips as of September thirtyth.
And finally, we developed we delivered more than 140 million paid downloads across all of our brands. During the nine month ended September 30.
Well, there's more work to be done we're proud of these results and remain confident in the strength of shutterstock dynamic and innovative platform.
We are laser focused on executing for both the short term and the long term.
And delivering increased value for our customers and our shareholders.
Now I'll turn over the call to Steve for more detailed financial review.
Thank you Stan.
Thank you everyone for joining us today.
I'd like to start by saying revenue growth in the third quarter of 2019 as compared to the prior year third quarter was 5%.
And excluding the impact of foreign currency movements revenue growth was approximately 6%.
Our ecommerce channel revenue increased 8% to 96.2 million as compared to the third quarter of 2018.
And on a constant currency basis ecommerce revenue grew 10%.
The enterprise revenue channel.
60.
The enterprise channel revenue of $62.8 million was comparable to its 2018 revenue and grew 1% on a constant currency basis.
Reviewing some of our key metrics in the third quarter on a year over year basis paid downloads grew by 5% 46.3 million.
Revenue per download remained constant at $3.40 per download.
Our image library expanded by 34% to approximately 297 million images.
And our video library increased by 33% to approximately 16 million clips.
Operating income was $3.2 million in the third quarter, a decrease of 52% from $6.7 million in the prior year.
And adjusted EBITDA for the quarter declined 14% to $21.6 million, which compares to $25.1 million in the same period a year ago.
As John previously mentioned the declines in operating income and adjusted EBITDA were attributed to increased marketing and customer acquisition costs and additional investment in our infrastructure.
GAAP net income increased or get net income in the third quarter was $4.9 million or 14 cents per diluted share a decrease from net income of $7.4 million were 21 cents per diluted share in the third quarter of 2018.
Adjusted net income was 10.3 million were 29 cents per diluted share for the third quarter of 2019 as compared to $13.4 million worth 38 cents per diluted share in 2018, representing a 23% decrease year over year.
As I discuss the following operating expenses amounted percentages will compare the third quarter of 2019 to 2018 and will exclude stock based compensation expense.
Total operating expenses increased 8%. This change was driven by increased general and administrative expenses cost of revenue.
And direct marketing expenses, partially offset by slight decline in product development expenses.
Our cost of revenues, which includes contributor royalties increased 3.4%.
The contributor royalty rate remained unchanged at approximately 26% of revenue.
As a percentage of revenue cost of revenues was the 43% in 2019 compared to 44% in 2018.
Sales and marketing expenses increased 11%, primarily due to increased cost in our performance marketing.
Sales and marketing expense was 28% of revenue in the third quarter of 2019.
As compared to 27% of revenues in the third quarter of 2018.
Product development costs decreased half million dollars, primarily driven by reduction software and other technology costs.
As a percentage of revenue.
Product development costs were 8%, both 2019 and 2018.
In addition, during the quarter the company capitalize $5.6 million of labor cost related to product development.
Gene a expense increased 27% from the third quarter of 2018.
As a percentage of revenue gene a expenses were 15% as compared with 13% in the third quarter of 2018.
And sequentially, Gina expenses decreased $2 million or 7% from the second quarter of 2019.
We had an income tax benefit of $1.3 million compared to an income tax benefit.
Of half a million dollars in the prior year.
The quarterly tax benefit is due to timing and recording a certain discrete income tax benefits.
On a year to date basis, our effective tax rate is 3.3%.
Cash taxes paid in the quarter were negligible as compared to half million dollars into third quarter of 2018.
On our balance sheet, our deferred revenue balance as of September Thirtyth 2019 was $137.5 million.
And was consistent with previous quarters.
Approximately 40% of our deferred revenue relates to our E Commerce channel and 60% tour Enterprise channel.
We continue to maintain a strong positive working capital position or cash and cash equivalents balance was approximately $285 million.
For the third quarter net cash flow from operations was $30.3 million, which is comparable to the 30.5 million in the third quarter of 2018.
Additionally, in the quarter free cash flow was $23.8 million, an increase of $1.4 million from the third quarter of 2018.
This increase was primarily driven by the change in capital expenditures.
We continually manager Capex and believes that the levels, we're managing two or reasonable for business the bar size and growth.
Our liquidity strategy continues to be to maintain a strong cash position that enables us to fund operations, while also providing us with the flexibility to consider operational and strategic growth opportunities.
As we've done historically, we will evaluate the appropriate use of cash generated aren't a business to optimize returns for stockholders.
And finally, we are reaffirming our guidance, which was communicated last quarter.
Our expectations for the full year 2019 continue to be as follows.
Revenue of $645 million to $670 million adjusted EBITDA of $93 million to $107 million income from operations of between $18 million to $32 million.
Non cash equity based compensation expense of approximately $25 million.
Capital expenditures, including capitalized labor of approximately $32 million.
And and effective tax rate in the teams.
We appreciate your time today.
And now John Stan and I will be happy to answer any questions you may have.
Shannon can you please prompt to participants for questions.
As a reminder to ask the question you will need to press star one or your telephone to withdraw your question press the pound Keith.
Please standby always compiled acuity roster.
Our first question comes from Youssef Squali with Suntrust. Your line is open.
Okay. Great. This is a neat mitchell on for USIS.
Two questions for me can you help us understand the full year guidance in the context of for Q4.
For your guidance currently implies a wide range for Fourq grew year over year reported revenue growth from negative 1% to plus 15% as well as for Q EBITDA from 21 million to 35 million and then can you comment on how you expect the growth trajectory to fair for E Commerce versus enterprise. So that's for Fourq, you and then looking out to 2020, how how should.
We'd be thinking about the topline in margin should directory, if you could walk us through the key <unk> growth and leverage drivers. There if stand you could call at the lowest hanging fruit from your prepared remarks.
As well as comment on enterprise versus e-commerce , any qualitative or quantitative color would be very helpful. For 2020. Thank you.
Okay. So high Nate This is Steve I'll first address your first question as it relates to full year guidance. So when we updated our guidance at the end as the second quarter.
Part of the components that were in and as you would see the rig the topline revenue range was widened from what we historically put out there and part of that was due to the fact that.
We weren't quite sure when we're going to see the results from some of the initiatives in the enterprise sales channel and when they were going to materialize that sales or some of long term longer term initiatives.
And that's a longer term sales cycles will be cost that we weren't quite short.
When we were going to see the results of that so what I would.
Say as it relates to 2019 is we're still on target to fall within both the revenue and EBITDA range.
And on the the enterprise versus ecommerce growth.
I can rise in details and San if you want to juncture well on Nate. This is Jon Oringer. Thanks for your question. So on the E. Commerce upfront you can see that our new platform is delivering.
Hi, growing a year over year Oh.
Currency neutral about 10%.
So.
There's a lot more opportunity there there, but we believe we're getting continue to to build out what what's happened over the past quarter. A that's interesting is we've shifted resources from the migration efforts to a more.
Kind of growth.
Path and we believe there's a a lot we can do there there is a long list of items, we have our roadmap I continue to.
Yes on and get a further growth off from that platform, a and also increased the efficiency and optimization of our marketing spend as all of those Oh, that's all that traffic that we buy I continues to head towards that platform, we're learning new new ways to kind of I make that more efficient on the enterprise front.
Maybe stand if you want to jump in sure so.
We talked a little bit about this about those on the last call. When you think about our enterprise sales channel, we have large enterprise customers and we have SMB.
We are being a lot more thoughtful and how we're thinking about enterprise differently from SMB.
So for the SMB segment were looking to rebuild the pipeline and that's going to consist of investment in both in both sort of reorganizing the team as well as investing in marketing tools necessary to develop the pipeline.
Our enterprise clients need a higher touch solution to address their needs and so.
We're going to be restructuring our sales organization comp plan, our go to market strategy and the products that we offer these or when you ask about sort of low hanging fruit. These are all things that serve as a basis for a how we're going to go into 2020 and.
How we're going to goal the team.
Into 2020, and so we're we're bullish that we can start to.
See the fruits of the work that we're doing now in 2020.
If I could add just a couple more things are this is John again on both editorial and customer. We believe that there are still some really interesting technology and product.
Disruptive opportunities a in the Mark and as we evolve our enterprise product, bringing onto our platform that weve, you've already build and we're starting to learn what we can do with on E. Commerce side, we can apply some of those same.
Principles over to the enterprise side and kind of build Alex.
That channel as well so we're excited about that for the rest of 2019 and also into 2020.
Great. Thank you.
Q.
Our next question comes from Brent deal with Jefferies. Your line is open.
Thanks, guys. This is Alex on for Brian John We've been getting a lot of questions recently regarding some comments you made at the Forbes summit around the fact that being public isn't isn't always the most fun thing is there any significant shift in your thinking for the future. The company that we should be aware of how would you consider going private if the opportunity arise.
And then lastly, if you can just provide more color around the CFO search maybe just expectations around timing there. Thanks, Yeah sure. It was great being in Detroit for the Forbes Summit.
30 under 30 conference.
I was was interesting.
We have fielding questions from all these entrepreneurs that we're thinking about going public and what I talked about during that panel and after that panel with with everyone that was.
Hi, there I was kind of the difference between being a public company in a private company.
And what I believe and what I told them was there are pros and cons to both but ultimately the strongest.
Kind of structure for our company is being public and we continue to you I believe that with the balance sheet, we have a with the opportunities we have a with everything we built over the past 16 years that being a public company.
Kind of suits us a and so I went to allied details about a kind of some of the pitfalls of going through that IPO process with that audience again. It was the 30 under 30 conference. So there were some pretty young entrepreneurs. There are that we're looking towards the future as to what to do it there their company.
I talked about Oh, keeping your eye on the product keeping your eye on the customer and keeping a really strong balance sheet. If you look at a kind of how we've operated this company over the past 16 years and how we operate as a public company. We continue to generate cash we focus on our EBITDA as much as our revenue.
We have a strong cash balance at all times that we can use to invest in new products New services.
We have a really strong team does a lot of dry powder odd to to make a lot of investments here and we have no debt on our balance sheet.
So we're pretty excited about all of that on your second question as far as the CFO search really far along on the we're really excited about some of the candidates were meeting so.
I will have.
News in the future on that.
And we'll be updating you.
As as soon as we possibly can thank you.
Thanks, John maybe just one more from from our side quickly.
Adobe originally said that their stock business was growing about 30% on the year. So just curious if if they're doing anything differently.
Recently to gain share.
Just maybe some broader comments on the overall competitive environment would be helpful. Thanks.
Yes, sure I'm on Adobe, specifically, I really I mean, I can't comment and we've talked about this before I've talked to all of all of our analysts about this I'm over the past couple of quarters look I have I have no idea how they account for where that 30% growth comes from I think you'd have to ask them, but what.
I can tell you this as far as the competitive environment. We believe were the best position company our space. It taking that had the opportunity in front of US I go back to our team I go back to our track record over the past 16 years of generating a profit every single quarter for all of his 16 years I go back to the.
Back that we have the clean balance sheet, we have I go back to.
The fact that Oh, we released and ship product, even as we need to go through a really complicated technical migration. We're still ahead of our competition when it comes the product.
And you'll see that our site you can watch it every week, we're pushing code changes constantly on all of those co changes are exactly what our customers want.
So as far as the competitive environment look you can you know you'll hear things from from our competitors.
Some of them are private some of them are public, but there is nobody providing as much detail about our space than we are.
And and I believe what I've said over and over we are the best positioned company to take advantage of this opportunity.
Thanks, John .
Thank you.
Thank you once again.
I should ask question at this time. Please press Star then one are you touched on telephone.
Next question comes from Lloyd Wamsley with Deutsche Bank. Your line is open.
Hey, Thanks for the question. This is Seth on for Lloyd.
Just wanted to follow up on two comments that you made one would be on the sales reorganization can you talk about how much is this is going to cost what kind of loss of productivity, if any and when we should expect the sales force to be at full strength and then also a second question. You mentioned you have a lot of dry powder can just talk about.
Potential for M&A and also shares a share repurchases I think you still have.
Significant amount left in the repurchase authorization and just curious to hear your thoughts are there. Thank you.
Now I'll start with.
With a question on enterprise and then turn it over to John too.
Give some color on M&A, but.
We understand the and I absolutely understand the ramp that's required as part of any sales reorganization.
And so were we are absolutely going to build that into our plans for.
2020 and for guidance for 2020, so you'll you'll definitely.
See that.
As far as incremental cost.
I think we've we've taken a a good look at the resources that we have and we don't see those sales restructure having a significant impact on.
EBITDA.
In the short term, where the long term.
On a.
On capital allocation I'll I'll jump in and talk a little bit about that Steve maybe if you want I want to join after I think when I look at our cash position we've always.
I had a strong cash position, we will continue to have a strong cash cash position.
We look to invest in our business first we look towards M&A. There's a there's a pipeline of businesses that we look at a regularly out there we know a everyone in our space than we also know kind of the adjacent spaces that we want to look too. So we talk to those.
Businesses as well when you look at the platform. We're building there are other products and services that we can integrate into that platform to make sure that our customers are getting kind of the end to end work flow need a and services in content.
That they need so in a way the new platform Weve build kind of opens up the opportunity for us to make further investments in this business and in the platform.
And so we plan to continue to do that that being said if there's extra capital. There. We're not looking to just a story forever. We do look to a figure out the most efficient way to return it back to shareholders via either a buyback or dividend as we've done in the past.
And John what I would just add to that and Seth right. If you've looked at our history. We have utilized in all the above with John mentioned, a special dividend buyback and M&A on a regular basis or conversations with the executive team and the board to to make sure. We ultimately do maximize return to the shareholders.
Okay.
Thank you next question, we have follow from Youssef Squali with Suntrust. Your line is open.
Hi, guys. This is made again just hopping back and.
I was just comment on the performance by Geo, we saw a negative growth in North America versus mid single digit in Europe , and low double digits for the rest of world. So maybe what are you seeing in North America. That's driving that is is it competitive related do you think and you know what's within Shutterstock control to change that thanks.
Hey, this is Steve I'm a lot of that is.
On the enterprise side of the house due to the size of some of the deals and that goes that they're coming in.
You can see some variability quarter to quarter, but what I would say is there's nothing in particular with the business or particular segment or client base that is that is driving that trend for the third quarter.
Oh no.
Geography I I'll.
We have a big international opportunity here at Shutterstock and one other things holding us back with some of the tax get that Weve unraveled out of over the past couple of years.
So part of our our product plan a into the future on the new platform is to continue to optimize by geography, and so you'll start to see some changes on the side based on specific geography, and we think there's a lot of opportunity there.
As well.
Got it thank you.
Yes.
Thank you and I'm currently showing no further questions at this time.
Ladies and gentlemen, just today's conference call. Thank you for participating you may now disconnect.