Q4 2019 Earnings Call
Ladies and gentlemen, the standby pretty squad principal became momentarily.
Again, he standby for conference will be getting too many thinking.
[music].
Good morning, ladies and gentlemen, thank you free standing by and welcome to the quarter Fourq when you're thinking about stock Inc. earnings conference call. At this time all participants are in other simple meals.
Leader, we will conduct a question and answer session.
Sure. So follow what that's fine if anyone should acquired systems. During the conference expressed far below zero on your Touchtunes telephone as a reminder, this conference call is being recorded I don't like to turn the conference over to tighten Garfield General Counsel. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for Shutterstock fourth quarter and full year 2019 earnings call. Joining me today as Jon Oringer, Our founder Chief Executive Officer, and Chairman, Dan Pavlovsky, Our President and Chief operating Officer, and Joe, Yes, Our Chief Financial Officer. Please note that some of the information you'll.
Here during our discussion today will consist of forward looking statements, including without limitation. The long term effects of our investments in our business the future success and financial impact of new and existing product offerings, our future gross margins and profitability, our long term strategy and our 2020 guidance actual results or trends could differ materially.
Lee from our forecast.
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 in our most recently filed annual report on form 10-K filed with the Securities and Exchange Commission.
We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA adjusted EBITDA margin adjusted net income revenue growth, including by distribution channel on a constant currency basis and free cash flow reconciliations of these non-GAAP measures to most directly comparable GAAP measures can be found in the financial tables included with today's.
The press release, which is posted on the Investor Relations section of our website. Finally, please refer to the breed information that we posted on our website that contains supporting materials for today's call and now I'll turn the call over to John.
Thanks, Heidi and thank you everyone for joining us today for sure so fourth quarter full year 2019 or.
As you've seen over the last several weeks, we made some leadership announcement for the entire board and management team are excited about.
First and most recently this morning, we announced that after serving as CEO for the past 16 years old be assuming the role as executive chairman of Shutterstock, which will take effect on April 1st.
In this new position I'm excited to continue to help the company from a different perspective.
We used to announce a sample blocky, our current president and Chief operating officer will be assuming the role as CEO.
I speak for the entire board when I say that we're confident that status the ideal person for the job I enjoyed working closely with him since he joined last year as leadership in vision have been invaluable.
Dan hit the ground running it since he joined take any impact full leadership role not only in the operations of Shutterstock, but also a development and execution of our long term strategic vision.
This experience in his extensive background it successfully growing and leading ecommerce retail and digital media businesses make him uniquely qualified to assume the responsibility CEO.
In my role as executive Chairman I will continue leveraging my areas of expertise advising on Shutterstock strategic initiative.
Supporting the company in the next phase of its growth and innovation.
I plan to stay involved in the strategy and long term direction of the business.
Including yearly planning M&A capital allocation and other large projects and initiatives.
I want to be clear that my fiduciary duty and commitment to shareholders will not change in my new role and will remain as strong as ever.
As the largest shareholder of the company my interest is in its in its success continues to be squarely aligned with our investors.
I'm fully confident and the strength and competitiveness shutterstock dynamic and creative technology platform and me and in the opportunities ahead of us as a leader our industry.
I'd also like to welcome Jarred, yes, our new CFO to his first Shutterstock earnings call.
Jerry join our leadership team in December and there's already been a tremendous addition to a man to our management team.
He has extensive experience, leading finance and accounting team and successfully growing businesses organically and through M&A.
We also announced that Peter Sylvia has been promoted to Chief Technology Officer.
After doing after doing an excellent job as head of engineered.
You will continue to lead our technology organization to drive in development and implementation of innovative products that bring new value add an outstanding user experience to our customers and contributors.
These are critical components of our business and her team is excited that Peter is going to help further shutterstock leading role in our industry.
With these appointments we have further augmented our management team with best in class leaders, we have the right experience to drive enhanced value for our shareholders.
I'm really excited to continue working closely with them in my role as executive Chairman.
Before I turn the call over to scanning Jared I will like to spend a few moments to reflect on where this company has been since we founded 16 years ago and were Shutterstock huh.
We started the company in 2003 as a scrappy sorrow, but quickly established ourselves as a great business.
We were profitable on day, one and have been every year. So.
Since that time, we've become a clear leader in the space and she numerous accomplishments over the years.
Most recently, we celebrated the remarkable milestone of paying $1 billion in earnings to our global network of contributors.
We're proud of the successor contributors have achieved leveraging shutterstock platform.
There are thrilled to share this accomplishment, but their global community, a fellow creatives, including Argus photographers Videographers and musicians.
I want to thank all of our contributors who made this historic breakthrough possible.
Well. This is a massive achievement, we have not forgotten our roots, we still maintain they'll start mentality is a disruptor in the space.
Since 2003, we have worked tirelessly.
You up in the industry by constantly innovating and providing professionals and creative with a comprehensive platform for high quality content tools and services.
We strive to stay in front of the needs of our customers and market trends.
This disruptor mines is deep rooted in our DNA and I'm encouraged that with a new leadership. This will remain integral to our company.
Looking at 2020, amnion, whereas committed as ever to our mission of providing sustainable value for our users.
We will also we will always seek to evolve our suite of product offerings provide enterprises, SMB marketers and creative with the assets they need whenever they need it.
That's a week sell that well continue to do.
In addition, we will continue to work diligently to best position our business for long term profitable growth in a competitive market.
We continue to see a growing need for digital content as marketing trends highly important.
Hi quality content solution.
Further well make shutterstock stand out because they're constantly evolving platform, which we thoughtfully developed and build upon to be highly nimble and provide a better user experience.
We see additional opportunities to leverage our platform to take advantage of new market opportunities that can further benefit or customers.
In the future is bright for Shutterstock, our collective goal and pushing for innovation and enhancing our team is meant to achieve long term sustainable growth.
With this in mind I remain very confident shutterstock future I look forward to helping supports continued.
Finally, before turning it over just Dan I'd like to thank our incredible Shutterstock team. It has been a privileged to serve as CEO for so many years I'm humbled by the hard work and dedication of our employees.
Their support will ensure we realize the full potential of this company and deliver value to our numerous stakeholders long into the future.
Working together Shutterstock revolutionize the stock image industry and along the way we created a global technology platform that brings the best most innovative content to organizations around the world.
I truly believe the best is yet to come.
Thank you for your support and now I'll turn to Stan.
Thanks, John and good morning, everyone.
Before I begin my remarks, I would like to thank John for his continued leadership and Shutterstock.
John is a true visionary he's been instrumental in every aspect of building this great company into a leading global platform operating best in class content tools and services to millions.
We've worked together with management team solidify a transition plan designed to provide leadership continuity and I look forward to working with John throughout the transition and beyond.
Having been the COO for almost a year now I've been focused on driving improved execution across sales marketing product and technology to ensure that all of these areas are working together to create a better customer and contributor experience.
As CEO I look forward to driving our long term strategy in support of Shutterstock division to be a leading content and technology platform that enables marketers and creators around the world to deliver impactful stories that capture and captivate their audiences.
As John mentioned this company started off as a disruptor in the space by taking advantage of the growing need for content Shutterstock ended up changing the stock content industry.
For the past 16 years, we've kept up that entrepreneurial spirit, and we must continue to push ourselves to be disruptors.
We are well position to expand on our current portfolio of offerings and find ways to better align with key trend to capture compelling new opportunities.
So as CEO I intend to drive higher customer retention and new revenue streams by focusing on three things.
Innovation that enhances our customer works well content that is relevant and fresh and data and insights that drive performance.
We haven't ambitious plan and a lot of work ahead of us and I'm excited about our future prospects.
As we look back to 2019, we started to take steps towards our future strategy.
Typically from a content perspective.
We increased our global content footprint, bringing more relevant and local content for users. We also launched new music solutions meeting to rapidly growing demand from key audience segments, such as social media managers, you to burst and production studios.
From a technology and innovation standpoint, we launched smart brief <unk> self service tool, enabling a wider range of customers to leverage our marketplace for unique content solutions and we reached over 3000 partners that offer our content to their customers via our <unk> integration as well as launching it.
Service Apiay subscription plan to meet that demand of small and midsize businesses.
From a data standpoint, we continue to invest deep learning, which allows us to drive customers performance and improved discovery as an example, deep learning models, we have built allow us to safely filter content for customers.
I would like I would like to briefly touch on our 2019 financial results before Jared provides a more detailed review.
In 2019, our revenue growth was 4% on a reported basis driven by positive momentum in our E Commerce channel, which saw reported revenue growth of 7%, reaching 392 million.
We did experience continued headwinds in our enterprise channel, which grew 1% to 258 million.
As I mentioned on previous calls we are implementing improvements within our enterprise channel to drive growth.
We recently realigned our sales organization and revised our compensation plan to ensure that our sales teams properly structured and incentivized to deliver the right product to our customers.
We also improved our go to market strategy and our focus on providing strategic solutions to our customers. We should start to see result of these initiatives in the back half of the year.
EBITDA was 96 million, an 8% declined from 2018.
We recognize the slowdown in growth and margin pressure and are committed to expanding our margins and 2020.
Well, there's work to be done we're confident that we are positioning the company for long term and sustainable success.
And I'm excited to help deliver on our long term strategy.
Now I'll turn the call over to Jarrett for more detailed financial overview.
Thank you Stan and good morning, everyone before I get started I'd like to say how excited I am to have joined Shutterstock in my first few months the CFO I've been impressed by the strong team here and their commitment to building innovative solutions to meet the changing needs of our customers.
I believe is a tremendous opportunity to enhance the operational and financial performance of Shutterstock and I look forward to continuing to work closely with Stan John Our board of directors and the entire team to solidify Shutterstock supposition for long term success and further our vision of being a leading content and technology platform.
And now for the financial results.
Revenue growth in the fourth quarter compared to the prior year was 3% on both reported and constant currency basis.
For the full year 2019 revenue growth was 4%.
Excluding the impact of FX movements revenue growth was approximately 2% higher for the full year or 6%.
Breaking down our revenue growth performance in 2019 further in the fourth quarter. The E Commerce channel, which represents 60% of our revenues increased 6% to 101 million as compared to the fourth quarter of 2018.
In the fourth quarter, the enterprise channel revenue, which represents 40% of our revenues decreased 2% to 65.5 million and was flat on a constant currency basis as compared to the fourth quarter of 2018.
For the full year or the ecommerce channel remained healthy and experienced growth of 7% or 9% on a constant currency basis consistent with 2018.
For the full year or the enterprise channel grew 1% and 3% on a constant currency basis.
As we've discussed this represents a considerable slow down for the enterprise channel on a full year basis as compared to the rapid growth in years past.
We do expect the negative enterprise trends to reverse themselves and for us to return to positive year on year growth comparable in the latter half of 2020 as some of the investments we've been making and reinvigorating our sales team and approach begin to pay off.
Reviewing some of our key operating metrics in the fourth quarter on a year over year basis paid downloads grew by 2% to 47.7 million.
Revenue per download grew by 1% to $3.44 per download.
Our image library expanded by 30% to approximately 314 million images and our video library increased 30% to approximately 17 million clips.
I'd like to add some additional transparency to the metrics by double clicking into revenue per download.
The growth we've seen in revenue per download this past year is predominantly due to mix shift with growth in video sales outpacing or other content types.
In addition from a sales channel perspective, we're seeing favorable trends in our E commerce revenue per download offset by pressure in our enterprise channel revenue per download.
Turning to our margins in the fourth quarter of 2019, our gross margins were 56.8% down 70 basis points from 57.5% in the fourth quarter of 2018.
The main driver of the change in gross margin as any increase in the depreciation and amortization component of our cost of goods sold from higher content acquisition and technology costs.
However for the full year 2019, gross margins were 57.2% up 10 basis points from 57.1% in 2018.
Sales and marketing expense was 28% of revenue in the fourth quarter of 2019 as compared to 27% in the fourth quarter of 2018.
Sales and marketing expenses increased 9.6% in the quarter and 15 million for the full year due to increased spending and performance marketing initiatives.
Product development costs were 9% of revenue in the fourth quarter of 2019 and were largely flat for the full year 2019.
Gene a expenses were 16% as a percentage of revenue as compared to 14% in the fourth quarter of 2018.
The Gina increase for the full year is largely attributable to investments, we made across cyber security data science and analytics as well as technology.
Adjusted EBITDA margins declined to 14.5% in the fourth quarter of 2019 compared to 20.9% in the fourth quarter last year for the full year EBITDA margins declined to 14.8% from 16.9% based on the additional spend in sales and marketing as well as GMV.
Right.
We recorded a tax expense of 4.3 million compared to a tax expense of 1.8 million in the fourth quarter of 2018.
On a full year basis, our effective tax rate is 19.3% as compared to 17.3%.
The fourth quarter 2019 tax expenses include a million dollars valuation allowance associated with our international operations and the fin 48 reserve.
GAAP net income in the fourth quarter was 4.4 million or 12 cents per diluted share.
Adjusted net income was 9.2 million or 26 cents per diluted share for the fourth quarter of 2019 as compared to 20.9 million were 59 cents per diluted share in the fourth quarter of 2018.
The quarterly decline and adjusted net income is largely as <unk> as a result of the tax expense true up at the end of this year.
Adjusted net income was $43.7 million were $1.23 per diluted share for the full year 2019, as compared to 55.7 million or $1.57 per diluted share in 2018.
Turning to our balance sheet and cash flows at the end of the quarter, we had approximately $303 million of cash and cash equivalents up from $231 million at December 30, Onest 2018.
Our free cash flow in 2019 $73.2 million was up 15% from $63.5 million in 2018, largely due to reductions in capex due to lower capitalized research and development costs.
Our deferred revenue balance was up as of December 30, Onest 2019 to 141.9 million from $137.5 million last quarter, an increase of $4.4 million. The increase in deferred revenue will ultimately be recognized as revenue through.
Our 2020.
We're encouraged by the growth in deferred revenue on our balance sheet and that gives us a good starting point for Twentytwenty.
Shifting from our financial performance to capital allocation the company continually evaluates its capital allocation strategy.
As part of this evaluation the board has approved a recurring quarterly dividend of 17 cents per share.
The quarterly dividend equates to an annual 1.5% yield on our current stock price.
This quarter the company will pay the cash dividend on March 19th 2020 payable to shareholders of record as of March Fiveth 2020.
We expect that we can grow the dividend in line with earnings growth and we will periodically revisit the payout based on our cash flow profile and all the alternative uses of capital.
With respect to our M&A strategy. We believe there are significant opportunities to expand our total addressable market into faster growth segments, and enhance the value and differentiation of our content with data and insights.
While we have a strong cash position will continue to be disciplined as we evaluate M&A opportunities and ensure we have the ability to integrate the acquisitions and that they present compelling industrial logic.
We believe that a balanced approach to capital allocation, combining M&A with record recurring quarterly dividend allow shutterstock, the flexibility to invest and innovate in our core business and provide long term value to shareholders.
Finally, turning to our guidance.
Our expectations for the full year 2020 are as follows.
Revenue of 665 million to 690 million with the midpoint of our range, representing approximately 4% revenue growth.
Adjusted EBITDA of 100 million to 107 million, but the midpoint, representing EBITDA margins of 15.3% up 50 basis points from 14.8% in 2019, and representing EBITDA growth of 7.5% year over year.
And adjusted earnings per share of between a $1.42 and $1.58 representing year over year growth of 22% the midpoint of the range.
I'd like to provide some additional color pertaining to our guidance.
From a revenue perspective, we expect a differential in growth rates between the E Commerce sales channel, which we expect to grow at approximately 6% and our enterprise channel, which we expect to grow at 2%.
The quarterly growth cadence in E commerce should be consistent with prior years the growth an enterprise will show negative comparable is in the first half of the year and stronger comparable from the back half of the year as we realize the fruits of our Salesforce investments.
From a margin and cash flow perspective, we're targeting at least 50 basis points of margin expansion in EBITDA in 2020.
We expect to see gross margin stable to slightly up consistent with this past year.
Therefore, the operating leverage we will see in the business mainly comes from amortization of the investments we've made in Gionee in 2019, combined with prudent ongoing cost management.
In terms of the margin trajectory during the year in 2020, Q1 margins will be approximately 2% to 3% lower than 2019 average margins as we continue to make sales investments.
Our margins should gradually improve over the course of a year quarter on quarter as we realize the return on those investments.
In terms of free cash flow, we expected to grow in line with EBITDA I would note. However that any additions to cash in Q1 will be nominal due to the timing of the payment of our annual bonuses as well as the settlement of an earn out from the flash stock acquisition. This is the only earn out payment associated with the acquisition.
Other modeling assumptions for 2020 of note relevant to investors include stock based compensation of $28 million.
Depreciation and amortization expense of $42 million.
Capital expenditures of $29 million.
And that effective tax rate in the mid teens.
We also expect our share count increase to be in line with historical trends.
With our 2020 plan, we believe that we're capitalizing on growth opportunities in our end market, while committing to modest margin expansion to grow our EBITDA.
We're further beginning to use our strong cash flows to return capital to shareholders in a predictable manner by starting with a dividend yield of 1.5%.
We will also be opportunistic with respect to the further use of our balance sheet for both share repurchases as well as strategic acquisitions.
We're energized as a new management team and we're excited to be able to deliver a strategic and financial update on our business management succession, and our capital plans and we very much appreciate your time today.
We look forward to seeing several of you in the weeks and months ahead in some of the investor discussions and an analyst conferences that we'll be attending and now John stand. It myself, we're happy to answer any questions that you may have operator. Please go ahead and open the line for questions.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtunes Allison.
Your question has been answered or you wish to remove yourself from the Q you May press the pound.
Your first question comes from Youssef Squali of Suntrust. Your line is now open.
Great. Thank you. This is made Mitchell on for use if first off John Stan Jerred Congrats on on your new roles.
Dan maybe maybe you first if you could maybe flesh out one or two most important strategic priorities for you and your first years CEO, particularly as it relates to the core image business, maybe you can update us on the contributions to your business from damage versus video versus music.
And then what gives you confidence that you can inflect enterprise in the second half and then I've a follow up for Jared.
Absolutely and thanks for the for the kind words.
Yes.
My priority for this year is a couple things first and foremost as Gerry mentioned.
We do feel that we're going to start to see leverage in the business. This year. So we're definitely focused on.
Improving margins first and foremost.
From a revenue perspective, as we look at the different asset types.
It's been it's been wonderful to see kind of the ship.
Mix shift of new.
And you know.
Emerging products like our video products or music products.
Start to really have an impact both on the price per download, but also on our revenue, particularly both in actually both in enterprise and in ecommerce.
As far as the enterprise growth.
We've started to make changes.
As we talked about over the last couple of quarters and this last month, we launched a new account segmentation, we launched a new Commission plan and we're hiring several new sales position and so as we think about the typical ramp up time and the sales cycle, we definitely expect to see improved results in the back.
Half of the year.
And as Jerry mentioned, one of the ways that.
We start to measure that effectiveness is through the deferred revenue balance going forward.
So the excitement I have about enterprise is the fact that we are putting our sellers against specific client segments.
And we are hiring new talents, we help us execute in that channel.
I'll turn it over to Jared or I'll actually I'll turn it over back to you to ask Jared Your next question.
Great. Thank you Stan and then shared what gives you confidence that you can drive EBITDA growth in 2000 20-F declining in 2019, and how do you think about the growth and performance marketing expense in 2020.
Sure. So I think we do feel very comfortable with getting not the margins back up I think we're very focused on it on as a company I think theres kind of two things that I would call out one is.
Ongoing prudent cost management, and really investing from a milestone perspective, as we achieve our objectives during the year.
If you look at the Gionee year on year, we put on about $15 million of incremental Gionee in 2019 as compared to 2018 on as I mentioned in my prepared remarks, there were investments in cyber security.
Technology as well as in other areas and I think we really are well prepared to realize the fruits of those investments are they are fixed investments and as we see revenue growth. This year, we would expect it to drop to the bottom line for more of a contribution margin perspective, rather than see growth in those Jna lines.
Yes.
I'm from a performance marketing perspective.
Performance marketing is more linked to revenue then RG in a line.
We do feel like there is opportunity within performance marketing to increase the effectiveness of that performance marketing spend we're very focused on our metrics around customer acquisition cost customer lifetime value in the value that we derive from our performance marketing spend.
So we think there is interesting opportunities there to get more bang from our Buck by leveraging additional channels for performance marketing spend and really taking a test and learn perspective with the way. We respect we spend out what is a fairly large marketing budget in that area.
Got it appreciate the color thanks, guys.
Thank you. Thanks. Thanks.
Your next question comes from Brentsville of Jefferies. Your line is that.
Thanks. Good morning, guys. This is Alex on for Brent. So two questions for me one for John and one for Jared for John I guess why was it and now the right time to step aside after running the company for so long and then was it you know an abrupt decision or or had been planned out for some time.
And then for Jarrod, if you could just talk through the thought process to pay out the quarterly dividend just wondering if it's a cognizant decision to baby viewed more as a value stock rather than a girl stock.
Or just any general thoughts around that decision. Thanks.
Thanks, Alex So yes. This is the this is a transition now as planned over.
Over a long period of time.
It was a couple of years ago now that I started to really talk through with the board about.
What this company needs for its next phase and we decided to go through the process of trying to you.
Figure out how to do that and all of that has rolled out over the past.
Couple of years of work to get to this point.
The truth of the matter is that we're just at a point, where we need a CEO with a different skill set we believe Stan is that person.
And over the past year working with stand it became clear to me that.
We are hit we're going to get to a great place.
With him as CEO.
And the board is behind me on that as well so.
I'd say it was a pretty.
Thoughtful.
Involved process.
Great. Thanks, John and just with respect to your question on the dividend on the way we look at the dividend is this is a more methodical way to return capital to shareholders and a predictable manner that existing and new investors can get behind in order to realize yield on top of the key.
Capital appreciation that they would expect from our stock.
If you kind of look at the way, we're starting the dividend at 17 cents a share it's approximately $24 million per annum.
Weights to about a 1.5% dividend yield on our stock and if you look at it as a percentage of free cash flow. It's about a third of our free cash flow, we think theres opportunity to move up from here on if you look historically the company has returned capital to shareholders either in the form of share repurchases or in the form of specialty.
Dividends and what's great about both of those formats is the immediacy of the return that you see.
But it's difficult to invest behind because there's no future predictability as to when those returns to shareholders are going to take place I think with our quarterly dividend.
We will have that predictability of return of capital to shareholders will also have the flexibility to continue to reinvest in our business for innovation as well as make acquisitions. So it's not an or it's an and where we'll be able to make investments in the company do M&A and a payout and hopefully.
Grow the dividend overtime.
We do recognize the slowdown in topline growth at the company and I think the dividend is really a recognition that there is a significant amount of capital on the balance sheet of the company and it is in our fiduciary best interest to return some of that capital to shareholders in a predictable manner, our that benefits them. So I think we feel quite.
Good about this at the decision and feel like it's a it's a great opportunity for our for shareholders as well.
Thank you guys and congrats to all three of you.
Thank you. Thank you.
There are currently no more questions at this time I will now turn the call back to the company for closing remarks.
Thank you for joining us today, we're so excited about these developments of the company and we look forward to continuing to update you as we deliver on our long term strategy.
Thanks, and good bye.
Ladies and gentlemen, this concludes todays conference call you may now disconnect.
[music].