Q3 2020 Shutterstock Inc Earnings Call
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I'd now like to hand, the conference over to Chris to Vice President Investor Relations and corporate development. Please go ahead Sir.
Thank you James and good morning, everyone. Thank you for joining us today for Shutterstock third quarter 2020 earnings call.
With me today is that the blocky, our chief Executive Officer, and Jarred gaze, our Chief Financial Officer.
Please note that some of the information you hear during our discussion today will consist of forward looking statements, including without limitation impacted koby 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.
Future gross 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 FCC from time to time, including the risk factors discussed in our most recently filed 10-Q and our.
And then what kind of K for discussions of important factors that could cause results to differ materially from any forward looking statements. We may make on our call.
We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin adjusted net income.
Revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow, but.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with todays press release and in our 10-Q, which are posted on the Investor Relations section of our website.
Finally, please refer to the information that we posted on our website that contains supporting materials for today's call and now at this time I'll turn the call over to Stan.
Thanks, Chris Good morning, everyone and thank you for joining Shutterstock third quarter earnings call.
This quarter Shutterstock returned to year on year revenue growth with revenue of 165 million representing growth of 4% from Q3 of last year.
3% on a constant currency basis, we saw year on year revenue growth across all regions, especially in North America, which was up 6%, which represented roughly half of the total growth.
Europe and rest of world were each up 3%.
Revenue growth across these regions, particularly in North America was driven by our smelter subscription products.
To continue to grow revenue, we are very focused on innovating on our product offering.
For example in response to the success of our smaller image subscriptions, we rolled out smaller footage subscriptions with allotment as low as five licenses per month for $99 per month.
Through our low cost subscription model, we meet our professional quality video content accessible to a broader audience, including prosumers and the DIY market her audience.
To help this audience ease into the work into working with video content and to expedite the editing process. We include with the subscription. So we clips that are created by our in house creative So users can save time on editing and focus on their story telling.
In addition in October we launched our first monthly premium <unk> music. So.
Also with an allotment of five licenses for 64 95 per month.
On an annualized basis, we believe that these new subscription products will be accretive to our average revenue per customer.
The product innovation, we are driving is leading to strong result against the subscription keep your eyes, we introduced last quarter and is attracting a whole new audience for Shutterstock right.
While our subscription metrics were exceptionally strong this quarter and were pleased with the result, we do not believe this pace of growth will continue each and every quarter.
Jerry will go into more detail on our key metrics in a few minutes.
Now turning our attention from product innovation to overall strategy, we continue to make progress against Shutterstock three strategic focus areas that I've outlined previously worked for with ovation fresh and relevant content and data and insights to drive performance today I'd like to spend some time in particular.
Really young workflow innovation in the enterprise channel.
On the workforce innovation front in the third quarter, we began to establish the groundwork for broader vision of driving inspiration and customer value.
In the third quarter, we started to work with a number of beta customers to test and refine our enterprise customer experience, our new enterprise experience introduce a self serve capabilities, including bulk actions such as licensing and downloads and improved access to multi asset works.
Those tend to spread discoverability.
We also completed the beta launch of our collaborative work spaces application work spaces, which is a core piece of our strategy to drive higher content utility will allow us to improve customer's creative workflow process by enabling on platform collaborative discovery and ideas.
Action across teams from small and medium businesses to enterprise.
In addition to innovating with work flow in the enterprise. We recently brought to market two exciting new products with the launch of editorial video and Shutterstock Studios.
At lunch editorial video will have more than 250000 user generated lives and archiving video clips news clips across news entertainment sports and fashion, which is highly complementary to our editorial imagery catalog containing over 50 million images.
Shutterstock Studios enables us to go beyond stock content to provide custom project services to address unique customer needs.
Now moving on from our strategic initiatives to discussing progress against our margin objectives.
In Q3 was 47 million, which represents a 29% adjusted EBITDA margin up from 14% last year and up from 23% in Q2.
Our strong EBITDA margins reflect our efforts on improving the efficiency of our content technology and marketing efforts.
We are however, going to continue to invest for growth and do anticipate some margin compression over the next several quarters, while we make records this investments in our business.
More specifically as we look towards the rest of 2020 and 2021.
We have a number of areas in which we plan to invest for growth we.
We continue to invest aggressively to drive growth in our platform solutions offering which includes headcount expansion in both sales and technology.
We continue to see platform solutions as a highly attractive area to redeploy capital yeah.
Even as laid out last quarter, the opportunity to expand to new market segments, and new customers secure higher usage and engagement and drive higher customer and revenue retention.
We also continue to invest in people not just in expanding the platform solutions team, but also in sales marketing product and technology.
It was also thrilled to announce earlier in the month that Sarah Birmingham Joint Shutterstock as Chief Human Resources Officer She.
She brings a wealth of experience in building and optimizing high performing organizations in a fast changing environment.
Before turning the call over to Jeremy to discuss our financial.
I wanted to thank the Shutterstock team that's impressive performance this quarter.
And now I'll turn the call over to Jarrett.
Thank you Stan and good morning, everyone.
In the third quarter Shutterstock realized to return to revenue growth earlier than we previously expected driven by the success of our subscription offerings and continued momentum in our enterprise revenue channel Q.
Q3 revenues grew 4% year on year or 3% on a constant currency basis.
Growth was led by our E Commerce channel, which grew 7% representing the fastest growth rate over the past year and a material uptick from last quarter.
Our enterprise channel also improved materially from down 6% last quarter to down 1%. This quarter were an improvement of 5%.
In our enterprise channel, it's clear that the changes we have implemented are now having a positive impact.
Hi, Reinvigorating our sales organization.
Innovating, our suite of product offerings, and making further platform investments in our <unk>, we're starting to see improvements in both bookings and deferred revenue.
We saw $6.4 million sequential increase in deferred revenues, which is indicative of the progress we're making.
We believe we are still tracking for the enterprise channel to return to recognize revenue growth in the early part of 2021.
From a geographic perspective, we saw return to year on year revenue growth and revenue acceleration this quarter across all regions with particular strength in North America, which was up 6% to $59 million.
Europe grew 3% to $53 million and the rest of the world, including Asia also grew 3% to $53 million.
Gross margins were 63.5% approximately 350 basis points from the first quarter.
While the gross margins were strong I would note for investors. The part of the gross margin improvement is short term in nature and driven by the reduction in utilization and paid downloads of 6.2%, which is partially due to the pandemic.
As utilization normalizes, we expect our gross margins to decline from these levels and investors should not expect this level of gross margin on a go forward basis.
Sales and marketing expense was 22% of revenue as compared to 29% in the third quarter of 2019.
Consistent with the second quarter, we've inherited type metrics or marketing or a wide and become more efficient customer acquisition.
As expected there was this quenching increase in sales and marketing from Q2 to Q3 consistent with our plan for accelerating marketing spend in the back half of the year on branding, our new subscription products and targeted performance marketing.
Product development costs were 6% of revenue down from 9% in the third quarter of 2019.
In product development, we're seeing reductions in software costs employee costs and third party contractor costs, we expect to continue to invest in developing new products and internal tools and enhanced the functionality of our existing products and technologies. So I would expect to see increases in product development costs going forward.
Gee, they expenses were 17% of revenue down from 18% of revenue in the third quarter of 2019.
Gina expenses in the third quarter included $3.1 million of expense associated with performance based stock Awards, where we anticipate the performance criteria now being met for those awards.
Absent this expense Gee, they would have approximated 15% of revenue, which is more in line with our DNA in the second quarter.
We're continuing to exert discipline with respect to vendor cost reductions and accelerating efforts towards process automation.
We believe these decisions will enable us to create long term operating leverage in GE and as our business scales.
Adjusted EBITDA margins increased to 29% compared to 14% in the third quarter of 2019.
This was an exceptional quarter from a margin perspective. However, please note that with the investments we are making in products and platform and the expectation of higher utilization in the quarters to come this will pressure margins in the quarters to come.
GAAP net income was $22.6 million or 62 cents per diluted share.
Adjusted net income was 29.3 million and adjusted diluted earnings per share was eight cents per share as compared to $10.3 million or 29 cents per diluted share in the third quarter of 2019.
On August 14th we completed a $125 million marketed offering of common stock and achieve several investor relations objectives for shutterstock, including broadening our shareholder base.
Increasing our public float and significantly expanding the universe of equity research analyst coverage.
We are pleased to welcome our new institutional investors and research analysts and look forward to working with them closely as we execute on our long term vision for creating shareholder value at Shutterstock.
Turning to our balance sheet and cash flows.
At the end of the quarter, we had $383 million of cash up from $311 million at June Thirtyth Twentytwenty.
The quarterly increase in cash of $72 million includes $64 million of operating cash flows.
In addition to 23 million of net proceeds from the stock offering partially offset by $70 million of Capex and content acquisitions, and the 6 million dollar quarterly cash dividend paid in September.
Our deferred revenue balance increased to $144.7 million from 138.2 million at June Thirtyth 2020 for an increase of $6.4 million.
The change in deferred revenue is due to both our E Commerce and enterprise businesses and this increase is a positive development as a result of getting back to bookings growth in prior periods.
Turning to our key operating metrics there were a particular bright spot for shutterstock during the quarter.
Subscribers increased by 39% to 255000 from 184000 at the end of Q3 2019.
Subscriber revenue increased by 12% to 67.6 million from 60.1 million in the third quarter of 2019 and subscriber revenue as a percentage of total revenue increased to 41%.
Average revenue per customer increased 0.3% year over year to $320 Walt.
While we are truly pleased with these trends and are aggressively investing in the subscription product innovation pipeline. Stan discussed we do not believe this pace of growth in subscription will continue each and every quarter.
[noise] paid downloads continue to be soft and were down 6% to 43.4 billion, partially due to a reduction in activity and utilization related to the pandemic.
This resulted in revenue per download increasing by 39 cents to $3.79 per download.
Our image library expanded by 18% to over 350 million images and our video library increased by 25% to over 20 million clips.
In terms of capital allocation, we will pay at our next quarterly dividend of 17 cents per share on December 16th 2020.
As previously stated we plan to grow the dividend in line with earnings growth and plan to revisit the quarterly dividend with our fourth quarter earnings release.
With respect to our M&A strategy, we're seeing a number of opportunities for smaller bolt ons of key talent and technology as well as medium size acquisitions and are optimistic we'll have some announcements before the end of the year on that front.
While we expect to provide full year 2021 earnings guidance with our fourth quarter results. We wanted to provide investors color on what to expect through the fourth quarter.
Firstly, we expect revenue growth to be consistent with the third quarter, assuming no material change in demand and utilization patterns due to the pandemic.
While we are pleased with the positive momentum we experienced in the quarter and the return to growth.
Our return to revenue growth is encouraging but our till our industry gets back to the previously forecasted 5% to 7% temp growth will continue to be cautious and evaluating our growth prospects for 2021.
From an EBITDA margin perspective, we expect Q4 EBITDA margins to be approximately 20% as we continue reinvesting some of the year to date margin upside we've experienced it.
Expense increases for the fourth quarter will be focused in sales and marketing and we also expect increased utilization to pressure gross margins. Both in Q4 as well as 2021 as compared to current levels.
We are pleased with as a management team with our Q3 results. Both in terms of the return to revenue growth combined with the exceptional margins as.
As stated previously we plan to continue to reinvest some of that margin upside you've experienced to best position Shutterstock for growth in the years to come thanks.
Thank you for joining us today, we very much appreciate your time, operator, we'd now like to open the line for any questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad and we'll pause for a moment, we compiled acuity roster.
And our first question comes from the line of Youssef Squali from Trust Securities Go ahead. Please your line is open.
Great. Thank you very much good morning, guys and congrats pretty impressive cost containment story there.
First question is around just the.
The trends, you're seeing and post Q3, I guess in October just the sustainability of the improvement you're seeing both on the E Commerce and the enterprise and on the cost side that was a big surprise, maybe can you unpack the gross margin improvement a little bit I think you talked about lower utilization just because.
It depends that make but there are a whole slew of other things that you guys are doing in terms of a rev share to distribute to the to the contributor is another thing if Jared maybe you can just help us kind of parse out the different impact from different components and you.
Q4 guidance of 20% gross margin.
Seems to be pretty I'm, sorry, EBITDA by 20% seems to be substantially below what you just reported so again, maybe if you can just go over the puts and takes there would be a would be super helpful. Thanks.
Hey, Youssef, it's down thanks.
Thanks, so much.
Touch on the.
Q4 piece and then let Jerry talked about the gross margins.
So just real quick in terms of the momentum heading into Q4.
We continue to see the momentum that we saw in Q3 sort of into Q4 and.
Hence the the guidance that we're giving around the performance for the quarter, which is continued.
Strengthen in E Commerce and continued improved momentum in enterprise.
I'll, let Jerry touched on the gross margin.
The gross margin piece.
Sure and you don't use up I think we feel good about the gross margins are we feel good about the trajectory of gross margins and.
There is out there is a number of reasons why the gross margins are trending in the right direction.
I think last quarter, you talked a lot about our content ingestion process I think we're doing a much better job of using AI in technology, rather than onshore and offshore people resources in order to manage our content ingestion process that.
That is certainly having a positive impact.
As you know we did make a change to our contributor royalties, where there's an annual.
Check as to be a payout profile two contributors and I think thats, having an impact at this point in time during the year.
I think there's also a significant impact from the change in paid downloads. If you kind of track the paid downloads they've gone from down 1%.
Down 5.6% to down 6.2% in this quarter and that does have a meaningful impact in terms of the the cost of goods sold and hence the gross margin profile on so we don't expect that the gross margins at this level our sustainable we think they will come back down.
We are confident that paid downloads will tick back up as utilization improves.
We think that is going to start to happen in the fourth quarter as well as into next year and so we think you'll see some of the upside we've experienced in gross margin I start to reverse itself, but suffice it to say, there's a number of things that we're doing it.
Including working on reducing our cost of credit card acceptance lowering or interchange fees and a number of other things to really work around the edges to keep gross margins as sustainable as possible, but again, we don't think they're going to have to stay at these levels. We think they will be.
Reverting back to where they've been historically over the course of the last several quarters.
Okay. That's helpful. Thank you.
Our next question comes from the line of Brad Erickson with Needham and company.
Please your line is open.
Hi, Thanks, just a couple so first on the subscription acceleration I guess beyond just broad based recovery in demand you talked about what are you doing anything different there either on performance marketing channels or is your messaging different in any channels for either new or existing customers. Just just curious what may have driven the faster shift over to subscription that we saw.
A quarter.
Well, so I'll take this one.
One of the Big changes we've made is that we've introduced subscriptions that are smaller in nature for.
Or smaller.
For smaller businesses.
Both on the image side as well as footage and then most recently.
With Premiumbeat.
And so from a marketing perspective, we do address.
You know, we do our dress our audiences differently in terms of how we go to market. So the channels that we use the pipe.
I think that we use.
How much we spend to acquire customers.
Relative to the lifetime value as well as how we communicate.
Okay with those customers once they once they become deeper subscribers.
Miles or subscribers love our products so.
We do have a segmentation approach to to acquiring these customers and.
That has been very helpful. If you look at the.
You look at the subscriber revenue growth relative to the subscriber.
Growth overall.
Thats, where you can kind of see how the impact of our smaller subscriptions are having on.
On overall revenue relative to.
To the to the much more accelerated growth in overall subscribers.
Got it that's helpful. And then just a follow up on the on the E. Commerce side of the business I know you said the rebound there was broad based again, but just curious to get a little bit more sub sector detail. If we could I imagine advertising and things like digital commerce came back fairly well just curious if you can call out any other categories that showed sort of output.
Formans type of improvement in the quarter. Thanks.
Yes, So I think we continue to see moment.
The momentum around.
Particularly as companies, we're getting ready for their Q4 push both in combination of back to school as well as.
Early holiday as well as you know you've seen.
All sorts of movement around things like.
Amazon Prime day, and what that did to the overall retail sector.
As well as some other categories of spend that have started to sort of come back so what I, what I would say is.
This was kind of a little bit more of.
Coming back to.
Revenue for several categories, particularly in E. Commerce continued growth in the small and medium business segment.
We do continue to see softness in.
In some very large categories such as.
Auto such as.
Travel, which continued to be impacted by the.
Damaged, but we.
We did see some acceleration in some of the categories that we saw growth last quarter as well.
Got it thats great. Thank you.
And again as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad fair.
Our next question comes from the line of Ron Josey with JMP Securities Go ahead. Please your line is open.
Great. Thanks for taking the quarter and taking the question instead I wanted to talk little more about subscriptions. You mentioned you are aggressively investing here and understood the lower profit pleasure price plans, but you're talking about the profile. Those that are buying these subscriptions I think you just mentioned smbs and and whatnot, but just curious about those who are buying subscriptions, we mentioned prosumers in the past and now.
I'm also curious if you can talk more about platform solutions and how that might be helping the broader growth. But then also for subscriptions. Thank you.
Yeah absolutely.
So you know today most of our subscriptions.
Our in our E Commerce area.
As we continue to invest we're going to create one more subscription products both in the enterprise as well.
Platform solutions.
So today a lot of the smaller subscriptions are sort of tailored for a customer that.
Needs self serve capabilities are not looking for an account manager to sort of help them, they're looking for they know that they are going to.
Develop certain projects over the course of the year and they need a simple way to do that.
When we think about investing in subscriptions the way we think about it is.
Today.
Our subscriptions are sort of tied to.
Different sets of content that we make available over allotment of content that we make available price points.
One of the things that I talked about.
On the script as well as previously.
Previously is the fact that we're going to continue to evolve our subscriptions with services.
So you can imagine.
As we as we continue to develop for example in the enterprise.
Our our Shutterstock studios business.
Those types of services will become part of our overall creative subscriptions.
We will start to make more than were workflow services available as part of our subscriptions and those will be targeted at various.
Audience pipes, so when when we think about our subscription growth you know that.
Something but we're we're definitely going to look out across our channels.
But today that is predominantly in E commerce driven.
Sort of area.
With with platform solutions. You know this has been really successful channel for US and continues to be a really successful channel. We are starting to introduce new products within the channel so not just content.
Sure we are launching services within that channel as well.
Including editing, including.
Leveraging our data sets and computer vision.
We are actively working on.
Sort of developing different subscription products worth that up for that channel as well.
However, today the way those contracts are written that we don't classify most of those.
As subscriptions.
So more to come in terms of how the subscription profile will evolve across our channels, but ultimately.
A lot of that is tied to our customers.
Purchasing their purchase behavior, and we do see an opportunity to drive subscriptions across all three of our sales channels.
That's great. Thank you.
Our next question comes from the line of John Egbert with Stifel. Go ahead. Please your line is open.
Great Congrats on the results and thanks for taking my question. So it looks like you had a nice inflection in gross billings and in a significant improvement in the enterprise revenue relative to the past few quarters and that seems like a reasonable timeline for that segment to return to growth. I was wondering you could talk about the evolution of your enterprise sales strategy as you evolve the sales organization.
I know you've talked about using E commerce to fuel some enterprise sales for example, I'm just curious on the steps you've taken in the recent last few months.
Yeah absolutely.
You know it's interesting I've been talking about enterprise for you know for several quarters and how our.
How our strategy, what's changing from purely sort.
Sort of a very transactional approach that we had.
Historically in the enterprise to much more of a strategic partnership approach.
That started with a realignment of the team around segmenting our customers.
First and foremost aligning the comp plan.
To focus on larger average order values aligned around.
You know objectives of creating.
Creating relationships within the enterprise.
And one of the biggest impact that we had some of the businesses as the team itself, we brought on a new CRM, though.
Jamie Feldman was done an amazing job, we have an incredible sales operations team and.
The go to market has changed as we can as we sort of talked about that we needed to we launched two new products and services. So if you think about what we offer today, it's not just creative its creative services.
Its work flow services and it's working.
Our customers, particularly today in this environment.
You need a global solution to two.
To to drive your creative means we can do that at scale, we can do that very cost effectively.
So what we're finding success is actually.
Interesting, we're seeing it across all of our enterprise verticals, including media, including agency.
Et cetera, but also.
Within our enterprise, we also have a small and medium.
Business segment, and a business team.
It is entirely focused on both.
New.
New customers as well as retention of existing customers and that segment is growing very nicely for us as well as part of as part of enterprise. So I think you know what I would say is our Mo.
From a from sort of a transactional organization to a much more strategic partnership organization is having some success and.
Very proud of the team and the results with our bringing.
Great. Thanks.
Our next question.
Question comes from the line of use of Squali with Trust Securities Go ahead. Please your line is open.
Oh. Thank you I just have a couple of follow ups, maybe one on wood for you stand on the last question.
You guys have talked to that improvement to our CLO, you know and innovate in that area for the enterprise channel for for quite some time now, but it seems like that's that's that's renewed a tourist areas of interest can you maybe just help us.
How how what's what's what's different now how are you guys going about it differently. This time around I think you talked about some self serve capabilities some data launches and what's not so that would be really helpful. And then in the in the presentation that you guys have on the on the micro site you guys. Some highlights first party data.
Thats.
An area of opportunity can you flush that out a little bit for us in terms of you know kind of what kind of products. You guys are seeing potentially coming out of there and and are you you know presently in the market with the with anything.
For that thank you.
Yep.
Yes so.
Seth as I as I've talked about before.
Leave for our company to be successful we need the combination.
Content.
Work flow as well as data.
Assets and this is where what really differentiates US is the fact that we want to bring all of three of those through.
Through all of our sales channels.
Unlike many of our competitors, we think about ourselves as an open platform. So when we work for example, when we work with.
Our partners and platform solutions.
And we're leveraging for example, computer vision internally.
For you know for how we either ingest content or how we'd look for content that is brand say, perhaps certain characteristics. Those services. We have started to make available for example through platform solutions because many of our customers have those needs. They have image recognition they have.
Needs around content that they manage internally so when we when we think about.
You know work flow and our seriousness about the.
Providing more services this isn't about sort of.
Us competing.
On any one tool or monetizing any tool. It's about you know when we bring collaboration services like with work spaces right worry we allow.
Customers to Ideate collaborate share content as.
As part of their initial work flow.
That's going to be that as a part of our subscription product that's going to be how we continue to develop retention engagement around our subscription products as we start to leverage our first party data one more for recommendations and one more for performance those are going to be part of our son.
Description products that we bring across all of our sales channels. So.
Some of these are in market like the computer Vision example, but I've just use.
Some are in beta right now with customers, but as we launch these products and as they become much more widely available we'll provide a lot more information as well as.
Usage and and.
Sort of how they're in.
Acting our subscription numbers in upcoming quarters, but we just wanted to really left you know the community know that this is an area that we're very serious about making.
Investments in and.
It's based on research from our customers.
The the the types of.
Work flow surfaces that we're bringing are entirely based on what our customers have asked us to break.
Okay sounds good.
Thank you thanks.
And there are no further questions in queue at this time I'd like to turn the call back over to CEO Stan Kosierowski.
Thank you so much I'd like to again say.
And express my gratitude to our employees, our customers and our contributors for their support and encouragement.
I continue to be so excited for the road ahead as we continue to take advantage of the opportunities that we have in front of us.
And with that that ends our call for today. Thanks, everyone.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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