Q3 2022 Shutterstock Inc Earnings Call

October 25, 2022

And not only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to Chris who VP Investor Relations and corporate development. Please go ahead.

Thanks, Joe.

Morning, everyone and thank you for joining us for <unk> third quarter 2022 earnings call joining us today as Paul Hennessy, Shutterstock, Chief Executive Officer, and Jarrod, Dave <unk> Chief Financial Officer.

Please note that some of the information Youll 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 exists.

Operations, our future growth margins and profitability, our long term strategy and our performance targets, including 2022 guidance.

Actual results or trends could differ materially from our forecast.

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 this call.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin adjusted net income adjusted net income per diluted share revenue growth, including by distribution channel on a constant currency basis billings and free cash flow.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today's press release and in our 10-Q.

I would now like to turn the call over to Paul Hennessy, Chief Executive Officer.

Thank you Chris.

Everyone and thank you for joining us today.

On our last earnings call, we identified four points of differentiation that we view as critical in our mission to delight, our customers empower our contributors and ultimately create long term value for our shareholders. These.

Okay.

Good day, and thank you for standing by and welcome to the Q3 2022 Shutterstock incorporated earnings conference call.

These differentiators consists of the breadth and depth of our content library, our creative flow offering our solutions and capabilities geared towards enterprise customers and last but not least our talented and highly engaged team.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Today, we have some exciting updates on how we are extending our video leadership position with our deal with film pack and our integration progress with <unk>. Five we will also discuss a major announcement in generative artificial intelligence that is poised to transform our industry.

Ask the question during the session you will need to press star one one on your telephone.

Be advised that today's conference is being recorded I would now.

Now like to hand, the conference over to Chris <unk>, VP Investor Relations and corporate development. Please go ahead.

However, before sharing this update I'd like to first provide some commentary on the overall demand environment that we're experiencing in our expectations looking ahead.

Thanks Michele.

Good morning, everyone and thank you for joining us for Shutterstock third quarter 2022 earnings call joining us today as Paul Hennessy, Shutterstock, Chief Executive Officer, and Jarrod days Shutterstock Chief Financial Officer. Please.

Global macroeconomic uncertainty has resulted in softness in overall demand and we're experiencing that most acutely in Europe and in our E Commerce channel.

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 <unk>.

Comparing the second quarter to the third quarter, we see evidence of this softness in our E Commerce business, where growth went from 6% to 2% as well as in Europe , where growth went from negative 3% to negative 5%.

In contrast, we see relative ongoing strength in the United States and in our enterprise channel.

Operations, our future growth margins and profitability, our long term strategy and our performance targets, including 2022 guidance actual results or trends could differ materially from our forecast.

For example, this past quarter in our enterprise channel Shutterstock partnered with well known brands like Allergan Amazon Carvana meta in the video and Staples. These brands are drawn to our suite of differentiated content technology and tools and bespoke services leading to deeper relationships.

Touch not only their content and marketing efforts, but also evolve technology and data integrations.

As the global economy experiences headwinds for the foreseeable future, we intend to make prudent and pragmatic approach to investing in our business to drive revenue growth and maximize on our upside opportunities while at the same time, maintaining our focus on balancing growth and margins.

I'll now shift gears and provide some detail on how we are capitalizing on the leadership position, we created for ourselves in video content with the acquisition of PON five.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today's press release and in our 10-Q.

First we've made strong progress in integrating <unk> content and capabilities.

I would now like to turn the call over to Paul Hennessy, Chief Executive Officer.

We are making pot pies creative video content available for our enterprise customers in a phased manner, providing them access to a combined video library that is now more than twice the size of our nearest competitor.

Thank you Chris Good morning, everyone and thank you for joining us today.

Furthermore, <unk> editorial content is now available on charter stock Dot com and vice versa with Shutterstock editorial content available on <unk> five.

These differentiators consists of the breadth and depth of our content library are accretive flow offering our solutions and capabilities geared towards enterprise customers and last but not least our talented and highly engaged team.

We also announced last week, an exciting new partnership with film pack that is exclusive among our competition and adds to our content mode.

Film pack onto a library of approximately 100000 cinema quality video assets produced by World class filmmakers.

Today, we have some exciting updates on how we are extending our video leadership position with our deal with film pack and our integration progress with <unk>. Five we will also discuss a major announcement and generative artificial intelligence that is poised to transform our industry.

This collection is nothing short of stunning and we expect it to be in high demand and sell through at premium prices.

Next as you may have seen in today's press release, we are exciting to share a major new development for Shutterstock in the nascent area a generative AI in the creative space.

However, before sharing this update I'd like to first provide some commentary on the overall demand environment that we're experiencing in our expectations looking ahead.

If you look back in history over any time period, the mediums to express creativity, it continually evolved and expanded.

Global macroeconomic uncertainty has resulted in softness in overall demand and we are experiencing that most acutely in Europe and in our E Commerce channel.

It is only in the last 25 years, where we experienced the adoption of digital cameras and mobile phones and applications, which has fueled the democratization and growth of content creation.

It is that massive growth in content and the constantly evolving set of use cases for that content that has allowed shutterstock to grow into the scaled marketplace. We are today.

In contrast, we see relative ongoing strength in the United States and in our enterprise channel.

Beyond the adoption of content capture tools like the camera and phone we've had a history of embracing digital content created and modified with creative design software such as vectors and illustrations, which today represent a sizable portion of our overall revenue and more recently content in the form of <unk> model.

We view generative AI as the next exciting chapter in Shutterstock ongoing evolution.

Touch not only their content and marketing efforts, but also evolve technology and data integrations.

Allowing our customers and our contributors to create at the speed of their imagination.

This morning, Shutterstock to announced a major expansion of our previously unannounced strategic partnership with open AI and AI research and deployment company with the mission to ensure that artificial intelligence benefits all of humanity.

I'll now shift gears and provide some detail on how we are capitalizing on our leadership position, we created for ourselves in video content with the acquisition of <unk> five.

In the coming months Shutterstock will be integrating Dolly too open AI is industry, leading tool for AI generated content for the benefit of our E Commerce and enterprise customers.

First we've made strong progress in integrating <unk> content and capabilities.

With direct access to open AI is generative AI content capabilities shutterstock customers will be able to input keywords and generate unique images based on their specific criteria within creative flow.

We are making palm sized creative video content available for our enterprise customers in a phased manner, providing them access to a combined video library that is now more than twice the size of our nearest competitor.

This will be they will be able to seamlessly modify existing content using either our generative AI capabilities or the template driven design tools in creative flow.

Furthermore, <unk> editorial content is now available on charter stock Dot com and vice versa with Shutterstock editorial content available on <unk>.

We also announced last week, an exciting new partnership with film pack that is exclusive among our competition and adds to our content mode.

Shutterstock is excited to play an active role in ensuring the responsible and ethical use of technology.

That also takes all stakeholders into consideration in an important effort to protect the IP rights of our artists photographers and creators are terms will require that the content generated on shutterstock platform with DALI to be derived from content that exist within our own vetted library.

Film pack onto a library of approximately 100000 cinema quality video assets produced by World class filmmakers.

This collection is nothing short of stunning and we expect it to be in high demand and sell through at premium prices.

Next as you may have seen in today's press release, we are exciting to share a major new development for Shutterstock in the nascent area of generative AI in the creative space.

Unique in generative AI Shutterstock will be the first to establish the creation of a pooled contributor fund that will compensate all of our contributors for the monetization of generative AI on Shutterstock platform.

If you look back in history over any time period, the mediums to express creativity, it continually evolved and expanded.

Every time, a customer downloads degenerative AI asset, we will fund our contributor pooled payout.

It is only in the last 25 years, where we experienced the adoption of digital cameras and mobile phones and applications, which has fueled the democratization and growth of content creation.

This is in recognition of the fact that in our review the contributing artists are the critical stakeholder and the fundamental driver of value in the world of generative AI.

Does that massive growth in content and the constantly evolving set of use cases for that content that has allowed shutterstock to grow into the scaled marketplace. We are today.

As I mentioned in my blog posts last month Shutterstock is in a powerful position to promote an inclusive and ethical approach to the application of data not only in the realm of AI applications, but also in areas, such as privacy and diversity equity and inclusion across the creative industry.

We are an active participant in and a sponsor of the efforts of the world Ethical data Foundation.

We view generative AI is the next exciting chapter in Shutterstock ongoing evolution.

<unk> continues to lead in developing policy procedures and methods to ensure that usage rights and proper licenses are secured for all featured content, including generative AI.

Wowing, our customers and our contributors to create at the speed of their imagination.

This morning, Shutterstock, they announced a major expansion of our previously unannounced strategic partnership with open AI and AI research and deployment company with the mission to ensure that artificial intelligence benefits all of humanity.

Before passing it over to Jared I am pleased to welcome Sage element to the Shutterstock executive team.

<unk> joined us about a month ago, as our Chief Technology Officer, and she brings a shutterstock a wealth of experience spanning technology product and operations. We're all looking forward to working with <unk> as we continue to pursue our technical roadmap aligned with our product vision and strategy.

In the coming months Shutterstock will be integrating Dolly too open air is industry, leading tool for AI generated content for the benefit of our E Commerce and enterprise customers.

With direct access to open their eyes generative AI content capabilities shutterstock customers will be able to input keywords and generate unique images based on their specific criteria. We then create a floor.

In closing I continue to be very excited about the capabilities and assets at hand at Shutterstock I'm quite excited about the way. We are charging ahead with integrating creativity at the speed of your imagination into creative flow and doing it in the right way.

This will be they will be able to seamlessly modify existing content using either our generative AI capabilities or the template driven design tools in creative flow.

We have the right mix of unique content workflow tools and applications distribution capabilities and the team to be the preferred creative partner for our customers globally.

Shutterstock is excited to play an active role in ensuring the responsible and ethical use of technology.

In line with our purpose to bridge the gap between idea and execution Shutterstock is enabling its customers to create with confidence.

I'll now hand, the call over to Jared to discuss our financial performance.

Thank you Paul and good morning, everyone.

However, stock had a third quarter with revenue growth that was below our expectations and strong profitability that was above our expectations.

<unk> revenues grew 5% in the third quarter or 10% on a constant currency basis.

Excluding the impact upon five reported revenue declined 1%, while revenue grew 4% on a constant currency basis.

Every time, a customer downloads of generative AI asset, we will fund our contributor pooled payout.

E Commerce revenue grew 2% on a reported basis or 6% on a constant currency basis this quarter.

This is in recognition of the fact that in our review the contributing artists are the critical stakeholder and the fundamental driver of value in the world of generative AI.

The growth rate in our E Commerce channel was meaningfully impacted by weakness in Europe .

To give you a sense for the company overall revenues in North America grew 15% this quarter, whereas we saw a decline in Europe , 5%, representing a 20% growth differential between geographies.

As I mentioned in my blog posts last month Shutterstock is in a powerful position to promote an inclusive ethical approach to the application of data not only in the realm of AI applications, but also in areas, such as privacy and diversity equity and inclusion across the creative industry.

Macro uncertainty is having a more pronounced impact on our business in Europe was weak customer demand exacerbated by FX pressure.

And the impact is being felt most acutely in our E Commerce channel.

We are an active participant in and a sponsor of the efforts of the world Ethical data Foundation.

Enterprise grew 9% on a reported basis or 15% on a constant currency basis.

<unk> continues to lead in developing policy procedures and methods to ensure that usage rights and proper licenses are secured for all featured content, including generative AI.

Performance in our enterprise channel was in line with expectations with revenue growing across all regions on a constant currency basis, including Europe .

We continued to see strong momentum with large brands with whom our end to end solution set spanning studios editorial and platform solutions are differentiated content and our world class service a resounding in the market.

Before passing it over to Jared I am pleased to welcome Sage element to the Shutterstock executive team.

Hey, Joel joined Us about a month ago, as our Chief Technology Officer, and she brings a shutterstock a wealth of experience spanning technology product and operations. We're all looking forward to working with <unk> as we continue to pursue our technical roadmap aligned with our product vision and strategy.

Gross margin, excluding D&A expense declined by 90 basis points year on year, driven by FX pressures on our revenues combined with mix shift in our business.

Sales and marketing expense was 23% of revenue compared to 28% in the third quarter of 2021.

Sales and marketing expense in the third quarter of 2021 included almost $5 million of linear television advertising spend.

Product development was 9% of revenue compared to 7% in the third quarter of 2021, driven by continued investment in our product offering including the build out of creative flow.

We have the right mix of unique content workflow tools and applications distribution capabilities and the team to be the preferred creative partner for our customers globally.

G&A expenses were 15% of revenue compared to 18% in the third quarter of 2021 based on both a reduction in professional fees are reflecting the strong operating leverage inherent in our business.

In line with our purpose to bridge the gap between idea and execution Shutterstock is enabling its customers to create with confidence.

I'll hand, the call over to Jared to discuss our financial performance.

Adjusted EBITDA for the quarter was $56 million approaching record profitability for Shutterstock and margins were exceptionally strong at 27, 5%.

Thank you Paul and good morning, everyone.

<unk> stock kind of third quarter with revenue growth that was below our expectations and strong profitability that was above our expectations.

Margins were up more than 450 basis points from last year, driven by prudently managing discretionary spend in the business and.

<unk> revenues grew 5% in the third quarter or 10% on a constant currency basis.

An additional month of profit contribution upon fives and.

Excluding the impact upon five reported revenue declined 1%, while revenue grew 4% on a constant currency basis.

And further G&A leverage as previously outlined.

For the third quarter GAAP diluted EPS was <unk> 64.

E Commerce revenue grew 2% on a reported basis or 6% on a constant currency basis this quarter.

And adjusted diluted EPS was $1.

Turning to our balance sheet, we had $76 million of cash at the end of the quarter with almost record EBITDA. This quarter Shutterstock as cash flow from operations was muted by the timing of working capital due to lower <unk> balances and the timing of certain payments.

The growth rate in our E Commerce channel was meaningfully impacted by weakness in Europe to.

To give you a sense for the company overall revenues in North America grew 15% this quarter, whereas we saw a decline in Europe of 5%, representing a 20% growth differential between geographies.

We expect this to reverse itself in the fourth quarter and working capital will be a contributor to operating cash flow.

Macro uncertainty is having a more pronounced impact on our business in Europe with weak customer demand exacerbated by FX pressure and the impact is being felt most acutely in our ecommerce channel.

We currently have $50 million drawn on our revolver. However, we have the ability to draw an additional $150 million if needed.

Even at higher interest rates, our revolver is currently at four 5% and cost $2 million of interest expense per annum, giving us the flexibility to consummate further acquisitions.

Enterprise grew 9% on a reported basis or 15% on a constant currency basis.

<unk> at our enterprise channel was in line with expectations with revenue growing across all regions on a constant currency basis, including Europe .

Purchase shares and invest for growth in our core business.

We sustained our share buyback program, taking advantage of the market conditions and repurchased $16 million of shares resulting in the completion of the $100 million authorization.

We continue to see strong momentum with large brands with whom our end to end solution set spanning studios editorial and platform solutions are differentiated content at our World class service a resounding in the market.

As a result, our total shares outstanding decreased by 200000 shares.

Gross margin, excluding D&A expense declined by 90 basis points year on year, driven by FX pressures on our revenues combined with mix shift in our business.

Year to date, we've repurchased $73 million of shares outstanding representing two 7% of our diluted share count.

Our deferred revenue balance was $174 million increased $3 million from the third quarter of 2021.

Sales and marketing expense was 23% of revenue compared to 28% in the third quarter of 2021.

Our deferred revenue growth rate was unfavorably impacted by FX as current bookings are converted to dollars at the lower foreign exchange conversion rates.

Sales and marketing expense in the third quarter of 2021 included almost $5 million of linear television advertising spend.

Product development was 9% of revenue compared to 7% in the third quarter of 2021, driven by continued investment in our product offering including the build out of creative flow.

Turning to our key operating metrics for the quarter.

Subscriber count was 607000 up from 338000, and 2021 and included 230000 creative flow plus and <unk> subscribers.

G&A expenses were 15% of revenue compared to 18% in the third quarter of 2021 based on both a reduction in professional fees and reflecting the strong operating leverage inherent in our business.

Subscriber count grew 80% year over year or 12% when backing out the newly added creative flow plus and pick monkey subscribers, we're reporting this quarter.

Adjusted EBITDA for the quarter was $56 million approaching record profitability for Shutterstock and margins were exceptionally strong at 27, 5%.

Subscriber revenue increased by 8% to $87 7 million and subscriber revenue represented 43% of total revenues.

Margins were up more than 450 basis points from last year, driven by prudently managing discretionary spend in the business and.

Highest level ever for Shutterstock.

Average revenue per customer decreased to $329 driven by the inclusion of pick monkey revenues and customers for the first time in the third quarter.

An additional month of profit contribution upon five and further G&A leverage as previously outlined.

For the third quarter GAAP diluted EPS was <unk> 64, and adjusted diluted EPS was $1.

Selling more creative flow subscriptions will expand our subscriber base, but generally lower average revenue per customer over time.

Paid downloads were down 3% and revenue per download increased to $4 43 per download.

Consistent with what we're seeing in our revenues paid downloads were up and our enterprise channel and up in the U S across all channels. However were down in Europe , and the rest of the world, bringing down the average for the corporate as a whole.

We expect this to reverse itself in the fourth quarter and working capital will be a contributor to operating cash flow.

We currently have $50 million drawn on our revolver. However, we have the ability to draw an additional $150 million if needed.

Turning to our guidance for the full year.

Even at higher interest rates, our revolver is currently at four 5% and cost $2 million of interest expense per annum, giving us the flexibility to consummate further acquisitions repurchase shares and invest for growth in our core business.

Waiting to 5% year over year revenue growth or 9% growth on a constant currency basis.

We sustained our share buyback program, taking advantage of the market conditions and repurchased $16 million of shares resulting in the completion of the $100 million authorization.

We are raising our EBITDA margin guidance for the full year to 26, 5% from 25.0 to 25, 5% and our porting pointing to the high end of our EBITDA range.

As a result, our total shares outstanding decreased by 200000 shares.

In 2022, we should deliver approximately 12% EBITDA growth and I'm pleased to report this will be the third consecutive year, where EBITDA growth exceeds revenue growth.

Year to date, we've repurchased $73 million of shares outstanding representing two 7% of our diluted share count.

Our deferred revenue balance was $174 million increased $3 million from the third quarter of 2021.

We are managing the business prudently in an uncertain environment.

And are delivering on our commitment to shareholders to drive annual margin expansion, while reinvesting in our business.

Our deferred revenue growth rate was unfavorably impacted by FX as current bookings are converted to dollars at the lower foreign exchange conversion rates.

Consistent with past practice, we will be providing 2023 guidance early next year.

Turning to our key operating metrics for the quarter.

Based on current spot rates, our reported revenue growth for next year will have a 3% headwind based on the strengthening of the U S. Dollar over the course of 2022.

Subscriber count was 607000 up from 338000 in 2021 and included 230000, Creatives flow plus and pick monkey subscribers.

We will of course provide a more robust update early next year with the benefit of additional financial performance in the rearview mirror.

Scriber count grew 80% year over year or 12% when backing out the newly added creative floor, plus and pick monkey subscribers, we're reporting this quarter.

Thank you so much for your time and attention and with that operator, we will now open the call for any questions.

As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Subscriber revenue increased by 8% to $87 7 million and subscriber revenue represented 43% of total revenues the highest level ever for Shutterstock.

Average revenue per customer decreased to $329 driven by the inclusion of pick monkey revenues and customers for the first time in the third quarter.

Our first question comes from Bernie Mcternan with Needham and company. Your line is now open.

Selling more creative flow subscriptions will expand our subscriber base, but generally lower average revenue per customer over time.

Great. Thank you for taking the questions to start.

The higher margin guidance for the year. Jared is this are these levels that you think you continue to expand upon.

Paid downloads were down 3% and revenue per download increased to $4 43 per download.

'twenty three 'twenty four or are there just trying to suss out if theres any one time benefits this year that might not be recurring.

So bernie.

Firstly pleased with the way that we're managing the business from from a profit perspective.

We think we're doing things for the long term and managing that balance between growth and profitability.

Turning to our guidance for the full year.

We're not taking shortcuts, there's a number of sustainable year on year efforts that we're undertaking to fundamentally improve the gross margin of the business.

Based on the current demand environment, and ongoing FX pressures and assuming no improvement in underlying demand through the end of the year, we're lowering our 2022 revenue guidance to $815 million equating to 5% year over year revenue growth or 9% growth on a constant currency basis.

And to continue to have operating leverage in our business and we think these are sort of multi year payouts for our business and for our shareholders.

So in short to answer your question to the extent we ended up the year with a 26, 5% that is resident in our guidance. We do think that that's a durable and sustainable baseline to build off of.

We are raising our EBITDA margin guidance for the full year to 26, 5% from 25.0 to 25, 5% and reporting pointing to the high end of our EBITDA range.

We do have targets that we've spoken about externally is getting 50 basis points of margin expansion.

And we're going to continue to focus on that so to answer your question nothing one time thats driving that theres a lot of opportunities to continue to build and grow that and drive the operating leverage into the future.

In 2022, we should deliver approximately 12% EBITDA growth and I'm pleased to report this will be the third consecutive year, where EBITDA growth exceeds revenue growth.

Great and then sorry, multipart multi parter on open AI, but just if you could just help us understand the use cases right now for AI generated content now versus stock and how that should change over time and then b.

We are managing the business prudently in an uncertain environment and are delivering on our commitment to shareholders to drive annual margin expansion, while reinvesting in our business.

Consistent with past practice, we will be providing 2023 guidance early next year.

It is getting a lot of publicity right now there is just the New York Times article, but like how prevalent in the marketplace and so maybe for an example, like how would you expect your 'twenty three content usage to be split between AI and stock and then what are the margin implications as assuming AI content increasing in popularity.

Based on current spot rates, our reported revenue growth for next year will have a 3% headwind based on the strengthening of the U S. Dollar over the course of 2022.

We will of course provide a more robust update early next year with the benefit of additional financial performance in the rearview mirror.

Thank you so much for your time and attention and with that operator, we will now open the call for any questions.

Alrighty.

Yes, Bernie as Paul maybe I'll, maybe I'll start.

With my favorite answer.

As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

I don't know this is the first pitch of the first inning around around a lot of this technology.

Here's what we know.

<unk>.

By leveraging our our content library by bringing this technology to bear we're doing with Shutterstock always does which is put our customers and our contributors in the way of creating great creative and in doing so we know how to monetize that and.

Our first question comes from Bernie Mcternan with Needham and company. Your line is now open.

Great. Thank you for taking my questions to start.

The higher margin guidance for the year. Jared is this are these levels that you think you continue to expand upon.

So we think that this will be a constructive part of our business going forward.

'twenty three 'twenty four or are there just trying to suss out if theres any one time benefits this year that might not be recurring.

Don't know what the size of this is going to be in 2023, but we're building. This in a way where it's contributory to revenue and to margin and Thats, how we think about it as far as use cases, I think we can let our minds wander.

So Bernie were firstly pleased with the way that we're managing the business from from a profit perspective.

But bringing the two together is a critical thought and then you add in tools that we have and we're putting our customers in the way of <unk>.

We think we're doing things for the long term and managing that balance between growth and profitability.

We're not taking shortcuts, there's a number of sustainable year on year efforts that we're undertaking to fundamentally improve the gross margin of the business.

Continuing to do their job, whether it's on the advertising side on the creative side or just on whatever they are trying to execute against Shutterstock is.

And to continue to have operating leverage in our business and we think these are sort of multi year payouts for our business and for our shareholders.

<unk> got the tools the content and now.

Degenerative images that will allow them to do even more than they could do yesterday.

So in short to answer your question to the extent we ended up the year at 26, 5% that is resident in our guidance. We do think that that's a durable and sustainable baseline to build off of.

Great. Thank you.

Please standby for our next question.

We do have targets that we spoken about externally of getting 50 basis points of margin expansion.

Our next question comes from Youssef Squali with <unk>. Your line is now open.

And we're going to continue to focus on that so to answer your question nothing one time, that's driving that or there's a lot of opportunities to continue to build and grow that and drive the operating leverage out into the future.

Thank you very much good morning, guys. So I guess is it just.

A follow up to the open AI question, obviously, congrats on the partnership I think thats important.

But have you have you kind of surveyed your customers are.

Just trying to get a sense of what kind of is there any customer demand I know, it's obviously super early but.

And in the architecture that partnership.

Is there any kind of push from customers already or is this just something that you think will evolve over time and you want it to be there early which kind of makes a ton of sense to us, but just wanted to get a sense of how you guys are thinking about it from the inside out.

It is getting a lot of publicity right now there is just the New York Times article, but like how prevalent in the marketplace and so maybe for example, like how would you expect your 'twenty three content usage to be split between AI and stock and then what are the margin implications as assuming AI content increasing in popularity.

So use of one of the things that is very obvious is theres a lot of hype and excitement about this technology right now.

Alrighty.

Yes, Bernie as Paul maybe I'll, maybe I'll start.

With my favorite answer.

There's a lot of people flocking to these websites to check it out and see what it can do and really too to experiment with the art of the possible.

I don't know this is the first pitch of the first inning around around a lot of this technology, but here's what we know.

We would love to have a lot of that engagement within Shutterstock platform.

<unk>.

By leveraging our our content library by bringing this technology to bear we're doing what's Shutterstock always does which is put our customers and our contributors in the way of creating great creative and in doing so we know how to monetize that and so.

We want our site to be a place where people come to explore to experiment and that's traditionally what it has been and we want them to be able to common explore and experiment with this technology.

Whether they ultimately at the end of the day find the perfect.

<unk> taken with the DSLR that meets their use case requirements or are they modify something that exists with generative capabilities.

So we think that this will be a constructive part of our business going forward.

Don't know what the size of this is going to be in 2023, but we're building. This in a way where it's contributory to revenue and to margin and that's how we think about it as far as use cases, I think we can let our minds wander.

<unk> with our template driven design tools and create a flow.

We want them to have the right outcome and so ultimately for us it's about bringing the technology to bear.

But bringing the two together is a critical thought and then you add in tools that we have and we're putting our customers in the way of <unk>.

Getting the engagement.

Having our platform be used as a place for exploration in creativity, but ultimately whether it's the generative content or existing content from our half a billion asset content library that fits the bill for their need.

Continuing to do their job, whether it's on the advertising side on the creative side or just on whatever they are trying to execute against Shutterstock is.

That's for them to decide not for us to decide we just need to put the right content and the tools in front of them and I think that's been our approach and it will continue to be our approach.

<unk> got the tools the content and now you know.

The generative images that will allow them to do even more than they could do yesterday.

Okay.

Thats helpful.

And when did you say it'll be ready it will be integrated into the workflow did you did you share that with us.

Great. Thank you.

Please standby for our next question.

So I think the phraseology use it is out in the next several months.

Our next question comes from Youssef Squali with <unk>. Your line is now open.

I think you should look out for something from us towards the end of this year beginning of next year.

Thank you very much good morning, guys. So I guess is it just.

Got it excellent and then last question just.

Obviously, one of your main competitors went out some.

A follow up to the open AI question, obviously, congrats on that partnership I think thats important.

Some core or lowered their debt.

But have you have you kind of surveyed your customers are.

Recent capital any any change in the competitive landscape that you've noticed in the last say three to six months, either either from incumbents or new players or anything like that.

Just trying to get a sense of what kind of is there any customer demand I know, it's obviously super early but in an in an architecture that partnership.

Yes, what I'd say is we're focused on running our playbook, because we've got a great playbook and.

Sure.

I haven't noticed anything particular different in our market other than the macro environmental issues that we've talked about and implications on demand broadly.

But we see where we're emerging clearly where we are tech forward and leaning into the evolution of this technology as we always have done and we're going to continue to be that player.

So use of one of the things that is very obvious is theres a lot of hype and excitement about this technology right now.

There's a lot of people are flocking to these websites to check it out and see what it can do and really too to experiment with the art of the possible.

Got it. Thanks. Thank you Gil Thank you sure. Thank you.

Please standby for our next question.

We would love to have a lot of that engagement within Shutterstock platform.

We want our site to be a place where people come to explore to experiment and that's traditionally what it has been and we want them to be able to common explore and experiment with this technology.

Our next question comes from Andrew Boone with JMP. Your line is now open.

Good morning, and thanks for taking my questions.

Whether they ultimately at the end of the day find the perfect.

<unk>.

Sure you talked a little bit in that last answer about bringing editing and template tools to generative AI can you double click on the tools that you expect to bring into the relationship and really the question behind the question is why would someone come to shutterstock versus going directly to open AI to to use generative today all right. So what are you guys.

<unk> taken with the DSLR that meets their use case requirements or are they modify something that exists with generative capabilities.

Or with our template driven design tools and create a flow.

We want them to have the right outcome and so ultimately.

Draw there in terms of the hillenbrand.

But for us, it's about bringing the technology to bear.

Sure. So I can start with that and then I'll.

Getting the engagement.

Our platform be used as a place for exploration in creativity, but ultimately whether it's the generative content or existing content from our half a billion asset content library that fits the bill for their need.

I'll pass it over to Paul I think when you think about Andrew tools.

We think that there are multiple ways that our customers and creative.

Can leverage tools to be able to.

Modifying customized.

Creative to their use case.

Don.

We have a fantastic suite of creative tools in our creative flow platform, it's a template driven design tool suite.

For a broad range of use applications everything from social media advertising all the way too.

Creating an image of your soccer team on a T shirt I mean, it's truly a phenomenal easy to use template driven design tool and we think the market for that and the Tam for that is something that we're really excited about going after in the years to come.

That template driven design tool can be used to modify our existing content images as well as images that were generated with generational AI <unk>.

Moreover.

This technology can be used to modify.

Generative AI as well and so that's something that we'll be bringing to the fore as well and so you will basically have the ability to use both.

In terms of why why come to our platform. While we think one our platform is a place where 2 million customers are coming to select from one.

One of the world's largest content libraries, each and every year, it's a high velocity platform with almost a couple hundred million downloads per year. So we are the destination that they are coming to today are to select content and we think that.

By integrating <unk>.

Generally of AI into our creative floor platform, it's going to be a seamless experience for those users and so we hope this generates not only excitement, but again experimentation and engagement and we think we're going to be a great destination for that.

Yes, and I think I think Jerry covered that in great detail.

My answer on.

Why come to Shutterstock is because we built the end to end platform that has it all and when you have it all our users are contributors our customers can do a defined exactly what theyre looking for create exactly what theyre looking for and do that all on our platform and there's really not another plant.

One that allows you to do that.

That makes sense.

I think you guys have taken to <unk>. This morning in terms of not allowing AI generative images on the platform right. It sounds like this is very specific in terms of it needs to be generated with shutterstock content and meta data to be able to share.

Enable the creator funding can you guys just go into more detail and I think <unk> is in line with you guys as well.

Really flush out the thought.

Yes.

Talk about the IP component of generative AI and what's different there and how you guys are viewing it and why it's not allowed on our core marketplace. Thanks, so much.

Yeah.

I'll start and let let Jared weigh in.

We've been really thoughtful about this.

We want to make sure that our contributors are well protected and well compensated and that our customers are well protected and can use the assets that they.

To get from Shutterstock.

With confidence.

And in order to do that we.

We want to be able to bridge our existing content library.

With the open AI generative tools of Dolly too.

So that we can.

No that the content that is created has a clean licence and right to use and in doing so again, our contributors can feel great about that they will be compensated when they participate in something that has us going forward and our customers can then execute.

Their project without worrying about not being able to use.

By integrating <unk>.

That that those those assets and so.

Generally of AI into our creative floor platform, it's going to be a seamless experience for those users and so we hope this generates not only excitement, but again experimentation and engagement.

In doing that we create a very very safe and environment that also allows contributors to them to be compensated.

We're going to be a great destination for that.

If we play it down the other side and accept anything that has been generated we're not sure of the true ownership and therefore by not knowing.

Yes and.

I think I think Jerry covered that in great detail.

My answer on.

The true ownership, we're not able to actually.

Why come to Shutterstock is because we built the end to end platform that has it all and when you have it all our users are contributors our customers can do a find exactly what theyre looking for create exactly what theyre looking for and do that all on our platform and there's really not another plan.

Past that confidence to our to our customers. So we think this is a great way to create engagement for our customers. They can find what they're looking for our contributors can be as enthusiastic as they've always been about continuing to deliver content that will be monetized.

One that allows you to do that.

And then as we go forward.

There will be.

That makes sense I think you guys have taken to <unk>. This morning in terms of not allowing AI generative images on the platform right. It sounds like this is very specific in terms of it needs to be generated with shutterstock content and better data to be able to share.

I'll fund created to make sure that.

As we.

Educate.

AI models.

Our contributors will be compensated for that and if it if it's their creative that's used in informing those models, we think that theyre entitled for compensation for that.

Enable the creator fund can you guys just go into more detail I think Eddie is in line with you guys as well.

Really flush out the thought.

Can I close out with just one kind of bigger picture macro question just on the subscriber count as we are facing tougher macro headwinds have you guys seen any uptick in churn or is there anything to note in terms of changes in subscriber behavior and I'll end. It there. Thanks so much.

Yes.

Talk about the IP component.

Generative AI and what's different there and how you guys are viewing it and why it's not allowed on our core marketplace. Thanks, so much.

Yeah.

I'll start and let let Jared weigh in.

Andrew No uptick some churn that we're seeing in any material way at present.

We've been really thoughtful about this.

We want to make sure that our contributors are well protected and well compensated and that our customers are well protected and can use the assets that they.

Really the issue that we're seeing is new customer demand.

And quite frankly that new customer demand is pretty sharply.

Focused in Europe .

And we're seeing it sort of across the board in all the major <unk>.

Get from Shutterstock.

Trees within Europe .

With confidence and in order to do that.

And it's pretty focused in on our E Commerce channel specifically.

We want to be able to bridge our existing content library.

Our belief and hope is that when discretionary spend returns.

With the open AI generative tools of Dolly too.

There will be an uptick in demand by new customers and E Commerce in Europe and that will help buoy our growth at this point in time, but we're we're pleased with the tenacity of the.

So that we can.

No that the content that is created has a clean licence and right to use and in doing so.

Our contributors can feel great about that they will be compensated when they participate in something that is used as going forward and our customers can then execute.

Existing subscriber and customer base.

And as you know our goal is to really improve our customer retention over time in particular by leveraging our creative flow platform. We've added a tremendous amount of value to the overall value proposition by combining this content and tools.

Their project without worrying about not being able to use.

That that those those assets and so.

In doing that we create a very very safe and environment that also allows contributors to them to be compensated.

Into one unified subscription and our goal with that is to improve our customer retention over time. So it's hanging in there I wouldn't go so far as to say that it's hanging in there specifically because of creative flow, but our hope is that that really.

If we play it down the other side and accept anything that has been generated we're not sure of the true ownership and therefore by not knowing.

Ah strengthens us over time, and we feel quite good about it.

The true ownership, we're not able to actually.

Thank you.

Please standby for our next question.

The next question comes from Nat Schindler with Bank of America. Your line is now open.

And then as we go forward.

Yes, hi, guys. Thank you.

There will be a.

Ill fund created to make sure that.

Regarding the difference in growth rate between.

As we.

The 2000 point swing between North America and Europe .

Educate.

Models are contributors will be compensated for that and if it if it's their creative that's used in informing those models, we think that they are entitled for compensation for that.

Much of that is currency and it sounds like some of it isn't just looking at the numbers and on the part that isn't.

Macro sensitive do you think your businesses I think you've said in the past.

Yes.

Business is less macro sensitive because compared to the cost of the advertising campaign that cost reduce.

Piece of the creative it's very small, but if we do look at something like an advertising restructuring what could we see as a real impact you could see on your business.

Hey, good morning, Thanks for thanks for the question.

Andrew No upticks in churn that we're seeing in any material way of present.

So.

Really the issue that we're seeing is new customer demand.

And quite frankly that new customer demand is pretty sharply.

To your point there is a <unk>.

Focused in Europe .

Significant swing when you look at the reported results for North America as compared to Europe .

And we're seeing it sort of across the board in all the major countries within Europe .

And it's pretty focused in on our E Commerce channel specifically.

Even when you look at constant currency, there's about an 11% delta between the growth rate in North America as compared to Europe , North America is growing about 15%, whereas Europe is growing about 6% on a on a constant currency basis, and so we're seeing a pretty big divide some of that divide.

Our belief and hope is that when discretionary spend returns.

There will be an uptick in demand by new customers and E Commerce in Europe and that will help buoy our growth at this point in time, but we're we're pleased with the tenacity of this the existing subscriber and customer base.

FX to your point, but it's still sort of we really are seeing sort of a tale of two cities. If you will in our business.

And if you refer back to my comments on paid downloads.

Paid downloads are slightly down.

But downloads in North America are strongly up it's really only downloads being significantly down in Europe that is pulling down the total for the company as a whole.

So it's a pretty sharp deviation in demand and it is also sort of further.

Our goal with that is to improve our customer retention over time. So it's hanging in there I wouldn't go so far as to say that it's hanging in there specifically because of creative flow, but our hope is that that really.

Deviated between the second and the third quarter Europe has certainly gotten worse between Q2, and Q3 and that's pretty obvious to us when we look at sort of a by country data.

Ah strengthens us over time, and we feel quite good about it.

As well as kind of the new customer demand by channel and by Geo.

Thank you.

Please standby for our next question.

And Ned I would just add I think Jared answered that perfectly.

The next question comes from Nat Schindler with Bank of America. Your line is now open.

You asked about.

I think the last line of your question was like and long term. If there is a longer term recession, one of the things that I love about this business is its diversity Jared discuss the diversity and Geo, but we've got a diversified customer set.

Yes, hi, guys. Thank you.

Regarding the difference in growth rate between.

The 20 point swing between North America, and Europe , how much of that is currency and it sounds like some of it isn't.

So we're not dependent on any one set of customers. We've got a diversified channel mix between our E Commerce business and our enterprise channel.

Looking at the numbers and on.

The part that isn't.

Macro sensitive do you think your businesses I think we've said in the past.

We've got a very diversified mix of content from images to music to video to three D. Two to.

But this business is less macro sensitive because compared to the cost of the advertising campaign the crops.

So now generative and synthetic <unk>.

Piece of the creative it's very small, but if we do look at something like an advertising recession, what could we see as a real impact you could see on your business.

Combined images.

And when you put all of those and of course, the geography as discussed when you put all those together.

The business.

Hey, good morning, Thanks for thanks for the question.

It doesn't have all of its eggs in one one basket and therefore allows us to leverage the areas that are that are doing very very well.

So to your point there is a.

Significant swing when you look at the reported results for North America as compared to Europe .

While maybe there might be other areas of softness across the globe.

However, even when you look at constant currency there is about 11% delta between the growth rate in North America as compared to Europe , North America is growing about 15%, whereas Europe is growing about 6% on a on a constant currency basis, and so we're seeing a pretty big divide some of that device.

Yeah.

Okay makes sense. Thank you.

Please hold for a next question.

Okay.

Our next question comes from Lauren Schenker with Morgan Stanley . Your line is now open.

As FX to your point, but it's still sort of are we really are seeing sort of a tale of two cities. If you will in our business.

Thank you just following up on that on the AI conversation one of your competitors announced just a few minutes ago their own partnership I guess.

And if you refer back to my comments on paid downloads paid downloads are slightly down but downloads in North America are strongly up it's really only downloads being significantly down in Europe that is pulling down the total for the company as a whole.

Ask a few different ways, but the bigger picture does the move to AI January content and I know, it's only after her debate whether or not it came from attraction does that change the competitive landscape or competitive dynamics.

So it's a pretty sharp deviation in demand and it is also sort of further.

Over the medium to long term. Thank you.

Sure Lauren one thing I would note is when we.

Deviated between the second and the third quarter Europe has certainly gotten worse between Q2, and Q3 and that's pretty obvious to us when we look at sort of a by country data.

<unk> partnership with open AI today.

We also mentioned that this is a partnership that has gone back really into last year. So we started working with them in terms of thinking about <unk> and what that would mean for our industry and thinking about training.

As well as kind of the new customer demand by channel and by Geo.

And Ned I would just add I think Jared answered that perfectly.

<unk> really into last year and one of the things. We ultimately got comfortable with was that open AI insurer stock shared a lot of the same values in terms of doing things the right way.

You asked about.

One of the things I would note is some of the companies that are out there.

Our engaging and tactics such as screen scraping and Thats not something that ultimately we're comfortable with and we think will stand the test of time and so we feel really good about the partnership that we chose and the partner that we are working with and that we're doing things the right way that will create a durable business model that protects intellectual.

So we're not dependent on any one set of customers. We've got a diversified channel mix between our ecommerce business and our enterprise channel.

We've got a very diversified mix of content from images to music to video to three D too.

Property and the rights of our contributors and I'm not sure that throughout the ecosystem that view and that perspective is is pervasive.

So now.

<unk> synthetic.

Combined images.

And when you put all of those and of course, the geography as discussed when you put all those together.

What was the second part of your question Martin could you just repeat that.

Yes, just whether or not if.

The business.

It doesn't have all of its eggs in one basket and therefore allows us to leverage the areas that are that are doing very very well.

There is a greater adoption of imagery over time, if that changes the competitive dynamics in landscape at the umbrella content market.

Okay.

I don't I don't think so I think that.

While maybe there might be other areas of softness across the globe.

We're well positioned to lead the change rather than be changed by it and so by bringing to bear our content by bringing to bear.

Okay.

Okay makes sense. Thank you.

Please hold for our next question.

Okay.

The new technology, and our creative tools.

Our next question comes from Lauren Schenk with Morgan Stanley . Your line is now open.

We're going to be well positioned to lead what will be the next evolution of the way content is created on our platform.

Thank you just following up on that on the AI conversation one of your competitors announcing them just a few minutes ago there their own partnership I guess.

Great. Thank you.

Sure.

Okay.

It's been asked a few different ways, but the bigger picture does the move to AI January content and I know, it's only up to her debate whether or not it gets a lot of traction does that change the competitive landscape or competitive dynamics.

At this time there are no further questions I would now like to turn the conference back to Paul Hennessy for closing remark.

Great. Thanks, as you heard in our prepared remarks and throughout the Q&A. There are three areas of really tremendous upside potential in our business that we're sharply focused on as we exit the third quarter.

Industry over the medium to long term. Thank you.

Sure Lauren one thing I would note is when we.

<unk> announced our partnership with opening I today.

One we're rapidly integrating generative AI into our product offering as discussed with our long term product partnership with open AI announced today and expect that to happen in the coming months as we discussed.

We're making aggressive moves on the back of our pawn five acquisition to expand our video leadership position with the absolute highest end video content and with our exclusive distribution agreement with film pack.

Was that open AI and Shutterstock shared a lot of the same values in terms of doing things the right way.

And we're delivering strong profitability and margins in the face of a difficult macro environment and are delivering against our framework of sustained revenue growth paired with disciplined margin management.

One of the things that would notice some of the companies that are out there.

Engaging in tactics, such as screen scraping and Thats not something that ultimately we're comfortable with and we think will stand the test of time and so we feel really good about the partnership that we chose and the partner that we are working with and that we're doing things the right way that will create a durable business model that protects intellectual.

On behalf of Shutterstock, thanks to our team and thank you all so much for your time and interest.

This concludes today's conference call. Thank you for participating you may now disconnect.

Property and the rights of our contributors and I'm not sure that throughout the ecosystem that view and that perspective is is pervasive.

What was the second part of your question Martin could you just repeat that.

Yes, just whether or not.

There is a greater adoption of <unk>.

Goodbye imagery over time, if that changes the competitive dynamics in landscape of the umbrella content market.

Yeah.

Okay.

I don't I don't think so I think that.

We're well positioned to lead the change rather than be changed by it and so by bringing to bear our content by bringing to bear.

The new technology, and our creative tools.

We're going to be well positioned to lead what will be the next evolution of the way content is created on our platform.

Great. Thank you.

Sure.

At this time there are no further questions I would now like to turn the conference back to Paul Hennessy for closing remark.

On behalf of Shutterstock, thanks to our team and thank you all so much for your time and interest.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference.

Vince will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Yes.

Sure.

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