Q1 2023 Shutterstock Inc Earnings Call
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Thank you for standing by and welcome to the Shadow shocks Q1, 'twenty two 'twenty three earnings conference call at this time, all participants when I listen only mode.
So to speak is presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone.
As a reminder, today's call is being recorded.
Now I'll turn the conference over to your host, Chris Xu Vice President Investor Relations and corporate development. Please go ahead.
Thanks Valerie.
Good morning, everyone and thank you for joining us for Shutterstock first quarter 2023 earnings call joining us today as Paul Hennessy, Shutterstock, Chief Executive Officer, and Jarrod Shutterstock Chief Financial Officer.
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 Arkansas.
Is your success and financial impact of new and existing product offerings, our ability to complete acquisitions and integrate the businesses, we have acquired when they acquire.
Existing operations.
Future growth margins and profitability our long.
Long term strategy and our performance targets, including 23 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 file 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 you may make on this call.
Well be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin.
Net income adjusted net income per diluted share revenue growth, including by distribution channel on a constant currency basis billings and free cash.
Reconciliations of non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included in today's press release.
Yeah.
I'd now like to turn the call over to Paul.
Exactly.
Thanks, Chris Good morning, everyone and thanks for joining us today.
Shutterstock delivered an exceptional first quarter.
I'm pleased to report that Shutterstock generated $215 million in revenue growing 8% year on year, well above our expectations. Our EBIT. This quarter was at record levels in terms of both dollars and margin.
Selecting strong revenue growth combined with operating leverage and cost discipline.
EBITDA grew 27% year on year to $70 million for the quarter, representing a 32% margin.
Free cash flow was $51 million in the quarter, allowing us to pay down our revolver in full while still maintaining a strong cash balance.
Growth in the quarter was led by our enterprise sales channel, which saw a 33% revenue growth driven by strength in subscription bookings for content or data partnerships to help global technology companies trained Theyre generative AI models and momentum at Shutterstock Studios and editorial.
I'd like to spend a few minutes detailing the strength of our core enterprise channel and what is driving our ongoing success and momentum.
Subscription bookings grew 20% this quarter and now represent 34% of total bookings up from 28% a year ago.
A rapid transition to a subscription model is having a positive effect on new business bookings, which is up 20% year on year as well as higher retention with churn declining by 4% year over year.
We also have expanded our relationship with large existing accounts, leveraging our editorial and studio capabilities, where we've seen strength, specifically in retail banking and travel and leisure.
Our creative engine, which includes Shutterstock studios and our data partnerships are the fastest growing parts of our enterprise channel and are expected to grow in excess of 50% this year.
Our E Commerce sales channel experienced similar trends from the fourth quarter declining by 6% driven by continued weak demand in Europe .
We're testing multiple strategies and tactics to improve the performance of this channel, which we see as underperforming relative to potential.
We remain cautious on the channel yet or hopeful that some of the top of funnel enthusiasm driven by our general AI offerings will begin to positively impact the business in the quarters ahead.
Briefly refresh everyone's memories, our content engine represents the main core of our business.
It drives most of the revenue today and is powered by one of the industry's largest content library, including six 615 million images 47 million videos 4 million music tracks and sound effects and 1.2 million three D models.
Our creative engine, which includes creative flow and studios allows us to extend our customer relationships by offering a powerful combination of content creative editing tools and production services.
And the rich metadata embedded in our content library has been the basis for our data engine, which has allowed us to unlock new verticals products and capabilities for our customers.
Across a variety of metrics and data points for example, customer engagement with our generative AI offering and our expanding pipeline of data partnerships, we're seeing signals that the investments, we're making across our creative engine and our data engines are yielding tangible dividends.
This is especially the case in our enterprise sales channel, where our value proposition for enterprise customers is rapidly evolving from being a scaled content provider across multiple content types to comprise more workflow tools data training sets an AI enabled services.
Today I want to take the opportunity to provide some recent examples of how these three engines are interconnected and how grilles and one engine accelerates growth in the others.
And there'll be mapping out how these various engines relate to one our initiatives engender the AI and some of the strong top of funnel interests, we're seeing.
To our recently announced partnerships with Nvidia and three the continued momentum.
Of our data partnerships.
After launching our AI image generation platform in partnership with open AI in January we had last reported that users have created 3 million assets in the two weeks immediately following the launch.
From the three months since inception, almost 1 million users have created more than 20 million assets on our platform.
To put that in context, Shutterstock averaged 10 million new images every quarter since 2020, and so the pace thus far in generative images created far exceeds the growth we've seen historically in our content engine.
Although it's too early to provide any definitive statements on generative AI as revenue potential I'm excited to report some early indicators that speak to high engagement and the exciting potential of this new technology across the entire user journey.
First our generative AI offering has been generating traffic at.
At the top of the funnel with our image generator tool driving creation of approximately 10000, new accounts every single day.
Now many of these new accounts are experimenting for the first time in engaging with the tools and technology and I'm trying to better understand what we have to offer with little purchase intent or monetization potential.
In addition, we're finding that our investment in paid media is being supplemented by robust levels of earned media.
So far we benefit benefited from millions of media impressions and over 100 news articles that have driven additional top of funnel traffic.
Secondly, when those new users get in the door, there really engaging with the tools and deriving value from them.
Furthermore, as we roll out additional features such as the ability to zoom out and create variations we have seen an increase in the average number of images generated per user as well as our improved conversion rates with one of the new features increasing conversion rates by two and a half times.
And lastly, I'm happy to report that customers can now search our growing library of the AI generated images, which are available for purchase we're already seeing a small but growing cohort cohort of users jumping into this part of our library, where they can find visuals that go beyond the bounds of what our core library offers.
In addition to our investments in generative AI for images, we recently announced a partnership with Nvidia to bring to market generative three D capabilities.
We believe this will lower the cost of three D model production and expand use cases, including the creation of low cost digital twins that replicate products found in the physical world.
This partnership is particularly exciting because it spans the full three D lifecycle, consisting of three D model production model monetization and last mile model customization.
Shutterstock is ideally positioned as a partner to Nvidia and we will bring our unique assets to bear, including metadata from our data engine, which will training videos text to three D model as well as our turbo squid marketplace, which will allow creators to monetize their generative three D models for use across III.
These many use cases, including in videos on their first and other net adverse environments.
In addition to the major investments, we're making in developing and delivered it delivering generative AI for our customers. We continue to be highly encouraged by our pipeline of data partnerships to help large tech companies train their models to develop their own generative AI products and solutions.
The need to use metadata regenerative AI model training is expanding and we are seeing new companies invest with urgency to build commercialize able products within their core area of focus.
We are also seeing our pipeline expanded for existing customers across multiple asset types customers, who started with images looking at video and customers looking at music and three D content for model training.
They used cases for training data are also expanding and we are seeing opportunities that are increasingly industry specific and for specific commercial products.
This quarter, we're excited to report that we signed two data partnerships, we significantly expanded and renewed for a six year term and existing data partnership when their needs expire expanded beyond image and into multiple other asset types, such as video three D and music.
And we're also establishing a new five year relationship with a leading social media platform.
As we convert our pipeline into opportunities we are seeing total contract value more consistently becoming high seven figure eight figure deals.
T J Lee, we're targeting multiyear multifaceted partnerships that feature recurring quarterly meta data refreshes, along with co investment in technology to align incentives.
These typically would also include content licensing and creative services as part of the overall future strategic roadmap.
We are starting to see consistency in the pattern of land and expand across deal that speaks to how our growth engines are interconnected and I wanted to provide some examples.
The first is an example, where we led with a data partnership largely around image model training data that involved where we integrated that evolved where we integrated the tools of our data partner into our core offering to grow revenues and provide new creative to our customers over time the needs of our partner grew and expanded.
It into other content.
Another example is where we have a long standing content relationship with a partner for a large technology platform, we have leveraged our API to provide them content for the years.
We then expanded this relationship to include higher end studio work, which we recently further expanded into a data partnership focused on providing data training sets for their AI applications for.
For both of the clients mentioned, our end to end creative platform has enabled a much more strategic relationship with clients, where we can deliver value across business lines.
As I noted at our Investor day, whether Youre, an individual creator small business or a fortune 500 company Shutterstock has the content the creative tools and the data to power your business.
To fulfill this vision, we have completely rethought the way Shutterstock goes to market leveraging our creative and data engines to aggressively transform our business in this dynamic and exciting content landscape.
Our journey as an end to end creative platform is full steam ahead.
With that I'll now hand, the call over to Jared to discuss our financial performance and our guidance.
Sure.
Thank you Paul and good morning, everyone.
Revenue growth was 8% for the first quarter were 10% on a constant currency basis exceeding our expectations. Our headline growth rate was strong and powered by our core enterprise channel, which had its best quarter ever.
Enterprise revenue was up 33% in the first quarter and 35% on a constant currency basis, an improvement from the fourth quarter, which was itself a record quarter.
Paul provided many of the key details on growth, we are experiencing in bookings subscription products and improved retention as well as the multiple business lines that are experiencing accelerated growth such as studios and data partnerships.
Consistent with last quarter E Commerce revenue was down 6% on a reported basis.
Our ecommerce channel saw continued weakness in Europe , and a slowdown in the rest of the world.
The weakness in our ecommerce channel directly impacts subscriber count, which was down sequentially. However, our subscriber revenues continue to grow due to momentum in our enterprise subscription products, where the count of subscribers is low but the <unk> is hot.
Turning to our income statement for the first quarter gross margins, excluding depreciation and amortization were flat.
Reported gross margins declined by 143 basis points, driven by higher M&A and cap labor amortization.
Sales and marketing expense in the first quarter was 22% of revenue compared to 27% in the first quarter of 2020 to the.
The decrease was driven by lower performance marketing spend as we reallocated certain marketing spend to the channels with the greatest effectiveness.
We also had several million dollars of linear TV spend from an earlier campaign in the first quarter of 2022 that did not take place in the first quarter of this year.
Product development was 7% of revenue flat with the first quarter of 2022, reflecting continued investment in our product offering and integration of our acquisitions.
G&A expenses were 16% of revenue compared to 15% in the first quarter of 2022, driven by increased staff and severance costs.
Excluding severance G&A was flat as a percentage of revenue compared to the first quarter of 2022.
We grew adjusted EBITDA by 27% to a record $69 8 million in the quarter.
Our adjusted EBITDA margins were up 490 basis points to 32, 4% driven by revenue growth and associated operating leverage combined with prudent cost management.
Turning to our balance sheet, we had $96 million of cash at the end of the quarter.
Exhibited strong free cash flow of 51 million, which included our payment of our annual performance bonus during the quarter.
During the quarter, we also fully repaid the $50 million, we had drawn on our revolver.
Our deferred revenue balance was $181 million down from $187 million last quarter, primarily due to the softness in ecommerce discussed earlier.
During the quarter, we paid out $10 million of dividends, which we recently increased to 27 per share as announced in January .
As is typical in the first quarter, we also paid $11 million related to taxes on the vesting of equity awards, which were issued underwithhold to cover basis further eliminating share count creep.
Cash outflows also included $16 million of Capex and content acquisitions.
For the full year, we are raising our 2023 guidance to 2% to 3% revenue growth and 50 to 75 basis points of year over year EBITDA margin expansion.
We significantly exceeded our own expectations this quarter, allowing us to bring up the bottom of the range with respect to revenues and be above the high end of the previous range with respect to margin.
We anticipate that 2023 will be shutterstock fourth consecutive year of expanding our margin profile.
As we highlighted in our last earnings call. We expect revenue growth to be first half loaded and we will remain cautious from a forecast perspective until we begin to see improvements in our e-commerce demand.
In closing, we're extremely pleased with the quarter and in particular, the strength of our core enterprise channel.
We are establishing new data partnerships with some of the largest companies in the world and expanding existing ones, while renewing multiyear commitments.
We have driven higher engagement at the top of the funnel as a result of our generative AI offering.
And we've evolved our value proposition to customers as an end to end creative platform comprising content workflow tools data training sets an AI enabled services.
Shutterstock is an extremely exciting place to be right now as we position ourselves to benefit from the extraordinary technology innovations that are taking place all around us.
With that operator wed like to open the line for any questions.
Thank you again.
Again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your telephone again to ask a question. Please press star 111 moment for our first question.
Our first question comes from the line of Laurence Fink of Morgan Stanley . Your line is open.
Great. Thank you thanks for all the detail on the computer vision side.
And an expanded pipeline of potential partners. Just wondering if there's any quantification you can put around that in terms of the number of companies that you have in your pipeline versus I think you had mentioned 20 plus.
Hey, Laurence Paul where we're not commenting on the specific number of of of deal flow coming in are in the pipeline, but what I will tell you is and I mentioned in my prepared remarks.
There seems to be a.
Growing our behavior and pattern.
Both the very large companies in the World and then the.
Next size down of people leaning into build their own their own models and so we see a a consistent pipeline build around around AI and data training and.
That's showing up both in our performance and we're encouraged by what we're seeing in the market.
Okay, Great and then maybe just on the on the contract size I know you gave some ranges on a number of figures, but if we just sort of compare to last quarter, maybe even six or nine months ago are you seeing sort of absolute contract sizes increase kind of across the board or does it really depend on the size of the partner.
Well the answer you've answered your question. It certainly depends on the size of the partner, but we have seen that number grow and then as you might imagine as we get more pervasive across companies. We don't expect that number to grow but right now we're very pleased with the size of the deals and more importantly.
The length of time of the relationships and how these relationships are actually turning into bigger broader strategic relationships leveraging all of the things that shutterstock has to offer. So don't think about this just as the impact of the data deals, but more of the alignment.
And helping businesses, even beyond their own creative needs into solving other business solutions for them.
Okay, and then just one more last last one and then I'll I'll hop back into the queue just.
Just on the partner that renewed after the exploration is the scope of that contract and the data that they're looking for similar to what they had originally.
<unk> signed up or are they sort of expanding the datasets and maybe the use cases about thanks. So much no. That's actually one of the things. We're most excited about theyre coming back for more.
We're using the full spectrum of what Shutterstock has to offer in both content types and again we were at.
Continue to lean in on alignment between that between our businesses as well as you know technical exploration of things that we can build together, so again, where we're encouraged that what often starts in one area expands into the next.
We think that adding the ability to.
To the business, but also enhances the relationship.
Wonderful. Thank you so much thank you.
Thank you one moment please.
Our next question comes from the line of Bernie Mcternan.
Of Needham Your line is open.
Good morning. Thank you for taking my questions maybe to start Paul you mentioned, 50% growth expected for this year and studios and computer vision can.
Can you provide any context of what that base number was in 2022 and then also does it assume any incremental computer vision deals that havent been signed yet.
So Bernie this is Jared let me just give a little bit of color on that we're not breaking out the exact composition of our enterprise growth, but suffice it to say we are seeing very strong growth.
Both in our data partnerships and our studios businesses and I'd call that growth quite.
Quite quite accelerated right, 50% type growth is quite strong.
No we have in the past talked about the magnitude of those businesses when they're approaching 10% of revenue will start to sort of break them out for folks and give a little bit more color, but I think for us what gives us incur.
Encouragement is not only are these are data partnerships are getting longer term in nature. So the two we announced today or a five year deal and a six year deal.
They are becoming much more all encompassing these are typically also including content relationships services relationships and they're being.
<unk> discussed and negotiated and entered into a much more senior executive levels within our client organization. So we're effectively moving out of selling into solely the marketing organization and moving into selling into both the marketing organization and the product and technology organization.
The strategic nature of these types of engagements. So I think we find that particularly exciting.
On enterprise, there's a lot going well, a Paul mentioned, 20% growth in overall bookings growth even faster than that in subscription bookings reductions in churn and improvements in customer retention.
So.
All the orders seem to be in the water and enterprise with some of those or is pushing the boat really really fast.
The result is what you what you see in the reported numbers.
Understood and then maybe just one other follow up on compute computer vision deals key Investor question, we get and I know, it's really hard to answer right. Now is just how many companies are going to need their own AI generative models and I think its move from if it is just foundational companies like like open AI need them as you mentioned.
In your prepared remarks, now company Pacific models, which is really interesting we love just to get maybe some context in terms of like how you're thinking on the subject has evolved over time and how you think it could play out I know, it's a really tough question, but would just love any thoughts that you had.
So Bernie Paul mentioned some of this in his remarks in response to the previous question, but there is definitely a broadening out of the desire for companies to own the intellectual property associated with generative AI. So if you read some of the headlines around Bloomberg looking at chat capabilities. If you read some of the headlines.
You quickly come to the conclusion and we are increasingly of the conviction that companies are going to want to own this IP and theyre not going to be solely reliant on a small cadre of global technology leaders to provide it to them and that really plays to our strength and plays to the depths.
That this Tam could have on a go forward basis.
It is all still work in progress. So no one is quite sure. How this is going to play itself out, but it really does seem like each company wants to own the IP and control their own destiny with respect to generative AI in a way that I don't think people quite.
Understood even several months ago.
Understood and then just last from me Big.
Big beat on EBITDA and <unk>.
Flow through for the full year guide was last week, maybe just have the seasonality wrong or anything we should be thinking about on the cost side of the business I know you called out some some shifts in marketing expense, but anything we should be thinking about the cost side and the remainder of the year.
The only thing I'd call out Bernie is number one youre aware of how at the gross margin level, our gross margin adjust annually based on the structure of our contributor royalty payouts and so that typically creates a slightly better gross margin at the beginning of the year on that's slightly declines as the year moves on so thats one thing to keep in mind.
The other piece of the sales and marketing.
We're keeping sales and marketing the vast majority of that spend is really around performance media and E Commerce.
And so as our e-commerce business is weak we are.
Our adjusting performance marketing consequently, right, we're not going to spend increasing percentages of sales and marketing spend in a business that has that is slightly lower.
And so we havent.
Don anything with sales and marketing to improve the margin, but we're also keeping a consistent.
So we feel great about the margin profile of the business, obviously to be able to raise your margins items in the first quarter means that you believe you strongly have the ability to operate the business in a highly profitable manner. So we feel great about that and our ability to continue to drive margin expansion, which we've done for the patch.
Several years now.
Great. Thanks, Sharon Thanks, Paul Thank you.
Thank you one moment please.
Our next question comes from the line of.
Youssef Squali of Truest your line is open.
Great. Thank you. Good morning, guys. So Jared can you maybe quantify the organic growth ex <unk> five so versus that 10% FX neutral number that you gave in the release what was the organic number since I think PON fiber was acquired in May of last year and then.
I know you're not quantifying the revenue contributions from all of these partnerships, but if you strip out the revenue from the partnerships and if that's true about maybe the contribution of studios what was the what was was there any weakness in the enterprise.
Segment from just the macro kind of.
Headwinds that we all know about.
Sure Youssef look rather than sort of stripping apart the business in that way. Let me just give you. Some some baseline figures that may help I think number one with respect upon five we talked about that business contributing roughly $11 million to $12 million a quarter. When we acquired the business and so there has been some growth in the business, but that's the <unk>.
Proximate a quarterly contribution of the business you know the acquisition date. So you can think about what the contribution of that is on a on a more specific basis.
In enterprise and I think we really tried to reinforces the business.
Regardless of weather.
You think about the studios piece in or out regardless of whether you think about the data partnerships being a strong contributor the business is quite healthy I don't think there is any other way to sort of cut it when you talk about overall bookings growth of 20% and subscription bookings growth in excess of that.
It just it feels really good.
And it is a continuation of the strategy that was embarked on a couple of years ago, which is leading to our success, which is cross selling into multiple content types, so expanding image relationships into video and music.
It is also enhancing that service offering solidifying that service offering with services and so whether it be our studios offering whether it be asset assurance, whether it be providing data partnerships. There is a culture of cross sell upsell and value delivery to customers.
That is a resounding in the market and working for us and so we feel we feel quite good about our core enterprise channel and look clearly as a result.
It's becoming a larger and larger part of our business you can see a day, where this is the majority of our business. If this trajectory continues in a relatively short period of time.
Super helpful. Thanks for that and then I guess one last question for me on E. Commerce can you. So Europe is not doing that well rest of world is slowing down.
What's the game plan is it a product issue is it really just a market environment kind of issue and.
How are you guys planning on an address in that or how are you addressing it yeah.
Fans of <unk>.
Reising product position of generative and even in the way our customers engage with it so where we are on the case and thats by the way fits very well with our strategy of getting out first being the leader in this space and learning from our customers. So that we can.
Given them exactly what they need and want.
That makes sense.
Paul I think you I think you mentioned earlier the acceleration that youre seeing in <unk> can you talk a little bit more broadly about the success, you're seeing outside of data partnerships with an enterprise is.
Is there any reason to think that this can you.
Can you just talk about the momentum there.
And how you guys are continuing to drive that side of the business.
Sure Shutterstock suffered from like a wonderful wonderful problem, we were known as a image stock provider.
And what large companies are learning now is we do a whole lot more.
And as you do a whole lot more we can move from hey, Here's some content that you can use and you are creative to an aligned to create a platform that can service multiple needs of the business and so studios is is just one of those opportunities we've talked a lot about data.
And you can.
Imagine with a level of innovation that shutterstock brings to any business.
And the amount of content that we bring.
We're rolling up our sleeves, and creating bespoke work on a variety of levels and then that creates new work because both.
<unk> within a company and say Hey, we want some of that too. We think we can leverage shutterstock creative platform to grow our business, but then we see it across companies as well. So you get this both share of wallet phenomena, but also share of market and that's the beauty of having a full creative platform rather than just being.
A stock photo image provider.
Okay.
And then our ultra tree as well.
That's probably in the future the high end of the revenue guide for 'twenty three did move.
Just conservative is that is there any way to think about what is a beat at least on our numbers for <unk> than not flowing through to the top end of the guide for the rest of the year. Thanks. So much guys I appreciate the help here.
Sure Andrew.
With respect to the revenues.
Our view is we are a part of our business that is not performing to its full potential there's a lot of work in progress to try and enhance that performance.
And.
As and when we start to see either macro demand changes.
Various geos that are moving in the right direction consistently month on month.
Or when we start to see real monetization that's flowing through from some of our generative efforts I think that'll give us confidence, we'll see that in some of the e-commerce numbers and I think that'll be probably the trigger for us.
Reevaluating the revenue guidance.
On the data partnership side.
We couldnt be any more pleased with how the pipeline has been evolving and sort of how we've been performing this year.
I think we are very disciplined with respect to the deals that we're entering into.
Rather than having a pure merchant mentality I think we're approaching these with a true strategic mentality, we're being disciplined on price.
And we realized that we have something that is extremely valuable in the market today and we're pairing that with our other service offerings to deliver holistic solutions for clients. So we're not looking at these as one offs for data. We're looking at these as comprehensive engagements that include content data services and solutions for our.
<unk>, so I think to the extent, we continue to execute in the way we have with some of the.
Two partnerships, we signed this quarter plus the Nvidia engagement, which we're quite excited about although it is not going to have a significant impact on revenue this year.
Those would be the catalysts for making a change to the revenue guidance at the top end of the range.
Thank you.
Thank you again, ladies and gentlemen, I'd like to ask a question. Please press star one one on your telephone again to ask a question. Please press star 111 moment. Please.
Our next question comes from the line of Nick Delfosse of Redburn. Your line is open.
Thanks, very much I've got one question remaining that Hasnt been on said, we should just on the gross margin.
So if we look at the graph your gross margin over time I was a little bit weaker in 'twenty, two and then obviously bounce in Q1 and you mentioned that there was some resets that occur but more broadly are.
Are there any impacts on gross margin that we should be thinking about from AI or in general from how youre paying youll contributors that could lead the level to change upwards or downwards over the next two years, thanks very much.
Thanks, So much for your question I appreciate it.
On the gross margin side Youre correct vis vis the royalty reset that happens in the first quarter. So thats a normal trajectory that we see over the course of the year as we think about our business mix and as we think about our studios business and as we think about some of the data partnerships. We're entering into we have said this publicly in the past, but we are paying.
Our contributors of royalty rate that is effectively equivalent to the royalty rate that we're paying on our core content business.
We think it's the right thing to do.
So the gross margins are that we're.
Seeing on our data partnerships are consistent with the gross margins in Shutterstock overall, and so that cost of goods sold the single largest component of that.
Are the royalties that we're paying to our contributors and so as you think about our business on a go forward basis, and you think about the changes to gross margin. The only piece that could changes to the extent that there is more software that is included in the service offering and so if you think about things like our creative flow platform.
Our creative flow platform is really based on software tools and software doesn't have cost of goods sold and royalties in the same way that our content offering does.
So to the extent, we see success in a pure tools first offering are you would see enhancements to our gross margin in an upward trajectory to our gross margin.
The years to come.
Thanks very much.
Thank you.
One moment please.
Our next question comes from the line of Nat Schindler Bank of America. Your line is open.
Yeah.
I think that was maybe because I heard America Nat Schindler yesterday. Your line is open okay. Sorry, there was a blanket call right. There when you said my name.
Yes quickly.
Wanted to ask how people really using the AI people that are using the AI from what you can tell but are using actually for commercial purposes as opposed to just plain and creative.
Of those that are using it for commercial purposes are they using it to create images from whole cloth or do you see it being used more as like kind of a.
Easy to use photoshop and redeeming in changing things that already exists.
Yeah, I'll take that one Matt.
First of all it is still early days.
We're starting to assess what is you know an initial behavior as far as what is what is the behavior pattern and again, it's very early but here's what we're seeing we're seeing it all there are those customers that are just coming in and saying AI is on.
On everybody's lips, let me check it out and Shutterstock has an outstanding place to come check that out because they cannot only.
Produce the images with a really high quality image creator.
Can also manipulate that content just like they are used to doing here at Shutterstock and so do I believe over time that AI general generative images becomes the ultimate tool replacement I think so I think that people are using.
Their words to create content.
Rather than other products to manipulate content makes a lot of sense to us and we suspect that to be the case going forward.
But again, it's early days and what customers are now able to use is ultimately what we're creating for them. So.
I'm sure customers have advanced demand and use cases that we have not yet discovered but we've positioned our company to have a front row seat for that and we're unveiling those products and services you know moment to moment month to month as we see what the what the signals from the customers on what they need next so but we're seeing the gamut.
Here.
And it's you know as you saw high engagement at 10000 accounts created every single day.
And the absolute tonnage of content creation, it's larger than our core content business.
So we're excited.
Great. Thank you.
Thank you.
I'm showing no further questions at this time I will turn the call back over to Paul Hennessy for any closing remarks.
Great.
To express our gratitude to our customers our contributors and our employees and for those of you on the call. Thanks for joining us that ends our call for today.
Thank you. Thank you.
Ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
Okay.
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