Q4 2023 Shutterstock Inc Earnings Call

February 21, 2024

Chris Hsu: Thanks, Kevin. Good morning, everyone, and thank you for joining us for Shutterstock's fourth quarter 2023. Joining us today is Paul Hennessey, Shutterstock CEO, and Jared Yates, Shutterstock CFO. 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, and The Future Success and Financial Impact of New and Existing Product Offers. Our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations. Our future growth, margins, and profitability, our long-term strategy, and our performance targets, including 2024 guidance and long-range financial targets. Absolute results for trends could differ materially from our. For more information, please refer to today's press release and the presentation material discussing our long-range financial targets, which we have posted to our website. Please also refer to the reports we file with the FEC from time to time, including the risk factors discussed in our most recent file, for discussions of important risk factors that could cause results to differ materially from any forelooking statements.

Chris Hsu: We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted margins. Adjusted Net Income, Adjusted Net Income for Delivered Share, Revenue Growth, Including By Distribution Channel, on a Constant Currency Basis, Billings and Briefs, Reconciliations of these non-gap measures to the most directly comparable gap measures can be found in the financial papers included with today's press release in our. Thank you, Chris, and good morning to everyone on the call.

Paul Hennessy: We appreciate you joining us. We have a lot of ground to cover today. We'll be discussing Shutterstock's 2023 results and 2024 guidance. In addition, we'll introduce a new framework to help investors better understand the company's long-term trajectory, including long-term financial targets for 2027. We have posted material that outlines our framework for Shutterstock 2027 on our Investor Relations website. I'll turn first to Shutterstock's strong performance in 2023. Shutterstock generated a record $241 million of EBITDA on $875 million of revenue in 2020, in line with our most recent guidance and well ahead of the initial guidance we had issued a year ago.

Paul Hennessy: In 2023, 6% top-line growth was paired with 27.5% EBITDA margin and 10% EBITDA growth. For the full year, our enterprise channel grew 33%. As investors are aware, the exceptional growth in our enterprise channel was driven by the strength of our data revenues, which more than quintupled to $104 million in 2020. Excluding data, Enterprise had another strong year, growing 8% in 2023, with growth accelerating to 12% in Q4 2023, driven by continued strength across content, studios, and Git. For the full year, our e-commerce channel declined 12%.

Paul Hennessy: While e-commerce revenues were softer than expected, operational improvements to the top of the funnel to the broader customer journey are stabilizing the business, and we are confident it will improve gradually over the course of 2024 and return to growth. To that end, we have a number of initiatives underway to drive a recovery in revenues from our small and medium customers that constitute the bulk of e-commerce revenue. These initiatives span two core areas.

Paul Hennessy: One driving higher traffic and higher conversion rates at the top of the funnel, and two, driving higher retention for the customers we've already converted. We are also in the process of dramatically reducing the free trial as part of our conversion fund. Reducing the use of the free trial as a conversion tool has led to some short-term pain in new customer additions and subscriber counts.

Paul Hennessy: However, we believe this is the right course of action to build a strong base of highly retentive customers seeking a premium stock content offering. We also believe that new and higher AOB content types will help us back to growth. For example, video and 3D have begun to pick up steam.

Paul Hennessy: For Shutterstock, revenue from video, 3D, and music has grown double digits for the past four years. Video, 3D music, and other non-image revenues as a percentage of total content revenue have increased from 25% to 35%, driven by higher AOV and revenue per download. We expect this trend to continue.

Paul Hennessy: And on the generative AI front, we are squarely focused on monetization and creating generative AI-focused product skews. We have now deployed multiple image generation APIs accessible within each of our products and are optimizing the technology to the specific customer behavior and product SKU, and we expect to be in market with our 3D generative capabilities this year. Switching gears, let's look ahead to our 2027 long-range targets.

Paul Hennessy: Over the past several years, the profitability of our content business has allowed us the flexibility and freedom to invest in other areas that offer faster opportunities for growth. These investment opportunities are both adjacent to and highly complementary to content. And now these investments are rapidly transforming into true businesses with multi-billion dollar TAMs and high growth. And going forward, we'll be shining a light on them and providing revenue breakouts across two categories, content, and Global Distribution and Service. This transition in reporting reflects the shift to emphasize our offerings rather than the sales channels we use to go to market; content is sold both online and through our global sales team. As a company, we are focused on acquiring and retaining customers, small, medium, and large, in a cohesive and integrated fashion. And the e-commerce versus enterprise dividing line has become increasingly blurred.

Paul Hennessy: Over the past several years, the profitability of our content business has allowed us the flexibility and freedom to invest in other areas that offer faster opportunities for growth. These investment opportunities are both adjacent to and highly complementary to content. And now these investments are rapidly transforming into true businesses with multi-billion dollar TAMs and high growth. And going forward, we'll be shining a light on them and providing revenue breakouts across two categories, content, and Global Distribution and Service. This transition in reporting reflects a shift to emphasize our offerings rather than the sales channels we use to go to market.

Paul Hennessy: Furthermore, the new reporting line enables us to provide a greater line of sight into our non-content revenues, which before had been embedded in Enterprise. As we think about our content category, since inception, Shutterstock has been, and will continue to be, a leading global creative platform that connects brands and businesses to high-quality content. Across a range of brands and content types, our content business grows steadily, operates globally at a massive scale, and generates large amounts of cash. Our content business generated $737 million in revenue last year, making us one of the largest players in our industry, and is powered by the industry's largest content library across content types. We also have the largest network of contributors and multiple channels with which to go to market, including a global sales force and multiple web properties that service a range of customers. This past year, we layered generative image creation and generative editing capabilities into our offerings, thereby making both stock content and AI-generated content available to our customers. Shutterstock's content business occupies a leadership position within the stock content industry and enjoys significant scale, brand recognition, and operating leverage.

Paul Hennessy: Content is sold both online and through our global sales team. As a company, we are focused on acquiring and retaining customers, small, medium, and large, in a cohesive and integrated fashion. Moreover, the e-commerce versus enterprise dividing line has become increasingly blurred.

Paul Hennessy: However, the stock content industry is a more mature market, with a TAM that approximates $8 billion and growing at 5-7%. We expect to return to growth at the higher end of this range by leveraging our current strengths in areas like video and 3D and leading with newer content types like generative image, video, and We intend to improve our leadership position in stock content by being attuned to customer demand signals for content and meeting their evolving needs. Our acquisition of BackGrid last month is a prime example of meeting customer demand for content. With this acquisition, we expanded our editorial library with an additional 30 million images and videos across candid celebrity, red carpet, and live events and added more than 1,400 contributors.

Paul Hennessy: In short, we acquired exclusive trending content, marquee customers, and a loyal customer base. Backgrade augments the launch of our editorial subscription last year and, combined with our splash acquisition, positions us well to be a supplier of choice for entertainment content. And so now having reviewed our core content category, I'd like to talk to investors about our emerging growth businesses, which, going forward, we will be reporting out as data distribution and service. Shutterstock's data business occupies a pivotal position on the generative AI value chain. Today, we are a preferred provider of training data for generative AI models due to the depth and quality of our ethically sourced content and metadata and the accompanying legal protection we provide across images, video, music, and 3D.

Paul Hennessy: As we look ahead, AI and machine learning model training will continue to be a growth opportunity, especially as we look to diversify our revenue base by targeting new buyers beyond the hyperscale. In fact, we just won our first seven-figure contract involving a venture-backed startup in the generative AI ecosystem, and we feel there are many more such opportunities ahead. We'll also be expanding our delivery model by leveraging our Cloud Marketplace partner. This will allow us to go from being a wholesale provider of data to the likes of Meta and OpenAI to a retail provider of data to the hundreds of companies we believe are going to custom train their own models.

Paul Hennessy: To that end, we are in the process of rolling out Shutterstock's training data onto data marketplaces like Databricks, Snowflake, Amazon, and Google Cloud. We are just starting to gain traction through this expanded distribution, and we are excited about leveraging the large-scale sales team and marketing support of these major partners. Data is a sizable TAM with enormous grip, licensing data sales for training generative AI models is estimated to be a $9 billion market by 2030 with a growth rate of over 20%. And we believe we have some of the most unique and differentiated assets in the space to be able to win here, as reflected in the growth of our data business, which grew to $104 million. Next, let's talk about distribution, which includes our newly acquired GIPI. Giphy is a scaled content platform that reaches more than 1 billion daily users, serves more than 10 billion pieces of content daily, and has more than 20,000 APIs slash SDKs.

Paul Hennessy: As we look ahead, AI and machine learning model training will continue to be a growth opportunity, especially as we look to diversify our revenue base by targeting new buyers beyond the hyperscale. In fact, we just won our first seven-figure contract involving a venture-backed startup in the generative AI ecosystem, and we feel there are many more such opportunities ahead. We'll also be expanding our delivery model by leveraging our Cloud Marketplace partner. This will allow us to go from being a wholesale provider of data to the likes of meta and open AI to a retail provider of data to the hundreds of companies we believe are going to custom train their own models. To that end, we are in the process of rolling out Shutterstock's training data to data marketplaces like Databricks, Snowflake, Amazon, and Google Cloud.

Paul Hennessy: The Giphy platform extends our reach into conversational content, which provides us with an enormous opportunity to build a native advertising business built on contextual signals. Native Advertising is a $95 billion business in the U.S. alone, growing at 14%, and Giphy is well positioned to be an industry leader in moment marketing within real-time conversation. Furthermore, GIPI allows us to expand our API relationships with the major tech giants and other API partners, and we will be looking to convert these partners into paying customers. Diffie also bolsters our ability to be an end-to-end solution for advertisers who can rely on us for both custom content creation and broad media distribution. In the past few quarters, we've already developed advertising relationships with brands such as L'Oreal's CeraVe These initial tests started small but are already rapidly expanding.

Paul Hennessy: We are just starting to gain traction through this expanded distribution, and we are excited about leveraging the large-scale sales team and marketing support of these major partners. Data is a sizable TAM with enormous grip; licensing data sales for training generative AI models is estimated to be a $9 billion market by 2030 with a growth rate of over 20%. And we believe we have some of the most unique and differentiated assets in the space to be able to win here, as reflected in the growth of our data business, which grew to $104 million. Next, let's talk about distribution, which includes our newly acquired GIPI. Giphy is a scaled content platform that reaches more than 1 billion daily users, serves more than 10 billion pieces of content daily, and has more than 20,000 APIs slash SDKs.

Paul Hennessy: The potential for budget and scale is tremendous. GIPHY has the potential to be hundreds of millions of dollars in revenue based on industry CPM rates of five to ten dollars and the billions of viewable impressions on our platform. Lastly, GIPI ties into our data business, and the content library contains a rich repository of data and extends the scope of our licensable data set to now include GIP.

Paul Hennessy: We are very excited about the early momentum of the Giffey business, the impressive breadth of deals already won, and the robust pipelines in place. And we're looking forward to keeping you informed as we grow the business. Next, let's talk about services, which include Shutterstock Studios. We launched Shutterstock Studios in 2020. Our studios business is growing rapidly, and we see the opportunity to grow 25% for the long term. Since inception, we have delivered an award-winning array of work spanning 30-second spots, branded documentaries, animated commercials, experiential activations, episodic series, and more.

Paul Hennessy: We continue to see strong demand and a robust pipeline going into 2024 for customers' traditional production and creative needs from the world's biggest brands and creative agencies. And most recently, we've already won work and see significant growth opportunities in the realm of virtual production and games development. Virtual production is a $2 billion market, and there's a very natural alignment between our Turbosquid 3D assets and studios offering that makes us unique. Now, with the production power of Shutterstock Studios, we leverage 3D and virtual production technology at scale, creating virtual environments from real locations and building fantastical worlds that are truly immersive. This is the same method that was initially pioneered by Hollywood Studios.

Paul Hennessy: And we're now adapting the same technology for commercial projects worldwide. This is completely transforming how our customers are approaching global content and marketing. Because of the investments we've made in 3D, this has become a viable alternative to physical production, creating new paths that are more sustainable, efficient, and creatively empowering. Meanwhile, game development is a $45 billion market, and you can't talk about gaming without talking about 3D.

Paul Hennessy: 3D content is a critical component in games, and TurboSquid is a trusted name for that content. Moreover, companies are looking to enter the gaming space with their original IP. However, budgets are tight, and talent is in short supply.

Paul Hennessy: Shutterstock's 3D assets, studio's footprint, and global talent network give us the right to play and win in this exciting round. Taken together, our data distribution and services offerings massively expand our TAM by over 10%. These offerings already account for 16% of Shutterstock's total revenue today, and we expect this percentage to grow to 22% of total revenue by 2027. We've developed a clear leadership position in content and a massively successful and profitable business, and we intend to do the same thing in data distribution and services over the next several years. We'll be innovating and investing in these businesses, setting them up to grow over 20% per annum for the long term. As a result, we expect Shutterstock 2027 to result in a significant reacceleration of our revenue growth to 10% with even faster growth in profitability.

Paul Hennessy: In conclusion, we're proud of what we accomplished in 2023 and the growth and profit we delivered for our shareholders. Across our business, we believe there are tremendous opportunities to accelerate growth, and we believe in Shutterstock's 2027 long-term targets and approach to allocating capital to large, fast-growing opportunities to accelerate the growth of our business. As a team, we are united in purpose and mission to empower the world to tell their stories by bridging the gap between idea and execution, and to connect customers to the content they need. We really like the hand we have, and we're excited for what's in store in 2024 and beyond. I'll now turn the call over to Jared to review our financial results, 2024 guidance, and the financial impact of Shutterstock. Thank you, Paul, and good morning, everyone.

Jared Yates: Shutterstock's revenues were up 6% in 2023 to $875 million, significantly better than expectations we had at the beginning of the year and at the midpoint of the guidance provided in the third quarter. In the fourth quarter, we grew our enterprise channel, excluding data, by 12%. While our e-commerce revenues were softer than we expected, we are stabilizing the business and improving our results, and expect to get back to growth during 2020. EBITDA was a record $241 million this year, with margins of 27.5% and annual EBITDA growth of 10%.

Jared Yates: 2023 is the fourth consecutive year Shutterstock has outperformed our EBITDA margin target. The combination of revenue growth and margin expansion has resulted in an EBITDA growth rate of 26% over the past four years. In the fourth quarter, EBITDA margins were 21%, as expected. We took advantage of our strong year-to-date margin performance and made significant investments in sales and marketing while still delivering 120 basis points of margin expansion for the full year. As I review the P&L, line items are net of related depreciation and amortization, stock compensation, and other expense items necessary to reconcile to our adjusted EDP. Gross margins in the fourth quarter declined by three percentage points to 65 percent, driven largely by a shift in our business mix, including the acquisition of gifts.

Jared Yates: Sales and marketing expense in the fourth quarter was 26% of revenue, compared to 21% in the prior year. This increase was the result of expected increases in performance marketing and branding spend. Product development was 6.4% of revenue, flat to the prior year, and G&A expenses were 11% of revenue compared to 13% in the prior year, driven by lower salary expenses. Turning to our balance sheet, we had $100 million of cash at the end of the quarter and $30 million drawn on our revolver.

Jared Yates: Free cash flow is strong at $42 million, and EBITDA to free cash flow conversion was 90%. In January, we deployed Cash for Acquisitions, acquiring BackGrid for $20 million. We expect the backward acquisition and our annual performance bonus to impact our cash in the first quarter in line with historical seasonality. As a testament to our confidence in our future cash flow, Shutterstock increased its quarterly dividend by 10% in January to $0.30 per share, our fourth year of double-digit dividend increases.

Jared Yates: We also bought back 1.6 million shares for 100 million under our share repurchase programs over the past two years, representing 4% of our shares, or 6% if you include the shares we purchased from employees for tax withhold to cover. For 2024, we anticipate continuing with our strategy of capital redeployment, with excess free cash flows being used to acquire businesses, pay dividends, and repurchase stocks. I would now like to turn to 2024 guidance before discussing our long-range financial. For the full year, we expect our revenues and adjusted EBITDA to be unchanged with $875 million of revenues and $241 million of EBITDA. In 2024, we expect content to continue its solid growth with medium and large sized companies. We also expect stabilization of our business with smaller online customers. The two customer segments are expected to offset each other, resulting in content revenues being flat for the full year.

Jared Yates: Year-over-year growth rates for content will start the year negative and improve gradually each quarter over the course of the year. In 2024, we expect data distribution and services to be unchanged from 2023 as we set the stage for accelerated growth. Distribution and services revenue will grow rapidly this year, driven by strong new customer acquisition and ongoing momentum. And while demand remains strong and the TAM is large and growing, our data offering is undergoing a known transition from an upfront licensing model to one where revenues are recognized radically over time. Our EBITDA guidance assumes normal annual levels of sales and marketing expenses of 24%, consistent with the past several years.

Jared Yates: We expect adjusted earnings per share to be in the range of $4.15 to $4.30, an effective tax rate in the high teens, and CapEx consistent with prior years. I would now like to review our long-term financial targets and what to expect from Shutterstock 2027. As Paul discussed, we are fundamentally changing the way we invest in and report on our business. Q4 will be the last quarter that we break out revenue channels between e-commerce and enterprise.

Jared Yates: As we focus on the execution of Shutterstock 2027, we have an opportunity to dramatically increase the overall growth rate of our business by making focused investments for growth in data distribution and services while maintaining our leadership position in Congress. We expect our content business to return to the high end of industry growth rates of five to seven percent. We are confident that we can achieve a reacceleration of growth, leveraging our existing leading portfolio of content and brands, and strong distribution with our world-class global talent. We also plan to capitalize on our leadership position in content types beyond images, such as video, 3D, and music. These content types are growing much faster at 12% per year, have higher AOVs, and now comprise 35% of our content business, up from 25% just a few years ago. We are targeting 22% growth in data distribution and services.

Jared: Shutterstock's revenues were up 6% in 2023 to $875 million, significantly better than expectations we had at the beginning of the year and at the midpoint of the guidance provided in the third quarter. In the fourth quarter, we grew our enterprise channel, excluding data, by 12%. While our e-commerce revenues were softer than we expected, we are stabilizing the business and improving our results, and we expect to get back to growth during 2020. EBITDA was a record $241 million this year, with margins of 27.5% and annual EBITDA growth of 10%.

Jared Yates: Our data distribution and services offerings are already growing rapidly with exciting demand figures. They've proven their ability to scale and become meaningful businesses. These fast-growing businesses will go from 16% of revenues today to 22% of revenues by 2027. The mixed shift will also have the effect of increasing our company growth rate by 300 basis points to 10% annually.

Jared Yates: By the end of 2024, we will have made the requisite investments and be well-positioned to capitalize on the massive TAM opportunity in these businesses. Our fastest growing businesses in data distribution and services are also some of the most profitable, creating a tailwind for margin. For example, Data benefits from 20 to 30 points of lower SG&A costs.

Jared: 2023 is the fourth consecutive year Shutterstock has outperformed our EBITDA margin target. The combination of revenue growth and margin expansion has resulted in an EBITDA growth rate of 26% over the past four years.

Jared Yates: And distribution benefits from 10 to 20 points of higher gross margins than our corporate average. Longer term, we expect EBITDA margins to improve from 27.5% today to 30% by 2027, driven by a 1-2% improvement in gross margin due to the business mix change toward data distribution and services and a 1-2% improvement in operating leverage through reduced SG&A and R&D costs. Achievement of our long-range targets will result in 1.2 billion of revenue in 2027 and revenue growth of 10% per annum. Combining double-digit revenue growth with expanding margins will result in even faster EBITDA growth of 13% with $350 million of EBITDA by 2027. Based on our strong free cash flow margins, we expect to generate over $800 million of cash over the next four years, cumulatively. Our capital allocation will be consistent with past practice, deploying 50% of free cash flow to M&A, an organic investment in our business, with the remainder split between dividends and share repurchase.

Jared: In the fourth quarter, EBITDA margins were 21%, as expected. We took advantage of our strong year-to-date margin performance and made significant investments in sales and marketing while still delivering 120 basis points of margin expansion for the full year. As I review the P&L, line items are net of related depreciation and amortization, stock compensation, and other expense items necessary to reconcile to our adjusted EDP. Gross margins in the fourth quarter declined by three percentage points to 65 percent, driven largely by a shift in our business mix, including the acquisition of gifts.

Jared: Sales and marketing expense in the fourth quarter was 26% of revenue, compared to 21% in the prior year. This increase was the result of expected increases in performance marketing and branding spend. Product development was 6.4% of revenue, flat to the prior year, and G&A expenses were 11% of revenue compared to 13% in the prior year, driven by lower salary expenses. Turning to our balance sheet, we had $100 million of cash at the end of the quarter and $30 million drawn on our revolver.

Jared Yates: We have consistently been disciplined acquirers, and M&A will likely be a key component of our achievement of Shutterstock 2027. We are pleased to be able to introduce Long-Term Targets as part of Shutterstock 2027. We believe this framework will allow investors to better understand our long-term revenue growth opportunity, more clearly see the business mix shift towards the large fast-growth TEMs, and provide clarity into our plans for margin expansion and capital allocation. And with that, operator, we will open the line for questions. Thank you. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star one one again.

Jared: Free cash flow is strong at $42 million, and EBITDA to free cash flow conversion was 90%. In January, we deployed Cash for Acquisitions, acquiring BackGrid for $20 million. We expect the backward acquisition and our annual performance bonus to impact our cash in the first quarter in line with historical seasonality. As a testament to our confidence in our future cash flow, Shutterstock increased its quarterly dividend by 10% in January to $0.30 per share, our fourth year of double-digit dividend increases.

Operator: We'll pause for a moment while we compile our Q&A roster. Our first question comes from Bernie McTernan with Needham & Company. Your line is open. Good morning.

Bernie Mcternan: Thanks for taking the questions. Maybe just to start, we'd love to just get your level of conviction on the 2027 targets and what the macro environments assume. And really, when you see content revenue coming back to growth, and really the client base of computer vision deals, as you mentioned earlier, going down market and more retail focus, just wanted to get some broader, you know, macro assumptions that underpin the 27 outlook. Great, thanks, Bernie. I'll take that one.

Paul Hennessy: And I'll start with a macro. We've got the same crystal ball that you all have. So we've made the assumption that we're gonna be operating in a market not tremendously different from the market that we're operating in today because it's just very, very difficult to project. What gives us the conviction about delivering, you know, big numbers and a return to growth categorically for our business? Is that we know how to do that?

Jared: We also bought back 1.6 million shares for 100 million under our share repurchase programs over the past two years, representing 4% of our shares, or 6% if you include the shares we purchased from employees for tax withhold to cover. For 2024, we anticipate continuing with our strategy of capital redeployment, with excess free cash flows being used to acquire businesses, pay dividends, and repurchase stocks. I would now like to turn to 2024 guidance before discussing our long-range financial. For the full year, we expect our revenues and adjusted EBITDA to be unchanged with $875 million of revenues and $241 million of EBITDA. In 2024, we expect content to continue its solid growth with medium and large sized companies. We also expect stabilization of our business with smaller online customers. The two customer segments are expected to offset each other, resulting in content revenues being flat for the full year.

Paul Hennessy: We've done it with our core content business, and when we when we lean into businesses, they tend to scale nicely. And we're going to be doing that again with our new product offerings of Data Distribution and Services. And the truth is, we wanted to shine a light on these businesses so everyone could understand our capital allocation, the growth opportunities, and the TAM expansion. And when you look at... expanding our core content PAM by over 10x, we believe we're going to get a share of that market. And so we're highly confident in the numbers that we put forward.

Jared Yates: Bernie, the one thing I would add is on the content side of things, you look at a historical 4% growth rate expanding to 7% prospectively. About a third of our revenues are now 3D video and music and non-image revenues. That piece of the content business, that's a third of the revenues, is growing double digits. It's growing at about 12%.

Jared Yates: And so when a third of your business is becoming a larger and larger piece of the pie, it does allow you to expand the growth of your business. And so we look forward to that makeshift benefiting our content prospectively over the next several years.

Jared: Year-over-year growth rates for content will start the year negative and improve gradually each quarter over the course of the year. In 2024, we expect data distribution and services to be unchanged from 2023 as we set the stage for accelerated growth. Distribution and services revenue will grow rapidly this year, driven by strong new customer acquisition and ongoing momentum. And while demand remains strong and the TAM is large and growing, our data offering is undergoing a known transition from an upfront licensing model to one where revenues are recognized radically over time. Our EBITDA guidance assumes normal annual levels of sales and marketing expenses of 24%, consistent with the past several years.

Bernie Mcternan: And just one follow-up mentioned data moving more toward those sales moving more towards marketplaces and more retail in nature. Is it possible just to peel back the onion on that a little bit more? Just how active are those marketplaces currently? How is the margin opportunity different? Would you just love it?

Jared Yates: Is this a 24-hour event? Or is this kind of like a longer-term potential fund? So Bernie, this is a 24-hour event.

Jared Yates: This is something that has been in the works and an area of investment for us for some time, and we strongly believe that we're effectively going to where the customers are. Customers don't naturally think of Shutterstock as a place to go for computer vision training data and train their generative AI models, but they do typically go to Databricks or Snowflake or AWS or GCF in order to acquire training data.

Jared Yates: This is also the natural compute environment for these customers. These platforms also, as you would understand, have tremendous brand recognition as well as sales capabilities that we expect to leverage. So we're excited about that. But we don't think it fundamentally changes the economic value proposition or the margin profile.

Jared: We expect adjusted earnings per share to be in the range of $4.15 to $4.30, an effective tax rate in the high teens, and CapEx consistent with prior years. I would now like to review our long-term financial targets and what to expect from Shutterstock 2027. As Paul discussed, we are fundamentally changing the way we invest in and report on our business. Q4 will be the last quarter that we break out revenue channels between e-commerce and enterprise.

Jared Yates: The way these distribution channels make money is not by taking a cut of the data sales; it's through compute. And so they're looking forward to having our data in their ecosystems so they can drive additional compute in the cloud.

Bernie Mcternan: Thanks, Sharon. One moment for our next question. Our next question comes from Youssef Squali with Truist Securities. Your line is open. Oh, great. Thank you very much.

Youssef Squali: So just a couple questions, maybe starting with the e-commerce revenue down 16%. There are obviously pieces out there that AI platforms may be structurally hurting that business. Can you talk about why you don't believe that to be the case?

Jared: As we focus on the execution of Shutterstock 2027, we have an opportunity to dramatically increase the overall growth rate of our business by making focused investments for growth in data distribution and services while maintaining our leadership position in Congress. We expect our content business to return to the high end of industry growth rates of five to seven percent. We are confident that we can achieve a reacceleration of growth, leveraging our existing leading portfolio of content and brands, and strong distribution with our world-class global talent. We also plan to capitalize on our leadership position in content types beyond images, such as video, 3D, and music. These content types are growing much faster at 12% per year, have higher AOVs, and now comprise 35% of our content business, up from 25% just a few years ago. We are targeting 22% growth in data distribution and services.

Paul Hennessy: And how do you see that business kind of progressing throughout 2024? And I think you just said earlier that you were going to stop reporting that as a segment, and it's going to just be part of content. What KPI should we be looking at to see that that business is indeed improving if you're going to be removing that KPI? Thank you. Great.

Paul Hennessy: Thank you. So on the AI question, here's our view. We deal with the largest buyers of content in the world on a daily basis, and we're in discussions with them about their creative needs. And while much of the world is experimenting and playing with and testing generative AI creations, we are not seeing our customers at any level of scale with a desire to buy, purchase, and utilize AI generated images or video or 3D. So we believe that any of the softness that we've seen in our own e-commerce business, as we mentioned in our prepared remarks, is a lot related to, I think, the free trial offering in our business running And it's really no longer constructive to our business.

Jared: Our data distribution and services offerings are already growing rapidly with exciting demand figures. They've proven their ability to scale and become meaningful businesses. These fast-growing businesses will go from 16% of revenues today to 22% of revenues by 2027. The mixed shift will also have the effect of increasing our company growth rate by 300 basis points to 10% annually.

Jared Yates: And as we've articulated, we're going to be moving away from that, and we'll find new and other interesting ways to promote our business to our smallest and maybe less frequent customers. But Shutterstock has built a business offering its products and services to customers that need to create some kind of advertising or other use for their bona fide customers. And we're going to appeal to those customers that are actually receptive and have a desire to purchase. I understand. Thank you. And then, maybe, one more.

Jared: By the end of 2024, we will have made the requisite investments and be well-positioned to capitalize on the massive TAM opportunity in these businesses. Our fastest growing businesses in data distribution and services are also some of the most profitable, creating a tailwind for margin. For example, Data benefits from 20 to 30 points of lower SG&A costs.

Youssef Squali: The 3D opportunity, can you talk a little bit about that and the partnership with NVIDIA? I think you talked about it being a 2024 event. Would you expect it to be?

Jared Yates: Early in 2024 or is this kind of by the end of the year and and and how do you think we should be thinking about the revenue opportunity part of this? Assi, Youssef, as you know, this is something we've been working on for some time. This has been an area of investment. Training a 3D generative model is a different and likely a more challenging endeavor than the image generation model. And so there's been a lot of work taking place behind the scenes. We're excited to bring this to market. We have already been working with alpha customers on the large customer side who have an interest in this technology. There is the potential to significantly lower the cost of content creation across a range of use cases and opportunities from gaming to film development. And so there is a lot of interest, and there are not products in the market that really are trained with the level of clean data that our product will be trained on. We do anticipate having this out in the early part of the year. This is not a second half of the year event.

Jared: And distribution benefits from 10 to 20 points of higher gross margins than our corporate average. Longer term, we expect EBITDA margins to improve from 27.5% today to 30% by 2027, driven by a 1-2% improvement in gross margin due to the business mix change toward data distribution and services and a 1-2% improvement in operating leverage through reduced SG&A and R&D costs. Achievement of our long-range targets will result in 1.2 billion of revenue in 2027 and revenue growth of 10% per annum. Combining double-digit revenue growth with expanding margins will result in even faster EBITDA growth of 13% with $350 million of EBITDA by 2027. Based on our strong free cash flow margins, we expect to generate over $800 million of cash over the next four years, cumulatively. Our capital allocation will be consistent with past practice, deploying 50% of free cash flow to M&A, an organic investment in our business, with the remainder split between dividends and share repurchase.

Jared Yates: This is a first half and maybe even a first quarter type of rollout, and we're already in extensive testing with alpha customers, so we are quite excited about this opportunity. This is not necessarily going to be a retail opportunity at first.

Jared Yates: It's going to be an API offering for some of the most sophisticated, large customers in the world. But we are quite excited about this opportunity. All right, that's very helpful. Thank you both.

Andrew M. Boone: One moment for our next question. Our next question comes from Andrew Boone with JMP Securities. Your line is open. Good morning, and thanks so much for taking my questions.

Paul Hennessy: I wanted to ask about Giphy and where that sits today, as well as how this factors into your new, 2017. Contemplating their... And then there are press reports that Reddit just signed a $60 million a year deal for their data. Can you just step back and talk about the big picture about pricing and how you guys are thinking about pricing your deals? With respect to that $60 million-a-year figure that's out there, how do you guys think about it? Thanks so much.

Operator: We have consistently been disciplined acquirers, and M&A will likely be a key component of our achievement of Shutterstock 2027. We are pleased to be able to introduce Long-Term Targets as part of Shutterstock 2027. We believe this framework will allow investors to better understand our long-term revenue growth opportunity, more clearly see the business mix shift towards the large fast-growth TEMs, and provide clarity into our plans for margin expansion and capital allocation. And with that, operator, we will open the line for questions. Thank you. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star one one again.

Jared Yates: Yeah, I'll take Giphy, and Jared can take data. On Giphy, Giphy plays a large role in the data distribution and services model going forward. We are, you know, we've been, since acquisition, in the middle of last year, we've been dusting off the ad platform.

Paul Hennessy: We've been going to market both with ad sales and working with our API partners for value exchange. And as you heard in my prepared remarks, given the amount of traffic and what I would call modest CPM rates, we believe this business is in the hundreds of millions of dollars and therefore plays, you know, an important role in the growth of our new area called data distribution services. So, Giphy's critical to that element, and we're super excited with the momentum and the performance of it. Um, I would just add on to that by saying that Giphy is already growing. Giphy is already acquiring clients, and we're very excited about the potential here. And Giphy also plays with data, as Paul mentioned previously.

Bernie Mcternan: We'll pause for a moment while we compile our Q&A roster. Our first question comes from Bernie McTernan with Needham & Company. Your line is open. Good morning.

Paul Hennessy: Hearing that Rez is looking at a $60 million deal annually for its data is not entirely surprising. I think there is a broad realization that training generative models on data that is scraped, that is not paid for, where content creators are not remunerated for their works, is not a sustainable, long-term business model. There is a case pending with the New York Times that I think people are eagerly awaiting the outcome of, and I think while it is possible to scrape data and use it in a model, ultimately, if Enterprise customers are going to want to use the output of that model, they are going to want to know what ingredients are used in the training of that model. And so that is going to benefit our business, and that is benefiting our business. There are companies that are taking shortcuts today, and they are able to train up models, but I think what they're going to find is, if you want to actually commercialize that model, you are going to need to convince your end customers that the training data set that was used was rightfully acquired.

Jared Yates: And so we believe that that's a significant tailwind for our business. As Paul spoke about, we think this is a $9 billion TAM with a very significant 20% type of growth potential. And we are just in the early stages of gearing up this business for growth, bringing it to the cloud ecosystems for distribution, and adding to our business development team in order to get our data out there. And today, we're working with many of the hyperscalers, but also newly extending our reach into smaller companies in the generative ecosystem, many of which have received billions of dollars of venture capital funding.

Jared: Bernie, the one thing I would add is on the content side of things, you look at a historical 4% growth rate expanding to 7% prospectively. About a third of our revenues are now 3D video and music and non-image revenues. That piece of the content business, that's a third of the revenues, is growing double digits. It's growing at about 12%.

Jared Yates: So we're all excited to sell and expand into the data. Thank you. One moment for our next question. Our next question comes from Nitin Bansal with Bank of America. Your line is open. I don't think I've opened the session yet.

Nitin Bansal: Can you, you mentioned that you're expanding your delivery model by leveraging the cloud market as part of this, which allows you to go from a wholesale provider to like retail providers. Can you shed some light on the pricing structure of data for like retail consumers? And secondly, like your competitors, you also have a similar set of data. So what kind of competition are you seeing in the data market? And what are the implications of that in the long term?

Jared: And so when a third of your business is becoming a larger and larger piece of the pie, it does allow you to expand the growth of your business. And so we look forward to that makeshift benefiting our content prospectively over the next several years.

Jared Yates: Thank you. Sure, Nitin, and thank you so much for your question. As you would expect, the way we price our data is effectively depending on the volume of data consumed. So there is volume-based pricing where the more you purchase, the lower the unit price of that data. There is differential pricing for images as compared to videos, music, and 3D. And ultimately, these deals are fairly individually negotiated, depending on the use cases of the customer. Some customers would like access to this data for generative model training for a number of years. Other customers are looking for a shorter period of time, and so I think that impacts the pricing as well.

Bernie Mcternan: Is this a 24-hour event? Or is this kind of like a longer-term potential fund? So Bernie, this is a 24-hour event.

Jared Yates: Ultimately, as we think about this, we think that there are tremendous opportunities here in order to grow, and, you know, these cloud ecosystems are going to be the place where that growth takes place. Thank you. Once again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. And I'm not taking any further questions at this time. I'd like to turn the call back over to Paul for any closing remarks. Thank you. As always, we want to express our gratitude to our customers, contributors, and, of course, our employees. Thank you all for joining us. That concludes our call for today. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Jared: This is something that has been in the works and an area of investment for us for some time, and we strongly believe that we're effectively going to where the customers are. Customers don't naturally think of Shutterstock as a place to go for computer vision training data and train their generative AI models, but they do typically go to Databricks or Snowflake or AWS or GCF in order to acquire training data.

Jared: This is also the natural compute environment for these customers. These platforms also, as you would understand, have tremendous brand recognition as well as sales capabilities that we expect to leverage. So we're excited about that. But we don't think it fundamentally changes the economic value proposition or the margin profile.

Jared: The way these distribution channels make money is not by taking a cut of the data sales; it's through compute. And so they're looking forward to having our data in their ecosystems so they can drive additional compute in the cloud.

Bernie Mcternan: Thanks, Sharon. One moment for our next question. Our next question comes from Youssef Squali with Truist Securities. Your line is open. Oh, great. Thank you very much.

Youssef Squali: And how do you see that business kind of progressing throughout 2024? And I think you just said earlier that you were going to stop reporting that as a segment, and it's going to just be part of content. What KPI should we be looking at to see that that business is indeed improving if you're going to be removing that KPI? Thank you. Great.

Paul Hennessy: And as we've articulated, we're going to be moving away from that, and we'll find new and other interesting ways to promote our business to our smallest and maybe less frequent customers. But Shutterstock has built a business offering its products and services to customers that need to create some kind of advertising or other use for their bona fide customers. And we're going to appeal to those customers that are actually receptive and have a desire to purchase. I understand. Thank you. And then, maybe, one more.

Youssef Squali: The 3D opportunity, can you talk a little bit about that and the partnership with NVIDIA? I think you talked about it being a 2024 event. Would you expect it to be?

Youssef Squali: Early in 2024 or is this kind of by the end of the year and and and how do you think we should be thinking about the revenue opportunity part of this? Assi, Youssef, as you know, this is something we've been working on for some time. This has been an area of investment. Training a 3D generative model is a different and likely a more challenging endeavor than the image generation model. And so there's been a lot of work taking place behind the scenes. We're excited to bring this to market. We have already been working with alpha customers on the large customer side who have an interest in this technology. There is the potential to significantly lower the cost of content creation across a range of use cases and opportunities from gaming to film development.

Youssef Squali: And so there is a lot of interest, and there are not products in the market that really are trained with the level of clean data that our product will be trained on. We do anticipate having this out in the early part of the year. This is not a second half of the year event. This is a first half and maybe even a first quarter type of rollout.

Jared: And we're already in extensive testing with alpha customers, so we are quite excited about this opportunity. This is not necessarily going to be a retail opportunity at first.

Jared: It's going to be an API offering for some of the most sophisticated, large customers in the world. But we are quite excited about this opportunity. All right, that's very helpful. Thank you both.

Andrew M. Boone: One moment for our next question. Our next question comes from Andrew Boone with JMP Securities. Your line is open. Good morning, and thanks so much for taking my questions.

Andrew M. Boone: I wanted to ask about Giphy and where that sits today, as well as how this factors into your new, 2020-2017. Contemplating their... And then there are press reports that Reddit just signed a $60 million a year deal for their data. Can you just step back and talk about the big picture about pricing and how you guys are thinking about pricing your deals? With respect to that $60 million-a-year figure that's out there, how do you guys think about it? Thanks so much.

Paul Hennessy: Yeah, I'll take Giphy, and Jared can take data. On Giphy, Giphy plays a large role in the data distribution and services model going forward. We are, you know, we've been, since acquisition, in the middle of last year, we've been dusting off the ad platform.

Jared: Giphy is already acquiring clients. We're very excited about the potential here. And Giphy also plays with data, as Paul mentioned previously. Hearing that Rez is looking at a $60 million deal annually for its data is not entirely surprising. I think there is a broad realization that training generative models on data that is scraped, that is not paid for, where content creators are not remunerated for their works, is not a sustainable, long-term business model. There is a case pending with the New York Times that I think people are eagerly awaiting the outcome of, and I think while it is possible to scrape data and use it in a model, ultimately, enterprise customers are going to want to use the results of that model.

Jared: They are going to want to know what ingredients are used in the training of that model. And so that is going to benefit our business, and that is benefiting our business. There are companies that are taking shortcuts today, and they are able to train up models, but I think what they're going to find is that if you want to actually commercialize that model, you are going to need to convince your end customers that the training data set that was used was rightfully acquired.

Jared: And so we believe that that's a significant tailwind for our business. As Paul spoke about, we think this is a $9 billion TAM with a very significant 20% type of growth potential. And we are just in the early stages of gearing up this business for growth, bringing it to the cloud ecosystems for distribution, and adding to our business development team in order to get our data out there. And today, we're working with many of the hyperscalers, but also newly extending our reach into smaller companies in the generative ecosystem, many of which have received billions of dollars of venture capital funding.

Jared: So we're all excited to sell and expand into the data. Thank you. One moment for our next question. Our next question comes from Nitin Bansal with Bank of America. Your line is open. I don't think I've opened the session yet.

Nitin Bansal: The New York Times and The New York Times Magazine. Thank you. We appreciate it. Can you please, you mentioned that you're expanding your delivery model by leveraging the cloud market as part of this, which allows you to go from being a wholesale provider to being a retail provider. Can you throw some light on the pricing structure of data for retail consumers? And secondly, like your competitors also have a similar set of data? So what kind of competition are you seeing in the data market? And what are the implications of that in the long term?

Jared: Thank you. Sure, Nitin, and thank you so much for your question. As you would expect, the way we price our data is effectively depending on the volume of data consumed. So there is volume-based pricing where the more you purchase, the lower the unit price of that data. There is differential pricing for images as compared to videos, music, and 3D. And ultimately, these deals are fairly individually negotiated, depending on the use cases of the customer. Some customers would like access to this data for generative model training for a number of years. Other customers are looking for a shorter period of time, and so I think that impacts the pricing as well.

Jared: Ultimately, as we think about this, we think that there are tremendous opportunities here in order to grow, and, you know, these cloud ecosystems are going to be the place where that growth takes place. Thank you. Once again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. And I'm not taking any further questions at this time. I'd like to turn the call back over to Paul for any closing remarks. Thank you. As always, we want to express our gratitude to our customers, contributors, and, of course, our employees. Thank you all for joining us. That concludes our call for today. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Operator: Good day, and thank you for standing by. Welcome to the Shutterstock Q4 2023 Earnings Conference Call. At this time, all participants are on a listen-only basis. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone.

Good day and thank you for standing by welcome to the Q4 2023 Shutterstock earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question during the session on the depressed Starwood and one on your telephone you will then hear an automated message by saying your hand is raised to Australia. Your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to speak today, Chris Xu Vice President Investor Relations and corporate development. Please go ahead.

Operator: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, today's conference is being recorded. I would like to hand the conference over to your speaker today, Chris Hsu, Vice President of Investor Relations and Corporate Development. Please go ahead.

Chris Xu: Thanks, Kevin.

Good morning, everyone and thank you for joining us for centers that fourth quarter 2023 earnings call.

Chris Xu: Joining us today as Paul Hennessy, Shutterstock, CEO and Jerry gave Shutterstock CFO.

Chris Xu: 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.

Chris Hsu: The Future Success and Financial Impact of New and Existing Product Offers. Our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations. Our future growth, margins, and profitability, our long-term strategy, and our performance targets, including 2024 guidance and long-range financial targets. Absolute results for trends could differ materially from our forecast. For more information, please refer to today's press release and the presentation materials discussing our long-range financial targets, which we have posted on our website. Please also refer to the reports we file with the FEC from time to time, including the risk factors discussed in our most recent UK file for discussions of important risk factors that could cause results to differ materially from any for-looking statements.

Jerry: Our ability to complete acquisitions and integrate the businesses, we have acquired or may acquire into our existing operations.

Jerry: Our future growth margins and profitability, our long term strategy and our performance targets, including 2020 for guidance and long range financial targets.

Jerry: Actual results or trends.

Jerry: Could differ materially from our forecast for more information. Please refer to today's press release and the presentation materials discussing our long range financial targets with with <unk> IR website.

Jerry: Please also refer to the reports we file with the SEC and time to time, including the risk factors discussed in our most recently filed K for discussions of important risk factors that could cause results.

Jerry: To differ materially from any forward looking statements, we make on the call.

Chris Hsu: We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted margins. Adjusted Net Income, Adjusted Net Income for Delivered Share, Revenue Growth, including by distribution channel on a constant currency basis, Billings, and Briefings. Reconciliations of these non-gap measures to the most directly comparable gap measures can be found in the financial papers included with today's press release in our. I'd now like to turn the call over to Paul Hennessy, CEO. Thank you, Chris.

Jerry: We will be discussing certain non-GAAP financial measures today.

Jerry: Including adjusted EBITDA and adjusted margin.

Jerry: Adjusted net income adjusted net income per diluted share revenue growth, including by distribution channel on a constant currency basis balancing free cash flow.

Jerry: 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.

Jerry: Our 10-K.

Jerry: I'd now like to turn the call over to Paul Hennessy CEO.

Paul Hennessy: Thank you, Chris and good morning to everyone on the call. We appreciate you joining us we had a lot of ground to cover today, we'll be discussing satisfied 2023 results and 2020 for guidance.

Paul Hennessy: And good morning to everyone on the call. We appreciate you joining us. We have a lot of ground to cover today. We'll be discussing Shutterstock's 2023 results and 2024 guidance. In addition, we'll introduce a new framework to help investors better understand the company's long-term trajectory, including long-term financial targets for 2027. We have posted material that outlines our framework for Shutterstock 2027 on our Investor Relations website. I'll turn first to Shutterstock's strong performance in 2023. Shutterstock generated a record $241 million of EBITDA on $875 million of revenue in 2020, in line with our most recent guidance and well ahead of the initial guidance we had issued a year ago.

Paul Hennessy: In addition, we will introduce a new framework to help investors better understand the company's long term trajectory, including long term financial targets for 2020.

Paul Hennessy: We have posted material that outlines our framework for Shutterstock 2027 on our Investor Relations website.

Speaker Change: I'll turn first to Shutterstock strong performance in 2023.

Speaker Change: Shutterstock generated a record $241 million in EBITDA on $875 million of revenue in 2023 in line with our most recent guidance and well ahead of the initial guidance, we had issued a year ago.

Speaker Change: In 2023, 6% topline growth was paired with 27, 5% EBITDA margins and 10% EBITDA growth.

Speaker Change: For the full year, our enterprise channel grew 33%.

Speaker Change: As investors are aware exceptional growth in our enterprise channel was driven by the strength of our data revenues, which more than doubled to $104 million in 2023.

Speaker Change: Excluding data enterprise had another strong year growing 8% in 2023 with growth accelerating to 12% in Q4 2023, driven by continued strength across content studios and gifting.

Speaker Change: For the full year, our E Commerce channel declined 12%, while E. Commerce revenues were softer than expected operational improvements to the top of the funnel to the broader customer journey are stabilizing the business and we are confident it will improve gradually over the course of 2024 and return to growth.

Paul Hennessy: In 2023, 6% top-line growth was paired with 27.5% EBITDA margin and 10% EBITDA growth. For the full year, our enterprise channel grew 33%. As investors are aware, the exceptional growth in our enterprise channel was driven by the strength of our data revenues, which more than quintupled to $104 million in 2022. Excluding data, Enterprise had another strong year, growing 8% in 2023, with growth accelerating to 12% in Q4 2023, driven by continued strength across content, studios, and Git. For the full year, our e-commerce channel declined 12%.

Speaker Change: To that end, we have a number of initiatives underway to drive a recovery in revenues from our small and medium customers that constitute the bulk of e-commerce revenues. These.

Speaker Change: These initiatives stand two core areas.

Speaker Change: One driving higher traffic and higher conversion rates at the top of the funnel.

Speaker Change: And to driving higher retention for the customers we've already converted.

Speaker Change: We are also in the process of dramatically, reducing free trial as part of our conversion funnel.

Speaker Change: Reducing the use of free trial as a conversion tool has led to some short term pain and new customer additions in subscriber counts. However, we believe this is the right course of action to build a strong base of highly retentive customers seeking a premium stock content offer.

Speaker Change: We also believe that new and higher <unk> content types will help us back to growth.

Speaker Change: Video and <unk> have begun to pick up steam.

Speaker Change: Our shutterstock the revenue from video <unk> and music has grown at double digits for the past four years.

Speaker Change: Video <unk> music and other non image revenues as a percentage of total content revenue has increased from 25% to 35% driven by higher <unk> and revenue per download.

Speaker Change: We expect this trend to continue and our magenta. The AI firm, we are squarely focused on monetization and creating agenda today I'll focus product skus.

Speaker Change: We have now deployed multiple image generation API accessible within each of our products and are optimizing the technology to this specific customer behavior and product here.

Speaker Change: We expect to be in market with our trading generative capabilities. This year.

Speaker Change: Switching gears, let's look ahead to our 2027 long range targets.

Speaker Change: Over the past several years the profitability of our content business has allowed us the flexibility and freedom to invest in other areas that offer faster opportunities for growth.

Speaker Change: These investment opportunities are both adjacent to and highly complementary to content.

Speaker Change: And now these investments are rapidly transforming into true businesses with multibillion dollar Tam with high growth potential.

Speaker Change: And going forward will be shining, a light on them and providing revenue breakouts across two categories.

Speaker Change: Content and.

Speaker Change: And data distribution and services.

Speaker Change: This transition and reporting reflects the shift to emphasize our offerings rather than the sales channels, we used to go to market.

Speaker Change: Content is sold both online and through our global sales team.

Speaker Change: As a company we are focused on acquiring and retaining customers small medium and large in a cohesive and integrated fashion in the E Commerce versus enterprise dividing line has become increasingly blurry.

Speaker Change: Furthermore, the new reporting lines enables us to provide greater line of sight into our non content revenue streams, which before had been embedded and enterprise.

Speaker Change: As we think about our content category since inception, Shutterstock has been and will continue to be a leading global creative platform that connects brands and businesses to high quality content.

Speaker Change: Across a range of brands and content types, our content business grow steadily operates globally at massive scale and generates large amounts of cash.

Our content business generated $737 million in revenue last year, making us one of the largest players in our industry and is powered by the industry's largest content library across content sites.

Speaker Change: We also have the largest network of contributors and multiple channels with which to go to market, including a global sales force and multiple web properties that service a range of customers.

Speaker Change: This past year, we layered generative image creation, and generative editing capabilities into our offerings, thereby making bulk stock content and AI generated content available to our customers.

Paul Hennessy: Over the past several years, the profitability of our content business has allowed us the flexibility and freedom to invest in other areas that offer faster opportunities for growth. These investment opportunities are both adjacent to and highly complementary to content. And now these investments are rapidly transforming into true businesses with multi-billion dollar TAMs and high growth. And going forward, we'll be shining a light on them and providing revenue breakouts across two categories, content, and Data Distribution and Service. This transition in reporting reflects a shift to emphasize our offerings rather than the sales channels we use to go to market; content is sold both online and through our global sales team. As a company, we are focused on acquiring and retaining customers, small, medium, and large, in a cohesive and integrated fashion. And the e-commerce versus enterprise dividing line has become increasingly blurred.

<unk> content business occupies a leadership position within the stock content industry and enjoy significant scale brand recognition and operating leverage.

Speaker Change: However, the stock content industry is a more mature market with a tam that approximates 8 billion growing at 5% to 7%.

Speaker Change: We expect to return to growth at the higher end of this range by leveraging our current strengths in areas like video and <unk>.

Speaker Change: And leading with newer content types like generative image video and treaty.

Speaker Change: We intend to improve our leadership position in stock content by being a tune to customer demand signals for content and meeting their evolving needs.

Speaker Change: Our acquisition of backward last month is a prime example of meeting customer demand for our content.

Speaker Change: With this acquisition, we expanded our editorial library with an additional 30 million images and videos across Canada celebrity Red carpet and live events and added more than 1400 contributors.

Speaker Change: In short, we acquired exclusive trending content marquee customers and a loyal customer base.

Speaker Change: That grid augment the launch of our editorial subscription last year and combined with our slash acquisition positions us well to be a supplier of choice for entertainment content.

Paul Hennessy: Furthermore, the new reporting line enables us to provide a greater line of sight into our non-content revenue stream, which before had been embedded in Enterprise. As we think about our content category, since inception, Shutterstock has been and will continue to be a leading global creative platform that connects brands and businesses to high quality content. Across a range of brands and content types, our content business grows steadily, operates globally at a massive scale, and generates large amounts of cash. Our content business generated $737 million in revenue last year, making us one of the largest players in our industry, and is powered by the industry's largest content library across content types. We also have the largest network of contributors and multiple channels with which to go to market, including a global sales force and multiple web properties that service a range of customers. This past year, we layered generative image creation and generative editing capabilities into our offerings, thereby making both stock content and AI-generated content available to our customers. Shutterstock's content business occupies a leadership position within the stock content industry and enjoys significant scale, brand recognition, and operating leverage.

Speaker Change: And so now having reviewed our core content category I'd like to talk to investors about our emerging growth businesses, which going forward, we will be reporting out as data distribution and services.

Speaker Change: Shutterstock data business occupies a pivotal position on the generative AI value chain.

Speaker Change: Today, we are a preferred provider of training data for generative AI model due to the depth and quality of our ethically sourced content and metadata and the accompanying legal protection, we provide across images video music and <unk>.

Speaker Change: As we look ahead AI and machine learning model training will continue to be a growth opportunity, especially as we look to diversify our revenue base by targeting new buyers.

Speaker Change: On the Hyperscale.

Speaker Change: In fact, we just won our first seven figure contract involving a venture backed startup in the agenda. The AI ecosystem and we feel there are much more such opportunities ahead.

Speaker Change: We will also be expanding our delivery model by leveraging our cloud marketplace partners.

Speaker Change: This will allow us to go from being a wholesale provider of data to the likes of meta and open AI to a retail provider of data to the hundreds of companies. We believe are going to cost us train.

Speaker Change: Their own models.

Speaker Change: To that end, we are in the process of rolling out Shutterstock training data onto data marketplaces of data bricks, Snowflake, Amazon and Google cloud.

Speaker Change: We are just starting to gain traction through this expanded distribution and we are excited about leveraging the large scale sales team and marketing support of these major partners.

Speaker Change: Data is a sizable tam with enormous growth potential.

Speaker Change: <unk> data sales for training generative AI AI model is estimated to be at $9 billion Tam by 2030 with a growth rate of over 20%.

Speaker Change: And we believe we have some of the most unique and differentiated asset in the space to be able to win here as reflected in the growth of our data business, which grew to $104 million.

Speaker Change: In 2023.

Speaker Change: Next let's talk about distribution, which includes our newly acquired gifting platform.

Paul Hennessy: However, the stock content industry is a more mature market, with a TAM that approximates $8 billion and growing at 5-7%. We expect to return to growth at the higher end of this range by leveraging our current strengths in areas like video and 3D and leading with newer content types like generative image, video, and We intend to improve our leadership position in stock content by being attuned to customer demand signals for content and meeting their evolving needs. Our acquisition of Backgrid last month is a prime example of meeting customer demand for content. With this acquisition, we expanded our editorial library with an additional 30 million images and videos across candid celebrity, red carpet, and live events and added more than 1,400 contributors.

Speaker Change: <unk> is a scaled content platform that reaches more than 1 billion daily users.

Speaker Change: Service more than 10 billion pieces of content daily and has more than 20000, API Slash SDK partners.

Speaker Change: But give me platform extends our reach into conversational content, which provides us with an enormous opportunity to build our native advertising business built on contextual signals.

Speaker Change: Native advertising is a $95 billion business in the U S alone growing at 14%.

Speaker Change: <unk> is well positioned to be an industry leader enrollment marketing within real time conversations.

Speaker Change: Furthermore, giffy allows us to expand our API relationships with the major Tech Giants and other API partners and we will be looking to convert these partners into paying customers.

Speaker Change: Yes. He also bolsters our ability to be an end to end solution for advertisers, who can rely on us for both custom content creation.

And broad media distribution.

Speaker Change: In the past few quarters, we've already developed advertising relationships with brands, such as L'oreal Cerave, Hep C's pure leaf tea and Sony plus additional work for two major financial service brands and a leading delivery service.

Speaker Change: These initial tests started small but are already rapidly expanding.

Speaker Change: The potential for budget and scale is tremendous here.

Paul Hennessy: In short, we acquired exclusive trending content, marquee customers, and a loyal customer base. That grade augments the launch of our editorial subscription last year and, combined with our splash acquisition, positions us well to be a supplier of choice for entertainment content. And so now having reviewed our core content category, I'd like to talk to investors about our emerging growth businesses, which, going forward, we will be reporting out as data distribution and service. Shutterstock's data business occupies a pivotal position on the generative AI value chain. Today, we are a preferred provider of training data for generative AI models due to the depth and quality of our ethically sourced content and metadata and the accompanying legal protection we provide across images, video, music, and 3D.

Speaker Change: <unk> has the potential to be hundreds of millions of dollars in revenue based on industry CPM rates of five to $10 and the billions of Viewable impressions on our platform.

Speaker Change: Lastly, give me ties into our data business and the content library contains a rich repository of data and extends the scope of our licensed civil dataset to now include gifts.

Speaker Change: We are very excited about the early momentum of the gift business.

Speaker Change: <unk> breadth of deals already won and the robust pipelines in place and we're looking forward to keeping you informed as we grow the business.

Speaker Change: Next let's talk about services, which includes Shutterstock studios.

Speaker Change: We launched Shutterstock studios in 2020, our studios business is growing rapidly and we see the opportunity to go to grow 25% for the long term.

Speaker Change: Since inception, we have delivered an award winning array of work spanning 32nd spots branded documentaries animated commercials experiential activations episodic series and more.

Speaker Change: We continue to see strong demand and a robust pipeline going into 2024 for customers traditional production and creative needs from the world's biggest brands and creative agencies and.

Paul Hennessy: As we look ahead, AI and machine learning model training will continue to be a growth opportunity, especially as we look to diversify our revenue base by targeting new buyers beyond the hyperscale. In fact, we just won our first seven-figure contract involving a venture-backed startup in the generative AI ecosystem, and we feel there are many more such opportunities ahead. We'll also be expanding our delivery model by leveraging our cloud marketplace partner. This will allow us to go from being a wholesale provider of data to the likes of Meta and OpenAI to a retail provider of data to the hundreds of companies we believe are going to custom train their own models.

Speaker Change: And most recently, we've already won work and see significant growth opportunities in the realm of virtual production and games development.

Speaker Change: Virtual production is a $2 billion market and is a very natural alignment between our turbo squid <unk> assets and studios offering that makes us unique.

Speaker Change: Now with the production power of Shutterstock Studios, we leveraged <unk> and virtual production technology at scale, creating virtual environments from relocation and building fantastical world that are truly immersive.

Speaker Change: This is the same method that was initially pioneered by Hollywood Studios and we are now adapting the same technology for commercial projects worldwide.

Paul Hennessy: To that end, we are in the process of rolling out Shutterstock's training data to data marketplaces like Databricks, Snowflake, Amazon, and Google+. We are just starting to gain traction through this expanded distribution, and we are excited about leveraging the large-scale sales team and marketing support of these major partners. Data is a sizable TAM with enormous growth; licensing data sales for training generative AI models is estimated to be a $9 billion market by 2030 with a growth rate of over 20% And we believe we have some of the most unique and differentiated assets in the state to be able to win here, as reflected in the growth of our data business, which grew to $104 million. Next, let's talk about distribution, which includes our newly acquired Giphy. Giphy is a scaled content platform that reaches more than 1 billion daily users, serves more than 10 billion pieces of content daily, and has more than 20,000 APIs slash SDKs.

Speaker Change: This is completely transforming how our customers are approaching global content and marketing.

Speaker Change: Because of the investments we've made in three D. This become a viable alternative to physical production, creating new paths that are more sustainable efficient and creatively empowered.

Speaker Change: Meanwhile, Meanwhile, game development is a $45 billion market and you cant talk about gaming without talking about <unk> <unk>.

<unk> content is a critical component in gains and turbo squid is a trusted name for that content.

Speaker Change: Moreover companies are looking to enter the gaming space with their original IP.

Speaker Change: Budgets are tight talent is in short supply Shutterstock <unk> asset studios footprint and global talent network gives us the right to play and win in this exciting realm.

Speaker Change: Taken together, our data distribution and the services offerings massively expands our Tam by over 10 X.

Speaker Change: These offerings already account for 16% of Shutterstock total revenue today, and we expect this percentage to grow to 22% of total revenues by 2027.

Speaker Change: We have developed a clear leadership position in content and a massively successful and profitable business and we intend to do the same thing in data distribution and services over the next several years.

Speaker Change: We will be innovating and investing in these businesses setting them up to grow over 20% per annum for the long term.

Paul Hennessy: The Giphy platform extends our reach into conversational content, which provides us with an enormous opportunity to build a native advertising business built on contextual signals. Native Advertising is a $95 billion business in the U.S. alone, growing at 14%, and Giphy is well positioned to be an industry leader in moment marketing within real-time conversation. Furthermore, GIPI allows us to expand our API relationships with the major tech giants and other API partners, and we will be looking to convert these partners into paying customers. Giphy also bolsters our ability to be an end-to-end solution for advertisers who can rely on us for both custom content creation and broad media distribution.

Speaker Change: As a result, we expect Shutterstock 2027 to result in significant reacceleration of our revenue growth to 10% with even faster growth and profitability.

Speaker Change: In conclusion, we're proud of what we accomplished in 2023 and the growth and profit we delivered for our shareholders.

Speaker Change: Across our business. We believe there are tremendous opportunities to accelerate growth and we believe in shutters blocks 2027 long term targets and approach to allocating capital to large fast growing opportunities to accelerate to accelerate the growth of our business.

Speaker Change: As a team we are United in purpose and mission to empower the world to tell their story by bridging the gap between idea and execution and to connect customers to the content they need.

Paul Hennessy: In the past few quarters, we've already developed advertising relationships with brands such as L'Oreal's CeraVe, Pepsi's Pure Leaf Tea, and Sony, plus additional work for two major financial service brands and a leading delivery service. These initial tests started small, but are already rapidly expanding. The potential for budget and scale is tremendous. GIPHY has the potential to be hundreds of millions of dollars in revenue based on industry CPM rates of 5 to 10 dollars and the billions of viewable impressions on our platform. Lastly, GIPI ties into our data business, and the content library contains a rich repository of data and extends the scope of our licensable data set to now include GIP.

Speaker Change: I really like the hand, we have and we're excited for what's in store in 2024 and beyond.

Speaker Change: I'll now turn the call over to Jerry to review, our financial results 2020 for guidance and the financial impact of Shutterstock 2027.

Jerry: Thank you Paul and good morning, everyone.

Jerry: <unk> revenues were up 6% in 2023 $875 million significantly better than expectations. We had at the beginning of the year and at the midpoint of the guidance provided in the third quarter.

Jerry: In the fourth quarter, we grew our enterprise channel excluding data by 12%.

Jerry: A sharp acceleration in inline with our expectations.

Jerry: While our e-commerce revenues were softer than we expected we are stabilizing the business and improving our results and expect to get back to growth during 2024.

Jerry: EBITDA was a record $241 million this year with margins of 27, 5% and annual EBITDA growth of 10%.

Paul Hennessy: We are very excited about the early momentum of the Giffey business, the impressive breadth of deals already won, and the robust pipelines in place. And we're looking forward to keeping you informed as we grow the business. Next, let's talk about services, which include Shutterstock Studios. We launched Shutterstock Studios in 2020. Our studios business is growing rapidly, and we see the opportunity to grow 25% for the long term. Since inception, we have delivered an award-winning array of work, spanning 30-second spots, branded documentaries, animated commercials, experiential activations, episodic series, and more.

Jerry: 2023 is the fourth consecutive year sugar stock has outperformed our EBITDA margin targets.

Jerry: A combination of revenue growth and margin expansion has resulted in EBITDA growth CAGR of 26% over the past four years.

Jerry: In the fourth quarter EBITDA margins were 21% per our expectations.

Jerry: We took advantage of our strong year to date margin performance and made significant investments in sales and marketing, while still delivering 120 basis points of margin expansion for the full year.

Jerry: As I review the P&L line items are net of related depreciation and amortization stock compensation and other expense items necessary to reconcile to our adjusted EBITDA.

Jerry: Gross margins in the fourth quarter declined by three percentage points to 65%.

Jerry: Driven largely by the shifted our business mix, including the acquisition of <unk>.

Jerry: Sales and marketing expense in the fourth quarter was 26% of revenue compared to 21% in the prior year.

Paul Hennessy: We continue to see strong demand and a robust pipeline going into 2024 for customers' traditional production and creative needs from the world's biggest brands and creative agencies. And most recently, we've already won work and see significant growth opportunities in the realm of virtual production and games development. Virtual production is a $2 billion market. And there's a very natural alignment between our TurboSquid 3D assets and studios offering that makes us unique. Now, with the production power of Shutterstock Studios, we leverage 3D and virtual production technology at scale, creating virtual environments from real locations and building fantastical worlds that are truly immersive. This is the same method that was initially pioneered by Hollywood Studios.

Jerry: This increase was the result of expected increases in performance marketing and branding expense.

Jerry: Product development was six 4% of revenue flat to the prior year and G&A expenses were 11% of revenue compared to 13% in the prior year driven by lower salary expenses.

Jerry: Turning to our balance sheet, we had $100 million of cash at the end of the quarter and $30 million drawn on our revolver.

Jerry: Free cash flow was strong at $42 million and EBITDA to free cash flow conversion was 90%.

Jerry: In January we deployed cash for acquisitions acquiring back rate for $20 million.

Jerry: We expect the backward acquisition.

<unk> annual performance bonus to impact our cash in the first quarter in line with historical seasonality.

Jerry: As a testament to the confidence in our future cash flow <unk> increased its quarterly dividend by 10% in January to <unk> 30 per share our fourth year of double digit dividend increases.

Jerry: We also bought back one 6 million shares for $100 million under our share repurchase programs over the past two years, representing 4% of our shares or 6%, including the shares we repurchased from employees for tax withhold to cover.

Jerry: For 2024, we anticipate continuing with our strategy of capital redeployment with excess free cash flow is being used to acquire businesses pay dividends and to repurchase stock.

Jerry: I would now like to turn to 2024 guidance before discussing our long range financial targets.

Jerry: For the full year, we expect our revenues and adjusted EBITDA to be unchanged with $875 million of revenues and $241 million of EBITDA.

Jerry: In 2024, we expect content to continue its solid growth with medium and large sized customers.

Jerry: We also expect stabilization of our business with smaller online customers.

Jerry: Two customer segments are expected to offset each other resulting in content revenues being flat for the full year.

Jerry: Year over year growth rates for content will start the year negative and improved gradually each quarter over the course of the year.

Jerry: In 2024, we expect data distribution and services to be unchanged from 2023, as we set the stage for accelerated growth.

Jerry: Distribution and services will grow rapidly this year, driven by strong new customer acquisition and ongoing momentum.

Jerry: And while demand remains strong and the Tam is large and growing our data offering is undergoing a node transition from an upfront licensing model to one where revenues are recognized ratably over time.

Paul Hennessy: Shutterstock's 3D assets, studio's footprint, and global talent network give us the right to play and win in this exciting realm. Taken together, our data distribution and services offerings massively expand our TAM by over 10%. These offerings already account for 16% of Shutterstock's total revenue today, and we expect this percentage to grow to 22% of total revenue by 2027. We've developed a clear leadership position in content and a massively successful and profitable business, and we intend to do the same thing in data distribution and services over the next several years. We'll be innovating and investing in these businesses, setting them up to grow over 20% per annum for the long term. As a result, we expect Shutterstock 2027 to result in a significant reacceleration of our revenue growth to 10% with even faster growth in profitability.

Jerry: Our EBITDA guidance assumes normal annual levels of sales and marketing expense of 24%.

Jerry: System with the past several years.

Jerry: We expect adjusted earnings per share to be in the range of $4 15.

Jerry: To $4 30.

Jerry: An effective tax rate in the high teens.

Jerry: And capex consistent with prior years.

I would now like to review, our long term financial targets and what you expect from Shutterstock 2027.

Jerry: As Paul discussed we are fundamentally changing the way, we invest in and report out on our business.

Jerry: Q4 will be the last quarter that we breakout revenue channels between E Commerce and enterprise.

Jerry: As we focus on the execution of sugar start 2027, we have an opportunity to dramatically picked up the overall growth rate of our business by making focused investments for growth in data distribution and services, while maintaining our leadership position in content.

Jerry: We expect our content business to return to the high end of industry growth rates of 5% to 7%.

Jerry: We are confident that we can achieve a reacceleration of growth leveraging our existing leading portfolio of content and brands and strong distribution with our world class Global sales team.

Paul Hennessy: In conclusion, we're proud of what we accomplished in 2023 and the growth and profit we delivered for our shareholders. Across our business, we believe there are tremendous opportunities to accelerate growth, and we believe in Shutterstock's 2027 long-term targets and approach to allocating capital to large, fast-growing opportunities to accelerate the growth of our business. As a team, we are united in purpose and mission to empower the world to tell their stories by bridging the gap between idea and execution and connecting customers to the content they need. We really like the hand we have, and we're excited for what's in store in 2024 and beyond. I'll now turn the call over to Jared to review our financial results, 2024 guidance, and the financial impact of Shutterstock. Thank you, Paul, and good morning, everyone.

Jerry: We also plan to capitalize on our leadership position in content types beyond image, such as video <unk> and music.

Jerry: These content types are growing much faster at 12% per year.

Jerry: Have higher <unk>.

Jerry: And now comprise 35% of our content business up from 25% just a few years ago.

Jerry: We are targeting 22% growth in data distribution and services.

Jerry: Our data distribution and services offerings are already growing rapidly with exciting demand signals.

Jerry: They have proven their ability to scale and become meaningful businesses.

Jerry: These fast growing businesses will go from 16% of revenues today to 22% of revenues by 2027.

Jerry: The mix shift will also have the effect of increasing our company growth rate by 300 basis points to 10% annually.

Jerry: By the end of 2024, you will have made the requisite investments and be well positioned to capitalize on the massive tam opportunity in these businesses.

Jerry: Our fastest growth businesses and data distribution and services are also some of the most profitable creating a tailwind for margins.

Jerry: For example data benefits from 20 to 30 points of lower SG&A costs.

Jerry: And distribution benefits from 10 to 20 points of look higher gross margins than our corporate average.

Jerry: Longer term, we expect EBITDA margins to improve from 27, 5% today to 30% by 2027, driven by a 1% to 2% improvement in gross margin due to the business mix change towards data distribution and services and a 1% to 2% improvement in operating.

Jared Yates: Shutterstock's revenues were up 6% in 2023 to $875 million, significantly better than expectations we had at the beginning of the year and at the midpoint of the guidance provided in the third quarter. In the fourth quarter, we grew our enterprise channel, excluding data, by 12%, a sharp acceleration and in line with our expectations. While our e-commerce revenues were softer than we expected, we are stabilizing the business and improving our results, and we expect to get back to growth during 2020. EBITDA was a record $241 million this year, with margins of 27.5% and annual EBITDA growth of 10%.

Jerry: Leverage through reduced SG&A and R&D costs.

Jerry: Achievement of our long range targets will result will result in $1 2 billion of revenue in 2027 and revenue growth of 10% per annum.

Jerry: Combining double digit revenue growth with expanding margins will result in even faster EBITDA growth of 13% with $350 million of EBITDA by 2027.

Jerry: Based on our strong free cash flow margins, we expect to generate over $800 million of cash over the next four years cumulatively.

Jerry: Our capital allocation will be consistent with past practice deploying 50% of free cash flow to M&A and organic investment in our business with the remainder split between dividends and share repurchases.

Jerry: We have consistently been disciplined acquirers and M&A will likely be a key component of our achievement of Shutterstock 2027.

Jerry: We are pleased to be able to introduce long term targets as part of charged off 2027.

Jared Yates: 2023 is the fourth consecutive year Shutterstock has outperformed our EBITDA margin target. The combination of revenue growth and margin expansion has resulted in an EBITDA growth taker of 26% over the past four years. In the fourth quarter, EBITDA margins were 21% per our expectations. We took advantage of our strong year to date margin performance and made significant investments in sales and marketing, while still delivering 120 basis points of margin expansion for the full year. As I review the P&L, line items are net of related depreciation and amortization, stock compensation, and other expense items necessary to reconcile to our adjusted EBT. Gross margins in the fourth quarter declined by 3 percentage points to 65 percent, driven largely by the shift in our business mix, including the acquisition of gifts.

Jerry: We believe this framework that will allow investors to better understand our long term revenue growth opportunity.

Jerry: More clearly see the business mix shift towards the large SaaS growth terms and provide clarity into our plans for margin expansion and capital allocation.

Speaker Change: And with that operator, we will open the line for questions. Thank you.

Speaker Change: Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.

Speaker Change: Question has been answered you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Speaker Change: Our first question comes from Bernie Mcternan with Needham <unk> Company. Your line is open.

Speaker Change: Great.

Bernie Mcternan: Good morning, Thanks for taking the questions maybe just to start we'd love to just get your level of conviction on the 2027 targets and what the macro environments assumed.

Bernie Mcternan: And really one content revenue coming back to growth and really the client base of computer vision deals as you mentioned earlier going down market and more retail focus just wanted to get some broader macro assumptions that underpin the 27 outlook.

Speaker Change: Great. Thanks Bernie.

Speaker Change: I'll take that one.

Speaker Change: I'll start with the macro.

Speaker Change: We've got the same crystal ball that you all have so we've we've made the assumption that we're going to be operating in a market.

Speaker Change: Not tremendously different than the market that we're operating in today, because it's just very very difficult to project.

Speaker Change: What gives us the conviction about delivering.

Speaker Change: Big numbers and a return to growth categorically for our business.

Speaker Change: Is that we know how to do that we've done it with our core content business.

Speaker Change: And when we when we lean into businesses they tend to scale nicely and we're going to be we're going to be doing that again with our with our new product offerings of <unk>.

Speaker Change: Data distribution and services and the truth is we wanted to shine a light on on these businesses. So everyone can understand our capital allocation the growth opportunities and the Tam expansion.

Speaker Change: And when you look at.

Speaker Change: Expanding our core content Tam by over 10 X. We believe we're going to get a share of that market and so we're highly confident.

Speaker Change: In the numbers that we put forward.

Speaker Change: Bernie the one thing I would add is on the content side of things. If you look at our historical 4% growth CAGR expanding to 7% respectively about a third of our revenues is now <unk> video and music and non image revenue types that piece of the content business. That's a third of the revenues is growing them.

Speaker Change: Digits, it's growing at about 12% and so with a third of your business is becoming a larger and larger piece of the pie. It does allow you to expand the growth of your business and so we look forward to that mix shift benefiting our content business prospectively over the next several years.

Speaker Change: Understood and just one follow up mentioned.

Speaker Change: Data moving more towards those sales moving more towards marketplaces and more retail in nature.

Speaker Change: So just to Peel back the onion on that a little bit more just how active are those marketplaces currently how does the margin opportunity different.

Speaker Change: And is this a 'twenty four event or is this kind of a longer term.

Speaker Change: <unk> funnel.

Speaker Change: So Bernie this is 24 event. This is something that has been in the works in an area of investment for us for some period of time.

Speaker Change: And we strongly believe that we're effectively going to where the customers are our customers don't naturally think of shutterstock as a place to go for computer vision training data on train their generative AI models, but they do typically go to a data breaks or snowflake or an AWS or gcs.

Speaker Change: There to acquire training data. This is also the natural compute environment for these customers.

These platforms also as you would understand have tremendous brand recognition as well as sales capabilities that we expect to leverage. So we're we're excited about that we don't think it fundamentally changes the economic value proposition or the margin profile.

Speaker Change: The way these distribution channels make money is not by taking a cut of the data cells.

Speaker Change: Through the compute and so theyre looking forward to having our data on their ecosystems. So they can drive the issue of compute in the cloud.

Speaker Change: Got it thanks Dara Thanks, Paul.

Speaker Change: Okay, and then for our next question.

Speaker Change: Our next question comes from Youssef Squali with true Securities. Your line is open.

Youssef Squali: Great. Thank you very much.

Youssef Squali: So just a couple of questions, maybe starting with the E Commerce revenue down 16% and there is obviously a thesis out there that AI platforms, maybe structurally hurting that business can you talk about why you don't believe that to be the case and how do you see that business kind of progressing.

Youssef Squali: Through throughout 2024, and I think you just said earlier that you are going to stop reporting that is.

Youssef Squali: Our segment.

Youssef Squali: And it's going to just be part of our content.

Youssef Squali: <unk> should be looking at to see that that business is indeed, improving if youre going to be removing that TPI.

Youssef Squali: Reported kpis.

Youssef Squali: Great.

Speaker Change: Thanks, you guys have on the on the AI question.

Speaker Change:

Here's our view, we're dealing with the largest buyers of content in the world.

Speaker Change: On a daily basis, and we're in discussions with them on a daily basis for their creative needs.

Speaker Change: While much of the world is experimenting and playing with and testing agenda of AI creation.

We are not seeing our customers at any level of scale.

Speaker Change: With a desire to buy purchase and utilize.

Speaker Change: AI generate generated images or video or <unk>.

Speaker Change: To this point.

Speaker Change: So we believe that the any of the softness that we've seen.

Speaker Change: In our in our own E Commerce business as we mentioned in our prepared remarks much is related to I think the free trial offering in our business running its course, and it's really no longer constructive to our business and as we've articulated we're going to be moving away.

Speaker Change: From that and we will find new and other interesting ways to promote our business to our smallest then maybe less frequent customers, but shutterstock has built a business in offering edge products and services to customers that needs. It created a need to create some kind of advertising.

Speaker Change: Our other use and our bonafide customers and we're going to appeal to those customers that are that are actually retentive and have a desire to purchase content.

Speaker Change: Understood. Thank you and then maybe one more.

Speaker Change: The <unk> opportunity can you talk a little bit about that and the partnership with India. I think you talked about it being in the 2024 event.

Speaker Change: Would you expect it to be.

Speaker Change: Early in 2024 or is this kind of by end of year and how do you how should we be thinking about the revenue opportunity or this one.

Speaker Change: Also use it as you know this is something we've been working on for some time. This has been an area of investment are trading of <unk> generative model as a different.

Speaker Change: Likely a more challenging endeavor than the limited generation model and so there's been a lot of work taking place behind the scenes. We're excited to bring this to market.

Speaker Change: We already have been working with alpha customers on the.

Speaker Change: The large customer side.

Speaker Change: Interest in this technology, there is the potential to significantly lower cost of content creation across a range of use cases and opportunities.

Speaker Change: <unk> gaming to our film development.

Speaker Change: And so there is a lot of interest and there are not products in market that really are trained with the level of clean data that our product will be will be traded with we do anticipate having this out in the early part of the year. This is not a SEC.

Speaker Change: Half of the year events obviously.

Speaker Change: This is our first half and maybe even the first quarter, our type of rollout and we're already in.

Speaker Change: Sensitive testing with alpha customers. So we are quite excited about this opportunity. This is not necessarily going to be a retail opportunity first it's going to be an API offering for some of the most sophisticated large customers in the world, but we're quite excited about this opportunity here.

Speaker Change: Alright, Thats very helpful. Thank you Brook.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Andrew Boone with JMP Securities. Your line is open.

Andrew M. Boone: Good morning, and thanks, so much for taking my questions.

Andrew M. Boone: I wanted to ask about <unk>, and where that sits today as well as how this factors into your new kind of a 2000 2017 framework and what we should be.

Speaker Change: Completing there.

Andrew M. Boone: And then there are press reports that <unk>, just signed a $60 million of your deal for their data can you just step back and talk big picture about pricing and how you guys are thinking about pricing your deals with respect to that $60 million of your figure that's out there. How do you guys think about your data sales. Thanks, so much.

Speaker Change: Yeah, I'll I'll take <unk> and Jared can take.

Speaker Change: Data.

Speaker Change: I'm getting to get the players are.

Speaker Change: A large role in the in the data distribution and services model going going forward. We are we've been since acquisition.

Speaker Change: In the middle of last year, We then dusting off the AD platform, we've been going to market, both with AD sales and working with our API partners or value exchange.

Speaker Change: And as you heard in my prepared remarks, given the amount of traffic and.

Speaker Change: What I would call modest CPM rates. We believe this business is in the hundreds of millions of dollars. Therefore plays.

Speaker Change: An important role in the growth of our <unk>.

Speaker Change: Our new area called data distribution services. So give me give me is critical to that to that element in and we're we're super excited with the momentum and the performance thus far.

Speaker Change: I would just add on to that by saying that <unk> is already growing.

Speaker Change: <unk> already acquiring clients were very excited about the potential here and give you also plays into data as Paul mentioned previously.

Speaker Change: Hearing that <unk> is looking at a $60 million deal annually for data is not entirely surprising.

Speaker Change: There is a broad realization.

Speaker Change: That training generative models on data that is scrape that is not paid for where content creators are not remunerated for their works is not a sustainable long term business model.

Speaker Change: There is a case pending with the New York Times that I think people are eagerly awaiting the outcome of and I think while it is possible the script data and use it in our model ultimately if.

Speaker Change: Enterprise customers are going to want to use the works of that model, they're going to want to know what ingredients are used in the training of that model and so that is going to benefit our business and that is benefiting our business. There are companies that are taking shortcuts today.

Speaker Change: We're able to train our models, but I think what they're going to find is if youre going to want to actually commercialize that model you are going to need to convince your any customers that the training data set that was used was rightfully acquired.

Speaker Change: And so we believe that Thats, a significant tailwind for our business.

Speaker Change: As Paul spoke about we think this is.

Speaker Change: Our $9 billion Tam with very significant 20% type of growth potential and we are just in the early stages of gearing up this business for growth.

Speaker Change: Bringing it to the cloud ecosystems for distribution, adding to our business development team in order to get our data out there and today, we are working with many of the Hyperscale <unk>.

Speaker Change: But also newly extending our reach into smaller companies and the generative ecosystem. Many of which have received billions of dollars of venture capital backed financing. So we're excited to sell and expand into the data ecosystem.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Greg <unk> with Bank of America. Your line is open.

Greg: Hi, Thank you for this indication.

Greg: To be honest.

Greg: Can you you mentioned that you've been expanding yard delivery model by leveraging cloud market.

Greg: Rich you could go from like wholesale provider like video providers can you throw some light on the pricing.

Greg: And the Canadian consumers and it can be like your competitor on conflict simulated data. So what kind of competition are you seeing the data market.

Greg: Yes.

Greg: Institutions flip back.

Rich: Thank you Brian.

Rich: Thanks.

Speaker Change: Shortened and then thank you so much for your question.

Speaker Change: As you would expect the way we price our data is effectively depending on the volume of data consumed. So there is a volume based pricing where the mortgage purchase.

The lower the unit price of that data there is differential pricing for images as compared to videos music and three D.

Speaker Change: And ultimately these deals are fairly individually negotiated depending on the use cases of the customer some customers would like access to this data for generative model trading for a number of years. Other customers are looking for a shorter period of time, and so I think that impacts the pricing as well.

Speaker Change: Ultimately as we think about this we think that there are tremendous opportunities here in order to grow and.

Speaker Change: These cloud ecosystems are going to the place where that where that distribution takes place.

Speaker Change: Okay.

Speaker Change: Thank you once again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.

Speaker Change: And I'm not showing any further questions pharma, let's turn the call back over to Paul for any closing remarks.

Paul Hennessy: Thank you.

Paul Hennessy: We want to express our gratitude to our customers contributors and.

Paul Hennessy: Of course, our employees. Thank you all for joining us.

Paul Hennessy: That ends our call for today, ladies and gentlemen. This does conclude today's presentation. You may now disconnect and have a wonderful day.

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