Q2 2024 Shutterstock Inc Earnings Call

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Speaker Change: Good day, and thank you for standing by. Welcome to the Q2 2024 Shutterstock Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker Change: Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1 1 on your telephone and wait for your name to be announced.

Rick Powell: To withdraw your question, please press star 1 once again. I would now like to hand the conference over to your speaker today, Rick Powell, SVP Finance and Investor Relations.

Rick Powell: Thank you Josh. Good morning everyone and thank you for joining us for Shutterstock's second quarter 2024 earnings call.

Speaker Change: Joining us today is Paul Hennessy, Shutterstock's Chief Executive Officer, and Jarrod Yahes, Shutterstock's Chief Financial Officer.

Speaker Change: Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, the long-term effects of investments in our business.

Speaker Change: The Future Success and Financial Impact of New and Existing Product Offerings

Unnamed: 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.

Speaker Change: 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.

Speaker Change: The actual results or trends could differ materially from our forecast.

Speaker Change: For more information, please refer to today's press release and the presentation material discussing our data business, which we have posted to our Investor Relations website.

Speaker Change: Please also refer to the reports we filed with the SEC from time to time, including the risk factors discussed in our most recently filed Form 10-K , for discussions of important risk factors that could cause actual results to differ materially for any forward-looking statements we may make on the call.

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

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

Rick: Thanks Rick. Good morning everyone, and thank you for joining us today.

Speaker Change: Thanks, Rick. Good morning, everyone, and thank you for joining us today.

Speaker Change: On our last earnings call, I reported that we had signed a definitive agreement to acquire Envato, a leading provider of digital creative assets and templates. As you may have seen, this transaction was completed successfully on July 22nd.

Speaker Change: We're truly excited about welcoming the experienced Envato team into the Shutterstock family, and also excited about the impact of this acquisition on our content business.

Speaker Change: The addition of Envato on top of Shutterstock's 2024 performance to date puts us well on our way to achieving the long-term targets that I laid out back in February for Shutterstock to achieve $1.2 billion of revenue and $350 million of EBITDA by 2027.

Speaker Change: Now let's get into the second quarter results.

Speaker Change: I'm pleased to report that the overall results in the second quarter were strong, and when combined with our first quarter results, make for a strong first half of 2024.

Paul Hennessy: In the second quarter, Shutterstock delivered revenue of $220 million, representing growth of 5.4%, and adjusted EBITDA of $62 million, with margins of 28%, solidly exceeding our expectations for both revenue and profit for the quarter. Our data, distribution, and services business had another quarter of hyper growth. By contrast, and consistent with the recent past, new customer acquisition in small and medium-sized customers was soft and did not experience the rebound we would have hoped for.

Speaker Change: In the second quarter, Shutterstock delivered revenue of $220 million, representing growth of 5.4%, and adjusted EBITDA of $62 million, with margins of 28%, solidly exceeding our expectations for both revenue and profit for the quarter.

Speaker Change: Our data distribution and services business had another quarter of hyper growth, and our content business showed a slight improvement, but not to the degree that we had hoped.

Speaker Change: Content revenue was $170 million for the quarter, a decline of 9% versus the prior year.

Paul Hennessy: Over the past several quarters, we've made strides from an execution perspective to improve the performance of content, including improving marketing execution around SEO, normalizing levels of SEM spend, as well as driving improvements in funnel conversion, and we remain focused on improving the performance of this business. When combined with our existing business, Envato is expected to have an immediate positive impact on both the sustainability and growth potential of content, with subscriber counts more than doubling to 1.15 million subscribers.

Speaker Change: Over the past several quarters, we've made strides from an execution perspective to improve the performance of content, including improving marketing execution around SEO.

Speaker Change: normalizing levels of SEM spend, as well as driving improvements in funnel conversion, and we remain focused on improving the performance of this business.

Paul Hennessy: Subscription revenue as a percent of total content revenue increased from 48% to 55%. Commercially available API access will begin in September for a range of corporate beta customers that have expressed an interest. Users of the API will be able to generate 3D models using both text prompts and images, which we believe is a game-changing capability.

Speaker Change: Subscription revenue as a percent of total content revenue, increasing from 48% to 55%.

Speaker Change: In addition to Gen3D, we also recently entered into a partnership with Databricks to offer Shutterstock Image AI.

Speaker Change: Image AI is built using the advanced capabilities of Databricks Mosaic AI and trained exclusively using Shutterstock's world-class image repository.

Speaker Change: Image AI generates customized, high-fidelity, trusted images that can be readily tailored to specific business needs with fine-tuning.

Paul Hennessy: This enables brands to combine the power of AI-generated content with their own libraries, enabling them to truly personalize that content. Shutterstock was also recently named Databricks Data Provider Partner of the Year, and we're very proud of this recognition. I would now like to turn to data distribution and services, which experienced hypergrowth of 129% in the second quarter. With respect to data, this business continues to surprise us to the upside. In terms of demand, we are continuing to sign a small number of larger deals each quarter, with total contract values between $25 million and $50 million.

Speaker Change: This enables brands to combine the power of AI-generated content with their own libraries, enabling them to truly personalize that content. Shutterstock was also recently named Databricks Data Provider Partner of the Year and we're very proud of this recognition.

Speaker Change: I would now like to turn to data distribution and services, which experienced hyper-growth of 129% in the second quarter.

Speaker Change: On a trailing 12-month basis, data distribution in services is up 160%.

Speaker Change: With respect to data, this business continues to surprise us to the upside. In terms of demand, we are continuing to sign a small number of larger deals each quarter with total contract values between $25 million and $50 million.

Speaker Change: In the second quarter, we signed a multi-year agreement with Microsoft to provide high-quality multi-modal training data for their AI projects.

Paul Hennessy: We also signed multi-year agreements with Runway and REC. Her thought leadership in this space will be a huge benefit to us as we continue to navigate this fast-paced and quickly evolving environment. Shutterstock is proud to be at the epicenter of the exciting innovation happening in generative AI and will continue to look at the multiple ways of maximizing the inherent value of our data to open up new and innovative revenue. Additionally, he has a strong history of building and scaling high-growth businesses. Leveraging the power of our 3D content and virtual production pipeline, we are delivering immersive storytelling on a global scale, putting ourselves in a position to continually return capital to shareholders.

Speaker Change: Both of these companies are highly innovative AI companies with extremely exciting futures and are backed by world-class venture and strategic corporates.

Speaker Change: I'm also extremely pleased to announce the recent appointment of Jamie Cheban to our Board of Directors.

Jamie Cheban: Jamie has been researching AI for decades, starting with a PhD in AI from MIT, and last year was recognized on Time Magazine's list of top 100 most influential people in AI.

Jamie Cheban: She is currently Chief Scientist and Technical Fellow at Microsoft. Her thought leadership in this space will be a huge benefit to us as we continue to navigate this fast-paced and quickly evolving environment.

Speaker Change: Shutterstock is proud to be at the epicenter of the exciting innovation happening in generative AI and will continue to look at the multiple ways for maximizing the inherent value of our data to open up new and innovative revenue streams.

Speaker Change: Moving on to distribution, at the center of distribution is Giphy, a scaled content platform that sits at the intersection of personal communications and shared moments revolving around events and emotions.

Jamie Cheban: It enjoys massive audience reach and generates billions of monthly impressions through over 14,000 API partners.

Jamie Cheban: All of this translates into a unique and exciting opportunity for brands.

Jamie Cheban: Traffic and impressions on the site continue their strong momentum. Media served on Giphy continues to trend upwards with the second quarter seeing annual growth of over 25 percent.

Jamie Cheban: In order to scale this business, we continue to aggressively hire salespeople.

Speaker Change: To oversee this expansion, we're delighted to announce that we have hired a Chief Growth Officer for Giphy, Kevin Hines.

Speaker Change: Kevin spent 13 years at Meta and was their Head of Agency Relationships. He brings with him a wealth of expertise in media sales encompassing strategic partnership development, revenue generation, and market penetration.

Speaker Change: Additionally, he has a strong history of building and scaling high-growth businesses.

Speaker Change: We look forward to welcoming Kevin.

Speaker Change: In order to help investors better understand our traction with Giphy, we wanted to provide an update on the number of active paying Giphy customers, including both API customers and brand advertisers.

Speaker Change: Beyond Meta, this number has increased from 5 at the start of the year to 65 in the second quarter, and we expect to bring many more customers into the fold as we grow the team.

Speaker Change: Finally, in terms of Q2 performance, our services business, which includes our cutting-edge global creative and production studio solutions, achieved 50% growth in the quarter.

Speaker Change: With studios, our 3D and immersive vertical continues to scale in leaps and bounds.

Speaker Change: We provided full mobile game development teams covering all art, engineering, music, sound effects, and VFX for the game. Our collaboration will continue to thrive with more exciting games yet to be announced.

Speaker Change: We're leveraging our 3D experience and Turbosquid 3D content to deliver immersive experiences.

Speaker Change: Our success is showing that these best-in-class 3D and creative services are the key in building a next-generation global production offering.

Speaker Change: Our strategy of investing in the large and rapid-growing TAMs in data distribution and services is paying off.

Speaker Change: We remain enthusiastic about content with the addition of value-packed unlimited subscription and huge progress around launching innovative generative AI capabilities with partners like NVIDIA and Databricks.

Speaker Change: And while we work to invest and accelerate growth in new and exciting areas, we are driving a highly profitable and cash flow generative business, putting ourselves in a position to continually return capital to shareholders.

Speaker Change: With that, I'll hand the call over to Jarrod.

Jarrod Yahes: Thank you, Paul, and good morning, everyone.

Speaker Change: I'd first like to start by welcoming Rick Powell to the Shutterstock team. Rick started in June as SVP Finance and Investor Relations, having held the same position at Shake Shack in his previous role.

Rik Powell: Prior to that, Rik spent 16 years at Getty Images, with his final position being CFO, which he held for three years. Shutterstock's revenue for the second quarter was $220 million, up 5.4% year-over-year, solidly exceeding our expectations. Content revenue was $170 million in the second quarter, down 9% versus the prior year. As Paul noted, all data distribution services businesses are in rapid growth and investment mode, with the focus on hiring sales talent across each of these businesses.

Rick Powell: Prior to that, Rick spent 16 years at Getty Images, with his final position being CFO , which he held for three years. Great to have you on the team, Rick.

Speaker Change: Also, I'd like to thank Chris Suh, who has transitioned his IR responsibilities so that he can dedicate his focus to corporate development.

Speaker Change: Chris has done an outstanding job running both IR and M&A and we will we are certain he will continue his track record of success at Shutterstock.

Speaker Change: Now, on to the second quarter financial performance.

Speaker Change: Content revenue was $170 million in the second quarter, down 9% versus the prior year.

Speaker Change: While the second quarter was a slight improvement compared to the first quarter, as Paul mentioned, performance was softer than we expected.

Speaker Change: Consistent with our prior comments, we expect gradual improvement in our content business in the second half of the year. However, getting back to year-over-year growth is taking longer than we had expected.

Paul Hennessy: We have factored our reduced expectations for content growth into our guidance.

Paul Hennessy: Data distribution and services drove impressive growth, with second quarter revenue of 50 million dollars, up 129 percent versus the prior year, and an increase of 24 percent sequentially.

Speaker Change: As I review the P&L, please note that line items are net of related depreciation and amortization, stock compensation, and other expense items necessary to reconcile to adjusted EBITDA.

Rik Powell: In the second quarter, sales and marketing was 22% of revenue compared to 25% in the first quarter and flat with the prior year. This is a key part of our strategy and adds an unlimited subscription product and a complementary customer base. As I mentioned last quarter, Envato is growing in line with industry growth rates of mid-single digits and maintains strong profitability of 20% adjusted EBITDA margins, with opportunities to expand margins as we scale the business. Post-acquisition, we have $280 million drawn on the facility. Given the extremely low cost of debt at 6.7%, we are currently not planning on paying down debt, and the facility has minimal amortization requirements.

Speaker Change: In the second quarter, sales and marketing was 22% of revenue compared to 25% in the first quarter and flat with the prior year.

Speaker Change: The reduction when compared to the first quarter was driven by elevated brand spend in the first quarter.

Speaker Change: Product development was 6% of revenue compared to 7% in the second quarter of 2023, reflecting prudent cost management and ongoing integration of our acquisitions.

Speaker Change: G&A expenses were 12% of revenue compared to 13% in the second quarter.

Speaker Change: Note that Q2 G&A expenses included $3.1 million of Envato transaction costs associated with legal and M&A fees.

Speaker Change: Adjusted EBITDA for the second quarter was an extremely solid $62 million with strong adjusted EBITDA margins of 28%.

Speaker Change: Pre-cash flow conversion was also strong in the second quarter at 36 percent.

Speaker Change: In line with our buyback plans, we executed 20 million of share repurchases in the second quarter.

Speaker Change: Despite the payment of our quarterly dividend and executing 20 million of share repurchases, we saw our cash balance increase sequentially to 75 million in the quarter.

Speaker Change: We are pleased to have closed the previously announced acquisition of Envato on July 22nd.

Speaker Change: This is a key part of our strategy and adds an unlimited subscription product and a complimentary customer base.

Speaker Change: As I mentioned last quarter, Envato is growing in line with industry growth rates of mid-single digits and maintains strong profitability of 20% adjusted EBITDA margins, with opportunities to expand margins as we scale the business.

Speaker Change: In connection with the acquisition of Envato, we put in place an unsecured $375 million credit facility consisting of a $125 million term loan and a $250 million revolver.

Speaker Change: Post-acquisition, we have $280 million drawn on the facility.

Speaker Change: Given the extremely low cost of debt at 6.7%, we are currently not planning on paying down debt and the facility has minimal amortization requirements.

Jarrod Yahes: Based on our strong balance sheet and flexible capital structure, Shutterstock has tremendous optionality around deploying capital for share repurchases, investments in organic growth, or tuck-in M&A. Before turning to guidance, I'd like to spend a minute on our data business, and we'll reference supplemental materials found on the Investor Relations section of our website. As this nascent industry evolves rapidly, data continues to be extremely difficult to forecast, with significant volatility in revenues and bookings from quarter to quarter.

Speaker Change: Based on our strong balance sheet and flexible capital structure, Shutterstock has tremendous optionality around deploying capital for share repurchases, investments in organic growth, or tuck-in M&A.

Speaker Change: Before turning to guidance, I'd like to spend a minute on our data business, and we'll reference supplemental materials found in the Investor Relations section of our website.

Speaker Change: As this nascent industry evolves rapidly, data continues to be extremely difficult to forecast with significant volatility in revenues and bookings from quarter to quarter.

Jarrod Yahes: We are responding to the needs of our customers with various engagement models that can be split into three primary categories. Customers large and small have engaged with Shutterstock in this way. Accounting for these deals can vary depending on the structure, whereas others have revenues recognized more rapidly over the lifetime of the contract. We have a mix of these contract types and, ultimately, will be responsive and flexible to the business needs of our customers when contracting.

Speaker Change: We are responding to the needs of our customers with various engagement models that can be split into three primary categories.

Speaker Change: The first category is term license deals, typically 3 to 5 years in length, where customers have broad-based use of our data for the express purpose of AI and ML model training.

Speaker Change: Customers large and small have engaged with Shutterstock in this manner.

Speaker Change: Accounting for these deals can vary depending on the structure.

Speaker Change: Some of these deals see most of the contract value being recognized upon transfer of the IP over the course of a few initial quarters.

Speaker Change: Whereas others have revenues recognized more radibly over the lifetime of the contract.

Speaker Change: We have a mix of these contract types and ultimately will be responsive and flexible to the business needs of our customers when contracting.

Jarrod Yahes: In the second category, we've seen an uptick in demand for large corpus deals with tier one VC-backed generative AI companies. In highly selective engagements, we've entered into partnerships where we've taken half cash and half equity as consideration. We are entering into these partnerships alongside world-class companies with well-known financial backers. Lastly, we have established several partnerships where we do not receive any upfront revenue from licensing but have an exciting revenue share opportunity over time through the creation of a joint product.

Speaker Change: In the second category, we've seen an uptick in demand for large corpus deals with Tier 1 VC-backed generative AI companies.

Speaker Change: In highly selective engagements, we've entered into partnerships where we've taken half cash and half equity as consideration.

Speaker Change: We are entering into these partnerships alongside world-class companies with well-known financial backers.

Speaker Change: And this structure provides us an opportunity for upside, while also ensuring that our customers receive the massive scale of data that they need, when they need it.

Speaker Change: Lastly, we have established several partnerships where we do not receive any upfront revenue from licensing, but have an exciting revenue share opportunity over time in the creation of a joint product.

Speaker Change: This is similar to what we're doing alongside NVIDIA in generative 3D and with Databricks with Image AI.

Jarrod Yahes: Our contributor community is compensated in each and every one of these structures in line with our ethical approach to licensing data for generative AI. We expect that over time, pricing, packaging, and deal structures for generative AI training data will continue to evolve, and that Shutterstock will be commercial and innovative in order to meet the expanding needs of customers while driving value for our shareholders.

Speaker Change: Our contributor community is compensated in each and every one of these structures in line with our ethical approach to licensing data for generative AI.

Speaker Change: We expect that over time, pricing, packaging, and deal structures for generative AI training data will continue to evolve.

Speaker Change: and that Shutterstock will be commercial and innovative in order to meet the expanding needs of customers while driving value for our shareholders.

Jarrod Yahes: Given the 2024 performance to date and the expectations for the remainder of the year, we are raising the lower end of our revenue guidance to 6% to 7% growth, with revenues of $927 million to $936 million, based on stronger than expected data distribution and services performance and weaker than expected content. We expect those businesses for the full year to be up 27% and down 8%, respectively, excluding any contribution from Envato. We expect content revenues to continue to improve each quarter in terms of year-over-year growth.

Speaker Change: Now turning to guidance.

Speaker Change: Given the 2024 performance to date and the expectations for the remainder of the year, we are raising the lower end of our revenue guidance to 6% to 7% growth, with revenues of $927 million to $936 million.

Speaker Change: Based on stronger-than-expected data distribution and services performance, and weaker-than-expected content, we expect those businesses for the full year to be up 27% and down 8% respectively, excluding any contribution from Envato.

Speaker Change: We expect content revenues to continue to improve each quarter in terms of year-over-year growth.

Jarrod Yahes: And we expect data distribution and services revenues to continue to be strong but down in the second half of the year versus the exceptional first half of the year. Envato is expected to contribute $75 million to 2024 revenues and will be reported in content revenues beginning in the third quarter. As a result, content will be up 2.5% for the full year, inclusive of the contribution of Envato on a reported basis. Adjusted net income per diluted share guidance is maintained at $4.18 to $4.32 per share, representing a nine times adjusted P.E.

Speaker Change: And we expect data distribution and services revenues to continue to be strong but down in the second half of the year versus the exceptional first half of the year.

Speaker Change: Envato is expected to contribute $75 million to 2024 revenues and will be reported in content revenues beginning in the third quarter.

Speaker Change: As a result, content will be up 2.5% for the full year inclusive of the contribution of Envato on a reported basis.

Speaker Change: Adjusted net income per diluted share guidance is maintained at $4.18 to $4.32 per share, representing a nine times adjusted P.E. multiple on our current share price.

Jarrod Yahes: multiple on our current share price. Adjusted EBITDA is maintained at $245 million to $248 million. Adjusted EBITDA is also burdened by $7.5 million of one-time M&A costs, of which half were in Q2 and the other half are expected to be in Q3.

Speaker Change: Adjusted EBITDA is maintained at $245 million to $248 million.

Speaker Change: Adjusted EBITDA is also burdened by 7.5 million of one-time M&A costs of which half were in Q2 and the other half were expected to be in Q3.

Paul Hennessy: In summary, we are focused on driving towards our Shutterstock 2027 targets of $1.2 billion in revenues and $350 million in EBITDA. Our profitability and free cash flow year to date are strong, and we expect an even stronger second half of the year. We are stepping up investments in sales talent to continue our accelerated growth within data distribution and services. And in content, the acquisition of Envato, combined with our Gen AI innovations, will ultimately drive long-term sustainable growth for Shutterstock. And with that, Operator, we'll open the line for questions. Thank you.

Speaker Change: In summary, we are focused on driving towards our Shutterstock 2027 targets of $1.2 billion of revenues and $350 million of EBITDA.

Speaker Change: Our profitability and free cash flow year-to-date is strong and we expect an even stronger second half of the year.

Speaker Change: We are stepping up investments in sales talent to continue our accelerated growth within data distribution and services.

Speaker Change: And in content, the acquisition of Envato combined with our GenAI innovations will ultimately drive long-term sustainable growth for Shutterstock.

Operator: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for questions. Our first question comes from Andrew Boone with JMP Securities. He may proceed.

Speaker Change: And with that, Operator, we'll open the line for questions.

Speaker Change: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for questions.

Speaker Change: Our first question comes from Andrew Boone with JMP Securities. He may proceed.

Andrew Boone: Good morning, and thanks so much for taking my questions. Jarrod, I wanted to ask about the DDS business in the back half. You talked a little bit about IP deals that are recurring versus ones that are more one-time in nature. Can you just help explain the step down that you're expecting for the back half of the year? And then secondly, as we think about these deals, and we're kind of coming up on two years of deals being issued, can you talk about the recurring nature and what you guys are building into contracts to ensure that when there is a renewal, you guys are seeing revenue continue? Sure, Andrew.

Andrew Boone: Good morning and thanks so much for taking my questions. Jarrod, I wanted to ask about the DDS business in the back half. You talked a little bit about

Andrew Boone: IP deals that are recurring versus ones that are more one-time in nature. Can you just help explain the step-down that you're expecting for the back half of the year?

Speaker Change: And then secondly, as we think about these deals, and we're kind of coming up on two years of deals being issued, can you talk about the recurring nature and what you guys are building into contracts to ensure that when there is a renewal, you guys are seeing revenue continue?

Jarrod Yahes: Sure, Andrew, and thanks so much for the question. Year-to-date performance in DDS has been exceptional. I think, you know, Paul spoke through some of the strong performance we've seen in data, but also in our distribution business and in our services business. And clearly, we're investing behind that success that we've seen. We expect to see continued success in the back half of the year, so please don't expect that step-down to be significant. It's less than a $10 million step-down.

Speaker Change: Sure, Andrew, and thanks so much for the question. Year-to-date performance in DDS has been exceptional. I think, you know, Paul spoke through some of the strong performance we've seen in data, but also in our distribution business and in our services business, and clearly we're investing behind that success that we've seen.

Speaker Change: We expect to see continued success in the back half of the year, so please don't expect that step-down to be significant. It's less than a $10 million step-down, I just didn't want to give people the expectation that there's going to be a significant sequential uptick in the back half of the year. But the business is healthy, the business is strong.

Jarrod Yahes: I just didn't want to give people the expectation that there's going to be a significant sequential uptick in the back half of the year. But the business is healthy. The business is strong. We're continuing to sign deals. Those deals are giving us a growing base of TEL revenue and bookings backlog, as you would expect. And quite frankly, we're focused on both serving the needs of our customers, so we are going to be flexible.

Speaker Change: We're continuing to sign deals.

Speaker Change: Those deals are giving us a growing base of TEL revenue and bookings backlog as you would expect.

Speaker Change: And, quite frankly, we're focused on both serving the needs of our customers, so we are going to be flexible, we are going to be nimble in terms of the way we contract.

Jarrod Yahes: We are going to be nimble in terms of the way we contract, but we're also focused on building a sustainable business and a business that's going to have a backlog that's going to be carrying us forward to grow to meet our needs in the years to come and really help us achieve the 2027 long-term targets that we've laid out for ourselves.

Speaker Change: But we're also focused on building a sustainable business, and a business that's going to have a backlog that's going to be carrying us forward to grow to meet our needs in the years to come, and really help us achieve the 2027 long-term targets that we've laid out for ourselves.

Andrew Boone: Go ahead, Andrew. I think you may have had another one.

Speaker Change: Thank you.

Speaker Change: Go ahead, Andrew, I think you may have had another. Yeah, thank you so much. I just wanted to focus on the step down in brand marketing for 2Q and how we should think about sales and marketing for the back half of the year and then going forward. What were your learnings in that?

Andrew Boone: Yeah, thank you so much. I just wanted to focus on the step down in brand marketing for 2Q and how we should think about sales and marketing for the back half of the year and then going forward. What were your learnings, and then what are you guys carrying forward? Thank you.

Jarrod Yahes: Um, sure. So Andrew, as you think about sales and marketing in our business, and you look at sort of where we are, you look back historically and exclude some of the items to reconcile to adjusted EBITDA. We've had about 24% sales and marketing as a percentage of revenue, and we would expect that to continue for the year.

Speaker Change: and what do you guys carry forward. Thank you.

Speaker Change: Sure. So, Andrew, as you think about sales and marketing in our business, and you look at sort of where we are, you look back historically and excluding...

Speaker Change: some of the items to reconcile to adjusted EBITDA. We've had about 24% sales and marketing as a percentage of revenue. We would expect that to continue for the year. And so the only reason for the step down was really we had done a large branding campaign with an agency.

Jarrod Yahes: And so the only reason for the step down was that we had done a large branding campaign with an agency that ran off between the first and the second quarter, but there was no pullback in SEM or any of the other performance marketing spend that we are normally working on. I would also add that sales and marketing will increase as a result of the sales hiring that we're gonna be doing to support our data distribution and services business.

Speaker Change: That ran off between the first and the second quarter, but there was no pullback in SEM or any of the other performance marketing spend that we are normally working on.

Speaker Change: I would also add that sales and marketing will increase as a result of the sales hiring that we're going to be doing to support our data distribution and services business.

Jarrod Yahes: Paul spoke through the hiring of Kevin. Kevin is gonna be hiring a team behind him to expand and grow Giphy. We're hiring in the studios aggressively, and our sales team and data is also growing behind some of the successes that they've already had. So to the extent we put more spend on sales and marketing, it's probably gonna be in some of these areas where we're seeing very significant market traction and success in data distribution and services.

Speaker Change: You know, Paul spoke through the hiring of Kevin. Kevin is going to be hiring a team behind him to expand and grow Giphy. We're hiring in studios aggressively.

Speaker Change: And our sales team and data is also growing behind some of the successes that they've already had. So to the extent we put on more spend in sales and marketing, it's probably going to be in some of these areas where we're seeing very significant market traction and success in data distribution and services.

Speaker Change: Great, thank you.

Bernie Mcternan: Our next question comes from Bernie McTernan with Needham & Company. Please proceed.

Speaker Change: Thank you.

Bernie Mcternan: Great. Thanks for taking questions, and I just want to start by saying, Jarrod, thanks for all the color on organic versus non-M&A growth, and what to expect for the rest of the year. It's really helpful.

Speaker Change: Great. Thanks for taking questions and just want to start by saying, Jarrod, thanks for all the color on organic versus non-M&A growth.

Bernie Mcternan: Maybe we should move over to the content part of the business. Um, if you just talk through it, you know, what's the updated plan from here? Is it just things are taking longer than expected to fix? Are there, you know? We talked about SEM, and SEO, trying to improve conversion. Like, are there other levers you guys are trying to pull? If you can just kind of bring us behind the curtain a little bit in terms of what's the latest in terms of trying to get this business back to growth, knowing that it's taking, you know, longer than expected.

Speaker Change: and the rest of you. It's really helpful. Maybe let's move over to the content part of the business.

Speaker Change: If you could just talk through, you know, what's the...

Speaker Change: updated plan from here? Is it just things are taking longer than expected to fix? Are there, you know, we talked about SEM, SEO, you know, trying to improve conversion, like are there other levers you guys are trying to pull? If you can just

Speaker Change: kind of bring us behind the curtain a little bit in terms of what's the latest in terms of trying to get this business back to growth knowing that it's taking longer than expected.

Paul Hennessy: Yeah, thanks, Bernie. It's Paul.

Paul Hennessy: I, you know, you saw that we had sequential improvement, albeit not at the pacing that we would like. I think Jarrod should guide us for continued sequential improvement. So the business is coming back, but it's not coming back at the pace that we wanted. And why do we believe that that's happening? We think there's an opportunity to actually simplify our product offering, and we've done that in real time, both with our premium beat offering and our Pond5 offering.

Speaker Change: Yeah, thanks, Bernie. It's Paul. I, um, you know, you saw that we had sequential improvement, albeit not to the pacing that we would like. I think Jarrod guided for continued sequential improvement. So the business, the business is coming back. It's not coming back at the pace that we wanted.

Speaker Change: and why do we believe that that's happening?

Speaker Change: We think there's an opportunity to actually, you know, simplify our product offering, and we've done that in real time, both with our Premium Beat offering, with our Pond5 offering. With Premium Beat, for example, you know, we've moved to a subscription-based, kind of more of all-you-can-eat than individual tracks. We see that change happening in the marketplace, and we want to make sure we offer customers exactly what they're looking for and the way they're looking for it. In Pond5, we just had a litany of offerings and plans, and now we've simplified that.

Paul Hennessy: With premium beats, for example, we've moved to a subscription-based, kind of more of an all-you-can-eat model than individual tracks. We see that change happening in the marketplace, and we want to make sure we offer customers exactly what they're looking for and the way they're looking for it. In Pond5, we just had a litany of offerings and plans, and now we've simplified that.

Paul Hennessy: And we believe that there's been a gap, you know, and there's been a gap in the opportunity to offer more unlimited products, and not surprisingly, we think Envato fits nicely into that product opportunity for customers. So, I think if you think about what we're doing. This is not about the demand for Shutterstock. Customers continue to come to us looking for our products and services. This is about getting them into the right products and being competitive in the marketplace from a pricing perspective, from a simplification perspective, and just having what they need. And that's going to take us a little bit longer than we thought. But we are absolutely committed to and confident that the content business will get back to growth.

Speaker Change: And we believe that there's been a gap, you know, and there's been a gap in an opportunity to offer more unlimited products. And not surprisingly, we think Envato fits nicely into that product opportunity for customers. So, I think if you think about what we're doing...

Speaker Change: This is not about the demand for Shutterstock. Customers continue to come to us.

Speaker Change: looking for our products and services.

Speaker Change: This is about getting them into the right products and being competitive in the marketplace from a pricing perspective, from a simplification perspective, and just having what they need. And that's going to take us a little bit longer than we thought, but we are absolutely committed and confident that the content business gets back to growth.

Paul Hennessy: And then just to follow up on the 3D Gen AI product with NVIDIA, can you talk about, you know, some of the use cases for this technology? I think you already said you had some customers on board.

Speaker Change: Understood. And then just to follow up on the 3D Gen AI product with NVIDIA, can you talk about some of the use cases for this technology? I think you already said you had some customers on board.

Paul Hennessy: Yeah, I think, look, it's super early days on the use cases. I think we mentioned beta customers coming on board in September.

Speaker Change: Yeah, I think, look, it's super early days on, you know, on the use cases, I think we mentioned beta customers coming on in September .

Paul Hennessy: But think, everything that you used to do with 3D models in terms of using traditional models can now be done super fast and with efficiency for those that are generating the models themselves. We mentioned some of the work we're doing in our studios business with Netflix and others. When you just think about where 3D is used in immersive, in gaming, any place where, in retail, any place where customers need 3D, this becomes a tool that supercharges their workflow.

Speaker Change: But think, everything that you used to do with 3D models in terms of using traditional models now can be done super fast and driving efficiency for those that are generating the models themselves.

Speaker Change: We mentioned some of the work we're doing in our studios business with Netflix and others.

Speaker Change: When you just think about where 3D is used, 3D is used in immersives, in gaming.

Speaker Change: Any place where, in retail, any place where customers need 3D.

Paul Hennessy: And so we're going to be on the front row. We have a front row seat for all of the use cases, and we're proud to be among the first with this kind of product in the market.

Speaker Change: This becomes a tool that supercharges their workflow, and so we're, you know, we're going to be on the front row. We have a front row seat for all of the use cases, and we're proud to be, you know, among the first with this kind of product in the marketplace.

Paul Hennessy: One follow-up question, if it's too early to get into, you know, revenue recognition and accounting for this product, is this the revenue share you receive, is that coming back at a pretty high margin?

Speaker Change: One follow-up, it's too early to get into revenue recognition and accounting for this product. The revenue share you receive, is that coming back at a pretty high margin?

Paul Hennessy: So I think the revenue share that we'll get, Bernie, is gonna be effectively on a net basis, and so it should come back at a high margin. I think what will bring the margin down to a more corporate average level is the fact that we are going to share the benefits of this with our contributors.

Speaker Change: So I think the revenue share that we'll get, Bernie, is going to be effectively on a net basis and so you know, it should come back at a high margin. I think what will bring the margin down to a more corporate average level of margin is the fact that we are going to share the benefits of this with our contributors. So we are going to be paying our contributor royalty on any revenues that we generate from the 3D product.

Paul Hennessy: So we are gonna be paying a contributor royalty on any revenues that we generate from the 3D product. And that's consistent with the approach that we've taken to data. That's consistent with the approach that we've taken to other Gen AI products. And I think, philosophically, our view is that as we innovate, sharing the benefits of that innovation with our contributor community is key. Makes a lot of sense.

Speaker Change: And that's consistent with the approach that we've taken to data, that's consistent with the approach that we've taken to other Gen-AI products, and I think philosophically, our view is, as we innovate, sharing the benefits of that innovation with our contributor community is key.

Bernie Mcternan: It makes a lot of sense. Thanks, Paul. Thanks, Jarrod.

Bernie: It makes a lot of sense. Thanks, Paul. Thanks, Jarrod.

Youssef Squali: Our next question comes from Youssef Squali with Truist. You may proceed.

Freddy: Thanks, Freddy. Thank you.

Robert Zeller: Hi, this is Robert Zeller on behalf of Youssef. Thanks for taking our questions. First, just on barter transactions, did you guys quantify what the barter transaction sizes were in this quarter? And then on licensing deals, you know, as the regulatory environment heats up, it's a serious concern for AI players, which is probably a very big tailwind for you guys. So can you just give an update on where you are with partnerships with the hyperscalers and major AI players?

Speaker Change: Our next question comes from Youssef Squali with Truist, you may proceed.

Bernie: Hi, this is Robert Zeller on for Youssef. Thanks for taking our questions.

Robert Zeller: First, just on barter transactions, did you guys quantify what barter transaction sizes were in this quarter?

Speaker Change: And then on licensing deals, you know, as the regulatory environment heats up, it's a serious concern for AI players, which is probably a very big tailwind for you guys. So, can you just give an update on where you are with partnerships with the hyperscalers and major AI players?

Jarrod Yahes: Sure. But I wasn't quite sure what the first part of your question was. I think it was related to partnership transactions around the large hyperscalers. We have, over the course of the past several years, at various points in time, announced the names and logos of some of the world's largest companies that we've engaged with around generative AI. We believe that many of those companies are ahead of the curve in terms of understanding that the licenseability of AI training data is critical.

Speaker Change: Sure. So, I wasn't quite sure what the first part of your question was. I think it was related to partnership transactions around the large hyperscalers.

Speaker Change: We have, over the course of the past several years, at various points in time, announced the names and logos of some of the world's largest companies that we've engaged with around generative AI.

Bernie: We believe that many of those companies are ahead of the curve in terms of understanding that the licenseability of AI training data is critical.

Jarrod Yahes: And the regulatory environment, as it evolves, is continuing to demonstrate that. If you look at some of the developments that have recently happened around the EU AI Act, some of the proposed legislation in the U.S., some of the media headlines that are emerging around scraped data, it's becoming very clear that having model releases around the data that you use for generative AI model training is mission critical. It's mission critical to manage reputational risk.

Speaker Change: And the regulatory environment, as it evolves, is continuing to evidence that. If you look at some of the evolutions that have recently happened around the EU AI Act, some of the proposed legislation in the U.S.

Speaker Change: some of the media headlines that are emerging around scraped data, it's becoming very clear that having model releases around the data that you use for generative AI model training is mission critical.

Jarrod Yahes: It's mission critical from an ethical perspective, and it's also mission critical for the commercialization of these future products and services that all these companies are building. We believe that Shutterstock is really at the heart of that. We believe that, apart and separate from what some publishers are doing with respect to digital media, what we're doing in respect of visual media is really groundbreaking and setting the stage for the long-term sustainability and durability of these gen AI products.

Speaker Change: It's mission-critical to manage reputational risk, it's mission-critical from an ethical perspective, and it's also mission-critical from the commercialization of these future products and services that all these companies are building.

Speaker Change: We believe that Shutterstock is really at the heart of that. We believe that, apart and separate from what some of the publishers are doing,

Speaker Change: With respect to digital media, what we're doing in respect of visual media is really groundbreaking and setting the stage for the long-term sustainability and durability of these Gen AI products. So we're really pleased with that. We're really proud of the companies that have done the diligence and really dug deep into our metadata and looked at the accuracy of it and looked at the fidelity of it and selected Shutterstock for their data needs.

Jarrod Yahes: So we're really pleased with that. We're really proud of the companies that have done the diligence and really dug deep into our metadata and looked at the accuracy of it and looked at the fidelity of it and selected Shutterstock for their data needs, and we hope to continue to grow and expand that.

Robert Zeller: Okay, thanks. The first question was just on, uh... How much of the revenue was non-cash, like for the data deal? All right.

Speaker Change: and we hope to continue to grow and expand that business.

Speaker Change: Okay, thanks. The first question was just on...

Speaker Change: How much of revenue was non-cash, like for the data deals?

Jarrod Yahes: So with respect to revenue that we received in the form of equity, that would be approximately $12 million in the second quarter, and you can see that in our 10-Q.

Speaker Change: Ah!

Speaker Change: So, with respect to revenue that we received in the form of equity, that would be approximately $12 million in the second quarter, and you can see that in our 10-Q.

Operator: Thank you, and as a reminder, to ask a question, please press star 1 1 on your telephone. Our next question comes from Nitin Bansal with Bank of America. You may proceed.

Speaker Change: Okay, thank you.

Speaker Change: Thank you, and as a reminder, to ask a question, please press star 1 1 on your telephone.

Nitin Bansal: Hi, thank you for taking my question. You mentioned that the decline in content business was driven by weakness in new customer acquisition, but your existing subscriber base is also declining. Can you help us understand what is driving the churn in your existing subscriber base and what gives you confidence that events can improve in the second half?

Speaker Change: Our next question comes from Nitin Bansal with Bank of America. You may proceed.

Nathan Basal: Hi, thank you for taking my question. You mentioned that the decline in content business was driven by weakness in new customer acquisition, but your existing subscriber base is also declining. Can you help us understand what is driving the churn in your existing subscriber base?

Jarrod Yahes: Sure, Nitin. So we really haven't seen significant movements and churn from the perspective of our customers. There is a normal level of about 80% net revenue retention in Shutterstock's business as a whole. And so, to the extent that new customer acquisition is weaker than we expect, assuming churn is held constant, you would see a reduction in the total number of customers in the business.

Speaker Change: And what gives confidence that the French can improve in the second half?

Speaker Change: Sure, Nitin. So we really haven't seen significant movements and churn from the perspective of our customers.

Speaker Change: There is a normal level of about 80% net revenue retention in Shutterstock's business as a whole.

Speaker Change: And so, to the extent that new customer acquisition is weaker than we expect, assuming churn is held constant, you would see a reduction in the total number of customers in the business.

Jarrod Yahes: What I would also point out is, if you sort of trace our business back a few quarters, we've spoken at length about the elimination of the free trial in our business. And that was a free trial for a subscription. And so what we've seen is, when you get rid of the free trial for subscriptions, customers are naturally pivoting to some of our more transactional impact products. And so that's also exacerbating some of the subscriber decline is really a product mix shift away from products that were erstwhile free trial products towards products that are more transactional and pack in nature. These are highly retentive products. These are high AOV products. We just feel like we're doing the right thing long term for our business by eliminating the free trial, and I think we'll stick with that strategy.

Speaker Change: What I would also point out is if you sort of trace our business back a few quarters, we've spoken at length about the elimination of the free trial in our business and that was a free trial for subscriptions.

Speaker Change: And so what we've seen is, when you get rid of the free trial for subscriptions, customers are naturally pivoting to some of our more transactional impact products.

Speaker Change: And so that's also exacerbating some of the subscriber decline, is really a product mix shift away from products that erstwhile were free trial products towards products that are more transactional and pack in nature. These are highly retentive products. These are high AOV products.

Speaker Change: We just feel like we're doing the right thing long-term for our business by eliminating the free trial, and I think we're sticking with that strategy.

Paul Hennessy: Thank you. I would now like to turn the call back over to CEO Paul Hennessy for any closing remarks.

Speaker Change: Thank you.

Speaker Change: Thank you. I would now like to turn the call back over to CEO Paul Hennessy for any closing remarks.

Paul Hennessy: Thanks, Josh. To finish, I'd just like to thank our team, say a special welcome to our new Envato colleagues, and also a big thank you to our customers for putting your trust in us each and every day. Thanks for joining us. This ends our call for today.

Paul Hennessy: Thanks, Josh. To finish, I'd just like to thank our team, say a special welcome to our new Envato colleagues, and also a big thank you to our customers for putting your trust in us each and every day. Thanks for joining, and this ends our call for today.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Speaker Change: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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