Shutterstock, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter 2020 Shared Stock Earnings Conference Call. At this time, our participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, the conference call is being recorded. I would like to hand the conference over to your host, Mr. Krista, VP of Investor Relations and Corporate Development. You may begin.

Thank you, Julie. Good morning, everyone, and thank you for joining us for Shutterstock's fourth quarter 2020 earnings call. Joining us today is Stan Pawlowski, Shutterstock's Chief Executive Officer, and Jared Yates, Shutterstock's Chief Financial Officer. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, the impact of COVID-19 on our business, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, the integration of the company's strategic acquisitions, our future growth margins and profitability, our long-term strategy, and our performance targets. actual results or trends could differ materially from our forecast. For more information, please refer to today's press release and the reports we file with the SEC from time to time, including the risk factors discussed in our most recently filed annual report on Form 10-K, for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA, and adjusted EBITDA margin, adjusted net income for diluted share, revenue growth including by distribution channel on a constant currency basis, billings, and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today's press release and in our 10-K, which are posted on the IR section of our website. please refer to the brief information that we posted on our website that contains supporting materials for today's call. Al, I'd like to turn the call over to Stan.

Thanks, Chris, and good morning, everyone, and thank you for joining Shutterstock's fourth quarter earnings call. In the fourth quarter, Shutterstock experienced a sharp acceleration in year-on-year revenue growth to 9%. which caps off a year in which we built tremendous momentum each and every quarter. Our revenue growth and our outperformance in the fourth quarter was broad-based by revenue channel, by geography, by product, and content types. Our subscription metrics were exceptionally strong this quarter. We also experienced upside from a desire by our clients to fully utilize budgets before year end in addition to strong holiday demand driven in part by increased promotional efforts. We estimate the end of the quarter increase in transactional revenues added between 1 to 2 percent to our revenues for the quarter. We experienced a return to revenue growth in our enterprise revenue channel earlier than expected. and with a stronger velocity than we previously expected on the back of multiple quarters of strong bookings growth. It is clear the changes we have implemented are now having a positive impact, which are translating into our reported results. By reinvigorating our sales organization, innovating our suite of product offerings, and making further platform investments in our API, we are starting to see more consistent and stronger growth in bookings and deferred revenue. Our year-end deferred revenue of $149.8 million has grown 5.6% from December of 2019 on the back of meaningful growth in the third quarter. We believe that our return to year-over-year growth earlier than we expected, coupled with multiple strong quarters of deferred revenue growth, are good leading indicators pointing towards a healthy 2021 for our enterprise revenue channel. In addition, our e-commerce channel ended the year extremely well, driven by overall company subscription growth metrics that meaningfully exceeded our expectations for the quarter. With quarterly year-over-year growth of 45% in the number of subscribers, 18% subscriber revenue growth, and increasing average revenue per customer, we are strongly encouraged by these results. We are not stopping here and have plans to aggressively innovate in 2021, both in terms of new subscription product rollouts and innovations in our product roadmap. None of our accomplishments this year would be possible without an ambitious management team that is eager to drive performance at Shutterstock and make an impact on our industry. Throughout 2020, we completed the build-out of the management team and demonstrated a strong ability to attract and retain world-class talent to drive our business to new heights. Of note, since the last investor call, we have been hiring aggressively in our API platform team and in enterprise sales. We have also added multiple executives to our management team, such as Dorian Quisp as Chief Marketing Officer, Megan Schoen, as SVP of Product, Bridget Gola as VP of Business Intelligence, and Aidan Darnay as Head of Shutterstock Studios. Most recently, I am pleased to report that we have also brought on board John Lapham as our General Counsel. John was most recently the General Counsel at Rover, an e-commerce marketplace company, and previous to that spent 14 years at Getty and brings a wealth of industry knowledge to Shutterstock. Each earnings call since the beginning of my new role as Shutterstock CEO, I have discussed our progress in each of Shutterstock's three strategic focus areas. Workflow innovation, fresh and relevant content, and data and insights to drive performance. Today, I'd like to highlight our focus on content, in particular, what we are doing to expand into new content areas like 3D with our recently announced acquisition of TurboSquid, but also to build a competitive moat around our business by gaining access to exclusive editorial content. On behalf of the team, I would like to welcome all of the squids to Shutterstock. I can't express enough how delighted we are to work with you. As a company with many folks based in New York, London, Berlin, and Singapore, We are excited to have a base of passionate employees in New Orleans and take advantage of the strong talent in Silicon Bayou. In addition to being the largest marketplace for 3D models today, TurboSquid brings to Shutterstock several technology assets that are of tremendous value, notably PixelSquid and Kraken. PixelSquid is effectively the bridge for 2D customers to be able to benefit from 3D models. Our clients will be able to take highly complex 3D models, spin it along multiple axes to find perfect angle, and then instantly create a PNG image asset. PixelSquid will save our clients tremendous time and money as compared to having to digitally manipulate and curate a 2D image that does not meet their requirements. PixelSquid is available for purchase both as an unlimited subscription or on a transaction basis. Kraken is a specialized digital asset management solution that is particularly well suited to the content needs of 3D users who use Kraken to create, manage, and share 3D assets. TurboSquid has a strong presence in many industry verticals that represent an important TAM extension for Shutterstock, including gaming, retail, education, visual effects, design, and architecture. Its clients include industry leaders such as Walmart, Ford, Energizer, GM, Ethan Allen, US Postal Service, and Google. There is a tremendous opportunity to take the thousands of corporates that purchase from TurboSquid today as e-commerce customers and provide them white glove customer service via our enterprise channel and offer them additional Shutterstock solutions. TurboSquid has been an open platform and supports models built with the major 3D tool sets, including 3DS Max, Maya, Cinema 4D, and open source 3D solutions such as Blender. The company also has close ties with the gaming development ecosystems and supports models by Unity and Unreal Engine. We plan to maintain those relationships and also work as an advocate in our industry to extend 3D into additional use cases, such as e-commerce, digital marketing, and for enhancing websites. Another way that we are focused on bringing fresh content to our customers is by increasing the amount of exclusive content we offer through our editorial business. As many of you know, Shutterstock entered the editorial business with the acquisition of Rex Futures in 2015. That acquisition injected the talent and platform to build our editorial business. This is a business that typically involves establishing long-term relationships and exclusivity around the content distribution relationship. These are typically three to five-year contracts, and so they come up for renewal infrequently. Recently, we have started experiencing additional traction in this area within sports, publisher archives, and media and production companies, which own and produce sought-after regional and global content, which can be delivered directly to our customers' workflows through our proprietary API technology. Shutterstock's ability to compete is further enhanced by our ability to invest in these relationships to increase revenue for the content partner, backed by a strong capital structure with no debt and a significant cash balance. Of note, in the past several months, we have won multiple new exclusive relationships, including West Ham, Rangers Football Club, and Motorsport Images. And we are in multiple discussions to win other meaningful exclusive partnerships. As I discussed when starting my new role, we expect to generate the majority of shareholder value over the next three to five years through a combination of consistent revenue growth and margin expansion. In 2020, we grew EBITDA over 60% and earnings per share even greater than that through a combination of revenue growth and by expanding margins by over 800 basis points. That increase in EBITDA translated to record-free cash flows for Shutterstock. This type of performance provides us tremendous flexibility in terms of our ability to strategically invest in the organic growth of our business. All of the product innovation around subscription products we brought to market in 2020 is fundamentally enabled by our ability to run a profitable business. To complement our investments in our business, we are fortunate to be able to simultaneously return capital to shareholders through smart acquisitions, raising our dividend, and repurchasing shares. We realize that as a result of the immense progress that we have made this past year with margin expansion, we have set a high bar for further margin expansion in 2021. We believe we are up for the challenge and are excited as a management team for the year ahead. Before turning the call over to Jared to discuss our financials, I wanted to thank the Shutterstock team for their hard work and dedication in 2020. With all of our lives fundamentally changed in 2020, our team was able to focus on our strategic initiatives, roll out new products, market them more effectively and efficiently, deliver for our clients around the world, and ultimately significantly accelerate revenue over the course of the year. And now I'll turn the call over to Jared. Thank you, Stan, and good morning, everyone. Shutterstock ended the year with exceptionally strong revenue growth, well exceeding our expectations and building off the positive momentum we had in the third quarter. Two areas of surprise to the upside were our enterprise channel, which returned to recognize revenue growth a quarter earlier than we expected and with demand levels that were stronger than we projected. Further, our subscribers and subscriber revenue growth accelerated to record levels as compared to the already strong results in the third quarter, driving outperformance in e-commerce. All of these trends position us extremely well going into 2021. Fourth quarter revenues grew 9% year over year, or 7% on a constant currency basis. Growth was led by our e-commerce channel, which grew 11%, whereas our enterprise channel ended the year with year-over-year growth of 6%. While our revenue growth for the quarter was extremely strong, as Stan noted, we benefited from an end-of-the-year budget flush at clients, combined with a strong holiday demand environment, which positively impacted the quarter. For the full year 2020, revenue growth was 2%, with e-commerce growth of 5%, offset by a 2% decline in the enterprise channel. From a geographic perspective, on a year-over-year basis, we saw revenue acceleration this quarter across all regions, with particular strength in North America, which was up 13 percent. Europe grew 8 percent, and the rest of the world, including Asia, grew 5 percent. Gross margins were 63.4 percent, consistent with our third quarter margins. While the gross margins were strong, I would note for investors that this is partially due to lower utilization which we believe will reverse itself over the course of 2021. For the full year 2020, gross margins were 61.1%, up 3.8% from 57.2% in 2019. Sales and marketing expense was 25% of revenue, as compared to 28% of revenue in the fourth quarter of 2019. As expected, there was a sequential increase in sales and marketing from Q3 to Q4, consistent with our plan for accelerating marketing spend in the back half of the year on branding our new subscription products and targeted performance marketing. For example, we embarked on our first connected TV and linear TV campaigns in the fourth quarter. Sales and marketing expenses also increased due to higher employee compensation associated with our improved business performance. Sales and marketing expenses as a percentage of revenues were 24% for the full year 2020, down from 28% in 2019. It's important to note that we incurred little to no T&E expenses in 2020 due to the pandemic, and we do expect those expenses to increase in 2021, particularly in the back half of the year. Product development costs were 5% of revenue for the quarter, down from 9% in the fourth quarter of 2019. In product development, we are seeing expense reductions due to fewer resources committed to the remediation of tech debt and a refocus on new projects and innovation. On a full year basis, product development expenses declined 20%, partially due to some one-time software expenses we incurred in 2019 that did not recur in 2020. G&A expenses were 18% of revenue, up from 16% of revenue in the fourth quarter of 2019. G&A expenses this quarter included some incremental stock-based compensation expense associated with our performance-based stock awards. Excluding stock comp expense, G&A expenses as a percentage of revenue were roughly flat compared to the fourth quarter of 2019. For the full year, G&A expenses were flat in 2019, and excluding stock comp expense declined due to cost reduction efforts combined with operating leverage in our business. adjusted EBITDA margins increased to 26.8 percent compared to 14.5 percent in the fourth quarter of 2019. We continue to have strong results from a margin perspective and are focused on driving shareholder value by balancing growth with robust margins and cash flows. For the full year, EBITDA margins increased 840 basis points to 23.2 percent from 14.8 percent in 2019, and we grew EBITDA in excess of 60 percent year-over-year from 96 million to 155 million. For the fourth quarter, GAAP EPS was 70 cents, and adjusted diluted EPS was 93 cents, representing growth of 483 percent and 260 percent respectively. For the full year, GAAP EPS was $1.97, and adjusted diluted EPS was $2.62, representing growth of 249 percent and 113 percent, respectively. Turning to our balance sheet and cash flows, at the end of the quarter, we had $429 million of cash, up from $383 million at September 30, 2020. The quarterly increase in cash of $45 million includes $65 million of operating cash flows, offset by $6 million of CapEx and content acquisitions, $7 million for investments and M&A activity, and the $6 million quarterly cash dividend paid in December. On February 1st, we closed on the acquisition of Turboswid for $75 million, which would have brought our cash balance down to $354 million from Q4 ending cash levels. Investors should expect more muted cash addition in Q1 as compared to Q4 with annual bonuses being paid in the first quarter. On January 12th, we announced a 24% increase in our quarterly dividend to 21 cents per share. This increase was attributable to the positive cash flow results we had in 2020, as well as our confidence in the business for 2021. We will continue to periodically revisit the quarterly dividend and plan to grow it further over time. Turning to our key operating metrics, they were a particular bright spot for Shutterstock during the quarter. Subscriber count increased by 45%. Subscriber revenue increased by 18%. Average revenue per customer increased by 0.9%. Paid downloads were down 4%, and revenue per download increased to $3.91 per download. Our image library expanded by 15%, and our footage library increased by 24%. As we look at our historical data, We believe these are the fastest rates of subscriber growth and subscriber revenue growth we have ever experienced as a company. Clearly, our SMB and prosumer-oriented products are resonating in the market and experiencing good traction. I will, however, reiterate what I said last quarter, which is that while we're thrilled with these subscription trends, we do not believe this accelerated pace of growth and subscription will continue each and every quarter. With respect to our M&A strategy, we've been picking up steam in terms of execution. We believe that the acquisitions of TurboSquid and Amper represent the types of acquisitions we'd like to continue to execute on. Amper is a small bolt-on of key talent and AI technology focused on music content, whereas TurboSquid is a medium-sized acquisition that adds a new content type to our marketplace in an attractive 3D market with strong industry tailwinds. TurboSquid has been a steady growth business over time with good margins. We paid a multiple for the business in line with our trading multiple, and the deal is immediately accretive. As we think about strategic acquisitions, Shutterstock's three revenue channels, including a large enterprise sales force, a market-leading API offering, and a customer base of 2 million e-commerce customers, should allow us to accelerate the growth in acquired companies over time. We have also recently added talent in post-merger integration to allow us to scale and integrate the acquisitions we've made to date and assist with deals we will execute on in the future. Finally, turning to our guidance. For 2021, our expectations for the full year are as follows. Revenue of $708 million to $722 million, representing 6% to 8% annual revenue growth. adjusted EBITDA of $165 million to $171 million, with margins ranging from flat to up 50 basis points, and adjusted EPS of between $2.75 to $2.90. In terms of the composition of revenue growth in 2021, we believe enterprise will grow 2% to 3% slower than e-commerce, and we will continue to experience quarterly growth throughout the year in both channels, although not necessarily the growth rates we experienced in the fourth quarter. Revenue guidance includes approximately $20 million of revenue based on the close of the TurboSquid acquisition as of February 1st, 2021, which will be reported within our e-commerce revenue channel. Investors should note that part of the way we're thinking about our revenue guidance is that we are still seeing multiple countries going in and out of lockdown due to the pandemic. which is driving uneven demand globally. As of now, we don't have complete visibility as to when these regions will come back, and we'll adjust our forecast accordingly as demand normalizes throughout the year. From a margin perspective, we're targeting up to 50 basis points of EBITDA margin expansion for 2021. For the full year 2021, we expect to see slight increases in sales and marketing as a percentage of revenues, which will be more than offset by further operating leverage in G&A costs and slightly better gross margins, the sum total of which should allow us to achieve additional EBITDA margin expansion in 2021. Other modeling assumptions for 2021 of note include stock-based compensation of approximately $33 million, depreciation and amortization expense of $50 million, capital expenditures of $30 million, and an effective tax rate percentage in the low 20s. Also, we expect our share count increases to be in line with historical trends. We are pleased as a management team with our results, both in terms of the sharp acceleration of revenue growth combined with exceptional margins. As stated previously, we plan to continue to reinvest some of the margin upside we've experienced to innovate and invest and to best position Shutterstock for growth in the years to come. Thank you so much for joining us today. We appreciate your time. Operator, we'd now like to open the line for any questions.