Shutterstock, Inc.

Good day, and thank you for standing by. Welcome to the Shutterstock, Inc. first quarter 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, you will need to press star 1 on your telephone. Please be advised, today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Chris, Sue, please go ahead.

Thank you, Mary. Good morning, everyone, and thank you for joining us for Shutterstock's first quarter 2021 earnings call. Joining us today is Stan Pawlowski, Shutterstock's chief executive officer, and Jared Gaze, 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 that we may make on our call. We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, 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 investor relations section of our website. Finally, please refer to the brief information deck we posted on our website that contains supporting materials for today's call. And now, I'll turn the call over to Stan.

Thank you, Chris. And good morning, everyone, and thank you for joining Shutterstock's Q1 2021 earnings call. It's hard to believe, but it's been over a year since Shutterstock employees began working from home due to the pandemic. It's been a year of challenges for many amongst us, but as I reflect on the past 12 months, I draw hope and inspiration from the manner in which our employees have risen to the occasion, adapted, and thrived. The strong results we're about to discuss today reflect their hard work and perseverance during these times. With that as a backdrop, I want to spend some time commenting on industry demand and the renewed growth we're experiencing. Then I'll touch on how we are well positioned to maintain this momentum by delivering product innovation that enhances our customer's workflow and delivering content that is relevant and fresh. And lastly, I will discuss some steps we are taking to ensure we foster an innovative culture that reflects different backgrounds and perspectives, both within Shutterstock as well as within our artist and contributor community. Broadly speaking, demand is strengthening, and it is clear that we are building momentum as we work our way out of the pandemic. Fourth quarter, digital ad spend grew 29%, and independent research analysts forecast broad-based rebound in U.S. digital ad spend growth across all industries in 2021 following uneven growth driven by several laggards in 2020. Marketers are spending on powerful content, creative tools, marketing technology, and seeking to create impactful ad campaigns that enhance the digital presence of businesses large and small. There seems to be growing confidence across industries, even in areas such as automotive, entertainment, media, and travel industries, which were particularly hard hit last year. This demand backdrop translated into Shutterstock revenue growing 14% in the first quarter, with balanced strength across revenue channels, geographies, and content types. Subscriber trends remain particularly encouraging in terms of both subscriber count, which grew 46%, and subscriber revenue, which grew 20%, driven mainly by continued strength in our smaller subscription products. E-commerce was up 19% in Q1 2021, driven by balanced growth across image, footage, and music, as well as the strong performance of 3D. Even backing out the growth from the contribution of TurboSquid, as well as favorable foreign exchange trends and an easier March comparable, e-commerce grew double digits year on year and exceeded our expectations. We had noted on previous earnings call that our enterprise channel returned to growth earlier than expected. We saw that momentum continue with 5% year on year growth in the first quarter. U.S., Canada, and EMEA led the way for enterprise growth, driven by an uptick in agency and corporate spend in those regions. Also, within enterprise, there has been greater interest in multi-asset and multi-faceted deals that leverage integrated solutions, including our studios and editorial products. Within enterprise, our platform solutions business remains the fastest growing part of our business, driven by growth in both new customers and increased volume through our integrations with existing partners. While overall we are seeing strong bookings growth in the quarter as evidenced by the third quarter of deferred revenue growth, we also note that bookings at an industry-by-industry level remain uneven, with some industries such as technology and retail performing well while others are lagging. As I mentioned at the top of the call, we are delivering product innovations to our customers that enhance their workflows and address their dynamic business requirements. For example, we recently announced the launch of Shutterstock Flex subscriptions targeted at small and medium sized businesses. Flex SMB customers get immediate access to millions of images, footage, and music assets in a single easy to customize plan at one simple price. What I find most exciting from a customer experience perspective is the simplicity. Customers can now more easily license a larger variety of our content with a single subscription, which can be shared with multiple users within the organization. We also announced last week an exciting new enterprise integration with Google Drive, which helps make Shutterstock content widely available and easily accessible across Google's suite of productivity tools for our enterprise customers. On the content front, we continue to focus on fresh and relevant content to differentiate our product and deliver value to our customers. For example, for our editorial business, we announced exclusive rights for the distribution of live and archival content in connection with the Screen Actors Guild Award. Our top-notch photographers will capture images from all SAG award events and deliver content to our customers in under one minute from the time the photo is taken. As in-person events return in the future, Shutterstock will have access to premium locations and will provide early access to deliver highly valuable content in near real time. Furthermore, we are now the exclusive global distribution partner for the Condé Nast collection which features more than 30,000 pieces of content from marquee brands like Vogue, Vanity Fair, GQ, Architectural Digest, House and Garden, and Glamour. This content is now accessible via the Vault at Shutterstock, which itself contains over 50 million assets. In terms of our newest content type, 3D, TurboSquid is performing solidly and above our expectations. There are tremendous untapped synergies and growth opportunities available to us as a result of this transaction and we are progressing with integrating their 3D content into our offering so Shutterstock customers can seamlessly purchase 3D. There are several industry tailwinds that are just starting to benefit us in 3D. For example, TurboSquid has benefited from the continued growth in visual effects production in such area as TV and film production and video games. We are also well positioned to benefit from the surging demand from artists who leverage 3D and non-3D content assets for the purposes of creating works of art using blockchain technology and non-fungible tokens. While we plot our Shutterstock's broader NFT strategy, we are already seeing world-class, internationally recognized artists leveraging TurboSquid's unique, high-quality 3D library to create original content. For example, we're extremely proud that Mike Winkelmann, the digital artist known as Beeple, is an active customer of TurboSquid and leverages our content for his unique and groundbreaking NFT exhibits. He was recently recognized for his collage, Every Days, the first 5,000 days, at an auction making him among the top three most valuable living artists today. As part of Every Days, Beeple creates and publishes new digital artwork every day, and the project is now in its 14th year, which is truly astonishing in terms of its unique approach to digital creation. And finally, I want to talk about team and culture. As you know, we've built out our capabilities as a team with key hires over the past 18 months. But this is only the beginning. We also want to augment our ability to make decisions and take purposeful actions that reflect our values. For example, inclusion and diversity are core to who we are as a company. We celebrate and draw strength from our differences, whether differences in backgrounds, cultures, or perspectives. We're excited to talk about some of the recent developments and initiatives that reflect our values. Mikel Beecher joined us as Head of Diversity, Equity, and Inclusion in early April. Mikel is responsible for implementing our DEI strategy and will be working to support Shutterstock's mission of building a workforce that is representative of the global community we live in and serve. He'll also be working closely with Shutterstock's existing employee resource groups, such as Shades, Todos Junios, Women at Shutterstock, Prism, and Seasons. Also in March, we launched our All the Best Artists campaign, which showcases eight artists chosen based on factors like their creative specialty and cultural diversity, from locales like Thailand, Russia, Sweden, Cyprus, and Indonesia. This campaign features a gallery showcasing their work and is representative of the many diverse artists within our contributor community that are at the core to our premium content offering. We also recently announced the launch of Through Their Eyes, a grant program affiliated with Shutterstock's The Create Fund to showcase and support underrepresented female and non-binary creators working in areas like illustration, 3D modeling, writing, photography, and videography. Other grants we've announced involve efforts to raise awareness of climate change by supporting artists who portray our changing environment, break the stigma surrounding mental health, and support older creatives who have their own unique stories to tell. In closing, we feel great about the start to the year. Based on our strong first quarter and higher confidence in a continuation of the economic recovery, we are raising our revenue and EBITDA guidance for 2021. We steadfastly believe that focusing on innovation that enhances our customers' workflow, content that is relevant and fresh, and data and insights that drive performance We will drive steady revenue growth and consistent margin expansion and ultimately generate above market returns for our shareholders. With that, before turning the call over to Jared, I wanted to thank everyone again for joining us today. Also, a big thank you to our amazing employees and contributors for helping deliver an impressive quarter. We have exciting plans for the rest of the year as we continue to innovate with new product and content solutions, all of which is delivered by the tremendous efforts of our team. We look forward to updating you as the year progresses. And now, I'll turn the call over to Jared. Thank you, Stan, and good morning, everyone. Shutterstock grew revenues 14% in the first quarter, or 11% on a constant currency basis. our third quarter of accelerating revenue growth. Our revenue growth was broad-based across revenue channels, geographies, content types, and industries. Revenues benefited this quarter from the addition of Turboswid on February 1st, which added 3% to our growth, as well as the impact of foreign currency due to the weaker US dollar, which added 2.5%. Our growth rate also benefited from the comparison to March 2020, when the demand impact of the pandemic had first started to materialize. Stripping out the impact of FX and the TurboSquid acquisition, first quarter growth was approximately 8%. This is a strong data point that demand is strengthening, and that as a prime destination for creatives to source digital content, Shutterstock is well positioned to capitalize on the rebound. Both our e-commerce and enterprise revenue channels performed strongly this quarter. Growth was led by our e-commerce channel, which grew 19% or 14% excluding TurboSquid, whereas our enterprise channel grew 5%. We are pleased with the consecutive quarters of growth in enterprise and increasingly confident that the revenue channel has turned the corner in terms of sustainable growth. From a geographic perspective, revenue is up 13% in North America, 16% in Europe, and 12% in the rest of the world, with increases coming from nearly every country except those in South America. European growth was strong and accelerated from the prior quarter and was also favorably impacted by currency movements. The rest of the world had strength in Asia and Australia, offset by softness in South America due to foreign currency and some country-specific demand issues driven by COVID. Gross margins for the quarter were 66%, compared to 57% in 2020. There are multiple factors contributing to the improvement in gross margins, including the advancement of technologies reducing the cost of content ingestion, the annual re-tiering of our contributor royalty program on January 1st, and lower utilization. While total revenue and subscribers increased year over year, our paid downloads declined 2% from 2020. the lower utilization benefited our gross margins in the quarter by 3%. As utilization improves during the year, it will negatively impact gross margins from current levels. Sales and marketing expense was 23% of revenue as compared to 26% in the first quarter of 2020. This decline is driven primarily from our efforts over the past year to reallocate our marketing spend to the channels with the greatest effectiveness. On a nominal basis, sales and marketing spend in the first quarter of $42 million was relatively flat from 2020. So we're seeing operating leverage in our model in terms of sales and marketing expense as a percentage of revenue. Product development as a percentage of revenue declined 200 basis points due to a sharper focus on growth and innovation, with fewer resources deployed towards the remediation of tech debt. Our product development spend of 10.7 million is up 9% sequentially from the fourth quarter of 2020. G&A expenses were 17% of revenue, down from 19% of revenue in the first quarter of 2020. On a nominal basis, G&A expenses of 30.7 million were flat from the first quarter of 2020, so we are seeing operating leverage in our model in terms of G&A as a percentage of revenue. The expansion in adjusted EBITDA margins to 30.8 percent resulted from the combination of accelerated revenue growth, upside in gross margin, and operating leverage across all major expense categories. For the first quarter, GAAP diluted EPS was 79 cents, and adjusted diluted EPS was 98 cents, representing growth of 558 percent and 277 percent, respectively. Turning to our balance sheet and cash flows, at the end of the quarter, we had $364 million of cash, down from $429 million at December 31st, 2020. The $65 million decline in cash is driven primarily from the acquisition of TurboSquid. Our free cash flow for the quarter was $26.8 million, a year-over-year increase of 334% from the first quarter of 2020. And our operating cash flow more than covered our annual bonus paid in the first quarter, cash flows for CapEx, content acquisitions, our quarterly dividend, and taxes paid on the vesting of our equity awards, which are issued on a withhold to cover basis. Our deferred revenue balance of $154 million increased 4 million from December 31st, 2020, and 15 million from the first quarter of 2020. The growth in our deferred revenue is a strong leading indicator of the future growth in recognized revenue of our enterprise revenue channel. Turning to our key operating metrics, they were exceptionally strong for Sugarstock during the quarter. Subscriber count increased by 46%. Subscriber revenue increased by 20%. Average revenue per customer increased by 4%. Paid downloads were down 2%, and revenue per download increased to $3.97 per download. Our image library expanded by 12%, and our footage library increased by 17%. Our subscriber growth and subscriber revenue growth are driven by demand for our SMB and prosumer-oriented smaller subscription products and some of the new products we've brought to market over the past year. Investors should remember that we introduced a range of new video and music subscription products in the back half of 2020, and we will, over the next several quarters, lap the introductions of those products and their contribution to our revenues. As a result, we expect subscriber growth and subscriber revenue growth to come down from current levels. With that being said, we are continuing to drive product level innovation to pivot our business towards a subscription model and introduce new subscription products. For example, we're excited about the launch of our Shutterstock Flex subscriptions for small and medium-sized businesses and have already seen good demand signals in the market. That product will have a more positive impact on subscription revenues than subscriber growth as it is an enterprise product. Finally, I'd like to review our revised guidance for the year. Based on the results from the first quarter and a greater level of confidence for the remainder of the year, we are increasing our full-year revenue, adjusted EBITDA, and adjusted earnings per share targets as follows. Revenue of $720 million to $730 million, representing 8% to 9.5% annual revenue growth. Adjusted EBITDA of $171 million to $177 million, with margin expansion against the prior year, ranging from up 50 basis points to up 100 basis points. Adjusted earnings per share are between $2.78 to $2.93. Looking at revenue growth for the remainder of the year, we expect to see continued steady growth in our enterprise business. The quarterly growth rate of e-commerce will moderate in the back half of the year as the comparables become more difficult, and we lap the growth of some of our subscription successful product introductions in 2020, as I mentioned previously. With respect to margins, implied in our guidance, we expect a 300 to 400 basis point decline in gross margins based on a step up in earnings tiers achieved by our contributors, as well as expected utilization increases. Sales and marketing spend will increase by 200 basis points as a percentage of revenue as we maximize our opportunity to capture the rebound in demand. Furthermore, we are hiring aggressively to execute on our business plan, which will increase G&A and product development. We are pleased with our results as a management team and the very strong start to 2021. We are experiencing accelerated revenue growth, and based on our revised guidance, we are now confident in delivering another consecutive year of margin expansion. We look forward to reinvesting our resources into new product and content solutions to continue to meet the need of Shutterstock's customers. Thank you so much for joining us today. We appreciate your time. Operator, we'd now like to open the line for any questions.