Shutterstock, Inc.

Good day and welcome to the third quarter 2021 Shutterstock Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll 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, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Chris Hsu.

Thank you, Renz. Good morning, everyone, and thank you for joining us for Shutterstock's third quarter 2021 earnings call. Joining us today is Stan Pawlowski, Shutterstock's chief executive officer, and Jared Yays, 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, 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. Actual results or trends could differ materially from our forecast. For more information, please refer to today's press release and the reports we file with the SEC from time to time, including the risk factors discussed in our most recently filed Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements 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 per 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 10Q, which are posted on the IR website. Finally, please refer to the brief information deck we posted on our website that contains supporting materials for today's call. With that, I'll turn the call over to Stance.

Thank you, Chris, and good morning, everyone, and welcome to Shutterstock's third quarter 2021 earnings call. This morning, I'll be providing a recap of Shutterstock's performance this past quarter in which we saw continued growth in the business across both enterprise and e-commerce. I'll also be updating you on the significant progress we've made in strategic focus area of workflow innovation through the acquisition of PicMonkey in the third quarter as well as some exciting product development. Shutterstock saw continued momentum this past quarter with revenue growth of 18% on a year-over-year basis. Our e-commerce channel grew 18% year-over-year, led by ongoing growth in our small subscription offerings. We introduced just today a new e-commerce subscription called Flex 25. Flex 25 is the first e-commerce subscription offering from Shutterstock's Flex family of products. Similar to Flex and Flex Premium for our enterprise channel, Flex 25 is a credit-based mixed asset subscription plan. These monthly credits can be used by e-commerce customers to download images, footage, and music products based on their individual needs, and we are excited about the market potential of this new product. Our enterprise channel experienced acceleration in momentum to 17% year-over-year growth, its fastest growth since 2018. We saw strength in our SMB Flex subscription product, which we introduced in April 2021. Shutterstock Studios also contributed to growth, driven by an acceleration in the delivery of creative content for Blue Chip enterprise clients. From a strategic perspective, I could not be more pleased that we have executed on the acquisition of PicMonkey in September. PicMonkey's easy-to-use design and editing tools, collaboration features across teams, and robust library of pre-designed templates make professional publishing assets widely accessible to anyone. and this is expected to allow Shutterstock to enhance and accelerate the delivery of our vision for further embedding ourselves into our customers' workflow. In addition to assisting in our existing customers' workflow, we expect PicMonkey to expand on Shutterstock's customer base to new audiences who require easy-to-use creative software and design tools. Over the medium term, the move that we have been making with Shutterstock AI and PicMonkey are designed to set the stage to allow us to serve our customers more fully and ultimately grow faster as a company. We believe that they open up larger and faster-growing TAMs for Shutterstock, such as the $8 billion TAM for creative applications, as well as the nascent market for using AI to improve marketing effectiveness, by predicting the performance of content assets. As we execute on our plan to transform Shutterstock over the long term, we should be able to accelerate our growth beyond the stock content market segment, which is growing at 5% to 7% on an annual basis. This morning, we also announced the launch of Creative Flow for our enterprise customers. Creative Flow is a suite of applications powered by AI. Each application enables customers to create and collaborate more efficiently. These workflow applications serve up insights, scores, and recommendations to give our customers content the best chance to succeed in a crowded landscape. To lay the foundations for creative flow, we introduced two distinct workflow applications today, Catalog and Plan. Catalog centralizes content and improves discoverability. It allows our enterprise customers to organize, find, and manage content in an efficient manner across functions and even across companies. Enterprise customers can upload and manage their image, video, and music content, whether that's licensed from Shutterstock or acquired from other sources in one unified view. In short, customers will be able to find their content faster, which will free up their time to focus more on the creative process itself rather than content management. Catalog is also the first place where we have started introducing insights powered by Shutterstock.ai. Our customers can see how Shutterstock content has been used and how popular it is in our library to ensure they are selecting unique content. In the coming weeks, customers will also be able to see predictive insights around which audience segments each image is most likely to resonate with. Additionally, we'll be using our color extraction technology to show the hex values for colors in any image so that customers can create faster without having to experiment to find the perfect palette. Plan, the second application we released, will enhance content discoverability and keep teams organized around specific deadlines. keeping enterprise teams organized and enabling tighter collaboration. Clients can access curated collections centered around moments, such as holidays, seasonal trends, or other events, as well as receive recommendations for content. Over the next several quarters, with the technology we acquired with PicMonkey and Shutterstock.ai, we will layer in a design creation capability as well as additional predictive performance capabilities into creative flow and extend the product into our e-commerce channel. This will transform Shutterstock into a true creative platform and allow our customers from small businesses to global enterprises to create with confidence. Before turning the call over to Jared, I'd like to leave you with a few takeaways. Over the past year, our strong financial performance has allowed us the flexibility to launch new multi-asset subscription products across channels, invest in our technology platform with the launch of Creative Flow, and accelerate our product strategic acquisitions supported by robust marketing. With these investments, both organic and inorganic, we are well on our way in our journey to transform Shutterstock into a leading creative platform, leveraging content, data, and workflow applications. I look forward to providing everyone with further updates in the quarters ahead. I'll now turn the call over to Jared. Thank you, Stan, and good morning, everyone. Shutterstock grew revenues 18% in the third quarter or 17% on a constant currency basis. Foreign exchange contributed 2% less to revenue growth as compared to the second quarter as the euro and the pound softened versus the US dollar. E-commerce revenue grew 18% this quarter with consistent growth across content types and strong growth from our subscription offerings. PicMonkey added 1% to total company revenues this quarter, and we recognized the revenue for the month of September in our e-commerce channel. Our enterprise channel experienced tremendous growth this quarter, accelerating to 17% year-over-year, based on strong year-to-date bookings momentum and great performance at Shutterstock Studios. Gross margin improved by 70 basis points year-over-year to 64%, and was consistent with second quarter gross margins. While we saw another quarter of gradual return to growth in paid downloads, the increase in utilization did not impact our gross margins. Sales and marketing expense was 28% of revenues as compared to 22% in the third quarter of 2020 and up from 24% in the second quarter. This increase was driven by increased investment in marketing largely around our previously discussed brand campaign, as well as higher sales commissions associated with strong enterprise revenue performance. Product development as a percentage of revenue increased 60 basis points in the third quarter due to costs associated with our third quarter acquisitions, higher compensation costs due to additional hiring of engineers, as well as additional performance-based stock compensation expense. G&A expenses were 18% of revenue, up 1% from the third quarter of 2020. G&A expenses this quarter included transaction costs of approximately $2.5 million related to our third quarter acquisitions, which explains the variance. The sequential decline in EBITDA margins to 23% resulted from the increased marketing spend we previewed in the second quarter and the one-time M&A expenses that impacted G&A costs. For the third quarter, GAAP diluted earnings per share was 43 cents, and adjusted diluted earnings per share was 70 cents. Turning to our balance sheet and cash flows, at the end of the quarter, we had $301 million of cash, down from $411 million at June 30, 2021. We generated $55 million of operating cash flows, offset by $110 million paid for PicMonkey, $31 million of cash paid in the quarter for our acquisitions associated with Shutterstock.ai, $10 million of CapEx and content acquisitions, the $8 million quarterly cash dividend paid in September, and $4 million of share repurchases. Our deferred revenue balance of $171 million increased almost $10 million from the second quarter and almost $27 million from the third quarter of 2020. $8 million of the third quarter deferred revenue balance is from PicMonkey, and so excluding that, we grew deferred revenue 13% year over year. This growth in our deferred revenue balance is a strong leading indicator of the future growth of recognized revenue of our enterprise revenue channel, which represents more than half of the deferred revenue balance. In terms of capital allocation, we will pay our next quarterly dividend of 21 cents per share, on December 16th, 2021. We plan to grow the dividend in line with cash flow growth and plan to revisit the quarterly dividend before we announce our fourth quarter results. With respect to our share buyback program, we have commenced our $75 million annual buyback and are in the market each day buying. At current share prices, this would allow us to buy back approximately 2% of the share count each year. By growing our dividend over time at rates in excess of average equity market rates of return, repurchasing shares on a consistent basis, and remaining active in M&A, our goal is to provide investors compounding annual returns that exceed our growth in revenues and operating profit. Turning to our key operating metrics, subscriber count increased by 32%, subscriber revenues increased by 21%, Average revenue per customer increased by 10 percent to $361, and paid downloads were up 2 percent, and revenue per download increased to $4.20 per download. We are pleased with the strong subscriber and subscriber revenue growth figures this quarter. In particular, we've seen strong market reception for our Flex multi-asset subscriptions that have already been in the market in our enterprise channel and just this week launched into e-commerce. The sequential slowdown in subscriber growth is largely due to the lapping of the new video and music subscription products introduced in the back half of 2020. At this point in time, we have not included PicMonkey's customers into our operating metrics, but anticipate doing so once the product is integrated into our Creative Flow application suite. We also continued to execute on our M&A strategy this quarter with the acquisition of PicMonkey. This deal is emblematic of the type of transaction we want to pursue, where we acquire a great business with leading technology, and where we believe we can use our sales channels and our marketing muscle to accelerate the growth of the acquired business. PicMonkey was a growing and profitable company with a large-scale subscriber base of over 200,000 customers. We paid a reasonable multiple for the business using cash on the balance sheet And from a technology perspective, we expect to fully integrate this into our Creative Flow application suite over the course of the next several quarters. Finally, turning to guidance for the remainder of the year. We are increasing our full-year revenue, adjusted EBITDA, and adjusted earnings per share guidance as follows. Revenue of $765 million to $770 million, representing 14.75% to 15.5% annual revenue growth. Adjusted EBITDA of 185 million to 191 million, with annual margin expansion of 100 to 150 basis points, above our previously provided range of 100 basis points of annual margin expansion. And adjusted earnings per share between $3.18 a share to $3.29 a share. In the fourth quarter, we expect to see continued steady growth in our enterprise business, and slower growth on more difficult comparables in e-commerce. We also expect to see EBITDA margins of 16% to 18% as we further ramp up spending on the brand campaign. This will result in sales and marketing to increase in the fourth quarter as a percentage of revenues as compared to the third quarter. We are pleased with our results for the third quarter and expect to provide formal 2022 full-year guidance as part of our fourth quarter results. We feel great about the PicMonkey acquisition and the moves that we're making to incorporate predictive performance data into our offerings with Shutterstock.ai. We are pleased with the introduction of Flex 25, our first multi-asset sub in e-commerce, and are excited about the rollout of the initial applications of Creative Flow for our enterprise customers. All around, Shutterstock is making tremendous progress in becoming a creative platform that allows our customers to create with confidence. Thank you so much for joining us today. We very much appreciate your time. Operator, we'd now like to open the line for any questions.