Earnings Call: Q2 2015

Aug 6, 2015

Day, ladies and gentlemen, and welcome to Shutterstock's 2015 Second Quarter Earnings Call. At this time, all participant lines are in a listen only mode to reduce background noise, but later we will be conducting a question and answer session and instructions will follow at that time. As a reminder, this conference call today is being recorded. I would now like to turn the conference over to Craig Felenstein, Senior Vice President of Investor Relations. You have the floor, sir. Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's Q2 2015 earnings call. Joining me today is John Oringer, our Founder, Chief Executive Officer and Chairman and Tim Bixby, our Chief Financial Officer. During this call, management may make forward looking statements that are subject to risks and uncertainty, including predictions, expectations, estimates and other information. These include statements relating to the expansion of our addressable market, the success of new product offerings, including products we recently acquired, revenue growth and the predictability of our revenue, adjusted EBITDA, equity based compensation, taxes and capital expenditures. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Please refer to today's press release and the reports and documents filed by us from time to time with the U. S. Securities and Exchange Commission, including the section entitled Risk Factors in the company's Form 10 ks filed on February 27, 2015, for a discussion of important risk factors that could cause actual results to differ materially from those discussed in any forward looking statements we may make on this call. On this call, we will refer to EBITDA, non GAAP net income and free cash flow, which are non GAAP financial measures. You can find a description of these items along with the reconciliation to the most directly comparable GAAP financial measures in today's earnings release, which is posted on the Investor Relations section of our website. We believe that the use of these measures provides additional insight for investors. However, these non GAAP financial measures should not be considered in isolation from or as a substitute for financial information compared in accordance with GAAP. With that out of the way, let me turn the call over to John. Thanks, Craig, and thank you everyone for joining us this morning. Shutterstock delivered another quarter of strong growth as the key competitive advantage we have built, most notably the quality of our content library and unparalleled search technology, continue to attract more customers and contributors to our platform. Product and user experience matter. It's a philosophy we have lived by since we launched our first offering in 2003 and it's what still drives us today. We continually hear from our engaged customer base that Shutterstock's content diversity of the images we offer. That is why once creative professionals interact with our platform, they keep returning as evidenced by our annual retention rates above 100%. To ensure we are meeting the demands of existing customers, while also attracting new users, we remain focused on building cutting edge technology and introducing new and innovative product offerings. A great example is our rollout during the Q2 of monthly subscriptions with no daily download limit. We also rolled out a smaller subscription offering for users who may not need as many images per month. While these new subscription offerings have some short term financial implications, which Tim will discuss in a moment, over time, we expect them to drive additional subscription growth, extend average retention length and increase lifetime customer value. Our relentless focus on providing the best user experience from a quality search and value perspective has resulted in consistent customer growth over the last 13 years. This past year alone Shutterstock user accounts have grown by 20 5% with over 1,300,000 customers licensing content. That trend has continued in the 3rd quarter despite changes in the competitive environment. User accounts at the end of July remained 25% above a year ago and our year content across our platform delivers bigger payouts to our contributor base and encourages them to upload fresh content to Shutterstock, further facilitating network effect of our business. During the content library grew by nearly 6,000,000 images, 60% more than we added in Q2 a year ago and now includes more than 58,000,000 photos, vectors and illustrations, along with over 3,000,000 video clips. With more contributors than ever uploading their best content in a state of the art processing operation that best images 24 hours a day, 7 days a week, we believe we are well positioned to scale this. We see plenty of opportunity to invest even further to create the best user experience for both customers and contributors and we will continue to do so, even if the ultimate return on that spend is not expected for quite some time. Our operating momentum today is broad based with strong gains across all of our businesses and content types. The strongest growth driver continues to be our enterprise business as we further build our relationships with agencies, media organizations and large enterprises by adapting our core offerings to their needs. This was a business that barely existed several years ago and now has over 20,000 users, up over 50% from the Q2 in 2014. By providing dedicated sales reps, user management functionality, curated content and robust legal protection, we regularly transform customers who are spending a few $1,000 per year in the clients with deep relationships who spend tens of 1,000 or even 100 of 1,000 of dollars annually. On average, an e commerce client who evolves into a premier enterprise client increases their annual spend by 10 times in that 1st year. This increase in spend is driven not only by the higher price we can charge per image given the additional services we provide, but also by increased usage across each enterprise. In fact, if you add up both the paid downloads as well as the free comps we provide as part of our enterprise agreements, the number of downloads across our enterprise business more than doubled this past quarter versus a year. As a result, in the past year alone, the number of customers spending over $50,000 annually has doubled and those spending over $100,000 has increased by nearly 70%. Our enterprise business now exceeds 20% of our overall revenue we continue to invest in new products and services to further enhance these relationships. In the last few years, we have introduced Offset, a highly curated marketplace featuring an elite collection of images with simple royalty free pricing that our enterprise customers and we acquired Webdam, a cloud based digital asset management service that enables marketing and creative teams to efficiently manage and collaborate on their creative files. Most recently, with the acquisition of PremiumBeat and Rex Features, we expanded our content offerings to include music and editorial content, further deepening and broadening our relationships, especially with enterprise customers. We have already made significant progress in integrating these businesses in June. And in June, we announced the next big step in building a preeminent editorial service. Our recently announced partnership with Penske Media combines Shutterstock's innovative platform and loyal customer base with Penske's event access and high quality content. This exclusive agreement speaks to both our commitment to provide the best and most diverse content to our customers as well as the opportunity ahead of us, as we look to revolutionize the editorial marketplace. Shutterstock has had a history of successfully disrupting established business models and we believe this is another area where we have significantly expanded our addressable market. The investments we have made over the last few years in new content types, advanced technology, global expansion and enterprise sales are paying off with sustained financial growth. We are still in the early days of maximizing the opportunity we see in front of us and we are determined to nurture both sides of our existing marketplace, so we can deliver strong financial growth. At the same time, in step with our philosophy from day 1, as we deliver these results, we are also hard at work developing the next generation user experience for our customers, so we can build additional long term value. Before I finish up, I'm sure that most of you have seen the announcement that Tim will be leaving Shutterstock and Stephen Burns, one of our Board members up until a few days ago will be taking over the CFO role next month. Tim has been a great financial and operational leader and his hard work and dedication during his tenure as CFO will allow us to build upon the growth we have delivered over the past few years. We wish him the best of luck. Now let me turn the call over to Tim to walk you through our financial results and outlook. Thank you very much, John, and thanks everyone else for joining us this morning. Our in Q2 with revenue increasing 30% versus the Q2 a year ago. Excluding the impact of currency as well as contributions from our premium bean REX acquisitions, which closed in January, revenue growth was approximately 27% as we delivered significantly increased contributions from our expanding video and enterprise offerings, while also generating growth from our traditional e commerce business. We continue to see nice trends across all key metrics as we attract new customers across multiple content types and work to increase customer lifetime value. This past quarter, our user base expanded to more than 1,300,000 customers, up 25% versus a year ago, including a 50% increase in our enterprise customer over that same period. While customer growth this past quarter remained quite strong, the number of new e commerce customers was somewhat below our initial expectations, primarily due to some softness across much of Europe. However, as John mentioned, we recently launched several new subscription offerings to better meet customer needs. The early signs have been encouraging with subscription growth increasing versus the months before we introduced these products. There's one nuance surrounding the new product offerings that I want to mention as it impacted reported revenues this past quarter and does have full year implications. While the new subscriptions are expected to lift average customer lifetime revenue, revenue recognition is somewhat more back loaded to the end of each month rather than evenly spread across the month, and this is due to the monthly rather than daily download limitation. As a result, we saw an increase in deferred revenue due to this change and we recognized roughly $2,000,000 less in revenue during the Q2 than we likely would have had with no product changes. This impact will flow through the remainder of the year. While customer expansion is certainly the biggest driver of our strong revenue growth, it is not the only metric that is growing nicely. Revenue per download increased 13% and paid downloads increased 14% year on year, with the growth in revenue per download the growth in revenue per download reflecting the impact of higher enterprise sales as well as continued momentum across video, editorial and music products, all of which carry higher than average effective prices for Shutterstock. Looking at customer growth in conjunction with these metrics provides a more complete snapshot regarding the overall health of our business and we'll continue to provide detail on customer accounts where it makes sense moving forward. As we generate strong revenue growth across a diverse set of asset types, we're also benefiting from the geographic diversity of our customer base. Currently, 39% of our revenues are from North America, 33% from Europe and 27% from the rest of the world. And this reflects a slight shift of share from Europe to North America versus the prior year. Each of these regions is growing at more than double digit growth rates and we continue to see strong momentum in nearly every country and region of the world, including most notably India, Japan and Germany. Although 70% of our revenue is generated from customers outside the U. S, only approximately 30% of the total revenue is exposed to currency fluctuations, primarily the euro and the British pound. Given that we record revenue at the foreign exchange rates when a product is sold as opposed to downloaded, the impact of currency movements on our financial results can lag somewhat the shift in currency rates. Assuming current rates going forward, we expect to still see a meaningful impact from currency movements in the Q3 and to a lesser extent in the Q4. Shifting now to the cost side of the business, we continue to align our spending with the revenue opportunity we see across our entire platform. Operating expenses increased 32% versus the Q2 a year ago with the primary driver being the higher contributor royalties associated with our growing revenue base. Contributor royalties were again stable at approximately 28% of our revenue in the 2nd quarter. Given the consistency in our contributor payout ratio, our gross margin has also remained largely steady at approximately 60% this past quarter, excluding stock compensation expense. Sales and marketing expense was approximately 25 percent of revenue in the quarter, excluding stock compensation costs. Though we are seeing somewhat higher keyword costs due to competition, it is important to note that our overall marketing spend as a percent of revenue is essentially unchanged versus the prior year quarter. The return on our marketing spend remains strong as we continue to drive new customers to our platform, while keeping retention to G and A expenses returned to normalized levels in the second G and A expenses returned to normalized levels in the 2nd quarter as compared to the Q1 of this year when we somewhat higher transaction related expenses. These did not recur in the 2nd quarter. Overall, R and D and G and A combined improved about 150 basis points versus the prior year quarter. We ended the quarter with a total of 6.42 employees worldwide and that includes the acquired REX and PremiumBeat Companies from January and this is up about 22 employees since the end of the Q1. We also generated solid bottom line results in the quarter. Adjusted EBITDA in the 2nd quarter grew 24% on a reported basis to $20,700,000 Excluding the impact of currency as well as contributions from acquisitions, adjusted EBITDA growth was approximately 32%. Adjusted EBITDA margin improved by approximately 200 basis points, excluding currency, as we delivered additional operating leverage. It's important to note that we are delivering this operating leverage even as we continue to invest in personnel, product development and technology so we can further strengthen top line growth, continue to innovate and build additional long term value. GAAP net income in the quarter was $5,300,000 or $0.15 per share as compared to $4,900,000 or 0.14 dollars per share a year ago. The increase primarily reflects the improved operating performance offset somewhat by increases in stock based compensation expense. Non GAAP net income, which primarily excludes the after tax impact of non cash equity based compensation expense, the amortization of acquisition related intangibles increased 23% in the 2nd quarter to $11,200,000 or $0.31 per share. Taking a look now at our cash position. Free cash flow in the quarter was $14,100,000 a bit less than the Q2 a year ago, primarily due to the timing of asset and liability movements. CapEx during the Q2 was $4,500,000 primarily for technology hardware. Our cash balance increased $21,000,000 to approximately $266,000,000 at the end of the quarter. And turning to the second half of the year, we remain very encouraged by the operating momentum across the entire business. We are updating our guidance to reflect the accounting impact associated with our new subscription offerings, lower than expected customer acquisitions in the second and some additional foreign currency headwinds which can have a lag effect depending on the timing of our customer downloads. So for the full year of 2015, we're updating our guidance as follows: revenue of $425,000,000 to $430,000,000 adjusted EBITDA of $82,000,000 to $85,000,000 non cash equity based compensation expense of approximately $31,000,000 an effective tax rate approximately 44 percent and capital expenditures approximately $18,000,000 And now taking a look specifically at the Q3 and we are assuming in these figures both for the quarter and the full year no material change from current U. S. Dollar exchange rates, we expect in the 3rd quarter revenue of $105,000,000 to $108,000,000 adjusted EBITDA of $18,000,000 to $20,000,000 non cash equity based compensation expense of approximately $8,000,000 an effective tax rate of 44 percent and CapEx of approximately $5,000,000 Before I finish up, I would like to thank John and the Board and the entire employee base at Shutterstock for providing me the opportunity to be a part of this team for these past few years. It is truly a unique company and we've worked hard to deliver sustained operating performance while further solidifying Shutterstock's long term strategic position. While it's difficult leave, I firmly believe Shutterstock is well situated to achieve long term success and continued growth. Thanks for your time this morning. And now if the operator could rejoin the call, John and I would be happy to answer any questions from the participants. You. Our first question for the day comes from the line of Rohit for second half, if you could just draw out your assumptions underlying the change in guidance versus in May and Q2 performance? In particular, if you could just call out what the accounting impact and incremental as far as kind of as far as kind of the big picture kind of competitive environment is concerned, is there any linearity that you saw in terms of how customer acquisition or your retention or your churn trended over the last 12 to 18 weeks around Adobe launch? And how do you think you need to react over the next 6 months or so? Sure. So we'll take a couple of questions there. So the first one around the guidance adjustments, second one around timing and Adobe potential Adobe impact. I'll take the first one. So important to note that this past year, we gave our initial full year guidance actually almost a year ago last November for the full year. A lot has changed since then. We did not adjust guidance in Q1, a lot of FX movement. And at this point, we decided that it felt the numbers were a little bit aggressive for the year, particularly due to the 3 primary changes that you noted. So about half of the adjustment that we're making to the revenue line in our guidance versus the previous guidance, about half of that is due to the softness we saw in customer acquisitions in Q2, which in a recurring revenue business with our retention rates, etcetera, that impact kind of rolls through the rest of the year. And then about 25% due to continued FX impacts, that sort of lag impact of FX and then the remaining 25% due to the actually the success of the new product launch, which has slightly different accounting implications. So there's just a little bit more deferred revenue that impacts us because this is the change over a year of launching this new product. In terms of the Adobe launch, and I'll let John chime in here, but from a timing perspective, Adobe didn't really launch anything new through FITOLIA until the end of the quarter. So clearly no potential to have real impact on the numbers. And while they're out there in the market with some marketing efforts, we have not seen any impact on our business either in the Q2 or in the continuing result to date in Q3. Yes. And further on the competitive environment point, the competitive environment has changed around us. And we've watched over the past decade plus change consistently. We focus on our product. We focus on our customers. We focus on our contributors. We're completely focused on doing what we do every day. And we're going to continue to deliver the strong growth we've been delivering and continue to invest in new opportunities and that's not going to change. Okay. And if I could just add one follow-up. On the Penske agreement, can you quantify or give more color as to how large of a contributor that agreement could become over the next 12 to 24 months? Yes. The partnership with Penske is a great one. They're obviously a super strong brand with a long reputation for great content and they're really forward thinking and they chose Shutterstock as a partner over several other options. So we're very excited about it. We're not giving financial guidance at this point. We're just kind of getting up and running over the next coming months and this is going to be a long term partnership and we are very optimistic about the results we can deliver. Yes. And the PMC, if you think about the combination of REX and PMC together, it's a very powerful combination. Our customers that buy commercial images from us have always asked for the editorial part of the business. It's been a hard thing to break into, but we think we have the right strategy. Now we have 2 important pieces that will push that strategy forward and we plan to make this a part of our business going forward. Okay. Thank you. I'll get back into the queue. Thanks. Thank you. Our next question is from the line of Brian Fitzgerald from Jefferies. Your line is open. Thanks. A question around maybe a follow-up question. With the changes in the competitive environment, have you seen any shift or changes in the dynamics around or percentages around your alacarte business versus your subscription customers? And then I have one follow-up. Thanks. No. I mean most of the trends in terms of the share of business we're seeing across each of the content types and the product lines has remained quite stable. I think that the change we have seen is with the launch of our new subscription product, some positive trends where more of our customers are choosing that subscription product than might have before. And so I think it's removing that daily download limit is not only appearing to be a great move for subscribers or historic subscribers, but also it's possible that on demand customers may find it more interesting. So we're seeing a couple of positive trends with that launch. Yes. And while you may see other companies out there try to replicate our subscription, 10 years ago, we invented the marketplace based subscription for stock photography. We have more data than all of our competitors. We know how this product sells better than anybody else in the competitive environment. We continue to evolve it. And you can see that in the changes we've made recently, they're very customer centric and we know those customers best. Thanks, John, Tim. And then maybe the follow-up maybe was, as you take a step back, do you think Shutterstock's library or the technology if you had to put yourself in one camp, what's the real competitive advantage against very fragmented spaces, a lot of big players there, everybody is getting to library sizes that are big. Is it the library or the technology you would argue is your competitive advantage? It's both. You need the content, but you also need all of the data. We have the best quality. You can see it by doing search results from our competitors and doing the same search result with us. In some cases for some searches, maybe other competitors will have good content too, but you'll get the content that you need for your project from us quicker because of all the data collected and because of how customer centric we are and how well we know these customers. Great. Thanks, John. Thanks. Thank you. Our next question comes from the line of Youssef Squali from Cantor Fitzgerald. Your line is open. Hi, thank you very much. A couple of questions please, if I may. Tim, can you go back to and maybe give us a little more clarity on exactly what happened in Europe? I think you singled out Europe as the area of some weakness around your e commerce offering and then you were launching the new products. So maybe just some more detail on that would be helpful. And then on the a la carte service, I think Adobe's offering is priced more competitively than yours. Any plans to match pricing? And if not, how do you compete within that niche? Thanks. Sure. So in some of the softness we saw across Europe, I would say, is a couple of things coming together. So you've got a pretty significant currency impact, whether you're in a local currency, you've got uncertain economies, you've got FX effect, and you've got countries like certainly Eastern Europe and Greece and Russia with fairly significant sort of macro issues. So that coupled with I think some kind of normal ongoing competitive impact, we just found that our forecast expectations were a little bit aggressive and that was much more localized in Europe. U. S. Growth rates were very strong. We're seeing steady improvement across most of Asia but that I think is the main driver there. With the product launch, this is kind of an expected thing. We're going to be testing different flavors of our subscription products going forward, but we're finding that customers are really reacting positively to no daily download limits. So that's one where we're going to continue to see how the data flows and the revenue recognition just a byproduct of that where anytime you switch over to a new product that has its impact and you're going to have that negative impact in the switch over year. On the alacarte pricing, price is not we're not competing on price. I think price and value for since the beginning of Shutterstock is important, but it's more around the simplicity and the clarity of the price and not the price level. This is not a commodity business. We want to be competitive on pricing, but quality, search, value, those are have always been and will continue to be the primary competitive components. As far as price goes, like Tim said, we're always looking at price and we're always looking at the competitive environment. We have a huge head start on our product. We have a huge head start on understanding our customers. We plan to keep that head start. And while we grow fast, we also continue to invest in new products and services that make it easier for our customers to find these images and to get the best images. That's not going to stop and as we grow, we're going continue to invest. So as long as we continue to have a lead, which we plan to, we will be competitive on price and we can probably even charge more because of that competitively. And John just one last one. Stock wise, maybe can you just help us understand your philosophy around buybacks and your stock obviously has seen a pretty major drop of late. Just wondering with your cash generative business model and strong balance sheet, What are your thoughts about buybacks or the Board's thoughts about buybacks on that? Thanks. Yes. Well, first, I agree. Our shares are significantly undervalued. But our first priority is investing organically to build off of long term growth opportunities. 2nd opportunity is M and A to augment our organic growth. And the third is then to return that capital back to shareholders in the form of in the future dividend or a buyback. But as long as we see a future where we can continue to invest organically, we do. As long as we see a future where we can continue to invest in M and A, we do. We will keep that cash for those investments. Okay. Thanks and Tim best of luck. Thanks, Susan. Thank you. Our next question comes from the line of Ralph Schuckert from William Blair. Your line is open. Good morning. A couple of questions if I could. I'm just curious how your customer acquisitions have trended post Q2 mainly in Eastern Europe with the new product? Has that new subscription product offering brought customers back there? And then maybe as a follow-up, why did you decide to change to the subscription pricing right now without metering? I think historically you sort of metered a number of images around 25 downloads per day if I'm not mistaken? And then one more if I could. With the no metering on the subscription, do you expect that to change the gross margin profile going forward? Sure. So I'll take the customer on the customer acquisition side, we don't break down that level of detail by region going forward outside the current the prior quarter. But I think we're seeing encouraging signs across the board with the subscription acquisition. So the data we've seen so far is all quite positive. Yes. On the unlimited well, on the no limit per day, no metering subscription, we were always listening to our customers and we always had a way for them to top off if they didn't if they did run out of their daily download limit and that was our on demand product. We decided to make it easier and with a bunch of back end changes, it became easier for us to launch this and it made sense. We listened to customers and we delivered the product that they wanted. It's as simple as that. On the gross margin side on the new products, our goal is for contributors to make a fair return. That is a key part of why our content library is so strong is our contributors tend to come to us first. We pay out 28% or so of revenue across the contributor base. Products on their own can have higher or lower royalty impacts, but we're seeing fairly consistent royalty rates across even the new products. It tends to be a little higher when you launch a new product and then comes down over time because folks are testing and without a limit they may download more. But the trend lines are all kind of going where we expect them to go. If we found that a new product had very strong uptake and great growth prospects and it somehow had a higher download rate and a royalty or margin impact, we control that and we would have to decide and we would decide And our target is to continue to deliver that just under 30% return to our contributors and I expect that will continue to be very part of the strategy going forward. Great. One more if I could. Just on the newly revised full year guidance. Just curious what's your visibility that you have into it now? I guess on one hand you have more visibility because it's subscription based, but the other hand, you have also the potential to have more customers adopt subscription, which could potentially change the dynamics in Q3 and Q4? Just so any thoughts around that? Yes, I would say the visibility is comparable, so not a dramatic change. What is a change is that we don't have the years of history for the new products that we have for 25 a day or on demand. And so from that perspective, you don't have quite as much of the seasonal historical data, but these are the same customers. They're creative professionals around the world. Their needs are not much different than they have been over many years. And so the nice thing about having 1,300,000 users and growing is that the law of large numbers helps you. Behavior is each each coming quarter, our track record of coming in that range or even slightly above has been very consistent. Great. One more if I could actually please. Your comment today on the increase in AdWords pricing, I know historically you've given out some LTV metrics around your customer base. Do you think that with what you've seen today that you could still sort of manage the business to your historic LTV range that you've talked about? Yes, I think we have seen some incremental increases and it's not just in the last couple of quarters, but the last couple of years there's been an increase in how much we're spending to acquire new customers particularly in search. But another benefit we have is search is not the only game in town. We have other ways of generating customers. We have strong word-of-mouth, a lot of customers coming to us through unpaid channels. So overall, we're still seeing our ability to grow the customer base and our ad spend or marketing spend versus revenue has remained pretty stable. Okay. Thanks. Best of luck, Tim. Thank you. Thank you. Our next question comes from the line of Aaron Kessler from Raymond James. Your line is open. Great. Thanks guys. A couple of questions. First just on the guidance, I believe you noted that the subscription change to unlimited will have some impact on the on demand buying. How is that factored if at all into guidance? Was that part of the accounting change? And second, Tim, for metrics going forward, I think you noted you made some changes there. Do you continue to plan to give out downloads and pricing? And third, just for Europe, I guess, how much of that would have been maybe seasonality, weaker seasonality in Europe in Q2 versus an actual slowdown there? Thanks. Yes. So the accounting change is really not related to on demand. It's really the unmetered or the no daily download limit. So the mechanics of revenue recognition are that when you have a daily download limit of 25, our practice is to recognize a month's worth of revenue pro rata each day over the course of the month. And when we switch to a unlimited download, we're recognizing on download. And then at the end of the month, we recognize the balance of the deferred revenue because the month is over and you start a new month and so it tends to be a little more back loaded. Over time that works itself out because you've got similar amounts coming into a month as being deferred out of a month. But because this is the changeover quarter Q2 and this is the changeover year 2015, we'll see a negative impact. We'll recognize a little bit a few $1,000,000 less of revenue than we otherwise would have. On the metrics, yes, we think that the there's a bunch of metrics combined that kind of capture the color of the business and we've increased the different data points that we've been sharing with folks and I expect we'll continue to add to share some of those particularly enterprise information because we think that's very helpful. Downloads and revenue per download will continue to provide. It's just one piece of the puzzle. And I think you see this quarter where the growth rate in the download count is actually increased versus the prior quarter. These will ebb and flow and it's a natural sort of capture sort of the flow of the business. So we expect to continue to share those metrics. On Europe seasonality, true seasonality tends to be in the 3rd quarter, which are the slower summer months. Q2, I wouldn't ascribe so much to seasonality as I would to sort of economic uncertainty and currency fluctuation, which not only affects just the translation of currency itself, but also folks' ability to purchase products in foreign currency. So there's quite a bit of business outside of the U. S. That's being conducted in dollars for Shutterstock as it is for lots of e commerce companies that also impact. Okay. And just back to the first question real quick. I understood the accounting changes. I guess the question was do you expect an impact from maybe less on demand bind in the guidance for second half? No. I mean, we kind of factored in the trend lines we're seeing. So we're seeing nice growth rate in on demand. To the extent that there's a change in mix of customers purchasing 1 versus the other, that's all factored into our models and our guidance. Okay, great. Thank you. Thank you. Our next question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open. Thanks guys. So a couple. I guess just first, it sounds like the new guidance reflects mostly some of the trends in Europe as well as some of these accounting changes around the new plans. But it doesn't sound like you're seeing anything outside of marketing costs potentially competitively. Is that fair to say the guidance doesn't really assume any meaningful competitive impact outside of marketing? Yes. We've seen no as I mentioned, the competitive landscape is very much like it has always been. Adobe launched something new at the end of the quarter, but Fotolia has been a key competitor of Shutterstock for many years. It's the same images, it's the same catalog, it's the same search. Adobe has a nice brand name, but no real change in the market dynamics that we're seeing either in the quarter or in the week since the quarter ended. Okay. And then on the lower volume subscription offerings, you kind of touched on it, but can you give us a better sense of how much of the uptake there is coming from kind of new customers or a la carte customers switching into the subscriptions versus people trading down from higher volume subscriptions? It's coming from everywhere. We also see, because we haven't had a subscription at that level before we're seeing new types of customers to come in. So it spans the whole customer base. It's pretty early days for the new product. And I think once we get a few quarters of data and a better understanding of how these the customers' decision making is working, that's the kind of information we would consider sharing. But it's we're a few months into this launch and things look good. But it's a little early, I think, to look at macro trends until we get a little bit more data. Okay. Thanks for the help guys. Thank you. Our next question comes from the line of Blake Harper from Topeka Capital Markets. Your line is open. Hi, guys. I wanted to ask you, John, if you think that any of the changes to the pricing for your subscription model or other lower priced offerings by your competitors changes the addressable market in any way or the size of it? Yes. I think what we're seeing through all these changes is a lot of people that normally wouldn't have bought images before start to buy them, just like we always have. We see more and more people starting to realize they need legal model released, property released imagery or else they start to get in trouble. If you just grab images off of Google, you will get in trouble. It's easier than ever to find your copyrighted material and to sue if someone uses it incorrectly. So, as people get more educated and as the environment changes around us and more and more people are able to easily create websites and do marketing on their own, we're seeing different types of customers come in, all the way from PowerPoint presentations to the to billboard advertisements. People need this stuff. Okay. And then one follow-up, if I could, on the paid download growth that accelerated again and after being after declining last quarter and previously. I just wanted to understand really how that is an indicator of the business. Obviously, with the enterprise product, it's not as relevant, but just wanted to can indicate can indicate some of the health of the business or if there's other types of metrics that you could release in the future that would us either to understand on the number of subscribers or on number of enterprise customers or something else like that that could help us to get a better understanding of the business? Yes. I think the it's a nice trend point we saw where the growth rate was a little higher in Q2 than in prior quarters. The download count tends to be somewhat of a proxy for the subscription business. We have sort of an eightytwenty rule where the bulk of the downloads are under the subscription plan, subscription products, probably 3 quarters or so of the downloads. And so it is a good indicator of subscription behavior. It's not necessarily an indicator of revenue or customer growth, but it's more an indicator of their behavior. And so that's a good data point. But looking at it in isolation, you definitely lose a lot of nuance of the rest of the business. I think enterprise accounts and their growth and our ability to take an e commerce customer and make them an enterprise customer and generate 10 times as much revenue in that year of transition is that's a pretty great metric. And those are the kinds of metrics that we've begun sharing and we'll continue to share things like that where it gives you a little more insight into the some of the sub business units of the business that are growing well. We are pretty conscious about metrics and we're always trying to figure out what could be the best way to get you guys to understand the business the best. So we're always reevaluating the stuff and trying to figure out how to communicate that those metrics. Okay. Thanks guys. Best of luck Tim. Thank you. Operator, we have time for one last question please. Sure. Our last question we have time for today is from the line of Deane Priceman from Morgan Stanley. Your line is open. Hey, guys. Thanks for taking my questions. I know you talked about enterprise customer growth, but what was enterprise revenue growth in the quarter? And how did it compare to last quarter? And then I think following up on Youssef's question, 1st question first. So enterprise growth was strong. We don't break out specific growth rates for each of the businesses, but enterprise continues to grow faster than the overall business. We've got more than 100 sales reps kind of cranking it out and selling well. That business is growing very nicely. It's 22% or so of the overall revenue. So, it continues to grow as a proportion of the whole business. As far as pricing goes, again, we're constantly evaluating the competitive environment. And you have to remember, these are businesses buying our images. Businesses are using our images to make money off of our images. A business spending a couple of dollars for an image is not too much to ask. It happens 4 times per second at Shutterstock and it will continue to happen because people need these images to run their businesses. Great. Great. Thanks. Best of luck, Tim. Thank you. Thank you. That's all the questions that we have time for today. So I'd like to turn the call back over to management for closing remarks. Thank you everybody for joining us today. And if you have any follow-up questions, please let us know. We're here in New York. Thank you very much. Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.