Earnings Call: Q4 2019

Feb 13, 2020

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Quarter 4 2019 Sherpa's Stock Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Heidi Garfield, General Counsel. Please go ahead. Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's 4th quarter and full year 2019 earnings call. Joining me today is John Oringer, our Founder, Chief Executive Officer and Chairman Stan Pavlovsky, our President and Chief Operating Officer and Joe Gies, our 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 long term effects of our investments in our business, the future success and financial impact of new and existing product offerings, our future growth, margins and profitability, our long term strategy and our 2020 guidance. 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 ks filed with the Securities and Exchange Commission. We will be discussing certain non GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, revenue growth, including by distribution channel, on a constant currency basis and free cash flow. Reconciliations of these non GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with today's press release, which is 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 John. Thanks, Heidi, and thank you everyone for joining us today for Shutterstock's 4th quarter and full year 2019 earnings call. As you have seen over the last several weeks, we made some leadership announcements that the entire Board and management team are excited about. First and most recently, this morning, we announced that after serving as CEO for the past 16 years, I will be assuming the role of Executive Chairman at Shutterstock, which will take effect on April 1. In this new position, I'm excited to continue to help the company from a different perspective. I am pleased to announce that Stan Pawlowski, our current President and Chief Operating Officer, will be assuming the role of CEO. I speak for the entire Board when I say that we are confident that Stan is the ideal person for the job. I've enjoyed working closely with him since he joined last year and his leadership and vision have been invaluable. Stan hit the ground running as soon as he joined, taking Impact's full leadership role, not only in the operations of Shutterstock, but also in the development and execution of our long term strategic vision. This experience and his extensive background is successfully growing and leading e commerce, retail and digital media businesses make him uniquely qualified to assume the responsibilities of CEO. In my role as Executive Chairman, I will continue leveraging my areas of expertise, advising on Shutterstock's strategic initiatives and supporting the company in the next phase of its growth and innovation. I plan to stay involved in the strategy and long term direction of the business, including yearly planning, M and A, capital allocation and other large projects and initiatives. I want to be clear that my fiduciary duty and commitment to shareholders will not change in my new role and will remain as strong as ever. As the largest shareholder of the company, my interest is in its success continues to be squarely aligned with our investors. I am fully confident in the strength and competitiveness of Shutterstock's dynamic and creative technology platform and in the opportunities ahead of us as a leader in our industry. I'd also like to welcome Jared Yeas, our new CFO to his 1 Shutterstock earnings call. Jared joined our leadership team in December and has already been a tremendous addition to our management team. He has extensive experience leading finance and accounting teams and successfully growing businesses organically and through M and A. We also announced that Peter Silvio has been promoted to Chief Technology Officer after doing an excellent job as Head of Engineering. He will continue to lead our technology organization to drive the development and implementation of innovative products that bring new value and an outstanding user experience to our customers and contributors. These are critical components of our business and our team is excited that Peter is going to help further Shutterstock's leading role in our industry. With these appointments, we have further augmented our management team with best in class leaders who have the right experience to drive enhanced value for our shareholders. I'm really excited to continue working closely with them in my role as Executive Chairman. Before I turn the call over to Stan and Jared, I would like to spend a few moments to reflect on where this company has been since we founded it 16 years ago and where Shutterstock is headed. We started the company in 2003 as a scrappy startup, but quickly established ourselves as a great business. We were profitable on day 1 and have been every year since. Since that time, we have become a clear leader in the space and achieved numerous accomplishments over the years. Most recently, we celebrated paying $1,000,000,000 in earnings to our global network of contributors. We're proud of the success our contributors have achieved leveraging Shutterstock's platform They are thrilled to share this accomplishment with our global community of fellow creatives, including artists, photographers, videographers and musicians. I want to thank all of our contributors who made this historic breakthrough possible. While this is a massive achievement, we have not forgotten our roots. We still maintain an upstart mentality as a disruptor in the space. Since 2003, we have worked tirelessly to upend the industry by constantly innovating and providing professionals and creative with a comprehensive platform for high quality content, tools and services. We strive to stay in front of the needs of our customers and market trends. This disruptor mindset is deep rooted in our DNA, and I'm encouraged that with the new leadership, this will remain integral to our company. Looking to 2020 and beyond, we are as committed as ever to our mission of providing sustainable value for our users. We will also we will always seek to evolve our suite of product offerings provide enterprises, SMBs, marketers and creatives with the assets they need whenever they need it. That's what we excel at and what we'll continue to do. In addition, we will continue to work diligently to best position our business for long term profitable growth in a competitive market. We continue to see a growing need for digital content as marketing trends highlight the importance of high quality content solutions. Further, what makes Shutterstock stand out is our constantly evolving platform, which we thoughtfully develop and build upon to be highly nimble and provide a better user experience. We see additional opportunities to leverage our platform to take advantage of new market opportunities that can further benefit our customers. The future is bright for Shutterstock. Our collective goal in pushing for innovation and enhancing our team is meant to achieve long term sustainable growth. With this in mind, I remain very confident in Shutterstock's future and look forward to helping support its continued success. Finally, before turning it over to Stan, I'd like to thank our incredible Shutterstock team. It has been a privilege to serve as CEO for so many years, and I'm humbled by the hard work and dedication of our employees. Their support will ensure we realize the full potential of this company and deliver value to our numerous stakeholders long into the future. Working together, Shutterstock revolutionized the stock image industry. And along the way, we created a global technology platform that brings the best, most innovative content to organizations around the world. I truly believe the best is yet to come. Thank you for your support. And now I'll turn it to Stan. Thanks, John, and good morning, everyone. Before I begin my remarks, I would like to thank John for his continued leadership at Shutterstock. John is a true visionary. He's been instrumental in every aspect of building this great company into a leading global platform offering best in class content, tools and services to millions. We've worked together with management team to solidify a transition plan designed to provide leadership continuity and I look forward to working with John throughout the transition and beyond. Having been the COO for almost a year now, I've been focused on driving improved execution across sales, marketing, product and technology to ensure that all of these areas are working together to create a better customer and contributor experience. As CEO, I look forward to driving our long term strategy in support of Shutterstock's vision to be a leading content and technology platform that enables marketers and creators around the world to deliver impactful stories that capture and captivate their audiences. As John mentioned, this company started off as a disruptor in this space. By taking advantage of the growing need for content, Shutterstock ended up changing the stock content industry. For the past 16 years, we've kept up that entrepreneurial spirit and we must continue to push ourselves to be disruptors. We are well positioned to expand on our current portfolio of offerings and find ways to better align with key trends to capture compelling new opportunities. So as CEO, I intend to drive higher customer retention and new revenue streams by focusing on 3 things: innovation that enhances our customer workflow, content that is relevant and fresh, and data and insights that drive performance. We have an ambitious plan and a lot of work ahead of us and I'm excited about our future prospects. As we look back to 2019, we started to take steps towards our future strategy. Specifically, from a content perspective, we increased our global content footprint, bringing more relevant and local content to our users. We also launched new music solutions, meeting the rapidly growing demand from key audience segments such as social media managers, YouTubers and production studios. From a technology and innovation standpoint, we launched SmartBrief as a self-service tool, enabling a wider range of customers to leverage our marketplace for unique content solutions. And we reached over 3,000 partners that offer our content to their customers via our API integration as well as launching a self-service API subscription plan to meet the demand of small and midsized businesses. From a data standpoint, we continue to invest in deep learning, which allows us to drive customers' performance and improve discovery. As an example, deep learning models we have built allow us to safely filter content for our customers. I would like to briefly touch on our 2019 financial results before Jared provides a more detailed review. In 2019, our revenue growth was 4% on a reported basis, driven by positive momentum in our e commerce channel, which saw reported revenue growth of 7% reaching 392,000,000 dollars We did experience continued headwinds in our enterprise channel, which grew 1% to 258,000,000 dollars As I mentioned on previous calls, we are implementing improvements within our enterprise channel to drive growth. We recently realigned our sales organization and revised our compensation plan to ensure that our sales team is properly structured and incentivized to deliver the right products to our customers. We also improved our go to market strategy and are focused on providing strategic solutions to our customers. We should start to see results of these initiatives in the back half of the year. EBITDA was 96,000,000 dollars an 8% decline from 2018. We recognize the slowdown in growth and margin pressure and are committed to expanding our margins in 2020. While there is work to be done, we are confident that we are positioning the company for long term and sustainable success, and I'm excited to help deliver on our long term strategy. Now, I'll turn the call over to Jared for a more detailed financial review. Thank you, Stan, and good morning, everyone. Before I get started, I'd like to say how excited I am to have joined Shutterstock. In my first few months as CFO, I've been impressed by the strong team here and their commitment to building innovative solutions to meet the changing needs of our customers. I believe there's a tremendous opportunity to enhance the operational and financial performance of Shutterstock and I look forward to continuing to work closely with Stan, John, our Board of Directors and the entire team to solidify Shutterstock's position for long term success and further our vision of being a leading content and technology platform. And now for the financial results. Revenue growth in the 4th quarter compared to the prior year was 3% on both a reported and constant currency basis. For the full year 2019, revenue growth was 4%. Excluding the impact of FX movements, revenue growth was approximately 2% higher for the full year or 6%. Breaking down our revenue growth performance in 2019 further, in the Q4, the e commerce channel, which represents 60% of our revenues, increased 6% to $101,000,000 as compared to the Q4 of 2018. In the Q4, the enterprise channel revenue, which represents 40% of our revenues, decreased 2% to $65,500,000 and was flat on a constant currency basis as compared to the Q4 of 2018. For the full year, the e commerce channel remained healthy and experienced growth of 7% or 9% on a constant currency basis, consistent with 2018. For the full year, the enterprise channel grew 1% and 3% on a constant currency basis. As we've discussed, this represents a considerable slowdown for the enterprise channel on a full year basis as compared to the rapid growth in years past. We do expect the negative enterprise trends to reverse themselves and for us to return to positive year on year growth comparables in the latter half of twenty twenty as some of the investments we've been making in reinvigorating our sales team and approach begin to pay off. Reviewing some of our key operating metrics in the Q4, on a year over year basis, paid downloads grew by 2% to $47,700,000 revenue per download grew by 1% to 3 point $4.4 per download. Our image library expanded by 30% to approximately 314,000,000 images and our video library increased 30% to approximately 17,000,000 clips. I'd like to add some additional transparency to the metrics by double clicking into revenue per download. The growth we've seen in revenue per download this past year is predominantly due to mix shift, with growth in video sales outpacing our other content types. In addition, from a sales channel perspective, we're seeing favorable trends in our e commerce revenue per download, offset by pressure on our enterprise channel revenue per download. Turning to our margins. In the Q4 of 2019, our gross margins were 56.8%, down 70 basis points from 57.5 percent in the Q4 of 2018. The main driver of the change in gross margin is increase in the depreciation and amortization component of our cost of goods sold from higher content acquisition and technology costs. However, for the full year 2019, gross margins were 57.2%, up 10 basis points from 57.1 sales and marketing expense was 20 8% of revenue in the Q4 of 2019 as compared to 27% in the Q4 of 2018. Sales and marketing expenses increased to 9.6% in the quarter and $15,000,000 for the full year due to increased spending in performance marketing initiatives. Product development costs were 9% of revenue in the Q4 of 2019 and were largely flat for the full year 2019. G and A expenses were 16% as a percentage of revenue as compared to 14% in the Q4 of 2018. The G and A increase for the full year is largely attributable to investments we made across cybersecurity, data science and analytics as well as technology. Adjusted EBITDA margins declined to 14.5% in the Q4 of 2019 compared to 20.9% in the Q4 last year. For the full year, EBITDA margins declined to 14.8% from 16.9% based on the additional spend in sales and marketing as well as G and A. We recorded a tax expense of $4,300,000 compared to a tax expense of $1,800,000 in the Q4 of 2018. On a full year basis, our effective tax rate is 19.3% as compared to 17.3%. The Q4 2019 tax expenses include $1,000,000 valuation allowance associated with our international operations and a FIN 48 reserve. GAAP net income in the 4th quarter was 4,400,000 dollars or $0.12 per diluted share. Adjusted net income was $9,200,000 or $0.26 per diluted share for the Q4 of 2019 as compared to $20,900,000 or $0.59 per diluted share in the Q4 of 2018. The quarterly decline in adjusted net income is largely as a result of the tax expense true up at the end of this year. Adjusted net income was $43,700,000 or $1.23 per diluted share for the full year 2019 as compared to 55,700,000 dollars or $1.57 per diluted share in 2018. Turning to our balance sheet and cash flows. At the end of the quarter, we had approximately $303,000,000 of cash and cash equivalents, up from $231,000,000 at December 31, 2018. Our free cash flow in 2019 of $73,200,000 was up 15% from $63,500,000 in 2018, largely due to reductions in CapEx due to lower capitalized research and development costs. Our deferred revenue balance was up as of December 31, 2019 to $141,900,000 from $137,500,000 last quarter, an increase of $4,400,000 The increase in deferred revenue will ultimately be recognized as revenue throughout 2020. We're encouraged by the growth in deferred revenue on our balance sheet and it gives us a good starting point for 2020. Shifting from our financial performance to capital allocation, the company continually evaluates its capital allocation strategy. As part of this evaluation, the Board has approved a recurring quarterly dividend of $0.17 per share. The quarterly dividend equates to an annual 1.5% yield on our current stock price. This quarter, the company will pay the cash dividend on March 19, 2020, payable to shareholders of record as of March 5, 2020. We expect that we can grow the dividend in line with earnings growth and we will periodically revisit the payout based on our cash flow profile and alternative uses of capital. With respect to our M and A strategy, we believe there are significant opportunities to expand our total addressable market into faster growth segments and enhance the value and differentiation of our content with data and insights. While we have a strong cash position, we'll continue to be disciplined as we evaluate M and A opportunities and ensure we have the ability to integrate the acquisitions and that they present compelling industrial logic. We believe that a balanced approach to capital allocation combining M and A with recurring quarterly dividend allows Shutterstock the flexibility to invest and innovate in our core business and provide long term value to shareholders. Finally, turning to our guidance. Our expectations for the full year 2020 are as follows: revenue of $665,000,000 to $690,000,000 with the midpoint of our range representing approximately 4% revenue growth adjusted EBITDA of $100,000,000 to $107,000,000 with the midpoint representing EBITDA margins of 15.3%, up 50 basis points from 14.8 percent in 2019 and representing EBITDA growth of 7.5% year over year. And adjusted earnings per share of between $1.42 $1.58 representing year over year growth of 22% at the midpoint of the range. I'd like to provide some additional color pertaining to our guidance. From a revenue perspective, we expect a differential in growth rates between the e commerce sales channel, which we expect to grow at approximately 6%, and our enterprise channel, which we expect to grow at 2%. The quarterly growth cadence in e commerce should be consistent with prior years. The growth in enterprise will show negative comparables in the first half of the year and stronger comparables in the back half of the year as we realize the fruits of our sales force investments. From a margin and cash flow perspective, we're targeting at least 50 basis points of margin expansion in EBITDA in 2020. We expect to see gross margin stable to slightly up consistent with this past year. Therefore, the operating leverage we will see in the business mainly comes from amortization of the investments we've made in G and A in 2019 combined with prudent ongoing cost management. In terms of the margin trajectory during the year in 2020, Q1 margins will be approximately 2% to 3% lower than 2019 average margins as we continue to make sales investments. Our margin should gradually improve over the course of the year, quarter on quarter as we realize the return on those investments. In terms of free cash flow, we expect it to grow in line with EBITDA. I would note, however, that any additions to cash in Q1 will be nominal due to the timing of the payment of our annual bonuses as well as the settlement of an earn out from the Flash Stock acquisition. This is the only earn out payment associated with the acquisition. Other modeling assumptions for 2020 of note relevant to investors include stock based compensation of $28,000,000 depreciation and amortization expense of $42,000,000 capital expenditures of $29,000,000 and an effective tax rate in the mid teens. We'd also expect our share count increase to be in line with historical trends. With our 2020 plan, we believe that we're capitalizing on growth opportunities in our end market, while committing to modest margin expansion to grow our EBITDA. We're further beginning to use our strong cash flows to return capital to shareholders in a predictable manner by starting with a dividend yield of 1.5%. We will also be opportunistic with respect to the further use of our balance sheet for both share repurchases as well as strategic acquisitions. We're energized as a new management team and we're excited to be able to deliver a strategic and financial update on our business, management succession and our capital plans and we very much appreciate your time today. We look forward to seeing several of you in the weeks months ahead in some of the investor discussions and at analyst conferences that we'll be attending. And now, John, Stan and myself, we're happy to answer any questions that you may have. Operator, please go ahead and open the line for questions. Thank you, Your first question comes from Youssef Squali of SunTrust. Your line is now open. Great. Thank you. This is Nate Mitchell on for Youssef. First off, John, Stan, Jared, congrats on your new roles. Stan, maybe you first, if you could maybe flush out the 1 or 2 most important strategic priorities for you in your 1st year as CEO, particularly as it relates to the core image business? Maybe you can update us on the contributions to your business from image versus video versus music? And then what gives you confidence that you can inflect enterprise in the second half? Then I have a follow-up for Jared. Absolutely. And thanks for the kind words. Yes, my priority for this year is a couple of things. 1st and foremost, as Jared mentioned, we do feel that we're going to start to see leverage in the business this year. So we're definitely focused on improving margins 1st and foremost. From a revenue perspective, as we look at the different asset types, it's been wonderful to see kind of the shift, the mix shift of new and emerging products like our video products, our music products, start to really have an impact both on the price per download, but also on our revenue, particularly both in actually both in enterprise and in e commerce. As far as the enterprise growth, we've started to make changes, as we talked about over the last couple of quarters. And this last month, we launched a new account segmentation. We launched a new commission plan and we're hiring several new sales position. And so as we think about the typical ramp up time and the sales cycle, we definitely expect to see improved results in the back half of the year. And as Jared mentioned, one of the ways that we start to measure that effectiveness is through the deferred revenue balance going forward. So the excitement I have about enterprise is the fact that we are putting our sellers against specific client segments, and we are hiring new talent to really help us execute in that channel. And I'll turn it over to Jared or actually I'll turn it over back to you to ask Jared your next question. Great. Thank you, Stan. And then, Jared, what gives you confidence that you can drive EBITDA growth in 2020 declining in 2019? And how do you think about the growth in performance marketing expense in 2020? Sure. So I think we do feel very comfortable with getting the margins back up. I think we're very focused on it as a company. I think there's kind of 2 things that I would call out. 1 is ongoing prudent cost management and really investing from a milestone perspective as we achieve our objectives during the year. If you look at the G and A year on year, we put on about $15,000,000 of incremental G and A in 2019 as compared to 2018. As I mentioned in my prepared remarks, there were investments in cybersecurity, technology as well as in other areas. And I think we really are well prepared to realize the fruits of those investments. They are fixed investments. And as we see revenue growth in this year, we would expect to drop to the bottom line for more of a contribution margin perspective rather than see growth in those G and A lines. From a performance marketing perspective, performance marketing is more linked to revenue than our G and A line. We do feel like there is opportunity within performance marketing to increase the effectiveness of that performance marketing spend. We're very focused on our metrics around customer acquisition costs, customer lifetime value and the value that we derive from our performance marketing spend. So we think there is interesting opportunities there to get more bang from our buck by leveraging additional channels for performance marketing spend and really taking a test and learn perspective with the way we spend what is a fairly large marketing budget in that area. Got it. Appreciate the color. Thanks, guys. Thank you. Thanks, Nate. Your next question comes from Brent Thill of Jefferies. Your line is now open. Thanks. Good morning, guys. This is Alex on for Brent. So two questions for me, one for John and one for Jared. For John, I guess, why was now the right time to step aside after running the company for so long? And then was it an abrupt decision or had it been planned out for some time? And then for Jared, if you could just talk through the thought process to pay out the quarterly dividends. Just wondering if it's a cognizant decision to maybe be viewed more as a value stock rather than a growth stock, or just any general thoughts around that decision? Thanks. Thanks, Alex. So yes, this was a transition that was planned over a long period of time. It was a couple of years ago now that I started to really talk through with the Board about what this company needs for its next phase and we decided to go through the process of trying to figure out how to do that. And all of that has rolled out over the past couple of years of work to get to this point. The truth of the matter is that, we're just at a point where we need a CEO with a different skill set. We believe Stan is that person. And over the past year working with Stan, it's become clear to me that we're going to get to a great place with him as CEO. And the Board is behind me on that as well. So I'd say it was a pretty thoughtful and involved process. Great. Thanks, John. And just with respect to your question on the dividend, the way we look at the dividend is this is a more methodical way to return capital to shareholders in a predictable manner that existing and new investors can get behind in order to realize yield on top of the capital appreciation that they would expect from our stock. If you kind of look at the way we're starting the dividend, it's $0.17 a share. It's approximately $24,000,000 per annum. It equates to about a 1.5% dividend yield on our stock. And if you look at it as a percentage of free cash flow, it's about a third of our free cash flow. We think there's opportunity to move up from here. If you look historically, the company has returned capital to shareholders either in the form of share repurchases or in the form of special dividends. And what's great about both of those formats is the immediacy of the return that you see, but it's difficult to invest behind because there's no future predictability as to when those returns to shareholders are going to take place. I think with our quarterly dividend, we will have that predictability of return of capital to shareholders. We'll also have the flexibility to continue to reinvest in our business for innovation as well as make acquisitions. So it's not an or, it's an and where we'll be able to make investments in the company, do M and A and pay out and hopefully grow the dividend over time. We do recognize the slowdown in top line growth at the company. And I think the dividend is really a recognition that there is a significant amount of capital on the balance sheet of the company, and it is in our fiduciary best interest to return some of that capital to shareholders in a predictable manner that benefits them. So I think we feel quite good about the decision and feel like it's a great opportunity for shareholders as well. Thank you, guys, and congrats to all 3 of you. Thank you. Thank you. There are currently no more questions at this time. I will turn the call back to the company for closing remarks. Thank you for joining us today. We're so excited about these developments of the company and we look forward to continuing to update you as we deliver on our long term strategy. Thanks and goodbye. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.