Earnings Call: Q2 2019

Aug 6, 2019

Hello, ladies and gentlemen, and welcome to the Q2 2019 Shutterstock 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 your host, Ms. Heidi Garfield, the Corporate Secretary. Heidi, please go ahead. Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's Q2 2019 earnings call. Joining me today is John Oringer, our Founder, Chief Executive Officer and Chairman Dan Pavlovsky, our President and Chief Operating Officer and Steve Cardiello, our Interim Chief Financial Officer and Chief Accounting Officer. During this call, management may make forward looking statements that are subject to risk and uncertainty, including predictions, expectations, estimates and other information. These include statements relating to 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 our growth potential potential future results of efforts to reduce our expense footprint and implementation of large scale business solutions and our 2019 guidance. 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 we file from time to time with the U. S. Securities and Exchange Commission, including the section entitled Risk Factors in the company's annual report on Form 10 ks for the year ended December 31, 2018, for discussions 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 adjusted EBITDA, adjusted EBITDA margin, adjusted net income, revenue growth on a constant currency basis and free cash flow, all of which are non GAAP financial measures. You can find a description of these items along with a 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 in connection with GAAP financial measures allows investors to consider our operating results on the same basis used by management. This provides them with important additional insights about the company's overall business and operating performance and enhances comparability in assessing our financial reporting. However, these non GAAP financial measures should not be considered as deck we posted on our website that contains supporting materials for today's call. 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. As you've seen in our press release this quarter, we continue to see demand from our customers around the globe, resulting in further revenue growth and strengthening our working capital position. However, we have announced that we are revising our full year 2019 guidance. Stan Populawski and Steve Cardiello will be providing more details shortly. But at a high level, we have some immediate issues to address, particularly in our enterprise sales channel that demand a critical reevaluation of how we drive renewed growth. As a team, we are now taking this opportunity to carefully evaluate all aspects of our enterprise sales channel and we have recently made some changes that we think will have a positive impact. The potential for this business remains significant. The marketplace is quickly evolving as are the challenges that our customers face. We believe we are the best positioned platform in our competitive landscape to capture these opportunities. Now more than ever, users turn to our platform to deliver solutions to meet their rapidly changing needs. We think we can do more for them and do it even better. We were looking at improving some areas within the e commerce channel in order to get us back on a stronger growth trajectory, better optimize our existing products and services and find opportunities for new sustainable revenue streams over the next several years. Even though we revised our outlook for the year, we made some positive strides in the quarter. Revenue in the Q2 of 2019 grew 3% from 2018 on a reported basis. Revenue from our e commerce channel grew 6% to $97,000,000 as compared to the Q2 of 2018, while our enterprise channel remained flat at $64,700,000 Adjusted EBITDA grew 4.4% from the Q2 of 2018, resulting primarily from our revenue growth. We further strengthened the stability and scalability of our platform this quarter and increase the percentage that is cloud enabled to almost 90%. As always, we make our content, tools and platform available anytime and anywhere. We introduced new footage offering. We introduced our new footage offering Shutterstock Elements, which offers cinema grade video effects for filmmakers. Our free design application Shutterstock Editor surpassed more than 5,000,000 users, demonstrating strong support from customers. We launched our new self serve API subscription plans, reflecting a demand for increased access and support to further serve our growing community of developers, startups and small and midsized businesses. We added more than 150,000 contributors and 20,000,000 assets to our marketplace in Q2. And we saw continued positive traction for our promotional campaign. It's not stock, it's Shutterstock. We are proud of these results and recent initiatives. And when we take a step back and look across our business, we have been and continue to be growing and profitable with strong cash flow and a clear strategy focused on 3 pillars platform, network and talent. When we started Shutterstock, our goal was to build a creative platform that provided customers with the most compelling content, tools and services. At our core, we are a disruptive technology company and it's through this lens that we are looking towards the future. We know that we have to keep pushing ourselves to stay at the forefront of the industry and constantly improving and building on our technology, being relentlessly innovative for our customers and contributors will fuel our growth and success. Today, we have a strong brand that our customers rely on, but the tools and content they need to be successful. 6 times per second, one of our 1,900,000 customers licenses accretive access from our marketplace. That data drives our contributors to shape the extensive library we sell day after day. This powerful network effect that we have created, refined and improved upon over the years gives us a strong platform to build other products and services off of. Additionally, we have repositioned our management team to plant the right seeds to capture these opportunities. As we look ahead, we will be making some operational improvements to further enhance our platform with a renewed dedication to stay ahead of our customers' ever changing needs. Customer and contributor engagement is our priority and I'm confident that we have the right tools and team to get back to our roots, thinking big and acting bold. To that point, we have recently added fresh perspectives to our management team. As you know, we elevated Sam Pavlovsky to President and Chief Operating Officer. In this role, Sam will leverage his expertise in managing the strategic and operational aspects of technology focused businesses to better position Shutterstock for success long into the future. Stan is the right person to lead our sales, product, technology and marketing teams as they continue to execute our platform and network strategy and drive the continuous improvement of the customer and contributor experiences. We are also in the midst of a comprehensive search process for our next Chief Financial Officer and are grateful that Steve Cardiello, our Chief Accounting Officer, is filling that role in the interim. In addition, our people are at the heart of our success, and we are confident that we have the talent across our organization to help us accomplish our goals. We remain focused on employee engagement and committed to attracting and retaining the best people to deliver on our vision and further our collaborative and innovative culture. I'd also like to take this opportunity to welcome a new Director to our Board, Roshna Vaseen. Roshna currently is Founder and CEO of EQ Partners and Co Founder Pacifica Investments, where she operates as a strategic advisor, investor and consultant to early stage technology and media companies. Prior to January 2019, Roshna served as Chief Business Officer for Magic Leap for over 3 years previously was the SVP of Corporate Strategy and Business Development at SiriusXM Radio in New York. She brings deep industry knowledge and strategic vision, which complement our existing Board members' perspectives as we look to drive Shutterstock's performance. We look forward to her contributions and guidance. Before I turn the call over to Stan to discuss the business strategy in greater detail, I want to underscore our confidence in our path forward as we reinforce our position as an industry changing technology company. Shutterstock's long term global market opportunity remains strong as we differentiate our growing brand and leverage our innovative technology. We are firmly focused on successfully executing on our strategy that will drive revenue and earnings growth, improve margins and increase cash flow. And we remain committed to delivering increased value for our customers and our shareholders. And with that, I'll turn it to you, Stan. Thanks, John, and good morning, everyone. It has been a great few months since I joined the company and I want to thank the management team and the company as a whole for giving me such a warm welcome. I'd like to accomplish a couple of things this morning. The first is to provide some of my initial impressions after my deep dive into the business and the second is to identify key focus areas for the company going forward. I've hit the ground running since starting this past April And while it's still early in my tenure, I've had the opportunity to meet a lot of talented colleagues and have been impressed by their passion and contributions. And much of what I've seen confirms my belief in the strength and potential of this company. Shutterstock is a leading innovative technology company that has developed an unparalleled creative platform. We have a strong reputation for high quality content solutions and services. Over the past few months, I have worked closely with John and the operational heads across the business, including product, technology, sales and marketing teams. It's clear that we have a number of great business lines that we can and will continue to leverage, including some that are newer and smaller, but have big potential. As we continue to innovate around our core business with a unified platform, we see further opportunities to grow. We are also identifying new areas that will provide additional value to customers, which we are confident will drive sustainable growth for the long term. It's no secret that the needs of our customers, their businesses and how they operate changes rapidly. The need for high performing authentic content that works across a range of platforms is growing. We need to further our efforts to demonstrate to customers that we have the right content, products and services to make them successful. From what I've seen at Shutterstock, I'm confident that we can make this happen. We are well positioned to help our customers be successful by leveraging our vast library, cutting edge technology and exceptional customer service. Our goal is to enable our users to do what they want as fast and as efficiently as possible. The improvements we are making all trace back to this fundamental yet critical goal. Focusing on our enterprise channel, we are in the process of enhancing our sales effectiveness and go to market strategy. We are better aligning our sales team to reflect the customers' needs and the competitive marketplace in which we operate. Internally, this includes organizational improvements, reviewing our incentive structures and improving our back end business systems. We are also taking a fresh look at our sales and marketing positioning in order to better present a unified value proposition to our customers. Within our e commerce channel, the costs associated with acquiring customers has increased. To address this trend, we are developing an integrated marketing strategy with a focus on activities that drive higher ROI, conversion rate and customer lifetime value. Optimizing the lifetime value of our customers will allow us to invest more thoughtfully and with greater impact. In addition, we are continuing to launch new products and evolve our existing products to offer uniquely meaningful solutions to our customers around the world. This includes our new footage offering Shutterstock Elements. This product introduced over 3,000 elements captured on cinema grade cameras and lenses, which are compatible with all major video editing programs. We also enhanced the user experience and our consumer mobile apps by adding 14 languages, bringing the app up to par with 21 languages served on our site. We enhanced our conversion and usage by streamlining the download experience and unifying the checkout experience for image and footage. And we've launched a View in Room augmented reality feature for our iOS app, allowing users to visualize how images from Shutterstock might look in real life settings. These and other initiatives are driving us to achieve our goal, helping users accomplish their goals as fast and efficiently as possible. We believe that innovating across our creative platform will continue to drive growth in our core business and unlock new revenue opportunities. We have a lot of important work ahead of us and our team is working thoughtfully and with urgency. I joined this team because I share their confidence and our ability to execute on the long term opportunities this company has with passion for innovation and operational excellence. Moving forward, our strategy positions us well to constantly discover ways to improve customer and contributor experiences and deliver value for our investors. I'm excited to be part of what comes next for Shutterstock and to work closely with John and the rest of this great team to further build on John's vision when he founded this company. I look forward to updating you on our progress on future calls. And with that, I'll turn the call over to Steve for a more detailed financial review. Thank you, Stan, and thank you everyone for joining us today. 1st, as John mentioned earlier, while we continue to have profitable growth in the quarter, improved our liquidity and had strong free cash flow, we have additional work ahead of us and are not satisfied with the results of our enterprise channel. Revenue growth as reported in the Q2 was 3%. Excluding the impact of foreign currency movements, revenue growth was approximately 5 in the Q2 as compared to 2018. Our e commerce channel revenue increased 6% to $97,000,000 as compared to the Q2 of 2018 and on a constant currency basis, e commerce revenue grew 7%. Our enterprise channel revenue of $64,700,000 was flat compared to 2018 on a reported basis and grew 2% on a constant currency basis. As a reminder, approximately 1 third of our revenues are denominated in foreign currencies with the majority in the euro and the British pound sterling. FX movements to the U. S. Dollar will impact our reported revenue growth. Reviewing some of our key metrics in the Q2 on a year over year basis, paid downloads grew by 3% to $46,600,000 revenue per download increased 1% to $3.44 per download. Our image library expanded by 37 percent to over 280,000,000 images and our video library increased by 36% to over 15,000,000 clips. Operating income was $3,100,000 in the 2nd quarter, a decrease of 45% from $5,600,000 in the prior year and adjusted EBITDA for the quarter grew 4% to $25,100,000 which compares to $24,000,000 in the same period a year ago. Our adjusted EBITDA margin grew 17 basis points to 15.5% in the Q2 of 2019 compared to the prior year. While our revenue growth was below our expectations, we continue to invest in our technology and platform to enable long term profitable growth. GAAP net income in the 2nd quarter was $3,300,000 or $0.09 per diluted share, an increase from a net loss of $300,000 or $0.01 loss per diluted share in the Q2 of 2018. As a reminder, in the Q2 of 2018, we recorded a $4,800,000 after tax impairment charge. Adjusted net income was $11,800,000 or $0.33 per diluted share for the Q2 of 2019 as compared to $10,700,000 or $0.30 per diluted share in the Q2 of 2018, representing a 10% increase year over year. Now the following discussions on operating expenses in the second quarter of 2019 will exclude stock based compensation expense and will be compared to the Q2 of 2018. Total operating expenses increased 4.4%. This increase was driven primarily by increased general and administrative and direct marketing expenses, offset by a decline in product development expenses. Our cost of revenues, which include contributor royalties, increased 1%. Our contributor royalty expense continues to be approximately 26% of revenues. Sales and marketing expenses increased 6% due to increased spending and marketing initiatives. Sales and marketing expense was 20 7% of revenue in the Q2 of 2019 as compared to 26% in the Q2 of 2018. Product development expenses decreased 18%, primarily due to lower personnel and consulting costs. As a percentage of revenue, product development costs were 8% for the quarter versus 10% in the 2018 period. In addition, during the quarter, the company capitalized $5,800,000 of labor costs related to product development. G and A expenses increased 29% from the Q2 of 2018 and sequentially G and A expenses increased $2,500,000 or 11% from the Q1 of 2019. This increase includes one time costs associated with severance benefits and accelerated amortization. As a percentage of revenue, G and A expenses were 16% as compared with 13% in the Q2 of 2018. Our income tax expense was $355,000 compared to a tax benefit of $1,100,000 in the Q2 of 2018. Our Q2 2019 effective tax rate was 9.7%. Cash taxes paid in the quarter were $1,200,000 as compared to $1,700,000 in the Q2 of 2018. Now on to the balance sheet. Our deferred revenue balance as of June 30, 2019 was 130 $7,100,000 of which approximately 40% relates to our e commerce business and 60% to enterprise. This mix is consistent with prior periods. At June 30, we had approximately $259,000,000 of cash and cash equivalents. We continue to maintain a strong positive working capital position. For the 2nd quarter, net cash flow from operations was $27,000,000 an increase of $10,100,000 from the Q2 of 2018. Additionally, in the quarter, free cash flow was $19,800,000 an increase of 11,600,000 from the Q2 of 2018. Free cash flow is cash flow from operations less cash payments for capital expenditures and content purchases. We had higher operating cash flow in the quarter compared to 2018. And in addition, our capital expenditures declined to 6,500,000 dollars from $8,100,000 in the Q2 of 2018. We actively manage our capital expenditures and believe that the current levels are reasonable for a business of our size and growth. Our liquidity strategy continues to be to maintain a strong cash position that enables us to fund operations, while also providing us with the flexibility to consider operational and strategic growth opportunities. As we have done historically, we will continue to evaluate the appropriate use of cash generated in our business to optimize return for stockholders. And finally, getting to our updated guidance. Based on weaker than expected revenue growth and the company's committed strong focus on our enterprise sales channel strategies in the second half of the year, we are reducing our full year revenue growth target to $645,000,000 to $670,000,000 from our previous guidance of 685,000,000 dollars to $695,000,000 This reduction will also impact our previously guided adjusted EBITDA and operating income targets. As a result, our updated expectations for the full year 2019 are now as follows: revenue of $645,000,000 to $670,000,000 adjusted EBITDA of $93,000,000 to $107,000,000 income from operations of between $18,000,000 to $32,000,000 non cash equity based compensation expense of approximately $25,000,000 capital expenditures including capitalized labor of approximately $32,000,000 and an effective tax rate in the teens. As we have mentioned, the company focuses on long term profitable growth and we will continue to invest in our business through 2019 and beyond and maintain our strong working capital position and free cash flow. We appreciate your time today. And now, John, Stan and I will be happy to answer any questions you may have. Joan, can you please prompt the participants for questions? Absolutely, sir. Your first question comes from the line of Youssef Squali from SunTrust. Your line is open. Okay, great. Thank you very much. Good morning, guys. Just a couple of questions, I guess, for us. Starting with the just with the e commerce part of the business, it sounds like the marketing efficiency in that business has waned a little bit. I think you spoke to the customer acquisition having gone up. Can you just parse out for us the effects from potential competitive pressures versus things that you're doing internally that may have caused that to happen? And maybe just broadly speaking, John, kind of what you're seeing broadly competitively? And second on the enterprise side, Stan, I think you talked about what you guys are doing to try to reinvigorate growth in that segment. I think you also spoke about or one of the things you spoke about the sales and marketing or repositioning using sales and marketing. Maybe you can kind of flesh that out for us a little bit. What exactly are you guys doing there? Are you introducing newer products at different price points or just kind of any kind of color there would be very helpful? Thank you. Thanks, Youssef. I'll start with e commerce and then I'll hand it over to Stan for enterprise. As far as the cost of acquisition goes, that's a pretty it's happening across all industries when you look at kind of using quantitative methods to produce results from paid advertising. The cost has increased there, but what we see is that with our data, we can get a bit smarter and zoom in on the leads that make the most sense for the e commerce business and the ones that don't. One great thing about our platform is that the data velocity is really high, selling 6 images per second, the most out of anyone we know in this industry by far. We can collect a lot of information and really shape our library and target our content in a way to prospective customers at the top of the funnel in a way we don't believe others can. So while we see the competitive pressure increase and the cost of that those acquisitions going up a bit. We also believe we're best positioned and it's not unique just to us in our industry or even other industries. As far as enterprise, Stan, you want to jump in? Sure. Hi, this is Stan Youssef. On the enterprise side, we are focused on the go to market strategy. When you think about market trends around consumer consumption of content and the time spent with content and then the subsequent pressure on our customers and clients to create an increase in the amount of content that's authentic, that is fresh, that's culturally relevant, we have a great opportunity to better position how we're able to deliver that with our clients. And so pricing and packaging is one piece of it, and that's kind of the blocking and tackling of the business. But how we communicate the tools and services that we provide is how we will build sort of deeper relationships with our client base. Your next question comes from the line of Alex Gamow from Jefferies. Your line is open. Okay. Just going back to the enterprise side, can you just help us parse out the main cause for the softness? Do you feel it's broader industry pressure or were there fundamental challenges in the quarter? I guess asked differently, do you feel like the industry is still growing on the enterprise side? And then just given the recent management changes, are there any changes we should be aware of going forward, maybe the way you guys will provide outlook or just anything to call out with the CFO turnover? Thanks. Sure. Thanks, Alex. Let me just I'll start with your first question here and then I'll let Stan jump in also on the enterprise side. So we believe the main cause for softness is our own operation. If you think about how the enterprise business grew, it was out of the e commerce channel. So what we did was we learned how our ecommerce customers interacted with our site. We saw multiple users from different companies. We started to reach out to those customers and we started to realize there were other customers in those organizations also. And we've built Teams subscriptions and our premier product, which is a different set of features for the enterprise customer. While these challenges exist, we believe the market is still growing because all businesses need images. And if you look at the 60,000,000 small businesses out there and the 1,900,000 businesses that we currently serve, there's a big gap and we can continue to build that. Each one of those small businesses could use the Teams subscription to build their own business. And we intend to organize our data in a better way and our team to seize on this opportunity. Anything else from on the enterprise side, Jim? Yes. Just to add a little bit to that. If you really think about our platform and what we offer and the workflow of our customers and clients, Both the content creation capabilities, whether it's stock or whether it's custom or whether it's editorial, coupled with services that we're able to provide around workflow, that combination and that value, we have to do a better job of communicating into the marketplace. And so obviously, with the enterprise, when you talk about a go to market strategy, when you talk about building deeper relationships with clients, it's a longer sales cycle. But having the right team in place and having the team organized around these core tenants, we believe will help us as we focus on the current set of products that we have, but also, the products that we plan to launch over the next 6 to 12 months. And Alex, on your second question as far as our CFO search, so Stephen left the company to pursue other opportunities and currently we're in market executing on a very comprehensive CFO search at the moment to find the next CFO for the company. And as you know, Steve Cardiello is our Interim CFO. Okay. Thank you, guys. Your next question comes from the line of Lloyd Walmski from Deutsche Bank. Your line is open. Thanks. On the enterprise following up there, it sounds like you're still evaluating the changes in strategy. Can you just give us a sense of the timeline of figuring out what the plan will be implementing that plan? What the issues may be in any transition period around changes to sales force compensation, etcetera? And then secondly, it looked like Europe in particular was a little bit weaker. Anything you'd call out there? And then last one was just you have a buyback authorization, haven't bought back shares in a while. How are you guys feeling about deploying cash from the balance sheet? Thanks. Thanks, Lloyd. Yes, so as far as the timeline, we're only giving 2019 guidance as we said before. But this is something that will evolve. We believe we've identified some areas in enterprise that are low hanging fruit that we can seize on immediately. But we also don't manage the quarter. So there could be investments that we'll make in this business in order to benefit enterprise, e commerce or other parts of the business that will take a payback period that's a lot longer than the quarter or the year because we believe in the business. As far as the buyback authorization, yes, we have $100,000,000 more authorized from the Board. As far as our capital allocation strategy goes, our first priority is investing in this business to drive an appropriate level of return. And we believe that through a recent strategy session, there are other areas we can invest in order to build new products and services off of our platform, just like we did many years ago, building the enterprise product off of the e commerce platform. So we believe that there's a lot of improvement in editorial, in custom, in enterprise, in e commerce. We also, on the capital allocation point, bought I'm sorry, we paid out $100,000,000 dividend last year. So we are always evaluating the amount of cash we have, what we can do within, how it will best benefit our shareholders. About the Lloyd, sorry, I think I just missed that part. I'll just jump in on that. We don't comment on the regional ups and downs of the business. There are several levers that can cause and a lot of different factors that can cause the up and down in any given quarter. The enterprise business deals are bigger, so they're choppier and that's where we are. Okay. Thank you. Thank you, Okay. It looks like there are no other questions. Thanks for joining us and we'll see you next quarter. Operator? Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.