Shutterstock Inc (SSTK) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter and full-year 2012 Shutterstock earnings conference call.

My name is Keith and I will be your operator for today.

At this time all participants are in a listen-only mode.

Later on we will conduct a question and answer session.

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes.

And with that, I'd like to turn the conference over to your host, Ms. Denise Garcia of ICR.

Please go ahead.

Good afternoon.

Welcome to Shutterstock's fourth quarter and full-year 2012 earnings call.

Joining me today to discuss our results are Jon Oringer, Founder, CEO & Chairman; Thilo Semmelbauer, President & Chief Operating Officer; and Tim Bixby, CFO.

Before we begin I would like to take this opportunity to remind you that during the course of this call management may make forward-looking statements that are subject to various risks and uncertainties including predictions, expectations, estimates and other information.

Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance.

Listeners are referred to the reports and documents filed from time to time by us with the Security and Exchange Commission, including the section entitled Risk Factors in the Company's latest 10Q filed with the SEC on November 20, 2012, for a discussion of these and other important risk factors that could cause actual results to differ materially from those discussed in forward-looking statements.

We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

In addition, as we refer to earnings we will were refer to adjusted EBITDA, which we define as income from operations before depreciation and amortization, non-cash equity-based compensation, interest and taxes; non-GAAP net income, which excludes a one-time benefit related to the Company's reorganization, non-cash equity compensation expense and tax benefit for deductible non-cash equity compensation; and free cash flow, which we define as cash by operating activities adjusted for cash, adjusted for cash interest income and expense and less capital expenditures.

Adjusted EBITDA, non-GAAP net income, and free cash flow are non-GAAP financial measures.

You can find a reconciliation of these items to the most directly comparable GAAP financial measures in our fourth quarter and full-year 2012 earnings release which is posted on the Investor Relations section of our website.

We believe the use of adjusted EBITDA, non-GAAP net income, and free cash flow provide additional insight for investors to use in the evaluation of ongoing operating results and trends.

However, these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

I now will turn the call over to Jon Oringer, Shutterstock's Founder, CEO & Chairman.

Thanks.

And thank you all for joining us for our fourth quarter and full-year 2012 earnings call.

I'm pleased to report another strong quarter where we exceeded our top-line and bottom-line expectations.

We continue to see strong growth in all major geographies and across all of our offerings.

On today's call we will describe the progress we made in the fourth quarter and 2012.

And provide financial guidance for the first quarter and full-year 2013.

Let's begin with our key operating metrics, download volume and revenue per download.

Every download is a business licensing image on our platform.

When businesses choose Shutterstock to license and video, contributors earn money and receive feedback on what's selling.

This motivates contributors to upload more content, which increases the breadth of our library and in turn helps us attract new customers and to foster their loyalty.

This is the virtual cycle that drives our Business and ultimately, our financial results.

So in the fourth quarter we are proud to have delivered a record 21.4 million downloads.

Our revenue per download reached a new high of $2.30 and our collection grew to more than 23 million images and video clips, making it one of the largest libraries of its kind.

Our strong operating results drove record financial performance.

Fourth-quarter revenue grew 42% year-over-year to $49.2 million.

Adjusted EBITDA grew 54% to $11.3 million in the fourth quarter of 2012.

We finished the year with revenue of $169.6 million, representing 41% growth over the prior year.

And we achieved this growth while delivering adjusted EBITDA of $34.9 million.

Along side this outstanding financial performance, we continue to make excellent progress on our three growth strategies which are -- increased global penetration, emerging content types, and large enterprises.

Let's spend a moment on these starting with global penetration.

Given that we represent a small portion of a multi-billion dollar market for commercial imagery, we continue to focus on aggressive customer acquisition.

While we have seen strong growth in all major territories, we have placed a particular emphasis on the international localization and marketing.

In the fourth quarter we launched four additional languages, Hungarian, Czech, Turkish, and Polish bringing the total number of languages we support to 14.

We also began accepting Australian dollars, our ninth currency, and we innovate on our search algorithms to better serve customers around the world, no matter what language they speak.

We are excited about the early results we have seen and we continue focus on global penetration as a core seam in the coming quarters.

Moving onto our second growth strategy -- emerging content type.

Video footage continues to be the priority in this area and we made impressive progress in the fourth quarter.

Our video collection grew at a record pace to more than 800,000 clips while the video revenue continues to be one our fastest growing product categories.

Finally as our third area of strategic focus, we continue to expand direct sales effort to large enterprises.

As you may recall, over 70% of Fortune 500 companies already have at least one Shutterstock user account.

However, the amount that these companies are spending is still just a small fraction of their overall spend.

Our direct sales team continued to make impressive progress in the fourth quarter, closing key master service agreement with large agencies and publishers and steadily growing direct sales revenue.

We are excited about the progress we've made with large enterprises during the quarter and look forward to expanding our relationships with these larger companies over time.

Reflecting on 2012, we achieved a number of significant milestones.

We started 2012 as a private company and during the course of this year we completed an initial public offering, recruited a world-class Board of Directors and strengthened our team to support continued growth.

Additionally, we delivered on our revenue and profitability goals, increased the number of paying customers to more than 750,000, and added more images to our collection in 2012 than we had in total as recently as 2008.

We are excited about all that we have accomplished during the year, the progress we have made toward our goals and the opportunity ahead.

And with that I will turn the call over to Thilo who will detail some operational highlights.

Thanks, Jon.

We are keenly focused on providing value to both sides of our global marketplace, contributors the customers.

I'm proud of the many accomplishments we had in the fourth order and the full-year 2012.

Starting with contributors, we continue to focus on increasing the size, quality and diversity of our content library.

Looking at the stats, we had a record quarter in contributor payouts and our collection grew more in Q4 than in any previous quarter.

We added 1.6 million images and more than 100,000 video clips in the quarter and ended the year with 23 million images and 800,000 video clips.

We continue to invest in initiatives to support this growth.

For example, in the fourth quarter we produced a comprehensive success guide to help new and existing contributors create high-quality stock imagery, which has gotten great feedback.

We also launched contributor profile pages so that our customers can easily follow and keep track of the latest content from their favorite contributors.

On the customer side of the marketplace, we know that finding the right image quickly is a major reason customers choose Shutterstock.

Search is a key competitive advantage and we continue to make improvements that leverage the high volume of data our users generate.

One improvement we made in the fourth quarter has reduced the number of times customers get zero search results.

By interpreting the user intent and making more intelligent recommendations, we've been able to improve the experience significantly.

We also continue to optimize our search results for different languages.

During the quarter we made progress in several languages leading to improved conversion and usage in those languages.

These types of changes can have a significant impact on our conversion rates over time, which allows us to lower our cost to acquire new customers and increases marketing efficiency.

We also continued to expand our mobile offerings in Q4.

We already have an award-winning iPad app and in Q4 were launched Shutterstock for iPhone.

Even though most of our customers are using Shutterstock at work, it's now easier than ever for them to access Shutterstock 24/7.

We're pleased with the results of marketing activities in the fourth quarter as we continued to improve efficiency, as well as expand spend a new channels.

The bulk of our spend continues to be online marketing.

Overall, across marketing and sales and excluding stock-based comp we spent $11.2 million in Q4, up 17% versus Q4 2011.

These activities drove a 42% increase in revenue from Q4 2011.

Our cost to acquire new customers remains stable as we increased spend and improved efficiency.

Through more testing and optimization, better localization of our campaigns across geographies, and the addition of new marketing channels, we have high confidence we took a step forward in gaining market share in 2012.

From a branding perspective our goal is to be top-of-line for any business that needs licensed imagery.

Based on new research we conducted in the fourth quarter with the help a leading brand research firm in five of our top countries, we see significant opportunities to increase users' awareness of our brand.

This research gave us added confidence to continue investing aggressively in marketing and reinforced how much untapped opportunity there is for us in the multi-billion dollar market for commercial imagery.

We continue to manage our marketing spend by balancing, testing, and optimization.

Some quarters we increase spend to test out new approaches.

In other quarters we optimized faster than we are able to invest in new testing.

So, we will continue to see quarter-to-quarter fluctuations.

Our direct sales team continued a strong trajectory, delivering another record quarter.

Direct sales continues to be one of the fastest-growing areas of our Business.

We are especially pleased with our large agency sales which are gaining promising momentum.

And in the quarter we continued to add sales personnel in key markets.

In the US we added new hires in Los Angeles, Chicago, and New York.

So as we look back on the full-year of 2012, I'm proud of the progress we made across the entire Business.

We added more images than ever before, 5.5million to our collection, which continues to be one of the largest of its kind.

We make it easier to get to the right image, through innovation and search discovery tools and mobile, with an award-winning iPad app and a new iPhone app.

We invested in our contributors, with approved contributor sign-up, profile pages, and our success guide.

And we scaled up marketing and sales efficiently, driving growth and profitability.

We enter 2013 well prepared for growth and I'm excited about the year ahead.

I'd now like to hand it over to Tim Bixby, our CFO, who will share financial highlights.

Great.

Thanks, Thilo.

We will now review a little more detail around some of the operational and financial metrics and then we will be happy take questions at the end.

As a quick review, the number of paid downloads was $21.4 million dollars for the quarter, a key operating metric for us.

This was up 32% from $16.2 million paid downloads in the fourth quarter of 2011.

Revenue overall was $49.2 million, an increase of 42% as compared to the same quarter in the prior year.

On a constant currency basis growth would have been two percentage points better, or 44% year-on-year growth.

Revenue per download also showed a nice increase, increasing 7% to $2.30, as compared to $2.14 in the same period a year ago.

This increase in revenue per download, as in past quarters, continues to be driven by the mix of pricing plans that our customers select.

We have a higher effective price per download in certain pricing plans, particularly our direct sales efforts to larger customers and our on-demand plans, both of which are growing faster than the overall Business, and that has continued to cause the average revenue per download to increase over time.

Note that we have not raised prices for several years, and this shift is due solely to mix shift.

Notably, if we look only at incremental new customer revenue, the split between on-demand and subscription is quite balanced, roughly 50/50.

Adjusted EBITDA grew 54% to $11.3 million for the quarter as compared to $7.3 million in the fourth quarter of 2011.

Primarily the result of increased revenue, but also due to increased efficiencies and marketing investment.

Net income was $29 million compared to $5.8 million in the fourth quarter of 2011.

Diluted earnings per share as result was $0.88.

This next income, it is important to note, includes the impact of a nonrecurring tax benefit of $28.8 million related to our conversion from an LLC to a C corporation on October 5. Net income includes stock-based compensation expense of about $7.6 million in the fourth quarter.

The diluted EPS calculation for the fourth quarter is based on a fully diluted weighted average share count of 32.7 million shares.

Non-GAAP net income in the fourth quarter was $6.6 million, as compared to $6.5 million in the fourth quarter of the prior year.

Non-GAAP net income excludes a one-time tax benefit related to our reorganization, excludes non-cash equity-based compensation expense, and the tax benefit for deductible non-cash equity-based compensation.

Looking at the full year of 2012 revenue was $169.6 million, an increase of 41% compared to the prior year.

On a constant currency basis, again, full-year revenue would have increased 43% or approximately two percentage points better.

Adjusted EBITDA grew 32% to $34.9 million for the year, as compared to $26.5 million in 2011.

Net income was $47.6 million compared to $21.9 million in 2011, and this includes, as well, the nonrecurring tax benefit.

Fully diluted earnings per share was $1.79.

This is based on a fully diluted weighted average share count of 23.8 million shares.

Non-GAAP net income for 2012, the full year, was $28 million, as compared to $24 million in 2011.

Now I'd like to give you a little more color on the geography breakdown of our revenue.

For the full year approximately 35% of our recognized revenue came from North America, about 37% from Europe and 28% from the rest of the world.

If we compare this to the prior year, there was a very small shift in share from Europe to the rest of the world, but only a couple of percentage points, so a fairly stable split across the world.

Growth by region has been stronger North America and the rest of the world, well above 40% year-on-year, while Europe grew in the low 30% range.

But in constant currency terms, Europe is growing nicely, as well, in the mid-30% range.

Let's now turn to the expense lines.

One thing to note, all expense line items do include non-cash equity-based compensation costs for the first time.

Prior to our conversion to a public Company in Q4, only G&A expense included stock compensation expense.

Going forward, all four expense lines will include this cost, and we've also provided the breakdown of the amount of stock compensation expense within each line within our press release.

Shifting to operating expenses for the fourth quarter, our cost of revenue was 38%, and this was in line to prior quarters during 2012.

Cost of revenue is made up primarily contributor royalty payments related to image downloads, and we expect this cost of revenue, as a percentage of revenue, to remain fairly stable in the coming quarters at between 38% and 39% of revenue.

And this includes stock compensation charges, which are minimal in the cost of revenue line.

Total R&D expense was $5.7 million in the quarter, or about or 11.5% of revenue, as compared to $2.7 million in the prior year.

If we just this expense line for stock compensation expense, R&D as a percent of revenue is about 8.1%, as compared to 7.8% in the prior year.

So, a very slight increase relative to revenue.

We expect R&D as a percent of revenue to be at these similar Q4 levels into 2013.

G&A expense, excluding non-cash equity-based compensation expense, increased as compared to the same quarter in the prior year from 8% to 10% of revenue.

And this is primarily due to costs associated with our transition to becoming a public Company, as well as higher non-income tax accrual rates in the quarter.

We also expect G&A as a percent of revenue to be at similar levels as we head further into 2013.

Sales and marketing continue to show operating leverage over the prior year, improving significantly relative to revenue, as we continued to find efficiencies within the marketing channels.

Sales and marketing as a percent of revenue decreased to 23% from 28% in the prior-year, excluding stock compensation expense.

We expect sales and marketing as a percent of revenue also to be at similar levels into 2013 as we saw Q4.

In terms of overall headcount, we ended the year with 238 employees.

This is an increase of about 38% from 173 at the beginning of 2012.

The breakdown of these headcount additions represent where we are investing in people, and over the course of the year were as follows; about 50% of the adds were within our sales and marketing groups, about 30% were within product and technology, and about 20% within our G&A area.

I'd now like to provide a little bit more detail on our expected first-quarter 2013 results for the first time and update our full year 2013 financial expectations.

For the first quarter we have strong growth expectations.

We expect revenue to grow to between $48.5 million and $50.5 million.

The midpoint in this range would put us at roughly 32% annual growth versus the prior-year.

We expect adjusted EBITDA between $9 million and $10 million in the first quarter.

We expect that our Q1 results will include a stock-based compensation expense in the amount of a approximately $2 million.

This amount for the full-year 2013 is expected to be approximately $8 million.

And we expect an effective tax rate of approximately 40%.

We are increasing our revenue expectation for the full year of 2013 from $204 million to $208 million previously, to between $213 million and $219 million for the full year.

We are expecting adjusted EBITDA for the year between $44 million and $46.5 million.

We also expect total capital expenditures in 2013 of approximately $11 million.

And this is made up of two key components.

$5 million in capital expenditures is related to ongoing computer servers and network infrastructure to run the business and expand operations to provide products to customers.

And this is apples to apples in comparison with the approximately $4 million we spent in 2012.

There is an additional $6 million included in our expectation for the coming year, and this is related to leasehold and other capital expenses, as we plan to relocate and expand our headquarters office in New York City to support the continuing growth of the Company.

The operating portion of capital expenditures, excluding the nonrecurring real estate related costs, remains right around 2% of revenue.

In summary, we close another strong quarter and a strong year and we've just begun executing on several growth opportunities ahead of us.

We have a unique business with one of the largest content libraries of its kind, leading search technology, and a business model that enjoys significant network effects.

We are very excited about the coming year and the future.

WIth that, we'll wrap up.

And we would now like to ask the operator if you would rejoin the call and we will be happy to take questions from the participants.

(Operator Instructions)

Ross Sandler, Deutsche Bank.

Hi, guys.

Nice quarter.

Just a couple questions.

First is you talked about the conversion rate improvement that you are seeing from the local language stuff, can you quantify that at all?

What kind of up-tick do you see when you go into a new market with the local language?

Second question is, are you also seeing any conversion rate improvement happening in the US from some of the design issues you talked about?

And lastly, it sounds like the direct sales initiative is ramping nicely.

Can you also talk about the opportunity for that piece in markets outside the US?

Like are there.

Which markets do you think it will work in and when does that roll out -- actually happen?

Thanks.

Hi, Ross.

It's Thilo.

I'll maybe take the first piece of your question.

We'll sort of go around.

I think when we launch a new language on our site, that is obviously one piece of the puzzle in our strategy to make our site and our content more relevant and increase penetration in our markets.

The way we think about it, it's one step.

We need to, in addition to having the local language, localize our marketing in those countries, make sure we have the right content, and make sure the search experience is providing the right content for our customers.

It's a lot of things that come together and really the language rollout and the search improvements are part of a longer-term strategy to optimize the site.

It is something that doesn't by itself have a significant input without all of the other things coming together.

The second part of your question, I believe was around design issues but you may need to clarify because I'm not sure I follow that one.

I want to know if you're seeing also conversion rate lift in the US market from some of the things you have been working on?

Yes.

We are always testing different things on the website, whether it's buttons or language and pricing pages and configurations, so that is part of an ongoing process.

When you look at marketing spend as a whole and the fact we were able to in Q4 increase spend significantly while holding efficiencies, that all the conversion improvements are flowing into that as well.

Yes, I think a good metric to look at is probably the growth rate overall in North America that is really driven by the US.

We are seeing growth rates that are well above the growth rate of the Company.

So even though it is our most established territory, we're still seeing very strong growth and that means both the existing users are continuing to recur at a high level, but also conversions are also improving in the US.

In terms of the direct sales opportunity, it is definitely US focus now and we are making very good traction but some of the master service agreements are with global agencies and so we are already making inroads with multi-national groups that have subdivisions in US and many other territories.

We are also seeing good traction in Germany and other European territories.

And that is probably where you will see the first inroads it's where we have people on the ground for the first time in the past couple of years.

And I would expect it to rollout that way.

Great.

Thanks, guys.

Scott Devitt, Morgan Stanley.

Hi, it's Zach calling in for Scott.

Just wanted to know if you can give us a little more detail on how you think about the revenue and EBITDA guidance?

How do you think about it internally and then what do you -- how may you modify it for the street and what kind confidence interval do you have in that?

We are highly confident to achieve these numbers, our philosophy hasn't changed.

We have a quarter under our belts as a public company but we obviously have been setting these expectations and measuring ourselves against them for many years, so that really hasn't changed.

It's the external communication that is now an added piece of it.

We have great is visibility into the current quarter, obviously.

We are half way through.

We have strong visibility into Q2 and as we go through the remainder of the year, we are really relying on what are very established annual trends.

If you look at the last three years you see an annual cycle that is consistent as the months of the year rollout.

We are really relying on a lot of data we now have and the year-to-date numbers support that confidence.

One thing to note, when we grow at a 40% or plus rate, that means a lot of things have gone right.

It means currency is not too much of a headwind.

It means that nothing radical has changed in the search spend market.

And it means we are continuing to find new marketing efficiencies.

All those have happened in the last couple quarters.

We can't rely on that happening every quarter into the future, but that is certainly our internal goal.

Great.

Thanks, guys.

Nat Borgadir, Stifel Nicolaus.

Hi guys.

Thanks for the time this quarter.

Quickly on the paid downloads.

That accelerated pretty nicely on a year-over-year basis.

Can you talk about why you think that is?

Is it the international expansion?

Is it North America?

I think the revenue per download seems to be coming inline, but you guys are certainly beating expectations on the paid downloads.

What is the driver there?

A couple of drivers, obviously mix can drive it, so as we continue to see a shift on-demand, it's a lower unit number but it obviously drives the revenue per download up.

Subscription usage can accelerate in Q4 as we get into the later part of the year.

And I think we saw a surge in usage that drove the downloads up as well.

Again, a lot of things came together even ahead of our own expectations in Q4 on a volume basis.

We are investing, from a marketing perspective, in pretty much every territory in creative ways and I think we're finding more and more of the niches where we able to convert more and that has helped drive volume up.

Great.

Thanks.

And just one follow-up, now that you have over $100 million in cash, in generating free cash, how do you think about the balance sheet and returning capital to shareholders?

We had a term loan and paid that down.

We will pay the rest down and we are keeping the balance sheet pretty clean, $100 million is a good base number.

We are obviously generating a fair amount of cash.

We are looking at ways to continue to invest.

We like to have a little cushion.

One of the things, we go in and talk to very, very large global companies now and they like to know that Shutterstock is as strong as the strongest companies in the world.

And having that strong balance sheet is part of that conversation.

We also take note that we, although we are growing very rapidly, if we see an opportunity to grow in-organically, we have cash in the balance sheet, we have the public equity that is also something we would take advantage of, if it made sense.

Great.

Thanks, guys.

Ralph Schackart, William Blair.

Good afternoon.

Tim, if I could ask another question on the 2013 outlook, what sort of drove the boosted outlook on this call?

Due to the last call, obviously you raised the guidance.

Also too, can you give us some perspective on what the annual retention rate was in 2012 and how that compared to 2011?

Thanks.

Yes.

On the retention side we are seeing very consistent metrics, where we are able to retain essentially 100% of our revenue from year-to-year so we haven't seen real shift in that.

Average revenue per customer and lifetime values and those basic measures remain quite consistent so that gives us a lot of confidence.

One of the things, when you see these annual patterns repeat year-over-year, it gives you a little more confidence into the coming year of seeing that same trend.

As a reminder, we have two surge points of the year, the early part of the year and then again in September.

And those we just saw some nice results again in 2012, and roll that forward with a good November and December result and enables us to put out numbers we are very confident in.

Great.

Thank you.

Brian Fitzgerald, Jefferies.

Thanks, guys.

You talked a bit about the record pace of growth for video footage into the library, can you talk a bit about the dynamics around the usage that you have seen around the newer formats?

And then internationally, is there a difference between what you are seeing in terms of the various markets along the same dynamics?

What's going in the library and the usage of the newer formats?

Thanks.

This is Thilo.

Our footage business is doing great.

We have talked before about it essentially doubling and we are continuing to see that trajectory.

We continue to build out the collection and that is coming from all geographies of the world.

And we have a nice geographic diversity in our footage sales as well.

We are very focused on continuing to improve the site and search experience and, yes, we are very pleased with the performance so far.

The formats -- I would say, as you probably would expect, the higher definition formats are gaining more and more traction.

And I think that we see the same thing on the image side as we see on the video side, that pixel count matters and there is high demand for more and more that.

That was consistent in Q4 as it has been in recent quarters.

A couple of good dynamics to keep in mind around footage, it tends to be a lower volume per user and a higher price point.

The buyers are tending to use it much more in related to motion videos, so a movie studio, a TV studio, production companies.

West Coast activity has been an interesting area for us.

So it is a real different dynamic economically, volume and price, but overall it's very similar to the core business.

And that is why it is a promising area for us and we are continuing to invest more in it.

Thanks.

Andre Sequin, RBC Capital Markets.

Great.

Thanks for taking my question.

I was wondering, how do you think about and approach the pricing on your enterprise contracts?

Do you feel you have to give up them a pretty big discount and if so are you able to flow any of that through to your contributors?

And then, you've got a 40% tax rate for the year, with all the revenue you earn overseas, do you expect you will be able to take advantage of some of the lower tax rates in any of those jurisdictions going forward?

Let me take those in order.

On the first one, direct sales as you know, our price points range widely in direct sales depending on the licensing terms, the indemnification terms and other features.

We can be in the tens of dollars per images up to the hundreds of dollars per image.

Discounting is very common, obviously, in all direct sales but we have significantly higher price points, obviously there than in the core business, which is the ecommerce side.

And as contributors are paid in percentage terms, they get -- if there are discounts, that will flow through the contributors as well.

But the higher price point flow through to the contributors and actually we're getting great feedback on what they are starting to see in terms of their payouts.

Much higher dollar per image.

From a tax perspective, it's obviously an area where we have the benefit of real revenue and real earnings in all territories of the world.

70% of revenue and essentially the same ratio outside the US, so that is opportunity for us and we are looking at ways to sync up our earnings and tax rate with appropriate jurisdictions.

For this year, our estimated -- our effective rate will remain essentially where it is.

But obviously that's an opportunity will are working on internally.

And as we get more information about when that is likely to roll into the numbers, we will certainly share at.

But at this point -- that has a little bit of lead time on it.

Okay.

Great.

Thank you.

Nice quarter.

Josef Scolli with Cantor Fitzgerald.

All right.

Thank you very much.

Couple questions.

If I look at the new guidance, it implies about a $10 million increase to the top line at the midpoint with virtually no flow through to the bottom-line.

I think it's about a million.

I was wondering if you could maybe elaborate on that a little bit.

Is there an increase in OpEx planned because I think your talk or your comments on gross margins seems to insinuate that gross margin should be relatively flat.

And second, if I look at the ratio of paid downloads to the number of images added to the library on a sequential basis, I think this was your strongest quarter ever, or at least in a long while.

So I was trying understand the reasons for the strong conversion and maybe as importantly, is there anything there that would make it not sustainable going forward?

Thanks.

Yes.

I'll take a crack at both of those.

On the operating expense side, we do expect cost of revenue and royalties to remain essentially static so no real change there.

The two areas that in Q1 we expect to sort of drive a flat-ish EBITDA, even though revenue we expect to increase, G&A has stepped up a little bit, so as we expand our headquarters operation and add headcount here, those costs have gone up slightly.

Public company readiness costs is going to be a little bit higher and then also we are also accruing at a slightly higher tax rate.

So some sort of non-operational items are escalating in the early part of this year and will be essentially flat through the year.

And in marketing we tend to spend a little bit more earlier in the year.

Again, we are always looking for opportunities to spend more but that is an area where the sooner you get folks in before the later part of the year the better and those two areas will drop most of it.

On the images added and paid downloads, it's a very interesting question.

I would go back to the network effects of the business because, as you know when we add content to the library, it makes it easier to convert new customers because there is more great stuff that customers can find and we get better retention.

Definitely we are seeing the a positive network effect in the business right now and that is one of the things that gives us confidence in our outlook.

I think adding content to the library is an indicator of overall health.

It's not a one to on, or sort of a direct correspondence with financial results but it is a good indicator over time, maybe not a quarter but multiple quarters and years, where we constantly add -- we have a fresh library where people are more likely to find what they need and so you want to see that to continuing to grow over time.

But I would hesitate to draw direct lines in short periods.

That makes sense.

And maybe Jon, I think in your prepared remarks you talked about your belief you are gaining share, I was wondering if you could expand on that a little bit.

What are you seeing competitively that either makes you more comfortable or maybe it's status quo versus what you were saying during the IPO process

We know selling two images per second is more than anybody else space.

We know that we have more data than any of our competitors because of the amount of downloads and images we serve.

All this adding up gives us the impression we are taking more share than others.

A lot more customers are tending to move from commissions to marketplace and from traditional to marketplace because our model is so easy to use.

Thanks a lot.

With that, ladies and gentlemen, that will conclude today's call.

Thank you very much for joining us and you may now disconnect.

Have a good day.