Shutterstock Inc (SSTK) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to your Q1 2013 Shutterstock earnings conference call.

My name is Denise and I will be your event manager for today.

Throughout the conference, you will remain on listen-only.

(Operator Instructions).

Now I would like to hand the presentation over to your host for today's call, Ms. Denise Garcia at ICR.

Please proceed.

Good afternoon.

Welcome to Shutterstock's first-quarter 2013 earnings call.

Joining me today to discuss our results are Jon Oringer, Founder, CEO and Chairman, Thilo Semmelbauer, President and 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 Securities and Exchange Commission, including the section entitled "Risk Factors" in the Company's 10-K filed with the SEC on March 1, 2013 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 will also refer to adjusted EBITDA, non-GAAP net income, and free cash flow, which are non-GAAP financial measures.

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

We believe that the use of these measures provides additional insight for investors.

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

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

Thanks Denise.

And thank you all for joining us to on today's call.

I'm pleased to report the Shutterstock delivered another strong quarter with continued growth across all products -- across all product lines and geographies.

We continue to strengthen our position in the multibillion-dollar market for commercial imagery by attracting more customers and contributors to our marketplace and innovating in the ways that we serve them.

On today's call, we'd like to share our key operating metrics and financial results for the first quarter, update you on the progress we are making against our key initiatives, and raise our financial guidance for 2013 based on the strong performance we've seen to date.

Let's start with the key operating metrics.

In the first quarter, download volume increased to a record 22.3 million paid downloads, while revenue per download grew 8% year-over-year to $2.29.

Revenue per download remained stable between the fourth quarter and the first quarter, consistent with prior year's seasonal trends.

Our collection has grown to more than 25 million images and over 1 million video clips, making it one of the largest libraries of its kind.

First-quarter revenue exceeded the high end of our outlook, growing 36% year-over-year to $51.1 million.

Adjusted EBITDA more than doubled in the quarter as compared to the prior year to $11.8 million.

We are very pleased with this performance.

Our financial results reflect the progress that we are making across the three primary growth strategies, which are increasing penetration in all markets, developing emerging content types, particularly video footage, and expanding direct sales to large enterprises.

Let's discuss each in turn, starting with global penetration.

We continue to focus on aggressive customer acquisition across all territories, given our relatively small share of the $6 billion market for commercial imagery.

One of the important ways that we support our customer acquisition activities is through continued international localization.

This includes improving our search capabilities around the globe, sourcing local content, and expanding the number of languages and currencies that our marketplace supports.

We recently introduced four new languages to our website, focusing on Scandinavia, a region which is home to some of the most influential design, technology, and media centers in the world.

We now support customers in Swedish, Norwegian, Finnish and Danish, bringing the total number of languages on our site to 18.

We license images in more than 150 countries and generate roughly 2/3 of our revenue outside the United States.

We know we are just scratching the surface in many of these markets.

We are excited about our ongoing transition to offering customers around the world an increasingly local experience.

Moving on to our second growth strategy, emerging content types, video footage continues to be our number-one priority.

In the first quarter, video licensing remained one of our fastest-growing offerings.

We are optimistic about the potential for this business, given the increasingly important role that video is playing in the digital media landscape.

Finally, as our third area of primary focus, we continue to expand our direct sales efforts to large enterprises and agencies.

Our direct sales team has been met with very receptive potential buyers in almost all cases thanks to Shutterstock's compelling combination of content, search and value.

We see opportunity for direct sales expansion in all of our territories, but our current focus is primarily the United States and Western Europe with additional activity in other parts of the world.

As part of the strategy to expand our relationship with large enterprises, we made an exciting announcement this quarter.

We soft-launched an entirely new brand from Shutterstock called Offset.

Offset enables us to meet the need of our larger customers for highly curated sophisticated imagery while also offering them superior licensing and pricing terms as compared to the alternatives.

Authentic sophisticated imagery is often accompanied by complicated licensing process that results in time-consuming rights management and high cost.

Offset is poised to disrupt this model by offering a remarkable library of extraordinary imagery from top photographers and illustrators around the world via a simple royalty-free license that covers unlimited print and online usage at an attractive price.

In the past, customers typically would not have come to Shutterstock for this caliber of work and contributors would not have used Shutterstock to license it.

With Offset, all of that has changed.

Offset is currently available on a limited invitation-only basis.

However, we expect to open it up to a larger customer audience later this year.

We are proud to be able to maintain such exciting growth in our core business while launching new offerings like this one.

If you would like to learn more about Offset, you can find a short video that we created for our preview event in New York by visiting offset.com/preview.

Offset was not the only exciting launch we had this quarter.

Our product development teams are always looking for new ways to inspire our customers and help them discover the right images, concepts and ideas to bring their projects to life.

To this end, we recently introduced a new image discovery tool called Spectrum.

Spectrum allows users to explore the Shutterstock collection through the dimension of color.

It makes for a uniquely compelling experience that you have to see yourself to appreciate.

I encourage each of you to try Spectrum by visiting Shutterstock.com/labs.

We know that attracting and retaining world-class talent is core to our continued success, so we are pleased to have good news to share with the team this quarter.

We have finalized plans to move from our current offices where we are spread across four noncontiguous floors that we have grown into during the past year few years to a new space where we can have the whole team together in a more collaborative and productive environment.

We are excited to be laying a foundation that can support future growth.

With that I'll turn the call over to Thilo Semmelbauer, Shutterstock's President and COO, who will detail some operational highlights for the first quarter.

Thanks Jon.

We remained focused on acquiring new customers and contributors in the first quarter as well as investing in enhancements to both sides of our marketplace.

On the contributor side, we added over 1.8 million images and 125,000 video clips in Q1, more than in any prior quarter.

We recently exceeded 25 million images and as of this week we have more than 1 million video clips, making our library one of the largest of its kind.

To support continued growth, we introduced a new tool that helps contributors add keywords to their images more quickly and more intuitively, and we relaunched a contractor referral program to incentivize contributors to help us recruit new photographers, illustrators and videographers to Shutterstock.

Helping contributors around the world to monetize their content is what we do.

In fact, we've paid out over $150 million to our contributors all over the world since founding the business.

On the customer side, we acquired more customers while improving efficiency versus a year ago thanks to improvements in our marketing efforts.

As you may recall, in Q1 last year, we engaged a number of marketing agencies around the world to help with international penetration, which drove an increase in spend.

We found that some of the agency spend was not productive, and in later quarters last year, we scaled back and brought a good portion of the spend management back in house.

This is the primary reason why our sales and marketing efficiency improved with expenses decreasing as a percent of revenue from 32% in Q1 2012 to 23% in Q1 this year.

Put another way, we spent roughly the same amount of marketing dollars as last year but we drove 36% more revenue.

We did this through a combination of spend optimization and increased investment in more efficient channels.

As we've discussed, we manage our marketing spend by balancing testing and optimization, so we will continue to see quarter-to-quarter fluctuations as we invest in growth.

Now, direct sales continues to be one of the fastest-growing areas of our business and has recently accelerated with revenue more than doubling versus Q1 2012.

The first quarter was also our first full quarter with Global Master Service Agreements in place with four major agency holding companies where we are seeing great results.

We continue to invest in this area by adding sales and support personnel in key markets, including UK, Germany and Asia.

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

Thanks Thilo.

I'll give a bit more color around the results as well as our expectations and then we'll turn to questions.

To review, the number of paid downloads we delivered in the quarter was 22.3 million and this was up 27% from 17.6 million in the first quarter a year ago.

Revenue was $51.1 million, an increase of 36% compared to the same quarter in the prior year.

And there was no significant currency exchange impact on revenue in this quarter, unlike some that we've seen in the most recent prior quarters.

Our revenue per download increased 8% from a year ago to $2.29.

Revenue per download decreased a little bit by $0.01 sequentially from $2.30 in the fourth quarter.

Revenue per download has grown consistently over the years, and throughout this period we've seen a consistent seasonal pattern of little change between Q4 and Q1.

For example, in the same period in prior years, revenue per download was up $0.01 in 2011 and was down $0.01 in 2012.

Adjusted EBITDA in the quarter grew 136% to $11.8 million for the quarter, as compared to $5 million in the first quarter of 2012.

And this improvement was primarily the result of an increase in revenue but also due to the increased efficiencies in marketing that Thilo detailed.

Net income increased by 49% to $5.5 million, or $0.16 per share, compared to $3.7 million in the first quarter of 2012.

Net income, as a reminder, includes stock-based compensation expense.

In this quarter, that expense was approximately $1.1 million.

We've detailed the breakdown of the $1.1 million in our press release from today for your help.

Non-GAAP net income in the first quarter increased by 39% to $6.1 million, or $0.18 per share, as compared to $4.4 million or $0.15 per share in the first quarter of 2012.

Also as a reminder, non-GAAP net income excludes the after-tax impact of non-cash stock compensation expense.

Our tax rate in the quarter was 44% and our effective tax rate for the full year is expected to be approximately 40%.

In the quarter, we had some minor adjustments that raised that tax provision rate slightly above the overall effective rate for the year to the 44% level.

Shifting now to operating expenses for the first quarter, gross margin was 61.2%.

This was in line with the prior year and with the most recent quarters.

The primary component of our cost of revenue contributor royalties was also fairly stable in the quarter and consistent with prior periods as a percent of revenue.

Sales and marketing, as we noted, continued to show significant operating leverage over the prior year and improved very slightly from the most recent quarter by about 1%.

The improvement versus the prior year was 9 percentage points, and we continued to find efficiencies within many of our marketing channels.

R&D expense was $4.6 million in the quarter, or about 9% of revenue, also consistent with a year ago, while G&A expense, excluding non-cash equity-based compensation expense, as a percentage of revenue increased slightly from 7.8% to 8.4%.

This increase primarily due to costs associated with our continuing transition cooperating as a public committee.

Turning now to head count, we ended the quarter with a total of 262 employees.

This is an increase of about 30% from 202 a year ago and up 10% from 238 at the beginning of this year.

This is in line with our overall staffing and growth goals.

Now I'd like to share our expectations for the second quarter and also our updated and increased full-year financial expectations.

For the second quarter, we expect revenue to grow to between $53 million and $55 million.

Furthermore, we expect adjusted EBITDA to be between $10.8 million and $11.8 million in the second quarter.

We are also increasing our revenue and adjusted EBITDA expectations for the full year of 2013.

For the full year, we expect revenue to now be between $221 million and $226 million, and we expect adjusted EBITDA of between $46 million and $48 million.

Over the course of the quarter, our cash balance strengthened and at March 31, we had a cash balance in total of $107 million.

During the quarter, we paid off 100% of our remaining $6 million outstanding debt.

We also generated $13.8 million of cash from operations during the quarter.

Capital expenditures during Q1 were in total $1.1 million.

Now that we are finalizing our office relocation plans, we expect total capital expenditures for the full year 2013 of approximately $15 million.

As a reminder, our CapEx this year is made up of two types.

Approximately $5 million is related to ongoing computer server and network infrastructure costs to run the business and expand our operations.

And this is as compared to approximately $3 million that we spent in 2012 in the same category.

The remaining $10 million of capital expenditures in 2013 is related to non-recurring leasehold improvements, furniture, and related costs as we relocate and expand our primary headquarters office over the course of the remainder of 2013.

Overall, we are very pleased with the start to the year with solid results on key operating metrics.

We see good, early indicators of continued growth, giving us enough confidence to increase our revenue and profit expectations for the full year.

We see strong potential in all areas of the globe and across all of our pricing plans and we continue to invest in the innovative image and video search experience and library that our customers have come to value.

With that, it wraps up our overview.

And we would now like to turn it back to the operator.

If you could rejoin the call, Denise, we'd be happy to take questions from the participants.

(Operator Instructions).

Brian Fitzgerald, Jefferies.

Thanks guys.

You talked about the expansion in languages.

Have you talked or can you give us some color about contributor and user uptake thus far from the new language introductions over the last few quarters?

And then you have said before that the bulk of your marketing spend is in the online marketing channel.

Can you give us some insight on where you're spending dollars nowadays?

Are you targeting contributors and customers as well?

And as you expand internationally, is the mix still consistent in terms of brand performance and online versus off-line, or is it different as you do more advertising internationally?

Thanks.

It's Thilo.

On the new languages, the first part of your question, this is really the beginning of several pieces of the strategy to increase penetration, having the site accessible and the local line, which is obviously important, but equally important is marketing in those new countries which we are actively focused on, getting contributors energized to give us more content in those markets.

So it's a series of things that all kind of work together and build over time.

I think we are pleased with kind of the early results, but it's early days.

And we see this being a big contributor to our growth rate over time, too early to tell specific impact.

On the marketing spend, we are very pleased with the efficiency that we are driving, and we are driving in Q1 higher revenue dollars with kind of the same level of overall spend as we had Q1 a year ago.

In terms of the mix, it continues to be mostly online, not a major shift there.

So the ratio, if you will, of sort of brand or harder to track spend to online easier to track spend I think is relatively consistent.

We are not spending a lot of marketing dollars on contributors.

We are using other outreach techniques which involve our staff but isn't a major source of spend.

And maybe there was another piece of your question?

Really quickly, any mix difference in terms of advertising between domestic and international?

The -- I would say no major change.

As you know, the US is a smaller piece of our revenue.

The majority of our revenue is actually outside the US, and the same is true for our marketing spend.

Okay, thanks guys.

Ross Sandler, Deutsche Bank.

It's Lloyd in for Ross.

I had a few, if I may.

Just first, it looked like sales and marketing expense on a year-over-year growth basis actually declined, so seeing tremendous efficiency gains it looks like.

Should we expect you to kind of reinvest some of those efficiency gains to see the growth in sales and marketing expense start to grow again?

And then on a related note, it looks like paid download growth was a little slower.

Was that partially due to slower marketing growth?

And then in terms of the -- secondly and another angle -- in terms of Spectrum and the image-based keyword search recommendations, I'm wondering potentially how this is helping you take share from perhaps competitors within existing clients.

Is there any kind of color you can give there in terms of how that uptake is driving the business?

So we'll take the first one first -- this is Tim -- on the sales and marketing spend rate.

I think a good thing to look at -- while the improvements year-on-year were I think fairly dramatic, I think, if you look at Q3, Q4, Q1, you can see a more consistent pattern and a tighter range of spend versus revenue.

And I think that's really the range that you should expect to see going forward, so sort of the low 20s% as a percent of total revenue.

You'll see it ebb and flow plus or minus a few percentage points, but I would not expect to see a swing nearly as dramatic as we saw year-on-year.

We are continually reinvesting where we find inefficiencies, and we cut spend in Place A, we are looking to increase in Place B which has a higher ROI, and that's sort of the constant effort of the marketing team, so we'll continue to do that.

In terms of the paid download growth, I think there's a couple of patterns you saw from Q4 to Q1 that are consistent, so not a change or actually a $0.01 decline, but essentially flat with a little bit of rounding in there, pretty normal.

There's a lot of subscription activity that happens in the first quarter tied to the calendar year, so that's a pattern we've seen year-on-year.

Download growth in aggregate, same thing.

I think if you look at the prior-year patterns, we're pretty much on track with what we've seen in prior years.

Q4 tends to show a significant surge and then the other quarters strong but not quite as strong as Q4.

The last piece I think was on Spectrum.

This is Jon.

Yes, Spectrum we are very excited about it.

It's just one of the new things that we've kind of -- that we've built here from scratch.

Typically, search was done by keyword.

With Spectrum, you can search more by color and kind of browse through the collection in an entirely different way.

A lot of our larger clients are getting very excited about this and seeing that we are kind of on the edge of building tools that are helping to kind of push the limits of how people are searching for stock photography today.

Another thing that we did this quarter was offset, which allows us to sell higher-end images, images that we normally wouldn't have gotten in a stock photography agency.

A lot of those images were never sold as stock before, and we can sell them for hundreds of dollars apiece.

Thanks guys.

Youssef Squali, Cantor Fitzgerald.

Thank you very much guys.

Congrats on a very nice quarter.

So a couple of questions.

Maybe just start -- going back to the marketing efficiencies that you showed, how much were you ROI constrained in the quarter?

In other words, could you have grown faster if you had not shown as much leverage in the sales and marketing, or did you effectively just max out on ROI and therefore just let the overage of efficiency flow down to the bottom line?

And on the Offset, how will you be pushing that product later on this year?

And in terms of just positioning versus competitors like Getty and whatnot, help us understand the positioning there.

Are you trying to differentiate yourself on price?

Is it on use of terms?

Is it on other things?

Maybe you can just help us understand the positioning.

It's Thilo.

On the marketing efficiency side, I think, in general, we would always rather spend a little bit more as long as we can do it cost effectively.

I think what happens in Q1, especially with the comparison from a year prior, there was a lot more efficiency gains than there was investment in spend in new channels.

Although we did grow spend in new channels, it just wasn't big enough to offset the improvement.

So we are always trying to put new money to work, and I think that is part of the fun, and great results so far from our marketing team.

And I think we'll continue to do that going forward.

If you look at Q4 versus Q1, so quarter-on-quarter, you'll notice that we did spend more, and we are going to continue to find ways to spend more cost effectively.

So stay tuned on that.

Offset?

Yes, with Offset, essentially we are trying to disrupt the higher-end part of the market.

Images that would typically be sold in really complicated rights managed way, we are selling those same images and even some that are higher quality and never been sold before in this manner, in a royalty-free license where you can pay once and use it very easily in your projects.

Okay, thank you.

Ralph Schackart, William Blair.

Good afternoon.

The first question is for Tim.

Tim, look at the guidance you usually provided on the November 12 call, it was about $206 million at the midpoint.

Last call, you were at $216 million.

This call you're at $223 million, $224 million.

Can you give some color sort of the factors that have contributed to the outperformance and so the guide up, was it mixed?

Was it new customers?

Was it new customers coming back for more?

A little color would be helpful.

Thanks.

I think it's fair to say there wasn't any one item that really drove either the results in the quarter or the confidence we see in the future numbers to drive the number up.

I think it's a mix of the same items we've seen over the past couple of quarters.

And I would point out a couple of things -- one, pretty consistent and strong growth rates in a fairly diverse view across all of our business.

So if you look at two measures, one sort of geographically, all of our territories are growing well.

Our lowest growth territories, which we view as slow growers, are growing at least 15% or more, which is a pretty solid number.

Our high-growth territories are growing 40%, 50%, 60%.

So, there's not one area which you might see or we might be concerned about where you would see flat or negative growth.

That's one thing that's held steady, and actually is getting a little bit stronger.

Likewise, across product lines and price points, we are seeing consistent uptake of both on-demand and subscription actually was no mix shift in the quarter, which suggested subscription did very well in Q1.

We've seen more of a skew towards on-demand in prior quarters, but that was pretty balanced in the quarter.

And then direct sales continues to perform really nicely, continues even with a pretty aggressive plan.

It's still really new for us, and so that's one where we just don't have quite as much data as we have on the core business, so maybe a little more conservative there but we're just still seeing really nice response from large companies, both in meetings, in interactions, and also in the dollars they're willing to commit.

Great.

One more if I could.

Can you clarify -- I missed it on the call.

Did you say the tax rate for the rest of year is 40%, so Q2 Q3 Q4, or was 40% sort of an average for the full year?

We expect to see 40% over Q2, Q3, Q4.

So the average for the year might be slightly higher because of Q1.

Okay.

That's all I needed.

Thank you.

Andre Sequin, RBC Capital Markets.

Great, thanks for taking my question.

While we were just on the topic of guidance, looking at the full-year guidance, we've got a nice raise in revenue.

While the EBITDA guidance for the year is largely just flowing through the beats in this quarter, is there some additional spend or investment that's keeping you from raising the EBITDA guidance as well?

And then if I could follow on to Youssef's question, you've already talk about competitive positioning for Offset.

Maybe you could talk to us a little more about that.

Any comments around timing of the official launch or where it will be rolled out?

Is that US only or internationally as well?

And is the arrangement with the constant contributors the same as it is now, where it's essentially free to you upfront and they participate in the revenue when that comes in?

Thanks.

Okay.

We'll take those in order.

On the first one, I think your appraisal is fair, which is we've bumped up the revenue numbers, given higher level of confidence.

We've let that sort of flow through, but the margin remains roughly the same.

And I think what we are seeing there is there's two drivers, two areas where we really focus our investment, so marketing spend, clearly, to bring in new customers and drive the growth line, and also in people, people resources to really support the growth of the Company, both in expanding the direct sales team, building out the R&D team and just making more robust a system to support a much larger customer base.

So those two areas are where, when we want to move quickly or we find more places to spend in marketing, we want to take advantage of that.

So if Q1 replicated where we find a lot of efficiency and we respend fast, we might see a benefit from that.

But we want to give ourselves a little room so we can spend up the marketing over the course of the rest of the year.

We also want to keep hiring at a reasonable pace, not necessarily as fast as we have over the past year and a half, but we're finding a lot of talented developers and salespeople and folks are more and more wanting to come join us here at Shutterstock.

We want to take advantage of that.

And this is Thilo.

Just to comment on Offset and our rollout plans, we are not going to be specific, but the great thing about Offset is that it's a new content for us, really a new business area, but we can sell this content to our existing customer base.

So wherever we are selling today in our core business and in our core markets, Offset will follow that quite nicely.

I'm sure we'll bring some new customers in with Offset as well, but we can leverage our existing base and our direct sales force, which as you know we're building up.

So expect to see Offset following in the footsteps of core in terms of where we are.

In terms of the relationship with the contributors, it's the same model, so when we license an image, then the contributor will get paid same as core, similar in terms of the margin structure, or the gross margin structure, and really no difference in the ratios there.

Okay, great.

Thank you.

That concludes today's Q&A session.

Thank you for your participation in today's conference.

You may now disconnect.

Have a great day.