Shutterstock Inc (SSTK) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Shutterstock Incorporated earnings conference call.

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

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Denise Garcia, please proceed.

Thank you.

Good afternoon.

Welcome to Shutterstock's first-quarter 2014 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.

I would like to remind you that during this call, Management may make forward-looking statements that are subject to risks and uncertainties, including predictions, expectations, estimates, and other information.

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 the reports and documents filed by us with the Securities and Exchange Commission, measured in our first-quarter earnings release, which is posted on the Investor Relations section of our site, and the risk factors of the Company's Form 10-K, filed with the US Securities and Exchange Commission, on February 28, 2014, for a discussion of important risk factors that could cause actual results to differ materially from those discussed in forward-looking statements.

We will 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 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.

The Company's first-quarter financial results include the impact of 17 days of operations of WebDAM, which was acquired by Shutterstock, effective as of March 14.

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 for our first-quarter 2014 earnings call.

On today's call, we will share key operating metrics and financial results, bring you up-to-date on our growth strategies including our investments in new products and technologies, and share updated financial expectations.

Then we will open the call to your questions.

I'm pleased to share that we had a very strong quarter, and are off to a great start for the year.

In the first quarter, paid downloads grew 33% annually, reaching a record 29.7 million.

Revenue per download was $2.45, a 7% increase, as compared to $2.28 in the same quarter last year, driven primarily by continued rapid growth in both our enterprise business, as well as in video footage, both of which carry a higher effective price per unit.

The growing volume of activity on both sides of our marketplace, customers and contributors, was reflected in our strong financial results, which exceeded the high end of our outlook for both revenue and profitability.

For the first quarter, revenue grew 42% year-over-year to nearly $73 million, while adjusted EBITDA increased 20%, as compared to the prior year, to just over $14 million.

I think it is helpful to reflect on Shutterstock's performance, as compared to our original expectations, as we prepared for our initial public offering two years ago.

Our expected growth for 2014 at that time was 20%, and with our updated guidance today, we currently expect 36% growth this year.

We achieved our 2014 revenue goal, from the time of the IPO, nearly a year ahead of expectation.

During this period of rapid growth, Shutterstock maintained strong profitability, even as we have continued to invest in new products, expand internationally, and lead the market in product innovation.

It is not a coincidence, our growth has been the result of a series of strategic investments that we've made in the business over several years.

We continue to seek out such investment opportunities as we lay the foundation for the years to come.

Among the variety of investments we are making, growing our relationship with enterprise customers continues to be a key area of focus.

Revenue from enterprise customers continues to grow at a greater than 100% year-over-year, while large companies continue to embrace Offset, our recently-launched premium image offering, featuring some of the world's best-known photographers and artists.

To further extend our presence in the enterprise, this week we announced a partnership with salesforce to make license imagery available inside the salesforce exact target marketing cloud, the world's largest [brand].

Through this integration, brand continuously acts as millions of Shutterstock images, and will be used in social posts by connecting a Shutterstock enterprise account, or by signing up for one.

This partnership underscores Shutterstock's role as premier technology partner for leading market -- for market-leading platforms like salesforce and Facebook that recognize high-quality imagery as a key to their customers' success.

Among many investments we've made in our enterprise strategy this quarter, the most notable was the acquisition of WebDAM, the leading provider of web-based digital asset management tools.

WebDAM provides marketing and creative teams with a cloud-based solution for managing, searching, distributing, and collaborating on digital assets.

This includes stock and custom images, videos, creative files, documents, and presentations.

The Company's offerings are particularly attractive to large enterprises, which make up the majority of WebDAM's client base.

The acquisition of WebDAM allows us to deepen our relationships with enterprise customers, and to expand our addressable share of wallet, to include both the content and the software that our customers need to do creative work.

And since the majority of WebDAM's revenue comes from annual or multi-year Software-as-a-Service commitment, WebDAM will strengthen our base of recurring, predictable, high-growth margin revenue.

We plan to accelerate our investment in this area.

Like Skillfeed, the subscription-based marketplace for online training that we launched in 2013, WebDAM is another example of how we can leverage our existing customer relationships to step into a multi-billion-dollar adjacent market.

We will continue to increase the breadth of our offerings, as we increase our penetration of a large and growing market for commercial digital imagery, and we are just getting started.

As a testament to the opportunity in front of us, I'm pleased to report that we've got continued momentum in the first quarter across all regions, with North America, Europe, Africa and Asia-Pacific all growing in excess of 40% annually.

We delivered this performance by executing on our three primary growth objectives, which are, one, increasing our penetration around the world; two, investing in emerging content types, particularly video footage; and three, bringing Shutterstock to large enterprises through our expanding direct sales team.

We're making strong progress in all three areas.

Our increased penetration around the world has been driven by strong marketing economics, which continue to be healthy and stable, even as we scale, and which are enhanced by our culture of testing and optimization.

Our investments in video footage and enterprise sales continue to pay off as well, with both businesses doubling year-over-year in the first quarter.

It is reassuring to note that our expanding sales organization is scaling efficiently, with sales revenue growth significantly faster than sales headcount.

Overall, I'm very pleased with our performance.

As we have done historically, you should expect us to continue to invest confidently to capture new market opportunities, and to work towards realizing our full potential.

Our willingness to invest in the long-term and innovation has been critical to our success.

We are excited about the progress we are making, and believe that we are laying a strong foundation for the years to come.

And now, I will turn the call over to Thilo Semmelbauer, Shutterstock's President and Chief Operating Officer, who will provide further detail on our performance in the quarter.

Thanks, Jon.

We continue to focus on growing both sides of our marketplace, customers and contributors, which reinforce and drive each other, fueling our growth.

As we have discussed, we have a unique and profitable business model that is driven by powerful network effects.

The more contributors upload new content, the more new customers we attract, and the more images they download, which in turn attracts more contributors.

This creates a flywheel affect with considerable competitive barriers.

Here are some specifics from Q1 to illustrate the point.

Our contributors are more active and loyal than ever before.

We added 3.2 million images to our collection in Q1, 70% more than we added in Q1 last year.

Our collection is growing faster than ever, and we ended the quarter with 35.4 million images, the largest library of its kind.

We've also become as obsessive about measuring contributor satisfaction as we have been with customer satisfaction.

We monitor everything from contributor payouts to the speed of our upload process, and as a result, submissions are at an all-time high.

On the customer side, our marketing activities drove a record number of new customer conversions in Q1, while our costs per acquired customer were the same as a year ago.

In other words, we have successfully increased marketing spend, and held our efficiency.

Our customers also downloaded more images than ever before, just under 30 million in Q1.

That's nearly four images per second.

We continue to be the volume leader in our space.

For large enterprise customers, revenue in Q1 continues to double year-over-year, which is a strong testament to the offering, and to the team we have put in place around the world.

As we have mentioned, large enterprise customers typically require different licensing, account features, and indemnification terms, which leads to higher revenue per download.

This also translates into higher payouts to contributors, which is something our contributors appreciate, and also adds to our strong network effects.

We're also pleased with our efficiency in this area, with sales headcount growth significantly lower than our enterprise revenue growth.

As you can see, across customers and contributors, our global network effects are healthy in fueling our growth.

In addition, we are pleased to see local network effects accelerating in many places around the world, including countries in Asia, the Middle East, South America, and Europe.

The local network effects are driven by a combination of things.

First, content acquisition.

We've been actively revisiting and sourcing content from contributors around the world, and customers are noticing the increase in relevant local content, including local places, people, food, and culturally-specific subjects.

Also, product improvements.

Here, our velocity is increasing.

In Q1 we tested three times as many product improvements as we did in Q1 last year, and many of these tests are related to search and usability in different languages.

Not every test was a winner, but the cumulative effect of our effort creates a better user experience and happy customers around the world.

Some have substantial impact, as with the recent test with one of our 20 languages, where we made a 10% difference in customer conversion.

Our strategy here, to continue to double down on product and technology investments, to further differentiate our offering.

Finally, our local marketing efforts continue to expand.

In Q1, we spent more marketing dollars than ever before in new markets.

And as I mentioned, we continue to see strong efficiencies globally.

As an example, in Q1, roughly 70% of our brand marketing was outside the US.

This type of exposure for our brand around the world drives interest as well as conversion, and contributes to our strong marketing efficiencies.

The network effect is also at work in our footage business, where revenue in Q1 continued to double year-over-year.

Our footage collection recently surpassed 1.7 million clips, also doubling in the last 15 months.

We believe our footage collection is now the best of its kind, and given our investment in technology and storage, we are well-positioned for Ultra HD, also known as 4K content, which launched in Q4, and is starting to grow.

The higher price point for Ultra HD is also great for contributors.

Overall, we are pleased that we drove more than 42% revenue growth in Q1, and we are excited about the opportunities ahead of us.

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

Great, thanks, Thilo.

I will give a bit more color around our results and expectations, and then we will turn to questions.

We will also be sharing our financial expectations for the second quarter, as well as an updated view of our expectations for the full year.

Quick review, the number of paid downloads we delivered in the quarter was $29.7 million, and this was up 33% from $22.4 million in the first quarter a year ago, while revenue was $72.8 million, an increase of 42%, compared to the prior year.

Revenue per download increased 7%, to $2.45 as compared to the prior year, and the increase in revenue per download in the quarter was driven primarily by the growing proportion of our revenue from enterprise licensing and video footage downloads.

Average revenue per download continues to increase, due to the shift in our product mix toward higher effective price products, like video footage and enterprise licensing.

We have not increased pricing on any of our product lines for several years.

Adjusted EBITDA increased 20% to $14.2 million for the quarter, as compared to $11.8 million in the first quarter of 2013, primarily as a result of significant revenue growth, offset somewhat by increased marketing investment, as well as personnel growth, as we continue to expand our sales, R&D and content teams.

GAAP net income was $4.9 million or $0.14 per share, as compared to $5.5 million or $0.17 per share in the first quarter a year ago.

Non-GAAP net income in the first quarter was $7.5 million or $0.20 per share, as compared to $6.1 million or $0.18 per share in the first quarter of 2013.

As a reminder, non-GAAP net income excludes the after-tax impact of non-cash stock-based compensation expense, and one-time tax impacts.

Our effective tax rate in the quarter was 46%, and the prior year was 44%.

It's important to note that this rate is slightly higher in the first quarter versus the full year actual rate we experienced in 2013, and also, as compared to our current estimated rate for 2014.

This is due to discrete state tax adjustments that only affect the first quarter.

We continue to expect a full year tax rate in 2014 of approximately 40%, similar to that we saw in 2013.

Shifting to operating expenses for the first quarter, our gross margin was 60%, as compared to 61% a year ago.

This reflects somewhat higher investment in content, customer support, and our network and hosting infrastructure.

It is important to note that contributor royalties, which make up approximately 28% of revenue and fall within the cost of goods line before gross margin, have remained consistent over many quarters.

Sales and marketing expense was $19.3 million or 26% of revenue, in line with our expectations, and we continue to find cost-effective ways to increase our marketing spend, all while maintaining our customer acquisition economics.

As we've noted for several quarters, we intend to reinvest incremental margin generated from faster revenue growth into additional sales and marketing efforts, to maintain or even hopefully increase that growth rate where possible.

The result of this strategy has been strengthening top line growth on a larger revenue base over the past several quarters.

It is also important to note that we continue to expect approximately 100% of the revenue from existing customers in 2013 to recur again in 2014, as we have for several years.

This trend is also true of both our video footage and enterprise customers.

Recurring purchase behavior is fairly consistent across all of our product offerings.

Product development expense was $7.8 million in the quarter, or 11% of revenue, up from about 9% of revenue in the prior year, and again in line with our expectations given on our last quarterly call, as we continue to invest in this area.

G&A expense was $7.5 million, or about 10% of revenue, also in line with our expectations.

Capital expenditures was approximately $10.9 million in the first quarter, of which $7.6 million was really carryover expense that fell over the end of the year from 2013 into 2014, related to our home office relocation project.

$3.3 million was related to computer server networking equipment to support customer and content growth.

We expect our core operations to contribute an incremental $1 million of EBITDA over the course of the rest of the year, as compared to our prior guidance.

We are also excited about the acquisition of WebDAM, which is part of our strategy to continue to grow our presence in the enterprise.

WebDAM's annual and multi-year Software-as-a-Service contracts result in upfront payments from customers, that we then recognize monthly over the term of the customer agreement.

As a result, WebDAM's cash flow significantly exceeds its GAAP EBITDA contribution.

This dynamic, combined with a very high customer retention rate, has enabled WebDAM to bootstrap its strong growth with no outside investment, prior to our acquisition of the company.

Given WebDAM's extremely profitable unit economics and minimal cash requirements to date, we are encouraged by this opportunity to invest further in this growing business.

We anticipate that WebDAM will contribute roughly single digit millions of revenue in 2014, growing rapidly versus the prior year, and that it will also result in approximately $3 million of incremental GAAP EBITDA investment, with a substantially smaller impact on cash flow.

We're optimistic about the contribution that this investment can deliver in the years to come.

Now, turning to headcount.

We ended the quarter overall with a total of 407 employees worldwide, and that is up from 345 at the end of 2013.

Our cash balance at the end of the quarter was approximately $213 million of cash, cash equivalents and short-term investments, and we generated $15.6 million of cash from operations during the quarter.

And now, I would like to give a little detail on our financial expectations for the second quarter, as well as an update from the full year of 2014.

For the second quarter, we expect revenue of $76 million to $78 million, and adjusted EBITDA between $14 million and $15 million.

We also expect stock-based compensation expense of approximately $6 million, and capital expenditures of approximately $3 million.

For the full year of 2014, we are increasing our revenue expectation for the full year by $10 million, to between $315 million and $320 million.

This revenue total for the year does include some revenue contribution from the WebDAM operations, totaling in the single digit millions of dollars.

We expect adjusted EBITDA for the full year of between $66 million and $68 million.

And this guidance reflects an increase of $1 million in EBITDA contribution from our core operations, compared to our prior guidance, less the $3 million incremental investment related to the WebDAM acquisition.

We also expect capital expenditures of approximately $20 million during the course of the year, and this includes the $7.6 million carried over from our home office relocation project.

Net new CapEx, outside of that relocation project, during the course of 2014 is expected to be approximately $12 million.

Also for the full year, we expect stock based compensation expense of approximately $22 million.

Overall, we are off to a great start for the year.

Financial and operational metrics are on track and our prior investments are continuing to pay off, accelerating growth and creating strong competitive barriers.

We now would like to turn the call back over to the operator, and if the operator can rejoin the call with Q&A instructions, we will be happy to take questions.

(Operator Instructions)

It looks like we have our first question coming in from the line of Steven Chen with Morgan Stanley.

Doubled in Q1 so much for the kind of growth rates you saw through 2013.

So it doesn't appear that growth is slowing.

Can you talk about how the acquisition of WebDAM impact growths in the second half of the year?

And how much of overlap is there between the WebDAM customer base and Shutterstock's customer base?

In terms of the guidance, WebDAM is relatively small impact on the year.

It is in the single digit millions, without disclosing are breaking it out specifically.

But it is captured in the guidance, and gives us a little bit of benefit.

But the bulk of the increased revenue guidance is clearly driven by our confidence in the outlook, as well as the strong performance in Q1.

This is Thilo, just on the customer base overlap, obviously it's early days for WebDAM, as we have been investing in our enterprise business and building our sales force.

We are very excited with the timing being right for us to leverage that sales team and our existing relationships, to also help offer the WebDAM solutions.

This is something that WebDAM provides a solution to a problem that our customers have been telling us about for many years, so we are excited about the synergies there to come.

So just as a follow-up.

So it doesn't seem like you are contemplating much impact of increased penetration because of the WebDAM platform, in terms of how you're thinking about the shape of the overall year for the enterprise business?

You're just including the SaaS portion of the revenue?

That's right.

Our growth rate in the enterprise overall has been very strong, more than doubling year-on-year.

We are not anticipating at this point -- the acquisition just closed at the very end of the first quarter, so we are not baking in any assumption of even more, or higher growth in the enterprise.

But there's certainly over the longer term an opportunity, it is a key part of the overall enterprise strategy.

Just to clarify, in the short term, we probably see more opportunity to help WebDAM grow by introducing the offering to Shutterstock customers than the opposite, if that helps you answer the question.

Okay.

Great, thank you.

It looks like your next question comes from the line of Lloyd Walmsley with Deutsche Bank.

On sales and marketing, seems to be creeping up a little bit as a percent of revenue.

Can you talk about what is going on there, is that building out the enterprise sales force?

And should we expect that to continue at the 1Q level as a percent of revenue?

And as we look at the WebDAM contribution, I don't know if you can narrow the range a little bit between $1 million and $9 million is a bit of a broad range.

And where should we expect the bulk of the expense to fall on that one?

So first of all the sales and marketing line, so yes, we have kicked that up a little bit as a percent of revenue.

There's really two primary complements there, you've got expanding the enterprise sales force, driving the sales proportion, as well as on the marketing side, working marketing spend, brand marketing, and then some sort of personnel costs that flows into marketing.

On the enterprise side, we've been growing it quite rapidly, faster than the overall growth rate of the Company.

But if you isolate enterprise sales growth and the enterprise sales head count add, and the costs that come with them, we have actually been growing the top line at roughly double the rate of the headcount adds.

So there is a build up, as you hire new reps, it takes them a while to ramp up, but the unit economics are as strong in that business as they are in our core business.

We are seeing leverage in the marketing line, in that we are maintaining our marketing ROI and we are reinvesting, testing new channels, and upping that spend a little bit.

We're also to invest in newer pieces of the business that are not yet at the growth rates of the overall business, so things like Offset and Skillfeed, and others that might come in the future.

We are investing a little bit in those as well, and so we will look to see the benefits over the next few quarters.

And I guess this just as a follow-up.

It seems like, with the top line reaccelerating slightly, a lot of that I'm sure is driven by enterprise and video.

But even the core may be accelerating a little bit.

I'm wondering if that is the case?

Yes I mean all of the pieces of the business are growing pretty strong.

All of the regions are 40% plus, we are seeing all product lines growing pretty steadily.

I think if you isolate the core, which is obviously a very large revenue base, it is growing at a slightly lower rate than the overall company, and then you got the newer pieces growing at sort of double the overall rate.

So the mix is how you get to the 40% to 42% growth rate.

Okay.

Great, thanks.

All right, so it looks like your next question comes from the line of Brian Fitzgerald from Jefferies.

Hi this is Sachin sitting in for Brian.

A couple of questions.

The first is, can you give us some more details around the WebDAM acquisition in terms of intangibly, what is it, and how will it benefit the enterprise customer?

What solution is it providing that you didn't provide before?

And then secondly, since Getty launched their free image product, we've been getting a lot of questions around that and what it means for Shutterstock, and do have any thoughts around how competitive that is for you?

Thanks.

This is Thilo, I'll take the first piece on WebDAM.

Just as a refresher, WebDAM is a cloud-based platform that allows creative and marketing teams to manage, collaborate on and publish digital assets.

So imagine a company that is iterating on their brand assets, they want to distribute those out to other parts of their organization, they can use WebDAM to work on those assets and then publish them out, and maintain version control.

The great thing is that many of those assets are stock images and videos.

So now, obviously we have been selling stock images and videos to the enterprise for a long time.

Now we can also offer the enterprise a tool to help them manage their assets and collaborate on those assets.

So it's highly synergistic and it's something actually our enterprise customers have been asking us for many years.

Shutterstock, can you help us with this problem that we have internally.

So hopefully that explains it at a high level.

Jon?

Yes, I can talk about Getty's [embed] product.

We sell images to customers that are selling other things, so we sell commercially released images to businesses.

Getty is giving away images for free for noncommercial usage, so these are blogs that are not making any money with their blogs.

Getty reserves the right to advertise in these embed spots and also collect data on the users that are visiting these blogs.

These are not people that would buy images before, and so we are going to concentrate on what we have been doing, which is selling images to businesses.

Just to add to Jon's point.

When we look our marketing metrics and our retention metrics, we are very pleased with our Q1 results, and we don't see anything negative.

Our acquisition costs are in line on much higher marketing spend; our retention is solid.

So we haven't seen anything, from what we can tell, that changes the picture at all.

Thank you a lot.

All right, well it looks like the next question comes from the line of Mark Mahaney with RBC Capital Markets.

This is Rohit Kulkarni.

One more on sales and marketing, since that seems to be very important today.

Can you talk about how you are approaching the incremental dollars, and how you think about allocating them towards your core products versus all of the new seeds that have you've sown over the last 12 to 18 months?

Offset, Skillfeed, enterprise, video.

And especially around, do you think that some of these products, these potential revenue streams could have significantly higher lifetime value for those customers?

Is that one of the reasons why you may have decided to push the pedal on marketing spend?

Because you could probably have a slightly higher acquisition cost as well.

We were having a little trouble hearing you around how we allocate and think about our marketing dollars across our lines of business.

So like I said, all-in, if you look at marketing as a whole, and our conversions across our various properties, our marketing efficiencies are consistent with what we have.

Now if you take an area like footage or Offset, where we have a much higher purchase price of revenue per download or image, we might spend more to bring in a customer in that area, versus another area, where the purchase price is lower, and we're going to spend less.

In aggregate if you look at it as a whole, the efficiencies are very consistent across a greater base of spend.

Okay.

And also a question on essentially the payout ratio or the payout to contributors.

As the business mix shifts toward as you call it more premium-priced media, how should we think about that?

Is that from a contributor standpoint, is it more important from an absolute dollar payout?

Or is there still a ratio that needs to be tweaked to perhaps go higher or lower?

In terms of how we pay our contributors, we structured the payout rates and structures so that it is roughly a comparable percent of revenue, regardless of what the price point is.

So on a subscription, it's a fixed dollar amount, obviously, because there is no specific revenue on the other plans, or there's no specific revenue -- we apply revenue at a percentage payout rate.

And overall across the company, it's roughly 28% of revenue and it is been quite consistent over time.

So as the revenue shifts across products, we don't see, we see very little change at all in the overall revenue [growth], as a percentage of revenue.

Okay.

And then one last thing, and then I'll get back into the queue.

What are the unique mobile use cases, or what do you see the business doing around mobile media and essentially consumption of media on mobile?

And how is the conversation evolving around your customers?

Mobile is important to us, just like the desktop version, but mobile -- we support all the iPad, iPhone type platforms.

We have apps on both android and iOS.

We also have responsive websites, where users can load our website on mobile.

But also we find that people are using the Website in different ways mobilely.

So they can share albums and sort photos and stuff like that in different ways from the iPad app.

I think there is another important distinction to think about also and that is our customers are businesses, and they have a certain workflow.

So during the week they might be sitting at their desk with a sophisticated large monitor setup, but at night or on the weekends, they might be heavily mobile, and they want to do a search and discovery on any device.

So we need to be designed around network flow.

It's very different from how consumers are typically moving a large proportion of what they're doing to mobile.

So we think about that.

The other piece on the contributor site.

Contributors want real-time information.

They want to know what's going on, what's being downloaded, how much they are earning.

So having the mobile app in their hand telling them about earnings is super exciting.

So that's another area where we spend a lot of time and focus.

All right great.

Thank you Jon, thank you Thilo, and thank you Tim.

All right, so it looks like your next question comes from the line of Youssef Squali with Cantor Fitzgerald.

This is Naved calling for Youssef.

Just a couple of questions.

So going back to WebDAM, I understand it is going on, it's going to be EBITDA negative for this year, but when do we actually expect it to become breakeven, or even positive for the business?

And then I have a follow-up question.

We are not giving multi-year guidance at this point for either the Shutterstock business, or the WebDAM business.

I think the important way to think about it is the cash flow characteristics are very strong.

So customers are paying upfront, and WebDAM was able to kind of build and grow its operations, cash flow positive, bootstrapping, stair stepping as they go.

So our expectation is that we will be able to continue and hopefully accelerate their growth rate.

It's relative to the overall size of Shutterstock, it is relatively small, but that's how we are looking at the next year.

Okay.

And then, you spoke about -- I think Jon spoke about with salesforce, can you talk a little bit about, or any color around the size of the -- or the scale of how big this could potentially be?

And can you also touch upon where you might be in terms of striking a distribution deal, as you did with Facebook, in terms of other publishers?

This is Thilo.

I will jump in on this one.

We're thrilled about the partnership with salesforce, obviously it is just rolling out, so it is early days.

But there are a few platforms that have the kind of reach in the enterprise that salesforce has.

And in terms of what value provides, obviously we will be making it easier for marketing teams in these large enterprises to create and publish content, a lot of social content.

If you step back from this particular deal, you know we have obviously Facebook and Constant Contact, and dozens of other partnerships.

This is all a strategy around getting our digital assets closer to the customers.

In aggregate, we are really excited this is a new and growing part of the business, with lots of stuff in the pipeline.

And in terms of economics, should we just assume it's kind of similar to what you might have with Facebook and others?

Or is this any different?

Well I would say that Facebook is somewhat unique, in that actually Facebook is picking up the tab and paying the licensing fee to Shutterstock, that is not typical.

Usually it's the customer or the end-user who's paying licensing fees.

That's more common.

But in terms of activity and licensing and flow and potential, it does have similar characteristics.

It's really more about taking Shutterstock to users.

There was a time when without the strategy, people had to come to Shutterstock.com, and that was the only way they could license.

Over time, we want Shutterstock to be everywhere, users can come to Shutterstock, they can go to dozens of other platforms where they are already conducting business, and we'll have our imagery available there, and we want to continue to expand that.

That's helpful.

And then final question from me.

Can you talk a little bit about the M&A pipeline, and where you see more opportunities, if it's on the technology side or the content side?

This is Thilo jumping in.

I think broadly speaking, we're constantly looking at opportunities.

It's opportunistic.

We think one of the strengths of the company is we have this combination of a healthy growing core business, coupled with fast-growing new businesses.

We've started a few ourselves, and now over the last five years, we've made two acquisitions.

One was BigStock 4.5 years ago, we are excited about adding WebDAM, and will be on the lookout for other opportunities that fit well strategically.

Thank you.

All right, so it looks like your next question comes from the line of Ralph Schackart from William Blair.

Two questions.

First, the investment and the cost of revenue line.

Just curious if this is a one-time event that you expect to get leverage on going forward, or should we think about this as a new base level for cost of revenue, which would sort of grow going forward?

I would think of that more like periodically we have step changes where we, with volume and technology requirements, where we have to step up a little bit faster than revenue growth.

But it is not something that I would expect to be sort of consistent and continuous over time.

So we might see nice scaling over the coming quarters, where it stays within the range that you've seen over the last couple of years, and periodically you might have to bump it up a little bit.

But 60% to 62% is kind of our target range.

We should expect to fall within that range.

Just one more, if I could.

On Facebook I know it's tough for you to answer a lot of specific questions.

But just wondering perhaps if you could just give us a sense if there's any Facebook revenue contribution flowing through your model today, and maybe in a baseball inning analogy, sort of where you are and the opportunity with Facebook?

Thanks.

Yes.

So it's up and running, and live, and generating revenue, and has been for several months now.

In terms of -- let's see the baseball inning, I would say it's the bottom of the first.

It's probably the best estimate right now.

Facebook has big ambitions of where this platform can go.

And you know our hope is that we will continue to be along for the ride as the sole image provider in that platform.

And I think things are going quite well.

Okay, appreciate it.

Thank you.

All right so it looks like you have another question coming from the line of Blake Harper with Wunderlich Securities.

I had two questions.

First, Jon, in your remarks you had talked about the size of the WebDAM market being several billion dollars for the enterprise there.

Is there any other way that you can help us think about that, and narrow it down to a more specific number?

Or are there other metrics such as the number of potential customers, or average size of the subscription package that you can share, that can help us put some parameters around the size of that market for WebDAM?

So what WebDAM does is allows the big agencies to manage all of their assets.

I don't know of maybe you guys could give the number, but multi-billion is where we're thinking.

Yes, it's a component of a bigger market that's been defined.

If you look at the content management, cloud storage collaboration, project management space, in aggregate, it's $30 billion.

Obviously, WebDAM is only addressing a piece of that.

You know if 10% of that is $3 billion, we don't know if that's exactly right, but it is multi-billions.

And it's just been an exciting adjacency for us, where we are just getting started.

Okay.

Thank you.

And then one question for Tim.

You had talked about the level of the reinvestment that you wanted to do, and to drive growth.

And you may have mentioned this, but I just wanted to see if you had it, was there a specific number that you are targeting as far as EBITDA margins, that you would invest over, or is it more just flexible, depending on how much growth you can drive, as far as the investments you want to make?

I mean it's definitely opportunistic in that we're -- when we are seeing ROI on investment stay steady and strong, driving higher growth rates, we are going to continue to ramp it up.

But we do set ground rules, guard rails in terms of the range.

And what you have seen for several quarters in a row, 20% to 25% as an adjusted EBITDA range, over the course of the year.

So Q1 tends to be a little tighter than the full year, and we saw that last year, and I think even the year before, as a seasonal dynamic.

But over the course of the year and for the full year, 20% to 25% is a range that we think is very strong, yet enables us to invest enough to keep the top line growth at these rates, or hopefully even more successful.

Okay, thank for taking my questions.

All right, so ladies and gentlemen that does conclude today's conference.

Thank you all for your participation.

You may now disconnect, and everyone have a great day.