Shutterstock Inc (SSTK) 2014 Q3 法說會逐字稿

Ladies and gentlemen, welcome and thanks for joining the third-quarter 2014 Shutterstock earnings call.

My name is Ryan.

I'll be the operator on the event.

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

Later, we will be opening the lines to facilitate questions and answers.

(Operator instructions)

As a reminder, we are recording the event for replay.

Now I'll turn the call over to Ms. Denise Garcia, Investor Relations.

Thank you.

Good afternoon.

Welcome to Shutterstock's third-quarter 2014 earnings call.

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

During this call, management may make forward-looking statements that are subject to risk and uncertainty, 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, including the section titled Risk Factors in 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 measures in our second quarter earnings release, which is posted within 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 an isolation from or as a substitute for financial information prepared in accordance with GAAP.

And now I'll turn the call over to Jon Oringer, Shutterstock's Founder, CEO, and chairman.

Thanks, Denise, and thank you all joining us for third-quarter 2014 earnings call.

On today's call we will share key operating metrics and financial results for the third quarter, bring you up to date on our vision for Shutterstock and our progress against key growth strategies, and then share updated financial expectations for 2014 and our initial expectations for 2015, then we'll open the call to your questions.

We had a strong quarter and continue to execute effectively against our strategic growth initiatives.

In the third quarter, paid downloads grew 23% annually to a total of $31.2 million.

Revenue per download was up significantly to $2.65, a 13% increase as compared to $2.35 in the same quarter last year driven by the continued rapid growth of enterprise licensing, as well as continued strong growth in video licensing, both of which carry a higher effective price per unit.

For the third quarter, revenue increased 41% year-over-year to $83.7 million, while adjusted EBITDA increased 36% as compared to the prior year to $17.3 million.

As I reflect upon this quarter's accomplishments, I'm reminded of the many initiatives and investments we have made over the year to get to this point.

I'd like to take a step back to share where we've been, where we're going, and our strategic vision for Shutterstock.

Our growth strategies and investments have been primarily focused on three areas, greater global penetration, emerging content types, and enterprise sales.

We've made solid progress in all three areas since becoming a public company two years ago and continue our progress in the past quarter.

I will discuss each of these with you starting with global penetration.

We have significantly expanded our international presence over the past three years.

We've doubled the number of languages that Shutterstock site is available in from 10 in 2012 to 20 today.

In 2013, we opened our first international office in London and established a European hub in Berlin.

Over the past three years we have expanded from a single office in New York City to eight offices in key media capitals across the US and Europe.

The past quarter we have expanded our European presence by opening an office in Amsterdam, one of Europe's best locations for multilingual media and tech talent.

With three major creative centers in Europe, we are well situated to support a region that is growing very quickly across all of our product lines.

Another in quarter part of serving a global audiences the continued expansion of our content library.

In the last two years we have more than doubled the number of images in our library from 20 million in 2012 to over 44 million today.

This is the result of tremendous focus on our contributors to whom we have paid over a quarter billion dollars to date and the strong network effect of our Business.

To continue to encourage the supply side of our marketplace, this quarter we launched a mobile app that enables our contributors to upload mobile images and then check their earnings on the go.

We also recently launched our contributor platform in Portuguese and Korean, bringing the total number of contributor languages we support to six.

Our second area of strategic focus is enterprise sales.

We've made significant investment in sales people and technology to serve enterprise clients and those investments are starting to pay off.

As a result of our focus, enterprise-driven revenue is approaching 20% of our total revenue, up from less than 10% two years ago.

In 2013 we successfully launched Offset, a highly curated marketplace featuring an elite collection of high-quality artistic images with single simple royalty-free pricing.

Our enterprise customers have embraced Offset enthusiastically and we are encouraged by our trajectory going into next year.

To further deepen our relationship with enterprise customers we acquired WebDAM earlier this year, a leader in web-based digital asset management.

We are now two full quarters into having WebDAM as part of the Shutterstock family, and WebDAM is showing great promise.

In the third quarter WebDAM bookings doubled year over year.

We're excited to continue to invest in this area.

Our third area of strategic focus is new assets types and offerings.

Earlier this year we launched music licensing to complement our imaging and video licensing businesses, offering a one-stop shopping experience to customers.

While it's early days for our music efforts, we are laying the foundation for growth and are starting see promising results.

We also continue to invest in Skillfeed, an online marketplace for learning with a special emphasis on digital professionals.

This helps to strengthen our relationship with customers and contributors and to expand the ways that we can help them.

While still early, the contribution from initiatives like music and Skillfeed look much like enterprise and video footage did several years ago.

We're encouraged by our track record for building and buying complementary offerings that our audience appreciates.

When you step back and consider the activities across all three of our strategic growth areas, the consistent theme is that our investments are paying off.

Our core business is strong and growing, while new initiatives are growing even faster.

In 2015 we expect to continue to invest in these and other market-expanding opportunities to further bolster the network effects of our business and to fuel long-term growth.

When we identify investment opportunities in promising areas where we have an advantage, we will aggressively pursue them.

We will do so even when investments result in short-term EBITDA compression in order to drive growth in revenue and profit over the long-term.

With that, I'll turn the call over to Tim Bixby, Shutterstock's CFO, who will provide further detail on our operating and financial achievements during the quarter, updated 2014 expectations, and a first look at our growth and profit expectations for 2015.

Thanks, John.

As a quick review, revenue in the third quarter grew 41% to $83.7 million, while paid downloads grew 23% to $31.2 million.

Revenue per download increased 13% annually to $2.65, the highest growth rate for this metric in the past three years.

Revenue growth across all regions of the globe was strong.

North America grew approximately 47%, while both Europe and the rest of the world grew at approximately 37% in the quarter.

Our overall revenue breakdown by region today stands at about 38% North America, 34% from Europe, and 28% rest of the world.

On the bottom line, adjusted EBITDA increased 36% year-over-year to $17.3 million in the third quarter, or approximately 21% of revenue.

GAAP net income in the quarter was $5.3 million, or $0.15 per share as compared to $6.2 million, or $0.18 in the third quarter of 2013.

Non-GAAP net income increased 29% in the third to $9.5 million, or $0.26 per share.

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

Our effective tax rate in the quarter was approximately 40%, in line with recent quarters, and we have begun to implement strategies to align our effective tax rate with the territories in which we do business.

Currently, about 70% of our global revenue comes from outside the United States.

Shifting now to operating expenses for the third quarter, our gross margin was about 60%, a slight improvement versus the prior quarter.

Contributor royalties, which represent approximately 28% of our revenue, have remained consistent as a percent of revenue for many quarters.

Sales and marketing expense was $21.1 million in the quarter, or about 25% of revenue, sightly better than our expectations as our newly added sales reps continue to ramp up quickly when they come on board.

We continue to expand this direct sales team and the amount of revenue we generate per new added rep added to this team gives us real confidence in our very large market opportunity.

Also, our performance marketing metrics continue to be strong as well with the proportion of marketing spend to revenue remaining stable in the quarter as compared to prior quarters.

We continue to see a consistent ratio of revenue recurring from one year to the next from the same cohort of customers.

Our year-over-year revenue retention continues to be approximately 100%, and this gives us real confidence in continuing to invest in growth.

Product development expense was $9.9 million in the quarter while G&A expense was $10.6 million, each approximately 12% of revenue.

It is important to note that all the expense lines now include the full impact of the WebDAM operations, WebDAM revenues is generally billed and collected up front, which gives us good revenue visibility, and then is recognized on a GAAP basis over a year long software as a service contract.

This is an area where we are increasing our level of investment as a result of these powerful unit economics.

Capital expenditures during the third product quarter was approximately $1.9 million.

We continue to invest in our technical infrastructure, while maintaining a relatively lean ratio of capital spend to revenue.

That metric is about 4% of revenue, which compares quite favorably to other companies with similar high availability requirements.

Turing now to headcount, we ended the quarter with a total of 491 employees worldwide, up from 345 at year-end 2013 including the 24 added in March as a result of the WebDAM acquisition.

Our cash balance at the end of the quarter increased to $260 million of cash, cash equivalents, and short-term investments, and we also generated $22.7 million of cash from operations during the quarter, up 55% as compared to the prior year.

John mentioned a few of the investments we've made to strengthen our market position expand the breadth of our portfolio into the new content types.

We generally expect new initiatives to consume cash as we build momentum and then progress toward being breakeven and then cash flow positive within 2 to 3 years.

We are excited about the investments we have made so far and that we continue to make.

Absent the current pace of investments we are making in these newer areas, our core business EBITDA margin is already above 25%.

I would now like to detail our updated and increased financial expectations for 2014, as well is give some initial guidance for the full year of 2015.

For the fourth quarter, we expect revenue between $90 million and $92 million.

We expect adjusted EBITDA to be between $19.5 million and $21.5 million for the quarter.

We expect stock-based compensation expense of approximately $7million and capital expenditures of approximately $3 million.

For the full year of 2014, this guidance would imply revenue of between $326 million and $329 million.

We are reaffirming our prior adjusted EBITDA guidance of between $68 million and $69.5 million dollars.

We expect stock-based expense to be approximately $23 million and full year capital expenditures to be approximately $20 million.

As a reminder about 20% of our global revenue is euro-denominated and about 10% in the British Pound.

The balance is primarily in US dollars.

For a global company with 70% our revenue outside of the US, we actually have relatively low foreign currency exposure.

While currency impact was minimal in the third quarter, the US dollar has strengthened substantially in recent weeks.

We have factored current exchange rates into our guidance for the fourth quarter.

Without the recent strengthening of the dollar, our fourth quarter revenue and adjusted EBITDA guidance would of been higher by $2.5 million and $2 million respectively.

For 2015, we expect revenue to be between $430 million and $435 million which implies a growth rate of 32%.

We expect adjusted EBITDA between $94 million and $98 million, which implies a 22% adjusted EBITDA margin.

We also currently expect capital expenditures to be approximately $16 million next year and stock-based compensation expense to be approximately $30 million.

And while we're not providing quarterly guidance for 2015 at this early date, I would like to highlight this the seasonal patterns we have seen historically.

We expect roughly similar proportions of revenue and EBITDA to fall within each of the four quarters of 2015 as we've seen in 2013 and to date in 2014.

Overall, I can say we're very pleased with our performance.

The investments where making in the contributions they are adding across all areas our business as we continue to focus on global penetration, enterprise sales, and new content types.

With continue strong execution and a strengthened Outlook we are well-positioned for what I think is a terrific start for 2015.

And now we're happy to open the call to questions.

If the operator would please rejoin, we will be happy to take any.

(Operator instructions)

Lloyd Walmsley with Deutsche Bank

Thanks, guys.

Couple, if I can.

Just first, it looks like you saw some leverage on sales and marketing for the first time in a while and you're still growing the personnel you mentioned portion of the sales and marketing so that would imply leverage on the pure advertising portion was a bit higher.

Can you talk about what you're seeing in paid acquisition channels and whether we should expect to see some leverage on the advertising or sales and marketing line in 2015 or whether you plan to keep investing there?

And then the second question would just be if you can just comment a little bit about what's driving the downloads, are a little slower, but revenue per download is a bit higher?

If you could walk us to some the dynamics there.

I think the leverage question first in the downloads question second.

On the leverage question I think, yes, we did see a little bit of benefit there.

I think in the variable piece, which is really the spend that we put out there to generate traffic to the website and convert that traffic to new customers.

That's been stable.

So our key metrics, our CPA, lifetime value, all that stuff that we track around variable spend has been quite stable.

So that is always a good sign, we're doing good things at a much larger scale.

On the sales side, which is also in that number, we're also seeing consistent improvement.

Although that's something where there's a little more upfront investment as we grow the sales team as opposed to marketing.

But that also has been consistent.

We've actually seen good results there and continue to grow the sales team at a pretty fast pace.

A little bit of the scale can come from the seasonal ebb and flow of some of the non variable marketing, so we're pretty active in trade shows and events and kind of branding efforts around the world and those can ebb and flow a little bit.

But, overall, I would say the key measures are stable and look great.

On the download question, I think what we're seeing now is kind of the result of the consistent trends and math.

As the newer pieces of the business grows at a pretty rapid clip.

Enterprise sales doubling year over year, video footage revenue growing nearly that fast, it just becomes, over time, much more likely that that revenue per download number is going to grow at a faster clip.

This quarter obviously was quite a bit of a step change.

I would not extrapolate from that, but I think the trend is likely to continue.

Those higher price pieces of business are really doing well.

Offset, for example, our average, if you go look at the website we've got a $250 price and a $500 price.

Most that is selling at the higher price and that's doing well in putting some nice upper pressure on the numbers.

So, we like all the trends that were seeing there.

Great thanks, guys.

Rohit Kulkarni with RBC.

Hey, guys.

It's actually [Brian] on for Rohit.

I

'm curious how you expect royalties to evolve over time as you move farther into enterprise, video, and music?

And then do you have any early lessons or surprises now that you've seen music download levels increase?

I'll take the royalty rate one first.

I think that we've done a nice job of structuring royalties with our eye on the contributor.

We want contributors to do well and make money and be happy and bring us more content, and part of that is kind of keeping things stable at a good range, so nearly all of our royalties are in a pretty tight range, around that 30% payout rate.

That feels quite stable.

If you look at it quarter to quarter it's super strong and stable.

Even as the newer piece of the business grows faster, whether its offset or enterprise or even now music is getting going, we would not expect to see much variability in that percentage relative to revenue.

Yes, we've kept things pretty stable for the past 10 years.

It's been around 30% for most of the image products.

Music's brand new and today we have one partner.

Eventually we'll have many partners.

But we're kind of still working our way through that, so it will take a bit of time, but we expect it will be around same.

Okay.

Great.

Thank you.

Brian Fitzgerald with Jefferies.

Thanks, guys.

A couple of questions.

I wanted to know if you could give us any color around your partnerships with Facebook and with salesforce.com.

How are they progressing?

Is one progressing at a faster clip than the another, and maybe any differentiation you would call out between those two?

And then on the video side, are you finding the majority of video is still being used by studios?

Do you expect this to eventually shift over time towards more advertising usages?

Thanks.

So, with Facebook and sales force, we put that into our API strategy and we're starting to look at the API as a business unit of its own.

We can integrate deep into lots of different businesses out there, so we're always on the lookout for places we can put our product into so that users of that product and can buy images.

As far as the video goes, we see a lot of different people using it today.

We see advertisements made with it, we see Hollywood studios buy our video, we see websites using it.

It's going to be used by anyone that needs to catch people's attention.

Yes, I think it's still very early in that evolution from kind of studio-driven growth to advertising-driven growth, but it's really something where we're seeing big brands do a lot of testing out in the market.

You can see it on YouTube, you can see it everywhere.

We want to make sure that we are in the middle of that trend as it evolves and it's really another piece of our overall enterprise strategy is to be top-of-line for these big brands whether it's images, footage, music, or even content management, all of which we're in now.

Thanks, guys.

Next we have Ralph Schackart with William Blair.

Good afternoon.

Tim, you provided us the FX headwinds for Q4.

I'm just curious, can you give us a sense of what you have implied for your 2015 outlook as well?

Yes, I think, at this point, we kind of run different scenarios, but in terms of guidance we tend to assume that rates remain unchanged from kind of current rates.

So it would be safe to assume sort of a pro rata effect from the Q4 numbers that we gave but larger base.

We factor that in for next year.

Okay.

One more if I could.

Just as enterprise continues to grow and scale, I think it's around 20% revenue today, how much farther do you think you can sort of go down this channel and do you expect this will continue to become a large portion of your overall revenue mix going forward?

It feels like pretty consistent expansion, so we look hard at how each individual rep does.

We don't want to hire folks and have them have a difficult time ramping up and to date it's been really consistent, which means there's just a big market out there for all the players.

Shutterstock has found a real focus where enterprises are really open to the offering we have and they're taking advantage of it.

We don't see that any time soon where that should slow.

It's a big part of the plans for next year.

Okay.

Thank you.

Youssef Squali with Cantor Fitzgerald.

Thank you very much.

Two quick questions.

First starting with you, Tim.

The [endpoint] margin guidance for 2015 looks like it's flat with 2014, if one were to adjust for that $3 million headwind [from WebDAM] that you had in 2014.

I was just wondering why considering that there is about $100 million additional revenue that comes through -- down the pike, if it's just increased investing maybe you can just highlight areas of investments?

And then, John, I want to go back to one of the three focus areas that you mentioned earlier, the one about new content types.

I was just wondering if there are any other obvious areas or new content types that you guys have not -- that you're not offering right now that would make obvious sense for you guys to go into over the next 12 to 24 months?

Thank you.

So we'll hit the investment question first and then the content.

So, as we have in the past couple of years, a good proportion of our spend, call it 3%, 4%, 5% goes towards what we would term new areas; Offset, Skillfeed, now WebDAM, music, areas where the spend is a little higher and they're burning cash, they move towards profitability, and then compare favorably with the rest of the business.

I think the focus in 2015 will be similar to this year.

WebDAM will be in its first full year with Shutterstock.

We see a lot of opportunity there.

On a GAAP bases, that's still going to be a little bit of EBITDA compression, but on a bookings basis it's super strong, so we're confident in that investment.

And then new content types, they're kind of working.

And so we're going to continue investing in those.

We're not finished by any means.

There are other opportunities out there and we're kind of thinking through the right priority, but we have our hands full with the new stuff that is out on the market now and we're investing in driving those to a little bit further growth.

As ours new content types go, music was the next obvious one.

With the video market kind of growing fast, people that buy video need audio to go along with it.

But if you look at Skillfeed and WebDAM, those are not new content types but great expansion markets for us.

So there's a lot that we can do to continue to expand.

All right, thanks.

At this time we have no further questions, so we'll close the call there.

Thanks, everyone, for your time and your participation and have a great rest of the day.