Shutterstock Inc (SSTK) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2014 Q4 Shutterstock conference call.

My name is Joyce 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, Investor Relations.

Please proceed.

Thank you.

Good afternoon and welcome to Shutterstock's fourth quarter and full year 2014 earnings call.

Joining me today to discuss our results are John Oringer, Founder, CEO, and Chairman, 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.

These include statements relating to the expansion of our addressable market, the success of new product offerings, including products we recently acquired, revenue growth, and the predictability of our revenue, adjusted EBITDA, equity-based compensation, taxes and capital expenditures.

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

Please refer to today's press release and the reports and documents filed by us with the Securities and Exchange Commission, including the section entitled 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 today's 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 in 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.

Thank you all for joining us for our fourth quarter and full-year 2014 earnings call.

Shutterstock delivered outstanding performance in 2014.

As a leader in unit volume, revenue growth and innovation in our category, I'm very pleased with the continued strength we have seen across all of our key operating measures.

In 2014, currency adjusted revenue grew 40%, adjusted EBITDA grew 32%, and our image library grew 45%, while in the fourth quarter currency adjusted revenue grew 36%, adjusted EBITDA grew 46%, and revenue per download hit a record high of $2.68.

Shutterstock continues to deliver solid revenue growth and strong adjusted EBITDA and cash flow margins, along with highly predictable revenue while supporting a global customer base.

Here are the figures.

In the fourth quarter, revenue increased 34% year-over-year to $91 million, while adjusted EBITDA increased 46% as compared to the prior-year, to $22.4 million.

Currency adjusted revenue growth was 36% in the period.

Our fourth quarter currency adjusted revenue and adjusted EBITDA both exceeded the high end of our expected range.

For the full-year, revenue grew 39%, to $328 million, while adjusted EBITDA increased 32%, to $70.7 million, a strong finish to a great year.

The progress we've made in the fourth quarter and throughout 2014 continues to strengthen Shutterstock's position, as we continue to focus on three strategic areas for growth, greater global penetration, emerging content types, and enterprise sales.

I'd like to share the progress we've made in these three areas during the fourth quarter and 2014.

I will start with global penetration.

We significantly increased our global presence in 2014.

During the year, we expanded the number of languages in which we serve customers to a total of 20, and we launched our contributor platform in Portuguese and Korean, bringing the total number of contributor languages we support to six.

We've expanded from a single office in New York City to a dozen offices across the US and Europe in recent years.

We opened an office in Amsterdam last year, one of Europe's best locations for multilingual media and tech talent.

Now with four major creative centers in Europe -- Amsterdam, Berlin, London and Paris -- we believe we are well-positioned to support a region where we are seeing strong growth across all of our product line.

In addition to increasing our global penetration, we continue to invest in emerging content types that expand our addressable market, specifically video, music and editorial content.

Our video business continues to be one of our fastest growing offerings.

To further expand the ways that we help video creators, in mid-2014 we launched Shutterstock Music.

Given our early success, we doubled down on this area last month through our acquisition of PremiumBeat, a leading provider of exclusive high-quality music and sound effects for use in videos, films, television, apps, games and other creative projects.

We believe PremiumBeat will accelerate our mission to make licensable music accessible to every creator.

Our goal is to become a leading provider of music licensing, as we have done with images and with video.

This considerably expends our addressable market.

Last month we also announced the acquisition of Rex Features, marking our entry into editorial imagery, a new market for Shutterstock, with significant potential.

Editorial image licensing includes celebrity, entertainment, sports, and news images that capture what is happening in the world around us.

Our customers have been asking us to provide editorial content for many years.

And given Rex's editorial expertise and Shutterstock's global reach, we are excited about what we can accomplish in this area.

This acquisition also expands our addressable market.

Finally, we continued to expand relations with large enterprises throughout 2014.

Our direct sales business to large enterprises continues to grow rapidly year-over-year, and in Q4 represented more than 20% of total revenue.

To deepen our relationships with enterprise customers, we acquired WebDAM in March.

WebDAM is a cloud-based digital asset management service that enables marketing and creative teams to effectively manage and collaborate on their creative files.

This acquisition highlights our expansion beyond content licensing and into creative and marketing tools, moving Shutterstock deeper into the daily workflow of creative professionals and expanding our addressable market.

We are pleased with the success of WebDAM to date.

In the fourth quarter, bookings roughly doubled year-over-year, while customer retention and renewal rates remained at nearly 100%.

As we close 2014 with $328 million in revenue, a 39% growth rate, and an adjusted EBITDA margin well above 20%, we envision a path towards our long-term goals of $1 billion in annual revenue and a 30% adjusted EBITDA margin, driven by the businesses in which we currently operate: images, video footage, music, workflow tools, and editorial licensing.

Shutterstock has evolved from an image-based marketplace for small businesses to a much broader platform, with a large and expanding addressable market opportunity.

As a leader in the market with increasing share and a strong multi-product portfolio, we believe that we are well positioned for growth in 2015 and beyond.

And with that, I'll turn the call over to Tim Bixby, Shutterstock's CFO, who will provide further details on our operating and financial achievements and expectations for 2015.

Thanks, Jon.

We finished 2014 with strong momentum, generating revenue in the fourth quarter of $91.2 million, an increase of 34% year-over-year, or 36% on a currency-adjusted basis.

Revenue for the full year grew 39%, to $328 million.

Constant currency revenue growth for the year was 40%.

For the quarter, revenue per download increased 10%, to a record $2.68, while paid downloads increased 20% to $33.5 million.

We continue to see strong growth in both paid downloads and revenue per download.

It's worth noting, however, that paid download metrics become less useful to fully capture the health and trajectory of the business as we continue to migrate customers from our core subscription offering to our enterprise products, and as we continue to expand into higher priced content types and creative tools, like WebDAM.

We plan to continue to provide these metrics, but we will focus somewhat less on their quarter-to-quarter fluctuations.

Revenue growth across all regions was also strong.

North America grew approximately 42%, while Europe grew 29%, and the rest of the world grew at approximately 32% in the quarter.

Our overall revenue breakdown by region today stands right in line with where it was last quarter, about 37% North America, 35% Europe, and 28% in the rest of the world.

We do benefit from both geographic and currency diversity in our customer base.

While 70% of our revenue comes from customers outside the United States, approximately 30% of our global revenue is exposed to currency fluctuations, primarily the pound and the euro, as the remainder of our non-US business is denominated in US dollars.

And now on to other key financial results, adjusted EBITDA in the fourth quarter grew 46%, to $22.4 million, or 25% of revenue, as compared to $15.4 million in the prior year.

Our strong adjusted EBITDA growth reflects the pay-off from investments we've made throughout the year, and as is typical in the fourth quarter, a somewhat slower pace of hiring.

Notably, we also incurred higher than planned acquisition-related expenses in the quarter, which reduced adjusted EBITDA by approximately $1 million.

Adjusted EBITDA for the full year grew 32%, to $70.7 million, up from $53.4 million in the prior year.

GAAP net income in the quarter was $7 million, or $0.19 per share, as compared to $7.88 million, or $0.22 per share, in the fourth quarter of 2014.

GAAP net income for the full year was $22 million, or $0.61 per share, as compared to $26.4 million, or $0.77 per share in the prior year.

Non-GAAP net income increased 37% in the fourth quarter, to $12.5 million, or $0.35 per share.

Non-GAAP net income for the full year increased 23%, to $38 million, or $1.06 per share.

Non-GAAP net income, as a reminder, excludes the after-tax impact of non-cash equity-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.

Shifting now to operating expenses for the fourth quarter and the full year, our gross margin in the fourth quarter was 61%, as it has been for several quarters.

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

Sales and marketing expense was $21.2 million in the quarter, or about 23% of revenue.

Other key operating metrics also continue to be strong.

Our retention and repurchase rates continue to be attractive and stable across both subscription and on-demand products.

Our year-over-year revenue retention overall continues to be approximately 100%, which continues to give us confidence to invest in marketing channels where we see a strong return.

Product development expense was $11.4 million in the quarter, while G&A expense was $10.8 million, each approximately 12% of revenue.

Capital expenditures during the fourth quarter was $2 million, while full-year capital expenditures was $18.7 million, including $3.6 million related to leasehold improvements early in the year.

These figures also include a small amount for content acquisition.

We continue to invest in our technical infrastructure, while maintaining a relatively lean ratio of capital spend to revenue, currently between 4% and 5% of revenue, excluding the leasehold improvement spending.

We continue to expand a talented team, particularly in the area of enterprise sales and support, R&D and product management.

We ended the quarter and the year with a total of 513 full-time employees worldwide, up from 345 at year-end 2013.

The employees added over the course of 2014 joined our team in the following areas: 45% of them in sales and marketing, 35% in product engineering and R&D, and the remaining 20% in infrastructure and G&A.

Our cash balance increased to $288 million at year-end, an increase of 37% as compared to the prior year.

We generated $23 million of cash from operations during the fourth quarter and $83 million in the full year, an increase of nearly 50% versus the prior year.

In the first quarter of 2015, we utilized cash of approximately $65 million related to the two recently closed acquisitions.

Our current expectations for 2015 are as follows.

And these expectations include the expected impact of recent currency changes.

And they also include the impact that we expect from the acquisition of both Rex Features and PremiumBeat.

For the first quarter, we expect revenue between $94 million and $96 million, and adjusted EBITDA between $16 million and $17 million.

We expect non-cash equity-based compensation expense of approximately $7 million, an effective tax rate of approximately 40%, and capital expenditures of approximately $5 million.

For the full year of 2015, we are increasing our revenue guidance to a range of $436 million to $444 million.

We expect adjusted EBITDA between $90 million and $94 million, non-cash equity-based compensation expense of approximately $30 million, an effective tax rate of approximately 40%, and capital expenditures of approximately $18 million.

We're very pleased with our performance in 2014, and we're optimistic about the exciting opportunities ahead of us.

We believe that the investments we're making and the contributions they are adding across all areas of our business will allow us to continue to grow the business and our addressable market in 2015 and beyond.

We're also looking forward to our first Investor Day, to be held at our offices in New York City on February 26.

This event will be publicly available via webcast, and more information can be found in a recent press release regarding this event within the Investor relations Section of our website.

And with that, we're happy to open the call to questions.

If we could ask the operator to rejoin, we'll do that.

(Operator Instructions)

Rohit Kulkarni, RBC Capital Markets.

Great.

Thank you.

Two questions, please.

One, just housekeeping.

What are your assumptions for revenue and EBITDA for 2015 for FX headwind as compared to the guidance you gave in November, and how much contribution are you assuming from the two acquisitions?

And then I have a follow-up.

So we don't break down our guidance for revenue by line item.

We have included in the FX assumptions the actual change in foreign exchange since our last guidance.

So we're assuming that the current run rate, foreign exchange rates of the most recent weeks continue forward.

So we're not assuming any change, any improvement or deterioration, beyond what we've seen over the last several weeks.

If we factor that in, as we noted, about 30% of our revenue is exposed to currency, about 20% to the euro, about 10% to the pound, and then we've also increased our guidance for the acquisitions and that enabled the overall total to increase.

Okay.

And slightly different question, on your API strategy, you have had partnerships with Facebook, Wix -- I'm missing a few, I'm sure Cafe Press, Constant Contact.

How do these partnerships affect the way you recognize paid downloads?

Is that also one of the caveats you would add as far as enterprise, the way that affects paid downloads and as revenue recognition result is also concerned?

For the most part, paid downloads are included.

They do run through our site and count as we would any other paid download.

Overall, we are highlighting the fact that there's quite a bit of activity and growth coming from areas that don't trigger paid downloads at all.

In our enterprise group, we have downloads that don't drive revenue, and that's part of that business.

As we expand into WebDAM and potentially other workflow tools, we'll have that aspect, as well.

But we do include them, for the most part, through the API strategy.

Thanks, Tim.

Youssef Squali, Cantor Fitzgerald.

Hello.

This is Kip Paulson for Youssef.

Just a couple of quick ones.

First, what did Rex and PremiumBeat do in 2014 on the top and bottom lines, and then what is baked into your 2015 guidance for those acquisitions?

We don't break our revenue down by product lines or by companies.

Those acquisitions were really giving us a foothold in those businesses, and that was really the goal of them.

They're both growing.

They're both generating revenue.

They're both profitable and cash flow positive.

We expect them to be accretive, but we're not breaking down the specific revenue for each of those.

Okay.

Thanks.

And how about addressable market?

Is there any color you can give us on what you think the addressable market with these two acquisitions in there?

For music, we believe it's about $0.5 billion, $500 million for music, and for editorial, it's around $750 million.

Okay.

Great.

All right.

Thank you.

Blake Harper, Wunderlich Securities.

Thanks, guys.

I wanted to ask about the paid download number.

And I know it's affected by the enterprise sales and just trying to understand, because in Q3 it was down a little bit but due to some of the better enterprise sales, but then this quarter came back fairly strong, at over $2 million.

And Tim, I know you had mentioned that it becomes less relevant of a metric.

But just wanted to understand some of the dynamics of why that would be up so much.

Would that imply that there was more subscription growth compared to enterprise?

Or maybe just help us understand how to think about that, the split between the enterprise growth and the subscription growth and how that affects that number going forward.

The sequential patterns are pretty consistent.

Q4 is typically a stronger quarter for usage and growth.

It was a good result.

It was an improvement over the sequential growth in the prior quarter.

But I think the bigger picture here is that the subscription business and the core business used to be 100% of the business.

It's now more like two-thirds, as we've expanded video footage and enterprise sales.

And so just gradually over time, this metric will become less and less helpful to capture the health of the total business.

It is an interesting metric and that's why we've continued to share it.

But those are the major drivers, the seasonal impact.

Revenue is really the key driver.

When you think of an average revenue per download of $2.68, yet we're licensing footage for $60 or $80 or offset images for $500, it's clear that metric is really very heavily weighted by something that's not the core of the business.

Okay.

Then one more, if I may, Tim.

Just wanted to understand where some of the investments are going.

And the revenue guidance you gave is obviously very strong.

Top line growth.

But the EBITDA, it implies on a margin basis about flat with where you were in 2013, about 21% to 22% EBITDA margins, so not a lot of leverage there.

But just wanted to understand, is that mainly due to the acquisitions that you're making and some more of the headcount that you're bringing on; or is that some of the marketing investments that you talked about or just other investments?

Just wanted to understand exactly which area those investments are going that's doing that to the model.

The most significant impact that's new is currently.

So if you take the high currency rates from mid-year last year or in the fall of last year and compare to where they are now, and understand that 30% of our revenue is exposed to that change and then also understand that we have a variable gross margin of above 60%, because we're paying out royalties on that revenue, a significant amount of that impact is falling to the EBITDA line.

If you correct for that, then I would say we're investing at similar pace and a similar rate as we have historically, 4% or so of our revenue is being reinvested in new higher growth areas.

Without that investment, EBITDA would be 4 points higher.

So that trend continues.

And I think in Q4, you really saw what can happen when revenue grows nicely and the hiring pace slows a little bit.

We saw a 25% EBITDA margin, even with the currency impact.

So there's clearly that leverage inherent in the model that you can see.

Okay.

That's really helpful.

Thanks, Tim.

Brian Fitzgerald, Jefferies.

Hello, guys.

This is [Suchan] sitting in for Brian.

So the question is, as enterprise becomes a bigger portion of the business overall, how should we think about the ARPU for the enterprise accounts?

How many customers are there, and what is the average ticket or revenue for the enterprise account?

And then a follow-up is how much potential do you think there is in your existing customer base in terms of converting them into enterprise accounts?

Thank you.

A couple thoughts on that.

So enterprise is a broad range of activity.

So you've got some customers and usage that at a volume and a price point where they're paying $20 or $40 or $60 per image.

You've got other users who are using our premier licensed product at $200, and you've got offset users at $500, with a very broad range.

We don't give a customer count and a revenue per customer because of that, because it's really tough without a lot of complex data, it's hard to get your arms around it.

The headline is significantly higher prices, tens to hundreds overall.

With the acquisition of editorial, we're seeing a similar kind of pricing impact, tens to hundreds of dollars in licensing.

Same with video footage, which is also very interesting to enterprise customers, a subset of our enterprise customers.

So that's one where we'll continue to give as much detail as we can, but we don't currently disclose customer accounts.

And on the second question, I think, there are very few enterprise accounts where we go in with a sales pitch where they aren't already active users of Shutterstock in one way or another, whether it's subscription or on demand.

But there's a tremendous number, several thousand, that are not customers today.

We have dozens and dozens of enterprise customers, but there's lots who are potential Shutterstock users that aren't today.

Okay.

Great.

Thanks a lot.

Lloyd Walmsley, Deutsche Bank.

Thanks.

Wondering -- I know it doesn't sound like you're going to give us any 2015 impact from acquisitions.

But can you give us color on what these companies did last year in terms of revenue and EBITDA maybe?

And then second question would just be, how do you think Adobe's acquisitions of Fotolia might impact the competitive environment, seeing Adobe has such a strong lock on the creative professionals who are both contributors and consumers of stock photography?

Is that something that you guys can react to?

Sure.

We'll hit the deals first and then Adobe second.

On the deals, we're not going to break down the revenue for each of those.

I think to help you get to a useful place, if you do the currency adjustment, our underlying guidance is unchanged from our prior guidance for the core business.

We're factoring in the currency, which is, you can kind of look and see what the change has been over the last 90 days.

That's affecting 30% of our business.

It's a multi percentage point impact.

So, net of that, the difference is really all from the deals.

So directionally, we want to give you as much color as we can without disclosing the specifics.

So hopefully that gets you there.

And with Adobe Fotolia, we've competed against big companies, multi-billion dollar competitors with brand recognition similar to Getty for many years, and we'll continue to that.

In this case, Adobe has acquired an asset that's strong in a couple of countries in Europe.

And we don't know exactly how they're going to integrate it into the Adobe Tools, but it doesn't seem to be such a clear-cut kind of path.

Licensing images is complicated.

This is new to Adobe.

And they've tried several times before and we knew that they would try again, at some point.

Okay.

Thanks, guys.

Thank you.

At this time, there are no further questions in queue.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.