Shutterstock Inc (SSTK) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Shutterstock's 2015 second-quarter earnings call.

(Operator Instructions) As a reminder, this conference call today is being recorded.

I would now like to turn the conference over to Craig Felenstein, Senior Vice President of Investor Relations.

You have the floor, sir.

Thank you, operator.

Good morning, everyone, and thank you for joining us for Shutterstock's second-quarter 2015 earnings call.

Joining me today is Jon Oringer, our founder, Chief Executive Officer, and Chairman, and Tim Bixby, our Chief Financial Officer.

During this call, management may make forward-looking statements that are subject to risks and uncertainties, 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 from time to time with the US Securities and Exchange Commission, including the section entitled Risk Factors in the Company's Form 10-K filed on February 27, 2015, for a discussion of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements we may make on this call.

On this call, we will refer to adjusted EBITDA, non-GAAP net income, and free cash flow, which are non-GAAP financial measures.

You can find a description of these items along with the reconciliation to the most directly comparable GAAP financial measures in today's 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.

With that out of the way, let me turn the call over to Jon.

Thanks, Craig.

Thank you, everyone, for joining us this morning.

Shutterstock delivered another quarter of strong growth, as the key competitive advantages we have built -- most notably the quality of our content library and unparalleled search technology -- continue to attract more customers and contributors to our platform.

Product and user experience matter.

It's a philosophy we have lived by since we launched our first offering in 2003, and it's what still drives us today.

We continually hear from our engaged customer base that Shutterstock's content is a true differentiator, given not only the size of the library but also the quality and diversity of the images we offer.

That is why once creative professionals interact with our platform they keep returning, as evidenced by our annual retention rate, above 100%.

To ensure we are meeting the demands of existing customers while also attracting new users, we remain focused on building cutting-edge technology and introducing new and innovative product offerings.

A great example is our rollout during the second quarter of monthly subscriptions with no daily download limit.

We also rolled out a smaller subscription offering for users who may not need as many images per month.

While these new subscription offerings have some short-term financial implications which Tim will discuss in a moment, over time we expect them to drive additional subscription growth, extend average retention length, and increase lifetime customer value.

Our relentless focus on providing the best user experience from a quality, search, and value perspective has resulted in consistent customer growth over the last 13 years.

This past year alone, Shutterstock user accounts have grown by 25%, with over 1.3 million customers licensing content.

That trend has continued in the third quarter despite changes in the competitive environment.

User accounts at the end of July remained 25% above a year ago, and our year-on-year subscription growth in July was the strongest it has been in 10 months.

The growing demand for content across our platform delivers bigger payouts to our contributor base and encourages them to upload fresh content to Shutterstock, further facilitating the network effect of our business.

During the second quarter, our content library grew by nearly 6 million images, 60% more than we added in Q2 a year ago, and now includes more than 58 million photos, vectors, and illustrations along with over 3 million video clips.

With more contributors than ever uploading their best content and a state-of-the-art processing operation that vets images 24 hours a day, seven days a week, we believe we are well positioned to scale the supply-side of our marketplace for years to come.

We see plenty of opportunities to invest even further, to create the best user experience for both customers and contributors, and we will continue to do so even if the ultimate return on that spend is not expected for quite some time.

Our operating momentum today is broad-based, with strong gains across all of our businesses and content types.

The strongest growth driver continues to be our enterprise business as we further build our relationships with agencies, media organizations, and large enterprises by adapting our core offerings to their needs.

This was a business that barely existed several years ago and now has over 20,000 users, up over 50% from the second quarter in 2014.

By providing dedicated sales reps, user management functionality, curated content, and robust legal protection, we regularly transform customers who are spending a few thousand dollars per year into clients with deep relationships who spend tens of thousands or even hundreds of thousands of dollars annually.

On average, an e-commerce client who evolves into a premier enterprise client increases their annual spend by 10 times in that first year.

This increase in spend is driven not only by the higher price we can charge per image, given the additional services we provide, but also by increased usage across each enterprise.

In fact, if you add up both the paid downloads as well as the free comps we provide as part of our enterprise agreements, the number of downloads across our enterprise business more than doubled this past quarter versus a year ago.

As a result, in the past year alone, the number of customers spending over $50,000 annually has doubled; and those spending over $100,000 has increased by nearly 70%.

Our enterprise business now exceeds 20% of our overall revenue, and we continue to invest in new products and services to further enhance these relationships.

In the last few years, we have introduced Offset, a highly curated marketplace featuring an elite collection of images with simple royalty-free pricing that our enterprise customers are embracing.

And we acquired WebDAM, a cloud-based digital asset management service that enables marketing and creative teams to efficiently manage and collaborate on their creative files.

Most recently, with the acquisition of PremiumBeat and Rex Features we expanded our content offerings to include music and editorial content, further deepening and broadening our relationships, especially with enterprise customers.

We have already made significant progress in integrating these businesses, and in June we announced the next big step in building a preeminent editorial service.

Our recently announced partnership with Penske Media combines Shutterstock's innovative platform and loyal customer base with Penske's event access and high-quality content.

This exclusive agreement speaks to both our commitment to provide the best and most diverse content to our customers as well as the opportunity ahead of us, as we look to revolutionize the editorial marketplace.

Shutterstock has had a history of successfully disrupting established business models, and we believe this is another area where we have significantly expanded our addressable market.

The investments we have made over the last few years in new content types, advanced technology, global expansion, and enterprise sales are paying off with sustained financial growth.

We are still in the early days of maximizing the opportunity we see in front of us, and we are determined to nurture both sides of our existing marketplace so we can deliver strong financial growth.

At the same time, in step with our philosophy from day one, as we deliver these results we are also hard at work developing the next-generation user experience for our customers so we can build additional long-term value.

Before I finished up, I'm sure that most of you have seen the announcement that Tim will be leaving Shutterstock and Steven Berns, one of our Board members up until a few days ago, will be taking over the CFO role next month.

Tim has been a great financial and operational leader, and his hard work and dedication during his tenure as CFO will allow us to build upon the growth we have delivered over the past few years.

We wish him the best of luck.

Now let me turn the call over to Tim to walk you through our financial results and outlook.

Thank you very much, Jon; and thanks, everyone else, for joining us this morning.

Our industry-leading marketplace continues to attract more and more customers and contributors.

This momentum once again translated into strong financial results in Q2, with revenue increasing 30% versus the second quarter a year ago.

Excluding the impact of currency, as well as contributions from our PremiumBeat and Rex acquisitions which closed in January, revenue growth was approximately 27% as we delivered significantly increased contributions from our expanding video and enterprise offerings while also generating growth from our traditional e-commerce business.

We continue to see nice trends across all key metrics as we attract new customers across multiple content types and work to increase customer lifetime value.

This past quarter, our user base expanded to more than 1.3 million customers, up 25% versus a year ago, including a 50% increase in our enterprise customer base over that same period.

While customer growth this past quarter remained quite strong, the number of new e-commerce customers was somewhat below our initial expectations, primarily due to some softness across much of Europe.

However, as Jon mentioned, we recently launched several new subscription offerings to better meet customer needs.

The early signs have been encouraging, with subscription growth increasing versus the months before we introduced these products.

There is one nuance surrounding the new product offerings that I want to mention, as it impacted reported revenues this past quarter and does have full-year implications.

While the new subscriptions are expected to lift average customer lifetime revenue, revenue recognition is somewhat more backloaded to the end of each month rather than evenly spread across the month.

This is due to the monthly rather than daily download limitation.

As a result, we saw an increase in deferred revenue due to this change, and we recognized roughly $2 million less in revenue during the second quarter than we likely would have had with no product changes.

This impact will flow through the remainder of the year.

While customer expansion is certainly the biggest driver of our strong revenue growth, it is not the only metric that is growing nicely.

Revenue per download increased 13%, and paid downloads increased 14% year-on-year, with the growth in revenue per download reflecting the impact of higher enterprise sales as well as continued momentum across video, editorial, and music products, all of which carry higher than average effective prices for Shutterstock.

Looking at customer growth in conjunction with these metrics provides a more complete snapshot regarding the overall health of our business, and we'll continue to provide detail on customer accounts, where it makes sense, moving forward.

As we generate strong revenue growth across a diverse set of asset types, we're also benefiting from the geographic diversity of our customer base.

Currently 39% of our revenues are from North America, 33% from Europe, and 27% from the rest of the world.

This reflects a slight shift of share from Europe to North America versus the prior year.

Each of these regions is growing at more than double-digit growth rates, and we continue to see strong momentum in nearly every country and region of the world including most notably India, Japan, and Germany.

Although 70% of our revenue is generated from customers outside the US, only approximately 30% of the total revenue is exposed to currency fluctuations, primarily the euro and the British pound.

Given that we record revenue at the foreign-exchange rates when a product is sold, as opposed to downloaded, the impact of currency movements on our financial results can lag somewhat the shift in currency rates.

Assuming current rates going forward, we expect to still see a meaningful impact from currency movements in the third quarter and, to a lesser extent, in the fourth quarter.

Shifting now to the cost side of the business, we continue to align our spending with the revenue opportunity we see across our entire platform.

Operating expenses increased 32% versus the second quarter a year ago, with the primary driver being the higher contributor royalties associated with our growing revenue base.

Contributor royalties were again stable, at approximately 28% of our revenue in the second quarter.

Given the consistency in our contributor payout ratio, our gross margin has also remained largely steady, at approximately 60% this past quarter excluding stock compensation expense.

Sales and marketing expense was approximately 25% of revenue in the quarter, excluding stock compensation costs.

Though we are seeing somewhat higher keyword costs due to competition, it is important to note that our overall marketing spend as a percent of revenue is essentially unchanged versus the prior-year quarter.

The return on our marketing spend remains strong, as we continue to drive new customers to our platform while keeping retention and repurchase rates high across both subscription and on-demand products.

Year-over-year revenue retention continues to run just above 100%, as it has for many years.

G&A expenses returned to normalized levels in the second quarter as compared to the first quarter of this year, when we had somewhat higher transaction-related expenses.

These did not occur in the second quarter.

Overall, overall R&D and G&A combined improved about 150 basis points versus the prior-year quarter.

We ended the quarter with a total of 642 employees worldwide.

That includes the acquired Rex and PremiumBeat companies from January; and this is up about 22 employees since the end of the first quarter.

We also generated solid bottom-line results in the quarter.

Adjusted EBITDA in the second quarter grew 24% on a reported basis to $20.7 million.

Excluding the impact of currency as well as contributions from acquisitions, adjusted EBITDA growth was approximately 32%.

Adjusted EBITDA margin improved by approximately 200 basis points, excluding currency, as we delivered additional operating leverage.

It's important to note that we are delivering this operating leverage even as we continue to invest in personnel, product development, and technology so we can further strengthen top-line growth, continue to innovate, and build additional long-term value.

GAAP net income in the quarter was $5.3 million or $0.15 per share, as compared to $4.9 million or $0.14 per share a year ago.

The increase primarily reflects the improved operating performance, offset somewhat by increases in stock-based compensation expense.

Non-GAAP net income, which primarily excludes the after-tax impact of noncash equity-based compensation expense and the amortization of acquisition-related intangibles, increased 23% in the second quarter to $11.2 million or $0.31 per share.

Taking a look now at our cash position, free cash flow in the quarter was $14.1 million, a bit less than the second quarter a year ago, primarily due to the timing of asset and liability movements.

CapEx during the second quarter was $4.5 million, primarily for technology hardware.

Our cash balance increased $21 million to approximately $266 million at the end of the quarter.

Turning to the second half of the year, we remain very encouraged by the operating momentum across the entire business.

We are updating our guidance to reflect the accounting impact associated with our new subscription offerings, lower-than-expected customer acquisitions in the second quarter, and some additional foreign currency headwinds which can have a lag effect depending on the timing of our customer downloads.

So for the full year of 2015, we're updating our guidance as follows: revenue of $425 million to $430 million; adjusted EBIDTA of $82 million to $85 million; noncash equity-based compensation expense of approximately $31 million; an effective tax rate approximately 44%; and capital expenditures approximately $18 million.

Now taking a look specifically at the third quarter -- and we are assuming in these figures both for the quarter and the full year no material change from current US dollar exchange rates -- we expect in the third quarter: revenue of $105 million to $108 million; adjusted EBITDA of $18 million to $20 million; noncash equity-based compensation expense of approximately $8 million; an effective tax rate of 44%; and CapEx of approximately $5 million.

Before I finish up I would like to thank Jon and the Board and the entire employee base at Shutterstock for providing me the opportunity to be a part of this team for these past few years.

It is truly a unique company, and we've worked hard to deliver sustained operating performance while further solidifying Shutterstock's long-term strategic position.

While it's difficult to leave, I firmly believe Shutterstock is well situated to achieve long-term success and continued growth.

Thanks for your time this morning.

And now if the operator could rejoin the call, Jon and I would be happy to answer any questions from the participants.

(Operator Instructions) Rohit Kulkarni, RBC Capital.

Okay, great.

Thanks.

Tim, on the guidance for second half, if you could just your draw out your assumptions underlying the change in guidance versus in May and Q2 performance.

In particular, if you could just call out what the accounting impact and incremental FX headwinds versus the softness in consumer or customer acquisitions in revenue and EBITDA, that would be helpful.

And as far as the big-picture competitive environment is concerned, is there any linearity that you saw in terms of how customer acquisition, or your retention, or your churn trended over the last 12 to 18 weeks around Adobe launch?

And how do you think you need to react over the next six months or so?

Sure, so I'll take a couple questions there.

The first one around the guidance adjustment; the second one around timing and potential Adobe impact.

I'll take the first one.

So important to note that this past year we gave our initial full-year guidance actually almost a year ago, last November, for the full year.

A lot has changed since then.

We did not adjust guidance in Q1; a lot of FX movement.

And at this point we decided that it felt the numbers were a little bit aggressive for the year, particularly due to the three primary changes that you noted.

So about half of the adjustment that we're making to the revenue line in our guidance versus the previous guidance, about half of that is due to the softness we saw in customer acquisitions in Q2, which in a recurring revenue business with our retention rates, etc., that impact rolls through the rest of the year.

And then about 25% due to continued FX impacts, that lag impact of FX; and then the remaining 25% due to actually the success of the new product launch, which has slightly different accounting implications, so there's just a little bit more deferred revenue that impacts us because this is the changeover year of launching this new product.

In terms of the Adobe launch, I'll let Jon chime in here, but from a timing perspective Adobe didn't really launch anything new through Fotolia until the end of the quarter.

So clearly no potential to have real impact on the numbers.

And while they are out there in the market with some marketing efforts, we have not seen any impact on our business either in the second quarter or in the continuing result to date in the third quarter.

Yes.

And further on the competitive environment point, the competitive environment has changed around, and we've watched it over the past decade-plus change consistently.

We focus on our product; we focus on our customers; we focus on our contributors.

We're completely focused on doing what we do every day.

And we're going to continue to deliver the strong growth we've been delivering and continue to invest in new opportunities, and that's not going to change.

Okay.

If I could just add one follow-up on the Penske agreement.

Can you quantify or give more color as to how large of a contributor that agreement could become over the next 12 to 24 months?

Yes, the partnership with Penske is a great one; they're obviously a super-strong brand with a long reputation for great content, and they are really forward thinking.

They chose Shutterstock as a partner over several other options, so we're very excited about it.

We're not giving financial guidance at this point.

We're just getting up and running over the next coming months.

This is going to be a long-term partnership, and we are very optimistic about the results we can deliver.

Yes, and the PMC -- if you think about the combination of Rex and PMC together, it's a very powerful combination.

Our customers that buy commercial images from us have always asked for the editorial part of the business.

It's been a hard thing to break into, but we think we have the right strategy.

Now we have two important pieces that will push that strategy forward.

And we plan to make this a part of our business going forward.

Okay.

Thank you.

I'll get back into the queue.

Brian Fitzgerald, Jefferies.

Thanks.

A question around -- maybe a follow-up question.

With the changes in the competitive environment, have you seen any shift or changes in the dynamics around -- or percentages around your a-la-carte business versus your subscription customers?

And then I have one follow-up; thanks.

No, I mean most of the trends in terms of the share of business we're seeing across each of the content types and the product lines has remained quite stable.

I think that the change we have seen is, with the launch of our new subscription products, some positive trends where more of our customers are choosing that subscription product than might have before.

So I think it's -- removing that daily download limit is not only appearing to be a great move for subscribers or historic subscribers but also it's possible that on-demand customers may find it more interesting.

So we are seeing a couple of positive trends with that launch.

Yes.

And while you may see other companies out there trying to replicate our subscription, 10 years ago we invented the marketplace-based subscription for stock photography.

We have more data than all of our competitors.

We know how this product sells better than anybody else in the competitive environment.

We continue to evolve it, and you can see that in the changes we have made recently.

They are very customer-centric, and we know those customers best.

Thanks, Jon, Tim.

Then the follow-up maybe was, as you take a step back, do you think Shutterstock's library or the technology, if you had to put yourself in one camp, what's the real competitive advantage against -- it's a very fragmented space.

There's a lot of big players there.

Everybody is getting to library sizes that are big.

Is it the library or the technology that you would argue is your competitive advantage?

It's both.

You need the content but you also need all of the data.

We have the best quality.

You can see it by doing search results from our competitors and doing the same search result with us.

In some cases for some searches, maybe other competitors will have good content, too.

But you'll get the content that you need for your project from us quicker, because of all the data collected and because of how customer-centric we are and how well we know these customers.

Great.

Thanks, Jon.

Youssef Squali, Cantor Fitzgerald.

Hi, thank you very much; a couple questions, please, if I may.

Tim, can you go back to -- and maybe give us a little more clarity on exactly what happened in Europe?

I think you singled out Europe as the area of some weakness around your e-commerce software, and then you were launching the new products.

So maybe just some more detail on that would be helpful.

And then on the a-la-carte service, I think Adobe's offering is priced more competitively than yours.

Any plans to match pricing?

And if not, how do you compete within that niche?

Thanks.

Sure.

Some of the softness we saw across Europe I would say is a couple things coming together.

You've got a pretty significant currency impact, whether you're in a local currency; you've got uncertain economies; you've got FX effect.

And you've got countries like certainly Eastern Europe and Greece and Russia with fairly significant or macro issues.

So that coupled with, I think, some normal ongoing competitive impact, we just found that our forecast expectations were a little bit aggressive, and that was much more localized in Europe.

US growth rates were very strong; we're seeing steady improvement across most of Asia Pacific.

But that I think is the main driver there.

With the product launch, this is an expected thing.

We're going to be testing different flavors of our subscription products going forward.

But we're finding that customers are really reacting positively to no daily download limit, so that's one where we're going to continue to see how the data flows.

The revenue recognition is just a byproduct of that, where anytime you switch over to a new product that has this impact.

And you're going to have that negative impact in the switchover year.

On the a-la-carte pricing, price is not -- we're not competing on price.

I think price and value since the beginning of Shutterstock is important.

But it's more around the simplicity and the clarity of the price and not the price level.

This is not a commodity business.

We want to be competitive on pricing; but quality, search, value, those are, have always been, will continue to be the primary competitive components.

As far as price goes, like Tim said, we're always looking at price and we're always looking at the competitive environment.

We have a huge head start on our product.

We have a huge head start on understanding our customers.

We plan to keep that head start.

And while we grow fast we also continue to invest in new products and services that make it easier for our customers to find these images and to get the best images.

That's not going to stop, and as we grow we're going to continue to invest.

So as long as we continue to have a lead, which we plan to, we will be competitive on price.

And we can probably even charge more because of that competitive lead.

Jon, just one last one.

Stock wise, maybe can you just help us understand your philosophy around buybacks?

Your stock obviously has seen a pretty major drop of late.

Just wondering; with your cash-generative business model and strong balance sheet, what are your thoughts about buybacks, or the Board's thoughts about buybacks on that?

Thanks.

Yes.

Well, first, I agree: our shares are significantly undervalued.

But our first priority is investing organically to build off of long-term growth opportunities.

Second opportunity is M&A to augment our organic growth.

And the third is then to return that capital back to shareholders in the form of, in the future, a dividend or a buyback.

But as long as we see a future where we can continue to invest organically, we do.

As long as we see a future where we can invest in M&A, we do.

We will keep that cash for those investments.

Okay.

Thanks; and Tim, best of luck.

Ralph Schackart, William Blair.

Good morning.

A couple questions if I could.

Just curious how your customer acquisitions have trended post Q2, mainly in Eastern Europe with the new product.

Has that new subscription product offering brought customers back there?

And then maybe as a follow-up, why did you decide to change to the subscription pricing right now without metering?

I think historically you've metered the number of images around 25 downloads per day, if I'm not mistaken.

And then one more if I could.

With the no metering on the subscription, do you expect that to change the gross margin profile going forward?

Sure, I'll take that.

On the customer acquisition side, we don't break down that level of detail by region going forward, outside the current -- the prior quarter.

But I think we're seeing encouraging signs across-the-board with the subscription acquisition.

The data we've seen so far is all quite positive.

Yes.

On the unlimited -- well, on the no limit per day, no metering subscription, we were always listening to our customers, and we always had a way for them to top off if they did run out of their daily download limit.

And that was our on-demand product.

We decided to make it easier.

And with a bunch of backend changes it became easier for us to launch this, and it made sense.

We listened to customers and we delivered the product that they wanted.

It's as simple as that.

On the gross margin side on the new products, our goal is for contributors to make a fair return.

That is a key part of why our content library is so strong, is our contributors tend to come to us first.

We pay out 28% or so of revenue across the contributor base.

Products on their own can have higher or lower royalty impacts, but we're seeing fairly consistent royalty rates across even the new products.

It tends to be a little higher when you launch a new product then comes down over time, because folks are testing, and without a limit they may download more.

But the trend lines are all going where we expect them to go.

If we found that a new product had very strong uptake and great growth prospects, and it somehow had a higher download rate at a royalty or margin impact, we control that.

We would have to decide -- and we would decide -- and our target is to continue to deliver that just under 30% return to our contributors.

I expect that will continue to be very -- part of the strategy going forward.

Great.

One more if I could.

Just on the newly revised full-year guidance, just curious.

What's your visibility that you have into it now?

I guess on one hand you have more visibility because it's subscription-based.

But the other hand you have also the potential to have more customers adopt subscription, which could potentially change the dynamics in Q3 and Q4.

Just any thoughts around that.

Yes, I would say the visibility is comparable.

So not a dramatic change.

What is a change is that we don't have the years of history for the new products that we have for 25 a day or on demand.

So from that perspective, you don't have quite as much of the seasonal historical data.

But these are the same customers.

They are the same.

They are creative professionals around the world.

Their needs are not much different than they had been over many years.

So the nice thing about having 1.3 million users and growing is that the Law of Large Numbers help you.

Behavior is consistent and stable, and so our visibility tends to be pretty good.

When we set our own goals for each coming quarter, our track record of coming in that range or even slightly above has been very consistent.

Great.

One more if I could, actually, please.

Your comment today on the increase in Adwords pricing, I know historically you've given out some LTV metrics around your customer base.

Do you think that with what you've seen today that you could still manage the business to your historic LTV range that you've talked about?

Yes, I think we have seen some incremental increases.

It's not just in the last couple quarters, but the last couple of years there's been an increase in how much we're spending to acquire new customers, particularly in search.

But another benefit we have is search is not the only game in town.

We have other ways of generating customers.

We have strong word-of-mouth, a lot of customers coming to us through unpaid channels.

So overall, we're still seeing our ability to grow the customer base and our ad spend or marketing spend versus revenue has remained pretty stable.

Okay, thanks.

Best of luck, Tim.

Aaron Kessler, Raymond James.

Great.

Thanks, guys; couple questions.

First just on the guidance, I believe you noted that the subscription change to unlimited will have some impact on the on-demand buying.

How was that factored, if at all, into guidance?

Was that part of the accounting change?

And second, Tim, for metrics going forward, I think you noted you made some changes there.

Do you continue to plan to give out downloads and pricing?

And third, just for Europe, I guess how much of that would've been maybe seasonality, just weaker seasonality in Europe in Q2 versus an actual slowdown there?

Thanks.

Yes, so the accounting change is really not related to on demand; it's really the unmetered or the no daily download limit.

So the mechanics of revenue recognition are that when you have a daily download limit of 25 our practice is to recognize a month's worth of revenue pro rata each day over the course of the month.

And when we switch to an unlimited download we're recognizing on download.

Then at the end of the month we recognize the balance of the deferred revenue, because the month is over and you start a new month.

So it tends to be a little more backloaded.

Over time that works itself out, because you've got similar amounts coming into a month as being deferred out of a month.

But because this is the changeover quarter, Q2, and this is the changeover year, 2015, we will see a negative impact.

We will recognize a little bit -- a few million dollars less of revenue than we otherwise would have.

On the metrics, yes, we think that the -- there's a bunch of metrics combined that capture the color of the business.

And we didn't -- increased the different data points that we've been sharing with folks.

I expect we'll continue to add -- to share to some of those, particularly the enterprise information, because we think that's very helpful.

Downloads and revenue per download we'll continue to provide.

It's just one piece of the puzzle.

I think you see this quarter where the growth rate in the download count is actually increased versus the prior quarter.

These will ebb and flow.

It's a natural -- captures the flow of the business; so we expect to continue to share those metrics.

On Europe, Europe's seasonality: true seasonality tends to be in the third quarter, which are the slower summer months.

Q2, I wouldn't ascribe so much to seasonality as I would to economic uncertainty and currency fluctuation, which not only affects just the translation of currency itself but also folks' ability to purchase products in a foreign currency.

There's quite a bit of business outside of the US that's being conducted in dollars for Shutterstock, as it is for lots of e-commerce companies.

So that also (technical difficulty) impact.

Just back to the first question real quick.

I understood the accounting changes; but I guess the question was: do you expect an impact from maybe less on-demand buying in the guidance for second half?

No.

I mean we factored in the trend lines we're seeing.

So we're seeing nice growth rate in on demand; to the extent that there is a change in mix of customers purchasing one versus the other, that's all factored into our models and our guidance.

Okay, great.

Thank you.

Lloyd Walmsley, Deutsche Bank.

Thanks, guys.

So a couple.

I guess just first, it sounds like the new guidance reflects mostly some of the trends in Europe as well as some of these accounting changes around the new plans.

But it doesn't sound like you're seeing anything outside of marketing costs potentially competitively.

Is that fair to say the guidance doesn't really assume any meaningful competitive impact outside of marketing?

Yes.

We've seen no -- as I mentioned, the competitive landscape is very much like it has always been.

Adobe launched something new at the end of the quarter, but Fotolia has been a key competitor of Shutterstock for many years.

It's the same images, it's the same catalog, it's the same search.

Adobe has a nice brand name, but no real change in the market dynamics that we're seeing either in the quarter or in the week since the quarter ended.

Okay.

Then on the lower volume subscription offering, you touched on it; but can you give us a better sense of how much of the uptake there is coming from new customers or a-la-carte customers switching into the subscriptions versus people trading down from higher-volume subscriptions?

It's coming from everywhere.

We also see -- because we haven't had a subscription at that level before, we're seeing new types of customers too come in.

So it spans the whole customer base.

It's pretty early days for the new product.

I think once we get a few quarters of data and a better understanding of how these -- the customers' decision-making is working, that's the kind of information we would consider sharing.

But it's -- we're a few months into this launch and things look good, but it's a little early I think to look at macro trends until we get a little bit more data.

Okay, thanks.

Thanks for the help, guys.

Blake Harper, Topeka Capital Markets.

Hi, guys.

I wanted to ask you, Jon, if you think that any of the changes to the pricing for your subscription model or other lower-priced offerings by your competitors changes the addressable market in any way, or the size of it?

Yes, I think what we're seeing through all these changes is a lot of people that normally wouldn't have bought images before start to buy them.

Just like we always have, we see more and more people starting to realize they need legal, model released, property released imagery or else they start to get in trouble.

If you just grab images off of Google you will get in trouble.

It's easier than ever to find your copyrighted material and to sue if someone uses it incorrectly.

So as people get more educated, and as the environment changes around us, and more and more people are able to easily create websites and do marketing on their own, we are seeing different types of customers come in, all the way from PowerPoint presentations to the billboard advertisements.

People need this stuff.

Okay.

Then one follow-up if I could.

On the paid download growth that accelerated again after being -- after declining last quarter and previously, just wanted to understand really how that is an indicator of the business.

Obviously with the enterprise product, it's not as relevant.

But just wanted to see if you could help us explain how that metric can indicate some of the health of the business, or if there's other types of metrics that you could release in the future that would help us either to understand on the number of subscribers, or on the enterprise customers, or something else like that, that could help us to get a better understanding of the business.

Yes, I think it's a nice trend point we saw where the growth rate was a little higher in Q2 than in prior quarters.

The download count tends to be somewhat of a proxy for the subscription business.

We have sort of an 80/20 rule where the bulk of the downloads are under the subscription plan.

Subscription products, probably three-quarters or so of the downloads.

So it is a good indicator of subscription behavior.

It's not necessarily an indicator of revenue or customer growth, but it's more an indicator of their behavior.

So that's a good data point; but looking at it in isolation, you definitely lose a lot of the nuance of the rest of the business.

I think enterprise accounts and their growth, and our ability to take an e-commerce customer and make them an enterprise customer and generate 10 times as much revenue in that year of transition, that's a pretty great metric.

And those are the kinds of metrics that we've begun sharing, and we'll continue to share things like that, where it gives you a little more sight into some of the sub-business units of the business that are growing well.

We are pretty conscious about metrics, and we're always trying to figure out what could be the best way to get you guys to understand the business the best.

So we're always reevaluating the stuff and trying to figure out how to communicate those metrics.

Okay.

Thanks, guys.

Best of luck, Tim.

Operator, we have time for one last question.

Dean Prissman, Morgan Stanley.

Hey, guys; thanks for taking my questions.

I know you talked about enterprise customer growth, but what was the enterprise revenue growth in the quarter, and how did it compare to last quarter?

Then I think following upon Youssef's question, Jon, what if anything in the competitive environment would make you consider price cuts in your a-la-carte business?

Thank you.

First question first.

Enterprise growth was strong.

We don't breakout specific growth rates for each of the businesses, but enterprise continues to grow faster than the overall business.

We've got more than 100 sales reps cranking it out and selling well.

That business is growing very nicely.

It's 22% or so of the overall revenue, so it continues to grow as a proportion of the whole business.

As far as pricing goes, again, we're constantly evaluating the competitive environment.

You have to remember: these are businesses buying our images.

Businesses are using our images to make money off of our images.

A business spending a couple dollars for an image is not too much to ask.

It happens 4 times per second at Shutterstock, and it will continue to happen because people need these images to run their businesses.

Great, thanks.

Best of luck, Tim.

Thank you.

That's all the questions that we have time for today, so I'd like to turn the call back over to management for closing remarks.

Thank you, everybody, for joining us today.

If you have any follow-up questions, please let us know.

We're here in New York.

Thank you very much.

Ladies and gentlemen, thank you again for your participation in today's conference.

This now concludes the program, and you may all disconnect your telephone lines.

Everyone have a great day.