Shutterstock [SSTK] Conference call transcript for 2022 q1
2022-04-26 12:33:04
Fiscal: 2022 q1
Operator: Good day and thank you for standing by. Welcome to the First Quarter 2022 Shutterstock Earnings Conference Call. [Operator Instructions] I’d now like to hand the conference over to your host today, Chris Suh, Vice President, Investor Relations and Corporate Development. Please go ahead.
Chris Suh: Thank you, Liz. Good morning, everyone and thank you for joining us for Sutterstock’s first quarter 2022 earnings call. Joining us today is Stan Pavlovsky, Shutterstock’s Chief Executive Officer; and Jarrod Yahes, Shutterstock’s Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets, including 2022 guidance. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release on the reports we file with the SEC from time to time, including the risk factors discussed in our most recently filed Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today’s press release and in our 10-Q. With that, I will turn the call over to Stan.
Stan Pavlovsky: Thanks, Chris. Good morning, everyone and thank you for joining us today. Today, we will be discussing Shutterstock’s first quarter results. We will also talk in more detail about Shutterstock’s product roadmap, which we believe uniquely positions Shutterstock for continued growth. And finally, we wanted to address the ongoing war in Ukraine and its impact on Shutterstock, both from a contributor and customer perspective. Shutterstock grew 9% year-over-year this past quarter or 11% on a constant currency basis, driven by a further acceleration of growth in our enterprise channel to 11% and e-commerce growth of 7% per our expectations. The 11% year-over-year growth in enterprise reflects the dramatically improved, execution the strength of our FLEX family of products, and continued momentum in our studios and editorial businesses. Our FLEX team subscription and FLEX Premium products are now a key part of our offering geared towards small and medium businesses and middle-market customers. Additionally, both Shutterstock Studios and Editorial businesses turned in strong quarters. Shutterstock Studios has built a strong presence and credibility in the market, which has enabled us to win multifaceted contracts for blue-chip brands, increase our overall AOVs and maintain strong customer retention, while all positioning Shutterstock as a strategic full-service partner capable of serving our customers’ most complex creative needs. Our Editorial business is growing at a healthy rate, driven by continuing innovation in our new newsroom offering, which we rolled out in 2021. We are especially proud of some of the great work being done by our photographers and their coverage at key entertainment and media events. In short, our increased focus on offering end-to-end enterprise solutions such as Studios and Editorial has enabled Shutterstock over the past several quarters to change the conversation with our enterprise customers and better position ourselves as a strategic partner able to meet their needs. In our e-commerce channel, we experienced 7.3% growth year-over-year and 9% on a constant currency basis, in line with our expectations, which we discussed last quarter. We saw the continuing shift by customers to our subscription offerings with accelerating net subscriber additions in the first quarter, driven by the FLEX 25 product introduced this past October. This past quarter, our overall subscriber count grew 17% and our subscription revenue grew 12% on a year-over-year basis, resulting in subscription revenue as a percent of total revenue, reaching 43%, which was an all-time high. We also feel good about the actions we are taking to reaccelerate growth in our e-commerce channel and expect to see some positive momentum throughout 2022. These actions include introducing new content subscriptions, including a new unlimited music subscription with sound effects in Q2, enhancing the value of our content subscriptions with predictive insights and workflow applications that helped our subscribers select and create better content, which I will discuss next. As you may remember, we made several key acquisitions last year in data and workflow. And I am happy to say that we are making exciting and tangible progress towards integrating these acquisitions and building out our core capabilities. We are entering a very exciting period of testing, learning and rapid iteration as we bring new features and capabilities to market in Q2. Our immediate focus is on adding value for our existing content subscribers and on bringing new subscriptions and add-ons to market in the second half of the year. In early April, we released our catalog and plan applications to our e-commerce customers. Catalog allows customers to organize their license and saved content in one place. Meanwhile, Plan allows customers to stay organized through a centralized content calendar. These value-enhancing features are available for free for our e-commerce subscribers and our enterprise customers and we are already seeing promising early results in terms of engagement. This week, we released AI-powered search to our enterprise customers and e-commerce subscribers. These are powered by our acquisitions of Pattern89, Datasine and Shotzr. And this feature allows customers to set objectives and define target audiences as part of their search to discover content most likely to perform for their goals. Additionally, our predictive technology provides the why behind content recommendations, helping our customers understand with specificity what elements in each photo are the key drivers of performance. This predictive power is now a feature of our core search experience. In addition, this AI-powered search underpins our newly launched Predict application, which we have released to a handful of beta enterprise customers. Given the reduced reliance on third-party cookies and device IDs and the ever-expanding sea of content available from which to choose, marketers are increasingly facing challenges and reaching their target audience with the right content. Our Predict app helps overcome this challenge by providing tools that enable our customers to select the right content asset for their specific needs. In addition, the Predict app allows our customers to collaborate within their teams to find the right content with features like shared project boards. We are also approaching a major milestone with the release of our create application in the coming weeks. This app powered by the technology acquired from the PicMonkey acquisition will allow customers to access templates, customized text, removed backgrounds, make touch-ups and handle other creative editing functions. In short, customers will be able to produce professional quality designs through an intuitive, easy-to-use interface. The catalog Plan, Predict and Create apps are either available now or will soon be available at no charge to our e-commerce subscription customers and our enterprise customers as value-enhancing features to our existing premium products. Across both our e-commerce and enterprise channels, we believe that these applications will resonate with our existing base of creative professionals who seek to supplement or validate their intuition with data backed insights. Moreover, as we continue to evolve these applications in 2022, they will enable us to better serve marketing professionals who will be able to generate predictive scores and insights on their own assets and leverage custom, account-based predictive scoring and insights based on their own historic data. In addition, we plan to introduce later this year a creative flow subscription, which will include the Catalog, Plan, Create and Predict apps and will also incorporate our AI-powered search. This new product will target the casual creative segment and will include a free tier of Shutterstock content with an upsell path to Shutterstock’s premium content subscriptions. We believe that this standalone creative flow subscription product, which will be available at lower monthly price point, represents an extension to new audiences who previously may not have had a need for stock content. In summary, our new offering will connect our massive content library, with a powerful editing and design platform, easy-to-use collaboration tools and AI-powered insights so that creatives and marketers can make, share, validate and organize their creative work all in one place. This will extend Shutterstock’s presence to a broader part of the creative process rather than just the contact selection phase. We encourage you to visit our Investor Relations microsite, which contains a link to a video that gives you a glim of all these capabilities. And lastly, we wanted to spend a moment addressing the war in Ukraine and any impact on our business. As an organization, we are committed to supporting our network of contributors in Ukraine. To that end, in early March, Shutterstock made a donation of $1 million to provide direct assistance to Shutterstock’s thousands of contributors in Ukraine. In the first quarter, Shutterstock had approximately 2.1 million contributors, up over 20% from the prior year and the content collection is massive with 430 million assets. We have not seen any significant changes in the pattern of content submissions in this region that is meaningfully different from the rest of the world. Throughout the history of Shutterstock, we have seen the sources of our content shipped globally from region to region with impressive flexibility and responsiveness to the needs of the market and that is part of the powerful network effect that we have created with our efficient marketplace. While we do not believe our contributor supply chain will impact our revenues, we do have about 1% of revenues from the impacted region, which we believe will go away in large part and we have factored into our expectations for the year. In conclusion, a few final takeaways before I turn over the call to Jarrod, first, the product rollouts in connection with our predictive performance and creative design capabilities represent the crystallization of our acquisitions from last year. Second, we believe that the recent and pending launches of our workflow applications will enable product differentiation and sustained growth in the marketplace. And finally, we are changing customers’ perception of Shutterstock by offering strategic full-service solutions and a suite of applications we are more deeply embedding us into our customers’ workflows. And with that, I will turn the call over to Jarrod.
Jarrod Yahes: Thank you, Stan and good morning everyone. Revenues grew 9% in the first quarter or 11% on a constant currency basis per our expectations for the quarter and a good start to the year. E-commerce revenue grew 7% this quarter or 9% on a constant currency basis. We witnessed an acceleration in net subscriber additions with the fastest growth in multiple quarters driven by our smaller subscription products, including our FLEX 25 launched in October of 2021. This strength was partially offset by our non-subscription pack and transaction products. To remind investors, pack and transaction products tend to have lower LTVs and lower net revenue retention than our subscription products. As a result of this continued mix shift towards subscription products, our subscription revenues reached a record 43% of revenues this quarter. As a reminder, we only include in our subscriber counts and subscription revenues, long-term subscribers that have been with Shutterstock for more than 3 months. Our enterprise channel turned in another strong quarter, growing 11% or 13% on a constant currency basis based on sustained growth in our FLEX team products, as well as strength of Shutterstock Studios and in editorial. For the first quarter, gross margin declined by approximately 114 basis points to 65.1% year-over-year largely driven by higher non-cash M&A amortization expense of $5.5 million. Backing out M&A amortization, Q1 gross margin improved by 150 basis points year-over-year. Gross margins are improving partially due to the ongoing mix shift towards subscription offerings, which tend to have lower utilization than pack and transaction products. Sales and marketing expense was 27% of revenues as compared to 23% in the first quarter of 2021 and down from 30% in the fourth quarter. The year-over-year increase in sales and marketing was driven by additional investment in performance marketing spend, along with sales head count additions to support the future growth of our enterprise channel. Product development as a percentage of revenue increased 1% due to costs associated with our 2021 acquisitions as well as further investment in our product roadmap. G&A expenses were 15% of revenue, down 120 basis points from the first quarter of 2021 as we are experiencing leverage in G&A as our business continues to grow. G&A also included the $1 million donation to our contributors in Ukraine, which had a 50 basis point impact to EBITDA margins for the quarter. Excluding the donation to Ukraine, G&A costs would have been down 170 basis points year-over-year. Adjusted EBITDA margins were 27.5%, down by 300 basis points from last year, mainly driven by additional marketing spend. For the first quarter, GAAP diluted earnings per share was $0.71 and adjusted diluted earnings per share was $1. Turning to our balance sheet and cash flows, at the end of the quarter, we had $258 million of cash, down from $314 million at December 31, 2021. The $56 million decline in cash is driven primarily from our share buyback program during the quarter as well as our annual bonus payment in the first quarter. As we indicated during the fourth quarter, we were more aggressive about buying back our stock and repurchased 422,000 shares for $38.4 million. As a result, our total shares outstanding decreased by 280,000 shares to 36.1 million shares at the end of the quarter. In addition, we also paid $18.5 million related to taxes on the vesting of our equity awards, which are issued on a withhold to cover basis, further limiting share count creep. We also paid $8.7 million for our quarterly dividend, which we recently increased to $0.24 per share and announced that in January. This is a total of over $65 million of cash utilized to return value to our shareholders during the quarter. Cash outflows also included $13 million of CapEx and content acquisitions. As described in previous calls, we believe that our framework of increasing dividends, consistent share buybacks and M&A is an attractive complement to our baseline of shareholder value creation generated from revenue growth, and margin expansion. Our deferred revenue balance was $179 million and increased $25 million from the first quarter of 2021, representing year-over-year growth of 16%. Adjusting for the deferred revenue balance for PicMonkey, deferred revenue grew 10% year-over-year, faster than our overall revenue growth for the quarter. Turning to our key operating metrics for the quarter, subscriber count increased by 17% to $360,000 and sequential net additions accelerated to 17,000 from 7,000 last quarter with one-third of the additions driven by the introduction of the FLEX 25 product introduced in October of last year. Subscriber revenue increased by 11% to $85.4 million and subscriber revenue represented 43% of revenues, our highest ever. Average revenue per customer increased by 4% to $355 on a year-over-year basis and decreased 3% on a sequential basis. The decline in ARPU sequentially was driven by our inclusion of TurboSquid revenues and customers in this metric for the first time this quarter. Paid downloads were down 2.5% and revenue per download increased to $4.22 per download. We are maintaining our guidance for the full year at 8% to 10% revenue growth with margins flat to up 50 basis points despite the headwinds we’ve experienced related to foreign exchange and the war in Ukraine. At current spot rates, projected through the end of the year, FX represents an additional 0.5% headwind to reported revenue growth for the full year as compared to when we gave guidance in the fourth quarter. We’ve also taken into account the loss of revenues from both Russia and Ukraine, representing 1% of revenues for the full year. So these headwinds are approximately 1.5% in total. Regardless, we feel quite good about our first quarter revenue performance and our growth prospects for the year. We’re off to a great start with our EBITDA margins above our own expectations at 27.5% in the first quarter. Should that positive margin outperformance continue, we will adjust our guidance accordingly. Overall, we are thrilled as a team with the progress we’ve been making towards evolving our business into a subscription model and integrating data and creative tools and workflow into our content offerings over the past year. We are pleased with our margins to start the year, giving us the flexibility to invest for growth, while still delivering on our commitments around annual margin expansion. And with that, operator, we would now like to open the line for any questions.
Operator: [Operator Instructions] Our first question comes from Youssef Squali with Truist Securities.
Operator: Our next question comes from Andrew Boone with JMP.
Operator: [Operator Instructions] Our next question comes from Bernie McTernan with Needham.
Operator: [Operator Instructions] We have a follow-up from Youssef Squali with Truist Securities.
Operator: I am showing no further questions in queue at this time. I would like to turn the call back to Stan Pavlovsky for closing remarks.
Stan Pavlovsky: I want to thank you all for joining us today. And as always, we want to express our gratitude to our customers, our contributors and employees. That ends our call for today. Thank you.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
