Shutterstock, Inc. — Q2 2017 Form 10-Q
Business and period: Global marketplace licensing images, video and music, plus Webdam digital asset management services. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $134.0 million | $124.4 million | $264.2 million | $241.1 million |
| Operating income | $3.3 million | $10.5 million | $13.6 million | $21.3 million |
| Net income | $3.1 million | $7.2 million | $9.7 million | $13.4 million |
| Diluted EPS | $0.09 | $0.20 | $0.27 | $0.37 |
| Operating margin | 2% | 8% | 5% | 9% |
| Operating cash flow | Not separately reported | Not separately reported | $40.4 million | $40.2 million |
- Q2 revenue grew 8% reported and 9% at constant currency; first-half revenue grew 10% reported and 12% constant currency. Higher enterprise activity and revenue per download supported growth.
- Q2 paid downloads declined to 42.7 million from 43.4 million, while revenue per download rose to $3.05 from $2.81. First-half downloads rose 2% to 86.2 million and revenue per download increased to $2.98 from $2.79.
- Operating expenses rose 15% in Q2, faster than revenue. Sales and marketing increased 18%, and general and administrative increased 29%; management cited greater marketing investment, workforce growth, infrastructure costs and acquisition-related professional fees. Q2 cost of revenue was 43% of sales versus 42%.
- First-half operating cash flow was essentially flat year over year. Investing used $28.7 million, including $25.8 million of capital expenditures; financing used $32.8 million, including $25.0 million of share repurchases. Cash decreased $13.6 million during the half.
- At June 30, cash and cash equivalents were $210.6 million and short-term investments were $55.0 million, totaling $265.5 million. Current assets were $332.9 million and current liabilities $205.7 million. The filing reports no long-term borrowings.
Changes, outlook and risks
- Liquidity and capital allocation: Management said cash, cash equivalents and operating cash flow should meet anticipated needs for at least 12 months. The company repurchased approximately 449,000 shares during the first half at an average $50.04 per share; $100 million remained authorized for repurchases at June 30.
- Outlook: No specific revenue or earnings guidance is provided. Management expects sales and marketing and product development spending to continue increasing in absolute dollars, alongside cost of revenue as sales grow. Product development investment includes capitalized software costs.
- Acquisition: On July 7, 2017, after quarter-end, Shutterstock acquired FlashStock for approximately $50 million, funded from cash on hand; $45.9 million was paid at closing and $4.1 million was due in September.
- Other obligations: Approximately $43.3 million of royalty guarantees and unconditional purchase obligations were outstanding, principally due through 2020. Future minimum payments under the amended New York headquarters lease were approximately $80.5 million through 2029.
- Contingencies and unusual items: The company reported no material active litigation or material litigation reserves. It paid $10.0 million of PremiumBeat contingent consideration in March. Q2 included immaterial adjustments relating to prior periods: a $0.6 million revenue reduction and a $0.1 million increase in general and administrative expense.
- Key risks: Foreign-currency revenue represented about 34% of Q2 sales; management estimated a 10% exchange-rate move against foreign-currency revenue would affect revenue by approximately 3%. The company does not currently hedge currency exposure. Management also cited competition, discretionary customer spending, seasonality and possible inability to offset inflationary costs. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Assess whether higher revenue per download and enterprise activity can offset flat-to-lower quarterly download volume.
- Track expense growth, especially marketing, infrastructure and G&A, against revenue growth and operating-margin recovery.
- Review cash deployment and post-quarter liquidity after the FlashStock acquisition and ongoing repurchases.
- Monitor currency exposure, royalty and purchase commitments, and the effect of future accounting-standard adoption, including revenue recognition in 2018.