Shutterstock, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Unless otherwise stated, financial figures are in U.S. dollars. Shutterstock operates a digital-content licensing platform for creative professionals and enterprises. It sold its Webdam digital asset management business on February 26, 2018.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $153.0 million | $130.2 million | Up 18% reported; up 13% excluding foreign-currency effects, according to management |
| Gross profit / margin | $88.5 million / 57.9% | $77.8 million / 59.8% | Cost of revenue rose 23%, faster than revenue |
| Operating income / margin | $4.5 million / 2.9% | $10.3 million / 7.9% | Down 56%; operating expenses rose 24% |
| Gain on Webdam sale | $38.6 million | — | Pre-tax, non-recurring gain |
| Net income / diluted EPS | $32.6 million / $0.92 | $6.6 million / $0.19 | Reported results benefited substantially from the sale gain |
| Operating cash flow | $21.1 million | $17.2 million | Management noted favorable timing of operating-expense payments |
| Cash and cash equivalents | $284.9 million | $253.4 million at Dec. 31, 2017 | Plus $2.6 million restricted cash |
| Debt | No long-term borrowings | — | Company reported no long-term borrowings at quarter-end |
At March 31, 2018, total assets were $606.5 million and total liabilities were $249.4 million. Current assets of $363.0 million compared with current liabilities of $230.9 million. Deferred revenue was $139.5 million, down from $157.8 million at year-end; nearly all was expected to be recognized within 12 months. Cash flow from investing was $10.9 million, including $42.3 million of net Webdam-sale proceeds, offset in part by $15.0 million of capital expenditures and a $15.0 million ZCool investment. Financing cash outflow was $2.8 million.
Business trends and changes versus prior year
- Revenue grew across core channels: e-commerce revenue was $89.7 million versus $80.6 million, and enterprise revenue was $60.6 million versus $46.2 million. Webdam contributed $2.7 million through its February sale date, compared with $3.5 million for the full prior-year quarter.
- Paid downloads were nearly flat at 43.7 million versus 43.5 million, while revenue per download rose to $3.40 from $2.91. Management attributed the increase primarily to product mix, with pricing relatively constant.
- Operating costs increased materially: sales and marketing rose 24% to $40.4 million; product development rose 49% to $16.4 million; and general and administrative expense rose 14% to $27.2 million. Cost of revenue increased to 42% of revenue from 40%.
- Reported revenue comparisons are affected by adoption of ASC 606 on January 1, 2018; prior periods were not restated. The new standard reduced Q1 2018 revenue by $1.0 million and net income by $0.8 million versus legacy accounting. The reported 18% revenue growth is therefore not fully like-for-like.
Outlook, commentary, risks and unusual items
- No specific numerical revenue or earnings guidance was provided. Management expects continued investment in customer acquisition, product development, platform functionality and infrastructure, and expects sales and marketing and product development spending to remain elevated or increase.
- Management said cash, cash equivalents and operating cash flow should meet anticipated needs for at least the next 12 months. The company had $100.0 million remaining under its share repurchase authorization, but made no repurchases in Q1.
- Webdam was sold for an aggregate purchase price of $49.1 million, subject to adjustments. In addition to $42.3 million received net at closing, $5.0 million was placed in escrow for expected release in two installments, subject to final adjustments. About $3.0 million of sale-related costs remained payable.
- Shutterstock invested $15.0 million in ZCool convertible preferred shares for a 25% fully diluted interest. ZCool is a China-based content licensing platform and an existing exclusive distributor. The investment is carried at cost, subject to impairment or observable price changes.
- The effective tax rate was 25.8%, including a discrete tax expense primarily related to the Webdam gain; excluding discrete items, management reported an estimated rate of 16.2%. Tax effects of the 2017 Tax Cuts and Jobs Act remained provisional and could be adjusted as further guidance became available.
- Foreign-currency revenue was approximately 37% of total revenue. Management estimated that a 10% exchange-rate change against foreign-currency revenue would affect revenue by approximately 4%; the company did not hedge this exposure. Results may also fluctuate with customer seasonality and discretionary spending.
- Contractual commitments included approximately $42.9 million of guaranteed royalties and purchase obligations, principally due through 2020, plus approximately $84.2 million of future operating-lease payments, including $76.5 million for the New York headquarters lease. The company reported no material active litigation and no material changes to the risk factors in its 2017 Form 10-K.
Most important facts for investors to verify
- Separate recurring operating performance from the $38.6 million Webdam-sale gain when assessing Q1 earnings and margins.
- Account for ASC 606’s transition effect and the non-restated prior-year comparison when evaluating revenue growth and deferred revenue.
- Assess whether higher revenue per download can persist while paid-download volume remains nearly unchanged and operating expenses grow faster than sales.
- Monitor the conversion of deferred revenue to sales, operating cash flow’s sensitivity to payment timing, and completion of the Webdam escrow and remaining sale costs.
- Review the performance, valuation and risks of the $15.0 million ZCool investment, alongside foreign-currency exposure and the company’s substantial lease and other contractual commitments.