Shutterstock, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; comparisons are with the quarter and nine months ended September 30, 2017. Shutterstock operates a digital-content licensing platform serving e-commerce and enterprise customers. It sold its Webdam digital asset management business on February 26, 2018.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $151.6 million | $141.1 million | $461.2 million | $405.3 million |
| Operating income | $6.7 million | $5.6 million | $16.8 million | $19.2 million |
| Net income | $7.4 million | $5.0 million | $39.8 million | $14.7 million |
| Diluted EPS | $0.21 | $0.14 | $1.12 | $0.42 |
| Operating cash flow | Not separately stated | Not separately stated | $68.5 million | $71.5 million |
- Q3 revenue rose 7% year over year, or 8% excluding foreign-exchange effects. Nine-month revenue rose 14%, or 12% excluding foreign-exchange effects.
- Approximate Q3 gross margin was 56.1% versus 58.3%; operating margin was 4.4% versus 3.9%; net margin was 4.9% versus 3.5%. Nine-month operating margin was 3.6% versus 4.7%; net margin was 8.6% versus 3.6%.
- Nine-month 2018 net income includes a $38.6 million pre-tax gain on the Webdam sale. Operating income declined 12% year over year despite revenue growth, reflecting faster growth in operating expenses.
- At September 30, cash and cash equivalents were $206.4 million, down from $253.4 million at year-end 2017. Current assets were $280.6 million and current liabilities $226.6 million. The company reported no long-term borrowings.
- Nine-month investing cash flow was a $6.5 million use, including $29.5 million of capital expenditures and a $15.0 million investment in ZCool, partly offset by Webdam sale proceeds. Financing cash flow was a $108.5 million use, principally the $104.9 million special dividend. Cash, cash equivalents and restricted cash decreased $47.0 million.
- Deferred revenue was $141.4 million at quarter-end. It is a customer contract liability, not debt; nearly all was expected to be recognized within 12 months.
Material changes and operating drivers
- Q3 paid downloads increased to 43.9 million from 41.9 million; revenue per download increased to $3.40 from $3.23. For the nine months, downloads were 132.8 million versus 128.1 million and revenue per download was $3.40 versus $3.06.
- Q3 e-commerce revenue rose to $88.7 million from $81.8 million; enterprise revenue rose to $62.9 million from $55.1 million. No Webdam revenue was recorded in Q3 2018, versus $4.2 million in Q3 2017.
- Q3 cost of revenue rose 13%, sales and marketing 14%, and product development 5%; general and administrative expense fell 15%. Management cited higher advertising spend and increased hosting, hardware, software, depreciation and amortization costs, partly offset by administrative efficiencies.
- Nine-month revenue growth was led by enterprise, which increased to $188.3 million from $149.4 million, and e-commerce, which increased to $270.2 million from $244.6 million. Prior-year revenue was not restated for the 2018 adoption of the new revenue standard, limiting direct comparability.
Outlook, risks and unusual items
- Management said cash on hand and expected operating cash generation should meet anticipated needs for at least the next 12 months. It expected sales and marketing spending to continue increasing in absolute dollars and planned continued investment in product development and platform functionality. No specific revenue or earnings guidance was provided.
- The $3.00-per-share special dividend totaled approximately $104.9 million and was paid in August. The company had $100 million of remaining stock repurchase authorization and made no repurchases in the first nine months of 2018.
- A $5.9 million impairment reduced the carrying value of the SilverHub Media investment to zero after the counterparty defaulted and entered UK administration. The $15.0 million ZCool preferred-share investment represents a 25% fully diluted interest and is carried at cost subject to impairment or observable price changes.
- Foreign-currency revenue represented approximately 35% of nine-month revenue. Management estimated that a 10% exchange-rate change against foreign currencies would affect revenue by approximately 4%; the company did not hedge this exposure. Management also noted seasonality and the discretionary nature of customer content spending.
- The company disclosed a material weakness in internal control over financial reporting involving accuracy, cut-off and completeness of certain enterprise license revenue transactions. It identified immaterial errors in revenue, receivables, deferred revenue and related disclosures for prior and current interim periods, but said there was no material misstatement. Remediation was underway and was not yet considered complete.
- Management reported no material active litigation and no material off-balance-sheet arrangements. Future obligations included approximately $73.9 million of minimum payments under the New York headquarters lease and approximately $70.3 million of minimum royalties and other purchase obligations.
Important facts for investors to verify
- Progress and testing of remediation for the enterprise-revenue control weakness, and whether further errors or disclosures emerge.
- Underlying operating earnings and margins excluding the one-time Webdam sale gain, alongside the pace of revenue growth and customer acquisition spending.
- Cash generation and liquidity after the special dividend, including capital expenditure needs and the expected Webdam escrow release.
- Performance and carrying value of the ZCool investment, and any recovery or further developments concerning SilverHub Media.
- Comparability of reported revenue and deferred revenue following adoption of the new revenue-recognition standard, which was applied without restating prior periods.