Shutterstock, Inc. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Shutterstock licenses images, footage, and music through e-commerce and enterprise channels. The company reported 1.9 million active paying customers over the trailing 12 months and 46.8 million paid downloads in the quarter.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $161.3 million | $163.3 million; down 1% reported and about 0.5% in constant currency |
| Gross profit and margin | $92.2 million; approximately 57.1% | $94.1 million; approximately 57.6% |
| Operating income and margin | $5.8 million; 4% | $8.1 million; 5% |
| Net income and diluted EPS | $4.3 million; $0.12 | $7.5 million; $0.21 |
| Operating cash flow | $6.9 million | $19.7 million |
| Capital expenditures | $7.7 million | $7.3 million |
E-commerce revenue increased 2% to $99.7 million; enterprise revenue fell 6% to $61.5 million. Paid downloads declined 0.8% to 46.8 million, while revenue per download was unchanged at $3.42.
At March 31, cash and cash equivalents were $295.7 million, current assets $369.7 million, and current liabilities $232.3 million, implying working capital of approximately $137.4 million. The company reported no long-term borrowings. Lease liabilities were $45.5 million. Cash and cash equivalents declined $7.6 million from year-end 2019. The filing says cash and expected operating cash flow should meet anticipated needs for at least 12 months.
Material changes and unusual items
- Net income declined 43% year over year as revenue softened, operating income fell 29%, and the effective tax rate rose to 31.4% from 16.4%.
- General and administrative expense increased 15% to $30.7 million, reflecting higher technology-infrastructure staffing costs, approximately $1.2 million of severance, and higher bad-debt expense. Sales and marketing fell 4%, and product development fell 13%.
- Operating cash flow was affected by $7.8 million of one-time payments related to long-term incentives from the Flashstock acquisition, as well as revenue and payment timing.
- The company paid a $0.17-per-share dividend, totaling $6.0 million, and declared another $0.17 quarterly dividend payable in June 2020. No shares were repurchased during the quarter; $100 million remained authorized.
- Adoption of the expected-credit-loss accounting standard resulted in a $0.2 million cumulative adjustment to retained earnings. The allowance for doubtful accounts was $4.6 million at quarter-end, up from $3.6 million at year-end.
Outlook, risks, and contingencies
Management said COVID-19 adversely affected Q1 revenue growth by weakening customers’ ability to spend marketing budgets and expected the pandemic to continue to negatively affect 2020 revenue. The company could not estimate when a recovery would occur and cautioned that reported revenue effects may emerge in later periods because revenue is generally recognized when content is downloaded. No numerical revenue or earnings guidance was provided in the supplied filing text.
Risks cited include weaker customer spending, demand and renewals; customer churn and collection risk; contributor and custom-content disruptions; remote-work productivity and cybersecurity concerns; and currency volatility. Foreign currencies generated approximately 36% of revenue; management estimated a 10% exchange-rate move against those currencies could affect revenue by about 3%. The company did not hedge currency exposure and reported no long-term borrowings.
Other non-lease obligations totaled approximately $41.3 million, mainly minimum royalty guarantees and purchase commitments. No material active litigation or material litigation reserves were reported. Management stated that existing matters were not expected to have a material adverse effect, while noting litigation can still impose costs and divert resources.
Important facts for investors to verify
- How COVID-19 affected demand, renewals, customer churn, and revenue after Q1, and whether the expected 2020 headwind persisted.
- Whether enterprise-channel declines and sales-organization changes improved results, and whether e-commerce growth continued.
- Whether operating cash flow recovered after the one-time Flashstock incentive payments and how cash use compares with the dividend and planned investment needs.
- Whether receivable collections, bad-debt reserves, and the $15.0 million ZCool investment remained sound amid economic disruption.
- Future dividend decisions, capital allocation, and the status of the remaining $100 million repurchase authorization.