Shutterstock, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Financial statements are unaudited. Shutterstock operates a global marketplace licensing images, video and music, and provides WebDAM digital asset management services.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $124.4m | $104.4m | $241.1m | $201.9m |
| Operating income | $10.5m | $9.7m | $21.3m | $17.9m |
| Net income | $7.2m | $5.3m | $13.4m | $8.6m |
| Diluted EPS | $0.20 | $0.15 | $0.37 | $0.24 |
- Growth and margins: Revenue grew 19% in both the quarter and first half. Approximate gross margin was 58.0% in Q2 (59.2% prior year) and 58.4% for the first half (59.3% prior year). Operating margin was 8.4% in Q2 (9.3%) and 8.8% for the first half (8.9%); net margin was 5.8% in Q2 (5.1%) and 5.6% for the first half (4.3%).
- Cash flow: First-half operating cash flow was $41.6m versus $40.1m. Investing used $26.4m, including $16.3m of capital expenditures; financing used $43.9m, primarily reflecting $44.5m of share repurchases. Cash and equivalents declined $30.4m to $210.9m.
- Liquidity and debt: At June 30, cash and equivalents were $210.9m and short-term investments were $55.0m. Current assets were $328.8m and current liabilities $183.8m. The company reported no borrowings. Deferred revenue was $111.3m, up from $98.2m at year-end 2015.
- Balance-sheet changes: Total assets were $468.4m versus $469.1m at year-end; total liabilities rose to $194.2m from $180.6m. Treasury stock increased to $59.7m from $15.6m, largely reflecting repurchases.
Material changes and operating drivers
- Q2 paid downloads increased 21% to 43.4m; first-half downloads rose 22% to 84.6m. Revenue per download declined 1.4% to $2.81 in Q2 and 2% to $2.79 for the first half.
- Management attributed revenue growth to higher download volumes, customer acquisition and increased enterprise activity, alongside expanded subscription offerings. The image collection reached 92.1m, versus 57.2m a year earlier.
- Operating expenses grew 20% in Q2 and 19% in the first half. Cost of revenue grew faster than revenue, partly reflecting royalties, hosting and depreciation. First-half general and administrative expense rose 32%, including a $1.7m charge from modifying PremiumBeat contingent consideration and higher bad-debt expense.
- Q2 net income increased 36%; first-half net income increased 56%. Lower effective tax rates contributed: 29.4% in Q2 versus 44.5%, and 36.5% for the first half versus 43.9%. A reserve release for uncertain tax positions contributed a $1.2m tax benefit.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management said current cash, investments and operating cash flow should cover anticipated needs for at least 12 months. It expected approximately $17m of capital additions, including digital content and capitalized labor, during the remainder of 2016; it expected to pay $10m of PremiumBeat contingent consideration in the first half of 2017.
- Management expected sales and marketing and product development spending to rise in absolute dollars as it pursues customer acquisition, international expansion, and product and technology investment. Capitalized software development costs also increased.
- International and currency exposure: Approximately 65% of first-half revenue came from outside the U.S.; about 32% was denominated in foreign currencies. The filing estimates a 10% exchange-rate change against foreign-currency revenue would affect revenue by about 3%. Shutterstock did not hedge currency risk. The filing flags Brexit-related economic, currency and regulatory uncertainty, as well as data privacy and localization compliance risks, including in the EU and Russia.
- Other exposures: Accounts-receivable aging deteriorated, and the allowance for doubtful accounts rose to $6.2m from $3.8m at year-end. The PremiumBeat contingent consideration liability was $9.6m, with a stated $10m payment due in 2017. The amended New York headquarters lease runs through 2029, with approximately $84.7m of future minimum payments. The company reported no material active litigation or material off-balance-sheet arrangements.
- Other unusual or relevant items include $2.2m of first-half foreign-currency translation losses in comprehensive income and a $44.5m first-half cash outlay for repurchases. The repurchase authorization had $40.3m remaining at quarter-end.
Important facts for investors to verify
- Whether download growth can continue to offset declining revenue per download and pressure on gross margin.
- Whether rising receivables and bad-debt expense indicate a persistent change in enterprise customer collections or credit risk.
- Cash needs for the planned investment program, the 2017 PremiumBeat payment, lease commitments and continued repurchases.
- The ongoing impact of international expansion, foreign-exchange movements, Brexit and evolving privacy and data-localization rules.
- How much reported earnings growth depended on the lower effective tax rate and the uncertain-tax-position reserve release.