Shutterstock, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. Unaudited results. Shutterstock operates a global marketplace licensing images, video and music, alongside its WebDAM digital asset management services.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $104.4 million | $80.2 million | $201.9 million | $153.0 million |
| Operating income | $9.7 million | $8.4 million | $17.9 million | $17.5 million |
| Net income | $5.3 million | $4.9 million | $8.6 million | $9.8 million |
| Operating margin | 9.3% | 10.5% | 8.9% | 11.4% |
| Net margin | 5.1% | 6.1% | 4.3% | 6.4% |
| Operating cash flow | Not presented by quarter | $40.1 million | $36.8 million |
- Revenue grew 30% in Q2 and 32% in the first half. Management attributed growth to more paid downloads and higher revenue per download. Q2 paid downloads rose to 35.9 million from 31.5 million; revenue per download increased to $2.85 from $2.52.
- Gross margin was approximately 59.2% in Q2 versus 60.0% a year earlier; first-half gross margin was approximately 59.4% versus 60.0%. Operating expenses grew faster than first-half revenue, and operating and net margins declined.
- First-half investing cash outflow was $70.0 million, including $62.4 million for acquisitions, $6.1 million of capital expenditures and $1.5 million for digital-content licensing. Financing cash inflow was $8.4 million. Cash and equivalents declined by $22.0 million to $211.5 million.
- At June 30, cash and equivalents were $211.5 million and short-term investments were $54.9 million. The company reported no borrowings. Current assets were $313.4 million and current liabilities $147.7 million.
- Total liabilities were $165.7 million; deferred revenue was $89.3 million. The company reported $8.5 million of unconditional purchase obligations and approximately $35.9 million of future minimum payments on its New York headquarters lease.
Material changes and developments
- In January, Shutterstock acquired Rex Features, a European editorial photo agency, for cash consideration of $32.7 million, and PremiumBeat, a music and sound-effects provider, for $31.7 million cash plus contingent consideration. PremiumBeat consideration included a potential additional payment of up to $10 million, subject to performance criteria.
- Acquisition accounting substantially increased goodwill, from $10.2 million at year-end 2014 to $54.7 million at June 30, 2015, and net intangible assets, from $4.9 million to $32.2 million.
- For the first half, other expense was $2.6 million versus $46,000 of other income in 2014, primarily reflecting $1.8 million of foreign-currency transaction losses and $0.9 million of increased fair value of acquisition-related contingent consideration.
- Management reported first-half foreign-currency revenue exposure and noted that a 10% exchange-rate change against foreign-currency-denominated revenue would affect revenue by approximately 3%.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected advertising and product-development spending to continue increasing in absolute dollars, and royalties generally to grow in line with revenue.
- Management expected approximately $11 million of capital expenditures for the remainder of 2015 and stated that cash, investments and operating cash flows should cover anticipated needs for at least 12 months.
- Management cited seasonal usage fluctuations, competitive pressure, discretionary customer spending, customer-acquisition costs and foreign-exchange movements as factors that could affect results. The company does not currently hedge currency exposure.
- The company reported no material active litigation and no material changes to the risk factors in its 2014 Form 10-K. It said disclosure controls were effective, while integration and internal-control work for the recently acquired businesses remained in progress.
- After quarter-end, CFO Timothy Bixby notified the company of his intention to resign, expected no later than September 30, 2015. Steven Berns, who resigned from the board, entered an agreement to become CFO no later than that date.
Investor verification points
- Assess whether paid-download and revenue-per-download growth can persist, and how much reported growth reflects the 2015 acquisitions.
- Track cost growth, especially royalties, marketing, general and administrative expense, and the resulting margin trend.
- Review acquisition integration, purchase-price allocation, goodwill and intangible-asset carrying values, and the contingent-consideration estimates.
- Monitor foreign-exchange effects, deferred-revenue conversion, operating cash generation and the planned capital spending.
- Verify CFO transition timing and progress integrating acquired businesses into internal controls.