Shutterstock, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Shutterstock operates a global marketplace licensing commercial digital imagery, including photographs, illustrations and videos. It reported more than 900,000 active paying users, over 50,000 approved contributors and 35.4 million images in its collection at quarter-end. Revenue is generated primarily through subscriptions and On Demand plans.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $72.8 | $51.1; up 42% |
| Cost of revenue | $29.1 | $19.8; 40% of revenue vs. 39% |
| Gross profit / margin | $43.7 / 60.0% | $31.3 / 61.2% |
| Operating expenses | $63.7 | $41.1; up 55% |
| Operating income / margin | $9.1 / 12.5% | $10.0 / 19.5% |
| Net income / margin | $4.9 / 6.8% | $5.6 / 10.9% |
| Diluted EPS | $0.14 | $0.16 |
| Operating cash flow | $15.6 | $13.8 |
| Capital expenditures | $10.9 | $1.1 |
At March 31, cash and cash equivalents were $158.0 million and short-term investments were $55.0 million. The company had no borrowings. Current liabilities were $98.1 million and current assets were $250.5 million. Deferred revenue was $60.9 million, up from $52.1 million at year-end 2013.
Operating cash flow included a $7.7 million increase in deferred revenue. Investing cash outflow was $21.5 million, including $10.9 million of capital expenditures and $10.1 million paid for WebDAM. Financing cash inflow was $8.5 million, largely reflecting option exercises and a $6.3 million excess tax benefit.
Material changes and management commentary
- Paid downloads rose to 29.7 million from 22.4 million; revenue per download increased to $2.45 from $2.28. Management attributed revenue growth to customer acquisition, higher download volume and increased On Demand mix.
- Operating expenses grew faster than revenue, compressing operating margin. Sales and marketing increased 61%, research and development 71%, and general and administrative 57%, reflecting investment in customer acquisition, product development, staffing and infrastructure.
- On March 14, Shutterstock acquired WebDAM, a cloud-based digital asset management provider, to strengthen its enterprise offering. Preliminary consideration was $12.4 million: $10.1 million cash and $2.4 million contingent consideration. The acquisition did not materially affect reported operating results.
- Management expects advertising, sales and marketing, product development and cost of revenue to rise in absolute dollars as the business grows. It expects approximately $9 million of capital expenditures for the remainder of 2014, and believes available cash and operating cash flow will cover anticipated needs for at least 12 months.
Outlook, risks and unusual items
- Management expects seasonal usage patterns, including a typical increase in Q1 and decrease in Q4, while cautioning that quarterly results can fluctuate and prior results are not necessarily indicative of future performance.
- International revenues expose the company to currency movements. Management estimated that a 10% exchange-rate change against foreign-currency-denominated revenues would affect revenue by approximately 3%. The company did not then hedge this exposure.
- Competition could pressure revenue, pricing and margins and require additional marketing expenditure. Customer spending is discretionary and affected by economic conditions and customer budgets.
- There were no material active litigation matters or material litigation reserves reported. The company disclosed ordinary-course claims and contractual indemnification obligations, including some customer arrangements with greater or unlimited indemnification.
- Unusual or notable period items included $0.4 million in fixed-asset disposal losses related to the headquarters move, approximately $0.3 million of WebDAM acquisition professional fees, and a 46.1% effective tax rate, including a discrete state-tax-related expense. The term loan had been fully repaid in March 2013.
Important facts for investors to verify
- Whether download growth and higher revenue per download continue, and how product mix affects revenue and contributor royalties.
- Whether elevated expense growth moderates and operating margins recover as customer-acquisition and product investments scale.
- WebDAM’s contribution to enterprise growth, integration costs and any changes to the preliminary purchase-price allocation or contingent consideration.
- Cash conversion and capital spending, including the planned remainder-of-2014 expenditures and commitments for the New York office lease.
- Foreign-exchange exposure, competitive pressures, and the potential effects of customer spending patterns and seasonality.