Shutterstock, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; compared with the corresponding 2013 periods. Amounts below are in millions of dollars except per-share data and operating metrics. Shutterstock operates a global marketplace licensing commercial images, video, and music; it acquired digital asset management provider WebDAM in March 2014.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $83.7 | $59.6 | $236.7 | $167.5 |
| Gross profit / margin | $50.5 / 60.3% | $36.6 / 61.5% | $142.3 / 60.1% | $103.0 / 61.5% |
| Operating income / margin | $8.9 / 10.6% | $9.9 / 16.6% | $26.4 / 11.2% | $30.8 / 18.4% |
| Net income / margin | $5.3 / 6.3% | $6.2 / 10.4% | $15.1 / 6.4% | $18.6 / 11.1% |
| Diluted EPS | $0.15 | $0.18 | $0.42 | $0.55 |
| Operating cash flow | — | $59.5 | $32.5 |
Revenue increased 41% in both comparisons. Paid downloads rose 23% in Q3 (31.2 million versus 25.4 million) and 28% for nine months (92.4 million versus 72.1 million); revenue per download increased to $2.65 from $2.35 in Q3 and to $2.54 from $2.32 for nine months. Management attributed growth to customer acquisition and a greater contribution from higher-revenue-per-download On Demand products.
Profitability weakened despite sales growth: operating expenses grew 51% in Q3 and 54% for nine months. Higher royalties and operating costs, increased investment in marketing and product development, and sharply higher equity compensation contributed. Equity-based compensation was $6.3 million in Q3 and $15.7 million for nine months, versus $1.9 million and $4.4 million, respectively. Effective tax rates were 40.3% for Q3 and 42.9% for nine months, compared with 37.7% and 39.7%.
Financial position and liquidity
- At September 30, 2014, cash and cash equivalents were $210.8 million and short-term investments were $49.7 million; investments matured within 90 days.
- Current assets were $296.6 million and current liabilities $114.1 million. Deferred revenue was $71.9 million, up from $52.1 million at year-end 2013.
- Total liabilities were $125.8 million; the company reported no borrowings. Its former term loan was fully repaid in 2013.
- Nine-month operating cash flow was $59.5 million. Investing activities used $21.8 million, including $16.3 million of capital expenditures and $10.1 million paid for WebDAM, partly offset by net investment maturities. Financing activities provided $17.8 million, principally from employee share plans and related tax benefits.
Material changes, outlook, and risks
- WebDAM’s results are included from its March acquisition date. Consideration was $12.4 million, including $10.1 million initial cash payment and $2.4 million contingent consideration. The acquisition added $8.8 million of goodwill; purchase-price allocation was preliminary.
- Management said cash and operating cash flow should cover anticipated needs for at least 12 months, and expected approximately $4 million of capital expenditures during the remainder of 2014. It anticipated continued growth in absolute advertising, cost of revenue, sales and marketing, and product-development spending. No specific revenue or earnings guidance was provided.
- Management expects seasonal usage to decline in Q4 during the holiday period and increase in Q1. It also identified competition, discretionary customer spending, and foreign-exchange movements as risks. A 10% currency-rate change was estimated to affect revenue by approximately 3%.
- Commitments include approximately $38.2 million of future minimum payments on the 11-year New York office lease and $8.5 million of unconditional purchase obligations. The company reported no material active litigation or off-balance-sheet arrangements.
- A CEO award granted in April 2014 comprises 500,000 options and 100,000 RSUs, subject to continued employment and a future share-price condition; compensation expense is recognized over a derived six-year service period, with no reversal if the market condition is ultimately unmet.
Most important facts for investors to verify
- Whether download and revenue-per-download growth can continue while operating and net margins remain under pressure.
- How much of the increased equity-based compensation and expanded hiring will persist, and their effect on earnings and dilution.
- WebDAM’s integration, performance against contingent-payment milestones, and contribution to enterprise growth.
- Whether customer acquisition spending delivers durable returns, particularly given expected Q4 seasonality and competitive risks.
- The filing’s MD&A results table reports nine-month general and administrative expense of $26.9 million, while the financial statements and MD&A discussion report $28.1 million; verify the correct figure against the filed statements.