Shutterstock, Inc. — Q1 2013 Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; unaudited results are compared with Q1 2012. Balance-sheet figures are compared with December 31, 2012. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Shutterstock operates a global marketplace licensing commercial photographs, illustrations, and videos. Revenue comes principally from subscriptions and usage-based plans. The company reported 22.3 million paid downloads and 25.1 million images in its collection during or at the end of Q1 2013, respectively. It launched the Spectrum image-discovery tool and announced the higher-priced Offset brand during the quarter.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $51.1 | $37.6; up 36% |
| Cost of revenue | $19.8 | $14.4; up 38% |
| Gross margin | 61.2% | 61.7% (calculated) |
| Operating income / margin | $10.0 / 19.5% | $3.8 / 10.1% |
| Net income / margin | $5.6 / 10.9% | $3.7 / 9.9% |
| Basic / diluted earnings per share | $0.17 / $0.16 | $0.13 / $0.13 |
| Operating cash flow | $13.8 | $9.8 |
| Cash and cash equivalents at period end | $107.0 | $102.1 at December 31, 2012 |
| Debt at period end | None | Term loan balance was $6.0 at December 31, 2012 |
Revenue growth reflected paid downloads rising 27% to 22.3 million and revenue per download increasing to $2.29 from $2.13. Management attributed the latter mainly to greater On Demand product mix. Sales and marketing expense fell 2%, while research and development rose 33% and general and administrative expense rose 28%. Cash from operations benefited in part from a $5.4 million increase in deferred revenue and a $4.6 million increase in income taxes payable. Capital expenditures were $1.1 million; operating cash flow less capital expenditures was approximately $12.7 million.
Current assets were $134.7 million and current liabilities $73.3 million at March 31, 2013. The company said cash and expected operating cash flow should meet working capital and capital expenditure needs for at least 12 months. It forecast approximately $14 million of capital expenditures for the remainder of 2013.
Material changes and unusual items
- The company repaid the remaining $6.0 million term loan on March 25, 2013; it recognized $0.125 million of accelerated deferred financing costs.
- The company became a taxable corporation after its October 2012 reorganization. Q1 2013’s effective tax rate was 44.2%, versus 2.3% in Q1 2012, when the LLC was generally taxed as a pass-through. A state apportionment change added 4.4 percentage points; excluding that discrete item, the 2013 rate was 39.8%. This makes the year-over-year net income comparison less directly comparable.
- Non-cash equity-based compensation was $1.0 million, versus $0.7 million a year earlier.
- In March, the company entered an 11-year New York office lease, with approximately $42.2 million in aggregate future minimum payments. A $1.8 million cash security deposit was restricted at quarter-end; lease commencement was expected no earlier than August 1, 2013.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management expected royalties to generally grow with revenue and anticipated increased absolute spending on advertising, product development, and other growth initiatives. It cited customer acquisition, international expansion, and improvements to search and user experience as growth priorities.
Risks highlighted include competition and the possibility that discretionary customer spending or marketing needs could pressure growth and liquidity. International revenue was approximately 64% of total revenue; about 33% of revenue was denominated in foreign currencies. Management estimated that a 10% U.S. dollar exchange-rate move against those currencies would affect revenue by approximately 3%. The company reported no material active litigation, no material off-balance-sheet arrangements, and no material changes to the risk factors in its 2012 Form 10-K. It noted ordinary-course claims and intellectual-property inquiries, whose outcomes cannot be assured.
Investor verification priorities
- Assess whether download growth and higher revenue per download persist, and whether On Demand mix continues to support revenue growth.
- Monitor margins as royalties, customer-support infrastructure, marketing, and product-development costs increase.
- Distinguish operating performance from the tax-rate change associated with the LLC-to-corporation reorganization and from the discrete state tax item.
- Track cash generation, planned remaining-2013 capital expenditures, and the cash impact of the new long-term office lease.
- Review foreign-currency exposure and competition-related risks; management’s forward-looking statements are subject to uncertainty and are not guarantees of results.