Shutterstock, Inc. — Q3 2019 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2019, compared with the same periods in 2018. Shutterstock licenses digital images, video and music through e-commerce and enterprise channels. It reported 1.9 million active paying customers over the prior 12 months and 140.1 million paid downloads in the first nine months of 2019.
Key financial results
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $159.1m | $151.6m | $484.2m | $461.2m |
| Operating income | $3.2m | $6.7m | $14.4m | $16.8m |
| Operating margin | 2.0% | 4.4% | 3.0% | 3.6% |
| Net income | $4.9m | $7.4m | $15.8m | $39.8m |
| Diluted EPS | $0.14 | $0.21 | $0.44 | $1.12 |
| Operating cash flow | Not separately provided for quarter | $77.0m | $68.5m |
Margins and revenue drivers. Q3 gross margin was approximately 56.9%, versus 56.2% a year earlier, while higher sales and marketing and general and administrative costs weighed on operating margin. Q3 e-commerce revenue rose 8% and enterprise revenue was flat year over year; constant-currency growth was approximately 10% and 1%, respectively. Paid downloads increased to 46.3 million from 43.9 million, while revenue per download remained $3.40. For the first nine months, paid downloads rose to 140.1 million from 132.8 million, and revenue per download increased to $3.42 from $3.40.
Liquidity and obligations. At September 30, cash and cash equivalents were $285.4m, current assets $364.0m and current liabilities $247.9m, implying working capital of approximately $116.1m. The company reported no long-term borrowings. Operating lease liabilities totaled $55.3m, including $9.3m current; the balance sheet also included $44.0m of right-of-use assets. Nine-month investing cash outflow was $18.9m and financing cash outflow was $1.8m. Management said cash and operating cash flow should cover anticipated needs for at least 12 months.
Material changes and unusual items
- Q3 revenue grew 5% reported and approximately 6% at constant currency, but operating income fell 52% and net income fell 34% year over year.
- For nine months, net income declined 60%, substantially reflecting the absence of the $38.6m Webdam sale gain recorded in 2018. The prior-year period also included a $5.9m impairment charge on a long-term investment; 2019 other income included $3.3m of interest income, partly offset by foreign-exchange losses.
- Q3 sales and marketing expense rose 11%, primarily from increased advertising; general and administrative expense rose 20%. For nine months, G&A included approximately $2.2m of one-time severance and $1.5m of accelerated amortization related to an Editorial product rebrand.
- Nine-month operating cash flow improved to $77.0m from $68.5m, with management attributing part of the increase to timing of operating expense payments. Capital expenditures were $19.5m, versus $29.5m in the prior-year period.
- Adoption of lease accounting in 2019 added lease assets and liabilities; the company recognized a $58.0m lease liability and $46.7m right-of-use asset at adoption.
Outlook, risks and controls
- No numerical revenue or earnings guidance is provided in the filing. Management expects to continue investing in customer acquisition, product development and platform improvements; it expects sales and marketing expense to rise in dollars and remain relatively consistent as a share of revenue.
- Management notes seasonal usage patterns, discretionary customer spending and competitive pressure as factors that may cause results to fluctuate. Foreign-currency revenue was about 35% of total revenue; management estimated a 10% exchange-rate change against foreign currencies would affect revenue by approximately 3%. The company did not hedge currency risk.
- The company disclosed a material weakness in internal control over financial reporting concerning accuracy, cut-off and completeness of revenue for certain nonstandard enterprise license arrangements. Identified historical errors were described as immaterial and did not materially misstate prior financial statements. Remediation was underway, but the weakness was not yet considered remediated pending sustained testing.
- Management reported no material active litigation and no material changes to the risk factors in its 2018 Form 10-K. Non-lease commitments, primarily minimum royalties and purchase obligations, totaled approximately $53.2m; no material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether enterprise revenue growth and the faster-growing e-commerce channel continue, and whether revenue per download holds up.
- Whether higher customer-acquisition and infrastructure spending produces revenue growth without further margin erosion.
- Progress and independent evidence of remediation of the enterprise revenue-recognition control weakness.
- Cash-flow sustainability, given payment-timing effects, lease liabilities and $53.2m of non-lease commitments.
- The composition and recurrence of tax benefits, severance charges and other nonrecurring items when assessing underlying earnings.