Shutterstock, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Shutterstock licenses digital images, video and music through e-commerce and enterprise channels. The 2018 comparisons include Webdam revenue only through its February 26, 2018 sale; Webdam was sold for $49.1 million, generating a $38.6 million pretax gain in 2018.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $161.7 million | $156.6 million | $325.1 million | $309.6 million |
| Operating income | $3.1 million | $5.6 million | $11.2 million | $10.1 million |
| Net income (loss) | $3.3 million | $(0.3) million | $10.8 million | $32.3 million |
| Diluted EPS | $0.09 | $(0.01) | $0.30 | $0.91 |
Q2 operating margin was approximately 1.9%, versus 3.6% a year earlier; six-month operating margin was approximately 3.4%, versus 3.3%. Six-month 2018 net income benefited from the Webdam sale gain, while 2018 other expense included a $5.9 million investment impairment.
- Revenue and operating trends: Q2 revenue increased 3% reported and approximately 5% at constant currency; six-month revenue rose 5% reported and approximately 7% at constant currency. Q2 e-commerce revenue increased 6%, while enterprise revenue was nearly flat; constant-currency growth was approximately 7% and 2%, respectively. For the first half, e-commerce and enterprise grew 8% and 4% reported, or approximately 10% and 6% at constant currency.
- Operating metrics: Q2 paid downloads increased to 46.6 million from 45.2 million, and revenue per download rose to $3.44 from $3.41. First-half downloads were 93.8 million versus 89.0 million. At June 30, the collection included approximately 280 million images and 15 million video clips.
- Expenses: Q2 sales and marketing rose 6% to $44.5 million and general and administrative expense rose 32% to $32.1 million. G&A included approximately $2.2 million of one-time severance and $1.5 million of accelerated Editorial rebranding amortization. Product development expense fell 19% to $13.6 million. For the first half, G&A increased 14%, sales and marketing 8%, and product development declined 14%.
- Cash flow: First-half operating cash flow was $46.7 million, up from $38.0 million. Investing activities used $12.5 million, including $13.7 million of capital expenditures, partly offset by $2.5 million released from Webdam escrow. Financing activities used $5.0 million, primarily for employee equity-award tax withholding. Cash and cash equivalents were $259.1 million at June 30, up from $230.9 million at year-end; cash, cash equivalents and restricted cash totaled $261.7 million.
- Liquidity, debt and obligations: Current assets were $333.1 million and current liabilities $228.8 million. The company reported no long-term borrowings. Adoption of lease accounting brought $56.2 million of lease liabilities and $44.8 million of right-of-use assets onto the balance sheet. Other non-lease commitments, primarily minimum royalty guarantees and purchase obligations, totaled approximately $60.9 million.
Material changes, outlook and risks
- Management said existing cash and expected operating cash flow should meet anticipated cash needs for at least the next 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management expects to continue investing in customer acquisition, products, platform improvements and infrastructure. It expects sales and marketing to increase in absolute dollars and remain broadly consistent as a share of revenue; royalties are expected to grow in dollars as revenue grows.
- Foreign currency revenue represented approximately 35% of first-half revenue. The company does not hedge currency exposure; management estimated a 10% U.S. dollar exchange-rate change against foreign currencies would affect revenue by approximately 3%.
- Disclosure controls were judged ineffective at June 30 because of a material weakness in controls over accuracy, cut-off and completeness of revenue for certain nonstandard enterprise license arrangements. Previously identified errors were described as immaterial, but the weakness could permit a material misstatement. Remediation actions were underway and would require sustained testing before the weakness could be considered remediated.
- The company reported no material active litigation and no material changes to the risk factors in its 2018 Form 10-K. It cautioned that customer spending is discretionary, results can be seasonal, and competition, foreign exchange and cost pressures could affect performance.
- During Q2, Shutterstock recorded a $0.5 million adjustment to increase stock-based compensation expense for an understatement in Q1 2019, which management concluded was not material. The company also changed to a single goodwill reporting unit and found no adjustment to goodwill was needed.
Investor verification points
- Track whether the enterprise revenue-recognition control weakness is fully remediated and whether disclosures or reported balances change.
- Assess whether constant-currency growth, download growth and revenue per download translate into sustained GAAP operating-margin improvement.
- Separate recurring operating performance from one-time items, including severance, accelerated amortization, and prior-year Webdam and impairment effects.
- Monitor cash conversion and the effects of lease payments, capital spending, royalty guarantees and other purchase commitments.
- Review the sensitivity of reported results to currency movements and the company’s decision not to hedge foreign-exchange exposure.