Shutterstock, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Shutterstock operates a platform licensing imagery, video and music to creative professionals and businesses. It sold its Webdam digital asset management business on February 26, 2018. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $156.6 million | $134.0 million | $309.6 million | $264.2 million |
| Operating income | $5.6 million | $3.3 million | $10.1 million | $13.6 million |
| Operating margin | 3.6% | 2.5% | 3.3% | 5.1% |
| Net income (loss) | $(0.3) million | $3.1 million | $32.3 million | $9.7 million |
| Diluted EPS | $(0.01) | $0.09 | $0.91 | $0.27 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $38.0 million | $40.4 million |
- Q2 revenue rose 17% year over year, or 14% excluding foreign currency effects. Paid downloads increased to 45.2 million from 42.7 million, and revenue per download rose to $3.41 from $3.05.
- Q2 cost of revenue was $67.9 million, or 43% of revenue; gross margin was approximately 56.6%, versus 57.2% a year earlier. Operating expenses increased 15%, slower than revenue, and operating income increased 71%.
- Q2 net loss reflected $5.9 million of impairment on the SilverHub Media investment and $1.8 million of unfavorable foreign exchange, partly offset by a $1.1 million income tax benefit. Six-month net income included a $38.6 million pre-tax gain from the Webdam sale.
- At June 30, cash and cash equivalents were $289.8 million ($292.5 million including restricted cash), versus $253.4 million at year-end 2017. Current assets were $361.9 million and current liabilities $216.0 million. The company reported no long-term borrowings.
- Six-month investing cash flow was positive $2.2 million, principally reflecting approximately $42.4 million of net Webdam sale proceeds, offset by $23.1 million of capital expenditures and a $15.0 million investment in ZCool. Financing cash outflow was $3.1 million.
Material changes and management commentary
- Revenue growth was broad-based: Q2 e-commerce revenue increased to $91.7 million from $82.2 million, and enterprise revenue to $64.9 million from $48.1 million. Q2 included no Webdam revenue, compared with $3.7 million in Q2 2017.
- For the first six months, revenue grew 17% as reported and 14% on a constant-currency basis. Revenue per download increased, while paid downloads rose 3% to 89.0 million. Europe and the rest of the world grew faster than North America.
- Investment spending increased: six-month sales and marketing rose 18% and product development 39%. Management expects both categories to continue increasing in absolute dollars as it invests in customer acquisition, products, search and platform improvements.
- Management said cash and cash generated from operations should cover anticipated needs for at least the next 12 months. It also noted that results may fluctuate with seasonality, discretionary customer spending and other factors.
- On August 1, 2018, the board declared a special dividend of $3.00 per share, approximately $105 million, payable August 29 to holders of record August 15. This was subsequent to quarter-end.
Risks, contingencies and unusual items
- SilverHub Media defaulted under its distribution agreement and entered UK administration. Shutterstock wrote its related lending facility, convertible note, accrued interest and minor equity investment down to zero, recording a $5.9 million impairment.
- Shutterstock invested $15.0 million in ZCool preferred shares for a 25% fully diluted interest. The investment is carried at cost subject to impairment or observable price changes; the filing reports no impairment at June 30.
- The company has $80.2 million of other obligations, primarily minimum royalty guarantees and unconditional purchase commitments. It also reported approximately $75.2 million of future minimum payments under its New York headquarters lease and $7.3 million under other operating leases.
- Approximately 35% of six-month revenue was denominated in foreign currencies. Management estimated a 10% U.S. dollar exchange-rate change against those currencies could affect revenue by approximately 4%; the company did not hedge this exposure.
- Revenue recognition guidance adopted January 1, 2018 changed the timing of subscription revenue recognition. Under the new guidance, Q2 revenue was $0.4 million lower and net loss $0.3 million higher than under legacy guidance; six-month revenue was $1.4 million lower and net income $1.1 million higher. Prior-year periods were not restated.
- Tax amounts related to the 2017 tax law remained provisional. Management reported no material active litigation or material litigation reserves. The filing identified no material changes to the previously disclosed risk factors apart from the special-dividend disclosure.
Investor verification points
- Separate underlying operating trends from the one-time $38.6 million Webdam sale gain and the $5.9 million SilverHub impairment.
- Assess whether growth in revenue per download and enterprise sales can continue, and whether higher marketing and product development spending supports profitable growth.
- Review cash and liquidity after the approximately $105 million special dividend, alongside capital expenditures and contractual commitments.
- Monitor recovery prospects, if any, for the SilverHub investment and the carrying value of the ZCool investment.
- Track the effects of the new revenue-recognition method, final tax-law estimates and foreign-currency movements on comparability and reported results.