Shutterstock, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Shutterstock operates a global marketplace licensing commercial digital imagery. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Revenue | $59.6 | $42.3 | $167.5 | $120.5 |
| Operating income | $9.9 | $8.9 | $30.8 | $18.9 |
| Operating margin | 16% | 21% | 18% | 15% |
| Net income | $6.2 | $8.7 | $18.6 | $18.5 |
| Net margin | 10% | 21% | 11% | 15% |
| Basic and diluted EPS | $0.18 | $0.31 | $0.55 | $0.67 |
- Q3 revenue rose 41% year over year; nine-month revenue rose 39%. Growth reflected more paid downloads and higher revenue per download. Paid downloads were 25.4 million in Q3 and 72.1 million for the nine months; revenue per download was $2.35 and $2.32, respectively.
- Gross margin, calculated as revenue less cost of revenue, was approximately 61% in Q3 and the nine-month period, versus approximately 62% in the comparable 2012 periods. Operating expenses grew faster than revenue in Q3, particularly sales and marketing, product development, and general and administrative costs.
- Net income comparisons are affected by the LLC-to-corporation reorganization: 2012 comparable periods generally had no entity-level federal and state income tax, while 2013 effective tax rates were 37.6% for Q3 and 39.7% for the nine months. The nine-month 2013 rate included a 0.1 percentage-point discrete item.
- Cash and cash equivalents were $195.5 at September 30, 2013, versus $102.1 at December 31, 2012. Total current assets were $233.4 and current liabilities $84.0. The company reported no outstanding debt, having repaid its remaining $6.0 term loan in March 2013.
- Nine-month operating cash flow was $32.5, compared with $32.9 in 2012; investing cash flow was negative $6.6 and financing cash flow was positive $67.6. Financing included $65.9 of net proceeds from the company’s follow-on offering.
Material changes and notable items
- Q3 operating income increased 12%, but net income declined 29%, largely reflecting the higher corporate tax burden after the 2012 reorganization. Nine-month operating income increased 63%, while net income was nearly flat for the same tax-comparability reason.
- Sales and marketing expense increased 53% in Q3 and 22% for the nine months; product development expense rose 50% and 44%, respectively. Management attributed increases to customer acquisition, international expansion, hiring, product initiatives, and public-company costs.
- The September follow-on offering raised $65.9 net for Shutterstock. The offering comprised 1.15 million company shares and 4.14 million shares sold by existing stockholders, at $60 per share.
- A new New York office lease commenced during Q3. It has an 11-year term, approximately $42.2 in aggregate future minimum lease payments, and a $1.8 cash-collateralized letter of credit.
- A tax accounting method change reclassified approximately $17.3 between current deferred tax assets and prepaid and other current assets; management said it did not affect net income tax expense.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects to continue investing in marketing, product development, staffing, and infrastructure; it anticipates approximately $10.2 of capital expenditures for the remainder of 2013 and believes cash and operating cash flow will cover needs for at least 12 months.
- Management expects royalties and credit-card costs to increase with revenue and expects advertising spending to rise in absolute dollars as international expansion continues. It also notes expected seasonal usage declines in Q4 and increases in Q1.
- Risks discussed include competition and discretionary customer spending, foreign-exchange exposure, and the possibility that costs may not be fully offset by pricing. Revenue denominated in foreign currencies was 33% in the 2013 periods; a 10% exchange-rate change was estimated to affect revenue by approximately 3%. The company did not hedge this exposure.
- The company reported no material active litigation or material litigation reserves, while noting ordinary-course claims and occasional intellectual-property inquiries. It also disclosed contractual indemnification obligations and $4.2 of unconditional purchase obligations.
Investor verification points
- Check whether download growth and revenue per download continue to support revenue growth, and monitor subscription versus On Demand mix.
- Assess whether increased spending converts into growth while operating margins remain under pressure.
- Separate underlying earnings trends from the material tax-rate difference between 2013 and the pre-reorganization 2012 comparison periods.
- Verify cash-flow conversion, planned capital expenditures, and the company’s ability to fund growth without debt or further equity issuance.
- Monitor foreign-currency exposure, seasonal trends, and the long-term lease and other contractual commitments.