Shutterstock, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are with Q3 2019 unless noted. Shutterstock operates a creative-content platform licensing images, footage, and music through E-commerce and Enterprise channels. Financial statements are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $165.2m | $159.1m | $485.7m | $484.2m |
| Operating income | $29.3m | $3.2m | $57.7m | $14.4m |
| Operating margin | 17.8% | 2.0% | 11.9% | 3.0% |
| Net income | $22.6m | $4.9m | $45.9m | $15.8m |
| Diluted EPS | $0.62 | $0.14 | $1.27 | $0.44 |
- Q3 revenue rose 4% reported (3% constant currency); nine-month revenue was nearly flat, up 0.3% reported (1% constant currency).
- Q3 E-commerce revenue increased 7% to $102.8m; Enterprise declined 1% to $62.4m. For nine months, E-commerce grew 3% to $300.7m while Enterprise fell 4% to $185.0m.
- Q3 cost of revenue fell 12%, sales and marketing fell 20%, and product development fell 22%. Lower operating expenses drove the substantial improvement in operating profit and margin.
- Q3 paid downloads fell 6% to 43.4m, while revenue per download rose to $3.79 from $3.40. Nine-month paid downloads fell 4% to 134.2m; revenue per download increased to $3.60 from $3.42.
- Subscribers reached 255,000, versus 184,000 a year earlier; subscriber revenue was $67.6m in Q3 versus $60.1m. Trailing-twelve-month average revenue per customer was $328, nearly unchanged from $327.
- Non-GAAP results: Q3 adjusted EBITDA was $47.4m (28.7% margin), adjusted net income $29.3m, and free cash flow $57.0m. Nine-month figures were $106.5m (21.9% margin), $60.6m, and $85.6m, respectively. These are management-defined measures, not GAAP substitutes.
Cash, liquidity, and capital
- At September 30, 2020, cash and cash equivalents were $383.1m, up from $303.3m at year-end 2019. Current assets were $450.7m and current liabilities $245.2m.
- Nine-month operating cash flow was $100.2m, compared with $77.0m; investing cash outflow was $22.1m, principally $20.3m of capital expenditures. Financing cash inflow was $1.7m.
- The company reported no long-term borrowings. Balance-sheet lease liabilities were $43.0m current and $43.0m non-current. It said cash and operating cash flow should cover anticipated needs for at least 12 months.
- In August, Shutterstock issued 516,000 shares and received $23.2m net proceeds; the founder and executive chairman separately sold 2.064m shares and the company received no proceeds from that sale. The company paid $18.2m in dividends during the first nine months and declared a further $0.17-per-share dividend payable in December.
Outlook, commentary, and risks
- Management said COVID-19 adversely affected revenue growth and paid-download activity by reducing customers’ ability to spend marketing budgets, and expected an unfavorable revenue impact to continue through 2020. It provided no specific numerical earnings or revenue guidance.
- Management is optimizing Enterprise sales, updating offerings, and investing in the platform. It also described marketing-spend reductions as a focus on more efficient customer acquisition and return on investment.
- Management noted possible seasonal variation, including historically lower third-quarter usage and stronger fourth-quarter demand, but cautioned that COVID-19 makes recovery timing uncertain and prior results may not indicate future performance.
- Foreign-currency revenue was about 35% of total revenue. Management estimated a 10% U.S.-dollar exchange-rate move against all foreign currencies would affect revenue by approximately 3%; the company did not hedge currency risk. Q3 other expense included $1.2m of unfavorable foreign-currency effects.
- Non-lease commitments totaled approximately $35.5m, mainly minimum royalty guarantees and purchase obligations. The company reported no material active litigation or material off-balance-sheet arrangements; it cautioned that litigation can still entail costs and management distraction.
- Q3 results benefited from lower operating costs, while nine-month cash flow included a $7.8m payment for acquisition-related long-term incentives. The 2019 comparison also included a discrete tax benefit; the Q3 2020 effective tax rate was 19.9%, versus a 35.3% tax benefit in Q3 2019.
Most important facts to verify
- Whether COVID-19-related customer budget pressure and weaker download volumes continued beyond the quarter, and how that affected subsequent revenue.
- Whether higher revenue per download and subscriber growth can offset declining paid downloads and the weakness in Enterprise revenue.
- Whether the sharp margin improvement is sustainable or reflects temporary expense reductions, including reduced marketing and development spending.
- Cash-flow quality and comparability: reported free cash flow excludes the $7.8m acquisition-related incentive payment for the nine-month period.
- Future dividend and repurchase decisions, remaining $100m repurchase authorization, and the dilution implications of equity compensation and the stock issuance.
- Potential effects of foreign-exchange movements, customer credit losses, contributor royalty obligations, and the company’s $35.5m of non-lease commitments.