Shutterstock, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Shutterstock operates a global marketplace licensing images, video and music, and provides digital asset management services through WebDAM.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $116.7 million | $97.5 million; up 20% |
| Gross margin | 58.8% | 59.5% |
| Operating income / margin | $10.8 million / 9.3% | $8.2 million / 8.4% |
| Net income | $6.1 million; diluted EPS $0.17 | $3.2 million; diluted EPS $0.09 |
| Operating cash flow | $23.0 million | $21.5 million |
| Cash and cash equivalents | $220.6 million | $241.3 million at Dec. 31, 2015 |
| Short-term investments | $55.0 million | $47.1 million at Dec. 31, 2015 |
| Current liabilities | $170.4 million | $160.8 million at Dec. 31, 2015 |
| Borrowings | None reported | Company reported no borrowings at March 31, 2016 |
Operating cash flow benefited in part from a $6.8 million increase in deferred revenue and included $7.4 million of non-cash equity compensation. Investing activities used $17.1 million, including $7.8 million of capital expenditures; financing activities used $27.6 million, primarily for share repurchases. Cash and cash equivalents declined $20.7 million during the quarter. Cash plus short-term investments totaled $275.5 million at quarter-end.
Material changes and operating trends
- Paid downloads grew 23% to 41.2 million, while revenue per download declined 3.5% to $2.77 from $2.87. Management attributed revenue growth to higher download volume, new customers and increased enterprise activity.
- Cost of revenue rose 22%, faster than revenue; royalties increased 23%, broadly in line with paid downloads. Sales and marketing rose 8%, product development 5%, and general and administrative expense 39%.
- Operating margin improved to 9.3% from 8.4%; net margin increased to 5.3% from 3.3%. Gross margin eased to 58.8% from 59.5%.
- Other expense was nearly zero, compared with $2.6 million of expense a year earlier, primarily reflecting a swing from foreign-currency losses to gains. The effective tax rate was 43.3%, versus 42.8%.
- The company repurchased approximately 881,000 shares for $27.7 million during the quarter, at an average $31.59 per share. $56.6 million remained under its $100 million authorization at quarter-end.
Outlook, commentary and risks
- No formal revenue or earnings guidance is provided in the filing. Management said cash, investments and operating cash flow should cover anticipated needs for at least the next 12 months.
- Management anticipated approximately $22 million of capital additions during the remainder of 2016, including digital content and capitalized labor. It expects absolute spending on cost of revenue, sales and marketing, product development and general and administrative functions to increase as the business grows.
- In March, Shutterstock entered an exclusive U.S. distribution agreement with the Associated Press to license news, sports and entertainment imagery and video.
- Risks highlighted include competition, discretionary customer spending, seasonality, foreign-exchange movements and the ability to sustain customer acquisition and growth. Revenue denominated in foreign currencies was approximately 32% of total revenue; management estimated a 10% exchange-rate change against those currencies would affect revenue by about 3%. The company does not currently hedge currency risk.
- Unusual item: a $2.4 million increase in the fair value of acquisition-related contingent consideration, including a $1.7 million general and administrative charge related to a PremiumBeat agreement modification and $0.7 million in other expense. Approximately $10 million related to PremiumBeat is expected to be paid in 2017; the approximately $4 million WebDAM amount was paid in April 2016.
- The New York headquarters lease was amended to add space and extend through 2029; future minimum payments under that lease are approximately $85.6 million. The company reported no material active litigation, no material change in its previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether download growth can continue and offset the lower revenue per download and slight gross-margin decline.
- How much of operating cash flow is recurring, given the contribution from deferred revenue and non-cash compensation.
- Capital spending, lease commitments, contingent acquisition payments and the pace of remaining share repurchases.
- The sustainability of earnings growth given higher general and administrative costs, foreign-exchange exposure and the elevated effective tax rate.
- How the AP distribution agreement and continuing investment in products, search and customer acquisition affect future revenue and margins.