Shutterstock, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company operates a global marketplace licensing images, video, and music. Financial statements are unaudited; amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Change | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|---|
| Revenue | $107.3 | $83.7 | +28% | $309.1 | $236.7 |
| Gross profit and margin | $62.7; 58.5% | $50.5; 60.3% | Margin down 1.8 pts | $182.6; 59.1% | $142.3; 60.1% |
| Operating income and margin | $8.1; 7.5% | $9.2; 11.0% | Income down 12% | $26.0; 8.4% | $26.7; 11.3% |
| Net income | $4.1 | $5.3 | Down 22% | $12.7 | $15.1 |
| Diluted EPS | $0.11 | $0.15 | Down | $0.35 | $0.42 |
| Operating cash flow | Nine-month period: $59.4, essentially flat year over year | $59.4 | $59.5 |
Revenue growth reflected more paid downloads and higher revenue per download. Q3 paid downloads rose to 38.1 million from 31.2 million, while revenue per download increased to $2.76 from $2.65. For nine months, downloads were 107.4 million versus 92.4 million and revenue per download was $2.83 versus $2.54. Operating expenses grew faster than revenue, particularly general and administrative expense, which rose 60% in Q3 and 62% year to date. Equity-based compensation was $22.8 million for the nine-month period, up from $15.7 million.
Balance sheet, liquidity, and cash flows
- At September 30, cash and cash equivalents were $229.6 million and short-term investments were $52.5 million, totaling $282.1 million. Current assets were $330.2 million and current liabilities $154.8 million.
- The company reported no borrowings. Nine-month operating cash flow of $59.4 million was offset by $72.0 million of investing outflows, including $62.4 million for acquisitions and $9.9 million of capital expenditures. Financing activities provided $9.7 million; cash ended the period at $229.6 million, down $3.8 million from year-end 2014.
- Deferred revenue increased to $94.3 million from $75.8 million at year-end 2014. Management said it expects cash on hand and operating cash generation to cover anticipated needs for at least 12 months.
- Other obligations, primarily minimum royalty guarantees and infrastructure-service purchase commitments, totaled approximately $26.0 million. The New York headquarters lease has approximately $34.9 million in aggregate future minimum payments.
Material changes and notable items
- January acquisitions of Rex Features and PremiumBeat added editorial content and music capabilities. Their reported cash acquisition outflows were approximately $62.4 million; the PremiumBeat deal includes contingent consideration of up to $10 million based on performance criteria. Acquisition-related intangible assets and goodwill increased materially.
- Other expense was $0.8 million in Q3 and $3.4 million for nine months, driven by foreign-currency losses and remeasurement of acquisition-related contingent consideration. Nine-month foreign-currency transaction loss was $2.0 million in the income statement; management separately described a $2.5 million transaction loss in its market-risk discussion.
- In October 2015, the board authorized repurchases of up to $100 million of common stock. The filing does not state that repurchases had begun. Also in October, Shutterstock announced an exclusive Red Bull video distribution arrangement beginning in 2016.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided. Management expects advertising, product-development, and related operating expenses to rise in absolute dollars as it invests in customer acquisition, international expansion, and product improvements. It anticipated approximately $6 million of capital expenditures for the remainder of 2015.
- Management noted expected seasonal usage declines in the fourth quarter and increases in the first quarter. Results may also vary with discretionary customer spending, competition, product mix, and foreign-exchange movements.
- International customers generated 61% of Q3 revenue; 30% of revenue was denominated in foreign currencies. Management estimated that a 10% exchange-rate move against foreign-currency revenue would affect revenue by approximately 3%. The company did not hedge currency risk at the time of filing.
- The filing identifies evolving internet, privacy, data-security, and content regulations as risks, including Russian data-localization requirements and the invalidation of the U.S.-EU Safe Harbor framework. The company was implementing alternative compliance mechanisms but could not assure successful compliance.
- The company reported no material active litigation and no material litigation reserves. It stated that ordinary-course claims and litigation can nevertheless entail costs and management distraction. Management said disclosure controls were effective; integration of controls for acquired businesses was ongoing.
Key facts for investors to verify
- Whether revenue-per-download and download growth persist, and whether acquisitions materially contribute to future growth.
- Whether expense growth moderates and operating margins recover after the Q3 and year-to-date compression.
- Cash conversion and the effects of acquisition payments, contingent consideration, and the newly authorized $100 million repurchase program.
- Foreign-exchange exposure and progress on Russian data-localization and European privacy compliance.
- Performance of the PremiumBeat and Rex Features acquisitions, including contingent payment milestones and integration costs.