Shutterstock, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Shutterstock operates a global online marketplace licensing photographs, illustrations and video. At year-end, its collection included 32.2 million images and more than 1 million video clips; over 900,000 active paying users generated revenue in 2013. Revenue is primarily from subscriptions and On Demand purchases, with customers generally paying in advance. The company reported one operating segment.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $235.5 million | $169.6 million |
| Operating income | $43.3 million | $21.9 million |
| Net income | $26.5 million | $47.5 million |
| Net cash from operating activities | $56.4 million | $45.5 million |
| Free cash flow (non-GAAP) | $42.3 million | $41.5 million |
| Adjusted EBITDA (non-GAAP) | $53.4 million | $34.9 million |
| Cash and cash equivalents | $155.4 million | $102.1 million |
| Short-term investments | $54.4 million | None |
Revenue grew 39%; operating margin rose to about 18% from 13%. Cost of revenue was 39% of revenue (38% in 2012), while sales and marketing declined to 24% from 26%. Net margin fell to about 11% from 28%, reflecting the prior-year tax benefit described below. Working capital was $151.3 million. The $12 million term loan was fully repaid in March 2013; year-end debt and available credit lines were both zero. Cash, equivalents and short-term investments totaled about $209.8 million.
In Q4 2013, revenue was $68.0 million versus $49.2 million in Q4 2012; operating income was $12.5 million versus $3.0 million, and net income was $7.9 million versus $29.0 million. The Q4 2012 net result included a large one-time tax benefit.
Material changes and unusual items
- Revenue growth reflected paid downloads rising to 100.2 million from 76.0 million and revenue per download increasing to $2.35 from $2.23, partly due to growth in higher-priced On Demand purchases.
- Operating expenses grew 30% to $192.2 million. Cost of revenue increased 40%, sales and marketing 26%, and product development 33%; management attributed spending growth to royalties, customer acquisition, staffing, product development and international expansion.
- 2012 net income included a $28.8 million non-cash tax benefit from the change to corporate tax status. In 2013, the company recorded a $16.9 million tax provision and stated its ongoing effective corporate tax rate is expected to be approximately 40%.
- 2013 investing cash outflow was $70.1 million, largely reflecting $54.4 million net purchases of short-term investments and $14.1 million of capital expenditures. The company raised $65.9 million net in its 2013 follow-on offering; most shares in that offering were sold by existing holders.
- The company opened offices in London and Berlin and launched Offset, Skillfeed and other product and localization initiatives. It expects continued investment in marketing, product development and international growth.
Outlook, risks and contingencies
Management said existing cash, investments and operating cash flow should meet anticipated needs for at least 12 months. It anticipated approximately $18.5 million of 2014 capital additions, including about $4.5 million already capitalized in 2013. No specific revenue or earnings guidance was provided. Management expects operating expenses to rise in absolute dollars and noted typical seasonal usage softness in Q4 and strength in Q1.
Key risks include intense competition and pricing pressure; reliance on repeat customers and contributor participation; technology outages, cybersecurity and third-party hosting/payment providers; intellectual-property claims and customer indemnification; evolving privacy, tax and other regulation; international execution and currency exposure; and growth-related investment needs. About 65% of revenue came from outside North America, and a 10% U.S. dollar exchange-rate movement against foreign-currency revenues would have an estimated 3% revenue impact. Standard customer indemnification is generally capped at $10,000, with higher or unlimited terms for some customers. The company reported no material active litigation and no material litigation reserves. Operating lease obligations totaled $43.1 million, including a long-term New York office lease.
Management reported effective disclosure controls and internal control over financial reporting at December 31, 2013. A previously disclosed material weakness concerning non-income tax compliance was reported as remediated. The independent auditor issued an unqualified opinion on the financial statements; it was not required to attest to internal-control effectiveness.
Important facts for investors to verify
- How sustainable are the 39% revenue growth rate and increases in downloads and revenue per download, particularly as competition and pricing pressure evolve?
- What are normalized earnings and tax expense absent the 2012 one-time $28.8 million tax benefit, and how will the approximately 40% expected tax rate affect future net income?
- How will planned spending, 2014 capital additions and the new office lease affect margins and cash generation?
- How are customer retention, contributor supply, direct-sales growth and expansion into video, enterprise accounts and new markets progressing?
- Review the full notes for tax exposures and reserves, indemnification terms, lease and purchase commitments, and dilution from equity awards and share issuance. Adjusted EBITDA and free cash flow are non-GAAP measures and should be assessed alongside GAAP results.