Shutterstock, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports quarterly results, including the quarter ended December 31, 2012. Amounts below are in U.S. dollars.
Business context
Shutterstock operates a global online marketplace licensing photographs, illustrations, vectors and video. Revenue is primarily from subscriptions and on-demand purchases. In 2012, more than 750,000 paying users downloaded 76.0 million paid images; the Shutterstock collection reached 23.3 million images. Customers in North America, Europe and the rest of the world generated approximately 35%, 37% and 28% of revenue, respectively.
Key financial results
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Revenue | $169.6 million | $120.3 million | Up 41%; growth reflected higher download volume and revenue per download. |
| Gross profit / gross margin | $104.9 million / 61.9% | $74.8 million / 62.2% | Cost of revenue rose 42%, approximately in line with revenue. |
| Operating income / margin | $21.9 million / 12.9% | $22.9 million / 19.0% | Income fell 5% as operating expenses grew 52%. |
| Net income | $47.5 million | $21.9 million | 2012 includes a one-time, non-cash $28.8 million tax benefit from the corporate conversion. |
| Non-GAAP net income | $28.0 million | $23.9 million | Excludes the one-time tax benefit and specified equity compensation tax effects and charges. |
| Adjusted EBITDA | $34.9 million | $26.5 million | Non-GAAP measure. |
| Operating cash flow / free cash flow | $45.5 million / $41.5 million | $39.5 million / $36.1 million | Free cash flow is a company-defined non-GAAP measure. |
| Cash and cash equivalents | $102.1 million | $14.1 million | Increase primarily reflects IPO proceeds. |
| Working capital | $56.7 million | $(28.4) million | Improved substantially after the IPO and reorganization. |
| Term loan | $6.0 million outstanding | None reported | Due September 21, 2013; secured by substantially all assets other than intellectual property. |
Operating expenses included sales and marketing of $45.1 million, product development of $16.3 million and general and administrative expense of $21.7 million. As a share of revenue, sales and marketing was 26% (27% in 2011), product development 10% (8%), and general and administrative 13% (8%).
Paid downloads increased to 76.0 million from 58.6 million, while revenue per download rose to $2.23 from $2.05. The filing attributes the higher revenue per download primarily to growth in on-demand products. Year-over-year customer revenue retention was 100% in 2012.
Material changes and unusual items
- Shutterstock reorganized as a Delaware corporation on October 5, 2012 and completed its IPO on October 16, selling 5.175 million shares at $17 per share. Net proceeds were approximately $81.8 million before estimated offering expenses of $4.9 million.
- The tax-status change generated a $28.8 million non-cash tax benefit. Management expects an ongoing corporate tax rate of approximately 40%, compared with the historically low rate under the LLC structure.
- Non-cash equity-based compensation rose to $10.4 million from $2.1 million, including one-time acceleration charges associated with the reorganization and IPO. Operating margin consequently declined despite strong revenue growth.
- Fourth-quarter revenue was $49.2 million versus $34.7 million in fourth-quarter 2011. Fourth-quarter operating income was $3.0 million versus $6.1 million; the quarter included a $0.9 million additional non-income-tax charge relating to under-accruals in earlier 2012 quarters. The filing says the adjustment was not material to the quarter or prior periods.
- Cash financing activities included the IPO, a $12.0 million term loan, a $6.0 million loan repayment and $36.0 million of distributions to LLC members before the reorganization.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expects continued investment in customer acquisition, product development, localization, enterprise sales and emerging content types; it expects these expense categories to increase in absolute dollars.
- Management estimated 2013 capital expenditures of approximately $11.0 million and stated that cash and operating cash flow were expected to cover working capital and capital needs for at least 12 months and repay the remaining term loan by maturity.
- A material weakness in internal controls over financial reporting related to non-income-tax compliance remained unremediated at year-end. Management concluded disclosure controls were not effective as of December 31, 2012. The weakness concerned international consumption taxes, sales and use taxes, and royalty withholding compliance.
- Key risks include intense competition and pricing pressure; maintaining customer and contributor retention; technology availability, cybersecurity and third-party hosting; intellectual-property claims and customer indemnification; international tax, regulatory and currency exposure; and the ability to manage rapid growth.
- The term loan imposes minimum EBITDA and liquidity covenants and other operating restrictions. The company reported compliance at December 31, 2012; a breach could accelerate repayment.
- The company reported no active litigation matters or litigation reserves at year-end and believed pending or threatened matters were not expected to have a material adverse effect. It provides standard customer indemnification generally capped at $10,000, with higher or unlimited protection for some customers.
Investor verification points
- Separate recurring operating performance from the $28.8 million non-cash tax benefit and the substantial increase in equity-based compensation.
- Review the remediation status and financial exposure associated with the disclosed tax-compliance material weakness and non-income-tax accruals.
- Confirm repayment or refinancing of the $6.0 million term loan due in September 2013, covenant compliance and the adequacy of liquidity after planned investment.
- Assess whether revenue growth, download growth and customer retention can persist as marketing, development and public-company costs rise.
- Evaluate the quality and comparability of company-defined non-GAAP measures alongside GAAP results and cash flows.