Shutterstock, Inc. 10-Q Summary: Period Ended September 30, 2012
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the three and nine months ended September 30, 2012. Shutterstock operates a global online marketplace for commercial digital imagery, licensing photographs, illustrations, and videos to businesses and individuals. The company operates primarily through subscription and "On Demand" purchase models. As of the reporting date, the company was organized as a New York limited liability company (Shutterstock Images LLC) but completed a reorganization into a Delaware corporation (Shutterstock, Inc.) on October 5, 2012, immediately preceding its Initial Public Offering (IPO) on October 16, 2012.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Revenue | $42,260 | $120,459 |
| Net Income | $8,742 | $18,523 |
| Net Income Available to Common Members | $6,556 | $13,892 |
| Operating Income | $8,891 | $18,895 |
| Operating Margin | 21% | 16% |
| Cash and Cash Equivalents (Sep 30, 2012) | $28,793 | N/A |
| Term Loan Facility Outstanding | $12,000 | N/A |
| Deferred Revenue | $36,214 | N/A |
Key Operating Metrics (Nine Months Ended Sep 30, 2012):
- Paid Downloads: 54.7 million (up from 42.5 million in 2011).
- Revenue per Download: $2.20 (up from $2.01 in 2011).
- Images in Library: 21.7 million.
Material Changes vs. Prior Period
Revenue Growth: Revenue increased 36% year-over-year for the quarter and 41% for the nine-month period. This growth was driven by a 26% increase in paid downloads and a 7% increase in revenue per download, attributed to the growing popularity of higher-priced "On Demand" plans.
Expense Increases: Total operating expenses rose 32% for the quarter and 48% for the nine-month period.
- Cost of Revenue: Increased 43% (quarter) and 42% (nine months), primarily due to higher contributor royalties driven by increased download volume.
- Sales and Marketing: Increased 13% (quarter) and 47% (nine months) due to higher advertising spend and increased headcount.
- General and Administrative: Increased 39% (quarter) and 67% (nine months), largely due to professional fees associated with the IPO preparation and increased headcount.
Profitability: Net income increased 54% for the quarter and 15% for the nine-month period. Operating margins improved to 21% for the quarter compared to 19% in the prior year quarter.
Guidance, Outlook, and Risks
Subsequent Events and Liquidity:
- IPO: On October 16, 2012, the company completed its IPO, selling 5,175,000 shares at $17.00 per share, raising approximately $81.8 million in net proceeds.
- Reorganization: The company converted from an LLC to a Delaware corporation on October 5, 2012. This change subjects the company to entity-level federal, state, and city income taxes, significantly increasing the effective tax rate compared to the LLC structure.
- Debt: On September 21, 2012, the company secured a $12 million term loan facility with Silicon Valley Bank to fund working capital needs prior to the IPO. The loan matures in September 2013.
Management Commentary: Management expects to continue investing aggressively in customer acquisition and product development. They anticipate that royalties will grow in line with revenue. The company does not anticipate paying cash dividends in the foreseeable future.
Risks and Contingencies:
- Tax Compliance: The company identified a material weakness in internal controls regarding tax compliance (specifically non-income taxes like VAT and sales tax) during its 2011 audit. Remediation efforts are ongoing.
- Competition: The market is highly competitive with traditional stock providers and new online entrants.
- Intellectual Property: Risks include third-party infringement claims and the misuse of imagery, though the company offers indemnification to customers.
- Foreign Currency: Approximately 64% of revenue for the nine months ended September 30, 2012, came from outside North America. A strengthening U.S. dollar could negatively impact reported revenue.
- Operational Risk: The company's headquarters in New York City was impacted by Hurricane Sandy in late October 2012, though server infrastructure remained operational. Management does not believe this will have a material financial impact.
Investor Verification Checklist
- Tax Rate Impact: Verify the projected effective tax rate post-reorganization, as the shift from LLC to C-Corp structure will materially increase tax expenses.
- Revenue Mix: Monitor the shift between subscription and "On Demand" revenue, as "On Demand" plans generate higher revenue per download but may have different retention characteristics.
- Internal Controls: Track the remediation progress of the material weakness in tax compliance controls to ensure future reporting accuracy.
- Debt Covenants: Review compliance with the $12 million term loan covenants, specifically minimum EBITDA and liquidity requirements.
- Customer Concentration: Assess reliance on large enterprise customers versus small/medium businesses, as the company aims to increase revenue from larger entities which may require higher service costs.