Shutterstock, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. Shutterstock operates a marketplace licensing images, video, and music, and provides digital asset management services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $141.1 million | $123.1 million | $405.3 million | $364.1 million |
| Operating income | $5.6 million | $11.3 million | $19.2 million | $32.6 million |
| Net income | $5.0 million | $9.4 million | $14.7 million | $22.8 million |
| Diluted EPS | $0.14 | $0.26 | $0.42 | $0.64 |
| Operating margin | 4% | 9% | 5% | 9% |
| Net margin | 4% | 8% | 4% | 6% |
Q3 revenue grew 15% year over year (14% at constant currency); nine-month revenue grew 11% (12% at constant currency). Q3 paid downloads increased 2% to 41.9 million, while revenue per download rose 11% to $3.23. For nine months, downloads increased 2% to 128.1 million and revenue per download rose 8% to $3.06. Management cited enterprise activity, customer growth, and product offerings as revenue drivers.
Profitability declined despite revenue growth: Q3 operating expenses rose 21%, led by a 61% increase in general and administrative expense; nine-month operating expenses rose 16%. Q3 cost of revenue was 42% of revenue versus 41% a year earlier; general and administrative expense rose to 19% from 14%.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $71.5 million, compared with $76.2 million in 2016. Investing cash outflow was $60.0 million, including $49.5 million net cash for the Flashstock acquisition and $37.6 million of capital expenditures, partly offset by a $32.8 million net reduction in short-term investments. Financing cash outflow was $33.1 million, including $25.0 million of share repurchases.
- Cash and cash equivalents were $212.8 million and short-term investments were $22.5 million at September 30, 2017, totaling $235.3 million. Cash declined $11.4 million from year-end 2016.
- Total current assets were $316.1 million and current liabilities $230.4 million. Deferred revenue was $146.4 million. The filing reports no long-term borrowings at quarter-end.
- Management said cash, cash equivalents, and operating cash generation were expected to meet anticipated needs for at least the next 12 months.
Material changes and notable items
- Flashstock was acquired in July for a purchase price of approximately $51.2 million. The company provides a custom-content creation platform; Shutterstock launched Shutterstock Custom in September. The preliminary allocation included $37.8 million of goodwill. Working-capital adjustments remained subject to finalization.
- General and administrative expense increased substantially, including higher staffing and professional services; the nine-month increase included $6.0 million of additional professional service fees. A $0.5 million expense related to Flashstock employee performance-based arrangements was recorded.
- The company repurchased approximately 449,000 shares for about $25.0 million during the first nine months. As of September 30, $100 million remained authorized for repurchases.
- The effective tax rate was 12.2% for Q3 and 31.0% for the nine-month period, affected by discrete tax benefits. Tax effects therefore contributed to period comparisons.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expects sales and marketing, product development, and cost of revenue to increase in absolute dollars, and plans continued investment in customer acquisition, products, and infrastructure.
- Management noted possible seasonality, discretionary customer spending, competition, and fluctuations in foreign-currency results. Approximately 34% of Q3 revenue was denominated in foreign currencies; the company did not hedge currency exposure and estimated a 10% exchange-rate movement could affect revenue by approximately 3%.
- At quarter-end, the company reported $42.1 million of other obligations, primarily minimum royalty guarantees and purchase commitments. It also disclosed approximately $79.2 million of future minimum payments under its amended New York headquarters lease, scheduled to expire in 2029.
- The company reported no material active litigation and no material changes to the risk factors in its 2016 Form 10-K. Management said disclosure controls were effective; integration of Flashstock’s internal controls was ongoing.
Important facts for investors to verify
- Whether revenue growth, particularly enterprise growth and higher revenue per download, is sustained, and how download volumes develop.
- Whether expense growth and infrastructure investment stabilize enough to recover operating margins.
- Flashstock’s subsequent contribution to revenue and profitability, and final purchase-accounting adjustments.
- Cash conversion and capital needs, including capital expenditures, repurchases, lease commitments, and other contractual obligations.
- The effects of foreign exchange and discrete tax items on future reported results.