Shutterstock, Inc. — Q3 2016 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2016, compared with the same periods in 2015. Shutterstock licenses images, video and music, and provides WebDAM digital asset management services. The company reported more than 1.6 million active paying customers over the preceding 12 months, a library exceeding 100 million images and 5 million video clips, and 125.8 million paid downloads in the first nine months.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $123.1m | $107.3m | $364.1m | $309.1m |
| Operating income | $11.3m | $8.1m | $32.6m | $26.0m |
| Operating margin | 9.2% | 7.5% | 9.0% | 8.4% |
| Net income | $9.4m | $4.1m | $22.8m | $12.7m |
| Diluted EPS | $0.26 | $0.11 | $0.64 | $0.35 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $76.7m | $59.4m |
- Growth and margins: Q3 revenue rose 15% year over year, or 17% on a fixed-currency basis. Paid downloads increased 8% to 41.2 million and revenue per download rose 5.4% to $2.91. For the nine months, revenue grew 18% reported and 21% on a fixed-currency basis; downloads increased 17% to 125.8 million, while revenue per download was unchanged at $2.83.
- Profitability: Q3 operating income increased 40% and net income 129%. Nine-month operating income grew 25% and net income 80%. Cost of revenue remained about 41% of revenue in both comparable periods; sales and marketing was 27% of Q3 revenue versus 26% a year earlier.
- Cash flow and investment: Nine-month operating cash flow was $76.7m. Investing activities used $38.9m, including $26.7m of capital expenditures and $6.2m for digital content; financing activities used $38.8m, chiefly $44.9m of share repurchases. Cash and equivalents were $238.0m and short-term investments $52.4m at September 30.
- Liquidity and debt: Current assets were $351.9m and current liabilities $202.8m. The company reported no borrowings. Deferred revenue was $117.9m, up from $98.2m at year-end 2015.
Material changes, outlook and risks
- Operating expenses rose 13% in Q3, slower than revenue growth. Sales and marketing increased 20%, principally due to advertising; management expects marketing and product-development spending to continue rising in absolute dollars. Product-development costs also increased, with a portion capitalized as internal-use software.
- The Q3 effective tax rate fell to 17.6% from 43.9%, mainly due to discrete U.S. research and development tax credits for 2013–2015. Excluding discrete items, management reported a 39.9% Q3 effective rate; the lower reported rate therefore materially benefited net income.
- Management said cash, cash equivalents and operating cash flow should cover anticipated needs for at least 12 months. It anticipated approximately $7m of capital additions, including digital content and capitalized labor, for the remainder of 2016. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Expected cash commitments included approximately $10m for PremiumBeat contingent consideration in the first half of 2017, $83.8m of minimum payments under the amended New York headquarters lease through 2029, and $26.9m of other obligations, mainly royalty guarantees and purchase commitments.
- On October 20, 2016, the company entered into an arrangement with a content contributor that includes a revolving facility to lend up to $4.6m at 10% interest, with interest deferred to maturity, exclusive distribution rights in certain markets, and options to acquire or match a third-party offer. Management noted that requested advances would increase cash outflows.
- Key exposures include foreign-exchange movements, competition, discretionary customer spending, seasonal usage, and execution of continued marketing and product investment. A 10% change in the U.S. dollar against foreign-currency-denominated revenue was estimated to affect revenue by about 3%. The company did not hedge currency exposure. Management reported no material active litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue growth, paid-download trends and revenue per download persist, particularly as subscription and enterprise activity evolve.
- How much reported earnings growth depended on discrete tax credits; the Q3 effective tax rate excluding discrete items was 39.9%.
- Returns from elevated marketing and product-development spending, and the effect of capitalized software costs on future depreciation and reported expenses.
- Cash needs from the share repurchase program, PremiumBeat payment, lease and other commitments, and the post-quarter contributor facility. At quarter-end, $40.3m remained authorized under the $100m repurchase program.
- Potential effects of foreign exchange, customer spending seasonality, receivable growth and credit-loss allowances; the allowance for doubtful accounts increased to $6.2m from $3.8m at year-end 2015.