Shutterstock, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014. Amounts below are in U.S. dollars. The filing is unaudited.
Business context
Shutterstock operates a global marketplace licensing commercial images, video and music, alongside hosted digital asset management services. It reported more than 1.2 million active paying users, 51.6 million images in its collection and 33.4 million paid downloads in the quarter.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $97.5 million | $72.8 million | +34% |
| Operating income | $8.2 million | $9.1 million | -9% |
| Operating margin | 8.4% | 12.5% | -4.1 percentage points |
| Net income | $3.2 million | $4.9 million | -34% |
| Diluted EPS | $0.09 | $0.14 | Down $0.05 |
| Operating cash flow | $21.5 million | $15.6 million | +$5.8 million |
Cost of revenue was $39.5 million, or 40.5% of revenue, versus $29.1 million, or 40.0%, a slight gross-margin decline. Cash flow from operations less capital expenditures was approximately $19.3 million; capital expenditures were $2.2 million.
At March 31, cash and cash equivalents were $190.5 million and short-term investments were $55.0 million. Current assets were $289.7 million against current liabilities of $141.4 million. The company reported no borrowings. Cash fell $43.0 million from year-end, principally reflecting acquisition spending and foreign-exchange effects.
Material changes and drivers
- Revenue growth reflected paid downloads rising 12% to 33.4 million and revenue per download increasing 17% to $2.87. Management attributed the higher yield chiefly to growth in On Demand and enterprise offerings, and partly to acquisitions.
- Operating expenses grew 40%, faster than revenue. General and administrative expense rose 85%, including higher employee and equity-compensation costs, professional fees and acquisition-related costs. Non-cash equity compensation increased to $7.5 million from $3.1 million.
- Other expense was $2.6 million versus $0.1 million of other income in Q1 2014, driven mainly by a $2.1 million foreign-currency transaction loss and a $0.5 million charge from remeasuring acquisition contingent consideration.
- The effective tax rate was 42.8%, compared with 46.1%; Q1 2015 included discrete tax expense that increased the rate by 3.3 percentage points.
- January acquisitions of Rex Features and PremiumBeat added editorial imagery/video and music capabilities. Their preliminary purchase prices were $32.7 million and $35.4 million, respectively; reported results include them from their acquisition dates. Pro forma Q1 revenue, as if both acquisitions had occurred January 1, 2014, was $98.8 million in 2015 and $78.5 million in 2014; pro forma net income was $3.3 million and $5.2 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash and operating cash flows to cover anticipated needs for at least 12 months and projected approximately $15 million of capital expenditures for the remainder of 2015.
- Management planned continued investment in customer acquisition, international expansion and product development. It expected royalties to grow broadly with revenue and noted that marketing, product development and general and administrative expenses were expected to rise in absolute dollars.
- Risks highlighted include competition and its potential effect on pricing, sales and marketing costs; discretionary customer spending; seasonal usage; foreign-currency movements; and execution and integration of acquisitions. Foreign-currency-denominated revenue was 31% of total; management estimated a 10% exchange-rate move against those currencies would affect revenue by about 3%.
- Unconditional purchase obligations were approximately $9.1 million. The New York headquarters lease has approximately $36.9 million of future minimum payments. The company disclosed no material active litigation, no material litigation reserves and no off-balance-sheet arrangements.
- Management said disclosure controls were effective at the reasonable-assurance level. Integration of Rex Features and PremiumBeat into internal controls was ongoing; no material risk-factor changes from the 2014 Form 10-K were reported.
Important facts for investors to verify
- How much of reported revenue growth came from organic performance versus Rex Features and PremiumBeat, and whether the acquisitions deliver the anticipated strategic benefits.
- Whether revenue-per-download gains and download growth persist, and how customer mix affects renewal, royalties and margins.
- Whether expense growth, including equity compensation and acquisition-related costs, moderates enough to stabilize operating margins and earnings.
- The sensitivity of earnings, cash flows and acquired-business valuations to foreign exchange, including contingent consideration based on performance milestones.
- Progress integrating the new acquisitions, completing related internal controls, and meeting the stated capital-spending outlook.