Shutterstock, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Unaudited consolidated statements. Unless otherwise noted, financial amounts are in millions of dollars.
Business context
Shutterstock operates a global marketplace licensing commercial images, video and music; contributors receive royalties on customer downloads. It reported more than one million active paying users, over 60,000 approved contributors and 38.8 million images in its collection at quarter-end. In March 2014, Shutterstock acquired WebDAM, a cloud-based digital asset management business, to expand enterprise offerings. Shutterstock Music launched in June.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $80.2 | $56.8 | $153.0 | $107.9 |
| Gross margin | 60.1% | 61.7% | 60.0% | 61.5% |
| Operating income / margin | $8.4 / 10.5% | $10.9 / 19.2% | $17.5 / 11.5% | $20.9 / 19.4% |
| Net income / margin | $4.9 / 6.1% | $6.9 / 12.1% | $9.8 / 6.4% | $12.4 / 11.5% |
| Diluted EPS | $0.14 | $0.20 | $0.27 | $0.37 |
| Cash provided by operating activities | — | $36.8 | $17.8 |
Q2 revenue rose 41% year over year, supported by paid downloads increasing to 31.5 million from 24.3 million and revenue per download rising to $2.52 from $2.33. For the first half, revenue grew 42%; the filing’s operating-metrics table reports 61.2 million downloads and $2.49 revenue per download, while MD&A gives 61.1 million and $2.48.
At June 30, cash and cash equivalents were $180.9 million and short-term investments $55.0 million. Current assets were $274.0 million versus current liabilities of $106.1 million, a current ratio of about 2.6. Total liabilities were $117.9 million; the company had no borrowings. Cash increased $25.5 million in the first half. Operating cash flow was $36.8 million; investing used $25.5 million, including $14.8 million of capital expenditures and $10.1 million for WebDAM; financing provided $14.2 million.
Changes, outlook and notable items
- Profitability declined despite strong revenue growth: Q2 operating income fell 23% and net income fell 29%. First-half operating income fell 16% and net income fell 21%.
- Operating expenses increased 57% in Q2, led by sales and marketing (+54%), product development (+83%) and general and administrative (+74%). Management attributed spending growth to customer acquisition, international expansion, product investment, increased headcount and public-company infrastructure. Non-cash equity compensation was $6.3 million in Q2 and $9.4 million for the first half, up from $1.6 million and $2.6 million, respectively.
- Management expects advertising, product development and other operating costs to continue increasing in absolute dollars. It expects approximately $5 million of capital expenditures in the remainder of 2014 and believes cash, investments and operating cash flow will cover anticipated needs for at least 12 months. No specific revenue or earnings guidance is provided.
- The company expects seasonal usage to decline in Q4 and rise in Q1; customer spending on digital imagery is discretionary and sensitive to economic conditions, competition and budgets. Management states that risk factors were not materially changed from its 2013 Form 10-K.
- WebDAM acquisition consideration was $12.4 million, comprising $10.1 million cash and contingent consideration. The new CEO equity awards include 500,000 options and 100,000 RSUs, subject to long-term service and share-price conditions; their reported grant-date fair values were $21.6 million and $5.9 million, respectively.
- Commitments include approximately $38.2 million of minimum payments on the 11-year New York office lease and $9.6 million of unconditional purchase obligations, primarily infrastructure services. The company reported no material active litigation, no material litigation reserves and no off-balance-sheet arrangements.
- International customers generated 64% of Q2 revenue; 33% of revenue was denominated in foreign currencies. Management estimates a 10% exchange-rate change against those currencies would affect revenue by approximately 3%. It does not currently hedge currency exposure.
Important facts for investors to verify
- Reconcile the first-half operating-metric discrepancies: paid downloads are reported as both 61.2 million and 61.1 million, and revenue per download as both $2.49 and $2.48.
- Assess whether rapid expense growth, elevated equity compensation and the resulting margin decline are consistent with the company’s growth and profitability objectives.
- Determine WebDAM’s revenue, earnings contribution and integration progress; the filing says pro forma results were not presented because the acquisition’s effect was not material, and does not separately quantify its contribution.
- Monitor contingent acquisition consideration, tax-rate variability, foreign-exchange exposure, lease and purchase commitments, and the execution of management’s spending and cash-flow plans.