Shutterstock, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Shutterstock operates a global platform licensing digital imagery, video and music through e-commerce and enterprise channels. The figures below are unaudited; dollar amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $163.3 million | $153.0 million | +6.7%; +9.1% constant currency |
| Operating income | $8.1 million | $4.5 million | +80.4% |
| Net income | $7.5 million | $32.6 million | -76.9% |
| Diluted EPS | $0.21 | $0.92 | Lower, primarily reflecting prior-year sale gain |
| Operating cash flow | $19.7 million | $21.1 million | -$1.4 million |
| Capital expenditures | $7.3 million | $15.0 million | -$7.7 million |
- Operating margin was approximately 5% of revenue, versus 3% a year earlier. Cost of revenue was 42% of revenue in both periods.
- Cash and cash equivalents were $240.1 million at quarter-end ($242.8 million including restricted cash); current liabilities were $232.2 million. The company reported no long-term borrowings.
- Adoption of lease accounting added $46.3 million of right-of-use assets and $57.7 million of lease liabilities at March 31, 2019. These are lease obligations, not borrowings.
- Net cash increased $9.3 million during the quarter. Operating cash flow less capital expenditures was approximately $12.5 million.
Business trends and changes from prior period
- E-commerce revenue increased 9.3% to $98.1 million; enterprise revenue increased 7.7% to $65.2 million. On a constant-currency basis, growth was 11.6% and 10.4%, respectively.
- Paid downloads grew to 47.2 million from 43.7 million; revenue per download rose to $3.42 from $3.40. The collection reached 260.5 million images and 14.3 million video clips.
- Sales and marketing expense rose 10.1% to $44.4 million, reflecting increased advertising. Product development expense declined 8.9% to $15.0 million, and general and administrative expense declined 2.4% to $26.6 million.
- Q1 2018 included a $38.6 million pretax gain on the 2018 sale of Webdam, which generated $2.7 million of revenue in that prior-year quarter. Its absence is the principal reason reported net income fell year over year despite higher revenue and operating income.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided in the supplied filing text. Management expects cash and operating cash generation to cover anticipated needs for at least 12 months, and expects cost of revenue and sales and marketing spending to rise in absolute dollars as the business grows and invests in customer acquisition.
- Management cites quarterly seasonality, discretionary customer spending, competition, foreign-exchange movements and the ability to offset potential cost inflation as relevant uncertainties. A 10% move in the U.S. dollar against foreign currencies was estimated to affect revenue by approximately 3%; the company did not hedge currency risk.
- The company adopted ASC 842 lease accounting on January 1, 2019. It also reported $71.5 million of non-lease purchase obligations, primarily minimum royalty guarantees and infrastructure and other service contracts.
- Disclosure controls were deemed ineffective because of a material weakness in controls over accuracy, cutoff and completeness of revenue for certain non-standard enterprise license arrangements. The filing says prior errors were immaterial and did not cause a material misstatement; remediation steps were underway, but the weakness was not yet considered remediated.
- The company reported no material active litigation, no material litigation reserves, and no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether remediation of the material weakness in enterprise revenue controls is completed and independently tested, and whether further errors or restatements arise.
- Whether constant-currency revenue growth, download volume and revenue per download remain supportive of growth across e-commerce and enterprise.
- Whether increased customer-acquisition spending translates into durable revenue and operating-margin improvement.
- Cash generation and liquidity relative to lease liabilities, purchase obligations and planned investment; the company stated it had no long-term borrowings.
- Comparability of earnings against Q1 2018, which included the Webdam sale gain, and the effects of foreign exchange and tax-rate changes.