Shutterstock, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Shutterstock operates a marketplace licensing images, video and music, and provides digital asset management services through Webdam.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $130.2 million | $116.7 million | +12%; +14% at constant currency |
| Gross profit and margin | $77.8 million; 59.8% | $68.6 million; 58.8% | Margin +1.0 percentage point |
| Operating income and margin | $10.3 million; 7.9% | $10.8 million; 9.3% | Income down 5%; margin down 1.4 points |
| Net income and diluted EPS | $6.6 million; $0.19 | $6.1 million; $0.17 | Net income +8% |
| Operating cash flow | $17.2 million | $21.5 million | Down $4.3 million |
| Capital expenditures | $13.5 million | $7.8 million | Up $5.7 million |
At March 31, cash and cash equivalents were $195.4 million and short-term investments were $54.9 million, totaling $250.3 million. Current assets were $316.3 million and current liabilities $196.1 million. The company reported no long-term borrowings. Cash declined $28.8 million during the quarter, to $195.4 million.
Cash used in investing activities was $15.7 million. Cash used in financing activities was $32.1 million, including $25.0 million of share repurchases, $3.7 million to settle PremiumBeat contingent consideration and $4.0 million of employee tax withholding related to stock awards. Deferred revenue was $126.8 million, versus $122.2 million at year-end 2016.
Changes versus the prior-year quarter
- Paid downloads rose 6%, to 43.5 million; revenue per download increased to $2.91 from $2.77.
- Enterprise revenue increased to $41.9 million from $33.4 million; e-commerce revenue rose to $83.8 million from $79.9 million.
- Sales and marketing expense rose 20% to $32.5 million, driven in part by a 43% increase in brand and performance advertising. General and administrative expense rose 23% to $24.0 million.
- Cost of revenue increased 9%, slower than revenue growth; operating expenses overall increased 13%, outpacing revenue growth and lowering operating margin.
- Revenue increased across all regions: North America 12%, Europe 9%, and rest of world 15%.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management expects sales and marketing and product development spending to increase in absolute dollars as it invests in customer acquisition, products, technology and infrastructure. General and administrative costs are also expected to rise to support growth.
- Management expects cash and cash from operations to meet anticipated needs for at least the next 12 months. It plans to fund operations and capital spending largely from operating cash flow.
- Management attributes growth to customer acquisition, greater enterprise activity, broader subscription offerings and increased download activity. The collection exceeded 132 million images and 6.9 million video clips at quarter-end; more than 1.7 million active paying customers contributed to revenue over the trailing 12 months.
- Key risks include competition, discretionary customer spending, seasonal usage patterns, foreign-currency movements, and the possibility that cost inflation cannot be offset through pricing. About 33% of quarterly revenue was denominated in foreign currencies; management estimated a 10% exchange-rate change against those currencies could affect revenue by approximately 3%. The company does not currently hedge foreign-currency risk.
- Commitments included approximately $81.9 million of future minimum payments under the New York headquarters lease, scheduled to expire in 2029, and $36.8 million of other obligations, primarily minimum royalty guarantees and purchase commitments. The company had no material active litigation or material off-balance-sheet arrangements reported.
Unusual items and accounting matters
- The company paid approximately $10.0 million of PremiumBeat contingent consideration in March 2017. The payment affected operating and financing cash-flow classifications as reported in the filing.
- Adoption of the share-based compensation standard in Q1 resulted in a $0.7 million reduction to retained earnings and changed the presentation of certain tax effects and cash flows.
- The effective tax rate was 38.6%, compared with 43.3% in Q1 2016. The 2017 rate included discrete tax expense, primarily foreign withholding taxes; excluding discrete items, the filing reports rates of 33.6% and 41.1%, respectively.
Important facts for investors to verify
- Whether revenue growth and higher revenue per download continue, and whether operating margin stabilizes as investment spending rises.
- Whether operating cash generation remains sufficient alongside elevated capital expenditures and share repurchases.
- The pace and returns of customer-acquisition spending, product investment and the expansion of enterprise sales.
- Foreign-exchange exposure, customer demand sensitivity and the company’s ability to manage its lease, royalty and purchase commitments.
- The remaining authorization under the repurchase program was $100.0 million at quarter-end; verify future repurchases and their effect on cash and share count.