Shutterstock, Inc. — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016, filed February 27, 2017. Shutterstock operates a global marketplace licensing images, video and music, and offers Webdam digital asset management software. Revenue is generated primarily through e-commerce, with enterprise sales growing.
The company served more than 1.6 million revenue-generating customers in over 150 countries and had over 190,000 approved contributors. Approximately 66% of revenue came from outside the United States.
Financial and operating results
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $494.3 million | $425.1 million |
| Operating income | $45.8 million | $41.0 million |
| Net income | $32.6 million | $19.6 million |
| Diluted EPS | $0.91 | $0.54 |
| Net cash from operating activities | $101.1 million | $85.3 million |
| Capital expenditures | $40.0 million | $14.0 million |
| Free cash flow (non-GAAP) | $53.1 million | $68.3 million |
- Revenue grew 16.3% as reported and 17.6% at constant currency. Paid downloads rose 14% to 167.9 million; revenue per download increased to $2.88 from $2.84.
- Operating margin was approximately 9.3%, versus 9.6% in 2015. Net margin increased to approximately 6.6% from 4.6%.
- Net income increased 67%, reflecting higher operating income, lower other expense and a lower tax provision. The 2016 effective tax rate was 26.7%, compared with 43.0% in 2015; R&D tax credits materially reduced the 2016 rate.
- Cash and cash equivalents were $224.2 million, with $55.0 million of short-term investments and $136.3 million of working capital at year-end. The company reported no long-term borrowings.
- Total liabilities were $215.1 million, including $122.2 million of deferred revenue. The filing reports $141.2 million of future operating lease, contingent consideration and purchase obligations.
- Annual channel revenue: e-commerce $328.4 million; enterprise $150.0 million; other $16.0 million. Enterprise represented about 30% of revenue, compared with 26% in 2015.
- Fourth-quarter revenue was $130.2 million, up from $116.0 million a year earlier. Q4 operating income was $13.2 million, down from $15.0 million, while net income rose to $9.9 million from $6.9 million.
Material changes versus the prior year
- Revenue growth slowed to 16.3% from 29.6% in 2015; constant-currency growth was 17.6% versus 35.9%.
- Operating expenses increased 17% to $448.5 million, slightly faster than revenue. Sales and marketing rose 19%, product development 16%, and general and administrative expense 15%.
- Investment increased substantially: capital expenditures reached $40.0 million, including $20.0 million of capitalized internal-use software costs, versus $14.0 million of capital expenditures in 2015. This contributed to lower free cash flow despite higher operating cash flow.
- The company repurchased $60.2 million of stock in 2016 and ended the year with $22.5 million remaining under its existing $100 million authorization. In February 2017, the board authorized an additional $100 million.
- The collection grew to 116.2 million images from 71.4 million. 2016 additions included acquired image collections and new content distribution agreements; product enhancements included search, workflow and creative-software integrations.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects continued investment in customer acquisition, product development, infrastructure, international expansion and content; it expects related expense categories to increase in absolute dollars.
- Management stated that cash, cash equivalents and operating cash flow should cover anticipated needs for at least the next 12 months. It also expected to pay $10 million of PremiumBeat contingent consideration in early 2017.
- Key risks include intense competition and pricing pressure; retaining customers and contributors; execution and returns on technology and product investments; service interruptions and cybersecurity; content-rights claims and customer indemnification obligations; foreign currency exposure; international regulation and taxation; and possible effects of Brexit. The U.K. generated approximately 10% of 2016 revenue.
- Potentially unusual or non-recurring items include the benefit from R&D tax credits, acquisition-related contingent consideration expense, and significant year-over-year growth in capitalized software investment. The filing also notes a $1.7 million charge in general and administrative expense related to modifying PremiumBeat contingent consideration terms.
- The company reported no material active litigation and no material off-balance-sheet arrangements. It stated that disclosure controls and internal control over financial reporting were effective at year-end.
- Non-GAAP adjusted EBITDA was $95.5 million and adjusted net income was $55.2 million. These management-defined measures exclude specified items and should not be treated as substitutes for GAAP results.
Important facts for investors to verify
- Whether revenue and enterprise growth can be sustained as annual growth slowed, and whether customer usage and revenue per download continue to improve.
- Whether higher technology and infrastructure spending produces returns, particularly given the decline in free cash flow and the sharp rise in capital expenditures.
- The durability of the lower 2016 effective tax rate, including the timing and availability of future R&D credits.
- Potential cash requirements from the $10 million PremiumBeat payment, $4.6 million contributor credit facility, lease obligations and purchase commitments.
- Effects of foreign exchange, Brexit, evolving privacy and tax rules, and the company’s indemnification exposure on future results and cash flow.
- Impact of ongoing repurchases on cash reserves and ownership concentration; founder and CEO Jonathan Oringer held approximately 46.8% of shares as of February 21, 2017.