Shutterstock, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are rounded.
Business context
Shutterstock operates a global marketplace licensing images, video, music and other creative content, alongside enterprise services and digital asset management through Webdam. Most revenue comes from e-commerce content licenses; enterprise customers accounted for approximately 33% of FY 2017 revenue. The company reported more than 1.8 million revenue-generating customers across more than 150 countries.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $557.1 million | $494.3 million |
| Revenue growth | 12.7% reported; 12.6% constant currency | 16.3% reported; 17.6% constant currency |
| Operating income / margin | $26.3 million / 4.7% | $45.8 million / 9.3% |
| Net income / diluted EPS | $16.7 million / $0.47 | $32.6 million / $0.91 |
| Operating cash flow | $108.0 million | $100.7 million |
| Free cash flow (non-GAAP) | $50.0 million | $52.7 million |
| Cash and cash equivalents at year-end | $253.4 million | $224.2 million |
| Working capital at year-end | $94.7 million | $136.3 million |
| Total liabilities / long-term borrowings | $263.2 million / none reported | $215.1 million / none reported |
Cost of revenue was 42% of revenue, implying a gross margin of approximately 58%, versus approximately 59% in 2016. Operating margin contracted as operating expenses rose 18%, faster than revenue growth of 13%. Sales and marketing was 26% of revenue; general and administrative expense increased 39% to $98.7 million. Capital expenditures were $55.1 million, up from $40.0 million. Free cash flow is a company-defined non-GAAP measure.
Revenue increased across channels: e-commerce revenue rose to $348.0 million from $328.4 million, enterprise to $186.0 million from $150.0 million, and other revenue to $23.1 million from $16.0 million. Paid downloads increased 2% to 172.0 million, while revenue per download rose 9% to $3.13, which management attributed largely to product mix and new offerings; pricing was described as relatively constant. The content library reached 170.1 million images and 9.1 million videos.
Fourth quarter: Revenue was $151.8 million, versus $130.2 million in Q4 2016. Operating income was $7.2 million, versus $13.2 million; net income was $2.1 million, versus $9.9 million, and diluted EPS was $0.06 versus $0.27. Q4 2017 income tax expense was $6.8 million and included the TCJA-related deferred-tax remeasurement and transition-tax charges.
The company had no long-term borrowings at year-end and said available cash and operating cash flow should fund anticipated needs for at least the next 12 months. Deferred revenue was $157.8 million, compared with $122.2 million a year earlier. The filing lists $86.2 million of operating lease obligations and $45.9 million of purchase obligations.
Changes, outlook and notable items
- Revenue growth slowed from 16.3% in 2016 to 12.7% in 2017, while net income fell 49% and operating income fell 42%. Higher G&A, marketing, and depreciation and amortization contributed to expense growth.
- Management expects continued investment in customer acquisition, product development, technology and infrastructure, and expects sales and marketing and product development expenses to increase in absolute dollars. The filing provides no specific numerical revenue or earnings guidance.
- In July 2017, Shutterstock acquired Flashstock for approximately $51.7 million and launched Shutterstock Custom. It also expanded content distribution partnerships and introduced product and workflow enhancements.
- After year-end, the company agreed to sell Webdam for approximately $49.1 million, subject to customary adjustments, with closing expected around February 26, 2018. It also invested $15.0 million in Zcool for a 25% fully diluted interest.
- The 2017 effective tax rate was 44.4%, including provisional TCJA charges of $3.7 million for deferred-tax remeasurement and $0.8 million for transition tax. Management said estimates could change as implementation guidance became available; the transition tax was to be paid in eight annual interest-free installments.
- Effective January 1, 2018, the company expected to adopt new revenue-recognition guidance, with an estimated $6.9 million increase to opening retained earnings. The change affects timing for unused subscription licenses and contract acquisition costs.
- Key risks include intense competition and pricing pressure, customer or contributor attrition, execution and return on technology investments, platform outages and cybersecurity, intellectual-property and indemnification claims, international and foreign-exchange exposure, and evolving privacy and tax rules. GDPR was due to take effect in May 2018. No material active litigation was reported.
Most important facts for investors to verify
- Whether the slowdown in revenue growth and sharp decline in operating and net margins persist, and whether higher product and infrastructure spending generates expected returns.
- How revenue per download, paid-download volume, enterprise growth and customer acquisition costs trend; the filing attributes much of the per-download increase to mix rather than price increases.
- The final tax effects of the TCJA and the impact of the new revenue-recognition standard on reported revenue, deferred revenue and opening equity.
- Completion and net proceeds of the Webdam sale, and performance and integration of Flashstock and the Zcool investment.
- Cash deployment, including capital spending, share repurchases (approximately $100 million of authorization remained at year-end), and substantial lease and purchase commitments.
- Foreign-currency sensitivity, international regulatory compliance, and potential credit losses as enterprise sales on payment terms grow.