Shutterstock, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in U.S. dollars. Shutterstock operates a content-licensing platform for images, footage and music, with e-commerce and enterprise sales channels.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $159.2m | $161.7m | $320.5m | $325.1m |
| Operating income | $22.5m | $3.1m | $28.3m | $11.2m |
| Net income | $19.0m | $3.3m | $23.3m | $10.8m |
| Diluted EPS | $0.53 | $0.09 | $0.65 | $0.30 |
| Operating margin | 14% | 2% | 9% | 3% |
| Net margin | 12% | 2% | 7% | 3% |
- Q2 revenue declined 2% year over year (approximately 1% on a constant-currency basis). E-commerce revenue rose 1% to $98.2m; enterprise revenue fell 6% to $61.1m. For the first half, revenue declined 1%; e-commerce grew 1% and enterprise declined 6%.
- Q2 paid downloads fell 6% to 44.0m, while revenue per download increased to $3.61 from $3.44. For the first half, downloads fell 3% to 90.8m and revenue per download rose to $3.51 from $3.43.
- Operating expenses fell 14% in Q2, led by lower sales and marketing, general and administrative, and cost of revenue. Q2 sales and marketing declined 20% to $35.6m; management cited reduced marketing spend and a shift toward more efficient customer acquisition. These lower expenses supported the substantial year-over-year increase in operating profit despite slightly lower revenue.
- Non-GAAP Q2 adjusted EBITDA was $37.0m (23.3% margin), versus $25.1m (15.5%); first-half adjusted EBITDA was $59.1m (18.4% margin), versus $50.6m (15.6%). Non-GAAP Q2 adjusted net income was $22.2m, versus $11.8m.
Cash, liquidity and obligations
- Cash and cash equivalents were $311.2m at June 30, 2020, versus $303.3m at December 31, 2019. Current assets were $386.5m and current liabilities $228.9m. The company reported no long-term borrowings.
- First-half operating cash flow was $36.3m, down from $46.7m. Investing cash outflow was $15.4m, including $14.0m of capital expenditures and $1.6m for content rights. Financing cash outflow was $14.9m, primarily dividends of $12.1m and $3.4m of employee tax withholding payments. Cash increased by $5.3m during the period.
- Non-GAAP free cash flow was $28.6m, versus $31.7m. Its 2020 calculation adds back $7.8m of acquisition-related long-term incentive payments; GAAP operating cash flow includes those payments.
- Management said available cash and expected operating cash flow should cover anticipated needs for at least 12 months. The company paid $0.34 per share in dividends in the first half and declared a further $0.17 per share dividend payable September 17, 2020, subject to the board’s stated conditions.
- Non-lease obligations totaled approximately $39.2m, primarily minimum royalty guarantees and purchase obligations: $18.2m for the remainder of 2020, $16.5m in 2021 and $4.4m in 2022. Lease commitments are additional.
Management outlook, risks and unusual items
- Management said COVID-19 reduced customers’ ability to spend marketing budgets and lowered product usage, adversely affecting revenue growth. It expected the pandemic to continue to weigh on 2020 revenue, but said it could not estimate when recovery would occur.
- Management cited continuing enterprise-channel headwinds and was optimizing the sales organization, updating offerings and investing in the platform. It also noted typical seasonality, including potentially lower customer usage in Q3 and higher demand ahead of the Q4 holiday season.
- Q2 included approximately $1.5m of sales and marketing severance charges and $0.7m of employee-related severance within general and administrative costs. First-half cost of revenue included $1.2m of severance. The prior-year comparison included elevated equity compensation and accelerated amortization, among other items, which also contributed to lower expenses in 2020.
- First-half operating cash flow was reduced by $7.8m of payments for long-term incentives related to the 2017 Flashstock acquisition. The company reported no material active litigation and no material changes to previously disclosed risk factors.
- Foreign-currency revenue was about 35% of first-half revenue; management estimated a 10% U.S. dollar exchange-rate change against foreign currencies could affect revenue by approximately 3%. The company did not hedge currency risk with derivatives.
Most important facts for investors to verify
- Whether COVID-19-related customer budget pressure and lower downloads persist, and how revenue trends develop after Q2.
- Whether enterprise revenue stabilizes as the company implements sales, product and platform changes.
- How much of the sharp profit-margin improvement reflects sustainable operating efficiencies versus lower marketing spend and prior-year comparison items.
- Cash-flow quality, including the $7.8m acquisition-related incentive payment and the adjustments used in non-GAAP free cash flow.
- Future dividend capacity and cash needs relative to lease obligations, royalty guarantees and other contractual commitments.