Shutterstock, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below are for Q4 2018. The 10-K was filed February 26, 2019. Unless noted, amounts are U.S. dollars.
Business context
Shutterstock operates a global marketplace licensing images, video, music and related creative services to customers, with contributors paid when content is licensed. It reported about 1.9 million revenue-generating customers in more than 150 countries. E-commerce and enterprise were its principal sales channels. The company sold its Webdam digital asset management business in February 2018.
Financial and operating performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $623.3 million | $557.1 million | +11.9% reported; +10.7% constant currency |
| Operating income | $32.5 million | $26.3 million | +23% |
| Operating margin | 5.2% | 4.7% | Improved |
| Net income | $54.7 million | $16.7 million | +227% |
| Diluted EPS | $1.54 | $0.47 | — |
| Cash from operations | $102.2 million | $108.0 million | -5% |
| Free cash flow (non-GAAP) | $63.5 million | $50.0 million | +27% |
FY 2018 gross margin was approximately 57.0%, down from 58.2% in 2017; net margin was approximately 8.8%, versus 3.0%. Net income included a $38.6 million pre-tax gain on the Webdam sale, so the increase in reported earnings was not solely from ongoing operations. Adjusted EBITDA, a non-GAAP measure, was $105.1 million versus $88.0 million.
Paid downloads increased 4% to 179.6 million, while revenue per download rose 9% to $3.40, largely reflecting product mix. E-commerce revenue grew 10% and enterprise revenue 22%. Enterprise represented approximately 41% of revenue, compared with 37% in 2017.
Q4 2018: Revenue was $162.1 million versus $151.8 million in Q4 2017. Operating income was $15.6 million versus $7.2 million, and net income was $14.9 million versus $2.1 million. Q4 diluted EPS was $0.42 versus $0.06.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $230.9 million, working capital was $83.4 million, and current assets and current liabilities were $306.7 million and $223.3 million, respectively. The company reported no long-term borrowings. Total liabilities were $244.8 million. Management said cash and expected operating cash flows should meet anticipated needs for at least 12 months.
FY 2018 investing cash use was $12.8 million, including $34.9 million of capital expenditures and a $15 million ZCool investment, partly offset by $41.8 million net cash proceeds from the Webdam sale. Financing cash use was $109.7 million, chiefly the $104.9 million special dividend of $3.00 per share. Remaining share-repurchase authorization was $100 million; no shares were repurchased during Q4. Operating leases and other purchase obligations totaled $152.5 million, including $78.6 million of lease obligations. The company expected to recognize a $55–$60 million lease liability upon adopting the new lease standard in 2019.
Material changes, outlook and risks
- Revenue growth slowed to 11.9% reported from 12.7% in 2017, while constant-currency growth declined to 10.7% from 12.6%. Management attributed growth to customer acquisition, expanded products, improved platform tools and higher revenue per download.
- Operating costs rose 11% to $590.8 million. Cost of revenue increased 15%, sales and marketing 14%, and product development 12%. Management expected sales and marketing, product development and cost of revenue to increase in absolute dollars as the company continued investing in growth and technology. No specific numerical revenue or earnings guidance was provided.
- The Webdam disposal generated the $38.6 million gain; its sale price was $49.1 million, with $2.5 million held in escrow at year-end. The company also recorded a $5.9 million impairment on its SilverHub investment and a $2.2 million foreign-currency transaction loss.
- Revenue recognition changed with adoption of ASC 606 on January 1, 2018 using the modified retrospective method; prior-year results were not restated. Adoption reduced FY 2018 revenue by $1.4 million relative to legacy guidance and increased net income by $1.0 million. This limits direct year-over-year comparability.
- Management and the auditor identified a material weakness in controls over accuracy, cut-off and completeness of certain non-standard enterprise sales and revenue recognition. Prior-period errors were described as immaterial, but disclosure controls were deemed ineffective at year-end. Remediation was underway and was not yet considered complete.
- Principal risks include intense competition and pricing pressure, customer and contributor retention and marketing efficiency, reliance on search engines and third-party cloud services, cybersecurity and privacy regulation, foreign-exchange exposure, content-rights and indemnification claims, and tax-law uncertainty. GDPR was effective in 2018; the California Consumer Privacy Act was scheduled to take effect in 2020. The company had no material active litigation reported.
Important facts for investors to verify
- How much of reported earnings growth reflects the Webdam gain versus recurring operating performance.
- Whether growth in downloads and revenue per download persists, particularly as revenue growth has moderated and sales-channel growth rates differ.
- Progress and testing results for remediation of the enterprise revenue-control material weakness.
- Cash-flow and balance-sheet effects of the special dividend, planned investment, capital spending, share repurchases and lease-standard adoption.
- Potential impacts of currency movements, privacy and tax regulation, and content indemnification obligations.