Shutterstock, Inc. — Q1 2023 Form 10-Q
Business context and period: Shutterstock operates a marketplace and creative platform licensing images, footage, music and 3D content, alongside enterprise, studio and other services. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Results include Pond5 and Splash News only from their May 2022 acquisition dates. Shutterstock also integrated OpenAI’s DALL-E 2 tool into its platform during 2023.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $215.3 million | $199.1 million | +8%; +10% constant currency |
| Operating income | $40.4 million | $31.9 million | +26% |
| Net income | $32.8 million | $26.6 million | +24% |
| Diluted EPS | $0.90 | $0.71 | +27% |
| Operating margin | 19% | 16% | +3 percentage points |
| Net margin | 15% | 13% | +2 percentage points |
| Operating cash flow | $66.8 million | $22.7 million | +$44.1 million |
| Free cash flow (non-GAAP) | $50.9 million | $10.2 million | +$40.7 million |
Cost of revenue rose 13% to $78.2 million; sales and marketing fell 11% to $47.5 million; product development rose 13% to $15.4 million; and general and administrative expense increased 10% to $33.8 million. Adjusted EBITDA, a non-GAAP measure, was $69.8 million, with a 32.4% margin, versus $54.8 million and 27.5% a year earlier. The effective tax rate was 20.7%, up from 18.7%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $95.8 million at March 31, down from $115.2 million at year-end 2022. Cash decreased $19.3 million during the quarter.
- The company repaid its $50 million credit-facility borrowing during Q1 and had no debt outstanding at quarter-end. It reported $98 million of remaining borrowing capacity, net of standby letters of credit, under the $100 million revolver; it was in compliance with facility covenants.
- Investing activities used $15.9 million, including $12.4 million of capital expenditures and $3.5 million for content rights. Financing activities used $70.7 million, primarily for debt repayment, dividends and employee tax withholding on equity awards.
- The company paid $9.7 million in dividends during Q1 and declared another $0.27-per-share dividend payable June 15, 2023. Its share-repurchase authorization was fully utilized by year-end 2022.
- Management said cash, operating cash flow and available credit were expected to meet anticipated cash needs for at least the next 12 months. Non-lease obligations were approximately $73.8 million; operating lease obligations were approximately $49 million.
Material changes and management commentary
- Enterprise revenue grew 33% to $95.5 million (35% constant currency), driven by computer-vision data partnerships, Studios and acquired businesses. E-commerce revenue fell 6% to $119.8 million (4% constant-currency decline), reflecting continued weakness in new customer acquisition in Europe and the rest of the world, partly offset by Pond5.
- Paid downloads declined to 42.7 million from 44.6 million, while revenue per download increased to $4.41 from $4.22, primarily due to sales-channel mix. North America revenue rose 24%; Europe revenue declined 6%.
- Higher cost of revenue reflected acquisition-related depreciation and amortization, royalties and content-review costs, and hosting, hardware and software costs. Lower performance-marketing spend helped reduce sales and marketing expense. G&A included $1.9 million of severance tied to strategic workforce optimizations.
- Operating cash flow benefited from higher operating income and timing of computer-vision customer collections and operating-expense payments; the prior-year quarter was affected by payment of large accrued expenses and accounts payable. The quarter’s cash-flow improvement may therefore not indicate a recurring trend.
- Management cited seasonal variation and the discretionary nature of customer content spending, and said expenses and foreign-currency gains and losses may fluctuate. No specific financial guidance for future periods is provided in the supplied filing text.
Risks, contingencies and unusual items
- Foreign-currency revenue was approximately 30% of total revenue. The company estimated that a 10% exchange-rate change against all foreign-currency-denominated revenue would affect revenue by approximately 3%; it did not hedge this exposure.
- Content spending may be affected by competition, economic conditions and customer budgets. Subscription revenue timing depends in part on estimates of unused licenses. Management also identifies acquisition integration, estimates for acquired assets, and tax matters as areas of judgment or risk.
- The company reported no material active litigation or material litigation reserves and believes existing matters will not materially affect results, while noting that litigation can still entail costs and management distraction.
- Non-lease obligations consist primarily of minimum royalty guarantees and purchase commitments for infrastructure and business services. The filing reported no goodwill or intangible-asset impairment indicators in the quarter.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether enterprise growth can offset continued e-commerce weakness and declining paid downloads, particularly as acquisition effects become less comparable.
- How much operating cash flow reflects sustainable earnings versus collection and payment timing; review non-GAAP reconciliations and capital/content investment needs.
- Whether higher acquisition-related amortization, contributor royalties, hosting costs and integration demands affect future margins.
- Cash, revolver availability, covenant compliance, required commitments and the sustainability of dividends and other capital allocation.
- Exposure to foreign exchange, discretionary customer spending, competitive pressures, and assumptions used in revenue recognition and asset valuations.