Shutterstock, Inc. (NYSE:SSTK) Q4 2022 Earnings Call Transcript

Shutterstock, Inc. (NYSE:SSTK) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day and thank you for standing by. Welcome to the Shutterstock Inc. Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. . Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Suh, VP, Investor Relations and Corporate Development. Please go ahead.

Chris Suh: Thanks Mitchell. Good morning, everyone and thank you for joining us for Shutterstock’s fourth quarter 2022 earnings call. Joining us today is Paul Hennessy, Shutterstock’s Chief Executive Officer; and Jarrod Yahes, Shutterstock’s Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets including 2022 guidance.

Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release on the reports we file with the SEC from time-to-time, including the risk factors discussed in our Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included in our press release and in our 10-Q.

I’d now like to turn the call over to Paul Hennessy, Chief Executive Officer.

Paul Hennessy: Thanks Chris, and good morning everyone. Thank you for joining us today. Today, we’ll be discussing Shutterstock’s 2022 results and 2023 outlook. We’d also like to provide an update on some of the exciting developments in our end-to-end creative platform across both our E-commerce and enterprise channels. Shutterstock closed out 2022 with $828 million in revenue, and $218 million in EBITDA, well ahead of our expectations and guidance. Overall, despite growth in North America and rest of world, we saw weakness in Europe, where growth was negative 4% for the year. This weakness in Europe was most evident in our E-commerce channel. Overall, our E-commerce channel was up 2% in 2022, with revenue growth in North America offset by a decline in Europe and rest of world.

Meanwhile, our enterprise channel grew 15% in 2022, a second consecutive year of double-digit growth. This growth reflects continued momentum driven by our multi-asset and multi-touchpoint relationships with large enterprises across North America, Europe and rest of world, as well as continued innovation in our product offerings. Looking ahead to 2023, our team is excited to capitalize on our strengths. As an end-to-end Creative Partner, Shutterstock is well-positioned to ultimately offer more value to our customers and to achieve sustained growth. Since joining as CEO last year, I’ve been talking about our content library, our Creative Flow platform, our enterprise capabilities, and our highly engaged team is the key drivers of differentiation and value creation at Shutterstock.

This quarter, we leverage these strengths to bring differentiated value to our customers. Today, I want to talk about how Shutterstock is not only embracing AI, but also commercializing it for the benefit of both our E-commerce customers within our Creative Flow suite, and our enterprise customers with our Computer Vision offering. Furthermore, I’d like to provide a few examples of how our broader end-to-end Creative platform has really resonated with our enterprise customers. In January, we formally launched our AI image generation platform to all of our customers across both our E-commerce and enterprise channels. Shutterstock AI image generator allows anyone to create high quality visuals ready in seconds, simply by describing what they’re looking for.

There are there are three truly unique differentiators which set Shutterstock apart in terms of bringing this innovative capability to our customers, namely ease and quality, convenience, and confidence. Ease and quality. Our image generator has been designed for creative use cases to produce unique, varied and high quality images from just a single word input or short simple phrases. We have built into the user interface and intuitive style picker, and integrated support for over 20 languages. We offer the ability to discover and licensed stock content and generative content in the same platform with a single plan, which is a unique capability in the market today. Convenience. We have immediately integrated this capability and put it into the hands of existing customers, making generative available in all our subscriptions, path products, and enterprise offerings.

Confidence. Customers have peace of mind when it comes to licensing content that’s created on our generative AI platform by virtue of being powered by properly commercially licensed training data. Also, our customers know that we’re paying creators and have uniquely structured our contributor fund to compensate artists for the revenue generated by Shutterstock in connection with the licensing of generative AI content, and of our training data. In short, we believe that Shutterstock’s AI image generation platform is uniquely positioned at the intersection of creativity, and productivity. I now like to turn your attention to our E-commerce channels specifically. Beyond the ease of use and peace of mind I described just now, we also have integrated our generative — generative AI platform with Creative Flow for E-commerce customers.

As a result, AI image generation is a seamless part of our customer’s creative journey. To illustrate, after creating a generative AI image, a customer can edit it in our Creative app, tag, store and search for them in catalog and amplify them on various social channels using our calendar in plan. We are encouraged by the engagement we’ve seen in the short period of time. Our early reads that we’re seeing about 75% of the generative AI traffic come from potential new customers, and 25% from existing customers engaging with the new technology. And users have already created over 3 million generative assets in just the past two weeks since launch. While we’re excited by this large scale and early engagement, we’re currently focused on incremental monetization opportunities.

Also on the E-commerce front, I’m very excited about the newest addition to our leadership team with John Kane joining us last week as the Global Head of E-commerce. John is the seasoned executive with a proven track record of successfully leading E-commerce businesses. He was most recently at NerdWallet in Broome, and he has almost 10 years of experience @priceline.com. John will be focused on driving growth in our E-commerce channel, and as such, we’ll be partnering closely with our product marketing and business operations team. With its unique combination of workflow applications and content, including now generative AI content, Shutterstock has a solid foundation upon wish to continue building and evolving and we look forward to John’s contributions.

I’d now like to provide an update on our enterprise channel. We continue to see sustained growth in our enterprise channel underpinned by, one, extremely strong customer retention, which is now in the mid 90s. Two, solid growth in our subscription bookings, which were up 27% for the year, and three, an acceleration and large enterprise deals valued at more than $100,000, which grew 24% for the year. We’re also investing in high profile branding events such as Con , Sundance and South by Southwest to drive awareness and demand for our enterprise offering. Clearly, our performance in enterprise in 2022, and in the fourth quarter was exceptionally strong, and our end-to-end creative platform is resonating with our enterprise clients. I’d like to provide a few examples of how our products and offerings are being applied in increasingly diverse use cases.

Amazon Web Services wanted to showcase some of the ways in which its customers and partners are using AWS. To that end, Shutterstock studios produced a collection of 32nd animated videos to highlight how these customers and partners use AWS to solve business challenges. Shutterstock partnered with Allergan in its initiative to promote inclusion and aesthetic medicine, by producing a collection of images that includes a range of people of varying gender, color, race, age and abilities. This diverse gallery is available for download and is a great example of how Shutterstock is embracing inclusive representation. On the editorial front, Shutterstock provides must have content in connection with breaking news and celebrity entertainment news, often on an exclusive basis.

Since our acquisition of splashed news, we’re seeing increased demand for our content and coverage from the global media companies like The Daily Mail, News UK in Ireland and the New York Post, and TMZ. With Pond5, we continue to see demand from large streaming platforms, and TV and film production studios. Companies like Netflix, Disney, and Discovery Channel, all rely on Pond5 as their source for the critical ingredient that goes into their creative endeavors. Our enterprise business has also been finding Computer Vision partnerships by leveraging Shutterstock AI and our massive pool of licensable metadata. Subsequent to establishing our partnership with open AI and LG, which I discussed last quarter, we’ve been announced an additional partnership with Meta, in which our data content library and associated metadata is being licensed to train their generative AI models into enhance their machine learning capabilities.

Today Shutterstock AI content library that we use for model training consists of 600 million images, 45 million videos, 2 million music tracks and over a million 3D models. It is massive, diverse and transparently licensable. Looking ahead, we believe we can leverage our leading position as the licensing partner to commercialize our data across more use cases that go beyond generative AI applications. In closing, as this management teams drives the business forward, we’re striking a prudent balance between investing for growth during this time of massive innovation in AI in our industry, and remaining nimble in the event of continued economic challenges. Looking ahead, I’m excited for what’s in store in 2023 as we continue to deliver value to our customers with the content, tools and data in our end-to-end Creative platform, spanning generative AI Computer Vision, and much more.

And I look forward to seeing many of you in person at our Investor Day here in New York at the Empire State Building in a few weeks. I’ll now hand the call over to Jarrod to discuss our financial performance and our guidance. Jarrod?

Jarrod Yahes: Thank you, Paul, and good morning, everyone. We’re extremely pleased to have ended the year with revenues of $828 million significantly above our previous expectations. For the full year 2022, our revenue growth was 7% or 11% on a constant currency basis, with our E-commerce channel growing 2% and our enterprise channel growing a robust 15%. In the fourth quarter, E-commerce revenue was down 5% on a reported basis, and down 2% on a constant currency basis. The growth rate in our E-commerce channel continues to be meaningfully impacted by ongoing weakness in Europe, where macro uncertainty is having a more pronounced impact with weak new customer demand exacerbated by FX pressure. To give investors a sense of the weakness in Europe, our E-commerce business in North America grew 4% in the quarter.

By contrast, our E-commerce business in Europe and the rest of the world combined was down 12% or a 16% differential relative to North America. It’s clear that Europe has gotten worse from the third to the fourth quarter, whereas North America has remained stable. Turning to our enterprise channel in the fourth quarter. Enterprise grew 25% on a reported basis, or 30% on a constant currency basis. Performance in our enterprise channel exceeded our expectations with revenue growing across all regions including Europe. Enterprise growth in the fourth quarter was driven by growth in our multi-asset flex product offerings, multiple Computer Vision deals, strong momentum and studios and editorial and the contributions from our acquisitions of Pond5 and Splash.

These products and business lines in enterprise are gaining scale and growing in excess of 20% with some closer to 60% growth. And therefore powering our enterprise channel growth in a balanced manner. Our investments in enterprise are paying off. Turning to our income statement. For both the full year and the fourth quarter gross margins were flat excluding non cash M&A, amortization. Sales and marketing expense in the fourth quarter was 22% of revenue compared to 30% in the fourth quarter of 2021, which included over $6 million of linear television ad spend. For the full year, sales and marketing expense was 25% of revenue, compared to 26% in 2021. The decrease largely related to our TV brand spin campaign in 2021. Product development was 8% of revenue, flat with the fourth quarter of 2021, reflecting continued investment in our product offering and the integration of our acquisitions.

For the full year, product development increased 8% of revenue from 7% in 2021, GNA expenses were 18% of revenue, compared to 17% in the fourth quarter of 2021, driven by an increase in bad debt expense. However, for the full year G&A expenses decreased to 16% from 17% in 2021. We are continuing to see operating leverage in our business, per our expectations, and that’s manifesting itself in the G&A line. With the difficult macro economic backdrop, we are sharply focused on cost and margins, and our results are showcasing that profitability focus. We are keeping a close eye on our headcount engaging in process automation, and rightsizing our physical office footprint. As part of rightsizing our office footprint, in the fourth quarter, we recognize the non-cash impairment charge related to lease and related assets of $18.7 million associated with our decision to close or consolidate certain office spaces that have been underutilized.

We expect this charge to benefit go forward lease operating expenses by more than $2 million per year in 2023 and beyond. In the fourth quarter, adjusted EBITDA was a record of $58 million. Shutterstock grew EBITDA by 13% this year from $193 million to $218 million, and EBITDA margins meaningfully exceeded our target for margin expansion, increasing 138 basis points to 26.3% from 25% in 2021. This is the third consecutive year we’ve driven significant margin expansion. And as a result, our EBITDA has more than doubled over the course of the past three years. Turning to our balance sheet, we had $115 million of cash at the end of the quarter, and exhibited strong cash flow generation. As of December 31, we had $50 million drawn on a revolver.

However, we’ve now fully repaid this balance and have zero debt on the balance sheet. On January 31, we announced a 13% increase in our quarterly dividend to $0.27 per share, which will be paid on March 16. This increase was attributable to the strengthen our cash flows, zero debt on the balance sheet and our competence in the business for 2023. During 2022, we repurchased 984,000 shares for $73 million and completed the $100 million repurchase authorization. As a result, our shares outstanding decreased by 588,000 shares compared to 2021. Our deferred revenue balance was $187 million, an increased $13 million from the third quarter of 2022, primarily due to growth in enterprise. On our key operating metrics for the quarter, subscriber count was 586,000 from 343,000 last year, driven by the inclusion of Creative Flow Plus and PicMonkey subscribers.

Subscriber revenue increased by 9% to $88.8 million. Average revenue per customer decreased to $341 driven by the inclusion of smaller ARPU subscribers. Paid downloads were down 5.6% and revenue per download increased to $4.49 per download. Consistent with what we’re seeing in our revenues, paid downloads were up in our enterprise channel and down in E-commerce largely due to weakness in Europe. Finally, turning to our guidance. Our expectations for the full year 2023 are as follows. Revenue of $836 million to $853 million, representing 1% to 3% annual revenue growth, adjusted EBITDA of $220 million to $228 million, with margins ranging from flat to up 50 basis points and adjusted earnings per share between $3.90 to $4.05 per share. Our revenue guidance is based on recent spot rates for the euro and pound and FX is expected to be a 1% headwind to revenue growth, while the additional months contribution of Pond5 adds 2% to revenue growth.

Our guidance is reflective of the ongoing macro challenges we’re seeing in Europe and a cautious approach to overall customer demand. We expect revenue growth to be first half loaded with faster growth in the first half of 2023. We are not factoring into our guidance, any upside from the rollout of generative AI, or from additional Computer Vision partnerships beyond the deals we’ve already signed. We are bullish on both of these opportunities and our pipeline and our prospects. But until deals are signed, or we see significant revenue incrementality, we prefer to keep them out of our forecast. From a margin perspective, we are targeting up to 50 basis points of EBITDA margin expansion in 2023, driven by operating leverage in G&A, and our ongoing focused on cost management.

Other modeling assumptions include stock-based compensation of %55 million, depreciation and amortization expense of $68 million, capital expenditures of $45 million and an effective tax rate percentage in the high-teens. Before opening up for questions, I’d like to formally invite everyone on the call to our Investor Day to be held in the Empire State Building on February 28. We plan to have an immersive extended reality experience for investors, including deep dives into Generative AI and Creative Flow and multiple other business opportunities. Thank you so much for your time and attention. With that, operator, we’ll now open the call for any questions.

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Q&A Session

Operator: Our first question comes from the line of Andrew Boone with JMP Securities. Your line is open. Please go ahead.

Andrew Boone: Hi, guys. Thanks so much for taking my questions. Can we start on the enterprise side of the business? You talked about strength within multi-asset flex, Computer Vision deals editorial Pond5 and Slash while contributing. But there was just a significant step up from 3Q to 4Q. Can you just break that down and help us better understand the drivers there? And then, you talked about just not including the pipeline of Computer Vision assets for 2023. Can you just talk about the pipeline and what that looks like, right? You seem to have added open AI embedded Meta. What else is out there as you think about that? And just as kind of an extension of that. You talked about earlier licensing beyond Generative AI. Can you just flush that out? So three questions for you. Thanks so much.

Jarrod Yahes: Thanks so much, Andrew. We’ll try and remember all those three questions to the best of our ability, but you may have to get us back on track if we lose focus. So look, turning to our enterprise business, we turned in a spectacular year. The business grew 15%. Paul gave some of the, really compelling metrics around how we grew our subscription bookings, which were up 27%, the acceleration, the large deals, which grew 24%, and the strong customer retention, which was in the mid 90s. So all of those, fundamentally, when you think of the core of the enterprise business, we’re moving up into the right. There are multiple business lines in our enterprise business, which don’t comprise 10% of the revenues of the business.

So that would include studios, that would include editorial that would include Computer Vision. Those businesses are growing somewhere between 20% and 60% a year. So we’ve got these engines of growth that are an enterprise sort of rolling the boat forward. And they’re performing particularly well. We don’t break out the quarterly or annual contribution of those individual business lines, but there are a number of different pockets of growth, and it resulted in fantastic growth for the year, and great growth for the quarter. I think your next question was really just pertaining to Generational AI. Andrew, are you most interested in sort of the incrementality around it? Or what was sort of the specific key area you were honing in on?

Andrew Boone: So, two points. One of which is just how do we think about these contracts on a go-forward basis? Is the step up there now on a go-forward basis, is it based on usage? Is it kind of an ongoing subscription type revenue period that we should be able to just simply model like going forward? Like, how do we think about the step up in 4Q then extending into 2023? And then additionally, earlier on, I think, Paul, you mentioned licensing beyond Generative AI, and so the second half of that question is just can you flesh out what is the — what do you guys see beyond Generative AI?

Jarrod Yahes: Sure. And Andrew, I’ll answer the first part of that. And then and then pass it over to Paul. So, in terms of the Computer Vision deals that we signed, these are large partnerships. Those partnerships positively impacted the fourth quarter, they will positively impact 2023. And these are long-term deals that will continue to benefit our business into 2024 and beyond. These deals do have somewhat of an upfront revenue composition, but they’re also tells of revenue that continue on through the long life of the contract. And moreover, we believe that there’s a variety of ways that we can add value to these relationships and grow these relationships over time. So we don’t view these as discrete deals with companies rather partnerships that we expand into and grow off of.

And internally, we’ve really proven our ability to use these as leverage points to develop larger and more multi prong relationships with the clients. So, we’re starting to really have strategic level engagements with customers and enterprise in a way that we never have before. And they’re becoming much more multifaceted and long-term and recurring in nature.

Operator: Thank you. And we’ll move on to our next question. Next question comes from a line of Bernie McTernan with Needham & Co. Your line is open. Please go ahead.

Bernie McTernan: Great. Good morning. Thanks for the questions. Maybe just to start, the 75% of traffic from new customers that are using generative AI and Creative Flow. Are these paying customers or trials? And then also any insight you can provide in terms of if it’s like a new vertical that’s using generative AI or kind of what you’re seeing from the composition of clients?

Operator: Ladies and gentlemen, please remain on your line your conference will resume shortly. I think we are experiencing technical difficulties. We do have Bernie McTernan with Needham & Company in the queue to ask a question. Bernie, please go ahead.

Bernie McTernan: Hey, guys. Thanks. So, you mentioned in the prepared remarks, 75% of traffic for new customers, are new to the platform. Any just more detail you can provide on the verticals that these customers are paying or not. Just trying to get a sense of the composition of people who are using generative AI?

Paul Hennessy: Yes. We tried to give you as much as we could in the few days since launch. As I mentioned, we’re seeing lots of good engagement. We gave the mix of customers. We don’t know if that’s a sustainable mix or representative of what that will be four weeks out, eight weeks out, and six months out. So we just tried to do our best to expose exactly what’s happening on the platform today. And then over time, as we have insights into the monetization of that behavior, we’ll be back out and discussing that.

Bernie McTernan: Understood. And we saw the customer count ticked down sequentially. Was there anything that we should — anything to call out that draw that?

Paul Hennessy: Bernie, I think the biggest piece is, you’ve seen some of the weakness in our E-commerce business. The customer count is really driven by the E-commerce business. Our enterprise customer count is very steady and a much smaller number as compared to the sort of aggregate customer count that we publish externally. So, it’s really a function of the weakness in E-commerce, which really is driven primarily by that significant differential in the performance of Europe as compared to the rest of the world and the U.S.

Bernie McTernan: Got it. And then, lastly for me. If I just take paid downloads and multiply by revenue per download, and look at that relative to 3Q. It seems like there was like a, call it $13 million step up in ancillary. That’s the right way to think about how much Computer Vision generated in the quarter?

Paul Hennessy: Yes. I think Bernie, we don’t consider that ancillary revenue, it’s not the right way to think about it. Unfortunately, we have a number of different businesses that fall into that area. So I would call out studios as impacting that. I would call out our asset assurance business as impacting that. I would call out Computer Vision business as acting that, and there are multiple other revenue streams that sort of encompass that, so.

Bernie McTernan: Okay, understood. Thanks for taking the question, guys.

Paul Hennessy: Yes.