Shutterstock, Inc. (NYSE:SSTK) Q1 2023 Earnings Call Transcript

Shutterstock, Inc. (NYSE:SSTK) Q1 2023 Earnings Call Transcript April 25, 2023

Shutterstock, Inc. beats earnings expectations. Reported EPS is $1.29, expectations were $1.07.

Operator: Thank you for standing by, and welcome to Shutterstock’s Q1 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question at that time, please press star-one-one on your telephone. As a reminder, today’s call is being recorded. I would now like to turn the conference over to your host, Chris Suh, Vice President of Investor Relations and Corporate Development. Please go ahead.

Chris Suh: Thanks Valerie. Good morning everyone and thank you for joining us for Shutterstock’s first quarter 2023 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’ll 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 impacts 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 2023 guidance.

Actual results or trends could differ materially from our forecasts. For more information, please refer to today’s press release and the reports we filed with the SEC from time to time, including the risk factors discussed in our most recently filed 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’ll 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 with today’s 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. Good morning everyone and thanks for joining us today. Shutterstock delivered an exceptional first quarter. I’m pleased to report that Shutterstock generated $215 million in revenue, growing 8% year-on-year, well above our expectations. Our EBITDA this quarter was at record levels in terms of both dollars and margin, reflecting strong revenue growth combined with operating leverage and cost discipline. EBITDA grew 27% year-on-year to $70 million for the quarter, representing a 32% margin. Free cash flow was $51 million in the quarter, allowing us to pay down our revolver in full while still maintaining a strong cash balance. Growth in the quarter was led by our enterprise sales channel, which saw 33% revenue growth driven by strength in subscription bookings for content, our data partnerships to help local technology companies train their generative AI models, and momentum at Shutterstock Studios and Editorial.

I’d like to spend a few minutes detailing the strength of our core enterprise channel and what is driving our ongoing success and momentum. Subscription bookings grew 20% this quarter and now represent 34% of total bookings, up from 28% a year ago. Our rapid transition to a subscription model is having a positive effect on new business bookings, which is up 20% year-on-year, as well as higher retention with churn declining by 4% year-over-year. We also have expanded our relationship with large existing accounts, leveraging our Editorial and Studio capabilities where we’ve seen strength specifically in retail, banking, and travel and leisure. Our creative engine, which includes Shutterstock Studios, and our data partnerships are the fastest growing parts of our enterprise channel and are expected to grow in excess of 50% this year.

Our ecommerce sales channel experienced similar trends from the fourth quarter, declining by 6% driven by continued weak demand in Europe. We are testing multiple strategies and tactics to improve the performance of this channel, which we see as under-performing relative to potential. We remain cautious on the channel yet are hopeful that some of the top-of-funnel enthusiasm driven by our generative AI offerings will begin to positively impact the business in the quarters ahead. At our investor day back in February, we talked about Shutterstock’s content engine and how our creative engine and data engine accelerated. To briefly refresh everyone’s memories, our content engine represents the main core of our business. It drives most of the revenue today and is powered by one of the industry’s largest content libraries, including 615 million images, 47 million videos, 4 million music tracks and sound effects, and 1.2 million 3D models.

Kletr/Shutterstock.com

Our creative engine, which includes Creative Flow and Studios, allows us to expand our customer relationships by offering the powerful combination of content, creative editing tools and production services, and the rich meta data embedded in our content library has been the basis for our data engine, which has allowed us to unlock new verticals, products and capabilities for our customers. Across a variety of metrics and data points, for example customer engagement with our generative AI offering and our expanding pipeline of data partnerships, we’re seeing signals that the investments we’re making across our creative engine and our data engines are yielding tangible dividends. This is especially the case in our enterprise sales channel, where our value proposition for enterprise customers is rapidly evolving from being a scaled content provider across multiple content pipes to comprise more work flow tools, data training sets, and AI-enabled services.

Today, I want to take the opportunity to provide some recent examples of how these three engines are interconnected and how growth in one engine accelerates growth in the others. To that end, I’ll be mapping out how these various engines relate to: one, our initiatives in generative AI and some of the strong top-of-funnel interest we’re seeing; two, our recently announced partnerships with Nvidia; and three, the continued momentum of our data partnerships. We are aggressively investing in bringing generative AI to our customers. After launching our AI image generation platform in partnership with OpenAI in January, we had last reported that users had created 3 million assets in the two weeks immediately following the launch. From the three months since inception, almost 1 million users have created more than 20 million assets on our platform.

To put that in context, Shutterstock averaged 10 million new images every quarter since 2020, and so the pace thus far in generative images created far exceeds the growth we’ve seen historically in our content engine. Although it’s too early to provide any definitive statements on generative AI’s revenue potential, I’m excited to report some early indicators that speak to high engagement and the exciting potential of this new technology across the entire user journey. First, our generative AI offering has been generating traffic at the top of the funnel with our image generator tool driving creation of approximately 10,000 new accounts every single day. Now, many of these new accounts are experimenting for the first time in engaging with the tools and technology and are trying to better understand what we have to offer with little purchase intent or monetization potential.

However, we believe that many of these new accounts also represent potential new customers who have never been paying customers of Shutterstock in the past. In addition, we’re finding that our investment in paid media is being supplemented by robust levels of earned media. So far, we’ve benefited from millions of media impressions and over 100 news articles that have driven additional top-of-funnel traffic. Secondly, when those new users get in the door, they’re really engaging with the tools and deriving value from them. Furthermore, as we’ve rolled out additional features, such as the ability to zoom out and create variations, we’ve seen an increase in the average number of images generated per user, as well as our improved conversion rates with one of the new features increasing conversion rates by 2.5 times.

Lastly, I’m happy to report that customers can now search our growing library of AI-generated images which are available for purchase. We’re already seeing a small but growing cohort of users jumping into this part of the library, where they can find visuals that go beyond the bounds of what our core library offers. In addition to our investments in generative AI for images, we recently announced the partnership with NVIDIA to bring to market generative 3D capabilities. We believe this will lower the cost of 3D model production and expand use cases, including the creation of low cost digital twins that replicate products found in the physical world. This partnership is particularly exciting because it spans the full 3D life cycle, consisting of 3D model production, model monetization, and last mile model customization.

Shutterstock is ideally positioned as a partner to NVIDIA and we will bring our unique assets to bear, including meta data from our data engine which will train NVIDIA’s text to 3D model, as well as our TurboSquid marketplace which will allow creators to monetize their generative 3D models for use across 3D’s many use cases, including NVIDIA’s omniverse and other metaverse environments. In addition to the major investments we’re making in developing and delivering generative AI for our customers, we continue to be highly encouraged by our pipeline of data partnerships to help large tech companies train their models to develop their own generative AI products and solutions. The need to use meta data for generative AI model training is expanding, and we are seeing new companies invest with urgency to build commercializable products within their core area of focus.

We are also seeing our pipeline expand for existing customers across multiple asset types: customers who started with images looking at video, and customers looking at music and 3D content for model training. The use cases for training data are also expanding and we are seeing opportunities that are increasingly industry-specific and for specific commercial products. This quarter, we’re excited to report that we signed two data partnerships. We significantly expanded and renewed for a six-year term an existing data partnership when their needs expanded beyond image and into multiple other asset types, such as video, 3D and music. We’re also establishing a new five-year relationship with a leading social media platform. As we convert our pipeline into opportunities, we are seeing total contract value more consistently becoming high seven figure and eight figure deals.

Strategically, we’re targeting multi-year, multi-faceted partnerships that feature recurring quarterly meta data refreshes along with co-investment in technology to align incentives. These typically would also include content licensing and creative services as part of the overall future strategic road map. We are starting to see consistency in the pattern of land-and-expand across deals that speaks to how our growth engines are interconnected, and I wanted to provide some examples. The first is an example where we led with a data partnership largely around image model training data. That evolved, where we integrated the tools of our data partner into our core offering to grow revenues and provide new creatives to our customers. Over time, the needs of our partner grew and expanded into other content.

Another example is where we have a longstanding content relationship with a partner for a large technology platform. We have leveraged our API to provide them content for the years. We then expanded this relationship to include higher end studio work, which we recently further expanded into a data partnership focused on providing data training sets for their AI applications. For both of the clients mentioned, our end-to-end creative platform has enabled a much more strategic relationship with clients, where we can deliver value across business lines. As I noted at our investor day, whether you’re an individual creator, small business or a Fortune 500 company, Shutterstock has the content, the creative tools and the data to power your business.

To fulfill this vision, we have completely re-thought the way Shutterstock goes to market, leveraging our creative and data engines to aggressively transform our business in this dynamic and exciting content landscape. Our journey as an end-to-end creative platform is full steam ahead. With that, 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. Revenue growth was 8% for the first quarter, or 10% on a constant currency basis, exceeding our expectations. Our headline growth rate was strong and powered by our core enterprise channel, which had its best quarter ever. Enterprise revenue was up 33% in the first quarter and 35% on a constant currency basis, an improvement from the fourth quarter which was itself a record quarter. Paul provided many of the key details on growth we are experiencing in bookings, subscription products and improved retention, as well as the multiple business lines that are experiencing accelerated growth, such as Studios and data partnerships. Consistent with last quarter, ecommerce revenue was down 6% on a reported basis.

Our ecommerce channel saw continued weakness in Europe and a slowdown in the rest of the world. The weakness in our ecommerce channel directly impacts subscriber count, which was down sequentially; however, our subscriber revenues continue to grow due to momentum in our enterprise subscription products, where the count of subscribers is low but the ARPU is high. Turning to our income statement for the first quarter, gross margins excluding depreciation and amortization were flat. Reported gross margins declined by 143 basis points driven by higher M&A and cap labor amortization. Sales and marketing expenses in the first quarter was 22% of revenue compared to 27% in the first quarter of 2022. The decrease was driven by lower performance marketing spend as we have reallocated certain marketing spend to the channels with the greatest effectiveness.

We also had several million dollars of linear television spend from an earlier campaign in the first quarter of 2022 that did not take place in the first quarter this year. Product development was 7% of revenue, flat with the first quarter of 2022, reflecting continued investment in our product offering and integration of our acquisitions. G&A expenses were 16% of revenue compared to 15% in the first quarter of 2022, driven by increased staff and severance costs. Excluding severance, G&A was flat as a percentage of revenue compared to the first quarter of 2022. We grew adjusted EBITDA by 27% to a record $69.8 million in the quarter. Our adjusted EBITDA margins were up 490 basis points to 32.4%, driven by revenue growth and associated operating leverage combined with prudent cost management.

Turning to our balance sheet, we had $96 million of cash at the end of the quarter and exhibited strong free cash flow of $51 million, which included our payment of our annual performance bonus during the quarter. During the quarter, we also fully repaid the $50 million we had drawn on our revolver. Our deferred revenue balance was $181 million, down from $187 million last quarter primarily due to the softness in ecommerce discussed earlier. During the quarter, we paid out $10 million of dividends, which we recently increased to $0.27 per share as announced in January. As is typical in the first quarter, we also paid $11 million related to taxes on the vesting of equity awards, which were issued on a withhold to cover basis, further eliminating share count creep.

Cash outflows also included $16 million of CapEx and content acquisitions. For the full year, we are raising our 2023 guidance to 2% to 3% revenue growth and 50 to 75 basis points of year-over-year EBITDA margin expansion. We significantly exceeded our own expectations this quarter, allowing us to bring up the bottom of the range with respect to revenues and be above the high end of the previous range with respect to margin. We anticipate that 2023 will be Shutterstock’s fourth consecutive year of expanding our margin profile. As we highlighted in our last earnings call, we expect revenue growth to be first half loaded, and we will remain cautious from a forecast perspective until we begin to see improvements in our ecommerce demand. In closing, we’re extremely pleased with the quarter and in particular the strength of our core enterprise channel.

We are establishing new data partnerships with some of the largest companies in the world and expanding existing ones while renewing multi-year commitments. We’ve driven higher engagement to the top of the funnel as a result of our generative AI offering, and we have evolved our value proposition to customers as an end-to-end creative platform comprising content, work flow tools, data training sets, and AI-enabled services. Shutterstock is an extremely exciting place to be right now as we position ourselves to benefit from the extraordinary technology innovations that are taking place all around us. With that, Operator, we’d like to open the line for any questions.

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Q&A Session

Operator: Our first question comes from the line of Lauren Schenk of Morgan Stanley. Your line is open.

Lauren Schenk: Great, thank you. Thanks for all the detail on the computer vision side. You mentioned an expanded pipeline of potential partners. Just wondering if there is any quantification you could put around that in terms of the number of companies that you have in your pipeline, versus I think you had mentioned 20-plus with us last quarter. Thank you.

Paul Hennessy: Hey Lauren, it’s Paul. We’re not commenting on the specific number of deal flow coming in, or in the pipeline. But what I’ll tell you is, and I mentioned in my prepared remarks, there seems to be a growing behavior and pattern of both the very large companies in the world and then the next size down, of people leaning into build their own models, and so we see a consistent pipeline build around AI and data training that’s showing up both in our performance, and we’re encouraged by what we’re seeing in the market.

Lauren Schenk: Okay, great, and then maybe just on the contract size, I know you gave some ranges on the number figures, but if we just sort of compared to last quarter, maybe even six or nine months ago, are you seeing absolute contract sizes increase kind of across the board, or does it really depend on the size of partner?

Paul Hennessy: Well, you’ve answered your question. It certainly depends on the size of partner, but we’ve seen that number grow, and then as you might imagine, as we get more pervasive across companies, we don’t expect that number to grow but right now, we’re very pleased with the size of the deals and, more importantly, the length of time of the relationships and how these relationships are actually turning into bigger, broader strategic relationships leveraging all of the things that Shutterstock has to offer. Don’t think about this just as the impact of the data deals, but more of the alignment and helping businesses even beyond their own creative needs into solving other business solutions for them.

Lauren Schenk: Okay, and then just one more last one, and then I’ll hop back into the queue. Just on the partner that renewed after the expiration, is the scope of that contract and the data that they’re looking for similar to what they had originally signed up for, or are they sort of expanding the data sets and maybe the use case as well? Thanks so much.

Paul Hennessy: No, that’s actually one of the things we’re most excited about – they’re coming back for more. They’re using the full spectrum of what Shutterstock has to offer in both content types, and again we continue to lean in on alignment between our businesses as well as technical exploration of things that we can build together. Again, we’re encouraged that what often starts in one area expands into the next. We think that adds real stability to the business but also enhances the relationship.

Lauren Schenk: Wonderful, thank you so much.

Paul Hennessy: Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Bernie McTernan of Needham. Your line is open.

Bernie McTernan: Great, good morning. Thank you for taking the questions. Maybe to start, Paul, you mentioned 50% growth expected for this year in Studios and Computer Vision. Can you provide any context of what that base number was in 2022, and then also does it assume any incremental Computer Vision deals that haven’t been signed yet?

Jarrod Yahes: Bernie, this is Jarrod. Let me just give a little bit of color on that. We’re not breaking out the exact composition of our enterprise growth, but suffice it to say we are seeing very strong growth both in our data partnerships and our Studios businesses, and I’d call that growth quite accelerated. Fifty percent-type growth is quite strong. We have in the past talked about the magnitude of those businesses. When they’re approaching 10% of revenue, we’ll start to sort of break them out for folks and give a little bit more color, but I think for us, what gives us encouragement is not only are these data partnerships getting longer term in nature, so the two we announced today are a five-year deal and a six-year deal, they’re becoming much more all-encompassing.

These are typically also including content relationships, services relationships, and they’re being discussed and negotiated and entered into at much more senior executive levels within our client organization, so we’re effectively moving out of selling into solely the marketing organization and moving into selling into both the marketing organization and the products and technology organization because of the strategic nature of these types of engagements. I think we find that particularly exciting. On enterprise, there’s a lot going well. Paul mentioned 20% growth in overall bookings, growth even faster than that in subscription bookings, reductions in churn and improvements in customer retention, so all the oars seem to be in the water in enterprise with some of those oars pushing the boat really, really fast, and the end result is what you see in the reported numbers.

Bernie McTernan: Understood. Then maybe just one other follow-up on Computer Vision deals. A key investor question we get, and I know it’s really hard to answer right now, is just how many companies are going to need their own AI generative models, and I think it’s moved from if it’s just foundational companies like OpenAI need them to, as you mentioned in your prepared remarks, now company-specific models, which is really interesting. Would love just to get maybe some context in terms of how your thinking on the subject has evolved over time and how you think it could play out. I know it’s a really tough question, but would just love any thoughts that you had.