Yahoo Finance Shutterstock, Inc. (NYSE:SSTK) Q1 2024 Earnings Call Transcript
Shutterstock, Inc. (NYSE:SSTK) Q1 2024 Earnings Call Transcript May 2, 2024
Shutterstock, Inc. misses on earnings expectations. Reported EPS is $0.447 EPS, expectations were $0.95. SSTK isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2024 Shutterstock Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Chris Suh, Investor Relations and Corporate Development. Please go ahead.
Chris Suh: Thanks, Alex. Good morning, everyone, and thank you for joining us for Shutterstock's first quarter 2024 earnings call. Joining us today is Paul Hennessy, Shutterstock's CEO, and Jarrod Yahes, Shutterstock's CFO. 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 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 gross margins and profitability, our long-term strategy and our performance targets including 2024 guidance and long range financial targets.
Actual results or trends could differ materially from our forecast. For more information, please refer to today's press release and the presentation material referencing our long range financial targets, which we have posted to our IR website. Please also refer to the reports we file 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 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: Thank you, Chris. Good morning, everyone, and thank you for joining us today. On our last earnings call, I laid out the long-term targets for Shutterstock 2027 with the commitment of reaching $1.2 billion of revenue and $350 million of EBITDA in 2027. And now, after another successful quarter and a great acquisition, we expect to accelerate our path to reaching that goal. Our business performed ahead of expectations this quarter and I'm pleased to report that we signed a definitive agreement to acquire Envato, a leading provider of digital creative assets and templates. As I'll explain in further detail later, this acquisition delivers to Shutterstock an exciting Trifecta, a new product that fills a critical gap, faster growing audiences and new content types.
But let's first turn to this quarter's results. Shutterstock delivered a strong first quarter with revenue of $214 million and EBITDA of $56 million, meaningfully exceeding our expectations. The composition of our business continues to evolve with rapid growth in our data distribution and services business, while our content business works to get back to growth. I'm excited to provide greater line of sight into our data distribution and services business, but first, let's take a moment to talk about what we're seeing in our content business. As a reminder, our content business includes a range of different asset types and global distribution channels. Our results and content in the first quarter were aligned to our expectations and characterized by the same trends we've been experiencing for the past year.
Demand from larger customers is growing and resilient, while demand from small and medium-sized customers who purchase from us online is muted. While we have not experienced an end-to-end recovery thus far, we are seeing leading indicators that are extremely encouraging and indicate a return to growth in the back half of the year even before adding on Envato's exciting products. These indicators include continued strength in top-of-funnel activity with total traffic up 18% year-on-year, proof that our efforts to drive SEO growth and additional investments in paid marketing are paying off. This strong top-of-funnel as well as product experimentation translated into better customer acquisition in Q1. In removing our free trial offering earlier this year, we eliminated low to no-intent shoppers from our business.
As a result, new and win-back customer orders grew 4% year-on-year, and serving higher intent customers has already begun to show in other health metrics of the business. For example, we're seeing more active customers who download, showcasing their engagement. One key recent new product launch is a generative AI subscription. Customers now have the ability to purchase credits to generate and download AI images directly within our ecosystem. Through an API, this product leverages the best available models in the market, including Google's imaging, OpenAI's DALL.E 3, and Amazon's Titan, and we can direct generations to a specific model based on our customers' use case. In the coming quarters, we plan to offer the full suite of generative asset types including image, video, audio, and 3D generative capabilities.
Lastly, we're making strong progress in bringing our generative 3D capabilities to market in partnership with Nvidia. Moving to data distribution and services, our revenue was up 90% in the quarter and made up almost 20% of total revenues, constituting a larger part of our overall business and well on our way to achieving our targets for Shutterstock 2027. Within data, it is now abundantly clear that emerging legislation and regulation in the EU and U.S. will drive demand for Shutterstock's ethically sourced, licensable datasets. There is real momentum towards accepting the reality that copyrighted data contains better metadata, and that retraining a model built on scrape data can ultimately be very costly with additional CPU costs and carries with it potential legal and brand issues.
Shutterstock is uniquely positioned to benefit from this trend towards leveraging ethically sourced, licensed dataset for training AI. With our trust framework solidly in place, we are now and continue to be the go-to destination for massive scale AI and ML multimodal model training data. We uniquely have a size and scale in video, audio, and 3D that nobody else can match. Now that many of the world's largest technology platforms have done the diligence and selected Shutterstock, we are benefiting from demand from companies that are following the course charted by these leaders in AI. On the supply side, to match the demand we are seeing for data, we are focused on growing our base of contributors and the depth and breadth and size of our library.
Our contributor base has increased by over 40% to 3.4 million in the past year alone, and our library growth is accelerating, growing 34% to almost 900 million assets in the last 12 months. We have never seen contributors in data grow this fast and we believe that the flywheel is spinning faster. Within distribution, our test and use cases are now behind us, and we have proven that the Giphy platform is poised for flight. We are aggressively hiring sales professionals and believe -- we believe we are well positioned to grow both Giphy's advertising business and to monetize its API connections to third parties. The business has been winning deals, most recently with Anheuser-Busch, Sony, PepsiCo and Universal Studios, and we are seeing AOV increase meaningfully from early test insertion orders averaging $50,000 to newer customers coming in at scale with $200,000 to $400,000 insertion orders.
Available inventory for sale also continues to grow with media served on Giphy growing at 19% this quarter. Lastly, within services, we continue to see growing demand for our cutting-edge global creative and production studio solutions. Many of the world's largest marketers are leveraging our full suite of services from creative strategy to post-production and beyond. As proof of our quality, we've recently been selected by a leading global consumer products company as the preferred vendor for all U.S. based commercial production. Much of our recent demand is driven by our immersive production solution, which leverages XR and 3D and enable the most creative, flexible, cost-effective and environmentally sustainable approach around, and it's all made possible through the powerful combination of studios and our TurboSquid 3D assets.
Switching gears, let's turn to Envato. As I mentioned at the top of the call, the Envato acquisition delivers a new product that fills a critical gap, expands into faster growth audiences, and further diversifies into new content types. I'll address each one of these in turn. First, the Envato acquisition fills a critical gap in Shutterstock's product offering with the addition of Envato Elements to our portfolio. Elements serves as a one-stop shop for fresh, diverse, and curated content that cuts across content types such as video, audio, graphics, fonts, code and web themes, templates and mockups. At $16.50 per month for unlimited consumption, Elements offers a highly compelling value proposition catering to the needs of creatives that fits perfectly between the packs we have today for episodic users and the high-priced premium subscribers we offer the entire Shutterstock library.
Second, this acquisition expands Shutterstock's reach within faster-growing, attractive audiences such as freelancers, influencers, small agencies and hobbyists, all of whom find great value in Elements' content's depth and breadth and unlimited consumption offering. And lastly, Envato further diversified Shutterstock's revenue into a broader range of content types with more than 80% of Elements content downloads attributable to video, audio, graphics and mockups. We are expanding our offerings to meet this need for multi-asset consumption, which helps us sustain a more durable content business with faster growth potential. With Envato, Shutterstock's revenue from video, audio, 3D, and other content types will increase from 35% to 45% as a percent of total content revenue.
The acquisition adds an extremely talented contributor community who have brought a diverse library of 6 million videos, 1 million audio clips, 500,000 design templates, 300,000 3D models, 200,000 graphics and fonts, and 10 million images, all of which have tremendous potential value for both our creative content customers and our data customers. Envato will immediately have a meaningful impact on the composition of Shutterstock's revenue base. Shutterstock's subscriber count will more than double to 1.15 million subscribers and subscription revenue as a percent of total content revenue will increase from 48% to 55%. Envato has successfully built a product that appeals to a highly retentive user base. 56% of Elements' subscriber base are annual subscribers who pay upfront and have higher retention rates than monthly subscribers.
We are beyond excited about this pending transaction and we expect to close in Q3 2024 when we will officially welcome the talented Envato team to Shutterstock. In conclusion, our mission, as ever, remains the same, to empower the world to tell their stories by bridging the gap between idea and execution and to connect customers to the content they need. Our execution against Shutterstock 2027 is ahead of schedule and we feel extremely well-positioned to deliver on our long-term targets. I'll now turn the call over to Jarrod who will walk through our Q1 results and updated full-year guidance for 2024.
Jarrod Yahes: Thank you, Paul. And good morning, everyone. Revenue was $214.3 million for the first quarter, exceeding our expectations. Content revenue was down 10%, in line with our expectations. As Paul discussed, we feel good about the progress we are seeing and expect to get back to growth this year, consistent with our commentary last quarter. Data distribution and services was up 90% in the first quarter to $40 million, driven by exceptionally strong growth in our data offering. The rapidly changing regulatory backdrop around AI, combined with the credibility and scale we now have, is resulting in a clear demand acceleration. We anticipate providing additional forward-looking growth indicators in data distribution and services in the second quarter.
As I review the P&L, please note that the line items are net of related depreciation and amortization, stock compensation, and other expense items necessary to reconcile to adjusted EBITDA. In the first quarter, we stepped on the gas with respect to sales and marketing at 25% of revenue compared to 22% in the first quarter of 2023. We made planned growth investments in branding spend and customer marketing across our businesses in the quarter and we expect the pace of marketing spend to continue throughout the year. Product development was 7% of revenue compared to 6% in the first quarter of 2023, reflecting continued investment in our product offering and ongoing integration of our acquisitions. We saw solid operating leverage in the quarter, particularly in G&A expenses.
G&A expenses were 10% of revenue compared to 12% in the first quarter of 2023. This is the third consecutive quarter with G&A leverage and Shutterstock is well set up to drive adjusted EBITDA as our business scales. Adjusted EBITDA was strong at $56 million with margins of 26.1%. Margins were impacted this quarter by the addition of Giphy and Backgrid as compared to the prior year, the heightened pace of marketing spend in the first quarter as well as $2 million of one-time costs associated with the acquisitions of Backgrid and Envato. Turning to our balance sheet, we had $72 million of cash at the end of the first quarter. In the quarter, we paid our annual performance bonus and closed on our acquisition of Backgrid for $20 million in cash.
At the time of this report, cash balances were back up to $90 million and cash flow generation remains strong. In terms of capital return, we paid out $11 million of dividends in the first quarter. We just increased dividends by another 10% in January to $0.30 per share. This is our fourth consecutive year of double-digit dividend increases. As is typical in the first quarter, we also paid $8 million to buy back stock from employees in respect of the taxes on the vesting of their equity awards, further reducing share count. I'd like to spend a few minutes providing additional details on Envato before turning to guidance. We believe the Envato acquisition is an incredibly positive strategic move for Shutterstock, consistent with our M&A strategy and historical track record.
We have acquired a world-class content business at an attractive purchase price that is both growing and highly profitable. As Paul discussed, the strategic merits speak for themselves, including product line extension into unlimited multi-asset subs, audience expansion into faster-growing audiences, and increased exposure to strategic content types like video and audio. We're also adding an extremely talented and valuable management team in Envato. In connection with the acquisition, we received a commitment for an unsecured $375 million credit facility provided by BofA, Citi, Wells Fargo and Citizens, consisting of $125 million term loan and a $250 million revolver. The cost of capital is low in the current rate environment, priced at 6.7%.
Access to low-cost and flexible capital is a testament to the robust cash flow generating business we have built and our future business prospects. We expect to have approximately $275 million drawn on the facility post the expected acquisition close in the third quarter. Expected leverage will be extremely low with net debt to pro forma combined adjusted EBITDA of just 0.7 times. Post close, we expect to have 100 million of unused revolver capacity to invest in the growth of our business, acquire additional companies, and return capital to shareholders. In line with our prior deals, this transaction is structured as a straightforward 100% cash purchase with no earnouts or other contingencies, allowing us to quickly integrate and focus on our plans for growth.
From a financial perspective, Envato is growth-accretive to our content business, growing revenues in line with the industry average of 5% to 7%. Consistent revenue growth is paired with strong profitability of 20% adjusted EBITDA margins, which we believe can go higher as the business scales over time. Envato adds meaningful revenue scale and profitability to Shutterstock, adding 20% to revenues and 15% to adjusted EBITDA on a full year basis. For the full year, we are raising our 2024 revenue guidance to 5.5% to 7% revenue growth based on our strong performance in the first quarter, combined with the Envato acquisition, which is expected to close in Q3. Data distribution and services is experiencing powerful growth and momentum and content is poised to improve consistently year-on-year throughout the course of the year with key data points indicating a turnaround.
Adjusted EBITDA guidance increases to $245 million to $248 million based on the revenue raise and including $6 million of one-time deal and integration costs we expect to incur. With our 2024 guidance updated for the Envato acquisition and that we are pacing well ahead of where we expected, we are pacing well ahead of where we expected against our Shutterstock 2027 long-range targets of $1.2 billion of revenue and $350 million of EBITDA. We expect to formally update our long-range targets with our fourth quarter results. In closing, we are extremely pleased with the quarter and the amazing demand we are seeing in data distribution and services. We believe our turnaround in content is underway and we are thrilled to get the Envato deal signed.
An exciting strategic roadmap lies ahead, and Shutterstock is extremely well positioned to execute on it. And with that, operator, we'll open the line for questions.
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