Denise Garcia - ICR Jonathan Oringer - Founder, Chairman and CEO Thilo Semmelbauer - President and COO Timothy E. Bixby - CFO.

Steven Shin - Morgan Stanley Lloyd Walmsley - Deutsche Bank Sachin Khattar - Jefferies Rohit Kulkarni - RBC Capital Markets Naved Khan - Cantor Fitzgerald Ralph Schackart - William Blair Blake Harper - Wunderlich Securities.

Good day, ladies and gentlemen, and welcome to the Q1 2014 Shutterstock, Inc. Earnings Conference Call. My name is Chris and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Denise Garcia. Please proceed..

Thank you. Good afternoon. Welcome to Shutterstock's first quarter 2014 earnings call. Joining me today to discuss our results are Jon Oringer, Founder, CEO, and Chairman; Thilo Semmelbauer, President and Chief Operating Officer; and Tim Bixby, CFO.

I would like to remind you that during this call, management may make forward-looking statements that are subject to risks and uncertainties including predictions, expectations, estimates and other information.

Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance.

Please refer to the reports and documents filed by us with the Securities and Exchange Commission [indiscernible] in our first quarter earnings release which is posted on the Investor Relations section of our site. [Audio gap] in the Risk Factors of the Company's Form 10-K filed with the U.S.

Securities and Exchange Commission on February 28, 2014 for a discussion of important risk factors that could cause actual results to differ materially from those discussed in forward-looking statements. We will refer to adjusted EBITDA, non-GAAP net income and free cash flow, which are non-GAAP financial measures.

You can find a reconciliation of these items to the most directly comparable GAAP financial [audio gap] Web-site. We believe that the use of these measures provides additional insight for investors.

However, these non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. The Company's first quarter financial results include the impact of 17 days of operations of WebDAM, which was acquired by Shutterstock effective as of as of March 14.

And now, I will turn the call over to Jon Oringer, Shutterstock's Founder, CEO and Chairman..

Thanks, Denise, and thank you all for joining us for our first quarter 2014 earnings call. On today's call, we will share key operating metrics and financial results, bring you up-to-date on our growth strategies including our investments in new products and technologies, and share updated financial expectations.

Then we'll open the call to your questions. I'm pleased to share that we had a very strong quarter and are off to a great start for the year. In our first quarter, paid downloads grew 33% annually, reaching a record 29.7 million.

Revenue per download was $2.45, a 7% increase as compared to $2.28 in the same quarter last year, driven primarily by continued rapid growth in both our enterprise business as well as in video footage, both of which are carrying a higher effective price per unit.

The growing volume of activity on both sides of our marketplace, customers and contributors, is reflected in our strong financial results which exceeded the high end of our outlook for both revenue and profitability.

For the first quarter, revenue grew 42% year-over-year to nearly $73 million, while adjusted EBITDA increased 20% as compared to the prior year to just over $14 million. I think it's helpful to reflect on Shutterstock's performance as compared to our original expectations as we prepared for our initial public offering two years ago.

Our expected growth for 2014 at that time was 20%, and with our updated guidance today, we currently expect 36% growth this year. We achieved our 2014 revenue goal from the time of the IPO nearly a year ahead of expectation.

During this period of rapid growth, Shutterstock maintained strong profitability, even as we have continued to invest in new products, expand internationally and lead the market in product innovation. It is not a coincidence. Our growth has been the result of a series of strategic investments that we've made in the business over several years.

We continue to seek out such investment opportunities as we lay the foundation for the years to come. Among the variety of investments we are making, growing our relationship with enterprise customers continues to be a key area of focus.

Revenue from enterprise customers continues to grow at a greater than 100% year-over-year rate, while large companies continue to embrace Offset, our recently launched premium image offering featuring some of the world's best photographers and artists.

To further extend our presence in the enterprise, this week we announced the partnership with Salesforce to make licensed imagery available inside the Salesforce ExactTarget Marketing Cloud, the world's largest [grab] (ph).

Through this integration, [indiscernible] can seamlessly access millions of Shutterstock images and use [indiscernible] by connecting a Shutterstock Enterprise account or by signing up for one.

This partnership underscores Shutterstock's [indiscernible] premier technology partner for market-leading platform with Salesforce and Facebook that recognizes high-quality imagery is the key towards customer success.

Of the many investments we have made in our enterprise strategy this quarter, the most notable was the acquisition of WebDAM, a leading provider of Web-based digital asset management tools. WebDAM provides marketing and creative teams with a cloud-based solution for managing, searching, distributing and collaborating on digital assets.

This includes stock and custom images, videos, creative files, documents and presentations. The company's offerings are particularly attractive to large enterprises which make up the majority of WebDAM client base.

The acquisition of WebDAM allows us to deepen our relationships with enterprise customers and to expand our addressable share of wallet to include both the content and the software that our customers need to do creative work.

And since the majority of WebDAM's revenue comes from annual or multi-year software-as-a-service commitment, WebDAM will strengthen our base of recurring, predictable high gross margin revenue. We plan to accelerate our investments there.

Like Skillfeed, the subscription-based marketplace for online training that we launched in 2013, WebDAM is another example of how we can leverage our existing customer relationships to step into multi-billion dollar adjacent market.

We will continue to increase the breadth of our offerings as we increase our penetration on the large and growing market for commercial digital imagery. So we're just getting started.

As a testament to the opportunity in front of us, I'm pleased to report that we saw continued momentum in the first quarter across all regions, with North America, Europe, Africa and Asia Pacific, all growing in excess of 40% annually.

We delivered this performance by executing on our three primary growth objectives, which are; one, increasing our penetration around the world; two, investing in emerging content types, particularly video footage; and three, bringing Shutterstock to large enterprises through our expanding direct sales team.

We are making strong progress in all three areas. Our increased penetration around the world has been driven by strong marketing economics, which continues to be healthy and stable, even as we scaled, and which are enhanced by our culture of testing and optimization.

Our investments in video footage and enterprises sales continue to pay off as well, with both businesses doubling year-over-year in the first quarter. It's reassuring to note that our expanding sales organization is scaling efficiently, with sales revenue growing significantly faster than sales headcount.

Overall, I'm very pleased with our performance. As we've done historically, you should expect us to continue to invest confidently to capture new market opportunities and to work towards realizing our full potential. [Indiscernible] investment long-term and new innovation has been critical to our success.

We are excited about the progress we are making and believe that we are laying a strong foundation for the years to come. And now, I'll turn the call over to Thilo Semmelbauer, Shutterstock's President and Chief Operating Officer, who will provide further detail on our performance in the quarter..

Thanks Jon. We continue to focus on growing both sides of our marketplace, customers and contributors, which reinforce and drive each other, fuelling our growth.

As we've discussed, we have a unique and profitable business model that's driven by a powerful network effect, the more contributors upload new content, the more new customers we attract and the more images they download, which in turn attracts more contributors. This creates a flywheel effect with considerable competitive barriers.

Here are some specifics from Q1 to illustrate the point. Our contributors are more active and loyal than ever before. We added 3.2 million images to our collection in Q1, 70% more than we added in Q1 last year. Our collection is growing faster than ever and we ended the quarter with 35.4 million images, the largest library of its kind.

We've also become as obsessive about measuring contributor satisfaction as we have been with customer satisfaction. We monitor everything from contributor payout to the speed of our upload process, and as a result, submissions are an all-time high.

On the customer side, our marketing activities drove the record number of new customer conversions in Q1, while our costs per acquired customer were the same as the year ago. In other words, we successfully increased marketing spend and held our efficiency. Our customers also downloaded more images than ever before, just under 30 million in Q1.

That's nearly four images per second. We continue to be the volume leader in our space. For large enterprise customers, revenue in Q1 continued to double year-over-year, which is a strong testament to the offering and to the team we've put in place around the world.

As we've mentioned, large enterprise customers typically require different licensing, account features and indemnification terms, which leads to higher revenue per download. This also translates into higher payouts to contributors, which is something our contributors appreciate and also adds to our strong network effect.

We are also pleased with our efficiency in this area with sales headcount growth significantly lower than our enterprise revenue growth. As you can see across customers and contributors, our global network effects are healthy and fueling our growth.

In addition, we're pleased to see local network effects accelerate in many places around the world, including countries in Asia, the Middle East, South America and Europe. The local network effects are driven by a combination of things. First, content acquisition.

We've been actively visiting and sourcing content from contributors around the world and customers are noticing the increase in relevant local content, including local places, people, food and culturally specific subjects. Also, product improvements. Here, our velocity is increasing.

In Q1, we tested three times as many product improvements as we did in Q1 last year, and many of these tests are related to search and usability in different languages. Not every test is a winner but the cumulative effect of our effort creates a better user experience and happy customers around the world.

Some tests can have substantial impact, as with the recent test with one of our 20 languages where we made a 10% difference in customer conversion. Our strategy here is to continue to delve down on product and technology investments to further differentiate our offering. Finally, our local marketing efforts continue to expand.

In Q1, we spent more marketing dollars than ever before in new markets. And as I mentioned, we continue to see strong efficiencies globally. As an example, in Q1 roughly 70% of our brand marketing was outside the U.S.

This type of exposure to our brand around the world drives interest as well as conversion and contributes to our strong marketing efficiencies. The network effect is also at work in our footage business, where revenue in Q1 continued to double year-over-year.

Our footage collection recently surpassed 1.7 million clips, also doubling in the last 15 months. We believe our footage collection is now the best of its kind, and given our investment in technology and storage, we're well-positioned for ultra-HD, also known as 4K content, which launched in Q4 and is starting to grow.

The higher price point for ultra-HD is also great for contributors. Overall, we're pleased that we drove more than 42% revenue growth in Q1 and we're excited about the opportunities ahead of us. I'd now like to hand it over to Tim Bixby, our CFO, who will share financial highlights..

Great. Thanks Thilo. I'll give a bit more color around our results and expectations and then we'll turn to questions. We will also be sharing our financial expectations for the second quarter as well as an updated view of our expectations for the full year. Quick review.

The number of paid downloads we delivered in the quarter was 29.7 million and this was up 33% from 22.4 million in the first quarter a year ago, while revenue was $72.8 million, an increase of 42%, compared to the prior year.

Revenue per download increased 7% to $2.45 as compared to the prior year, and the increase in revenue per download in the quarter was driven primarily by the growing proportion of our revenue from enterprise licensing and video footage downloads.

Average revenue per download continues to increase due to the shift in our product mix towards higher effective priced products like video footage and enterprise licensing. We have not increased pricing on any of our product lines for several years.

Adjusted EBITDA increased 20% to $14.2 million for the quarter as compared to $11.8 million in the first quarter of 2013, primarily as a result of significant revenue growth, offset somewhat by increased marketing investment as well as personnel growth as we continue to expand our sales, R&D and content teams.

GAAP net income was $4.9 million or $0.14 per share as compared to $5.5 million or $0.17 per share in the first quarter a year ago. Non-GAAP net income in the first quarter was $7.5 million or $0.20 per share as compared to $6.1 million or $0.18 per share in the first quarter of 2013.

As a reminder, non-GAAP net income excludes the after-tax impact of non-cash stock-based compensation expense and one-time tax impacts. Our effective tax rate in the quarter was 46%. In the prior year it was 44%.

It's important to note that this rate is slightly higher in the first quarter versus the full year actual rate we experienced in 2013 and also as compared to our current estimated rate for 2014, and this is due to discrete state tax adjustments that only affect the first quarter.

We continue to expect the full year tax rate in 2014 of approximately 40%, similar to that we saw in 2013. Shifting to operating expenses for the first quarter, our gross margin was 60% as compared to 61% a year ago, and this reflects somewhat higher investment in content, customer support and our network and hosting infrastructure.

It's important to note that contributor royalties, which make up approximately 28% of revenue and fall within the cost of goods line before gross margin, have remained consistent over many quarters.

Sales and marketing expense was $19.3 million or 26% of revenue, in line with our expectations, and we continue to find cost-effective ways to increase our marketing spend, all while maintaining our customer acquisition economics.

As we've noted for several quarters, we intend to reinvest incremental margin generated from faster revenue growth into additional sales and marketing efforts to maintain or even hopefully increase that growth rate where possible.

The result of this strategy has been strengthening top line growth on a larger revenue base over the past several quarters. It is also important to note that we continue to expect approximately 100% of the revenue from existing customers in 2013 to recur again in 2014, as we have for several years.

This trend is also true of both our video footage and enterprise customers. Recurring purchase behavior is fairly consistent across all of our product offerings.

Product development expense was $7.8 million in the quarter or 11% of revenue, up from about 9% of revenue in the prior year, and again in line with our expectations given on our last quarterly call, as we continue to invest in this area. G&A expense was $7.5 million or about 10% of revenue, also in line with our expectations.

Capital expenditures was approximately $10.9 million in the first quarter, of which $7.6 million was really carryover expense that fell over the end of the year from 2013 into 2014, related to our home office relocation project. $3.3 million was related to computer server and networking equipment to support customer and content growth.

We expect our core operations to contribute an incremental $1 million of EBITDA over the course of the rest of the year as compared to our prior guidance. We are also excited about the acquisition of WebDAM, which is part of our strategy to continue to grow our presence in the enterprise.

WebDAM's annual and multi-year software-as-a-service contracts result in upfront payments from customers that we then recognize monthly over the term of a customer agreement. As a result, WebDAM's cash flow significantly exceeds its GAAP EBITDA contribution.

This dynamic combined with a very high customer retention rate has enabled WebDAM to bootstrap its strong growth with no outside investment prior to our acquisition of the company. Given WebDAM's extremely profitable unit economics and minimal cash requirements to date, we are encouraged by this opportunity to invest further in this growing business.

We anticipate that WebDAM will contribute roughly single-digit millions of revenue in 2014, growing rapidly versus the prior year, and that it will also result in approximately $3 million of incremental GAAP EBITDA investment, with a substantially smaller impact on cash flow.

We're optimistic about the contribution that this investment can deliver in the years to come. Now turning to headcount, we ended the quarter overall with a total of 407 employees worldwide. That's up from 345 at the end of 2013.

Our cash balance at the end of the quarter was approximately $213 million of cash, cash equivalents and short-term investments, and we generated $15.6 million of cash from operations during the quarter. And now I'd like to give a little detail on our financial expectations for the second quarter as well as an update for the full year of 2014.

For the second quarter, we expect revenue of $76 million to $78 million and adjusted EBITDA of between $14 million and $15 million. We also expect stock-based compensation expense of approximately $6 million and capital expenditures of approximately $3 million.

For the full year of 2014, we are increasing our revenue expectation for the full year by $10 million to between $315 million and $320 million, and this revenue total for the year does include some revenue contribution from the WebDAM operations totaling in the single-digit millions of dollars.

We expect adjusted EBITDA for the full year of between $66 million and $68 million, and this guidance reflects an increase of $1 million of EBITDA contribution from our core operations compared to our prior guidance, less the $3 million incremental investment related to the WebDAM acquisition.

We also expect capital expenditures of approximately $20 million during the course of the year and this includes the $7.6 million that carried over from our home office relocation project. Net new CapEx outside of that relocation project during the course of 2014 is expected to be approximately $12 million.

Also for the full year, we expect stock-based compensation expense of approximately $22 million. Overall, we're off to a great start for the year. Financial and operational metrics are on track and our prior investments are continuing to pay off, accelerating growth and creating strong competitive barriers.

We'd now like to turn the call back over to the operator, and if the operator can rejoin the call with Q&A instructions, we'll be happy to take questions..

(Operator Instructions) We have our first question coming in from the line of Steven Shin with Morgan Stanley..

[Audio gap] doubled in Q1 from the kind of growth rates you guys saw through 2013, so it doesn't appear that growth is slowing.

Can you talk about how the acquisition of WebDAM could impact growth rates in the second half of the year or how much overlap is there between the WebDAM customer base and Shutterstock's customer base?.

In terms of the guidance, WebDAM is relatively small impact on the year. It was in the single-digit millions. I'm not disclosing or breaking it out specifically but it is captured in the guidance and gives us a little bit of benefit.

But the bulk of the increase in our revenue guidance is clearly driven by our confidence in the outlook as well as the strong performance in Q1..

This is Thilo. Just on the customer base overlap, obviously it's early days for WebDAM.

As we've been investing in our enterprise business and building out our sales force, we're very excited with the timing being right for us to leverage that sales team and our existing relationships to also help offer the WebDAM solution, and this is something the WebDAM provides a solution to a problem that our customers have been telling us about for many years.

So we're excited to set up the synergies there to come..

So just as a follow up, so it doesn't seem like you're contemplating much impact of like increased penetration because of the WebDAM platform in terms of how you're thinking about the shape of the overall year for the enterprise business, you're just including the SaaS portion of the revenue?.

That's right. Our growth rate in the enterprise overall has been very strong, more than doubling year on year.

We're not anticipating at this point – the acquisition just closed at the very end of the first quarter, so we're not baking in any assumption of even more or higher growth in the enterprise, but there's certainly over the longer term an opportunity. It's a key part of the overall enterprise strategy..

And just to clarify, in the short-term we probably see more opportunities that help WebDAM grow by introducing the offering to Shutterstock customers than the opposite, if that helps answer the question..

Your next question comes from the line of Lloyd Walmsley with Deutsche Bank. Please proceed..

On sales and marketing, it seems to be creeping up a little bit as a percent of revenue.

Can you talk about what's going on there, is that building out the enterprise sales force, and should we expect that to continue at the 1Q level as a percent of revenue? And then as we look at the WebDAM contribution, I don't know if you can narrow the range a little bit between 1 million and 9 million, it's a bit of a broad range, and where should be expect the bulk of the expense to fall on that one?.

So, first of all on the sales and marketing line, so yes, we've ticked that up a little bit as a percent of revenue. There is really two primary components there.

You've got expanding the enterprise sales force driving the sales proportion, as well as on the marketing side, working marketing spend, brand marketing and then some personnel costs that flows into marketing.

On the enterprise side, we've been growing it quite rapidly, faster than the overall growth rate of the Company, but if you isolate enterprise sales growth and the enterprises sales, headcount adds and the costs that come with them, we've actually been growing the top line at roughly double the rate of the headcount adds. So, there is a build-up.

As you hire new reps, it takes them a while to ramp up, but the unit economics are as strong in that business as they are in our core business. We are seeing leverage in the marketing line in that where we're maintaining our marketing ROI and we're kind of reinvesting, testing new channels and upping that spend a little bit.

We're also able to invest in newer pieces of business that are not yet at the growth rates of the overall business, so things like Offset and Skillfeed and others that might come in the future, we're investing a little bit in those as well, and so we'll look to see the benefits over the next few quarters..

And I guess just as a follow-up, it seems like with the top line reaccelerating slightly, a lot of that I'm sure is driven by enterprise and video but even the core maybe accelerating a little bit, wondering if that's the case?.

Yes, I mean all the pieces of the business are growing pretty strong, all the regions are 40% plus. We're seeing all product lines going pretty steadily.

I think if you isolate the core, which is obviously a very large revenue base, it's growing at a slightly lower rate than the overall Company, and then you've got the newer pieces growing in sort of double the overall rates. So the mixes probably get to the 40% to 42% growth rate..

Your next question comes from the line of Brian Fitzgerald with Jefferies..

This is Sachin filling in for Brian. Couple of questions.

The first is, can you guys give us some more details around WebDAM acquisition in terms of sort of essentially what is it and how will it benefit the enterprise customer, what solution is it providing that it didn't provide before, that you didn't have before? And then secondly, since Getty launched their sort of free image product, we've been getting a lot of questions around that and what it means for Shutterstock, I mean do you guys have any thoughts around how competitive that is for you?.

This is Thilo. I'll take the first piece on WebDAM. Just so as a refresher, WebDAM is a cloud-based platform to allow our creative and marketing teams to manage, collaborate on and publish digital assets.

So imagine a company that's iterating on their brand assets, they want to distribute those out to other parts of the organization, they can use WebDAM to sort of work on those assets and then publish them out and maintain brand control. The great thing is that many of those assets are stock images and videos.

And so now, obviously, we've been selling stock images and videos to the enterprise for long time, now we can also offer the enterprise tool to help them manage their assets and collaborate on those assets.

So it's highly synergistic and it's something actually our enterprise customers have been asking us for many years, 'Shutterstock, can you help us with this problem that we have internally?'. So, hopefully that explains it at a high level.

Jon?.

I could talk about Getty and their product. We sell images to customers that are selling other things. So we sell commercially released images to businesses. Getty is giving away images for free for non-commercial uses. So these are blogs that are not making any money with their blog.

Getty reserves the right to advertise in these [indiscernible] [sites] (ph) and also collect data on the user side that are visiting these blogs. These are not people that would buy images before. And so, we're going to concentrate on what we've been doing, which is selling images to businesses..

Just to add to Jon's point, when we look at our marketing metrics and our retention metrics, we're very pleased with our Q1 results, we don't see anything negative, our acquisition costs are in line on much higher marketing spend, our retention is solid.

So we haven't seen anything from what we can tell that changes the picture at all, kind of a non-issue..

The next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed..

This is Rohit Kulkarni. One more on sales and marketing, since that seems to be a very important tray.

Can you talk about how you are approaching the incremental dollars and how you think about allocating them towards your core products versus all the new seeds that you've sown over the last 12 to 18 months, Offset, Skillfeed, enterprise, video, and especially around do you think that some of these products are – these potential revenue streams could have significantly higher lifetime value for those customers, is that one of the reasons why you may have decided to push the pedal on marketing spend because you could probably have a slightly higher acquisition cost as well?.

I think the question – we were having a little trouble hearing you – is around how we allocate and think about our marketing dollars across our lines of business. So like I said, all-in, if you look at marketing as a whole and our conversions across our various properties, our marketing efficiency is sort of consistent with what we have.

Now, if you take an area like footage or Offset where we have a much higher purchase price of revenue per download or image, we might spend more to bring in a customer in that area versus another area where the purchase price is lower and we're going to spend less.

It's like, in aggregate, if you look at it as a whole, the efficiencies are very consistent across a greater base of spend..

Okay.

And also a question on essentially the payout ratio or the payout to contributors, as the business mix shifts towards as you call it more premium priced media, how should we think about that, as in is that from a contributor standpoint is it more important from an absolute dollar payout or is there still a ratio that needs to be tweaked around or perhaps go higher or lower?.

In terms of how we pay our contributors, we have structured the payout rates and structured so that it's roughly a comparable percent of revenue, regardless of what the price point is. So on a subscription, it's a fixed dollar amount obviously, because there is no specific revenue.

On the other plans, where there's a specific revenue, we apply revenue, a percentage payout rate, and overall across the Company, it's roughly 28% of revenue and it's been quite consistent over time.

So, as the revenue shifts across products, we don't see – we see very little change at all in the overall revenue – royalty made as a percentage of revenue..

Okay. And one last thing, then I'll get back into the queue.

What are the unique mobile use cases or what do you see this business doing around mobile media and essentially consumption of media on mobile and how is the conversation evolving around your customers?.

Yes, the mobile is important to us just like the desktop version, but mobile we support all of the iPad, iPhone type platforms. We have an app on both Android and iOS. We also have response in Web-site where users can – mobile Web-site on mobile. But also we find that people are using the Web-site in different ways with mobile.

So they could share albums and photos and stuff like that in different ways from the iPad app..

I think there's another important distinction to think about also, is that our customers our businesses and they have a certain workflow.

So, during the week they might be sitting at their desk with a sophisticated large monitor setup, but at night around the weekends, they might be heavily mobile and they want to do a search and discovery on any device. And so we need to be kind of designed around that workflow.

It's very different from how consumers are typically moving in large proportion what they're doing through mobile. So we think about that. Then the other piece is on the contributor side. Contributors want real-time information.

They want to know what's going on, what's being downloaded, how much they are earning, and so having that mobile app in their hand telling them about earnings is super exciting. So it's another area where we spend a lot of time and focus..

Your next question comes from the line of Youssef Squali with Cantor Fitzgerald. Please proceed..

This is actually Naved Khan for Youssef. Just a couple of questions. So just going back to WebDAM, I understand it's going to be EBITDA negative for this year, but when do you actually expect it to become breakeven or even positive for the business? And then I have a follow up or two..

So we're not giving multi-year guidance at this point for either the Shutterstock business or the WebDAM business.

I think the important – probably the way to think about it is, cash flow characteristics are very strong, so customers are paying upfront and WebDAM was able to kind of build and grow its operations cash flow positive, kind of bootstrapping or stepping as they go.

So, our expectation is that we'll be able to continue and hopefully accelerate their growth rate. Relative to the overall size of Shutterstock, it's relatively small, but that's how we're looking at the next year..

Okay. And then you spoke, I think Jon spoke about the agreement with Salesforce.

Can you talk a little bit about or any kind of sort of color around the size or the scale of how big this could potentially be? And then can you also touch upon where you might be in terms of striking a distribution deal as you did with Facebook in terms of other publishers?.

This is Thilo. I'll jump in on this one. I mean we're thrilled about the partnership with Salesforce. Obviously it's just rolling out, so it's early days, but there are few platforms that have the kind of reach in the enterprise that Salesforce has.

And in terms of what value it provides, obviously we'll be making it easier for marketing teams in these large enterprises to create and publish content or the social content. If you step back from this particular deal, we have obviously Facebook [indiscernible] and dozens of other partnerships.

This is all a strategy around getting our digital assets close to the customer. In aggregate, we're really excited that this is a new and growing part of the business with lots of stuff in the pipeline..

And in terms of economics, I mean should we just assume it's kind of similar to what you might have with Facebook and others or is this any different?.

I would say that Facebook is somewhat unique, in that – actually Facebook is picking up the [tab] (ph) and paying licensing fee to Shutterstock. That's not typical. Usually it's the customer or the end-user who is paying the licensing fees, so that's more common.

But in terms of activity and licensing and flow and potential, it does have similar characteristics. It's really more about taking Shutterstock to users. There was a time when without this strategy, people had to come to Shutterstock.com and that was the only way they could license. Over time, we want Shutterstock to be everywhere.

Users can come to Shutterstock, they can go to dozens of other platforms where they are already conducting business, and we'll have our imagery available there and we want to continue to expand that..

It's helpful. And then a final question for me.

Can you talk a little bit about the M&A pipeline, where do you see more opportunities, if it's on the technology side or on the content side?.

This is Thilo, I'll just jump in. I think broadly speaking, we're constantly looking at opportunities, it's opportunistic. We think one of the strength of the Company is, we have this combination of sort of a healthy growing core business coupled with fast growing new businesses.

We've started a few ourselves and now over the last five years we've made two acquisitions, one was Bigstock 4.5 years ago, we're excited about adding WebDAM and we'll be on the lookout for other opportunities that fit well strategically..

Your next question comes from the line of Ralph Schackart with William Blair..

Two questions.

First the investment and the cost of revenue line, just curious if this is sort of a one-time event that you would expect to get leverage on going forward or should we think about this as sort of a new base level for cost of revenue which would sort of grow going forward?.

I would think of it more like periodically we have step changes where we – with volume and technology requirements we have to kind of step up a little bit faster than revenue growth, but it's not something that I would expect to be sort of consistent and continuous over time.

So we might see nice scaling over the coming quarters where it stays within the range that you've seen over the last couple of years, but periodically we might have to bump it up a little bit, but 60% to 62% is kind of our target range. You should expect it to fall within that range..

Just one more if I could, on Facebook, I know it's tough for you to answer a lot of specific questions, but just wondering perhaps if you could sort of give us a sense if there's any Facebook revenue contribution flowing through your model today, and maybe sort of in a baseball inning analogy, sort of where you are in the opportunity with Facebook?.

So it's up and running and live and generating revenue and has been for several months now. In terms of, let's see, the baseball inning, I would say it's bottom of the first, is probably the best estimate right now.

Facebook has big ambitions of where this platform can go and our hope is that we'll continue to be along for the ride, we're the sole image provider in that platform, and I think things are going quite well..

You have another question coming from the line of Blake Harper with Wunderlich Securities. Please proceed..

So I had two questions.

First, Jon, in your remarks you had talked about the size of the WebDAM market being several billion dollars for the enterprise there, and is there any other way that you can help us think about that to narrow it down to a more specific number or is there other metrics such as the number of potential customers or average size of the subscription package that you can share that can help us put some framework around the size of that market for WebDAM?.

So WebDAM does allows big, big agencies to manage all their assets, and I don't know if any of you guys could give a number, multi-billion is where we're thinking..

Yes, it's a component of a bigger market that's being designed. If you look at the sort of content management, comp stores collaboration, project management space, in the aggregate $30 billion. Obviously WebDAM is only addressing a piece of that. If it's 10% of that, it's $3 billion.

We don't know if that's exactly right but it's multi-billion and it's sort of an exciting adjacency for us where we're just getting started..

Okay thanks.

And then, one question for Tim, you had talked about the level of or the reinvestment that you wanted to do to drive growth, and you may have mentioned this but I just wanted to see if you had it, was there a specific number that you're targeting as far as EBITDA margins that you would invest over or is it more just flexible depending on how much growth you can drive as far as the investments you want to make?.

I mean it's definitely opportunistic, in that when we're seeing ROI on investment stay steady and strong and driving higher growth rates, we're going to continue to ramp it up.

But we do kind of set ground rules, sort of guardrails in terms of the range, and what you've seen for several quarters in a row is sort of 20% to 25% as an adjusted EBITDA range over the course of the year. So Q1 tends to be a little tighter than the full year. We saw that last year and I think even the year before, sort of a seasonal dynamic.

But over the course of the year and for the full year, 20% to 25% is the range that we think is very strong, yet enables us to invest enough to keep the top line growth at these rates or hopefully even more successful..

Alright. So, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect and everyone have a great day..