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

Lloyd Walmsley - Deutsche Bank Brian Fitzgerald - Jeffries & Co. Youssef Squali - Cantor Fitzgerald Ralph Schackart - William Blair Rohit Kulkarni - RBC Capital Markets Blake Harper - Wunderlich Securities.

Good day, ladies and gentlemen, and welcome to the Second Quarter Shutterstock, Incorporated Earnings Conference Call. My name is Denis and I will be the 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 turn the conference over to Denise Garcia, Investor Relations. Please proceed..

Thank you. Good afternoon. Welcome to Shutterstock's second 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.

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 including the section entitled Risk Factors in 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 measures in our second quarter earnings release which is posted within the Investor Relations section of our website. 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.

Please note that the company's second quarter financial results include for the first time the impact of a full quarter of operations of WebDAM, which was acquired by Shutterstock effective as of as of March 14th. 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 second 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. We had a very strong quarter and continue to execute well against our strategic growth initiatives. In the second quarter, paid downloads grew 30% annually, reaching a record 31.5 million downloads.

Revenue per download was $2.52, an 8% increase as compared to $2.33 in the same quarter last year, driven primarily by rapid growth of enterprise licensing as well as continued strong growth in video licensing, both of which carry a higher effective price per unit.

For the second quarter, revenue grew 41% year-over-year to just over $80 million, while our adjusted EBITDA increased 25% as compared to the prior year to $16.8 million or 21% of revenue. We continued to be focused on our three primary growth opportunities.

Greater global penetration, emerging content types and enterprise sales, I will discuss each in turn. Our investments in localizations within key territories are paying off as we focus on greater global penetration.

In territories where we have invested in local language search capabilities, keeping our collection of local content and develop a local approach to marketing, growth rates have strengthened. Global expansion continues to be a significant growth opportunity for us.

In addition to strengthening our focus in key geographies, we also continue to increase our focus on emerging content types including video footage and more recently music. Given the continuing strong growth in our video footage business, we were excited to launch a music licensing offering this quarter.

It’s typical for video customers to often use a licensed music whether a soundtrack, background music or sound effects to complement their video projects. With the launch of this category, we can now offer a one-stop shopping experience and extend our relationship with video customers at minimal additional cost.

Shutterstock Music already has more than 60,000 music tracks available for commercial licensing and we are pleased with the early results. Music is a large incremental market for Shutterstock.

Our focus is not on streaming music to customers -- our focus is not on streaming music to consumers or negotiating multimillion dollar of licensing agreements with name brand artists, rather we are focused on meeting the needs of million of businesses who are increasing using video in their communication.

Our goal is to become a leading provider of license music as we have done with images and video. Finally, our enterprise sales efforts continue to perform extremely well. We continue to grow our relationships with agencies, media organizations and large enterprises by adapting our core offering to their needs.

Through this approach we are regularly transforming customers who were sending a few thousand dollars per year with us just a year or two ago to spending tens of thousands or even hundreds of thousands dollars with us per year.

Though already a significant portion of our business, enterprise sales represents a very large opportunity, where we are still in the early stages. We are pleased to report that our revenue in this area doubled in Q2 versus the prior year.

And now, I will 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. In Q2, we continue to focus aggressively on both sides of our marketplace, customers and contributors which reinforce and drive each other fueling our growth. Our contributor base is more active and more loyal than ever before. We added 3.4 million images to our collection in Q2, 60% more than we added in Q2 last year.

Our collection is growing more quickly than ever and we ended the quarter with 38.8 million images, the largest and freshest library of its kind. We also added more new contributors in Q2 than in any prior quarter, with over 64,000 improved and active contributors from around the world and a 24x7 processing operation to vet every image.

We are well poised to scale the supply side of our marketplace for years to come. On the customer side, our marketing activities drove a record number of new customer conversions in Q2, while our costs per acquired customer were even better than a year ago. In other words, we continue to increase marketing spend, while remaining efficient.

Revenue growth has accelerated in a number of key markets where we have been applying special focus. I will share data on a few of these comparing the Q2 growth last year, so 2013 versus 2012 to the Q2 growth this year, 2014 versus 2013. So revenue growth in Japan accelerated from 18% to 32% year-over-year. The U.K.

accelerated from 35% to 52% growth year-over-year. Germany accelerated from 40% to 52% growth year-over-year. These examples illustrate how our activities to improve localization, cross marketing sales, content and product are paying off.

Globally our customers downloaded more images than ever before in the second quarter, 31.5 million, that's four images per second. We continue to extend our leadership in delivering what we believe to be more paid downloads than any other player in the commercial imagery market.

As Jon mentioned our enterprise business continued to perform very well in Q2, doubling revenue year-over-year. Some historical perspective on what we've accomplished here. Three years ago we had zero customers pay us more than $100,000 per year. Today, we have over 20. Three years ago we had less than 150 customers paying us more than $10,000 per year.

Today, we have more than 500, spending more than $10,000 a year with us. In Q2, we added sales and operational staff in multiple markets and expanded distribution through reseller in a number of other markets.

And offset our premium collection is generating interest among agencies and enterprises which allows us to deepen our relationships and meet more of their needs. Also during the quarter, our video footage business continued to grow rapidly and efficiently.

Our footage collection recently surpassed 1.9 million clips with 70% more content than one year ago. As we invest in new asset types like video, we benefit from being able to leverage the large existing base of image customers we have built over 11 years.

In our core business, Shutterstock's first offering, we found that for every new customer that comes through a paid marketing channel, we typically get two new customers from free channels. This is a great ratio. But for footage, it's even better.

For every new footage customer that comes through a paid marketing channel, we get four new customers from free channels. It’s a very efficient model and bodes well for other new asset types including music. Overall, we are very pleased with our trajectory as we continue to scale while successfully expanding into video and now music.

The opportunities ahead are significant and exciting. I would now like to hand it over to Tim Bixby, our CFO, who will share financial highlights. .

Great. Thanks, Thilo. I will give a bit more color on our results and our expectations and give updated and increased guidance for the full year and then we will turn to questions. For a quick review, revenue in the second quarter was $80.2 million which was an increase of 41% compared to the same quarter in the prior year.

If we look at the breakdown of revenue, the number of paid downloads we delivered in the quarter was 31.5 million, up 30% from 24.3 million a year ago. Revenue per download increased 8% annually to $2.52 as compared to prior year.

Average revenue per download continues to increase due to the shift in our product mix toward effectively -- effective price products including video footage and enterprise licensing. We have not increased the prices of any of our core product lines for several years.

Revenue growth rates continued to be higher for enterprise and video footage licensing as we have noted. As a result, enterprise revenue is now approximately 18% of total company revenue, while video footage licensing now makes up approximately 7% of total revenue. Now shifting to the bottom line.

Adjusted EBITDA increased 25% to $16.8 million for the quarter as compared to $13.4 million in the second quarter of 2013. Our EBITDA -- our adjusted EBITDA as a percent of revenue was 21%.

And we look out to the second half of the year we expect to see our typical seasonal pattern of increased investment in Q3 followed by above average EBITDA margins in the fourth quarter with increased full year EBITDA guidance overall.

GAAP net income in the quarter was $4.8 million or $0.14 per share in the second quarter as compared to $6.9 million or $0.20 per share in the second quarter of 2013. Non-GAAP net income in the second quarter was $9 million or $0.25 per share as compared to $7.8 million or $0.23 per share in the second quarter of 2013.

As a reminder, non-GAAP net income excludes the after tax impact of non-cash stock-based compensation expense. Our effective tax rate in the quarter was 42% as compared to prior year when it was 37%.

And while there are quarterly fluctuations in our effective tax rate due primarily to the timing of stock option exercises, we continue to expect the full year tax rate in 2014 of approximately 40%, similar to 2013. Shifting now to operating expenses for the second quarter, our gross margin was 60% in line with the first quarter.

It's important to note that contributor royalties, which make up approximately 28% of revenue, have remained consistent as a percent of revenue for many quarters.

Sales and marketing expense was $20.5 million in the quarter or 25.5% of revenue, slightly better than our expectations as we continue to leverage our previous investments and drive sales in new product adoption.

Product development expense was $9.3 million in the quarter, approximately 12% of revenue, while G&A expense was $10 million roughly the same percentage of revenue, both in line with our expectations.

Capital expenditures during the second quarter were approximately $3.9 million and this is related primarily to computer server and networking equipment to support our customer and content library growth. Turning now to headcount. Overall, we ended the quarter with a total of 449 employees worldwide, and this is up from 345 at year-end 2013.

If we add in the headcount at WebDAM, which was part of our operations for our full quarter for the first time, total headcount now stands at 478. Going forward, we will report consolidated total company headcount including WebDAM from here of.

Our cash balance at the quarter-end was up to approximately $236 million of cash, cash equivalents and short-term investments, and we also generated approximately $21.2 million of cash from operations during the quarter.

I would now like to highlight our updated financial expectations for the first time for the third quarter and increased guidance for the full year of 2014. For the third quarter, we expect revenue of between $81 million and $83 million and adjusted EBITDA of between $15.5 and $16.5 million.

We also expect stock-based compensation expense of approximately $7 million and capital expenditures of approximately $4 million. We are increasing our revenue expectation for the full year to $323 million to $327 million and $320 million. And we are increasing our expected adjusted EBITDA for the full year to between $68 million and $69.5 million.

For the full year, we expect a total capital expenditure of approximately $20 million, of which $5 million remains to be spent in the second half of the year. And for the full year, we expect stock-based compensation expense of approximately $23 million.

In summary, we are real pleased with the progress we have made across all areas of our business, especially our key growth initiatives including global expansion, new content types and enterprise sales. With continued strong execution and a great foundation and team, we are really energized by the opportunities ahead of us.

And now, I will turn the call back to Jon. .

Thanks, Tim. You may have seen that earlier today we issued a press release announcing Thilo's plan to step back from his day-to-day operating role at the end of this year. When Thilo joined in 2010, we were a private company, with fewer than 100 employees in one office.

Thilo helped to structure our operations, building executive management team and prepare the company to scale. We are now a team of nearly 500 around the world with strong senior leadership and momentum.

Given the solid foundation that we have built and the years of dedicated service that Thilo has given to the company, I support him in his decision to take some time for himself.

Even as we will miss having Thilo as part of the team next year, I am extremely confident that he and I have put the right team and organizational structure in place to continue to succeed for years to come. We have been operating as a tight-knit Executive Team for many years, with Thilo and me working side-by-side.

Over time, we have recruited and developed senior leaders across each of our business areas including Chris Hoerenz, who leads our core E-Commerce business and Nick Flynn, who leads our Enterprise Sales business and others.

Though he won't be stepping down until the end of the year, I would like to take this opportunity and thank Thilo for helping to set Shutterstock on such a strong footing and for his many contributions..

Thanks, Jon. Since early 2010, I poured all my energy into Shutterstock and I have loved every minute of it. I am proud of what we have accomplished and in many ways I feel like we are just getting started. At the same time, I have been increasing feeling the need to take a break and I am looking forward to recharging my batteries next year.

For now and over the coming months, Jon and I are focused on driving our key growth strategies, and later in the year I will start shifting my energy towards managing a smooth transition. Looking forward to the many successes ahead for Shutterstock and this great team. And now we would like to turn the call back over to the operator.

If you could rejoin the call with Q&A instructions, we would be happy to take any questions..

(Operator Instructions) Our first question comes from Lloyd Walmsley with Deutsche Bank. Please proceed. .

Thanks, guys. It looks like sales and marketing on a year-over-year basis delevered again, but deleverage improved on a quarter-over-quarter basis. What kind of leverage or deleverage should we expect on this over the next couple of quarters and is any of this kind of a competitive impact in key word prices.

And then if I can as a follow-up, just taking a step back, I know you guys are investing quite a bit in some of these new tangential businesses that are not generating meaningful revenue.

Can you maybe give us a sense for how much of a drag all of this investment is on margins, and how that will progress over the next a year or two?.

Sure. We will take -- kind of hit those one-by-one and we will all chime in. I think from a margin perspective taking sales and marketing relative to revenue, we have rough goals of where we would like to see that as a percent of revenue and we have very specific sort of marketing ROI metrics that we track as we acquire new customers.

Those marketing metrics have remained quite consistent. In fact, some of them have actually improved as we found, better and more efficient channels.

But we've continued to take those benefits and improvements and any upside in the revenue and continue to reinvest, sort of drive higher growth in the core and continue to invest in new parts of the business.

One of the -- sort of a comment on how much overall impact on the business, we've said over several quarters that we typically invest anywhere from 3% to 5% of revenue into newer things, things that may generate no revenue or be at sort of the early -- or infancy stages, such that our overall margins would be roughly that much higher if we weren't investing in those areas.

I don't expect that range to change dramatically but we are consistently looking for areas where we can expand, new content types that we can launch, so that teams to be a comfortable range for us..

And then any -- you seen any impact in marketing channels from competition or with one of your competitors new and subscription products?.

We've seen our competition testings over the past 10 years and we haven't seen much of a change, recently no changes to our marketing metrics..

Okay. Thanks, guys, and Thilo, good luck, in the well-deserved time off..

Thank you..

Our next question comes from Brian Fitzgerald with Jeffries. Please proceed..

Thanks guys.

I want to ask you a question around traction you're seeing from Facebook and salesforce in terms of entities as distribution outlet, could you do other deals here that may be interesting? Are they exclusive? And then maybe one more on enterprise, can you give us a sense of how many enterprise licenses -- enterprise licenses you have out there? Is it growing to your expectation, and has WebDAM adoption thus far been what you expected? Thanks..

This is Jon. I'll start with the first part. As far as Facebook goes we're pretty excited about it, but it's still very early days. We're starting to see more and more other advertisers use our images and that's pretty exciting but it is still very early.

With salesforce, that's something that held for our enterprise business and there's a lot of other types of partnerships that we're looking at that can use our API in the same ways as the whole team of people constantly looking for these types of deals. So, it's early, but we're excited about it..

Yeah, in terms on the WebDAM front, there's definitely some overlap between the two businesses as we bring Shutterstock and WebDAM together. It's particularly helpful for large enterprises, the WebDAM product offering, and we're pretty encouraged.

The bookings, we kind of look at forward bookings for that business because it's more of a -- software as a service hosted model, and we're quite encouraged both by the scope of the pipeline, as well as the types of companies and the size of companies that are in the sales cycle right now. So, things are looking quite good..

Great. Thanks, guys. And Thilo best of luck..

Thanks..

Our next question comes from Youssef Squali with Cantor Fitzgerald. Please proceed..

Thank you very much. Two quick questions. I guess Tim, if I look at Q3 revenue guidance at $82 million at the midpoint, it would imply lowest sequential dollar increase in a long, long time.

And just given the mostly subscription nature of the business and the impact -- the positive impact, you're seeing from enterprise and from video, can you just help us to understand the puts and takes there? Or is it just maybe lack of visibility into the transactional side that's kind of causing to you do that? And then on the music offering, I wondering if you can help us size the addressable market there in any early metrics you can share with us, on what you're seeing? Thanks..

Yes, on the seasonality, we don't see anything that's radically different from prior periods other than the higher growth that we're seeing from video and enterprise; we don't have any reason to think that will change dramatically.

Those are large enterprises, particularly from our enterprise sales group and they tend to have pretty consistent patterns. Any time you're comparing forward expectations and prior actuals, you might get apples and oranges thought there.

If everything replicates as in the past, there definitely is potential there, but we never seem that everything goes perfectly when we look at -- especially once we get out to one or two quarters..

With -- for the music question, music is interesting. Video for us nearly doubling year-over-year. We know that our video buyers need audio also to go along with those tracks. Today nobody is really made it easy to buy music in any way for companies at all.

So, your only option would be to kind of go and get some low quality stuff or go to one of the big labels and kind of deal with really complicated licensing rights. So, we think we're embarking on something that will make this a lot easier for people to use in the future..

One of the things on the market side is interesting. Music, there's a little more data out there in terms of what businesses and consumers also of course spend on music, music licensing, royalties.

If you focus on the area that we're really targeting that sort of sweet spot in the center of the licensing business, today there's probably a $500 million to $1 billion active spend. And then on top of that, it's not that unlikely that we'll see what we've seen in images and video which is that we make it easier to license.

When that happens, you tend to bring in new buyers and expand the market. We see many times customers that license from Shutterstock are never licensed before because of the disruptive nature of the model. So, there is -- we're optimistic that can also happen in music..

Great, very helpful. Thank you..

Our next question comes from Ralph Schackart with William Blair. Please proceed..

Good afternoon.

Tim, can you give us a little bit more color on some of the new marketing channels that you referenced in some of your earlier comments? And then I guess follow-up to that in terms of video, what's unique to that channel that's enabling more marketing efficiencies?.

Yes, so there's a couple of things happening there. One, because the customers that we're licensing images to, there's some overlap certainly with those who are licensing video. We do -- we see some benefit from that. Word of mouth is significant contributor to our image business and has been for some time.

So, we're certainly seeing that affecting video at somewhat higher rates.

In terms of specific channels, we don't go into too much detail, just primarily for competitive reasons, but what we see when we go into specific markets particularly in localized content, get better at search, and really optimize the marketing channels, it all comes together to drive some of the growth improvement that Thilo mentioned.

So, it's one part of the puzzle, but just one part..

Okay. Thank you..

Our next question comes from Rohit Kulkarni with RBC Capital Markets. Please proceed..

Great. Thank you. Two questions please. One is payout ratios as in despite the mix shift in your revenue base, enterprise video, on demand, subscription, what have you -- the 28%-ish payout ratio seemed to stay quite constant.

Can you help us peel back the onion layers, if you will? Are there any structural or any other differences in how contributor is expect to be paid out depending on what your sales channel is or what your media type is? And second question sort of a big picture one now in terms of -- now that you have three types of media available online for media buyers to buy, download, does that open up new doors in terms of which customers or group of customers, be it agencies or large media companies, production houses, that otherwise couldn't have -- or wouldn't have considered Shutterstock as a Prudential kind of avenue to license media?.

We'll take the payout question first. So, it has been part of our strategy for quite some time to target a similar payout range across our entire business. So, we strive to do that when we structure new payout levels. We think it's good for the business. We think it's also fair and correct for our contributors.

It encourages them to bring in new content and it has worked very well. On occasion where we think it makes sense for everyone involved, we will be a little more strategic. Offset, for example, in some cases we have had higher payout ratios because we are building in new brand in our new business and bringing something new to the market.

But even there over time our goal is to continue to pay a high fair rate, but directionally get a closer over time to the overall rate of the company. So that has really enabled us to keep that flat over time..

Yeah, and this is Thilo, I will take the other part of your question about new asset types and what kind of customers that brings in.

I think one of the reasons we are so excited about adding pieces to the business, and it's not just video and music, but also our premium images and Offset and other things that we are doing, is that we can sell those things to our existing base suppliers and do that cross-selling.

But we are also finding that new customers are coming in from some of those new types and they get interested in other parts. So we've ad customers come in for the first time Shutterstock because of our Offset collection and we've had customers come in for the first time due to our footage and then buy other things. So it's highly synergistic..

Okay. Thanks Tim. Thanks Thilo. Good luck..

Our next question comes from Blake Harper with Wunderlich. Please proceed..

Yeah, thanks. Jon I want to ask you about some of the products upgrades that you did, specifically with pallet and just want to understand if kind of what the roadmap ahead would be as far you doing things like that.

And then what have you seen from the data? Is that -- there was types of things impact the number of downloads or activity that you have on the site and just how does that affect the customer activity and just what do you expect to see more of that type of stuff going forward..

Yeah, pallet is something that we launched in Shutterstock Labs which is the place where we test certain things out with. Once your customers figure out how they are using them and then eventually the goal is to get them to the main product.

We've pushed hundreds of different things over the past quarter, lots of them very small changes to the website. We reiterated on pricing plans, we have several processes and we are always working on all sorts of different things to improve conversion and help sell more images.

Some of the things may include multiple languages we have on the site; some may include how we change our search algorithms to get people their images quicker. We do a variety of things very quarter to improve user experience..

Okay. And then I just -- one more question if I may. Lots of localization, and you had said in the past that you had reached the certain penetration rates in a lot of the international markets that you have. In some of your more developed markets that you could double reps, given what you are seeing in some of those markets, Japan, U.K.

and Germany that you mentioned there. Is there any other way that you look at that now as far as how big that opportunity can be? And then secondly, is that also driven by some more targeted marketing in those markets or sales headcount expansion in those markets.

Can you maybe just talk about specifically besides the content what else is driving the growth in those international markets?.

Yes, in terms of some of the metrics around those markets, it's still quite early. I think Peter you were referring to was something we've given a rough feel for. If we were able to take all of our non-U.S. markets to the same penetration level of the U.S., we would roughly double our overall business and that remains true.

So, we're really still just getting started in these territories, we thought it would be helpful to mention a couple of specific territories today where we're getting some nice traction. But it's still early, we're still relatively quite small in those territories, but the growth rates are quite impressive.

What we see is that when we do these things together, localization, more focused marketing, better search in the local language; simultaneously it can really move the needle. If you look at our global splits, Europe is -- and the greater region around Europe is growing as strongly as all of the rest of the world regions as well.

And so, we're definitely seeing the early signs that things are working well..

Okay. Thanks for taking my questions..

This concludes today's conference. You may now disconnect. Great day, everyone..