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

Lloyd Walmsley - Deutsche Bank Brian Peak - RBC Capital Markets Brian Fitzgerald - Jeffries & Co. Ralph Schackart - William Blair Youssef Squali - Cantor Fitzgerald.

Ladies and gentlemen, welcome and thanks for joining the Third Quarter 2014 Shutterstock Earnings Call. My name is Ryan. I will be the operator on the event. And at this time, all participants are in a listen-only mode. Later, we will be opening the lines to facilitate questions-and-answers.

(Operator instructions) And as a reminder we are recording the event for replay. Now I will turn the call over to Ms. Denise Garcia, Investor Relations..

Thank you. Good afternoon. Welcome to Shutterstock's third 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 28th, 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. And now, I will turn the call over to Jon Oringer, Shutterstock's Founder, CEO and Chairman..

Greater global penetration, emerging content type and enterprise sales. We have made solid progress in all three areas since becoming a public company two years ago and continued on our progress in the past quarter. I will discuss each of these with your starting with global penetration.

We have significantly expanded our international presence over the past few years. We have doubled the number of languages. The Shutterstock site is available in from 10 in 2012 to 20 today. In 2013, we opened our first international office in London, and established a European hub in Berlin.

Over the past three years, we have expanded from a single office in New York City to eight offices in key media capitals across the U.S. and Europe. The past quarter we have expanded our European presence by opening an office in Amsterdam, one of the Europe's best locations for multilingual media and tech talent.

With three major creative centers in Europe, we are well-situated to support the region that is growing very quickly across all of our product lines. Another important part of survey in global audience is a continued expansion of our content library.

In the last two years, we have more than doubled the number of images in our library from 20 million in 2012 to over 44 million today.

This is the result of tremendous focus on our contributors to whom we have paid over $0.25 billion today and the strong network effects of our business To continue to encourage the supply side of our marketplace, this quarter we launched a mobile app that enables our contributors to upload mobile images and check their earnings on a go.

We also recently launched our contributor platform in Portuguese and Korean bringing the total number of contributor languages we support to six. Our second area of strategic focus is enterprise sales. We have made significant investments in sales people and technology to serve enterprise clients. And those investments are starting to pay off.

As a result of our focus, enterprise driven revenues approaching 20% of our total revenue, up from less than 10% two years ago. In 2013, we successfully want to offset a highly curated marketplace featuring elite collection of high-quality artistic images with simple royalty free pricing.

Our enterprise customers have embraced offset enthusiastically and we are encouraged by a trajectory going into next year. To further deepen our relationship with enterprise customers, we acquired WebDAM earlier this year, a leader in web-based digital asset management.

We were now two full quarters having WebDAM as part of the Shutterstock family and WebDAM is showing great promise. In the third quarter WebDAM bookings doubled year-over-year. We are excited to continue to invest in this area. Our third area of strategic focus is new asset type and offering.

Earlier this year, we launched music licensing to compliment our imaging video licensing businesses, offering a one stop shopping experience to customers. While it’s early days for our music efforts, we are laying the foundation for growth and are staring to see promising results.

We also continue to invest in Skillfeed, an online marketplace for learning with a special emphasis on digital professionals. This helps to strengthen our relationship with customers and contributors and to expand the ways that we can help them.

While still early the contribution from initiative like the music and Skillfeed look much enterprise and (inaudible) did several years ago. We are encouraged by our track record for building and buying complementary offering that our audience appreciates.

When you step back and consider the activities across all three of our strategic growth areas, the consistent theme is our investments are paying off. Our core business is strong and growing, while new initiatives are growing even faster.

In 2015, we expect to continue to invest in these and other market expanding opportunities to further bolster the network effects of our business and to fuel long term growth. When we identify investment opportunities in promising areas where we have an advantage, we will aggressively pursue them.

We will do so even when investments result in short term EBITDA compression in order to drive growth in revenue and profit over the long term.

With that, I will turn the call over to Tim Bixby, Shutterstock's CFO who will provide further detail on our operating and financial achievements during the quarter, updated 2014 expectations and a first look at our growth and profit expectations for 2015. .

Thanks Jon. As a quick review, revenue in the third quarter grew 41% to $83.7 million while paid downloads grew 23% to $31.2 million. Revenue per download increased 13% annually to $2.65, a highest growth rate for this metric in the past three years. Revenue growth across all regions of the globe was strong.

North America grew approximately 47%, while both Europe and the rest of world grew at approximately 37% in the quarter. Our overall revenue breakdown by region today stands at about 38% North America, 34% from Europe and 28% rest of world.

On the bottom line, adjusted EBITDA increased 36% year-over-year to $17.3 million in the third quarter or approximately 21% of revenue. GAAP net income in the quarter was $5.3 million or $0.15 per share as compared to $6.2 million or $0.18 in the third quarter of 2013.

Non-GAAP net income increased 29% in the third quarter to $9.5 million or $0.26 per share. Non-GAAP net income as a reminder excludes the after tax impact of non-cash stock based compensation expense. Our effective tax rate in the quarter was approximately 40% in line with recent quarters.

And we have begun to implement strategies to align our effective tax rate with the territories in which we do business. Currently about 70% of our global revenue comes from outside of the United States. Shifting now to operating expenses for the third quarter, our gross margin was about 60%, a slight improvement versus the prior quarter.

Contributor royalties, which represent approximately 28% of our revenue, have remained consistent as a percent of revenue for many quarters. Sales and marketing expense was $21.1 million in the quarter or about 25% of revenue, slightly better than our expectations as our newly added sales reps continued to ramp up quickly when they come on board.

We continue to expand this direct sales team and the amount of revenue we generate per new added rep added to this team give us real confidence in a very large market opportunity.

Also our performance marketing metrics continued to be strong as well, with the proportion of marketing spend to revenue remaining stable in the quarter as compared to prior quarters. We continue to see a consistent ratio of revenue recurring from one year to the next from the same cohort of customers.

Our year-over-year revenue retention continues to be approximately 100% and this gives us real confidence in continuing to invest in growth. Product development expense was $9.9 million in the quarter, while G&A expense was $10.6 million each approximately 12% of revenue.

It is important to note that all of the expense lines now include the full impact of the WebDAM operations. WebDAM revenue is generally built and collected upfront which gives us good revenue visibility and then it recognize on a GAAP basis ratably over a year along software-to-service contract period.

This is an area where we are increasing our level of investment as a result of these powerful unit economics. Capital expenditures during the third quarter was approximately $1.9 million and we continue to invest in our technical infrastructure while maintaining a relatively lean ratio of capital spend to revenue.

That metric is about 4% of revenue which compares by favorably to other companies with similar high availability requirements. Turning now to headcount. We ended the quarter with a total of 491 employees worldwide, up from 345 at year-end 2013, including the 24 added in March as a result of WebDAM acquisition.

Our cash balance at the end of the quarter increased to $260 million of cash, cash equivalents and short-term investments, and we also generated $22.7 million of cash from operations during the quarter, up 55% as compared to the prior year.

Jon mentioned the few of the investments we have made to strengthen our market position and expand the breadth of our portfolio into the new content types. We generally expect new initiatives to consume cash as we build momentum and then progress toward breakeven and then cash flow positive within usually two to three years.

We are excited about the investments we have made so far and that we continue to make. Absent the current pace of investments we're making in these newer areas our core business EBITDA margin is already above 25%.

I would now like to detail our updated and increased financial expectations for 2014 as well as give some initial guidance for the full year of 2015. For the fourth quarter, we expect revenue between $90 million and $92 million. We expect adjusted EBITDA to be between $19.5 million and $21.5 million for the fourth quarter.

We expect stock based compensation expense of approximately $7 million and capital expenditures of approximately $3 million. For the full year of 2014, this guidance would imply revenue of between $326 million and $329 million. We are reaffirming our prior adjusted EBITDA guidance of between $68 million and $69.5 million.

We expect full year stock based compensation expense to be approximately $23 million and full year capital expenditures to be approximately $20 million. As a reminder about 20% of our global revenue is euro denominated and about 10% in the British pound. The balance is primarily in U.S. dollars.

For a global company, with 70% of our revenue outside of the U.S., we actually have relatively low foreign currency exposure. While currency impact was minimal in the third quarter, the U.S. dollar has strengthened substantially in recent weeks. We have factored current exchange rates into our guidance for the fourth quarter.

Without the recent strengthening of the dollar, our fourth quarter revenue and adjusted EBITDA guidance would have been higher by $2.5 million and $2 million respectively. For 2015, we expect revenue to be between $430 million and $435 million, which imply the growth of 32%.

We expect adjusted EBITDA between $94 million and $98 million which imply the 22% adjusted EBITDA margin. We also currently expect capital expenditures to be approximately $60 million next year and stock based compensation expense to be approximately $30 million.

And while we are not providing quarterly guidance for 2015 at this early day, I would highlight the seasonal patterns we have seen historically. We expect roughly similar proportions of revenue and EBITDA to fall within each of the four quarters of 2015 as we have seen in 2013 and to-date in 2014.

Overall, I can we are very pleased with our performance. The investments we are making and the contribution, they are having across all areas of our business, as we continue to focus on global penetration, enterprise sales and new content types.

With continued strong execution and the strengthened outlook, we are well-positioned for what I think is a terrific start to 2015. And now, we are happy to open the call to questions. If the operator would please rejoin, we will be happy to take any. .

Great. (Operator Instructions) And our first question here comes through from Lloyd Walmsley with Deutsche Bank..

Thanks, guys. A couple, if I can. Just first, it looks like you saw some leverage on sales and marketing for the first time in a while and you are still growing the personnel you mentioned portion of the sales and marketing, so that would imply leverage on the pure advertising portion was a bit higher.

Can you talk about what you are seeing in paid acquisitions channels and whether we should expect to see some leverage on the advertising or sales marketing line in 2015? Or whether you plan to keep investing there? And then second question would just be, if you can just comment a little bit about that what's driving -- the downloads are little slower, but revenue per downloads a bit higher, if you can just kind of walk us through some of the dynamics there..

Yeah, I think -- I take the leverage question, hold on a second. On the leverage question, I think -- yeah, we did see a little bit of benefit there. I think in the variable piece which is really the spend that we put out there to generate traffic to the website and convert that traffic to new customers, that's been stable.

So our key metrics, our CPA, lifetime value, all the stuff that we track around variable spend has been quite stable. So, that is always a good sign. We are doing things at a much larger scale. On the sales side which is also in that number we're also seeing consistent improvement.

Although, we that's something where that's a little more upfront investment as grow the sales team as opposed to marketing, but that also is been consistent. We've actually seen good results there and continue to grow the sales teams at a pretty fast pace.

A little bit of the scale can come from the seasonal ebb and flow from some the non-variable marketing. So, we're pretty active in trade shows and events and branding efforts around the world and those can ebb and flow a little bit. But overall, I would say the key measures are stable and look great.

On the download question, I think what we're seeing now is kind of the result of the consistent trend and math.

So, as the newer pieces of the business grow it at pretty rapid clip, enterprise sales doubling year-over-year, video footage revenue growing nearly that fast, it just becomes overtime much more likely that that revenue per download numbers going to grow at a faster clip. This quarter obviously was quite a bit of a step change.

I would not extrapolate from that, but I think the trend is likely to continue. Those higher price pieces of the business are really doing well. Offset, for example, our average, if you go look at the website, we've got a $250 price and $500 price. Most of that is selling at a higher price.

And that's doing well and putting some nice upward pressure on that number. So, we like all the trends we're seeing there..

Great. Thanks guys..

Our next question comes through from Rohit Kulkarni with RBC..

Hey guys. It's actually Brian on for Rohit. Just curious how you expect royalties to evolve overtime as you move farther into enterprise, video and music? And then do you have any early lessons or surprises now that you've seen music download levels increase? Thank you..

I'll take the royalty rate one first. I think that we've done a nice job I think of structuring royalties with our eye on the contributor. We want contributors to do well and make money be happy and bring us more content and part of that is kind of keeping things stable, at a good range.

So, nearly all of our royalties are in a pretty tight range around that 30% payout rate. That feels quite stable. If you look at a quarter-to-quarter, it's super strong and stable. Even as the newer piece of the business grow faster, whether it's offset or enterprise or even now music is getting going.

We would not expect to see much variability in that percentage relative to revenue..

Yeah, we've kept things pretty stable for the past 10 years. It's been around 30% for most of the image products. Music is brand-new and today we have one partner, eventually we'll many partners. But we're kind of still working our way through that. So, it will take a bit of time. But we expect it will be around same..

Okay, great. Thank you..

Our next question is from Brian Fitzgerald with Jeffries..

Thanks guys. A couple of questions. I wanted to know if you could give us any color around your partnerships with Facebook and with salesforce.com, how are they progressing. Is one progressing faster -- at a faster clip than the other? And maybe any differentiation you would call out between those two.

And then on the video side, are you finding the majority of the video is still being used by studios? Do expect this to eventually shift over time towards more advertising usages? Thanks..

So, with Facebook and salesforce, we kind -- we put that into our API strategy. And we're starting to look at the API as a business unit of its own. We can integrate deep into lots of businesses different businesses out there. So, we're always on the lookout for places we can put our product into that, users of that product and we can buy images.

As far as the video goes, we see a lot of different people using it today. We see advertising made with it, we see Hollywood studios buy our video, we see website using it. It's going to be used by anyone that needs to catch people's attention..

Yeah, I think it's still very early in that evolution from kind of studio-driven growth to advertising driven growth, but it's really -- it's something where we're seeing big brands do a lot of testing on the market. I mean you can see it on YouTube, you can see it everywhere.

We want to make sure that we're in the middle of that trend as it evolves and it's really another piece of our overall enterprise strategy is to be top-of-line for these big brands whether its images, footage, music, or even content management all of which we're in now..

Great. Thanks guys..

Next we have Ralph Schackart with William Blair..

Good afternoon. Tim you provide us the FX headwinds for Q4. I'm just curious can you give us a sense of what you have implied for your 2015 outlook as well..

Yeah, I think at this point we're kind of running different scenarios, but we -- in terms of guidance, we tend to assume that rates remain unchanged from the current rates. So, can -- it would be safe to assume sort of a pro rata affect from the Q4 numbers that we gave, but a larger base. So, we factor that in for next year..

Okay. One more if I could.

Just as enterprise continues to grow and scale, I think it's around 20% of revenue today, how much farther do you think you can sort of go down this channel and expect this will continue to become a large portion of your overall revenue mix going forward?.

It feels like pretty consistent expansion. So, we look hard at how each individual rep does. We don't want to hire folks and have them have a difficult time ramping up. And to-date it's been really consistent, which means there's just a big market out there for all the players.

Shutterstock has found a real focus where enterprises are really open to the offering we have and they are taking advantage of it. We don't see any time soon where that just roll in big part of the plans for next year..

Okay. Thank you..

Next question comes through from Youssef Squali with Cantor Fitzgerald..

Thank you very much. Two quick questions. First, starting with you Tim. The employee margin guidance for 2015 looks like it's flat with 2014 if one were adjust for that 3 million headwind from (Inaudible) that you had in 2014.

I was just wondering why considering that there's about $100 million of additional revenue that comes through, down the pike -- if just increased investment maybe you can highlight areas of investments. And then John, I want to go back to one of the three focus areas that you mentioned earlier, the one about new content side.

So, I was just wondering if there were any other obvious -- other areas or new content types that you guys have not -- you are not offering right now that would make obvious sense for you guys to go into over the next 12 to 24 months. Thank you..

So, we'll hit the investment question first and the content. As we have in the past couple of years a good proportion of our spend, call it 3%, 4%, 5% go towards where would we term new areas offset Skillfeed, now WebDAM music, areas where the spend is little higher and they are burning cash.

They move towards profitability, and then compare favorably with the rest the business. I think the focus in 2015 will be similar to this year. WebDAM will be of the set with Shutterstock. We see a lot of opportunity there. On a GAAP basis, that's still going to be a little bit EBITDA compression, but on a bookings basis it's super strong.

So, we're confident in that investment. And then new content types, they are kind of working. And so we're going to continue investing in those. We're not finished by any means.

There's other opportunities out there and we're kind of thinking through the right priority, but we have our hands full with the new stuff it's on the market now and we're investing in driving those a little bit further growth..

As ours new content types go music was the next obvious one. With the video market kind of growing .Fast that people buy video need audio to go along with it. But if you want to get Skillfeed and WebDAM, those are non-new content types but great expansion markets for us. And so there's a lot that we can do to continue their expand..

All right. Thanks..

All right. So, at this time, we have no further questions. So, we'll close the call there. Thanks everyone for your time and your participation and have a great rest of the day..