Craig Felenstein - Senior Vice President-Investor Relations Jonathan Oringer - Founder, Chairman & Chief Executive Officer Steven Berns - Chief Financial Officer & Treasurer.

Youssef Squali - Cantor Fitzgerald Securities Rohit Kulkarni - RBC Capital Markets LLC Aaron M. Kessler - Raymond James & Associates, Inc. Kevin LaBuz - Deutsche Bank Securities, Inc. Blake T. Harper - Topeka Capital Markets Brian P. Fitzgerald - Jefferies LLC Dean J. Prissman - Morgan Stanley & Co. LLC.

Good day, ladies and gentlemen, and welcome to the Shutterstock, Inc. Full Year and Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder this call maybe recorded.

I would like to introduce your host for today's conference, Mr. Craig Felenstein, Senior Vice President, Investor Relations. Please go ahead, sir..

Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's fourth quarter and full year 2015 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer, and Chairman; and Steven Berns, our Chief Financial Officer.

During this call, management may make forward-looking statements that are subject to risk and uncertainty, including predictions, expectations, estimates and other information.

These include statements relating to the expansion of our addressable market, the success of new product offerings, including products we recently acquired, revenue growth and the predictability of our revenue, adjusted EBITDA, equity-based compensation, taxes, and capital expenditures.

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 today's press release and the reports and documents we file from time-to-time with the U.S.

Securities and Exchange Commission, including the section entitled Risk Factors in the company's Form 10-K filed this morning for discussions of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements we may make on this call.

On this call, we will refer to adjusted EBITDA, non-GAAP net income and free cash flow, which are non-GAAP financial measures. You can find a description of these items along with a reconciliation to the most directly comparable GAAP financial measure in today's earnings release, which is posted on the Investor Relations section of our website.

We believe that the use of these measures provides important additional insights 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 with all that out of the way, let me turn the call over to Jon..

Thanks, Craig. And thank you, everyone, for joining us this morning. 2015 was another strong year for Shutterstock with sustained operating momentum across our diverse content portfolio driving consistent financial results.

Our commitment to maintaining an unmatched content library and developing unparalleled search technology continues to attract an increasing number of customers and contributors to our platform, fueling robust revenue and profit growth.

Steven will cover our financial results in a moment but before he does, let me take a few minutes to discuss the key drivers of our business this past year and how we are further positioning ourselves to continue to build additional long-term value moving forward.

When I founded Shutterstock in 2003, I was the first customer as well as the first contributor and experienced first-hand the unique opportunities and challenges of both sides of the content landscape space.

From day one we made it a priority to connect with our global users, to understand what excites them and the obstacles that make their jobs difficult. Maintaining this kind of connection with the creative community has enabled us to focus on the things that matter most across our user base.

And while priorities tend to shift over time, the one constant without question is that content matters. We hear this from customers of all types and sizes that is why we remain focused on maintaining the most robust and freshest content worldwide.

In 2015, we added more content than ever before, increasing our library by 53% or nearly 25 million images. This was a 68% increase compared with 2014, and our royalty-free library now contains over 71 million photos, vectors and illustrations.

We also continue to build out our unique video offering, which expanded by over 60% this past year and now includes more than 3.7 million video clips. As demands for stock video content continues to grow rapidly, we have focused on building a wide array of video offerings to satisfy the diverse users of stock video content.

And as we announced last quarter, we further bolstered our footage library through a partnership with Red Bull Media House to serve as the exclusive distributor of their unique video collection.

While we are proud of the scale and diversity of Shutterstock's commercially licensable content library, equally important to our customers is the quality and freshness of the content we provide. Overall, we now have over 100,000 contributors submitting content, almost 1 million pieces of content per week.

And despite the significant quantity of submissions we receive daily, we still review every single piece of the content to ensure it meets the rigorous quality standards we have implemented.

We also work diligently to get approved content up on the site within 24 to 36 hours so our library remains fresh and our contributors can get paid as soon as possible.

With a growing and engaged customer base and nearly 1.5 million users downloading an average of 4.7 images per second, our contributor base is encouraged to provide the best and freshest content to Shutterstock, which only attracts additional customers and download activity. The network effect of our business has never been stronger.

This past year we also took steps to further broaden Shutterstock's product offerings, expanding our addressable market by investing in music and editorial content, natural offshoots of our existing business and content types where clients were looking for alternatives.

We're just one year into our acquisition of PremiumBeat and Rex and we couldn't be happier with the results thus far. PremiumBeat, our curated royalty-free music collection, is a perfect complement to our video business and we have recently rolled out a comprehensive music offering to our enterprise customers.

Rex spearheaded our entry into the editorial business and we further bolstered our editorial content by exclusively partnering with PENSKE Media, combining our innovated platform and loyal customer base with PENSKE's event access and quality content.

Already in 2016 we have covered well over 200 events, including the Golden Globes, BAFTA, the Sundance Film Festival, and Fashion Week in New York. And to-date, we have supplied over 200,000 images to our customers in real time.

It is still very early days of our editorial expansion, but we believe there is significant opportunity in the years ahead to further meet the needs of our customers. The primary beneficiaries of our editorial investment is our enterprise customer base, which now exceeds 24,000 customers, an increase of more than 75% in the past 12 months.

Enterprise revenue now accounts for over 25% of our overall revenue as we regularly transform customers who were spending a few thousand dollars per day into clients with deep relationships who spend tens of thousands or even hundreds of thousands of dollars annually.

In the past year alone, the number of customers spending over $100,000 annually has increased by over 70%. With less than 2% of our existing customer base converted to enterprise accounts thus far, we see significant opportunity to upgrade additional e-commerce clients over time.

As we further expand our content offerings to include music and editorial, we fully expect our existing enterprise customers to continue spending more and more moving forward.

I have spent the last few minutes discussing the quality and freshness of our content as a key driver of our business, but it is also vital for our customers be able to quickly find the content they need.

We have spent considerable time and resources to develop technology and functionality that makes the search process more efficient and effective for our customers. In 2015, we improved our local language search capabilities, as well also beginning to move away from reliance on keywords with considerable investment in computer vision.

And earlier this week, we began to see the result of this investment with the launch of reverse image search, which allows users to upload any image they want and in a split second find similar images on our site that are ready to be licensed.

It is these types of innovations, along with dozens of algorithmic improvements and interface changes, which enhance our customer experience and why we frequently hear from our users that our search capabilities are another key differentiator for Shutterstock.

While we continue to innovate our search functionality, we are also focusing on workflow tools to further increase engagement with our customers and make the creative process more efficient. Our cloud-based digital asset management service, WebDAM, further integrates us in the workflow of marketing, creative and brand professionals.

And during the fourth quarter, we launched Shutterstock Editor, an in-browser editing tool to simplify and speed common steps in the creative process. It's still very new, but early signs are encouraging with users of Shutterstock Editor twice as likely to download an image.

Innovating from both the product and tools perspective remains a priority and we will continue to invest in these areas even as we focus on delivering continued strong financial results.

We are also investing today in migrating our technology platform from our legacy structure to a fully services-oriented architecture that will enable us to be even more nimble and pioneering in the years ahead.

We expect this migration to finish up later this year, but the impact of this transition is included in the financial guidance that Steven will provide shortly. From its founding, Shutterstock's primary focus has been providing the highest quality product along with cutting-edge tools and technology to empower the world's storytellers.

The stock content business continues to evolve, but the foundation we have built and the investments we continue to make have us ideally positioned to capitalize on the significant opportunities across the creative landscape. It is still very early days.

And while I'm certainly proud of what we accomplished in the past year, I am even more excited about what the future holds. So now I'll turn the call over to Steven who'll walk you through our financial results..

non-cash equity-based compensation expense of approximately $35 million, capital expenditures of approximately $25 million, and in 2016 we anticipate that we will begin to reduce our effective tax rate.

Our current assumptions include a couple of hundred basis points decline in 2016, that's 200 basis point decline in 2016, but the majority of that improvement coming in the back half of the year.

But the actual timing and amount of the reductions are dependent on several moving parts, and we will update you on our tax expectations as the year progresses. We appreciate your time this morning, and now Jon and I would be happy to answer any questions you may have. Operator, please open the line for questions..

Thank you. Our first question is from the line of Youssef Squali of Cantor Fitzgerald. Your line is open..

Thank you very much. Good morning, guys. A couple of questions, maybe starting with you Steven.

Going back to what you just said in terms of the headwinds to your 2016 guidance, can you maybe just provide a little more color on the FX? And I think you mentioned three things, one was FX, one was the tech platform migration and the third was the editorial business..

Sure..

I guess, in trying to kind to parse out those how much is this – I guess FX you can't really project beyond 2016. But for the others, are these one-time events, i.e.

we go through them in 2016 and then we see a kind of a catch up in 2017, or are these investments that will sustain for multiple years? And then maybe Jon, can you just talk broadly about the competitive landscape, what you are seeing out there? I think the top line guidance for 2016 implies some decent deceleration.

How much of that is backed in potentially pricing pressure or lower demand – driven by competition? Thanks..

So thanks for the question, in regards to the impacts of the technology re-platform and our increased investment in editorial as we continue to integrate the Rex business and build out our capabilities.

Those are both 2016 items, which we do not expect to recur in 2017, and so we expect this to be once again a 2016 event, which we'll start to see benefits even later this year..

Cool. And I could talk about the competitive landscape a bit. It's always changed around us, and for the past 10 years, it's been consolidation, it's been new companies that start. We don't see any underlying trends of our business change. And in addition, we do not compete on price.

We are building, we are investing, we are re-platforming, we are releasing some amazing stuff out there in terms of editorial product features, and also workflow features. And we are going to continue to differentiate our products from the rest of the competitors that way and stay ahead of them like we always have..

All right.

So we start to assume that at least so far you have not seen any pressure from Adobe?.

No..

Okay. All right, thanks..

Thank you. Our next question is from Rohit Kulkarni of RBC. Your line is open..

Thank you. One for Jon and one for Steve. Jon, in terms of kind of thinking out your product roadmap over the next 12 to 24 months, and then you talk about workflow and it's interesting that you launched this Editor in Q4.

Can you talk about what other tools do you think, as you interact both more with enterprise customers and other forms of media, that Shutterstock needs to build or buy or partner as you kind of look ahead over the next 12 to 24 months? Are there any obvious holes that you think you need to fill to be able to get a greater share of wallet of your customers as you're going to build out your enterprise capabilities? And another one for Steve.

On your gross margin comments, can you peel back a little bit in terms of what is the effect of the unlimited downloads on gross margins? And also, what are you assuming with respect to mix shift towards editorial and offset on gross margins? Thank you..

Yeah, I can jump in first, and then Steven can answer the second part. On our product roadmap, we're doing what we have done for the past 13 years, which is listening to our customers and build the things that they need. We're starting from an amazing place.

We sell 4.6 images every single second, and we spend very little time with that user before and after today.

But as we start to expand into products like Editor where we start to spend more time with the user and we can see that they start to download more images because they are spending more time with us, that gives us an opportunity to continue to expand along the entire workflow of the user. We do this incrementally. We release products.

We spend some more time with the user. We interview them. We talk to them. We watch them. And then we build more for them and we continue to build into the pain points that we experience with them. As far as build or buy, again same story. We're always looking around for world class companies. When we find them, we buy them.

When we find them, we partner with them. When it comes to acquisition we've done that with Rex, we've done that with PremiumBeat, we've done that with WebDAM. We did that back in the day with BigStock and we'll continue to do that going forward. Fortunately, we're very good at building stuff and so that's where we start.

When we see something out there that can accelerate our build efforts, we buy and we integrate. And that's been our strategy and that's what we're going to continue to do..

As it relates to the gross margin question, we haven't really – the unlimited download has not really had an impact on our gross margin. What I did mention in my comments in terms of editorial and music and products where we have a slightly lower gross margin, we're accepting of that because we're getting higher contribution dollars.

And that's why as those businesses grow, we might see some increase in our contributor royalties as time moves on but we don't see that as anything but really indicative of the strength of the business overall, versus just stock image really across all of our products both on our e-commerce platform and enterprise customers, as well as for WebDAM.

So we feel good about, like I said, the absolute level of profitability and the trajectory that we see..

Okay. Thanks, Jon. Thanks, Steve..

Thank you..

Thank you. Our next question is from Aaron Kessler of Raymond James. Your line is open..

Yes. Hi, guys, just a couple of questions. First on geography, any updates just on the strength in different geographies? Second, I don't know if you provided the video and music percentage in Q4 roughly. And then is it possible to quantify the rough EBITDA impact from the tech re-platform in the editorial investments? Thank you..

So as it relates to geography, we still see Europe as choppy despite the fact that we mentioned Germany and the UK. We are seeing not the same level of robustness that we would like to see going forward. The U.S. continues strong.

Asia has been particularly strong as well, and so we feel that the overall – there's nothing that we're seeing that's, if you will, a cause of concern. But we want to make sure that we're being mindful as to those areas of the world where there is opportunity and those where we see greater strength.

And as it relates to the video and music percentage, we don't break out those percentages. But at the moment, on a combined basis, they're about 10%.

Okay, so when you look at video and music, but we certainly look forward to the day when we're having more conversations and we feel like those are coming soon because we believe that both our product, as well as the user acceptance of that product, the functionality of those products, will be far greater for the customer.

And we think, as Jon said earlier, we're going to continue to be a leader in those product areas..

Can you possibly quantify the impact from the tech platforming on EBITDA?.

Yeah. So really the impact, I would say, is two-fold. One is we're making sure that we position ourselves, as Jon indicated, really a platform on a go-forward basis that is nimble and flexible and as user friendly as it possibly can be. And so it's – that we would expect is going to be "several million dollars of EBITDA impact".

Cash is going to be higher because there'll be some cap labor involved there but overall, we see this as a 2016 event. So impact on EBITDA, call it below $10 million. But once again, there's cap labor involved there as well..

Great. Thank you..

Thank you. Our next question is from Lloyd Walmsley of Deutsche Bank. Your line is open..

Hi, thank you. This is Kevin LaBuz on behalf of Lloyd. For 2016, if I assume you grow your enterprise business about 40% year-over-year and video 50% year-over-year, that implies that the core business is growing about 6%. Just wondering if you could comment on the outlook to your core business for 2016.

And related to that, does 2016 guidance incorporate any price cuts or lower-tier subscriptions? And I've got a follow-up. Thank you..

So as it relates to the latter part of your question in terms of price cuts, it doesn't incorporate anything other than us continuing to offer packages that are desired by consumers. So there's no expectation of a price cut.

As Jon indicated, we see our value proposition as one that has not just been successful but continues to be highly desired by our customers. We'll continue to test new packages as and when our customers ask us about that. But at the moment, as I said, there's nothing incorporated into guidance if that would be the case.

As it relates to the core business, it continues to grow nicely. The on-demand business is better than the subscription business, but both are growing.

And I can't comment on your particular assumptions, all I can say is that as we continue to go through 2016, we believe that the businesses will grow and will be positioning ourselves for even accelerated growth as we move into 2017 and beyond..

And one more important thing, you can't really split them out that well. The way that the core and the enterprise businesses work is that they're very intimately related.

We're getting better and better at converting some of our core customers and identifying which ones will become premier customers quicker and more effectively in bringing them into the enterprise product. So as we get better and better at bringing new clients into core, we get better and better at also bringing them up into the enterprise product..

All right, thank you for that. And just as a follow-up, you had mentioned in your Analyst Day that the productivity of your enterprise sales force is ramping. So just wondering if that continues to be the case, and if that's incorporated into guidance for 2016? That's all, thanks..

Yeah. We see the enterprise sales team continuing to produce improved results. They've done a phenomenal job and we also have – all that's been incorporated into our 2016 guidance. As we do bring our new hires, there is a period of ramp up, but they pay for themselves within a 12-month period.

And so we feel very positive about the people that we have and the new talent that we're also adding on top of that to build capabilities on a more global basis. So as Jon said, adding enterprise customers at a continued rapid clip..

Thank you. Our next question is from Blake Harper of Topeka Capital. Your line is open..

Yeah, thanks. Good morning, guys. Jon, I wanted to ask you two questions. First, I wanted to see if you could comment on the Corbis deal and the partnership with Getty, if any of the changes there has had any positive or negative effect to you with contributors or customers. And then my second question is related to your API strategy.

Some of the partners that you have there have had traction with their advertising business and just wanted to see if you had seen anything similar there, or what you can comment there as far as the level of activity that you've seen with those partners on your API. Thanks..

Sure. On the competitive environment, it's kind of the same answer I gave before on the competitive environment. It continues to change around us. It's always changed around us for the past 13 years. Nothing surprises me anymore. And this is business as usual. We have not been stronger with our contributor community.

We're ramping up our image intake and we're getting a lot more efficient with it, and we see contributors continue to choose us over other companies more and more as the environment around us changes, so that goes to the impact. On the API, it's a business line for us. We continue to sign on new partners all the time.

We signed on a couple in the past quarter and those were in our release, Optimizely and Sprinklr and some others. And it'll continue to be a growing business unit for us. We want to get more integrated into our partners. And if we can help them with deeper and deeper integrations directly into our product, that benefits both us and our partners.

And we continue to keep those clients for a long period of time because of that deep integration. And this kind of goes back to the re-platform we're talking about, too.

As we start to move over to a fully services-oriented architecture, the API become a more efficient and powerful tool for us to integrate, and it lets us do it cross the entire kind of workflow or the user instead of just delivering images in the future. Hopefully that answers both..

Yeah. Thanks, Jon..

Sure..

Thank you. Our next question is from Brian Fitzgerald of Jefferies. Your line is open..

Thanks, guys. A couple of questions maybe on that note on the API integrations. Do those tend to start out exclusive? How long do those usually run for maybe before they fall off exclusive? And then a follow-up to some of the enterprise questions.

As you look at your enterprise sales efforts, how much are dedicated towards current customers versus new customers? Any noteworthy dynamics in the length of sales cycle or product cross promotion, maybe specifically as you continue to broaden your offerings and tool sets? Thanks..

On the API, they're all different. Some of them are exclusive, some of them are not. They tend to stay with us for a long time when they integrate with us, because it's a pretty deep partnership. But it's something we focus on. We have a team and we continue to build out..

Yeah. And as it relates to the growth in enterprise customers, it's coming equally from expansion of new customers, as well as growth with existing customers as they see the benefits of the platform, as we continue to enhance the platform, as we listen to their needs and solve their problems and workflow issues.

I think that will even become a greater amount of connectivity with our customers. We've just added music to our enterprise platform and so we're also rolling out editorial on our enterprise platform, and so therefore we only see future growth continuing and accelerating from here..

Thanks, Jon. Thanks Steve..

Operator, we have time for one last question, please..

Our last question is from the line of Dean Prissman of Morgan Stanley. Your line is open..

Thanks for taking my questions.

I may have missed this, so apologies if so, but can you please comment on the growth rate of your enterprise revenue stream in the fourth quarter? And then within your 2016 revenue growth guidance, how meaningful are the Red Bull and PENSKE Media partnerships, and how should we think about the margin profile of these deals?.

So we don't actually speak to specific growth of enterprise, but what we have said in the past kind of where it is directionally, and it's now approximately – it's more than 25% of our overall revenue. And so that is certainly, as Jon said, important as we've grown the customers, as well as the amount of business with each of those customers.

As it relates to Red Bull Media and our deal with Penske Media that we closed in 2015, we haven't discussed specifics but in terms of the – what it does for our business, I think a couple of things. It makes our overall platform more desirable by customers.

It attracts both other contributors and other players because they want to be part of that platform. We are an extremely customer-friendly organization and I think that has historically differentiated us from some others.

And so being able to provide this first-rate, high quality content in real-time really puts us in a very good position with our customers. But once again, it's not beneficial to break that out independent of any other – the overall business..

Thanks..

Thanks, everybody, for joining us today. We appreciate your time. And if you have any follow-up questions, please let us know. We're happy to answer them over the next couple days..

Thanks..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program, you may all disconnect. Everyone, have a great day..