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 Ralph E. Schackart - William Blair & Co. LLC Blake T. Harper - Topeka Capital Markets Lloyd Walmsley - Deutsche Bank Securities, Inc..

Good day, ladies and gentlemen, and welcome to the Shutterstock First Quarter 2016 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 may be recorded.

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

Thank you, operator. Good morning, everyone. And thank you for joining us for Shutterstock's first quarter 2016 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 results predicted, and reported results should not be considered as 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 for discussions of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements that 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 the reconciliation of the most directly comparable GAAP financial measures 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 it over to Jon..

Thanks, Craig. And thank you, all, for joining us this morning. Shutterstock is off to a great start in 2016, with the sustained financial and operating momentum we generated throughout 2015 continuing during the first quarter.

Both sides of our diverse marketplace continue to expand rapidly, as we remain laser-focused on delivering the best possible user experience for our customers and our contributors. Content matters is something you've heard us say consistently, and that is, without a doubt, what we hear the most often from our customers.

Knowing that Shutterstock provides the most robust collection of high-quality content that can spark the creative process is why existing customers keep coming back and why more and more new customers are using Shutterstock than ever before.

With over 100,000 contributors submitting content, we continue to build scale while ensuring our content remains fresh and hot. During the first quarter, we added nearly 10 million high-quality inputs (03:00) for our royalty-free library, twice as many as we added in Q1 of 2015.

And Shutterstock now provides over 81 million photos, vectors, illustrations to customers of all types and sizes. We also continued to expand our unique video offerings with over 4 million video clips, 62% growth from a year ago. We're capitalizing on the growing demand for stock video content.

And similar to images it's not just the size of the library, but also the quality and diversity of our offering that's being embraced by the creative community. Whether building a simple webpage, preparing a corporate presentation or augmenting a scene in a major television show or motion picture, we have something for everyone.

As the breadth and depth of our content offering expands rapidly, it is more imperative than ever that we continue to innovate on the search experience. Helping our customers find that perfect image quickly removes one of the biggest constraints in the creative process.

On the last earnings call, I highlighted how we are beginning to move away from the reliance on keywords by developing computer vision technology. This past quarter, we launched Reverse Image Search, allowing users to upload an image and instantly find similar images on our site that are ready to be licensed.

It's still early days for this innovative technology, but initial indications are very positive, with search success rate for Reverse Image 15% higher than traditional search method. Product matters, you've heard us say this over and over again as well.

While we continue to build our search functionality, we also focus on workflow tools to further increase engagement with our customers and make the creative process more efficient. In January, we launched Shutterstock Editor, our in-browser editing tool that simplifies common steps in the creative process.

And customer adoption is growing steadily three times as many users downloading an image through Shutterstock Editor in March versus when it launched.

Overall, Shutterstock Editor users are twice as likely to download an image, and we keep expanding its capabilities, most recently adding text functionality, so another consistent customer need (05:10).

While innovating from both a product and tools perspective remains priority, as we mentioned on the last call, we're spending a significant amount of time, energy and resource today, migrating our technology platform from our legacy monolithic structure to a fully services-oriented architecture.

This will enable us to be even more nimble and pioneering in the years ahead. We're well underway in this migration. I expect to have the bulk of this work completed this year.

Delivering its superior customer experience by having the best content and unparalleled search experience and powerful workflow tools is attracting more and more users to Shutterstock.

Over 1.5 million customers downloaded content over the past 12 months, and we continue to see remarkably high level of revenue retention, with rates exceeding 95% over the past year.

Customer acquisition and retention remain core priorities, and I'm excited to announce that we have just hired a new Chief Marketing Officer, Jeff Weiser, who will be joining us from Beachbody, where he has been a significant contributor to their growth.

Jeff's diverse experience and track record in strategy, analytics and marketing optimization make him an ideal fit, as we look to capitalize on the many opportunities we see ahead.

As the customer base expands, we also continue to convert more and more of our traditional e-commerce client into Enterprise accounts, with deep relationships, who can spend tens of thousands or even hundreds of thousands of dollars annually. We now have nearly 28,000 Enterprise (06:42), up 80% from the same period a year ago.

And we continue to grow our content offering to further meet the diverse need of these businesses. In January, we introduced Shutterstock Music (06:53) to our Enterprise platform, and just last month, we announced an exclusive partnership with the Associated Press to further build out our editorial offering.

By offering a broad suite of content and workflow tools, we will continue to attract new Enterprise customers, while driving additional share expense (07:11) from existing relationship. Overall, Shutterstock is off to a great start in 2016. We're delivering sustained financial growth, as the network effect of our business remains stronger than ever.

Investments we have made over the last several years continue to bear fruit, and we're still in the early days of maximizing the opportunities across the creative landscape.

As we deliver these strong results, we remain committed to creating new opportunities by expanding our content horizon, building innovate workflow tools and developing unique technology solutions, so we can build additional long-term value. I will now turn the call over to Steven, who'll walk you through our financial results..

Thanks, Jon. And good morning, everyone. Appreciate you're joining us this morning. Before I discuss our performance, I want to let you to know that we have posted a brief presentation deck on our website, which contains supporting materials for our quarterly results, as well as other items, which we will discuss on today's call.

As Jon highlighted, Shutterstock is off to a great start in 2015, as the powerful network effects of our business model drives significant growth in both our content library and our customer base.

The sustained operating momentum we delivered in the first quarter translated into revenue growth on a reported basis of 20% and adjusted EBITDA growth of 28%.

Excluding the impact of currency, revenue growth was approximately 24%, and adjusted EBITDA increased 36%, as we continue to see strong gains from our Enterprise offering, as well as from our e-commerce image and footage products.

We continue to see solid trends across key metrics, as we attract new customers across multiple content types and build increasing customer lifetime value. This past quarter, our user base expanded to more than 1.5 million customers, including an 80% increase in our Enterprise customer base versus the first quarter a year ago.

We also saw a 23% increase in paid downloads, primarily from new subscribers but also from a higher level of activity across our existing subscriber base, in conjunction with the new monthly download limit we introduced during the second quarter of 2015.

While this increased engagement is expected to deliver greater lifetime customer value from longer retention, as customers further integrate our products into their workflow, in the short term, the increased usage is actually a drag on our revenue per download.

On a reported basis, revenue per download declined 3% this past quarter, and excluding currency movements, it was in line with the level of a year ago.

Over time, we certainly expect this metric to increase, as we further grow Enterprise sales and generate increased consumption across our video, editorial, and music products, which carry higher average prices than our e-commerce image platform.

However, given that subscription downloads make up the vast majority of the download activity today, in the short term, the revenue per download trend will primarily be a byproduct of increased customer usage, as we anniversary the April 2015 revisions that we made to the monthly limit as well as the 350-image plan.

As Shutterstock generates strong revenue growth across a diverse set of asset types, we are also benefiting from the geographic diversity on our customer base. Currently, 40% of our revenues are from customers in North America, 34% from European customers, and 26% from the rest of the world.

Each of these regions is growing at double-digit growth rates for us, and we continue to see strong momentum in nearly every country and region, including most notably, India, Korea, and Germany. Shifting to the cost side of the business, we continue to align our spending with the revenue opportunity we see across our platform.

Operating expenses increased 19% versus the first quarter a year ago, primarily driven by higher contributor royalty rates associated with our revenue growth. Contributor royalties were approximately 29% of revenue for the first quarter, which was consistent with the full year 2015.

However, it is slightly higher than the first quarter 2015, as we did not introduce our monthly download products until April of last year. Sales and marketing expense increased 9% versus the first quarter a year ago, excluding stock-based compensation and was approximately 22% of revenue.

Total marketing expense was down slightly versus the year ago, primarily due to the timing of certain marketing costs. However, we anticipate marketing as a percentage of revenue for the full year to be similar to 2015, as we further grow our traditional businesses and capitalize on newer opportunity such as music and editorial.

Overall, the cost of the acquiring a customer remains relatively steady, and the return on our marketing investment remains strong, as we continue to drive new customers to our platform, while keeping retention and repurchase rates high across both subscription and on-demand products.

Excluding stock-based compensation, G&A expense has increased 50% for the first quarter versus the same period a year ago, driven primarily by approximately $1.7 million from the modification of the terms of the contingent consideration agreement related to our PremiumBeat acquisition.

The total cost of this modification was $2.4 million with the remaining $700,000 included in other income and expense category, which is consistent to prior periods.

The change in the agreement, which relates to a broader responsibility for the PremiumBeat team, resulted in the accelerated recognition in the quarter as well as the partial recognition above the operating income line.

Product and development costs, excluding stock-based comp, increased 9% in the first quarter versus last year, primarily due to higher personnel and consulting costs related to building a more expansive user experience and transitioning the technology platform, partially offset by increased capitalization of labor of approximately $3 million.

Overall, our revenue growth in the first quarter, along with the controlled cost base translated into solid adjusted EBITDA growth. On a reported basis this past quarter, adjusted EBITDA increased 28%, and excluding the impact of currency, our adjusted EBITDA growth was approximately 36%.

It's important to note that while we are delivering this growth – while delivering this growth, we continue to focus on expanding our capabilities by investing in personnel, product development and technology, so we can further strengthen top line results and continue to innovate, to build additional long-term value.

GAAP net income in the quarter was $6.1 million or $0.17 per share as compared to $3.2 million or $0.09 per share in the first quarter 2015, with the improved operating performance and lower stock-based compensation expense partially offset by approximately $2.1 million in the additional expense related to the PremiumBeat contingent consideration I just mentioned.

Non-GAAP net income, which excludes the after-tax impact of non-cash equity-based compensation, as well as excluding the amortization of acquisition-related intangibles and changes in the fair value of contingent consideration related to acquisitions, that non-GAAP net income amount increased 46% in the first quarter to $13.1 million or $0.36 per share as compared to $9 million or $0.25 per share in the first quarter 2015.

Turning to our balance sheet, we generated $14.6 million of free cash flow this quarter and finished the quarter with $275.5 million of cash and short-term investment. This equates to approximately $8 per share of cash.

Given the strength of our balance sheet, the sustained operating momentum across the company, and our belief that our share price is not reflective of the value of the company, as well as our prospects, we continued in the quarter to repurchase shares as part of our $100 million share repurchase program.

This past quarter, we repurchased nearly $28 million worth of stock, reducing our share count by approximately 881,000 shares.

Since the end of the first quarter and through May 2nd of this year, both during the second quarter – once again, through May 2nd, we've repurchased an additional 160,000 shares which takes our total purchases under the plan to-date to 1.5 million shares, expending approximately $49.8 million.

The total number of shares purchased represents 7.6% of the non-insider owned shares outstanding. It's important to note that our first priority for capital allocation remains unchanged, and that is investing in our business and external growth opportunities that enhance our long-term profitable growth opportunity.

Looking to the remainder of 2016, we remain very encouraged by the operating momentum across the entire business, and our full year guidance remains unchanged. For the full year of 2016, our expectations remain revenue of $495 million to $510 million and adjusted EBITDA of $95 million to $100 million.

These expectations include the impact of our technology platform migration and assume that current foreign exchange rates to the U.S. dollar hold.

At these exchange rates, we still anticipate a headwind of 3 percentage points to 4 percentage points on full year revenue growth and 8 percentage points to 9 percentage points on EBITDA growth, when looking at 2016's results compared to 2015.

Please remember that we report revenue with the exchange rate at the time a product is sold, as opposed to when the actual download by the customer occurs. As result, the impact of currency movement tends to lag the shipped and (17:44) market currency rates.

And the ultimate effect this year will depend on the actual exchange rates, as well as the timing of downloads. We expect the currency impact in the second quarter will be similar to the first quarter and then begin to abate in the second half of this year.

We also expect lower EBITDA margins in the second quarter versus the first quarter, with our marketing spend returning to more normal levels, while we further invest in newer product lines and upgrading our infrastructure.

In addition to the revenue and EBITDA guidance for 2016, we also expect that in 2016, non-cash equity-based compensation expense will be approximately $35 million. Capital expenditures will be approximately $25 million. We thank you for your time this morning and your interest in Shutterstock.

Jon and I are now happy to answer any questions you may have.

Operator, please open the lines for questions?.

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

Thank you very much. And guys, congrats on the solid quarter. Two quick ones, maybe starting with you, Jon.

Can you talk, just broadly speaking, about the competitive environment? By just looking at your sales and marketing, it seems that you're actually showing leverage where we thought you wouldn't necessarily, considering what's going on in the broader market. So, maybe you can speak to that.

And just broadly speaking, with these increased investments that you're calling out – or with the increase in sales and marketing that you've mentioned, and Steven mentioned, which areas are you basically going to be spending money on, if it's not customer acquisition? And then, Steven, if I look at your EBITDA guidance, it looks like Q1 of last year was kind of the trough EBITDA period followed by higher levels of EBITDA Q2, Q3, Q4.

If I look at your – if I look at Q1 of this year relative to your guidance, even at the higher end of your range, it looks like we're going the other way. So, maybe you can kind of call out any one-time issues, or just why would that actually be happening? Thanks..

Okay. I think, I'll start on the competitive environment, talk about our marketing spend and hand it over to Steven. On the competitive environment, same as usual. The past 13 years, we see the competitive environment change around us.

Sometimes, there's consolidation, sometimes there's investment, sometimes there are big moves, sometimes there are small moves. It's always changed though, and every year has been a year of change in our competitive environment. What has not changed is that we continue to be focused on the customer.

And we listen to our customer, we build what the customer wants. And we've grown every quarter through all of these changes around us. How that affects marketing spend quarter-to-quarter, I would just say that marketing spend will fluctuate quarter-to-quarter, as we spend in new areas in some quarters, get more efficient, in other quarters.

And as marketing spend continues to move around, that doesn't mean we're not going to be aggressive with our marketing spend. We're always looking for new areas, we're always looking to get more efficient in our current areas, and then we're always looking to redeploy the funds that we create efficiency with in the area where that'll work (21:24).

That's the story on the marketing spend..

As it relates to guidance, you're correct with regards to the comparison, of course, for the first quarter 2016 versus the first quarter 2015 and the cadence throughout 2015. As I mentioned, our marketing spend has become more efficient as well as the timing, so we have done a better job.

There's a set of variables that at this point in the year are uncertain as it relates to the market dynamics.

And therefore, for us to adjust our guidance after our first quarter results would be premature, and therefore, we expect the second quarter, as I mentioned, to be the slowest quarter of the year, but with nice growth during the remaining portion of the year.

So, I would just say that we're not doing anything different than you would expect, which is one quarter of 2016 in, lots of activity both here at Shutterstock and in the marketplace. And we'll address guidance each and every quarter to see what makes the most sense for us to – given the landscape we see ahead of us.

But right now, as Jon and I talked about, we want to position ourselves not just for 2016, but for 2017 and beyond, and make sure that we continue to invest in core capabilities which drive profitable growth. So, that's our focus..

Great. Thank you very much..

Thank you. Our next question is from Ralph Schackart of William Blair. Your line is open..

Good morning. Just want to touch on the strong Enterprise growth that you saw in the quarter.

Maybe you could give some color just in terms of how much of that growth was from the work and effort you've added and the workflow products, the content that continues to grow, your focus on converting e-com to enterprise, and maybe just sort of how many new enterprise sales customers were there? And a sort of broader color on that would be great..

So, as it relates to the workflow product, it's still early for the workflow product, that I think from an attribution standpoint, as it relates to your question, in saying, as a result of this thing, this activity, or this product, or this enhancement that we provided, that we are able to attribute our growth to that, I think we've stepped up a lot of our efforts on both innovation, not just workflow but Reverse Image Search, visually similar, so that it makes it easier for creatives to find the image they're looking for to engage with our library in a very meaningful way.

So, I think, this summation of activity is what we would say has resulted in the increased level of activity with Enterprise. About half the growth from new customers comes from Enterprise and about half from increased spending with the existing customers. So, we're seeing both activity with existing as well as the attraction of new customers.

And we're increasing our sales team both geographically as well as in those countries and markets in which we currently have people, because we see the opportunity for continued growth as well as expansion of growth in some regions..

Great. And one more if I could, please. I think in the last call you talked about somewhere in the neighborhood of around sub-$10 million impact from some new investments that you're planning in 2016.

Is that still sort of a good range for us to think about?.

Yes, it is..

Okay. Thank you very much..

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

Hi. Good morning. Jon, I wanted to ask you about some of the workflow tools especially the mobile Editor.

And just want to see how could you have gotten adoption there, and how that compared with some of your other workflow tools such as WebDAM? And how (25:45) customer base, or how much – how many of your customers are using that yet? And what (25:53) adoption and what else you can get them to use?.

Sure, actually, Editor (26:59) through the browser. It's right off of the download. And what Editor allows you to do is to manipulate the image in ways that we know a lot of our users do manipulate image in some of the tools out there, and we allow all of that for free.

The simple resizing to common format; filtering, just some of the more popular filtering kind of theme; adding text to your image. Those are the kind of things that are all available now in browser, right when you're downloading the image. And these are some of the most common reasons why someone would go to another tool.

And we're seeing that users that use these editing tool continue to download our images at faster paces than users that do not. And we're also seeing increased adoption of these tools. One of the things that's holding us back right now that we continue to work on and we'll be done with a lot of this, this year is our tech migration.

We're spending a lot of effort right now moving our tech stack to a services-based architecture set. All of our property and all of our product can be within this one tech stack, and we can use all of our available technologies across all of our products.

So, while we're even focused on doing that, we still released some amazing stuff like Editor and like Reverse Image Search. We continue to learn, and we're going to continue to innovate from there..

Got it. Okay. Thanks. And then if I can just follow up with that.

If we can fast forward a year from now and you have the tech platform migrated, what would you say were the most significant things that you would have that's different now for your customers to use, either from workflow or from – just related with the content or search? And what are some of the things that you would expect to be able to monetize on top of that, too?.

So, there's going to be amazing stuff we'll be able to do internally, where we can track customers across all of our products with a single user ID, for one. Externally, we'll be able to – customer-facing features will be a lot easier.

So, imagine, as our Editor product grows, we'll be able to deploy that in multiple different environment on our site, off our site, in WebDAM, across all of our different types of products, off-deck, Premier, or Enterprise platform et cetera.

So, the reason for the migration is that we have a single view of our customer across all of our products and when we develop the technology, we can develop it once and use it across all of our products within Shutterstock..

Okay. Thanks, Jon..

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

Thanks, guys. Just wanted to turn it back to the marketing. I guess, it did look like you saw a lot of leverage there.

Can you just elaborate a bit more on the timing differences, what exactly where those? Was some of that hiring in the Enterprise group or something, or just timing of ad spend? And then, are you actually seeing leverage just come out of the Enterprise side, as your sales force gets more efficient and that are you kind of seeing that continue in numbers? That would be....

Yes. So, appreciate the question. I mean, what we're seeing is really nothing that is specific to any one area. The marketing spend is the outcome of the activity. We've had some related to timing. There are things that occur, both product launches, releases and activity that we have. Our cost per acquisition is growing more predictably year-over-year.

We've got more efficient and better in our SEO and SEM work that we're doing. There are some events that are pushed to later in the year. The actual event themselves that we had extended, some money in the first quarter and prior years.

So, there's nothing that – it wasn't like oh, we were trying to – we weren't saying, oh, we want to spend less marketing dollar. I think it's a summation of a number of activities that happened to occur in the quarter. And, of course, we're looking at, obviously, have the highest return on investment we've had over multiple period.

And so, we're focused on continuing to be able to manage our spend across all of our categories. But we will also lean in and spend on marketing, as and when appropriate, to drive profitable growth that has high cash return on investment. So, it's – I guess, I think it's – there's nothing unique that you're missing or that we're not telling you.

I think it's just the activity within the quarter. But once again, we expect that will pick up in the second quarter. We have a number of both events, and we also have a product activity in the second quarter, which we will be supporting aggressively..

Hey. One thing I just want to add is that over the past 13 years, we have clearly been, in our space, the most aggressive market, and we've learned a ton. There's no one in the space that spent more money marketing than we have, especially on the performance side. And we have all this data, and we know exactly how to reach our customers.

Some, of course, will get more efficient than others. And we won't spend that money if it doesn't make sense. And during that pullback, you can see some of the stuff that you see this quarter for those numbers..

Okay. And just as a quick housekeeping question. Forgive me if I missed it.

Did you all give Enterprise as a percent of overall revenue, or could you?.

What we've said in the past was it was in the low to mid-20%s. It accelerated from there to be between slightly over 25%. And we certainly expect it to continue to grow, given the opportunities we see both at existing and new customers..

Thanks guys..

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

Hi, guys. This is John (32:36) on for Brain. Thanks for taking my question. You noted in your commentary that around 6% or so is coming – of revenue is coming from outside of North America, especially some growth coming from India and Germany and Korea.

And maybe, if you can just talk a little bit about the dynamics of international versus North America, and what you see from the customer base, and also maybe from the contributor side as well? Thank you..

Yeah. I don't have any specifics on the countries you mentioned, but we continue to grow around the world across all of our regions and across the many different countries that we do business in.

We continue to get more local, we continue to learn more about our customers around the world, and that causes us to sell more images and products and video to all of our customers..

So, as it relates to some of the markets in which we're expanding, Korea and India and other, not necessarily emerging markets, but developing markets are ones where there's great amounts of advertising and communication, especially when you think about markets like India. We have not historically been – had a large business there.

And so, our growth rates have been significant. We're just hitting a great user base in terms of both larger-sized enterprises as well as small and medium-sized businesses in those markets. We have been relatively strong in Germany, and we continue to see strength.

We have an office in Berlin, aggressively pursue the European market with our team there and continue to see opportunities across both Western and Eastern Europe to further expand.

Asia-Pacific remains a significant opportunity, and we're focused on continuing to expand not just in India but in other markets in the Asia-Pac region, especially given, as Jon said, our ability to be more local, to provide both content as well to the customers and the customers in those markets. So, we feel real strong about it.

Enterprise is now growing fast internationally. And as we talked about in past quarters, we're seeing greater consistency in Europe as well versus some of the fluctuations during the maybe economic crisis that they were going through. So, overall, we're seeing good stabilization.

But I think being local in market and having that network effect is really important for us. And we'll continue to do everything we can to continue to grow those opportunities..

Great. Thank you..

Thank you. And that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Craig Felenstein for any closing remarks..

Thank you, everybody, for joining us today. If you have any follow-up questions, please let me know here in New York. We're happy to help. Thanks..

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