Rawson Daniel - Vice President, Corporate Development, FP&A and Investor Relations Jonathan Oringer - Founder, Chief Executive Officer and Chairman of the Board Steven Berns - Chief Financial Officer.

Ralph Schackart - William Blair Lloyd Walmsley - Deutsche Bank Kip Paulson - Cantor Fitzgerald.

Good morning, ladies and gentlemen, and welcome to the Q2 2017 Shutterstock, Inc. earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Rawson Daniel, Vice President of Corporate Development..

Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's second quarter 2017 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman, and Steven Berns, our Chief Operating and 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 growth of our customer base, and success of new and existing product offerings, revenue growth and the predictability of our revenue, adjusted EBITDA, equity-based compensation, foreign currency rates, 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 US Securities and Exchange Commission, including the section entitled Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2016 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, adjusted EBITDA growth, adjusted EBITDA margin, adjusted net income; each of these metrics on a constant currency basis, revenue growth on a constant currency basis, and free cash flow, all of which are non-GAAP financial measures.

You can find a description of these items, along with the reconciliation to the most directly comparable GAAP financial measures in today's earnings release and in our Form 10-K, which are posted on the Investor Relations section of our website.

We believe that the use of these matters in conjunction with GAAP financial measures provides important additional insights for investors about the performance of the company's overall business and operating performance and enhances the comparability for investors in assessing our financial reporting.

However, these non-GAAP financial measures should not be considered as a substitute for, or superior to, financial information prepared in accordance with GAAP. And with that, I’ll turn the call over to Jon..

Thanks, Rawson. And thanks everyone for joining us today for Shutterstock's second quarter 2017 earnings call. We're pleased with the progress we're making in our business.

While our quarterly results do not reflect the long-term proposition of our business, we're beginning to see the benefits of our new technology platform and operating structure and we believe we are making significant progress against our objective of moving from a content marketplace to a creative platform.

In the second quarter of 2017, on a constant currency and year-over-year basis, revenue grew 9% and adjusted EBITDA decreased 10%. Our revenue grew slower than expected in the second quarter, which negatively impacted adjusted EBITDA.

In addition, in the second quarter of 2017 and on a year-to-date basis, adjusted EBITDA was negatively impacted by one-time costs related to M&A and our continuing move to a cloud-based hosting environment. On a year-over-year basis during the quarter, our customer base grew by 11% to more than 1.7 million customers.

Paid downloads decreased by 2% to 42.7 million. We grew revenue per download by 10% on a constant currency basis. We've expanded our image library by 57% to 144.7 million images and our video library increased by 55% to 7.6 million clips.

The story that the quarterly metrics don't fully tell is the exciting evolution that’s taking place at Shutterstock.

We are taking deliberate actions to transition from a stock image marketplace to a broader platform that provides individuals and enterprises with the various content types and tools needed to collaboratively design, build and distribute creative projects.

We've built a better technology, reorganized our talent and have acquired our launch assets that we believe will define the future of our business. On the product and engineering side, we're now able to get to market faster than we did previously and we'll continue to deliver product and solutions that our individual and enterprise customers want.

Most notably, in the second quarter of 2017, we made significant improvements to our e-commerce subscription offering, by launching smaller subscription packs that are aimed at customers who have lower volume needs.

We improved the features and functionality of our team subscription offering in our enterprise business, adding administrative control and collaboration capabilities. This has been a major relaunch of a key product of ours, with significant improvement.

We continue to improve our search functionality with new features that customers have been asking for, which allow for easier searching based on demographics. We continue to improve the feature set on our editor product, including support for multipage designs, emojis and multiple perspectives within images.

We launched a new product called RocketStock, which provides motion content creators with easily downloadable collection of curated after-effects content. We completed the rollout of Workstream, our new collaboration workflow product sold under our digital asset management product.

And among other significant editorial events, we provide exclusive coverage inside the celebrity-laden Met Gala to our editorial customers.

Additionally, within each of our customer-centric teams, we continue to focus on driving profitable revenue growth and building increased customer value as we believe there is a substantial market opportunity in front of us.

In our e-commerce image business, we are expanding our international presence and plan to launch additional languages later this year, adding to our current offering of 20 languages.

We're also focused on personalizing the product suite by geography and media channel, optimizing our customer acquisition funnel, continuing to improve our in-browser editor product and extending customer lifetime value.

We continue to take a data-driven look at how we are acquiring customers, pricing and packaging sensitivity and ruling out innovative products more quickly and effectively, which we wouldn’t have been able to do without our new technology platform. As it relates to our e-commerce image business, we're driving a shift in mix among our product plans.

Our data is showing that this shift is increasing lifetime revenue and value from our e-commerce image customers. However, it also has the effect of slowing revenue and download growth in the short-term. In March [indiscernible] new smaller subscription packages.

Although it is early days, we're pleased with the customer response to our expanded offering as these packages have driven improvements in mix, retention and customer growth. In the second quarter of 2017, we significantly increased the mix of customers buying subscription.

This has improved our overall retention rates and led to double-digit year-over-year growth in the number of our active e-commerce customers. Importantly, we've been able to effect this change without changing our unit costs. In other words, our royalty rates and cost to acquire customer have remained constant.

Taken together, this means that we believe we've been able to improve lifetime revenue by acquiring more subscription customers, while simultaneously keeping costs constant or even slightly lower.

Overall, we believe we will be able to recover customer acquisition costs for these customers within the 12-month period and that we will have improved ROI over three and five-year periods. We believe that mix shift is positive for our business in the long run. Downloads are lower as a result of this change.

On average, although we continue to have more subscription customers each quarter, the average downloads allotted under the plans purchased by these customers has declined. The majority of our total downloads at Shutterstock come from our e-commerce image subscription customers.

So, this is the primary driver of this decline in this metric year-over-year. In our enterprise business, we're also building our geographic presence beyond our current markets, expanding usage of video, music, editorial and custom content within our customer base and we continue to develop a feature-rich workflow platform for teams and enterprises.

Over the last 12 months, we added an enterprise team in Asia and started to build out our European operations in London. As a result, we've seen 34% customer growth globally and 26% of our customers are buying more than one asset type.

Across our emerging businesses, motion, editorial, digital asset management, and now custom content, the ramp will take some time, but we believe the opportunity is very large. In editorial, for instance, we've just begun to make headway.

Today, we believe our editorial business represents less than 1% of what we estimate is a more than $1 billion market opportunity. In motion, we believe we have around 3% of what we estimate is a $2 billion and growing market opportunity.

And in our digital asset management business, we believe we earn around 1% of what we estimate is a $2 billion and growing market. So, based on our internal estimates of what the potential markets are for each of these businesses, we have the potential for huge runway for growth in these emerging areas of our company.

Which brings me to another significant component of what we expect to be a meaningful contributor to our growth down the road – custom content. The increasing demand for content – for creative content in local, national and international social media and marketing campaigns is growing.

As a result, offering a tech-driven solution for custom content that aligns with our vision and strategy has huge potential and was a big driver behind our acquisition of Flashstock, which closed in July.

Flashstock serves a growing base of enterprise marketers, seeking on-brand custom content to seize ever-growing visual demand of multiple marketing channels. We expect this offering will help us take home a bigger piece of our clients' overall content budget.

Flashstock's business model also centers around technology and their text stack complements ours. Now that we are on our new platform, their technology will be able to integrate seamlessly into ours.

We plan to fully integrate Flashstock throughout the balance of the year and to brand our custom business under the Shutterstock master brand as Shutterstock Custom. We will keep you updated on that progress.

To give you a sense of the opportunity this business has for Shutterstock, our internal estimate indicate a potential total addressable market of about $7 billion and we believe that, specifically with our Flashstock acquisition, we currently have a minimal share of the market.

Flashstock has about 300 customers and 10,000 contributors today, which compares to our tens of thousands of enterprise customers and hundreds of thousands of contributors. So, there's lots of room to scale there. Before I turn it over to Steven, let me take one last moment to comment on our EBITDA margin.

While our consolidated EBITDA margin has come down over the past 12 months, a significant portion of this is driven by our investments we're making in the emerging businesses that I had just spoke about and in our infrastructure.

While the majority of our revenue continues to be driven by our e-commerce image business, we aspire to a larger opportunity that can only be attained with the right allocation of resources and the right investments. So, that's what we're doing.

While we continue to invest in our image business, we are also investing in motion, editorial, digital asset management and custom. Over the past 12 months, we've reinvented roughly 200 basis points of EBITDA margin back into these smaller, but high growth and high potential businesses.

This is also true in the second quarter and on a year-to-date basis. As we have spoken about previously, we're also setting up our infrastructure for the future. We are implementing workday and sales force and transitioning to a cloud hosting environment, all of which we believe will drive efficiency and increase our future profitability.

Over the last 12 months, we have reinvested roughly 150 basis points of EBITDA margin back into these projects. While these investments are dilutive to our current margin, we believe it will have a higher return on investment in the future.

We know that this approach is affecting EBITDA this year, but we strongly believe that our focus here ensures our pace of innovation can be sustained far into the future. We are preparing our business for what's ahead over the next decade and beyond.

In summary, we continue to have good momentum in our business and are confident and optimistic about the opportunities ahead. We are bringing new solutions to the market more quickly and efficiently, which in turn is bringing on new customers and contributors.

We believe we are outpacing our competition in our original business and we're also forging ahead to build a broader platform to find the trends of the market going forward. We strongly believe that execution of our strategy will translate into strong growth and, ultimately, returns for our shareholders.

And with that, I will now turn the call over to Steven Berns, our Chief Operating and Financial Officer, to provide you details of the drivers of our financial performance..

Thanks, Jon, and thank you, everyone, for joining us today. Before I discuss our performance, I want to let you know that we posted a brief presentation deck on our website that contains supporting materials for today's call, as well as other items discussed on today's call.

As Jon has highlighted, Shutterstock continues to execute against our vision throughout the second quarter, translating into revenue growth on a reported basis of 8% and an adjusted EBITDA margin of 14%. On a constant currency basis, revenue growth was 9% and adjusted EBITDA margin was 15%.

This past quarter, our customer base expanded 11% to over 1.7 million customers.

As compared to the prior-year second quarter, we saw revenue per download increase 9% on a reported basis or 10% on a constant currency basis, driven by the continued growth in our enterprise and motion businesses, as well as a shift within our e-commerce business toward our smaller subscription plans, which are sold at higher price per image rates in our traditional larger subscriptions.

We also saw a 2% decrease in paid downloads, driven by lower downloads from our e-commerce subscription customer base. In the second quarter of 2017, revenue from our e-commerce business was $85.9 million or 3% higher than the second quarter of 2016.

Revenue growth in the e-commerce channel decelerated slightly compared to the first quarter of 2017, driven by the changes in mix of our subscription business, as Jon detailed earlier. Enterprise revenue grew 16% year-over-year to $42.9 million and now makes up approximately 32% of our total revenues.

International expansion and localization continues to be a core part of our long-term growth strategy. In the first quarter of 2017, of the approximately 65% of our revenues from customers outside the United States, approximately half of that amount is from customers in Europe with the balance from Asia-Pacific and Latin America.

Shifting to the cost side of the business, for the second quarter of 2017, operating expenses increased 15% versus the second quarter of 2016, driven primarily by investments we are making in our infrastructure and increased sales and marketing spending year-over-year.

Contributor royalty payments were approximately 27% of revenue in the second quarter, which compares to the approximately 28% in the first quarter of 2017. Now, I’ll discuss some of the major expense categories. And for each category discussed, my comments and the numbers referenced exclude stock-based compensation expense.

Our sales and marketing expense increased 19% versus the second quarter a year ago. This spend is split roughly 50-50 between performance marketing spend and the cost of running our sales force. Overall, our return on investment on this spend remains consistent with our historical pattern.

Cost of acquiring a new customer remained steady and our customer lifetime value remains consistent due to steady retention and repurchase rates. Additionally, we continue to build our enterprise sales engine.

Additionally, as we continue to build our enterprise sales engine, we have been able to keep sales rep productivity and ramp rates consistent with historical levels. We expect a pay back on our sales and marketing spend within 12 months, which is consistent with our historical norms.

Product and development costs increased 9% in the second quarter of 2017 versus the second quarter last year, primarily due to higher personnel and consulting costs related to building a more expansive platform, which were partially offset by capitalization of labor of $6 million.

General and administrative expenses increased by 32% for the second quarter versus the same period a year ago, driven primarily by higher personnel costs and consulting expenses related to our implementations of the applications, Workday and salesforce.com. GAAP net income in the quarter was $3.1 million or $0.09 per diluted share.

Adjusted net income was $8.3 million or $0.24 per share for the second quarter of 2017. Overall, our revenue growth in the second quarter, along with increased operating expenses, translated into adjusted EBITDA of $18.3 million, which compares to adjusted EBITDA of $22.5 million in the same period a year ago.

As of the end of the second quarter of 2017, we have approximately $265 million of cash and liquid investments. During the second quarter, as Jon indicated, we entered into an agreement to acquire Flashstock, a fast-growing business that enables the efficient creation of custom content through its proprietary platform.

The transaction closed in July of this year and had no impact on our financial results for the second quarter other than one-time transactional costs incurred in connection with the acquisition. We expect Flashstock to have a minimal impact on our financial results in 2017, but believe it is a significant growth engine in our future years.

Adjusted EBITDA for the second quarter includes approximately $1 million of one-time charges, primarily comprised of transaction costs associated with the Flashstock acquisition. Turning to the remainder of the year, we want to provide an update on guidance for 2017. There are two big factors driving where we are today.

First, revenue has come in lighter than expected due primarily to the mix shift in our e-commerce business that we discussed earlier in today's call. Again, we believe our product portfolio is well positioned for the long run.

Second, we're continuing to invest in the business, as we discussed today, at the level that we expected when we came into 2017. So, together, with the lower revenue that I just mentioned and the level of investment spending, this has negatively impacted our expectations for 2017's adjusted EBITDA for the full year.

And as a result, we expect our full-year guidance – our full-year 2017 guidance to now be revenue of $535 million to $545 million, with adjusted EBITDA of $85 million to $95 million. These numbers include results from Flashstock, which we expect to have a minimal impact, as I said, on this year's P&L. We appreciate your time today.

And now, Jon and I will be happy to answer any questions you may have.

Kim, can you please prompt the full participants for questions?.

[Operator Instructions]. Your first question comes from the line of Ralph Schackart from William Blair. Your line is open..

Good morning. Two questions, if you could please.

Jon, maybe if you could just give us an update on sort of where you are with the other platform transition and if you're on beta with any customers right now and the feedback you're getting and any timelines around when that might roll out broader? And then second, just on the sort of reinvestment phase right now with the business, can you give us a sense right now if the current sort of reinvestment spend is the right level? Would you need to take that up potentially in the future? And then, how much longer are you anticipating this current reinvestment phase to last? Thank you..

I'll start with the platform transition. There's nothing in beta right now. And the entire platform is available to our e-commerce customers today. We're running multiple tests. At any moment, testing different plans, pricing, features, functionality. You see that on our search results page. There are several new features that we launch.

And those are all on our new platform changes. Some of our businesses are moving over the next quarter. So….

As it relates to investment spending, what we see is that the opportunities for us are significant. We will continue to invest at appropriate levels. Having said that, we do expect our growth rates in the future will increase on the revenue line. And certainly, we expect margins to improve.

Our investment in our infrastructure will over time come down as we evolve from what has been a physical server environment into a cloud-based environment, and so we will not have, if you would, the level of costs of basically that transition where sometimes you incur for some period of time a duplication of costs of both physical as well as cloud..

Okay, thank you..

Your next question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open..

Thanks. Two, if I can. First, when you look at the broader stock market, not a lot of great third-party data out there.

Wondering if you guys have a view as to how fast the market as a whole was growing and kind of whether you guys are gaining share in that market? And then second one would just be, as you see customer shift to different plans and you look at lifetime value, have you had customers on long enough to really get a firm view of the lower-priced plans, like how it is changing lifetime value or is it more just a function of having the lower-priced plans does retain customers that otherwise might leave? Wondering how you guys look at that..

Thanks, Lloyd. I'll start with the first question. As far as the market, hard to pin down the exact size. We know that there is more and more demand for images.

But let me just kind of take a step back and talk about all of our different lines of business because there's a lot of opportunity in each one and I can go into a little bit of detail for each one. So, we can start with e-commerce images.

Our site today, on the new platform, there's a ton of opportunity as we start to get even more local, more international, improve our search results, and improve the user experience of that site. Now that we're fully on that new platform, we're seeing that we're able to do that faster and better than ever.

So, there should be a lot of stuff we can do there. Our second line of business, e-commerce motion. That includes footage and that includes audio. As it gets easier and easier to use footage, which will have become more and more democratized, we feel like there's a lot of opportunity on the stock video side. And we plan to take advantage of that.

On the audio side, with our acquisition of PremiumBeat, as we learn more and more about how people are using footage and music together, the opportunity becomes bigger and bigger for us. And as that footage platform starts to get further on to our core platform, there's even more opportunity for us.

On the enterprise side, we have begun a pretty big effort to make our tools easier to use for our reps to get more predictive models going here, so that we can better figure out exactly who we should target from our e-commerce customer and bring into enterprise and who in the world we should target as an enterprise customer.

We get better and better at that every single day. On the editorial side, we're just getting started. Our acquisition of Rex, combined with all the different partnerships that include AP, Penske Media and several other image sources, give us an amazing opportunity.

And if you look through periodical websites – news websites, sports, entertainment type content providers, you're going to see us show up more and more with the traditional players that you used to see on those websites. You'll see it print also.

On the digital asset management side, we're getting smarter and smarter about cross-selling between our Shutterstock enterprise customers and our WebDAM digital asset management customers.

We're going to be bringing the digital asset management platform into the Shutterstock family of brands, doing a more thoughtful integration and creating a Shutterstock digital asset management platform – digital asset management product from that platform.

You're going to see a lot more connection points between those two and you're going to see the brand come together under our Shutterstock master brand. On the custom side, we're really excited about Flashstock.

We've always had our enterprise customers ask us questions about how can they hire our photographers to do work for them that doesn't look like a stock photo. There are plenty of brand out there every day buying stock photos from us that also need custom content.

And today, we have that productized technology solution that we can integrate into our product in a seamless way. Our Node and React platform meshes really well with the Flashstock platform. We're going to be bringing that together into a full Shutterstock product that our customers will be able to purchase.

As a reminder, when we bought Flashstock a month ago, they had 300 customers. We have 30,000 enterprise customers that we can bring to that product and allow them to develop custom photography that is not stock photography. It is custom photography that has their product in it, that is exclusive to them.

And that’s a big deal because the custom commercial market is very large, very inefficient. And for the past decade, people have been asking us how we're going to solve that, and now we have a solution..

As it relates to your other questions on the early days for the smaller subs, we have about half a year of data and what we know is the following. We've seen extremely view on retention.

And the most important outcome that I can give you at this point in time is we have more customers buying more subs than before and we have more total customers overall than we had before for those products. So, it's true that it's somewhat early days, the indications are strong on a comparable basis..

Thank you..

Sure..

[Operator Instructions]. Your next question comes from the line at Kip Paulson from Capital. Your line is open..

Hi. This is Kip Paulson from Cantor Fitzgerald. Thanks for taking my question. Just a couple from me. Enterprise growth decelerated, this 15% year-on-year year from 25% in the first quarter.

Were there any one-time impacts here and how should we think about growth going forward? And then second, do you expect paid download decline to get worse before they get better? How does the mix shift toward subscription play out on downloads in the back half of the year within the context of your guidance? Thanks..

Yeah. As it relates to the second part of your question with regard to paid downloads, at this point in time, it's really premature for us to tell you – we're not able to say kind of the quantity of downloads that will happen.

As Jon indicated in his prepared remarks and just now in response to a question, the number of features and functionality that we're launching is such that we certainly got to be at a greater level of activity.

So, while absolute downloads, we would expect, would once again recover and increase, I can't tell you specifically whether that’s going to be in the second half of the year or beyond relative to the experience in the second quarter. As it relates to enterprise, it is definitely slower than expected. Certainly, the numbers have gotten larger.

We are certainly focused on certain parts of the world where we've had historically not had the level of sales resources that we do today. That's true in Asia-Pacific and Europe. Also, having the editorial business opens up doors for us on the media side, agencies and corporates that we previously were not necessarily participants in.

And so, we are continuing to see significant opportunities there to work with every type of large or even medium-size, like I say, media agencies and corporates. And our return on investment of enterprises, as I mentioned in my comments with regard to the reps we hire, is still within 12 months.

Last thing I would say that, as we plug in more products, as we bring in, as Jon just mentioned, custom, as we bring in editorial, as we launch our tools and asset management products, all of these create an ecosystem and a platform which is more attractive to enterprise customers on a global basis.

And so, we believe the opportunities are certainly significant and don't look at the second quarter as representative of future growth..

Okay, great. And then just one more, if I could squeeze one in. It seems that the US slowed more than the regions outside the US.

Anything other than the mix shift toward subscription or the pricing plan changes impacting this?.

No, the biggest thing was really the mix as we talked about on the e-commerce side. There wasn't anything beyond that that would be noteworthy..

Okay, great. Thank you..

There are no further questions at this time. I would now like to turn the conference back to Steve Berns. .

Kim, thank you. And thank you, participants. We appreciate your time today and we'll talk to you soon. Bye-bye..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect..