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Shutterstock, Inc. (SSTK)

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Shutterstock, Inc. (SSTK)

Q3 2017 Earnings Call

October 31, 2017 8:30 am ET

Executives

Michael Mestrandrea - Shutterstock, Inc.

Jonathan Oringer - Shutterstock, Inc.

Steven Berns - Shutterstock, Inc.

Analysts

Lloyd Walmsley - Deutsche Bank Securities, Inc.

Alex Giaimo - Jefferies LLC

Ralph Edward Schackart - William Blair & Co. LLC

Youssef Squali - SunTrust Robinson Humphrey

Kip Paulson - Cantor Fitzgerald Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2017 Shutterstock, Inc. 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 conference call may be recorded.

I would now like to introduce your host for today's conference Michael Mestrandrea. Please go ahead.

Michael Mestrandrea - Shutterstock, Inc.

Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's third quarter 2017 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman; Steven Berns, our Chief Operating Officer and Financial Officer. During this call, management may make forward-looking statements that are subject to risk, uncertainty, including predictions, expectations, estimates and other information. These include statements relating to expansion of our addressable market, the growth of customer base, success of new and existing product offerings, growth and 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. The reported results should not be considered as an indication of future performance.

Please refer to today's press release, the reports, documents we file from time-to-time with the U.S. Securities and Exchange Commission, including section entitled Risk Factors in the company's annual report on the Form 10-K on December 31, 2016, for a discussion of important risk factors that 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 refer to adjusted EBITDA, adjusted EBITDA growth, adjusted EBITDA margin, adjusted net income, each of these metrics on a consistent currency basis, revenue growth on a constant currency basis, free cash flow all of which are non-GAAP financial measures. You will find a description of these items along with the reconciliation of most directly comparable GAAP financial measures in today's earnings release from our Form 8-K, which are posted on our Investor Relations website.

We believe that the uses of the measures in conjunction with GAAP financial measures provides an important additional insights for investors about the performance of the company's overall business and operating performance, it enhances comparability for investors in assessing our financial reporting. However, these non-GAAP financial measures should not be considered as a substitute for financial information prepared in accordance with GAAP.

And with that, I'll turn the call over to Jon.

Jonathan Oringer - Shutterstock, Inc.

Thanks, Mike. And thanks everyone for joining us today for Shutterstock's third quarter 2017 earnings call. We continue to make progress in our business. As we noted last quarter, we are seeing positive operational momentum as a result of our new technology platform and operating structure. We are pleased with the improvement in our top line performance in the third quarter. So our margins continue to be affected by the investments we are making in our business, which will have a long-term positive impact. In the third quarter of 2017, on a constant currency and year-over-year basis, revenue grew 14% and adjusted EBITDA increased 1%. In addition, on a year-over-year basis during the third quarter of 2017, our customer base grew by 11% to nearly 1.8 million customers. Paid downloads increased by 2% to 41.9 million. We grew revenue per download by 10% on a constant currency basis.

We expanded our image library by 52% to over 155 million images, and our video library increased by 54% to more than 8 million clips. We continue to take 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 used to collaboratively design, build and distribute creative projects. Over the past few years, we've been making investments in our business that are enabling us to address larger opportunities, that we believe will drive shareholder value over the long-term. Our technology platform, which as you know, has been undergoing an upgrade over the last several quarters, is showing positive results from our investments. We're seeing a better speed of innovation, which is allowing us to get our products and services to the market quicker and more efficiently.

Operationally, we are now organized to align more deliberately with our customers, which means we are able to focus on our product, engineering and marketing efforts according to customer needs and demands, and respond more quickly to market dynamics. I can tell you that I see this happening every day across the organization at all levels. This past July, we completed our acquisition of Flashstock, now rebranded as Shutterstock Custom, which serves enterprise marketers seeking on-brand custom content across channels. All of these actions are leading to positive momentum in our business. In our e-commerce image business, we're seeing solid customer growth, and our focus continues to be on offering the right pricing and packaging for our customer base, and optimizing our customer acquisition funnel.

As we noted last quarter, earlier this year we launched two smaller subscription packages, which are driving improvements in mix and retention. We've also been able to ramp up A/B testing significantly in our e-commerce business since getting onto our new technology platform. Importantly, while doing this, we have also improved the efficiency of our sales and marketing spending, resulting in lower cost per acquisition in the quarter. We continue to upgrade our product offering. We are utilizing our search tools and machine learning capabilities to deliver the best experience for customers globally. Earlier this month, we launched a beta version of a new tool called Composition Aware Search, that transforms the way users can search for images using computer vision. With this tool, our customers can find objects that exist in specific parts of an image. For marketers searching for an image with copy, paste or for an object or person in a specific location in an image becomes easy. We believe we're just scratching the surface when it comes to machine learning and machine vision.

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