Shutterstock, Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Q2 2021 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 is being recorded. I would now like to turn the conference over to your host, Mr. Chris Suh, VP, Investor Relations and Corporate Development.

[Chris Suh:]

Thank you, Phyllis. Good morning everyone and thank you for joining us for Shutterstock's second quarter 2021 earnings call. Joining us today is Stan Pavlovsky, Shutterstock's Chief Executive Officer; and Jarrod Yahes, Shutterstock's Chief Financial Officer.

[Stan Pavlovsky:]

Thank you, Chris. Good morning everyone and thank you for joining Shutterstock's second quarter 2021 earnings call. We're happy to report that the company has seen another strong quarter in terms of growth. This morning, I'll be discussing the key drivers of growth. However, before doing that, I'd first like to talk in more detail about the exciting announcement that you saw this morning in connection with the formation of Shutterstock.AI and the acquisition of three AI-driven creative intelligence platforms. As a backdrop, in previous quarters, I've spoken about Shutterstock’s three strategic pillars; workflow innovation, fresh and relevant content and data and insights to drive performance. Shutterstock.AI and its three acquisitions represent a very important and tangible advancement with respect to our plans for data and insights. This is a major milestone for us that will reshape our product offerings and ultimately our addressable market in the years to come.

[Jarrod Yahes:]

Thank you, Stan, and good morning, everyone. Shutterstock grew revenues 19% in the second quarter or 16% on a constant currency basis, our fourth quarter of accelerating revenue growth. Revenues benefited this quarter from the addition of TurboSquid, which added 4% to our growth. Our growth rate also benefited from the comparison to the second quarter of 2020 when demand was negatively impacted due to the pandemic. Constant currency organic growth was 12% for the second quarter. The acceleration in organic constant currency revenue growth in the second quarter is further evidence of demand acceleration, along with solid execution across revenue channels, geographies, content types and industries. Both our e-commerce and enterprise revenue channels performed strongly this quarter. Growth was led by our e-commerce channel which grew 23% or 16%, excluding TurboSquid. TurboSquid has grown 20% plus year-to-date post acquisition, clearly exceeding our expectations for the business. Our enterprise channels were 13% and accelerated from 5% growth realized last quarter on the back of some of the product introductions and bookings momentum Stan mentioned previously. From a geographic perspective, revenue was up 23% in North America, 24% in Europe, and 11% in the rest of the world. European growth was strong and accelerated from the prior quarter driven by the UK, Germany and France, which also continued to be favorably impacted by currency movements. The rest of the world had more moderate growth, led by Asia and Australia. However, that growth was negatively impacted by relatively weaker performance in South America. Gross margin improved by 400 basis points to 64% in the second quarter compared to 60% in the second quarter of 2020, and was down 200 basis points from the first quarter per our expectations and commentary last quarter. Gross margin was impacted by the return to growth in paid downloads in this quarter of 2%, an additional month of the inclusion of TurboSquid royalties, and an ongoing step-up in earnings tiers achieved by our contributors over the course of the year.

[Operator:]

. Your first question comes from the line of Youssef Squali with Truist.

[Youssef Squali:]

Thank you very much, and guys congrats on a really nice quarter. Two questions, if I may. First, Jarrod, on just the guidance that you just went through. I think you talked about sequential improvement I guess and the top line driven by enterprise and maybe to a lesser degree e-commerce. If I look at even the high end of your guide of 750, it effectively implies that on just a pure dollar standpoint for Q3 and Q4, they would actually be at or below what you did in Q2. So just wondering if you can maybe peel that onion a little bit for us, any reason for that or is that just out of conservatism? And Stan, congrats on these deals. Maybe can you just step back a little bit, 30,000 foot view of the business relative to where you guys were, say, last year or a couple years ago, and where you see the business? It seems like the business is pivoting more and more towards AI. These campaigns or these acquisitions seem to be even putting you more maybe into campaign management optimization, particularly with Datasine and Shotzr. So maybe if you can just speak to how you see the business evolve and where you see -- how would you see the business in like three to five years? Ideally, how do you see it, because it's clearly very, very different from where it was two or three years ago? Thank you.

[Jarrod Yahes:]

Sure, Youssef. So with respect to our guidance, I think we feel really good about the guidance raise. $20 million at the top end and the bottom end of the raise I think is something that at this point in the year we're feeling quite confident about the business. We're feeling quite good about the subscription metrics. And yes, to your point, we are feeling quite good about enterprise and the bookings growth that's taking place there. And you can see some of that on the balance sheet in the deferred revenue balance. As you look towards the back half of the year, I think there's a few things going on. Number one, as we've mentioned several times, we are lapping some of the new subscription product introductions in the second half of the year, and we think that will bring some of the subscription growth metrics down. We are going to face tougher comparables in the back half of the year. So if you look at 2020, by the time we got to the fourth quarter, there was a pretty sharp rebound in demand. We grew 9% in the fourth quarter of 2020. And so as we face those tougher comparables, we are being more conservative as we look towards the back half of the year. I think as you pull apart the numbers, one of the things you'll see is, if you look at the constant currency organic revenue growth implied by the top end of the guidance, it's somewhere around mid-single digit growth in the back half of the year. And I think at this point in time, that's a zone that we feel quite good about from a guidance perspective and visibility perspective.

[Youssef Squali:]

Okay.

[Stan Pavlovsky:]

Good morning, Youssef. Thanks for your question about the company and sort of strategically where we're going. You're right. We are definitely pivoting the company. But what I would say is, from an industry perspective, the cross section or the intersection of content technology and data is something that's extremely powerful, and something that we've talked about for a couple of years. But at the 30,000 foot level, we looked at what are our customer pain points? And the creative selection criteria is one of the key pain points that remains within the marketing workflow. And so we felt like this is an area that is open and fragmented and really felt like our first party data in conjunction with some of these acquisitions. It could really be a powerful solution for customers as they determine what content will work for their campaigns. So what you can expect from us in terms of pivot is that our subscription products will continue to be enhanced so that customers have not just content, but intelligence around that content. So they can make smart decisions about what will work. But also as I mentioned in my talking points earlier, we will continue to further develop products in the workflow. So you can imagine that we will continue to launch products that indrench us further in the customer's workflow. And everything will be data-enabled to allow customers to make smarter decisions. So we are going to be much more of a technology platform going forward, not just a content marketplace. And we feel that this is going to be a good use of our cash for shareholders, but also we feel like the decisions we're making with these investments will be great for our customers.

[Youssef Squali:]

Thank you. That's actually helpful. Thanks.

[Operator:]

Your next question comes from the line of Andrew Boone with JMP Securities.

[Andrew Boone:]

Hi, guys. Thanks for taking the question. I've got one and then I have a follow up please. As we think about the impact of AI kind of in 2022, can you help us understand how big the impact can be? So said another way, as AI starts to mature, does that decouple Shutterstock from industry growth of 5% to 10%? Can you guys grow faster than that now? Can it materially move kind of revenue growth higher?

[Stan Pavlovsky:]

Yes, absolutely. I'll take this one. This is Stan. Ultimately, everything we do in support of our customers is meant to improve retention and acquire new customers. So this is definitely for us part of the growth strategy that we have over the next several years. So while we're not providing any guidance today on 2022 and the impact that Shutterstock.AI will have, we will do so in Q4. The one thing I can tell you is that, for example, today we're in market with computer vision services and we have a very robust pipeline. We've already generated several million dollars of revenue and we have a robust pipeline around that. So that hopefully at least gives you a sense of the fact that this is something that we are launching in the near term, but we expect a lot more of the benefits as we integrate these technologies within the marketplace and within our subscriptions over the next, call it, 12 to 18 months.

[Andrew Boone:]

Okay. That makes sense. Thank you. And then on enterprise, bookings growth was pretty impressive, up 6% quarter-over-quarter. Can you talk about just the sustainability of enterprise and the impact from SMB FLEX?

[Stan Pavlovsky:]

Yes. So there is really -- with enterprise, there's really several customer segments that we focus on. On the high end or our high-touch business, we've seen a lot of growth resulting from both increased retention of customers as well as new customer growth, as well as average order value on that growth. And the reason that this is happening is because one, over the last 12 to 18 months, we have completely changed our go-to-market approach. We've brought new services, including Studios, Editorial, News Desk as well as other services to the enterprise. We have segmented our sales team around customer segments. And so we're seeing a lot of success that has been the fruit of our labor over the last, call it, 12 to 18 months and it's really nice to see. On the small and medium segment, we've been really innovative with new products that support small businesses. In fact, in that segment, we've launched our first multi-asset sub, where customers can buy image, music and footage assets, all within the same subscription or have access to multiple assets within the same subscription, and we're finding a lot of success globally from that product as well. So I guess what I would say is, we're really trying to continue to bring new products to market. And with our recent acquisitions, including 3D, some of these data acquisitions as well as additional new products that we plan to launch for the small and medium business segment, we feel pretty confident that we have a team now in place that can really bring a lot of value to our agency partners, corporate customers, as well as our small and medium business customers.

[Andrew Boone:]

Great. Thanks, guys.

[Operator:]

Your next question comes from the line of Bernie McTernan with Needham & Company.

[Bernie McTernan:]

Great. Good morning. Thanks for taking the question. The investments in AI make a whole lot of sense. I was just wondering from like a competitive standpoint or agencies, are they doing anything with AI and big data and just how differentiating your offering will be? And I have a follow up as well.

[Stan Pavlovsky:]

Yes, absolutely. So many companies are leveraging AI for a number of -- for a lot of purposes and a lot of ways to both automate increased margins as well as drive performance. And media agencies definitely use AI, given the troves of data that they have on behalf of their customers and partners. Our offering is really focused on creative and our data offering is focused on the performance of that creative, which still continues to be a real pain point for customers. It's what do I choose upfront in that process, both leveraging my creative instinct as well as being able to leverage data upfront to really make that process much more efficient. And so when you think about a company like ours, when you show up to our site and you are searching across a library of almost 0.5 billion assets, having those types of recommendations and being able to have more confidence around what content will work, not just performing A/B tests, but actually understanding upfront what's going to work we feel is a real differentiator in the marketplace. But the use and application of AI, machine learning, in our case, computer vision, these are very fragmented use cases across the marketplace and we expect that will be also a major player with AI in the market for creative content and creative performance. The other thing I would just say is as a business, we've been leveraging machine learning and AI for some time with our internal processes. So really what we're doing now is we're taking some of the assets that we've built internally and really commercializing those data assets for our customers.

[Bernie McTernan:]

It makes sense. And then I know we spent a lot of time on last call talking about TurboSquid. So I was just wondering if you could talk about the contribution of TurboSquid in the quarter, how the integration process is going and any early data points on cross-selling to existing customers?

[Stan Pavlovsky:]

Yes, so I'll talk really briefly on the integration, and then I'll let Jarrod talk about the numbers. But TurboSquid has been great. The team is fantastic. Just as a reminder, this is a company based in New Orleans, the largest 3D marketplace in the world. The business has really seen nice growth during this time. We've seen a lot of really nice growth, not just in terms of the volume, but also the unit economics as we see more and more sophisticated models are being used for a number of use cases, as you can imagine for gaming, for special effects, movies, et cetera. And we really do see in 2022, some real opportunities from an integration perspective across the areas that I talked about, right, in terms of the marketplace itself, we want to democratize the use of 3D, which today really requires a skill set that is not necessarily prevalent. So we want to make it much easier for customers to use 3D. There is also -- in terms of the models, as you think about technologies that are emerging around augmented reality, virtual reality, we feel like we have a real role to play to help the large platforms that are developing really exciting technologies such as self-driving cars, and really mapping out the world with 3D objects. So we do see a lot of excitement and a lot of demand. And what you're going to see from us is integration across all of our sales channels. We'll have offerings, including Studio offerings within enterprise around 3D. We'll have much more self-service offering in e-commerce. And as is always the case, we will leverage our platform partners and platform solutions to do 3D integrations with some of the largest platforms in the world. And Jarrod, do you want to talk a little bit about the contribution of TurboSquid this quarter?

[Jarrod Yahes:]

Sure. And Bernie, just in terms of the specific contribution from my prepared remarks, TurboSquid contributed 4% in the quarter, so $6.8 million of recognized revenue. This is the first quarter where we recognize the full three months of TurboSquid revenue as we closed on the deal at the beginning of February. But I would say that the business has certainly outperformed our expectations from the time of the consummation of the acquisition really as a result of a lot of the tailwinds that Stan mentioned. So we feel great about the secular industry demand for 3D. We feel great about the company that we've acquired and brought into the Shutterstock family. And I think now we're really going to be in investment mode, integrating the business and making sure that we can leverage the full breadth of assets that we acquired with Shutterstock's channels and capabilities.

[Bernie McTernan:]

Great. Thanks for taking the questions.

[Operator:]

. At this time, I would like to turn the call back over to Stan Pavlovsky, CEO.

[Stan Pavlovsky:]

Well, thank you everyone for joining us today. In closing, we are extremely excited for what lies ahead in terms of innovation around data and insights, workflow innovation, and fresh and relevant content. As always, thank you to all of our customers, contributors and employees. That ends our call for the day.

[Operator:]

Thank you. That does conclude today's conference. We thank you for participating. You may now disconnect.