Stock photography and footage provider Shutterstock (NYSE:SSTK) missed analysts' expectations in Q2 FY2023, with revenue flat year on year at $208.8 million. Shutterstock made a GAAP profit of $50 million, improving from its profit of $19.4 million in the same quarter last year.
Shutterstock (SSTK) Q2 FY2023 Highlights:
- Revenue: $208.8 million vs analyst estimates of $214.4 million (2.6% miss)
- EPS (non-GAAP): $1.07 vs analyst estimates of $1.01 (6.2% beat)
- The company lifted revenue guidance for the full year from $848.5 million to $860.5 million at the midpoint, a 1.41% increase
- Free cash flow of $33.4 million, down 34.4% from the previous quarter
- Gross Margin (GAAP): 59.6%, down from 62.8% in the same quarter last year
- Subscribers: 0.56 million, up 188 thousand year on year
Originally featuring a library that included many of founder Jon Oringer’s photos, Shutterstock (NYSE:SSTK) is now a digital platform where customers can license and use hundreds of millions of pieces of content.
This vast collection of digital content includes photos, videos, and music that customers can use in their projects ranging from advertising campaigns to editorial to personal art projects. Contributors to Shutterstock's library include professionals and hobbyists alike. Contributors are compensated based on the type of license purchased by the customer, with royalties ranging from teens percentages to nearly half of the sale price. The more popular an asset, the higher the royalty percentage.
Shutterstock solves the need for high-quality visual content without legal worries. “A picture is worth a thousand words” is a good way to understand how important visuals are. However, using any good image or video on the internet can be dangerous since a user may not have legal rights. Shutterstock’s content comes with licensing rights so users can sleep easy and know that they are legally protected from copyright or trademark infringement.
Shutterstock generates revenue by selling digital content and the associated licenses to it. Customers can choose from a variety of licensing options depending on their needs, such as standard or extended licenses for images or footage, or subscription plans that provide access to a certain number of downloads per month.
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.Competitors offering visual content include Adobe (NYSE:ADBE), Getty Images (NYSE:GETY), and Alphabet (NASDAQ:GOOGL).
Shutterstock's revenue growth over the last three years has been unremarkable, averaging 9.53% annually. This quarter, Shutterstock reported rather lacklustre 0.95% year-on-year revenue growth, missing analysts' expectations.
Ahead of the earnings results, analysts covering the company were projecting sales to grow 0.14% over the next 12 months.
As an online marketplace, Shutterstock generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.
Over the last two years, Shutterstock's users, a key performance metric for the company, grew 43% annually to 0.56 million. This is among the fastest growth rates of any consumer internet company, indicating that users are excited about its offerings.
In Q2, Shutterstock added 188 thousand users, translating into 51.1% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Shutterstock because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and Shutterstock's take rate, or "cut", on each order.
Shutterstock's ARPU has declined over the last two years, averaging 21.7%. Although it's unfortunate to see the company lose its pricing power, it was still able to achieve strong user growth. This quarter, ARPU declined 33.2% year on year to $375.61 per user.
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Shutterstock's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 59.6% this quarter, down 3.2 percentage points year on year.
For online marketplaces like Shutterstock, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, Shutterstock had $0.60 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Despite declining over the last 12 months, Shutterstock's average gross margins of 60.9% are still around that of a typical consumer internet business. These unit economics suggest that Shutterstock has a decent business model and competitive products and services mixed with some potential pricing pressure.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Shutterstock grow from a combination of product virality, paid advertisement, and incentives.
Shutterstock is efficient at acquiring new users, spending 37.2% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Shutterstock the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Shutterstock's EBITDA came in at $60.1 million, resulting in a 28.8% margin. Additionally, Shutterstock has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 28.8%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Shutterstock's free cash flow came in at $33.4 million in Q2, up 20.5% year on year.
Shutterstock has generated $153.5 million in free cash flow over the last 12 months, an impressive 18% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Shutterstock's Q2 Results
Sporting a market capitalization of $1.87 billion, Shutterstock is among smaller companies, but its more than $87.1 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We were very impressed by Shutterstock's robust user growth this quarter. We were also glad that its full-year revenue guidance came in higher than Wall Street's expectations. On the other hand, it was unfortunate that its revenue missed analysts' expectations and its revenue growth was quite weak. In addition, the company's gross margin also deteriorated. Overall, this was a mixed quarter for Shutterstock. The stock is flat after reporting and currently trades at $51 per share.
Is Now The Time?
When considering an investment in Shutterstock, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although Shutterstock isn't a bad business, it probably wouldn't be one of our picks. And while its growth in users has been strong, unfortunately its ARPU has been declining.
At the moment Shutterstock trades at 18.0x next 12 months EV/EBITDA. In the end, beauty is in the eye of the beholder. While Shutterstock wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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