Shutterstock (NYSE:SSTK) Reports Sales Below Analyst Estimates In Q4 Earnings, Stock Drops

Full Report / February 21, 2024

Stock photography and footage provider Shutterstock (NYSE:SSTK) missed analysts' expectations in Q4 FY2023, with revenue flat year on year at $217.2 million. The company's full-year revenue guidance of $875 million at the midpoint also came in 4.8% below analysts' estimates. It made a non-GAAP profit of $0.72 per share, down from its profit of $1.05 per share in the same quarter last year.

Shutterstock (SSTK) Q4 FY2023 Highlights:

  • Revenue: $217.2 million vs analyst estimates of $223.9 million (3% miss)
  • EPS (non-GAAP): $0.72 vs analyst estimates of $0.60 (19.5% beat)
  • Management's revenue guidance for the upcoming financial year 2024 is $875 million at the midpoint, missing analyst estimates by 4.8% and implying 0% growth (vs 5.8% in FY2023)
  • Free Cash Flow of $41.6 million is up from -$6.30 million in the previous quarter
  • Gross Margin (GAAP): 55.9%, down from 59.6% in the same quarter last year
  • Subscribers: 523,000, down 63,000 year on year
  • Market Capitalization: $1.59 billion

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.

Online Marketplace

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 that feed back into further customer acquisition.

Competitors offering visual content include Adobe (NYSE:ADBE), Getty Images (NYSE:GETY), and Alphabet (NASDAQ:GOOGL).

Sales Growth

Shutterstock's revenue growth over the last three years has been unremarkable, averaging 9.6% annually. This quarter, Shutterstock reported a year on year revenue decline of 0.2%, missing analysts' expectations.

Shutterstock Total Revenue

For the upcoming financial year, management expects revenue to reach $875 million at the midpoint, representing 0% growth compared to the 5.8% increase in FY2023.

Usage Growth

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 33.8% annually to 523,000. This is among the fastest growth rates of any consumer internet company, indicating that users are excited about its offerings.

Shutterstock Subscribers

Unfortunately, Shutterstock's users decreased by 63,000 in Q4, a 10.8% drop since last year.

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 ARPU

Shutterstock's ARPU has declined over the last two years, averaging 14.8%. Although it's unfortunate to see the company lose its pricing power, it was still able to achieve strong user growth. This quarter, ARPU grew 11.8% year on year to $415.33 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert 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 55.9% this quarter, down 3.7 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 $0.56 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Shutterstock Gross Margin (GAAP)

Despite declining over the last 12 months, Shutterstock's average gross margins of 60.1% 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

Consumer internet businesses like Shutterstock grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

Shutterstock is efficient at acquiring new users, spending 40.8% 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.

Shutterstock reported EBITDA of $46.27 million this quarter, resulting in a 21.3% margin. Additionally, Shutterstock has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 27.5%.

Shutterstock Adjusted EBITDA Margin

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 $41.6 million in Q4, down 7.9% year on year.

Shutterstock Free Cash Flow

Shutterstock has generated $103.8 million in free cash flow over the last 12 months, a solid 11.9% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Shutterstock's Q4 Results

We struggled to find many strong positives in these results. Its revenue, operating margin, and free cash flow missed estimates, driven by churn in its subscriber base and paid downloads that fell short of analysts' expectations. A lone bright spot was its revenue from its Data, Distribution, and Services product offering, which grew 256% in 2023 compared to 2022. That increase can be attributed to growth in its data offering and revenue generated from Giphy, a company Shutterstock bought in May 2023 from Meta as part of the UK regulator order (Giphy wasn't generating meaningful revenue at the time of acquisition). 

The company will begin disclosing more granular information with investors; it plans to break down its revenue into two reportable segments - Content and Data, Distribution and Services. Looking ahead, the company's full-year 2024 revenue and EBITDA guidance came up short, but it did share its 2027 goals. The company expects to grow its revenue at a 10% CAGR with a long-term EBITDA margin of 28-30% (up from 21% this quarter).

The Board also declared a dividend of $0.30 per share payable on 3/14/24 to stockholders as of 2/29/24.

Overall, this was a mixed quarter for Shutterstock. The company is down 6.7% on the results and currently trades at $41.5 per share.

Is Now The Time?

Shutterstock may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Although Shutterstock isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been a little slower over the last three years, and analysts expect growth to deteriorate from here. And while its growth in users has been strong, unfortunately, its ARPU has declined over the last two years.

At the moment Shutterstock trades at 6.6x next 12 months EV-to-EBITDA. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Shutterstock doesn't trade at a completely unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $60.80 per share right before these results (compared to the current share price of $41.50).

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