Shutterstock(SSTK) - 2020 Q4 - Annual Report

Part I Business Shutterstock operates a global creative platform licensing content from over 1.6 million contributors to over 2.0 million customers, with revenue primarily from E-commerce and Enterprise channels - The company's business model is a two-sided marketplace connecting over 1.6 million content contributors with over 2.0 million customers in more than 150 countries as of 2020[23][26][241] - Content offerings include images, footage, music, and, as of February 2021, 3D models through the acquisition of TurboSquid, Inc[17] Revenue by Sales Channel (2016-2020, in thousands) | Sales Channel | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | E-commerce | $412,521 | $392,241 | $365,730 | $332,376 | $318,916 | | Enterprise | $254,165 | $258,282 | $254,809 | $208,713 | $164,384 | | Other | — | — | $2,711 | $16,022 | $11,017 | | Total Revenue | $666,686 | $650,523 | $623,250 | $557,111 | $494,317 | - The number of subscribers grew by 45% and subscriber revenue grew by 12% from December 31, 2019 to December 31, 2020, indicating strong growth in recurring revenue streams[25] - The company's workforce decreased from 1,116 employees at the end of 2019 to 967 at the end of 2020. In response to COVID-19, a mandatory work-from-home policy was implemented in March 2020[59][62] Risk Factors The company faces material risks including the COVID-19 pandemic, intense competition, operational challenges, intellectual property issues, international regulatory complexities, and concentrated stock ownership - The COVID-19 pandemic poses a significant risk, potentially leading to decreased customer spending, reduced content contributions, and other operational disruptions[75] - The business is highly dependent on attracting and retaining customers and contributors in a competitive industry with low barriers to entry. Competitors include Getty Images, AdobeStock, and Canva[78][84][58] - The company is subject to extensive governmental regulation regarding data privacy and security, such as GDPR and CCPA, and any failure to comply could result in significant penalties and harm to the business[138][140][142] - Founder and Executive Chairman, Jonathan Oringer, controls approximately 36.8% of outstanding common stock, giving him significant influence over corporate matters. Share repurchases could increase this concentration[182][183] - International operations, which account for about two-thirds of revenue, expose the company to risks including foreign exchange fluctuations, compliance with diverse legal systems (e.g., FCPA, UK Bribery Act), and political instability[153][154] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[202] Properties Shutterstock's corporate headquarters is leased in New York, NY, with other leased facilities globally, deemed adequate for current needs - The company's principal office is leased in New York, New York, with the lease agreement set to expire in 2029[203] Legal Proceedings The company is not currently involved in material litigation but faces various ordinary course claims, not expected to have a material adverse effect - Shutterstock is not currently involved in any material active litigation but faces various claims in the ordinary course of business[205] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[206] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Shutterstock's common stock trades on the NYSE under "SSTK", with a quarterly cash dividend initiated in February 2020, and no share repurchases in Q4 2020 - The company's common stock is listed on the NYSE under the symbol "SSTK"[208] - A quarterly cash dividend policy was initiated on February 11, 2020[210] - No issuer purchases of equity securities were made in the fourth quarter of 2020[211] Selected Financial Data This section provides selected consolidated financial and operating data for 2016-2020, including GAAP and non-GAAP measures, and key operating metrics Consolidated Statements of Operations Data (2016-2020, in thousands) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $666,686 | $650,523 | $623,250 | $557,111 | $494,317 | | Income from operations | $85,266 | $20,155 | $32,452 | $26,349 | $45,786 | | Net income | $71,766 | $20,108 | $54,687 | $16,727 | $32,628 | | Net income per share (diluted) | $1.97 | $0.57 | $1.54 | $0.47 | $0.91 | Consolidated Balance Sheet Data (As of Dec 31, in thousands) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $428,574 | $303,261 | $230,852 | $253,428 | $224,190 | | Total assets | $729,644 | $630,512 | $531,488 | $577,776 | $501,778 | | Total liabilities | $307,719 | $302,367 | $244,821 | $263,191 | $215,082 | | Total stockholders' equity | $421,925 | $328,145 | $286,667 | $314,585 | $286,696 | Key Operating Metrics (2016-2020) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Subscribers (end of period, thousands) | 281 | 194 | * | * | * | | Paid downloads (millions) | 180.0 | 187.8 | 179.6 | 172.0 | 167.9 | | Revenue per download | $3.68 | $3.43 | $3.40 | $3.13 | $2.88 | | Images in collection (millions) | 360 | 314 | 242 | 170 | 116 | | Footage in collection (millions) | 21 | 17 | 13 | 9 | 6 | Reconciliation to Adjusted EBITDA (in thousands) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $71,766 | $20,108 | $54,687 | $16,727 | $32,628 | | Adjusted EBITDA | $154,934 | $96,314 | $105,114 | $88,049 | $95,463 | | Adjusted EBITDA margin | 23.2% | 14.8% | 16.9% | 15.8% | 19.3% | Reconciliation to Free Cash Flow (in thousands) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $165,072 | $102,646 | $102,202 | $108,037 | $100,723 | | Capital expenditures | ($25,630) | ($26,081) | ($34,890) | ($55,062) | ($39,959) | | Content acquisitions | ($2,970) | ($3,344) | ($3,838) | ($2,961) | ($8,045) | | Free Cash Flow | $144,231 | $73,221 | $63,474 | $50,014 | $52,719 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses 2020 financial performance, noting a 2% revenue increase driven by E-commerce growth, significant operating and net income surges due to expense reductions, and a strong liquidity position Comparison of 2020 and 2019 In 2020, revenue grew 2% to $666.7 million, driven by E-commerce, while operating expenses decreased 8%, leading to a 323% surge in operating income and 257% rise in net income Financial Performance Comparison: 2020 vs. 2019 (in thousands) | Account | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $666,686 | $650,523 | $16,163 | 2% | | E-commerce Revenue | $412,521 | $392,241 | $20,280 | 5% | | Enterprise Revenue | $254,165 | $258,282 | ($4,117) | (2)% | | Total operating expenses | $581,420 | $630,368 | ($48,948) | (8)% | | Income from operations | $85,266 | $20,155 | $65,111 | 323% | | Net income | $71,766 | $20,108 | $51,658 | 257% | - The decrease in operating expenses was primarily driven by a $21.1 million decline in marketing spend and lower royalty expenses resulting from a 4% decline in paid downloads and a modification to contributor compensation[277][278] Comparison of 2019 and 2018 In 2019, revenue increased 4% to $650.5 million, but operating expenses rose 7%, causing income from operations to fall 38% and net income to decrease 63% due to the absence of a prior-year gain Financial Performance Comparison: 2019 vs. 2018 (in thousands) | Account | 2019 | 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $650,523 | $623,250 | $27,273 | 4% | | Total operating expenses | $630,368 | $590,798 | $39,570 | 7% | | Income from operations | $20,155 | $32,452 | ($12,297) | (38)% | | Gain on Sale of Webdam | — | $38,613 | ($38,613) | * | | Net income | $20,108 | $54,687 | ($34,579) | (63)% | - The 63% decline in net income in 2019 was primarily due to the non-recurrence of a $38.6 million pre-tax gain from the sale of the Webdam business in 2018[296][287] Liquidity and Capital Resources As of December 31, 2020, the company maintained strong liquidity with $428.6 million in cash, supported by operating cash flow, and engaged in dividend payments, capital expenditures, and a stock offering Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $165,072 | $102,646 | $102,202 | | Net cash used in investing activities | ($35,310) | ($27,234) | ($12,827) | | Net cash used in financing activities | ($4,587) | ($1,696) | ($109,739) | - The company completed a stock offering on August 14, 2020, receiving net proceeds of approximately $23.2 million[304] - In 2020, the company paid $24.4 million in cash dividends. In 2018, a special dividend of $104.9 million was paid[305][307] Contractual Obligations as of Dec 31, 2020 (in thousands) | Obligation Type | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $64,317 | $9,334 | $14,725 | $14,607 | $25,651 | | Purchase obligations | $38,637 | $26,524 | $12,113 | — | — | | Total | $102,954 | $35,858 | $26,838 | $14,607 | $25,651 | Critical Accounting Policies and Estimates Management identifies revenue recognition, allowance for doubtful accounts, and accounting for income taxes as critical policies requiring significant estimates and judgment - Revenue recognition for subscription products requires management to estimate expected unused licenses based on historical download activity, which could impact the timing of revenue[335] - The allowance for doubtful accounts was $4.9 million as of Dec 31, 2020, up from $3.6 million in 2019, determined by evaluating receivable aging, historical loss rates, and specific customer situations[340] - Accounting for income taxes requires significant management judgment in assessing the realizability of deferred tax assets and establishing reserves for uncertain tax positions[342][343] Quantitative and Qualitative Disclosures About Market Risk The company faces market risk primarily from foreign currency exchange rates, with 36% of 2020 revenue in foreign currencies, but does not use derivatives to hedge this risk - Approximately 36% of total revenue in 2020 was denominated in foreign currencies, primarily the Euro and British Pound[349] Revenue by Currency (in thousands) | Currency | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Euro | $138,128 | $133,341 | $124,732 | | British pounds | $49,402 | $48,307 | $49,561 | | All other non-U.S. currencies | $49,630 | $47,471 | $44,393 | | Total foreign currency | $237,160 | $229,119 | $218,686 | | U.S. dollar | $429,526 | $421,404 | $404,564 | | Total revenue | $666,686 | $650,523 | $623,250 | - The company does not have any long-term borrowings as of December 31, 2020, and does not believe interest rate or inflation risks have a material effect on its business[353][354] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and notes, including the independent auditor's report, which identified revenue recognition as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[380] - The auditor identified Revenue Recognition as a critical audit matter due to the significant audit effort involved in evaluating evidence related to content license arrangements and customer download activity[387][389] - On February 1, 2021, subsequent to the reporting period, the company acquired TurboSquid, Inc. for approximately $75 million in cash[554] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial disclosure - None reported[356] Controls and Procedures As of December 31, 2020, management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes in Q4 2020 - Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2020[358][360] Other Information The company reports no other information for this item - None[364] Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14, covering governance, executive compensation, security ownership, related transactions, and accounting fees, is incorporated by reference from the 2021 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement to be filed within 120 days of the fiscal year-end[366][368][370] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, the independent auditor's report, and an index of all exhibits filed as part of the Form 10-K - This item lists the financial statements, notes, and exhibits filed with the Form 10-K[373][375] Form 10-K Summary The company reports no information for this item - None[376]