Shutterstock, Inc. Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Financial Performance: Shutterstock reported record revenues of $233 million, 14% year-on-year growth. EBITDA was $65 million (28% margins). EBITDA has exceeded $60 million for three consecutive quarters and is on track to grow double digits in 2023. Revenue and EBITDA guidance for 2023 is raised.
• Enterprise: Enterprise revenues exceeded E-commerce in Q3. FLEX subscription for medium-sized enterprises grew 9% in Q3. Studios signed two largest deals ever. Excluding data, enterprise growth of 10%-15% is expected in Q4.
• E-commerce: Stabilizing with increased marketing spend, conversion effectiveness and retention improving. Traffic growth accelerated in October to 9%, conversion rates improved by over 10%, and churn rates in subscription products are at the lowest in three and a half years. Launched Shutterstock Essentials plan with generative AI capabilities.
• Giphy: Ad platform officially open, receiving brand interest in CPG, retail, etc. Expecting exciting developments as advertiser interest grows.
• Data: Strong growth with new customers like Amazon, expanded with existing customers. Data revenue expected over $100M in 2023 due to new signings and land-and-expand wins.

Segment Performance

• Enterprise: In Q3, enterprise revenues exceeded E-commerce revenue. The enterprise channel grew 60% total and 4% excluding data. The FLEX subscription for medium-sized enterprises grew 9% in Q3. Studios signed two largest deals ever. Excluding data, enterprise growth is expected to be between 10% and 15% in Q4. Revenue contribution from enterprise is significant with consistent growth.
• E-commerce: Down 15% year-on-year in Q3 2023. It is stabilizing with initiatives like increased marketing spend, improved conversion effectiveness and retention. The recent launch of Shutterstock Essentials plan with unlimited content and generative AI capabilities is part of the recovery efforts.
• Giphy: Giphy's ad platform is officially open, receiving strong receptivity from brands in CPG, retail, food and beverage, and financial services. It has massive audience reach with billions of monthly impressions through over 14,000 API partners.
• Data: Data sales for AI and ML model training is a growth opportunity. Shutterstock signed a new multi-year deal with Amazon and expanded relationships with existing strategic customers. Data revenue is expected to be over $100M in 2023, driven by new customers like Google and Amazon and land-and-expand wins with existing customers.

Guidance

• Raised 2023 revenue guidance from 3%-5% to 5%-7% and adjusted EBITDA guidance from $227M-$235M to $240M-$245M.
• Q4 enterprise (excluding data) expected to grow 10%-15%. E-commerce expected to be stable sequentially.
• Data revenue expected to be over $100M in 2023, up from prior expectations of $70M. Bookings and pipeline for 2024 show line of sight to over $60M in revenue.
• Q4 expected to generate record free cash flows with significant marketing spend ramp and Giphy expenses being cash neutral.

Risks

• Legal, financial, and reputational risks associated with data scraping for AI models, which Shutterstock avoids by offering ethically sourced data but still faces broader industry risks.
• Dependence on marketing spend to drive E-commerce recovery; if marketing efforts do not yield expected results, E-commerce recovery may be delayed.
• Uncertainty in E-commerce margin recovery due to factors like increased marketing spend and potential impact on margins.

Question and Answer

Q: Bernie McTernan asks about the industry's attitude towards web script content for training purposes and E-commerce traffic growth.

A: Paul Hennessy states there are brand reputation, legal, and regulatory issues driving change, and on E-commerce, traffic growth accelerated in October to 9% with conversion rates improving.

Q: Youssef Squali inquires about legal ethically-sourced metadata, data deals for smaller companies, and Q4 guidance/margins.

A: Paul Hennessy mentions large companies are engaging with Shutterstock for clean data, and Jarrod Yahes discusses Q4 revenue growth and EBITDA margin expectations.

Q: Andrew Boone asks about 2024 data contracts, enterprise vs self-service adoption, and gross margins.

A: Jarrod Yahes explains data contracts are more recurring, Paul Hennessy talks about differences between enterprise and e-commerce customers, and Jarrod Yahes discusses gross margin components.

Q: Curtis Nagle asks about Giphy monetization potential.

A: Paul Hennessy expresses enthusiasm about Giphy's ad platform being open and advertiser interest.

Q: Karen Kenny asks about expansion deals and TCV composition.

A: Paul Hennessy talks about vertical and horizontal expansions with customers, and Jarrod Yahes mentions existing customers contributing to incremental bookings.