Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Shutterstock, Inc. Earnings Conference Call. My name is Jackie and I will be your operator today. At this time, all participants are in a listen-only mode. And following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Denise Garcia, Head of Investor Relations. Please proceed.

Thank you. Good afternoon. Welcome to Shutterstock's fourth quarter and full year 2013 earnings call. Joining me today to discuss our results are Jon Oringer, Founder, CEO, and Chairman; Thilo Semmelbauer, President and Chief Operating Officer; and Tim Bixby, CFO. I would like to remind you that during this call, management may make forward-looking statements subject to risks and uncertainties including predictions, expectations, estimates and other information. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Listeners are referred to the reports and documents filed with us by the Securities and Exchange Commission including the section entitled Risk Factors on the company's Form 10-Q filed with the U.S. Securities and Exchange Commission on November 8, 2013. For a discussion of important Risk Factors that could cause actual results to differ materially from those discussed in forward-looking statements. We will also refer to adjusted EBITDA, non-GAAP net income, and free cash flow, which are non-GAAP financial measures. You can find a reconciliation of these items to the most directly comparable GAAP financial measures in our fourth quarter earnings release, which is posted on the Investor Relations section of our website. We believe that the use of these measures provides additional insights for investors. However, these non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. And now I'll turn the call over to Jon Oringer, Shutterstock's Founder, CEO, and Chairman.

Thanks, Denise, and thank you all for joining us for our fourth quarter and full year 2013 earnings call. Shutterstock delivered another strong quarter and closed the year exceeding the high-end of our revenue and adjusted EBITDA guidance range. The powerful network effects of our business model continue to drive our momentum and to attract customers and contributors form all over the world. On today's call we will share key operating metrics and financial results, update you on our growth strategies, including our investments in new products and technologies, and share updated financial expectations. Then we'll open the call to your questions. In the fourth quarter, paid downloads grew 31% year-over-year, reaching a record 28 million download. Revenue per download was $2.43, a 6% increase as compared to $2.30 in the same quarter last year, due primarily to continuing strengthen in enterprise sales and video footage licensing, both of which carry a higher revenue per downloads in our overall average. Along with growth on the demand size of our marketplace, we also saw continued momentum in the size and freshness of our image function. With more than 33 million images and 1.5 million video clips currently available, Shutterstock offers one of the largest libraries of its kind. This volume of activity on both sides of our marketplace was reflected in our stronger financial results, which exceeded the high-end of our outlook. For the fourth quarter, revenue grew 38% year-over-year to $68 million and adjusted EBITDA increased 37% compared to the prior year to $15.4 million. For the full year, revenue grew 39% to $235.5 million, while adjusted EBITDA increased 53% compared to the prior year to $53.4 million. We are very pleased with our fourth quarter results and our accomplishments throughout 2013. This performance came as a result of many…

Thanks, Jon. We continue to be focused on growing both sides of our marketplace as we execute across our primary growth strategies. As we've discussed on prior calls, our first growth strategy is to increase penetration in markets around the world. We have a few key levers to increase penetration, bringing in more content that customers are looking for, making it easier for customers to search and discover that content, and expanding our marketing efforts to increase awareness of Shutterstock and reach new customers. I will touch on each one of these. Looking at our content, in Q4, we had another record quarter. We added 2.5 million new images more than in any prior quarter. And our library now contains more than 33 million images, including photography, vector art, and illustrations. Our contributor base has also seen strong growth. Our active contributor base has increased to 55,000 and we're especially pleased with the diverse geographies, subject matter, and a high talent level of new contributors we're attracting. We're also proud to have reached an important milestone for our contributors. We've paid our more than $200 million to artists around the world since the inception of the company. We also continue to improve the way customers search for and discover new content in Q4. One of the very visible examples is that we created an option that allows users to view search results as a beautiful mosaic of images. This view maximizes the amount of image information that's on a page, which creates a better user experience and increases paid downloads. To improve the experience of our mobile customers, we launched our Android app and also improved the way our site works on mobile browsers. We have a full portfolio of tools for mobile covering IOS, Android, as well as mobile…

Great, thanks, Thilo. I'll give a bit more color around our results and our expectations and then we'll turn to questions. We will also be sharing our financial expectations for the first quarter as well as an updated view for the full year. To review a bit, the number of paid downloads we delivered in the quarter was $28 million, and this was up 31% from $21.4 million in the fourth quarter a year ago. Revenue was $68 million; an increase of 38% compared to the same quarter in the prior year, and revenue for the full year was up 39% to $235.5 million. Revenue per download increased 6% to $2.43 as compared to the prior year. And the increase in revenue per download in the quarter was driven primarily by the growing proportion of our revenue deriving from enterprise licensing and video footage downloads and this is a trend we've seen for several quarters. Adjusted EBITDA grew 37% to $15.4 million for the quarter, as compared to $11.3 million in the fourth quarter of 2012, primarily as a result of the significant revenue growth, offset by increased investment in sales and marketing and increased G&A expense. Adjusted EBITDA for the full year grew 53% to $53.4 million, up from $34.9 million in the prior year. GAAP net income was $7.9 million or $0.22 per share in Q4, as compared to $29 million in the fourth quarter of 2012. GAAP net income in Q4 2012 and in the full year of 2012 included a non-recurring tax benefit relating to our conversions with Delaware Corporation in that quarter which equaled approximately $28.8 million. Non-GAAP net income in the fourth quarter was $9.1 million or $0.26 per share, as compared to $6.6 million or $0.20 per share in the fourth quarter in…

(Operator Instructions) And your first question comes from the line of Youssef Squali with Cantor Fitzgerald. Please proceed.

Couple of questions and congrats obviously on really nice quarter again. Tim, I wanted to just follow-up on the margin comments you had. So understandably your Q1 margins will decline for the year though as we look at the midpoint or even at the higher end of the guidance it assumes flat margin year-on-year. So I want to go back to just trying to understand the leverage in the model, just how long do you feel this heavier investment cycle is going to last before we start seeing greater leverage in the model? And then, two Jon may be can you touch a little bit about the competitive landscape you're seeing right now, one of your peers had increased their sales and marketing quite a bit in the third quarter, was wondering if you could may be provide some color on their impacts or lack of thereof in the fourth quarter and what takes you to your guidance in terms of just marketing I'm sorry, competitive pressures in 2014? Thanks.

Sure. So we will take the margin and leverage question first and turn to Jon. So on the model in terms of the quarterly flow, you're correct. The intent there on the first quarter is to make it clear that the pattern we've seen in the prior couple of years will continue, which is tighter margins in Q1, that's really driven by increased marketing spend relative to revenue in the first quarter, we've seen that in the past that's really a sign of strength and our confidence in the marketing metrics. We also tend to hire new hires to kind of help grow the existing business and push new products and innovations forward at a little more aggressive pace in the first half as compared to the second half that will continue this year. And we've also got the one-time G&A expense which is real estate related transition that will hit in Q1. So the net of those, tighter margins in Q1, but we expect overall in the course of the year greater level of EBITDA in the out quarters. In terms of the leverage and the model, you're not seeing a leverage externally that we can see internally and that's really when we kind of pull apart the business a little bit and say what are we spending to drive and support the core as opposed to what are we spending to drive new products and innovations that aren't driving significant revenue. And you can see really anywhere from 3 to 5 percentage points of spend going new areas that aren't yet driving a lot of revenue. So we're comfortable in this EBITDA range of between 20% and 25% and that's where we have been over five or six quarters, and as long as our marketing metrics hold and opportunities are what they're now and over the past several quarters you should expect us to be in that range long-term certainly we believe 30% plus EBITDA margins are doable larger established players obviously has slower growth rates at much higher margins and our growth margin will certainly support that long-term.

As far as competitive changes and marketing changes from our competitors we haven't seeing that much change over the past few years. Our competitors have tried different types of marketing channels they've tried different types of creatives and we've iterated ourselves also. But the great thing about the model we have the high volume subscription model is that we have a lot more data to use to continue to iterate and to get better and better with our marketing effort and we haven't seen much change in our cost for acquisition or retention metrics.

And your next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed.

When you guys think of the rev share agreements with contributors, there are competitors out there that have more generous revenue shares. Can you -- would that tend to impact or take share from you guys over the course of time or can you talk about how that dynamic is panning out? And then, it seems like guys have been driving down pricing among your major competitors. They're now trying to price match. Have you seen any real impact from that thus far? Thanks.

Yes, as far as our contributors go, we've had 30% of them and we've seen competitors come in and try to play with that number. What happens is if they payout more to contributors, they leave less room for marketing spend and that causes less sales in the long run and less payout to their contributors. So with this we really found the sweet spot over the past 10 years with the subscription plan, with the 30% payout, and competitors have come and gone and tried different things but we haven't seen much change.

Yes, this is Thilo. May be I'll touch on the pricing topic a little bit. Obviously there's always lots of experimentation going on in this space. We ourselves are doing experimentation all the time. In the last 12 months we've launched and tested multiple different pricing plans. When you look at our offering, we really average, as you know about $2 per image, but for high volume users it could be a $1 or less and for lower volume users it could be significantly more including with our enterprises customers who are paying in the range of $20 and up. Sometimes hundreds per image depending on the licensing rights and so forth as we've talked about before. At this point we are not seeing anything that is really changing the landscape from what it has been which is quite active in experimentation. As Jon mentioned, our acquisition costs are stable even as we increased our marketing spend, which is a great sign and our retention continues to be very, very strong. We haven't seen any degradation and we would continue to see positive movement there, so not much impact.

(Operator Instructions) And your next question comes from the line of Blake Harper with Wunderlich. Please proceed.

I wanted to ask about the Skillfeed contribution, Jon, you'd talked about that, and I just want to understand what the contribution is to the business, both now and in the future, as you see this is something that would be material or is it more just something that you see strategically that can drive your core business?

Well it's super early. We're starting to see the same sorts of network effects that happen with Shutterstock where the subscribers come in and they can view as much as they want. So they pay the low monthly fee and come in and they provide us with a lot of data that exactly what they're looking for. We then use that data to go out and try to find more contributors that create that type of content and then that kind of speeds the network effect up just over a little bit more, and we kind of do this every single day, every single week, every single month to try to get those network effects going. The types of things we're seeing now are the types of things we saw 10 years ago when Shutterstock started and so it will take a little bit of time to actually make the contribution.

And then if I could have a -- I'm sorry go ahead.

Hi, this is Tim Bixby. In terms of the guidance we've factored in something greater than zero, but certainly a modest amount given the newness of the product and the early stage that we're at.

Yes, thanks for that Tim and then if I could just have a quick follow-up. With the -- how do you think about the revenue per download and the emerging content and Ultra HD stuff and obviously there's a big difference there with that and the enterprise, but just how do you kind of think about that moving forward is it kind of increased gradually or is there a some type of a point there where you see that things could accelerate more with what either of those two things and how that would affect the revenue per download?

Yes, I think the best place to look is that what happened with the transition to HD. So there was a time when high resolution was a standard, HD came along, and there was sort of a slow transition and then a little bit of a tipping point. The nice thing about HD is that it posts a higher revenue per download a higher price point. In aggregate if you just look at video overall for Shutterstock our average revenue per downloaded is around -- per clip is around $60. So 30 times with the overall number is for the company. It's a little bit too early to say where 4K or Ultra HD will play out. What we are comfortable -- what we do know is that would be a significantly higher price point. But I think it will take some time to know where that would settle out. But we would expect a similar dynamic where the cost structure is a little bit higher, but the value it provides and the quality that is there will support a much higher price point. So I would expect to have a -- either a flattish or potentially positive impact over time on revenue per download.

(Operator Instructions) And your next question comes from the line of Lloyd Walmsley with Deutsche Bank. Please proceed.

Thanks guys. I'm wondering if you could talk about the spending profile customers and enterprising video. Do you see the same kind of pretention rates as you do as you have historically in those products or might it even be higher, and may be if you could give us an update on where those are each as percent of revenue and kind of growth rates in the fourth quarter that would be helpful.

Sure, this is Thilo. On the spending profile of enterprise customers, that's a great question. It's obviously early days for us and customers here are work groups, divisions of companies, agencies et cetera. And what we're doing is methodically sort of up selling from year-to-year those groups and teams and that's part of what's driving our strong growth in that area. If you disaggregated a piece obviously coming from a lot of new accounts, but a very significant piece is also coming from taking new account from $20,000 to $50,000 to $100,000 to $200,000 et cetera without getting into details. We are nowhere near seeing the end of the increases there. So in a sense, we've talked about the business as a whole having a 100% revenue retention year-over-year, in the enterprise area its north of that. Now well, that's a smaller part of our business but that gives us lot of confidence going forward. In the video area, which is doubling year-over-year it's still early days to see what kind of retention characteristics we will see but we're also seeing more strong retention behavior there. So I'd say it is similar to enterprise at smaller dollar level. In terms of the proportion of revenues, so enterprise has be growing nicely greater than a 100% and now represents more than just about 15% of revenue, still continues to be and expand as a meaningful part of the revenue stream. Video is growing at similar rates, right around a 100%, doubled last year, but on a smaller base and is still single-digit as a percent of revenue, so I'd kind of call it 5%, 6% of revenue approximately.

And as a follow-up if I may, you've talked about how enterprise customers are often paying higher price points. What tips an enterprise? I know I think it's, to some extent, the indemnifications you give them. But what characteristics really tip something into those deals? You've talked to agencies that don't pay any higher, kind of large ad agencies that still don't pay any higher download rates. I'm curious what is it that would trigger that in a customer?

So as you said, it's a combination of the license and the rights they get, the indemnification, the service, as well as the functionality that we provide. So as an example, agencies use a platform where they can download what's called comps for free. Comps are sort of full resolution files without watermarks that they can use in their discussions with clients in their workflow. And until their clients decide yes we want to use this image they're actually not paying for that. So now, when they do license that image it's going to be in the hundreds of dollars per image. So that's a very different type of workflow that's very suited to the agency market. And I won't go through all the other categories but it's an example of how we've customized our offering for publishers, large corporations, agencies. And the price point for image varies based on some of those suites of things.

And your next question comes from the line of Ralph Schackart with Williams Blair. Please proceed.

Nice strong quarter. Just curious, on the enterprise business one more question if I could, you mentioned it doubled year-over-year, and now represents about 15% of revenue. Do you think you could see potentially double again in 2014? Or could we continue to see the sustained growth? I'm just trying to gauge how far along Shutterstock is in what appears to be a pretty big opportunity.

We expected to continue at the high-end of the growth rate that we have overall as a company, doubling again year-over-year would be quite extraordinary. And so we don't expect that to happen. We have not built that into the guidance. It's certainly possible over the longer-term that they will continue to grow and represent something well above 20% -- 20% to 25% of revenue some day but I think it's a little premature at this point of the year to assume that's doubling growth rate will continue.

Okay. One more if I could, we get a lot of questions on Facebook. I can appreciate how it's probably hard to give a lot of details on it, but if I could ask just may be one question, is it fair to assume that that relationship is rolling through the financial model at this point?

Yes, we are generating revenue on a GAAP basis, so up and running and part of the revenue flow. We've included something greater than zero in the guidance and its part of the expectations for the year.

All right. May be one more follow-up, are you seeing any incremental customers that are coming in through Facebook it's sort of like a new channel for you?

Absolutely, it's a new channel for us. It's -- actually we think of it as the kind of deal that expands the market for stock imagery because we think a lot of the types of advertises on Facebook might not buy stock but now that we've put it into the workflow and through Facebook because Facebook is paying for the image, it's essentially free to the advertiser, it's a way that we really expanded the market and reached customers that we wouldn't otherwise have but still very early days.