Good day, ladies and gentlemen, and welcome to the Shutterstock, Inc. fourth quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Michael Mestrandrea, Director of Corporate Finance and Investor Relations. Sir you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's fourth quarter and full year 2017 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman; and Steven Berns, our Chief Operating Officer and Financial Officer. During this call, management may make forward-looking statements that are subject to risk, uncertainty, including predictions, expectations, estimates and other information. These include statements relating to long term effects of our investment in our business, the future success and financial impact to new and existing product offerings, our future growth and profitability, our long term strategy, growth potential, future results of efforts to reduce our expense footprint and implementation of large scale business solutions, new recognition rules and 2018 guidance. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Please refer to today's press release and the reports and documents we file from time-to-time with the U.S. Securities and Exchange Commission, including the section entitled Risk Factors in the company's annual report on Form 10-K the year ended December 31, 2017, for discussions of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements we may make on this call. On this call, we refer to adjusted EBITDA, adjusted net income, revenue growth on a constant currency basis and free cash flow which are non-GAAP financial measures. You can find a description of these items along with the reconciliation of most directly comparable GAAP financial measures in today's earnings release and in our Form 10-K, which are posted on our Investor Relations site. We believe that the uses of the measures in conjunction with GAAP financial measures allows investors to consider our operating results on the same basis used by management. This provides them with an important additional insight about the company's overall business and operating performance, and it enhances the comparability in assessing our financial reporting. However, these non-GAAP measures should not be considered as a substitute for or superior to financial information prepared in accordance with GAAP. And with that, I’d like to turn the call over to Jon.

Thanks, Mike. Thanks everyone for joining us today for Shutterstock's fourth quarter and year end 2017 earnings call. We continue to make solid progress in the evolution of our business from a marketplace to accretive platform. We’re seeing continued operational momentum from our many initiatives including our upgraded technology platform, the transformation of our operating structure to focus business units and the introduction of new products, features and functionality for our customers. In addition we continue to build and strengthen our team every day. Overall I am pleased with the improvement in our revenue performance in the fourth quarter. Although margins this quarter and for the full year were impacted by the infrastructure and platform investments we have made in our business. We’re confident these critical investments will have a long term positive impact on our financial results. Also while being an important long-term investment we look forward to see some of this positive impact in 2018. In the fourth quarter of 2017 on a constant currency basis revenue grew approximately 12.6%, compared to the fourth quarter of 2016 and adjusted EBITDA was $23.3 million compared to $25.9 million in 2016. In addition on a year-over-year basis during the fourth quarter of 2017, our customer base grew by 9.5% to just over $1.8 million customers. Paid downloads increased by 4% to 43.9 million, we grew revenue per download by 7% on a constant currency basis and we expanded our image library by 46%. So over 170 million images and increased our video library by 47% to more than 9 million clips. As we discussed on prior calls over the last few years we made investment that we believe transforms our marketplace into a platform that provides and enterprises, with the content types and tools they need to collaboratively design and…

Thanks, Jon and thank you everyone for joining us today. Before I discuss our performance I want to let you know that we posted a brief information deck on our website that contains supporting materials for today’s call. As Jon has highlighted Shutterstock continued to execute against our strategic vision throughout the fourth quarter translating into revenue growth on a reported basis of 16.6% and an adjusted EBITDA margin of 15.3%. On a constant currency basis as compared to the prior year fourth quarter revenue growth was 13.9%. As compared to the prior year fourth quarter we saw revenue per download increased 11% on a reported basis and 8% on a constant currency basis driven by the continued growth in our enterprise and motion businesses, as well as a continued shift in our e-commerce image offerings toward our smaller subscription plans, which were sold for higher price per image rates than our traditional larger subscriptions. Revenues generated by our e-commerce platform improved 10% as compared to the prior year fourth quarter as we’re continuing to see positive results from improved focus on product mix and improved optimization of our conversion funnel. Our enterprise business grew 26% compared to the prior year fourth quarter to approximately $52 million. International expansion and localization continues to be a core part of our long-term growth strategy and in the fourth quarter of 2017 of the approximately 62% of our revenues from customers outside the United States approximately half of that 62% was derived from customers in Europe with the balance from Asia Pacific and Latin America. Shifting to the cost side of the business, for the fourth quarter of 2017 operating expenses increased 24% versus the fourth quarter of 2016. Driven primarily by investments we’re making in both our infrastructure and our smaller but…

Thank you, sir. [Operator Instructions] Our first question comes from Brian Fitzgerald with Jeffries. Your line is now open.

Thanks, guys. With respect to the 2018 guidance any color you can provide on the anticipated contribution from Shutterstock Custom on the outlook? And then as we think about the mix between e-commerce and enterprise, enterprise growing from 18% to 34% now, how do you see enterprise ramping through 2018? And then maybe where that can get to -- where do you expect that to get to longer term? Thanks.

So as it relates to the Shutterstock Custom contribution, we don’t breakout the individual products within each of the e-commerce and enterprise. What I will say is that Custom is an important part of the overall portfolio of products and services that we offer to our enterprise clients. And we believe that it’s not just important as a product by itself, but important as a portfolio that can be offered to multinational customers as well as customers in single countries to serve the content needs that they have for their marketing programs. As it relates to enterprise and e-commerce, just if you can repeat the question, I mean, you’re talking about the growth in enterprise from 18% to 34%.

Yes, we like that it’s grown from 18% of the business in 2014 to 34% now, maybe how should we see that trajectory continue in the future. What do you think enterprise as a portion of your mix can get to longer term?

Right, so when we think about kind of where we’ve been successful in the enterprise space, we have not fully penetrated in any way shape or form, most of the countries in which our products are offered. So we are in 21 languages where we’re not strong, we don’t have our fair share of wallet in many of those markets. And remember when we talk about enterprise we’re also talking about our SMB product. And so it’s not just large multinational businesses, but it’s also those companies that might have a team of people that could be working -- it could be a multinational company, but also working in potentially smaller environments, but still good sized businesses. So we see all of the regions and the countries in those regions as opportunities once again despite the size. As it relates to the -- which will go up faster, obviously enterprise is growing faster than e-commerce now. And we’re not trying to force those ratios into a certain level, what we’re trying to do is serve the customer needs. And we’ve adapted and launched products that meet those needs as we go through it. So we don’t have - it’s not like the just called the old days where companies would try to target X percent within a product. We focus on the customer work back into what’s going to make the most sense for them. And thus far like you say we’ve seen this great growth in enterprise, but we don’t see anything slowing that down.

Got it. Thanks, Steve.

Thank you. Our next question comes from Youssef Squali with SunTrust. Your line is now open.

Yes, good morning. Thank you for taking the questions. A couple if I may, first, can you speak a little more about the marketing efficiency in the model maybe the market efficiency within enterprise versus e-commerce, growth is certainly impressive, we saw a reflection point this quarter, which is great, but it’s certainly coming at a much lower margin. On a related topic, anything to call out in both the sales and marketing product and development line that’s maybe one time in nature, over the last several quarters you’ve called out some consulting work we thought, we’re under the impression that most of these consulting works were now behind us, but I think you’ve mentioned consulting a couple of times in your prepared remarks. And then I have follow-up. Thank you.

Sure. So, first is relates to marketing efficiency, I think, a few things to know, one is that, our overall cost for acquiring customers, we’ve become much more efficient in how we’re going at the customers, our efforts in terms of localization, we’re certainly not where we expect to be as we go forward, but we’ve made significant strides in the marketing arena as it relates to SEM, as it relates to content marketing, as it relates to other areas. With regard to the costs, we’ve talked about pressure on our costs related to a number of different areas, including our infrastructure move to AWS and having about 150 basis points of margin pressure on that, which we expect we’ll be reducing throughout 2018, and we’ve talked about that. So, there has been a number of projects as we move to a hybrid cloud environment there has been other consulting areas, where some of which shows up in capitalized labour, but some portion of that is making its way just through the P&L, once again. So, we’re very focused, we don’t think, as you know, the margins that we’re producing are indicative of the long-term strength of the business, and we’re focused on improving those as our 2018 guidance implies. There’s nothing else I would say about our sales and marketing efforts, it’s obviously a dynamic market and we continue to look for the best and most optimal way of attracting and retaining customers.

And same thing from product development and the one-time thing to call out?

No, I wouldn’t call out any one-time thing. Clearly, we’re focused as you’ll note from Jon’s comments, and I think the cadence of what we’ve been doing in the editorial space, our inclusion of Custom, where we’ve been on other features and functionality on our e-commerce and traditional enterprise offerings or our launch of the new team experience product, which enables greater collaboration and functionality for teams. I think all of those are indicative of the product efforts that our engineering and product focus have put forth.

Thank you, that’s helpful. And then just quickly, was there -- what was the contribution from Flashstock this quarter, if you can, just to get some organic growth numbers in there. And then, Jon, maybe you can touch a little bit about the Webdam sales, why do it now, we were under the impression initially, when you first made the acquisition that that asset was important to your transformation from a marketplace to a platform, maybe you can just help us kind of think through the puts and takes of that decision? Thank you.

So, on the custom contribution first, I’d say, once again, we don’t talk specifically about the contribution of each of the specific products. What I’d say is that, for 2017 consistent with the comments that we made at the time of the acquisition, Shutterstock Custom was not material contributor to either top-line or any impact -- or any material impact on EBITDA.

On Webdam, so back in 2014 we purchased Webdam to try to work our way into enterprise workflow at the time our enterprise revenue was pretty small. And we were growing our way into that business. As we grew into that business, we realized that the Webdam customer is pretty distinct from the Shutterstock enterprise customer. So, overtime, we looked for the right integration points in the workflow and we can find them. We continue to build Webdam, we continue to grow as a standalone business. We referred customers to Webdam, and overtime we built other types of workflow enhancements into our product and into our platform which we continue to do every day now. Why do it now? The opportunity came up. We had some inbound interest and we took the conversation and it happened. So if it didn’t happen it would have been fine also we would’ve continued to grow it.

I think just to add to Jon’s comments for a second, as Jon said at the time that Webdam was acquired there wasn’t a workflow effort on our core products. So it wasn’t as if we were building the editor tool, it wasn’t as if we were building the collaboration capabilities and as time moved on those were being tightly integrated into our offering. So the workflow aspects that we initially thought we would get from the Webdam acquisition, while important to customers just looking for digital asset management, we saw that the buyer of digital asset management services tends to be very different inside an organization than the buyer or end user of Shutterstock’s services and workflow tools. So it’s really evolved and I think it made sense for us to once again take the call and we’re pleased both for Shutterstock shareholders as well as for Webdam and its new partner and owner Bynder. So we think it’s a good transaction for all involved.

Great, that’s helpful. Thank you.

Thank you. Our next question comes from Lloyd Walmsley with Deutsche Bank. Your line is now open.

Thanks. Just wondering you guys have clearly been investing a lot in the re-platforming, which has driven capitalized R&D and CapEx up over the last call it two years. The guidance for $48 million looks like it’s down slightly, but it’s still pretty elevated relative to where you were back in say 2015. Should we expect that to continue to trend down after 2018 as you just wind down some of the investment or should we expect it to kind of stay at these levels? And then a second one, if I can, when you look at the Custom business can you just give us a sense for how much of the growth you’re seeing there is plugging the acquisition into Shutterstock and leveraging the Shutterstock customer base versus perhaps the business operating on its own that you acquired. And I guess just at a higher level, do you feel like it’s performing at a much better level inside Shutterstock than it was as a standalone? Thanks.

So as it relates to -- thanks for the question, Lloyd. So as it relates to investment, I think it’s important to know how do we measure ourselves and it’s not as if we look and think of something as capitalized labor and therefore it’s somehow is not meaningful to us. We look at our performance as a function of the cash flows generated off of EBITDA and the business, the revenues generated, the expenses we have and whether those expenses are then on the balance sheet in the form of capitalized labor or it’s in the form of taxes paid or it’s in the form of other deductions. We’re focused on that free cash flow generation off of revenues. So to know, first and most importantly is that we are completely focused on the dollars in and the dollars out. As it relates to the capitalization of labor, we’re not giving guidance beyond 2018 other than to say that we’re very focused on making sure that we are improving both EBITDA margins, as well as our free cash flow margins as we go forward. And that obviously includes both revenue increases, but also making sure that we have the proper level of investment associated with that revenue generation. So we certainly are focused on we have zero based process, we’re not looking at like what we did last year. We look at what makes sense to do and we expect as we become more efficient with our engineering resources that we will be able to once again which we’re doing in 2018 reducing external labor materially, as well as being more efficient in our use of our internal resources. I’ll flip it Jon in one second on the Custom business, but what I wanted to say about the Custom business is when we think about acquisitions and this is I think important to think in the context to your question. We think about our core capabilities and when we add something to that as we added Premium B in the music side, as we added Rex in the editorial side and as we add Custom in the offering primarily at this point to enterprises. We think of those as expanding our core and not as if they are somehow independent of the core of the business. And so growth attracts new customers to the Shutterstock platform the addition of Custom, as well as it attracts Shutterstock to customers of Custom. And given that there are customers who we’re seeing is a need by specifically right now one multinational looking at us very early in the acquisition after Custom and saying hey I want to look at all my content needs across stock video, Custom and see how we can work collaboratively to solve their need. So I think it presents opportunities that otherwise wouldn’t be there, but it’s not two separate paths running in parallel, but one single path serving customer needs.

Yes, I mean, you answered the question but I would just add that Custom is really clean integration for us. We changed the name on day one basically. We started the integration that first week and we today have one sales team that’s out selling all of our products on the enterprise side. It’s going to take some time we just do the acquisition this past summer. So the company is -- the product is growing and we expect that we’ll be able to accelerate that growth with our sales team now, which is a lot bigger than what Flashstock had before as Shutterstock Custom.

Thanks.

Thank you. Our next question comes from Masumi Nishida with Citigroup. Your line is now open.

Hi, thanks for taking my question. My question is for your fiscal year 2018 guidance revenue is up 16%, 17%, can you please provide more color on what is driving it in terms of volume and pricing? And my second question is on pricing for image, can you just please help us understand how you’ve been able to increase pricing year-on-year, quarter-on-quarter? That’s my two questions. Thanks.

So as it relates to volume and price, clearly we look at a mix of product to serve customer needs. And so we look for those offerings and price them accordingly so that it both attracts our customers retain for the customers, but also provides a share return to our -- a fair return to our contributors. And we’re focused on making sure that we continue to attract the highest quality content on a global basis and make that available to customers and that’s what creates the network effect that has enabled Shutterstock to grow to its current levels. And so it’s not a -- we’re not trying to make a single choice for customers. We’re trying to provide them sufficient choice and still have something that obviously makes economic sense. As it relates to the pricing is -- I think you might be referring to the increase in price per download and that relates primarily to the changing subscriptions that we’ve offered. We’ve had new product offerings of small subs, which have a higher price per download than our larger subs did. And the growth in absolute customers of those smaller subs has been very good. And so that has increased -- has been a contributor to the increase in the price per download. In addition to the fact that our product mix, music and video, editorial often have prices that are higher and so those can have an impact. And obviously in our enterprise business that’s a higher price as well. So it’s product mix, but it’s also the offerings within our e-commerce subscription model.

Got it, thank you. That’s helpful.

And that does conclude our Q&A session for today. I would now like to turn the call back to Mr. Steven Berns, Chief Financial Officer and Chief Operating Officer for any further remarks.

Thanks very much. We appreciate everybody’s participation today and look forward to speaking with you soon. Thank you.

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program you may all disconnect. Everyone have a great day.