Hello ladies and gentlemen and welcome to the Q2 2019 Shutterstock, Inc. 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 follow 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, Ms. Heidi Garfield, the Corporate Secretary. Heidi, please go ahead.

Thank you operator. Good morning everyone and thank you for joining us for Shutterstock's second quarter 2019 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman, Stan Pavlovsky, our President and Chief Operating Officer and Steve Ciardiello, our Interim Chief Financial Officer and Chief Accounting Officer. During this call, management may make forward-looking statements that are subject to risk and uncertainty, including predictions, expectations, estimates and other information. These include statements relating to long-term effects of our investments in our business, the future success and financial impact of new and existing product offerings, our future growth, margins and profitability, our long term strategy, our growth potential, potential future results of efforts to reduce our expense footprint and implementation of large-scale business solutions and our 2019 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 for the year ended December 31, 2018, 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 will refer to adjusted EBITDA, adjusted EBITDA margin, adjusted net income, revenue growth on a constant currency basis and free cash flow, all of which are non-GAAP financial measures. You can find a description of these items along with a reconciliation to the most directly comparable GAAP financial measures in today's earnings release, which is posted on the Investor Relations section of our website. We believe that the use of these measures in connection with GAAP financial measures allows investors to consider our operating results on the same basis used by management. This provides them with important additional insights about the company's overall business and operating performance and enhances comparability in assessing our financial reporting. However, these non-GAAP financial measures should not be considered as a substitute for or superior to financial information prepared in accordance with GAAP. Finally, please refer to the brief information deck we posted on our website that contains supporting materials for today's call. And now I will turn the call over to Jon.

Thanks Heidi and thank you everyone for joining us today. As you have seen in our press release this quarter, we continue to see demand from our customers around the globe, resulting in further revenue growth and strengthening our working capital position. However, we have announced that we are revising our full year 2019 guidance. Stan Pavlovsky and Steve Ciardiello will be providing more details shortly. But at a high level, we have some immediate issues to address, particularly in our enterprise sales channel that demand a critical reevaluation of how we drive renewed growth. As a team, we are now taking this opportunity to carefully evaluate all aspects of our enterprise sales channel and we have recently made some changes that we think will have a positive impact. The potential for this business remains significant. The marketplace is quickly evolving as are the challenges that our customers face. We believe we are the best positioned platform in our competitive landscape to capture these opportunities. Now, more than ever, users turn to our platform to deliver solutions to meet their rapidly changing needs. We think we can do more for them and do it even better. We are looking at improving some areas within the e-commerce channel in order to get us back on a stronger growth trajectory, better optimize our existing products and services and find opportunities for new sustainable revenue streams over the next several years. Even though we revised our outlook for the year, we made some positive strides in the quarter. Revenue in the second quarter of 2019 grew 3% from 2018 on a reported basis. Revenue from our e-commerce channel grew 6% to $97 million, as compared to the second quarter of 2018, while our enterprise channel remained flat at $64.7 million. Adjusted EBITDA grew…

Thanks Jon and good morning everyone. It has been a great few months since I joined the company and I want to thank the management team and the company as a whole for giving me such a warm welcome. I would like to accomplish a couple of things this morning. The first is to provide some of my initial impressions after my deep dive into the business and the second is to identify key focus areas for the company going forward. I have hit the ground running since starting this past April. And while it's still early in my tenure, I have had the opportunity to meet a lot of talented colleagues and have been impressed by their passion and contributions. And much of what I have seen confirms my belief in the strength and potential of this company. Shutterstock is a leading innovative technology company that has developed an unparalleled creative platform. We have a strong reputation for high-quality content, solutions and services. Over the past few months, I have worked closely with Jon and the operational heads across the business, including product, technology, sales and marketing teams. It's clear that we have a number of great business lines that we can and will continue to leverage, including some that are newer and smaller but have big potential. As we continue to innovate around our core business with a unified platform, we see further opportunities to grow. We are also identifying new areas that will provide additional value to customers, which we are confident will drive sustainable growth for the long term. It's no secret that the needs of our customers, their businesses and how they operate changes rapidly. The need for high-performing authentic content that works across a range of platforms is growing. We need to further our…

Thank you Stan and thank you everyone for joining us today. First, as Jon mentioned earlier, while we continued to have profitable growth in the quarter, improved our liquidity and had strong free cash flow, we have additional work ahead of us and are not satisfied with the results of our enterprise channel. Revenue growth as reported in the second quarter was 3%. Excluding the impact of foreign currency movements, revenue growth was approximately 5% in the second quarter as compared to 2018. Our e-commerce channel revenue increased 6% to $97 million as compared to the second quarter of 2018 and on a constant currency basis, e-commerce revenue grew 7%. Our enterprise channel revenue of $64.7 million was flat compared to 2018 on a reported basis and grew 2% on a constant currency basis. As a reminder, approximately one-third of our revenues are denominated in foreign currencies, with the majority in the euro and the British pound sterling. FX movements to the U.S. dollar will impact our reported revenue growth. Reviewing some of our key metrics in the second quarter on a year-over-year basis, paid downloads grew by 3% to $46.6 million, revenue per download increased 1% to $3.44 per download. Our image library expanded by 37% to over 280 million images and our video library increased by 36% to over 15 million clips. Operating income was $3.1 million in the second quarter, a decrease of 45% from $5.6 million in the prior year and adjusted EBITDA for the quarter grew 4% to $25.1 million, which compares to $24 million in the same period a year ago. Our adjusted EBITDA margin grew 17 basis points to 15.5% in the second quarter of 2019 compared to the prior year. While our revenue growth was below our expectations, we continued to invest…

[Operator Instructions] Your first question comes from the line of Youssef Squali from SunTrust. Your line is open.

Okay. Great. Thank you very much. Good morning guys. Just a couple of questions, I guess, for us. Starting just with the e-commerce part of the business. It sounds like the marketing efficiency in that business has waned a little bit. I think you spoke to the cost of customer acquisition having gone up. Can you just parse out for us the effects from potential competitive pressures versus things that you are doing internally that may have caused that to happen? And maybe just broadly speaking, Jon, kind of what you are seeing broadly competitively? And second, on the enterprise side, Stan, I think you talked about what you guys are doing to try to reinvigorate growth in that segment. I think you also spoke about or one of the things you spoke about the sales and marketing or repositioning using sales and marketing. Maybe you can kind of flesh that out for us a little bit? What exactly are you guys doing there? Are you introducing newer products at a different price point? Or just kind of any kind of color there would be very helpful. Thank you.

Thanks Youssef. I will start with e-commerce and then I will hand it over to Stan for enterprise. As far as the cost of acquisition goes, that's pretty, it's happening across all industries when you look at kind of using quantitative methods to produce results from paid advertising. The cost has increased there. But what we see is that with our data, we can get a bit smarter and zoom in on the leads that make the most sense for the e-commerce business and the ones that don't. One great thing about our platform is that the data velocity is really high. Selling six images per second, the most out of anyone we know in this industry by far. We can collect a lot of information to really shape our library and target our content in a way to prospective customers at the top of the funnel in a way we don't believe others can. So while we see the competitive pressure increase and the cost of those acquisitions going up a bit, we also believe we are best positioned and it's not unique just to us in our industry or even other industries. As far as enterprise, Stan, you want to jump in?

Sure. Hi. This is Stan, Youssef. On the enterprise side, we are focused on the go-to-market strategy. When you think about market trends around consumer consumption of content and the time spent with content and then the subsequent pressure on our customers and clients to create an increase in the amount of content that's authentic, that is fresh, that's culturally relevant, we have a great opportunity to better position how we are able to deliver that with our clients. And so pricing and packaging is one piece of it and that's kind of the blocking and tackling of the business. But how we communicate the tools and services that we provide is how we will build sort of deeper relationships with our client base.

Thank you.

Your next question comes from the line of Alex Giaimo from Jefferies. Your line is open.

Okay. Thanks for taking the question. Just going back to the enterprise side. Can you just help us parse out the main cause for the softness? Do you feel its broader industry pressure or were there fundamental challenges in the quarter? I guess, asked differently, do you feel like the industry is still growing on the enterprise side? And then just given the recent management changes, are there any changes we should be aware of going forward, maybe the way you guys will provide outlook or just anything to call out with the CFO turnover? Thanks.

Sure. Thanks Alex. Let me just, I will start with your first question here and then I will let Stan jump in also on the enterprise side. So we believe the main cause for softness is our own operation. If you think about how the enterprise business grew, it was out of the e-commerce channel. So what we did was we learned how our e-commerce customers interact with our site. We saw multiple users from different companies. We started to reach out to those customers and we started to realize there were other customers in those organizations also and we built team subscriptions in our premier product, which is a different set of features for the enterprise customer. While these challenges exist, we believe the market is still growing because all businesses need images. And if you look at the 60 million small businesses out there and the 1.9 million businesses that we currently serve, there's a big gap. And we can continue to build that. Each one of those small businesses could use a team subscription to build their own business. And we intend to organize our data in a better way and our team to seize on this opportunity. Anything else from on the enterprise side, Stan?

Yes. I will just add a little bit to that. If you really think about our platform and what we offer and the workflow of our customers and clients, both the content creation capabilities, whether it's stock or whether it's custom or whether it's editorial coupled with services that we are able to provide around workflow, that combination and that value, we have to do a better job of communicating into the marketplace. And so obviously, with the enterprise when you talk about our go-to-market strategy, when you talk about building deeper relationships with clients, it's a longer sales cycle. But having the right team in place and having the team organized around these core tenets we believe will help us as we focus on the current set of products that we have, but also the products that we plan to launch over the next six to 12 months.

And Alex, on your second question, as far as our CFO search, so Steven left the company to pursue other opportunities. And currently, we are in market executing on a very comprehensive CFO search at the moment to find the next CFO for the company. And as you know, Steve Ciardiello is our Interim CFO.

Okay. Thank you guys.

Your next question comes from the line of Lloyd Walmsley from Deutsche Bank. Your line is open.

Thanks. On the enterprise following up there, it sounds like you are still evaluating the changes in strategy. Can you just give us a sense or the timeline of figuring out what the plan will be implementing that plan? What the issues may be in any transition period around changes to sales force compensation, et cetera? And then secondly, it looks like Europe, in particular, was a little bit weaker. Anything you would call out there? And then last one was just you have a buyback authorization, haven't bought back shares in a while. How are you guys feeling about deploying cash from the balance sheet? Thanks.

Thanks Lloyd. Yes. So as far as the timeline, we are only giving 2019 guidance as we said before. But this is something that will evolve. We believe we have identified some areas in enterprise that are low-hanging fruit that we can seize on immediately, but we also don't manage the quarters. So there could be investments that we will make in this business in order to benefit enterprise, e-commerce or other parts of the business that will take a payback period that's a lot longer than the quarter or the year because we believe in the business. As far as the buyback authorization, yes, we have $100 million more authorized from the Board. As far as our capital allocation strategy goes, our first priority is investing in this business to drive an appropriate level of return. And we believe that through a recent strategy session, there are other areas we can invest in order to build new products and services off of our platform, just like we did many years ago building the enterprise product off of the e-commerce platform. So we believe that there's a lot of improvement in editorial, in custom, in enterprise, in e-commerce. We also, on the capital allocation point, I am sorry, we paid out $100 million dividend last year. So we are always evaluating the amount of cash we have, what we can do with it and how it will best benefit our shareholders. About the Europe business, Lloyd, sorry, I think I just missed that part. I will just jump in on that. We don't comment on the regional ups and downs of the business. There are several levers that can cause and a lot of different factors that can cause the up and down in any given quarter. The enterprise business deals are bigger, so they are choppier. And that's where we are.

Okay. Thank you.

Thank you Lloyd.

[Operator Instructions]

Okay. It looks like there are no other questions. Thanks for joining us and we will see you next quarter. Operator?

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.