Good day and thank you for standing by. Welcome to the First Quarter 2022 Shutterstock Earnings Conference Call. [Operator Instructions] I’d now like to hand the conference over to your host today, Chris Suh, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, Liz. Good morning, everyone and thank you for joining us for Sutterstock’s first quarter 2022 earnings call. Joining us today is Stan Pavlovsky, Shutterstock’s Chief Executive Officer; and Jarrod Yahes, Shutterstock’s Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets, including 2022 guidance. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release on the reports we file with the SEC from time to time, including the risk factors discussed in our most recently filed Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today’s press release and in our 10-Q. With that, I will turn the call over to Stan.

Thanks, Chris. Good morning, everyone and thank you for joining us today. Today, we will be discussing Shutterstock’s first quarter results. We will also talk in more detail about Shutterstock’s product roadmap, which we believe uniquely positions Shutterstock for continued growth. And finally, we wanted to address the ongoing war in Ukraine and its impact on Shutterstock, both from a contributor and customer perspective. Shutterstock grew 9% year-over-year this past quarter or 11% on a constant currency basis, driven by a further acceleration of growth in our enterprise channel to 11% and e-commerce growth of 7% per our expectations. The 11% year-over-year growth in enterprise reflects the dramatically improved, execution the strength of our FLEX family of products, and continued momentum in our studios and editorial businesses. Our FLEX team subscription and FLEX Premium products are now a key part of our offering geared towards small and medium businesses and middle-market customers. Additionally, both Shutterstock Studios and Editorial businesses turned in strong quarters. Shutterstock Studios has built a strong presence and credibility in the market, which has enabled us to win multifaceted contracts for blue-chip brands, increase our overall AOVs and maintain strong customer retention, while all positioning Shutterstock as a strategic full-service partner capable of serving our customers’ most complex creative needs. Our Editorial business is growing at a healthy rate, driven by continuing innovation in our new newsroom offering, which we rolled out in 2021. We are especially proud of some of the great work being done by our photographers and their coverage at key entertainment and media events. In short, our increased focus on offering end-to-end enterprise solutions such as Studios and Editorial has enabled Shutterstock over the past several quarters to change the conversation with our enterprise customers and better position ourselves as a strategic partner…

Thank you, Stan and good morning everyone. Revenues grew 9% in the first quarter or 11% on a constant currency basis per our expectations for the quarter and a good start to the year. E-commerce revenue grew 7% this quarter or 9% on a constant currency basis. We witnessed an acceleration in net subscriber additions with the fastest growth in multiple quarters driven by our smaller subscription products, including our FLEX 25 launched in October of 2021. This strength was partially offset by our non-subscription pack and transaction products. To remind investors, pack and transaction products tend to have lower LTVs and lower net revenue retention than our subscription products. As a result of this continued mix shift towards subscription products, our subscription revenues reached a record 43% of revenues this quarter. As a reminder, we only include in our subscriber counts and subscription revenues, long-term subscribers that have been with Shutterstock for more than 3 months. Our enterprise channel turned in another strong quarter, growing 11% or 13% on a constant currency basis based on sustained growth in our FLEX team products, as well as strength of Shutterstock Studios and in editorial. For the first quarter, gross margin declined by approximately 114 basis points to 65.1% year-over-year largely driven by higher non-cash M&A amortization expense of $5.5 million. Backing out M&A amortization, Q1 gross margin improved by 150 basis points year-over-year. Gross margins are improving partially due to the ongoing mix shift towards subscription offerings, which tend to have lower utilization than pack and transaction products. Sales and marketing expense was 27% of revenues as compared to 23% in the first quarter of 2021 and down from 30% in the fourth quarter. The year-over-year increase in sales and marketing was driven by additional investment in performance marketing spend, along…

[Operator Instructions] Our first question comes from Youssef Squali with Truist Securities.

Great. Thank you very much. Hi, Stan and Jarrod. Just two questions for me. First, maybe just on the FX impact on Russia and the headwinds from Russia on the quarter, if you look at it on a sequential basis, can you maybe just quantify the impact? I think so relative to I though, you just said earlier that for the year, it’s 50 bps. So that assumes that it was about 50 bps for the quarter as well. And Russia, I know you guys, I think, conducted business in Russia until maybe end of February. So just what was the net-net just so that we can back into a number relative to the expectations that you guys set up back in February? And then Stan thanks for all the color that you gave about products that you guys are planning in the second half. But where are you in maybe plans to integrate PicMonkey into the bundles? I’m thinking the FLEX maybe FLEX 10 any early feedback on retention or on any other metric from this integration? Thanks.

Sure. And Youssef I can help with the first part of your question, then I’ll turn it over to Stan. Just in terms of FX impact, as we think about it, we have about third of our revenues that are denominated in euros and GDP. Year-over-year, we saw the euro depreciated about 7% year-over-year and the GDP depreciated about 3% year-over-year. We had factored into our guidance in the fourth quarter when we gave the full year guidance, about a 2% impact to revenues from foreign exchange. We’ve seen that accelerate by about 50 basis points from my prior remarks. If you look at that impact of 50 bps in the first quarter, there would be approximately $1 million of revenue. We also have about 1% of our revenues from Russia and Ukraine. That would be about $8 million of annual revenue. We saw some of that revenue come off in the month of March. Going forward, we will have the full annualized impact of that in our numbers. And so we factored that into our guidance. Our reported revenues for the quarter, was really right in the middle of our guidance. And so despite that 1.5% headwind, we do still feel comfortable with our current guidance and feel good about the growth prospects of the business.

Hi, Youssef, and this is Stan. To answer your question on the applications, and I realize that we went into some detail about all of the applications and kind of the launch of the application. So just a quick reminder, Catalog and Plan was released in early April. And then AI-powered search was also just released this past week. And then our predict application is currently out in beta with some of our enterprise customers and then we’re a couple of weeks away from the Create application, which is the PicMonkey integration into the Shutterstock sort of core experience. This quarter is very much focused on learning and continuing to follow with additional features. In fact, the rest of the year will be like that. However, we will be doing a lot more marketing in the second half of the year around these applications. As far as retention goes, which is sort of what’s most important about these applications, we’re seeing about 20% – for the applications that we’ve launched, we’re seeing about a 20% engagement with the applications already. For new customers that are coming and engaging with the apps, they have about twice the engagement of customers who don’t engage with the apps. And your question about FLEX and how we’re going to be making the creative flow suite of applications available, they will be available to all of our subscription products. This includes our FLEX products as well. And then we will also have a stand-alone Creative Flow subscription with a free tier of content for those that maybe previously have not had a need for stock content. And what this allows us to do is to capture a completely new audience and also start to introduce them to the effectiveness of being able to leverage not just stock content but being able to leverage stock content with data that tells them which – what content will actually perform. So the way we’re thinking about it is it’s a value add for all of our existing subscriptions and then for customers who want the Creative Flow applications without a content subscription, we will make that available as well.

Excellent. Thank you. And on the – just on the bundles, so your FLEX 25, which I think you launched last year, you seem to be very happy with the outcome. There was a talk of maybe a FLEX 10. Can you give us an update on that?

Yes. So we are testing and going to be testing a FLEX 10 product as well. We’re still in the planning stages of that. Part of the testing that we do is we do AB testing on all major releases. Some of that has to do with just ensuring that especially given our content products are becoming much more robust with the combination of video and music within the subscriptions and then the fact that we’re also launching individual subs that are tied to each of our content categories. We have to do a lot of testing and a lot of thinking around how to best support these products, what audiences we should target with these products, the pricing of the product. But yes, we do plan to test that this quarter.

Great. Thank you.

Our next question comes from Andrew Boone with JMP.

Good morning. Thanks for taking my questions. Can you talk about – you mentioned this just off of Youssef’s question, but can you talk about how you plan to educate users on the apps themselves. AI and predict is somewhat of a new feature in terms of users on the platform? How are you educating users on it? And then more broadly, as we think about these tools as kind of a new on-ramp in terms of marketing. Can you talk about just double-click on the marketing plans that you mentioned in terms of the back half of the year and how big should we think about the investment being made in these newer tools? Thanks.

Yes. Hi, thanks for the question. Great question. So right now, the way that we are learning is through customers discovering these applications effectively on their own. And the way that they are discovering these applications is that if you go to Shutterstock today, whereas previously, you just had a search bar today, you start to see a sidebar that also has applications as part of the experience. As we move forward to the back half of the year, we have a complete go-to-market plan, which will include everything from specific site marketing. So, call-outs that we will have, videos that we will have in terms of help things that our UX team is responsible for in sort of helping our consumers based on where they are across the site. So, whether they are on a search page, whether they are on a asset detail page, we will have unique ways to engage our customers into the application experience. We are also going to be creating an enormous amount of content and content marketing in support of – in support of these new applications, and we will be doing some upper funnel marketing as well. Jarrod can talk to the specifics in terms of the marketing spend as a percent of revenue. But we do have a complete plan to drive that discovery to drive – from a brand perspective to really talk about Shutterstock in a completely new way, educate both our existing subscribers, but also expand our reach to new customers who are looking for tools and templates to help them get going from a creative perspective. So Jarrod, I don’t know if we are providing any additional guidance at this point about marketing in the back half, but I will turn that over to you.

Sure. So, as we mentioned in the fourth quarter, we do expect sales and marketing expense to slightly decrease year-over-year as compared to 2021. Andrew, if you remember, towards the back half of last year, we embarked on a linear television campaign that was about $13 million of spend or about 1.8% sales and marketing spend as a percentage of revenues. We don’t expect to let all of that fall to the bottom line, and we are going to be reinvesting in sales and marketing. We were at about 27% for the first quarter. And so what you will expect to see is a more even pace of sales and marketing spend over the course of the year. But you are not going to see us tick back up to that 30% of revenue, sales and marketing spend that we approached in the fourth quarter of last year. So, sales and marketing overall year-on-year to be slightly lower than last year as we redeploy some of those linear advertising dollars into other investments. However, a more even pace of sales and marketing spend this year as compared to last year, what was more second half weighted.

Thanks so much, guys.

[Operator Instructions] Our next question comes from Bernie McTernan with Needham.

Great. Good morning. Thanks for taking the questions. Maybe to start just on guidance, so called out the 150 basis point impact to revenue growth, but keeping revenue guidance the same. So, what is outperforming expectations or offsetting tailwinds that impacted the original guide?

Bernie, just a couple of points. I think one, clearly, our enterprise channel is really executing very strongly. And I think stand of into some of the backdrop and reasons for that. But you can look at multiple data points, including the deferred revenue growth on the balance sheet you can look at sequential improvement in the growth of that business. We just have a lot of confidence in that business continuing to perform. Secondly, we feel quite good about our product roadmap. We have invested in this very heavily over the course of the past year. First, through our acquisitions, our organic efforts in really evolving into a creative platform as well as the migration towards becoming a subscription revenue business, which gives us better revenue visibility because of the better net revenue retention associated with subscribers. And quite frankly, we started off the year with a healthy degree of conservatism. And so we have built in enough cushion for ourselves to be able to absorb these lumps and still meet and exceed our expectations for the business. So, I think despite that percent and half headwind, we feel quite good about the top line growth prospects of the business. And lastly, we really put up a great quarter in terms of profitability. And while that’s great in terms of margin expansion, it also gives us dry powder to be able to reinvest in our business to accelerate the revenue growth even further. There is a bit of a virtuous cycle when you put up great profitability to be able to put those monies back into your business and pick up the growth. So, I think it’s our execution on top line. It’s the enterprise channel. It’s the evolution towards a subscription business. And lastly, strong profitability gives us that dry powder to be able to put back in the business and make sure we can meet and exceed our numbers.

Understood. And maybe just going further in on Europe and Rest of World, both were flat year-over-year in 1Q ‘22. I think there were some difficult comparisons there, maybe was there anything else to call out from like a macro standpoint that was impacting revenue growth in Europe aside from Ukraine and Russia?

So, one of the things that’s important to note in Europe is when you think about the 2% FX headwind to revenues, all of that is as a result of depreciation in the GBP and the euro, which is in our European geography that we disclose externally, which is about a third of our revenues. So, if you think about a 2% headwind to revenue growth, on the third of your revenues, the constant currency growth of that European division is closer to 6% to 7%. So, it’s actually not flat year-over-year. What I would say broadly speaking, is that we have had better success with our evolution and our sell-through of our subscription products in the U.S. as compared to Europe and Asia. I think we are making some headway in that regard, and we are very focused on it. But I do think that the European business on a constant currency basis is growing at that 6% to 7% growth rate. And quite frankly, we feel quite good about some of the things we are doing in Asia, and particularly in our enterprise channel going forward.

Understood. And then just lastly for me, on competition, there was some news flow that happened over the past month over the last few weeks, at least with some AI-based content competitors like Dali 2 potentially coming into this stock imaging market. Just any thoughts in terms of what competition looks like in the stock imaging market, if it’s still – or stock content market. Is it still kind of like the big three, or are there other maybe competitors out there we should be focused on as well, too?

Well and hey Bernie, good talking to you. I think when you look at our category, I think there is a lot of innovation that continues in terms of how you leverage content, how you deal with the fact that cookies are going away, how to be effective as a creative in market. When we think about the investments that we make, we think about it from a standpoint of what is proprietary to us. So, for example, when we take our library and we – 430 million assets, and we score that library based on the data acquisitions that we have against IED segments and audience segments or segments tied to affinity, content affinity aesthetics, etcetera, that is really unique to us. It’s not like this is third-party data that somehow is equally distributed across these competitors in the marketplace. And so there is a lot of companies in the AI space. The reason we decided to make these investments is because when you think about the size of our library, when you think about the type of training sets that we have developed internally, and now when you think about our ability to actually help our customers target the audiences that they are trying to target with a lot of content library that is unparalleled we think we definitely have a very compelling product. So, you are right, it’s very – we are in a very competitive space, and there is going to continue to be tens and hundreds of companies that are going to leverage AI in different ways. For us, it’s really about a very practical and proprietary application based on the strengths that we have at Shutterstock, which is the depth of our library as well as the data that we have acquired that is proprietary to us.

Understood. Thanks for taking all the questions.

[Operator Instructions] We have a follow-up from Youssef Squali with Truist Securities.

Thank you. Hey guys. Just two clarifications. One, did you guys include the PicMonkey subs in the subcount this quarter, because I think you spoke to it as part of ARPU. And the other, Jarrod, so the Q1 EBITDA performance sets you up nicely for potentially delivering more than that zero to 50 bps for the year? How do you – I know you are basically keeping your guidance unchanged. But do you have plans of reinvesting that money more aggressively in other areas that you didn’t think of maybe three months ago? Thanks.

So, Youssef we have not yet included the PicMonkey subscribers in our numbers. I think if we were to include them at a point in time in the kind of prior period comparable, we didn’t include them as well as a pro forma would be a little bit misleading. So, we are probably going to wait until we have kind of annualized the acquisition to include those subs in our KPIs. And we will call that out specifically for investors when we do so, from a part of the...

Was it part of ARPU discussion that you had before, I am sorry.

No, it’s not part of the ARPU. What was part of the ARPU was the inclusion of TurboSquid, which we had done in February of last year, so that is included in the numbers. But pickup is not in either. In terms of the margins, we are very pleased with the margins in the first quarter. And by the way, that margin performance is inclusive of the donation we made in Ukraine. So, we feel great obviously about our start to the year and our ability to do something like that, while still being able to invest in our business. We realize that we have made commitments around margin expansion. We have some pretty important growth opportunities in our business, and we have been executing on those in terms of our product roadmap. And you may have also seen in our press release that we put out yesterday about our new CMO and Head of Brands. So, we are very excited about the prospects of our team and what we can do from a marketing and branding perspective. So, we are going to have that balance of investing in our business for growth, while also adhering to our commitments around margin expansion.

I am showing no further questions in queue at this time. I would like to turn the call back to Stan Pavlovsky for closing remarks.

I want to thank you all for joining us today. And as always, we want to express our gratitude to our customers, our contributors and employees. That ends our call for today. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.