Thank you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2024 Shutterstock Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Suh, Investor Relations and Corporate Development. Please go ahead.

Thanks, Alex. Good morning, everyone, and thank you for joining us for Shutterstock's First Quarter 2024 Earnings Call. Joining us today is Paul Hennessy, Shutterstock's CEO; and Jarrod Yahes, Shutterstock's CFO. Please note that some of the information you'll 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 2024 guidance and long-range financial targets. Actual results or trends could differ materially from our forecast. For more information, please refer to today's press release and the presentation material referencing our long-range financial targets, which we have posted to our IR website. Please also refer to 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'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income for dividend 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 tables included with today's press release and in our 10-Q. I'd now like to turn the call over to Paul Hennessy, Chief Executive Officer.

Thank you, Chris. Good morning, everyone, and thank you for joining us today. On our last earnings call, I laid out the long-term targets for Shutterstock 2027 with the commitment of reaching $1.2 billion of revenue and $350 million of EBITDA in 2027. And now after another successful quarter and a great acquisition, we expect to accelerate our path to reaching that goal. Our business performed ahead of expectations this quarter, and I'm pleased to report that we signed a definitive agreement to acquire Envato, a leading provider of digital creative assets and templates. As I'll explain in further detail later, this acquisition delivers to Shutterstock an exciting trifecta, a new product that fills a critical gap, faster-growing audiences and new content types. But let's first turn to this quarter's results. Shutterstock delivered a strong first quarter with revenue of $214 million and EBITDA of $56 million, meaningfully exceeding our expectations. The composition of our business continues to evolve with rapid growth in our data distribution and services business, while our content business works to get back to growth. I'm excited to provide greater line of sight into our data distribution and services business. But first, let's take a moment to talk about what we're seeing in our content business. As a reminder, our content business includes a range of different asset types and global distribution channels. Our results in content in the first quarter were aligned to our expectations and characterized by the same trends we've been experiencing for the past year. Demand from larger customers is growing and resilient, while demand from small- and medium-sized customers who purchase from us online is muted. While we have not experienced an end-to-end recovery thus far, we are seeing leading indicators that are extremely encouraging and indicate a return to growth…

Thank you, Paul, and good morning, everyone. Revenue was $214.3 million for the first quarter, exceeding our expectations. Content revenue was down 10%, in line with our expectations. As Paul discussed, we feel good about the progress we are seeing and expect to get back to growth this year, consistent with our commentary last quarter. Data distribution and services was up 90% in the first quarter to $40 million, driven by exceptionally strong growth in our data offering. The rapidly changing regulatory backdrop around AI, combined with the credibility and scale we now have is resulting in a clear demand acceleration. We anticipate providing additional forward-looking growth indicators in data distribution and services in the second quarter. As I review the P&L, please note that the line items are net of related depreciation and amortization, stock compensation and other expense items necessary to reconcile to adjusted EBITDA. In the first quarter, we stepped on the gas with respect to sales and marketing at 25% of revenue compared to 22% in the first quarter of 2023. We made planned growth investments in branding spend and customer marketing across our businesses in the quarter, and we expect the pace of marketing spend to continue throughout the year. Product development was 7% of revenue compared to 6% in the first quarter of 2023, reflecting continued investment in our product offering and ongoing integration of our acquisitions. We saw solid operating leverage in the quarter, particularly in G&A expenses. G&A expenses were 10% of revenue compared to 12% in the first quarter of 2023. This is the third consecutive quarter with G&A leverage and Shutterstock is well set up to drive adjusted EBITDA as our business scales. Adjusted EBITDA was strong at $56 million with margins of 26.1%. Margins were impacted this quarter by…

[Operator Instructions] And your first question comes from the line of Bernie McTernan with Needham & Company.

Maybe just to start, we'd love to just get insights in terms of how we should be thinking about the guidance change for the addition of Envato versus organic changes to the guidance?

Sure, Bernie. And we're very pleased in the first quarter out of the gate to be able to meaningfully raise our guidance for the year. We meaningfully outperformed our first quarter expectations that we had internally for our business. We outperformed those expectations in the aggregate. And in particular, our data distribution and services business significantly outperformed our expectations. We're effectively rolling that out performance into the guidance. We're also rolling in the acquisition of Envato, assuming that the business is going to contribute about 20% to our revenues for the full year and 15% to our EBITDA for the full year, assuming the transaction closes in the third quarter. So that's the detail I can provide for you, and I think we're thrilled to be able to roll in both the deal contribution as well as the meaningful outperformance in the first quarter.

That's great. And then on the DDS business, is $60 million still the right number to think about for computer vision? There were some rumors that an Apple deal was signed early in the quarter. So I'm not sure how much you can give on specifics for the Apple deal, but maybe just frame in terms of the $60 million that you referred to prior.

So we're not able to comment on specific customers, and we don't have a track record of doing that or talking about their specific contribution in the quarter. What we can say is that data distribution and services as a whole is outperforming. And so that $60 million that we referenced with respect to data, your assumption should be that, that is going up. And as we think about our 2027 plan, what we've baked in is 20%-plus growth for data distribution and services as a whole and 20% growth for each of the components of data distribution and services. If the first quarter is the indication, that growth target is looking conservative. We feel really, really good about how each of these components is performing. And the first quarter was a phenomenal start out of the gate for Shutterstock.

Understood. And then just lastly for me. On Giphy expenses, how should we expect those to pace throughout the year? I know Meta is covering a portion of those, at least for a part of the year, and then a portion of those expenses, too. It sounds like you guys are going out and hiring a sales force as well. So just how we should expect maybe just Giphy profitability to be trending throughout the year?

Sure, Bernie. So the first thing I would call out is, although we are getting reimbursed for many of the cash expenses, all of the typical salary and bonus expenses associated with the employee population is hitting our EBITDA. We are aggressively hiring for Giphy. We're hiring sales professionals and business development professionals. We're seeing a clear market demand and need, and we need more feet on the street to be able to satisfy that demand that's out there. So we're thrilled to be able to making those investments right now. The good news is as the revenue grows over the course of the year, that's actually going to be a tailwind to our profitability. The business is making losses today. The revenue is growing quickly, and we expect to more quickly cover those expenses such that the revenue growth is going to exceed any expenses that we put on from the hiring of the sales force. And so Giphy growth is actually going to allow us to sequentially improve profits in the business and profits for Shutterstock overall over the course of the year.

Your next question comes from the line of Andrew Boone with JMP.

This is Matt on for Andrew. Maybe just back on the data sales business. Can you just give us any color on just the pipeline there? And then as it relates to adding on Envato, what does this do actually to your data sales business as it adds to your and diversifies your data corpus?

Yes. I'll take that one. And I think the -- we don't give a lot of the specifics around the particulars around the data business around the pipeline, what's on the common, what's not. I think we've been trying to give much greater line of sight to the entire DDS business. That's why we broke that out. But what I can tell you is we're seeing a lot of demand. I referenced the change in regulatory environment, some of the early signs that we're seeing. And that's all goodness for Shutterstock's uniquely positioned, ethically sourced content, and customers of all sizes are coming for that content. You saw the growth in the DDS business, and a lot of that is related to data. So what I would just say is we are very bullish on the DDS side of the house. On the Envato question, more content, I talked about the growth in content in our core business, more content, diversified content, specific content that we maybe not -- don't have is all great opportunities to grow our data business, and there's interest from data partners in wide varieties of content and as much as we can give them. So we're seeing real change in that market where we were wondering if people would be demanding all product types, and we're actually seeing a level of insatiable desire for a diversity of content types with all sorts of levels of specificity increasing. So we're bullish.

And then maybe one more, if I could. Just as you talk about the Envato acquisition, doubling your subscriber base, can you just talk about what opportunities are there just for cross-sell?

Yes. I think it's all the things you would normally suspect in an acquisition like that when we've got more subscribers that are more retentive, that's great for the business to the extent that we have content that's not currently offered to Envato customers that becomes upside levels of retention. We've talked kind of clearly about we believe that this could fit very, very nicely into our small and medium-sized customer offering sitting in between packs and larger subscriptions. There's a lot to like in this acquisition. And I'd just say, and you combine that with a great company that's really well run by a great leadership team with a talented set of employees, we really like the combination of Shutterstock and Envato.

Your next question comes from the line of Agnieszka Pustula.

I've got a couple. The first one is a follow-up on your new guidance. So I just wanted to clarify, do you assume in that guidance that Envato will be added to your revenues and EBITDA from the start of Q3? And secondly, on your content business, if you could maybe talk a little bit more about the trend within the quarter? Is there any month-on-month improvement already? And what trends are you seeing in April so far?

Sure. So thank you so much for your question. I'll take the first part, and then we'll talk a little bit about trends in April. So I think it's probably unlikely the acquisition is going to close in July. So I think to your point, the back part of Q3 is more likely with respect to the acquisition. We feel really good about this deal. I think, as we mentioned, and we're really excited to be able to offer this to our customers and to include this into our overall business.

And regarding -- if I heard the question properly, it was what are we seeing on the content business in the -- in April time frame? You heard in my prepared remarks that there's some really positive trends in our small and medium business. And it starts with the idea of, amazingly, if you charge customers rather than give away our very valuable content, they actually pay and not only do they pay, but they download and come back. And so we're very encouraged. And then we expect our business to kind of return to growth in the back half of the year. We're seeing good signs on the content business. And while we won't call this turnaround complete, we're very encouraged and all of that is reflected in an increase in our overall guidance.

One other point I would add on that is you should fully expect the year-over-year growth in content to improve over the course of the year each and every quarter, both in terms of year-over-year growth percentage, but also in terms of sequential revenue contribution. And I think that's really important to note. We feel quite good about that. And I think April is looking good. So we're excited about what we're seeing. And I think Paul's point on the way we've extracted ourselves from the free trial is spot on. This was the right strategic move for Shutterstock and is going to create a more durable, longer-term faster-growing content business for us.

Your next question comes from the line of Nitin Bansal with Bank of America.

As the pace of building GenAI applications, accelerate across verticals, can you throw some light on where you are seeing the demand for your data beyond the LLMs? And how has your go-to-market strategy evolved in the last few months to monetize this data opportunity?

Sure. So let me just give a little bit of a perspective of some of the demand that we're seeing. And by the way, what I would call out is we're seeing demand increases from both new customers as well as existing customers. Existing customers are asking us for more, so greater scale in existing content types. They're asking us for specific types of metadata as well as specific types of content. So we're increasingly being asked for to source specialized types of content for those customers. There is a common misperception that visual media content is only needed for companies that are training image generators or video generators as outputs. It is the case that multimodal models, broadly speaking, require visual media training data in order to create inputs as well as generate outputs. And I think that's something that's not well understood. The perception is that if the output is chat-based, that visual media is not needed as a training input, that is incorrect. Visual media is a critical component of training chat-based output models or large language models. So we're seeing demand across the spectrum for the various model types, particularly as things go multimodal, more broadly defined. In terms of the way the pipeline and distribution are trending, Paul, any thoughts?

Well, we're not giving a lot of insight into that, that you haven't already covered, Jarrod. And I mentioned to the prior question, we're seeing lots of strong demand across channels.

One more. On the Giphy business, what are some of the challenges that you are countering in scaling up this business? And by when do you think we can start to see like a more meaningful impact from the Giphy on your top line?

Yes. The challenge of restarting any business from a cold start is all of the things you would expect is reaching back out and telling our story to the tens of thousands of interested advertisers, getting in front of them, getting in front of their budgets. But when they hear the story, it's a very compelling story. So again, we believe that market is coming our way. We're not giving an exact date of what -- when meaningful revenue comes in. We're already seeing, again, high interest and an ascending AOV. Those are the trends of a critical advertising model. And so again, we feel very good about overcoming any of the hurdles of moving a business from a cold start to bonafide ad platform. But we're -- every single month that goes by, we're making headway. And you heard we're investing in that business with more salespeople because we see the demand.

Given it is an advertising business, do you think a potential third-party partnership with a bigger platform similar to something that interested can expedite the monetization of this asset?

Yes. I like the way you think. I think that's spot on. And we're -- as you might expect, we're exploring those opportunities and have interested folks that are talking to us about just that. I can't say much more about that, but you can imagine a large-scaled high-use platform has interest from a lot of folks.

Your next question comes from the line of Kieran Kenny with Morgan Stanley.

First, Jarrod, can you comment on whether the data deals signed in the quarter were all recognized ratably? And then related to that, any color you can provide on whether or not the data revenue grew year-on-year? And then, Paul, you talked about the growth in the contributor base and the library. Can you talk about some of the trends that are driving that, both organically and some of the inorganic contribution?

Thanks so much for your question, Kieran. I think as you think about our data deals, we are increasingly structuring these deals such that the revenue is recognized over time. We signed a number of deals under that construct. There are different structures that we have for different deals that create an inherent lumpiness in this business. And so this business is becoming more visible. And the recurring base of revenue in this business is becoming higher as a percentage of the total revenues in this business. But there will be an inherent lumpiness in this business, and we expect that. With our data distribution and services business growing 90% year-over-year, this is going to go up and down, but we're thrilled with the start. I mean, we couldn't be any more excited about the momentum, not just in data but also in Giphy and studios. We really feel like these are 3 large TAM opportunity, high-growth business segments that we expect to have a long runway for growth over time.

And regarding the contributors, our content growth, the scale, organic and otherwise, what I can tell you is, as our business evolves from purely serving the needs of advertisers and folks that would have more traditional use for our content as we opened up the aperture to include accepting content for data, the market follows that trend. And so now we're seeing demand and supply pouring in relating to giving us content across content types and across content use cases. So we think that, that flywheel spins very, very nicely for in our favor and is actually spinning faster because as we have more content that theoretically helps our conversion rate because we've got more to offer our customers that are -- have more traditionally used. That creates a broader opportunity for our data buyers. And so again, more of that is -- and I think it is critical to driving our business forward. I think I could go further and say and as we identify gaps in any supply that we have, we now become well positioned to actually go acquire and fill those gaps meeting the demand side of the equation for our customers. So again, love to see the content. We're a content company and that scaling content is good. Helps both sides of our business.

That concludes our Q&A session. I will now turn the conference back over to Paul Hennessy, Chief Executive Officer, for the closing remarks.

Yes. I just want to thank all of our contributors, our employees and all of our customers for helping us deliver an extraordinary Q1 and set us on a path to deliver our 2027 plan. Thank you all for joining our call, and this ends our call for today.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.