Good day, and thank you for standing by. Welcome to the Q2 2024 Shutterstock, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rik Powell, SVP, Finance and Investor Relations.

Thank you, Josh. Good morning, everyone, and thank you for joining us for Shutterstock's second quarter 2024 earnings call. Joining us today is Paul Hennessy, 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 gross 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 discussing our Data business, which we have posted to our Investor Relations 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 for any forward-looking statements we may make on the call. We'll be discussing certain non-GAAP financial measures today, including adjusted net income, adjusted net income per diluted share, adjusted EBITDA and adjusted EBITDA margin, 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. I'd now like to turn the call over to Paul Hennessy, our Chief Executive Officer.

Thanks, Rik. Good morning, everyone, and thank you for joining us today. On our last earnings call, I reported that we had signed a definitive agreement to acquire Envato, a leading provider of digital creative assets and templates. As you may have seen, this transaction was completed successfully on July 22. We're truly excited about welcoming the experienced Envato team into the Shutterstock family and also excited about the impact of this acquisition on our Content business. The addition of Envato, on top of Shutterstock's 2024 performance to date, puts us well on our way to achieving the long-term targets that I laid out back in February for Shutterstock to achieve $1.2 billion of revenue and $350 million of EBITDA by 2027. Now, let's get into the second quarter results. I'm pleased to report that the overall results in the second quarter were strong, and when combined with our first quarter results, make for a strong first half of 2024. In the second quarter, Shutterstock delivered revenue of $220 million, representing growth of 5.4%, and adjusted EBITDA of $62 million, with margins of 28%, solidly exceeding our expectations for both revenue and profit for the quarter. Our Data, Distribution and Services business had another quarter of hypergrowth and our Content business showed a slight improvement, but not to the degree that we had hoped. Content revenue was $170 million for the quarter, a decline of 9% versus the prior year. Demand from our larger customers was resilient with solid bookings growth in the quarter and strong retention. Our larger customers are spending with confidence across geographies, content types and product SKUs. By contrast and consistent with the recent past, new customer acquisition in small- and medium-sized customers was soft and did not experience the rebound we would have hoped for.…

Thank you, Paul, and good morning, everyone. I'd first like to start by welcoming Rik Powell to the Shutterstock team. Rik started in June as SVP, Finance and Investor Relations, having held the same position at Shake Shack in his previous role. Prior to that, Rik spent 16 years at Getty Images with his final position being CFO, which he held for three years. Great to have you on the team, Rik. Also I'd like to thank Chris Suh, who has transitioned his IR responsibilities so that he can dedicate his focus to Corporate Development. Chris has done an outstanding job running both IR and M&A, and we are certain he will continue his track record of success at Shutterstock. Now, onto the second quarter financial performance. Shutterstock's revenue for the second quarter was $220 million, up 5.4% year-over-year, solidly exceeding our expectations. Content revenue was $170 million in the second quarter, down 9% versus the prior year. While the second quarter was a slight improvement compared to the first quarter, as Paul mentioned, performance was softer than we expected. Consistent with our prior comments, we expect gradual improvement in our Content business in the second half of the year. However, getting back to year-over-year growth is taking longer than we had expected. We have factored our reduced expectations for Content growth into our guidance. Data, Distribution and Services drove impressive growth, with second quarter revenue of $50 million, up 129% versus the prior year and an increase of 24% sequentially. As Paul noted, all Data, Distribution and Services businesses are in rapid growth and investment mode with the focus on hiring sales talent across each of these businesses. As I review the P&L, please note that line items are net of related depreciation and amortization, stock compensation and other…

Thank you. [Operator Instructions] Our first question comes from Andrew Boone with JMP Securities. You may proceed.

Good morning, and thanks so much for taking my questions. Jarrod, I wanted to ask about the DDS business in the back half. You talked a little bit about IP deals that are recurring versus ones that are more one-time in nature. Can you just help explain the stepdown that you're expecting for the back half of the year? And then secondly, as we think about these deals and we're kind of coming up on two years of deals being issued, can you talk about the recurring nature and what you guys are building into contracts to ensure that when there is a renewal, you guys are seeing revenue continue?

Sure, Andrew. And thanks so much for the question. Year-to-date performance in DDS has been exceptional. I think Paul spoke through some of the strong performance we've seen in Data, but also in our Distribution business and in our Services business. And clearly, we're investing behind that success that we've seen. We expect to see continued success in the back half of the year. So, please don't expect that stepdown to be significant. It's less than a $10 million stepdown. I just didn't want to give people the expectation that there's going to be a significant sequential uptick in the back half of the year. But the business is healthy. The business is strong. We're continuing to sign deals. Those deals are giving us a growing base of tail revenue and bookings backlog as you would expect. And quite frankly, we're focused on both serving the needs of our customers. So, we are going to be flexible. We are going to be nimble in terms of the way we contract, but we're also focused on building a sustainable business and a business that's going to have a backlog that's going to be carrying us forward to grow to meet our needs in the years to come and really help us achieve the 2027 long-term targets that we've laid out for ourselves.

Thank you...

Can I...

Go ahead, Andrew. I think you may have had another.

Yeah. Thank you so much. I just wanted to focus on the stepdown in brand marketing for 2Q and how we should think about sales and marketing for the back half of the year and then going forward. What were your learnings? And then, what are you guys carrying forward? Thank you.

Sure. So, Andrew, as you think about sales and marketing in our business and you look at sort of where we are, you look back historically, and excluding some of the items to reconcile to adjusted EBITDA, we've had about 24% sales and marketing as a percentage of revenue. We would expect that to continue for the year. And so, the only reason for the stepdown was really we had done a large branding campaign with an agency that ran off between the first and the second quarter, but there was no pullback in SEM or any of the other performance marketing spend that we are normally working on. I'd also add that sales and marketing will increase as a result of the sales hiring that we're going to be doing to support our Data, Distribution and Services business. Paul spoke through the hiring of Kevin. Kevin is going to be hiring a team behind him to expand and grow GIPHY. We're hiring in Studios aggressively. And our sales team in Data is also growing behind some of the successes that they've already had. So, to the extent we put on more spend in sales and marketing, it's probably going to be in some of these areas where we're seeing very significant market traction and success in Data, Distribution and Services.

Great. Thank you.

Thank you. Our next question comes from Bernie McTernan with Needham & Company. You may proceed.

Great. Thanks for taking the questions. And just want to start by saying, Jarrod, thanks for all the color on organic versus non-M&A growth and the -- expected for the rest of the year. It's really helpful. Maybe just moving over to the Content part of the business. If you can just talk through what's the updated plan from here? Is it just things are taking longer than expected to fix? Are there -- you talked about SEM, SEO, trying to improve conversion. Like, are there other levers you guys are trying to pull? If you can just kind of bring us behind the curtain a little bit in terms of what's the latest in terms of trying to get this business back to growth knowing that's taking longer than expected?

Yeah, thanks, Bernie. It's Paul. You saw that we had sequential improvement, albeit not to the pacing that we would like. I think Jarrod guided for continued sequential improvement. So, the business is coming back, it's not coming back at the pace that we wanted. And why do we believe that that's happening? We think there's an opportunity to actually simplify our product offering and we've done that in real time both with our PremiumBeat offering, with our Pond5 offering. With PremiumBeat, for example, we've moved to subscription based kind of more of all-you-can-eat than individual tracks. We see that change happening in the marketplace. We want to make sure we offer customers exactly what they're looking for and the way they're looking for it. In Pond5, we just had a litany of offerings and plans and now we've simplified that. And we believe that there's been a gap. And there's been a gap in an opportunity to offer more unlimited products. And not surprisingly, we think Envato fits nicely into that product opportunity for customers. So, I think if you think about what we're doing, this is not about the demand for Shutterstock. Customers continue to come to us looking for our products and services. This is about getting them into the right products and being competitive in the marketplace from a pricing perspective, from a simplification perspective, and just having what they need. And that's going to take us a little bit longer than we thought, but we are absolutely committed and confident that the Content business gets back to growth.

Understood. And then, just a follow-up on the 3D GenAI product with NVIDIA. Can you just talk about some of the use cases for this technology? I think you already said you had some customers on board.

Yeah. I think, look, it's super early days on the use cases. I think we mentioned beta customers coming on in September, but think everything that you used to do with 3D models in terms of using traditional models, now can be done superfast and driving efficiency for our -- for those that are generating the models themselves. We mentioned some of the work we're doing in our Studios business, with Netflix and others. We just think about where -- 3D is used in immersive, in gaming, any place where -- in retail, any place where customers need 3D, this becomes a tool that supercharges their workflow. And so, we're going to be on the front row. We have a front-row seat for all of the use cases and we're proud to be among the first with this kind of product in the marketplace.

One follow-up. I guess, it's too early to get into revenue recognition and accounting for this product. Is this -- the revenue share you receive, is that coming back at a pretty high margin?

So, I think the revenue share that we'll get, Bernie, is going to be effectively on a net basis. And so, it should come back at a high margin. I think what will bring the margin down to a more corporate average level of margin is the fact that we are going to share the benefits of this with our contributors. So, we are going to be paying a contributor royalty on any revenues that we generate from the 3D product. And that's consistent with the approach that we've taken to Data. That's consistent with the approach that we've taken to other GenAI products. And I think philosophically, our view is, as we innovate, sharing the benefits of that innovation with our contributor community is key.

Got it. Makes a lot of sense. Thanks, Paul. Thanks, Jarrod and Rik.

Thanks, Bernie.

Thank you. Our next question comes from Youssef Squali with Truist. You may proceed.

Hi, this is Robert Zeller on for Youssef. Thanks for taking our questions. First, just on barter transactions, did you guys quantify what barter transaction sizes were in this quarter? And then, on licensing deals, as a regulatory environment heats up, it's a serious concern for AI players, which is probably a very big tailwind for you guys. So, can you just give an update on where you are with partnerships with the hyperscalers and major AI players? Thanks.

Sure. So, I wasn't quite sure what the first part of your question was. I think it was related to partnership transactions around the large hyperscalers. We have, over the course of the past several years, at various points in time, announced the names and logos of some of the world's largest companies that we've engaged with around generative AI. We believe that many of those companies are ahead of the curve in terms of understanding that the licenseability of AI training data is critical. And the regulatory environment as it evolves is continuing to evidence that. If you look at some of the evolutions that have recently happened around the EU AI Act, some of the proposed legislation in the US, some of the media headlines that are emerging around scrape data, it's becoming very clear that having model releases around the data that you use for generative AI model training is mission critical. It's mission critical to manage reputational risk, it's mission critical from an ethical perspective, and it's also mission critical from the commercialization of these future products and services that all of these companies are building. We believe that Shutterstock is really at the heart of that. We believe that apart and separate from what some of the publishers are doing with respect to digital media, what we're doing in respect to visual media is really groundbreaking and setting the stage for the long-term sustainability and durability of these GenAI products. So, we're really pleased with that. We're really proud of the companies that have done the diligence and really dug deep into our metadata and looked at the accuracy of it and looked at the fidelity of it, and selected Shutterstock for their data needs, and we hope to continue to grow and expand that business.

Okay. Thanks. The first question was just on how much of revenue was non-cash, like for the Data deals?

So, with respect to revenue that we received in the form of equity, that would be approximately $12 million in the second quarter, and you can see that in our 10-Q.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Nitin Bansal with Bank of America. You may proceed.

Hi. Thank you for taking my question. You mentioned that the decline in Content business was driven by weakness in new customer acquisition, but your existing subscriber base is also declining. Can you help us understand like what's driving the churn in your existing subscriber base? And what gives you confidence that trends can improve in the second half?

Sure, Nitin. So, we really haven't seen significant movements in churn from the perspective of our customers. There is a normal level of about 80% net revenue retention in Shutterstock's business as a whole. And so, to the extent that new customer acquisition is weaker than we expect, assuming churn is held constant, you would see a reduction in the total number of customers in the business. What I would also point out is, if you sort of trace our business back a few quarters, we've spoken at length about the elimination of the free trial in our business, and that was a free trial for subscriptions. And so, what we've seen is when you get rid of the free trial for subscriptions, customers are naturally pivoting to some of our more transactional and pack products. And so, that's also exacerbating some of the subscriber decline is really a product mix shift away from products that erstwhile were free trial products towards products that are more transactional and pack in nature. These are highly retentive products. These are high AOV products. We just feel like we're doing the right thing long term for our business by eliminating the free trial and I think we're sticking with that strategy.

Thank you.

Thank you. I would now like to turn the call back over to CEO, Paul Hennessy, for any closing remarks.

Thanks, Josh. To finish, I'd just like to thank our team, say a special welcome to our new Envato colleagues, and also a big thank you to our customers for putting your trust in us each and every day. Thanks for joining. This ends our call for today.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.