Shutterstock, Inc.: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Oct 29, 2024 and accepted by EDGAR at Oct 29, 2024, 07:28 ET.
Management's discussion and analysis
As filed, 72,470 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q and with information contained in our other filings, including the audited consolidated financial statements included in our 2023 Form 10-K.
In addition to historical consolidated financial information, this discussion contains forward-looking statements including statements about our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those expressed or implied in forward-looking statements. See “Forward Looking Statements” above and the “Risk Factors” disclosures contained in our 2023 Form 10-K for additional discussion of the risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.
Overview and Recent Developments
Shutterstock, Inc. (referred to herein as the “Company”, “we,” “our,” and “us”) is a leading global creative platform connecting brands and businesses to high quality content.
Our platform brings together users and contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed. Contributors upload their content to our web properties in exchange for royalty payments based on customer download activity. Beyond content, customers also leverage our platform to assist with the entire creative process from ideation through creative execution.
Digital content licensed to our customers for their creative needs includes images, footage, music, and 3D models (our “Content” offering). Our Content revenues represent the majority of our business and are supported by our searchable creative platform and driven by our large contributor network.
In addition, our customers have needs that are beyond traditional content license products and services. These include (i) licenses to metadata associated with our images, footage, music tracks and 3D models through our data offering, (ii) distribution and advertising services from our Giphy business, which consists of GIFs (graphics interchange format visuals) that serve as a critical ingredient in text- and message- based conversations and in contextual advertising settings, (iii) specialized solutions for high-quality content matched with production tools and services through Shutterstock Studios and (iv) other tailored white-glove services (collectively, our “Data, Distribution, and Services” offerings).
As of September 30, 2024, our content library includes 800 million images and 55 million footage clips available for distribution in our Content and Data, Distribution and Services offerings. We believe this large selection of high-quality content enables us to attract and retain customers and drives our network effect. In addition, we had over 4.1 million active, paying customers contributing to our revenue for the twelve-month period ended September 30, 2024.
Our Content Offering
Our Content offering includes licenses for:
- Images - consisting of photographs, vectors and illustrations. Images are typically used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses.
- Footage - consisting of video clips, premium footage filmed by industry experts and cinema grade video effects, available in HD and 4K formats. Footage is often integrated into websites, social media, marketing campaigns and cinematic productions.
- Music - consisting of high-quality music tracks and sound effects, which are often used to complement images and footage.
- 3 Dimensional (“3D”) Models - consisting of 3D models available in a variety of formats, used in a variety of industries such as advertising, media and video production, gaming, retail, education, design and architecture.
- Generative AI Content - consisting of images generated from algorithms trained with high-quality, ethically sourced content. Customers can generate images by entering a description of their desired content into model prompts.
Our Content is distributed to customers under the following brands: Shutterstock; Pond5; TurboSquid; PicMonkey; PremiumBeat; Splash News; Bigstock; Envato; and Offset. Shutterstock, our flagship brand, includes various content types such as image, footage, music and editorial.
Pond5 is a video-first content marketplace which expands the Company’s content offerings across footage, image and music. TurboSquid operates a marketplace that offers more than one million 3D models and a 2 dimensional (“2D”) marketplace derived from 3D objects. PicMonkey is a leading online graphic design and image editing platform. PremiumBeat offers exclusive high-quality music tracks and provides producers, filmmakers and marketers the ability to search handpicked production music from the world’s leading composers. Splash News provides editorial image and video content across celebrity and red carpet events. Bigstock maintains a separate content library tailored for creators seeking to incorporate cost-effective imagery into their projects. Our Offset brand provides authentic and exceptional content for high-impact use cases that require extraordinary images, featuring work from top assignment photographers and illustrators from around the world.
On February 1, 2024, we acquired Backgrid USA, Inc. and Backgrid London, Ltd. (collectively “Backgrid”). Backgrid supplies media organizations with real-time celebrity content. On July 22, 2024, we completed our acquisition of Envato Pty Ltd. (“Envato”). Envato offers digital creative assets and templates.
Our Data, Distribution, and Services Offering:
Our Data, Distribution, and Services offering addresses customer demand for products and services that are beyond our Content licenses. These products and services include, among other things, the use of our metadata, leveraging our Giphy, Inc. platform, and customized Shutterstock Studios offerings.
We have seen increased demand for access to our metadata for machine learning and generative artificial intelligence model training. We offer ethically sourced and licenseable metadata at industry leading scales and quality. Our metadata customer base ranges from large technology and media companies to smaller start-up organizations.
In 2023, we completed our acquisition of Giphy, Inc. (“Giphy”). Giphy is a content platform that allows users to personalize casual conversations with GIFs, and generates billions of monthly impressions through over 14,000 API partners. We believe customers in all industries will look to use Giphy in marketing campaigns as another advertising outlet.
Our Data, Distribution, and Services offering also includes high-quality production and custom content at scale provided by Shutterstock Studios (“Studios”). Studios is a cost-effective solution for brands and agencies looking to meet their content needs and create fresh dynamic digital assets. Customers can bring an idea, and our Studios team will provide a 360-degree content creation solution. We offer a whole spectrum of services at pre-production, production, live production and post-production stages.
Acquisition of Backgrid USA, Inc. and Backgrid London LTD
On February 1, 2024, the Company completed its acquisition of all of the outstanding shares of Backgrid USA, Inc. and Backgrid London LTD, (collectively, “Backgrid”), for approximately $20 million, subject to customary working capital adjustments. The total purchase price was paid with existing cash on hand. Backgrid supplies media organizations with real-time celebrity content. The Company believes this acquisition expands Shutterstock Editorial’s Newsroom offering of editorial images and footage across celebrity, red carpet and live-events.
Acquisition of Envato Pty Ltd.
On July 22, 2024, the Company completed its previously announced acquisition of Envato Pty Ltd. (“Envato”) pursuant to a Share Purchase Agreement (the “Purchase Agreement”) entered into on May 1, 2024, to acquire all of the issued and outstanding capital stock of Envato. The aggregate consideration paid by the Company, after customary working capital and other adjustments in accordance with the terms of the Purchase Agreement, was $250 million.
The addition of Envato has:
- Complemented Shutterstock’s existing offering with Envato Elements, a leading unlimited multi-asset subscription offering,
- Expanded Shutterstock’s reach within faster growing audiences such as freelancers, hobbyists, small businesses and agencies,
- Increased Shutterstock’s Content revenue from video, audio, graphics, fonts and templates, and
- Further diversified Shutterstock into new content types including code & web themes, product mock-ups, fonts and templates (e.g. Slides, PowerPoint, Keynote, WordPress, video, designs for social posts, gaming, podcasts and print-on-demand).
Key Operating Metrics
In addition to key financial metrics, we regularly review a number of key operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe that these metrics can be useful for understanding the underlying trends in our business.
Subscribers, subscriber revenue and average revenue per customer from acquisitions are included in these metrics beginning twelve months after the closing of the respective business combination. Accordingly, the metrics include Subscribers, Subscriber revenue, and Average revenue per customer from Pond5 and Splash News beginning May 2023, and, for Average Revenue per Customer, from Giphy beginning July 2024. These metrics exclude the respective counts and revenues from Backgrid and Envato.
Subscribers
We define subscribers as those customers who purchase one or more of our monthly recurring products for a continuous period of at least three months, measured as of the end of the reporting period. We believe the number of subscribers is an important metric that provides insight into our monthly recurring business. We believe that an increase in our number of subscribers is an indicator of engagement in our platform and potential for future growth.
Subscriber Revenue
We define subscriber revenue as the revenue generated from subscribers during the period. We believe subscriber revenue, together with our number of subscribers, provide insight into the portion of our business driven by our monthly recurring products.
Average Revenue Per Customer
Average revenue per customer is calculated by dividing total revenue for the last twelve-month period by customers. We define customers as total active, paying customers that contributed to total revenue over the last twelve-month period. Changes in our average revenue per customer will be driven by changes in the mix of our subscription-based and transactional products as well as pricing in our transactional business.
Paid Downloads
We define paid downloads as the number of downloads that our customers make in a given period of our content. Paid downloads exclude content related to our Studios business, downloads of content that are offered to customers for no charge (including our free trials), and metadata delivered through our data deal offering. Measuring the number of paid downloads that our customers make in a given period is important because it is a measure of customer engagement on our platform and triggers the recognition of revenue and contributor royalties.
The following tables summarize our key operating metrics, which are unaudited, for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended September 30, Shutterstock1 2024 | Envato2 2024 | Pro Forma3 2024 | 2023 | |
|---|---|---|---|---|
| Subscribers (end of period) | 470,000 | 635,000 | 1,105,000 | 551,000 |
| Subscriber revenue (in millions) | $78.7 | $34.4 | $113.1 | $88.3 |
| Average revenue per customer (last twelve months) | $446 | $85 | $254 | $401 |
| Paid downloads (in millions) | 32.9 | 79.4 | 112.3 | 36.4 |
| Nine Months Ended September 30, Shutterstock1 2024 | Envato2 2024 | Pro Forma3 2024 | 2023 | |
|---|---|---|---|---|
| Subscribers (end of period) | 470,000 | 635,000 | 1,105,000 | 551,000 |
| Subscriber revenue (in millions) | $242.9 | $102.0 | $344.9 | $266.3 |
| Average revenue per customer (last twelve months) | $446 | $85 | $254 | $401 |
| Paid downloads (in millions) | 101.3 | 229.6 | 330.9 | 117.6 |
1 Represents Shutterstock, Inc. key operating metrics before combining the Envato related metrics. Subscribers, Subscriber Revenue and Average Revenue Per Customer from acquisitions are included in these metrics beginning twelve months after the closing of the respective business combination. Accordingly, the metrics include Subscribers, Subscriber revenue, and Average revenue per customer from Pond5 and Splash News beginning May 2023, and, for Average Revenue per Customer, from Giphy beginning July 2024. These metrics exclude the respective counts and revenues from our acquisitions of Backgrid and Envato.
2 Envato Subscribers and Subscriber Revenue are presented as if Envato was acquired as of the beginning of the period presented, and represent metrics incremental to amounts presented under the “Shutterstock, Inc.” heading. Envato Average revenue per customer is derived from Envato historical results over the last twelve months.
3 The Pro Forma key operating metrics are derived from (i) the Shutterstock amounts before combining with Envato and (ii) the historical Envato metrics, as discussed in footnote 2 above.
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the volume of expected unused licenses used in revenue recognition for our subscription-based products, the fair value of acquired goodwill and intangible assets and income tax provisions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Therefore, we consider these to be our critical accounting estimates. Actual results could differ from those estimates.
A description of our critical accounting policies that involve significant management judgments appears in our 2023 Form 10-K, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates.”
See Note 1 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of the impact of the adoption of new accounting standards on our financial statements. There have been no material changes to our critical accounting estimates as compared to our critical accounting policies and estimates included in our 2023 Form 10-K.
Key Components of Our Results of Operations
Revenue
We distribute our product offerings through two primary channels:
Content: The majority of our customers license image, video, music and 3D content for commercial purposes either directly through our self-service web properties or through our dedicated sales teams. Content customers have the flexibility to purchase subscription-based plans that are paid on a monthly or annual basis. Customers are also able to license content on a transactional basis. These customers generally license content under our standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs. Certain content customers also have unique content, licensing and workflow needs. These customers communication with dedicated sales professionals, service and research teams which provide a number of tailored enhancements to their creative workflows including non-standard licensing rights, multi-seat access, ability to pay on credit terms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of those available on the e-commerce platform.
Data, Distribution, and Services: Our Data, Distribution, and Services offering addresses customer demand for products and services that are beyond our stock image, footage music and 3D model licenses. We have seen increased demand for access to our metadata for machine learning and generative artificial intelligence model training. We offer ethically sourced and licensable metadata at unique scales and quality. Our metadata customer base ranges from large technology and media companies to smaller start-up organizations.
In 2023, we completed our acquisition of Giphy, Inc. (“Giphy”). Giphy is a content platform that allows used to personalize casual conversations with GIFs, and generates billions of monthly impressions through over 14,000 API partners. We believe customers in all industries will look to use Giphy in marketing campaigns as another advertising outlet.
Our Data, Distribution, and Services offering also includes high-quality production and custom content at scale provided by Shutterstock Studios (“Studios”). Studios is a cost-effective solution for brands and agencies looking to meet their content needs and create fresh dynamic digital assets. Customers can bring an idea, and our Studios team will provide a 360-degree content creation solution. We offer a whole spectrum of services at pre-production, production and post-production stages.
The Company’s revenues by distribution channel for the three and nine months ended September 30, 2024 and 2023 are as follows (in thousands):
| Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 | |
|---|---|---|---|---|
| Content | $203,713 | $178,791 | $547,494 | $559,738 |
| Data, Distribution, and Services | 46,875 | 54,457 | 137,462 | 97,630 |
| Total Revenues | $250,588 | $233,248 | $684,956 | $657,368 |
Costs and Expenses
Cost of Revenue. Cost of revenue consists of royalties paid to contributors, credit card processing fees, content review costs, customer service expenses, infrastructure and hosting costs related to maintaining our creative platform and cloud-based software platform, depreciation and amortization of capitalized internal-use software, purchased content and acquisition-related intangible assets, allocated facility costs and other supporting overhead costs. Cost of revenue also includes employee compensation, including non-cash equity-based compensation, bonuses and benefits associated with the maintenance of our creative platform and cloud-based software platform.
Sales and Marketing. Sales and marketing expenses include third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing expenses also include associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, and commissions as well as allocated facility and other supporting overhead costs.
Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Product development costs also includes software and other IT equipment costs, allocated facility expenses and other supporting overhead costs.
General and Administrative. General and administrative expenses include employee compensation, including non-cash equity-based compensation, bonuses and benefits for executive, finance, accounting, legal, human resources, internal information technology, internet security, business intelligence and other administrative personnel. In addition, general and administrative expenses include outside legal, tax and accounting services, bad debt expense, insurance, facilities costs, other supporting overhead costs and depreciation and amortization expense.
Bargain Purchase Gain. A bargain purchase gain is recognized subsequent to an acquisition, if the fair value of the net assets acquired and liabilities assumed exceeds the net consideration.
Interest Expense. Interest expense consists of interest on our debt and amortization of deferred financing fees.
Other Income, Net. Other income, net consists of non-operating costs such as foreign currency transaction gains and losses, in addition to unrealized gains and losses on investments and interest income and expense.
Income Taxes. We compute income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted statutory income tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized.
Results of Operations
The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods.
(in thousands)
| Consolidated Statements of Operations: | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Revenue | $250,588 | $233,248 | $684,956 | $657,368 |
| Operating expenses: | ||||
| Cost of revenue | 104,405 | 94,219 | 283,863 | 256,798 |
| Sales and marketing | 55,403 | 56,165 | 163,520 | 152,084 |
| Product development | 28,610 | 28,098 | 69,520 | 72,722 |
| General and administrative | 44,021 | 37,574 | 112,492 | 109,488 |
| Total operating expenses | 232,439 | 216,056 | 629,395 | 591,092 |
| Income from operations | 18,149 | 17,192 | 55,561 | 66,276 |
| Bargain purchase gain | — | 9,864 | — | 51,804 |
| Interest expense | (4,451) | (562) | (5,574) | (1,286) |
| Other income, net | 3,829 | 1,119 | 4,490 | 3,614 |
| Income before income taxes | 17,527 | 27,613 | 54,477 | 120,408 |
| Provision for income taxes | (88) | (806) | 17,116 | 9,133 |
| Net income | $17,615 | $28,419 | $37,361 | $111,275 |
The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:
| Consolidated Statements of Operations: | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Revenue | 100% | 100% | 100% | 100% |
| Operating expenses: | ||||
| Cost of revenue | 42% | 40% | 41% | 39% |
| Sales and marketing | 22% | 24% | 24% | 23% |
| Product development | 11% | 12% | 10% | 11% |
| General and administrative | 18% | 16% | 16% | 17% |
| Total operating expenses | 93% | 93% | 92% | 90% |
| Income from operations | 7% | 7% | 8% | 10% |
| Bargain purchase gain | —% | 4% | —% | 8% |
| Interest expense | (2)% | —% | (1)% | —% |
| Other income, net | 2% | —% | 1% | 1% |
| Income before income taxes | 7% | 12% | 8% | 18% |
| Provision for income taxes | —% | —% | 2% | 1% |
| Net income | 7% | 12% | 5% | 17% |
Note: Due to rounding, percentages may not sum to totals.
Comparison of the Three Months Ended September 30, 2024 and 2023
The following table presents our results of operations for the periods indicated (in thousands):
| Consolidated Statements of Operations: | Three Months Ended September 30, 2024 | 2023 | $ Change | % Change |
|---|---|---|---|---|
| Revenue | $250,588 | $233,248 | $17,340 | 7% |
| Operating expenses: | ||||
| Cost of revenue | 104,405 | 94,219 | 10,186 | 11 |
| Sales and marketing | 55,403 | 56,165 | (762) | (1) |
| Product development | 28,610 | 28,098 | 512 | 2 |
| General and administrative | 44,021 | 37,574 | 6,447 | 17 |
| Total operating expenses | 232,439 | 216,056 | 16,383 | 8 |
| Income from operations | 18,149 | 17,192 | 957 | 6 |
| Bargain purchase gain | — | 9,864 | (9,864) | * |
| Interest expense | (4,451) | (562) | (3,889) | 692 |
| Other income, net | 3,829 | 1,119 | 2,710 | 242 |
| Income before income taxes | 17,527 | 27,613 | (10,086) | (37) |
| Benefit for income taxes | (88) | (806) | 718 | (89) |
| Net income | $17,615 | $28,419 | $(10,804) | (38)% |
Revenue
Revenue increased by $17.3 million, or 7%, to $250.6 million for the three months ended September 30, 2024, compared to the same period in 2023. Revenue was not impacted on a constant currency basis in the three months ended September 30, 2024, compared to the same period in 2023.
The Company’s Content revenues increased by 14%, to $203.7 million in the three months ended September 30, 2024, compared to the same period in 2023. On a constant currency basis, Content revenues grew 13% in the three months ended September 30, 2024, compared to the same period in 2023. During the three months ended September 30, 2024, growth in our Content revenue was driven by the contribution of Envato, which was acquired on July 22, 2024. The increase was partially offset by a reduction in Content revenue generated from Shutterstock’s content offering due to weakness in new customer acquisition.
The Company’s Data, Distribution, and Services revenues decreased by 14%, to $46.9 million in the three months ended September 30, 2024, compared to the same period in 2023. The decrease in Data, Distribution, and Services revenues was driven by a decline in our data offering, which was offset by growth in our Distribution and Services offerings.
Changes in our revenue by region were as follows: revenue from North America decreased by $2.8 million, or 2%, to $120.5 million, revenue from Europe increased by $12.9 million, or 23%, to $69.5 million and revenue from outside Europe and North America increased by $7.2 million, or 14%, to $60.6 million, in the three months ended September 30, 2024 compared to the same period in 2023.
Costs and Expenses
Cost of Revenue. Cost of revenue increased by $10.2 million to $104.4 million in the three months ended September 30, 2024 compared to the same period in 2023. As a percentage of revenue, cost of revenue increased to 42% for the three months ended September 30, 2024, from 40% for the same period in 2023. This increase was driven by increased royalties, content expenses, and employee-related costs driven by the acquisition of Envato. These amounts were partially offset by a decrease in Shutterstock-legacy related royalties, content expenses, production costs and employee-related costs, and a decrease in recurring and non-recurring Giphy Retention Compensation. We expect that our cost of revenue will continue to fluctuate in-line with changes in revenue.
Sales and Marketing. Sales and marketing expenses decreased by $0.8 million, or 1%, to $55.4 million in the three months ended September 30, 2024 compared to the same period in 2023. As a percentage of revenue, sales and marketing expenses decreased to 22% for the three months ended September 30, 2024, from 24% for the same period in 2023. This was driven by a decrease in Shutterstock-legacy brand and performance-based marketing expenses and a decrease in consultant expenses. This was partially offset by marketing spend and employee-related costs attributable to the Envato business. In addition, there were $0.9 million and $1.1 million increases from recurring and non-recurring Giphy Retention Compensation expenses, respectively. We expect sales and marketing expenses to continue to fluctuate as we optimize our sales channels and invest in new customer acquisition, products and geographies.
Product Development. Product development expenses increased by $0.5 million to $28.6 million in the three months ended September 30, 2024 compared to the same period in 2023. The increase in product development was driven by an increase in employee-related costs associated with the Envato business, offset by a decline in Shutterstock-legacy employee-related costs. In addition, there was a $1.2 million decrease and a $2.7 million increase from recurring and non-recurring Giphy Retention Compensation expenses, respectively. We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhance the functionality of our existing products and technologies.
General and Administrative. General and administrative expenses increased by $6.4 million to $44.0 million in the three months ended September 30, 2024 compared to the same period in 2023. This increase was driven by an increase in professional fees and employee-related costs associated with by the Envato business, offset by a decline in the Shutterstock-legacy employee-related costs. In addition, there were $0.7 million and $1.1 million decreases from recurring and non-recurring Giphy Retention Compensation expenses, respectively. In the three months ended September 30, 2024, the Company also incurred $3.2 million of transaction costs associated with the acquisition of Envato.
Bargain Purchase Gain. In the three months ended September 30, 2023, we recorded an increase to the Giphy bargain purchase gain of $9.9 million associated with updates to deferred income tax balances recorded on the Giphy opening balance sheet.
Interest Expense. In the three months ended September 30, 2024 and September 30, 2023, we recognized interest expense of $4.5 million and $0.6 million, respectively, related to our credit facility and the amortization of deferred financing fees. Interest expense for the three months ended September 30, 2024 increased due to the borrowings under A&R Credit Agreement entered into during the quarter ended September 30, 2024 to fund the acquisition of Envato.
Other Income, Net. In the three months ended September 30, 2024, other income, net was driven by $1.6 million of unrealized gains related to our investment in Meitu, Inc. In addition, other income, net had $1.1 million of interest income and $1.2 million of unrealized foreign currency gains. During the three months ended September 30, 2023, other income, net substantially consisted of $1.9 million of interest income and $0.8 million of unrealized foreign currency losses. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.
Income Taxes. The income tax benefit decreased by $0.7 million for the three months ended September 30, 2024, compared to the same period in 2023. Our effective tax rates yielded a net benefit of 0.5% and 2.9% for the three months ended September 30, 2024 and 2023, respectively.
For the three months ended September 30, 2024, the net effect of discrete items decreased the effective tax rate by 32.9%. The discrete items for the three months ended September 30, 2024 primarily relate to reversal of unrecognized tax benefits of $7.3 million due to the settlement of an IRS audit. Excluding discrete items, our effective tax rate would have been 32.4% for the three months ended September 30, 2024.
For the three months ended September 30, 2023, the net effect of discrete items decreased the effective tax rate by 14.9%. The discrete items for the three months ended September 30, 2023 primarily relate to the effect of the U.S. Research and Development (“R&D”) tax credit claimed on the Company’s 2022 tax return, which was substantially completed in the third quarter of 2023. Excluding discrete items, our effective tax rate would have been 12.0% for the three months ended September 30, 2023.
As we continue to expand our operations outside of the United States, we have been and may continue to become subject to taxation in additional non-U.S. jurisdictions and our effective tax rate could fluctuate accordingly.
Comparison of the Nine Months Ended September 30, 2024 and 2023
The following table presents our results of operations for the periods indicated:
(in thousands)
| Consolidated Statements of Operations Data: | Nine Months Ended September 30, 2024 | 2023 | $ Change | % Change |
|---|---|---|---|---|
| Revenue | $684,956 | $657,368 | $27,588 | 4% |
| Operating expenses: | ||||
| Cost of revenue | 283,863 | 256,798 | 27,065 | 11% |
| Sales and marketing | 163,520 | 152,084 | 11,436 | 8% |
| Product development | 69,520 | 72,722 | (3,202) | (4)% |
| General and administrative | 112,492 | 109,488 | 3,004 | 3% |
| Total operating expenses | 629,395 | 591,092 | 38,303 | 6% |
| Income from operations | 55,561 | 66,276 | (10,715) | (16)% |
| Bargain purchase gain | — | 51,804 | (51,804) | * |
| Interest expense | (5,574) | (1,286) | (4,288) | 333% |
| Other income, net | 4,490 | 3,614 | 876 | 24% |
| Income before income taxes | 54,477 | 120,408 | (65,931) | (55)% |
| Provision for income taxes | 17,116 | 9,133 | 7,983 | 87% |
| Net income | $37,361 | $111,275 | $(73,914) | (66)% |
*Not meaningful
Revenue
Revenue increased by $27.6 million, or 4%, to $685.0 million in the nine months ended September 30, 2024 compared to the same period in 2023. Revenue was not impacted on a constant currency basis in the nine months ended September 30, 2024, compared to the same period in 2023.
The Company’s Content revenues decreased by 2%, to $547.5 million in the nine months ended September 30, 2024, compared to the same period in 2023. Foreign currency fluctuations did not have a significant impact on the Company’s Content revenues in the nine months ended September 30, 2024. The decline in our Content revenues was driven by weakness in new customer acquisition, partially offset by revenue from Envato, which was acquired on July 22, 2024.
The Company’s Data, Distribution, and Services revenues increased by 41%, to $137.5 million in the nine months ended September 30, 2024, compared to the same period in 2023. Foreign currency fluctuations did not have a significant impact on the Company’s Data, Distribution, and Services revenues in the nine months ended September 30, 2024. The increase in Data, Distribution, and Services revenues was driven by growth in our data offering, which grew 22% in the nine months ended September 30, 2024, as well as growth in our Distribution and Services offerings.
Changes in our revenue by region were as follows: revenue from North America increased by $32.4 million, or 10%, to $351.1 million, revenue from Europe increased by $4.2 million, or 2%, to $178.2 million and revenue from outside Europe and North America decreased by $9.1 million, or 5%, to $155.6 million, in the nine months ended September 30, 2024 compared to the same period in 2023.
Costs and Expenses
Cost of Revenue. Cost of revenue increased by $27.1 million, or 11%, to $283.9 million in the nine months ended September 30, 2024 compared to the same period in 2023. As a percent of revenue, cost of revenue increased to 41% for the nine months ended September 30, 2024, from 39% for the same period in 2023. This increase was driven by increased royalty and content costs, costs associated with website hosting, hardware and software licenses, and employee related costs, and depreciation and amortization driven by the acquisition of Envato. We expect that our cost of revenue will continue to fluctuate in line with changes in revenue.
Sales and Marketing. Sales and marketing expenses increased by $11.4 million, or 8%, to $163.5 million in the nine months ended September 30, 2024 compared to the same period in 2023. As a percent of revenue, sales and marketing expenses increased to 24% for the nine months ended September 30, 2024, from 23% for the same period in 2023. This increase was driven by increases in employee-related costs performance marketing spend driven by the Envato business, offset by a decline in Shutterstock’s performance marketing spend. In addition, there were $3.2 million and $0.8 million increases from recurring and non-recurring Giphy Retention Compensation, respectively. We expect sales and marketing expenses to continue to fluctuate as we optimize our sales channels and invest in new customer acquisition, products and geographies.
Product Development. Product development expenses decreased by $3.2 million, or 4%, to $69.5 million in the nine months ended September 30, 2024 as compared to the same period in 2023. The decrease in product development was driven by a decrease in outside consultant expenses and a decrease Shutterstock-legacy employee-related costs. This was partially offset by increases in employee-related costs driven by the Envato business. In addition, there was a $2.7 million increase and a $0.7 million decrease from recurring and non-recurring Giphy Retention Compensation expenses, respectively. We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhance the functionality of our existing products and technologies.
General and Administrative. General and administrative expenses increased by $3.0 million, or 3%, to $112.5 million in the nine months ended September 30, 2024 compared to the same period in 2023. The increase was driven by an increase in professional fees associated with the acquisitions of Envato and Backgrid, and increase in employee-related costs driven by the the acquisition of Envato. This was partially offset by a decrease in bad debt expense, and a decrease in Shutterstock-legacy employee-related costs. In addition, there was a $0.3 million increase and a $1.5 million decrease from recurring and non-recurring Giphy Retention Compensation expenses, respectively. General and Administrative expenses for the nine months ended September 30, 2024 also includes $8.2 million of transaction costs for the Backgrid and Envato acquisitions.
Bargain Purchase Gain. In the nine months ended September 30, 2023, we recognized a bargain purchase gain of $51.8 million related to the acquisition of Giphy, which represents the excess of the fair value of the net assets acquired in addition to the net negative purchase price.
Interest Expense. In the nine months ended September 30, 2024 and September 30, 2023, we recognized interest expense of $5.6 million and $1.3 million, respectively related to our credit facility and the amortization of deferred financing fees. Interest expense for the nine months ended September 30, 2024 increased due to borrowings under the A&R Credit Agreement entered into during the quarter ended September 30, 2024 to fund the acquisition of Envato.
Other Income, Net. During the nine months ended September 30, 2024, other income, net substantially consisted of $3.5 million of interest income and $1.7 million of unrealized gains related to our investment in Meitu, Inc., partially offset by $0.7 million of unrealized foreign currency losses. During the nine months ended September 30, 2023 other income, net consisted of $0.9 million of unrealized foreign currency gains and $2.7 million of interest income. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.
Income Taxes. Income tax expense increased by $8.0 million for the nine months ended September 30, 2024 as compared to the same period in 2023. Our effective tax rates yielded an expense of 31.4% and 7.6% for the nine months ended September 30, 2024 and 2023, respectively.
For the nine months ended September 30, 2024, the net effect of discrete items increased the effective tax rate by 8.2%. The discrete items for the nine months ended September 30, 2024 relate to shortfalls on equity award vestings and a one-time charge of $6.3 million related to the reversal of a deferred tax asset resulting from the expiration of equity awards granted to the Company’s Founder and Executive Chairman, partially offset by the reversal of unrecognized tax benefits of $7.3 million due to the settlement of an IRS audit. Excluding discrete items, our effective tax rate would have been 23.2% for the nine months ended September 30, 2024.
For the nine months ended September 30, 2023, the net effect of discrete items decreased the effective tax rate by 8.9%. The discrete items for the nine months ended September 30, 2023 primarily relate to the non-taxable bargain purchase gain associated with the acquisition of Giphy and the effect of the U.S. Research and Development (“R&D”) tax credit claimed on the Company’s 2022 tax return, which was substantially completed in the third quarter of 2023. Excluding discrete items, our effective tax rate would have been 16.5% for the nine months ended September 30, 2023.
As we continue to expand our operations outside of the United States, we have been and may continue to become subject to taxation in additional non-U.S. jurisdictions, and our effective tax rate could fluctuate accordingly.
Quarterly Trends
Our operating results have in the past fluctuated from quarter to quarter as a result of a variety of factors, including the effects of some seasonal trends in customer behavior, timing of acquisitions and the timing of revenue recognition associated with data deal partnerships. For example, for the Content business, we expect that certain customers’ usage may decrease at times during the third quarter of each calendar year due to the summer vacation season and may increase at times during the fourth quarter of each calendar year as demand is generally higher to support marketing campaigns in advance of the fourth quarter holiday season. While we believe seasonal trends have affected and will continue to affect our quarterly results, our growth trajectory may have overshadowed these effects to date.
In addition, expenditures on content by customers tend to be discretionary in nature, reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns and a variety of other factors, many of which are outside our control. As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indicators of our future operating performance.
Liquidity and Capital Resources
As of September 30, 2024, we had cash and cash equivalents totaling $131.4 million which consisted primarily of bank balances. Since inception, we have financed our operations primarily through cash flows generated from operations. In addition, if necessary, we have the ability to draw on our A&R Credit Agreement dated July 22, 2024.
Historically, our principal uses of cash have included funding our operations, capital expenditures, and content acquisitions. In addition, our capital allocation strategies also include funding business combinations and asset acquisitions that enhance our strategic position, cash dividend payments, principle and interest payments under our credit facilities and share purchases under our share repurchase programs. We plan to finance our operations, capital expenditures and corporate actions largely through cash generated by our operations and our credit facility. Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources.
Dividends
We declared and paid cash dividends of $0.90 per share of common stock, or $31.9 million during the nine months ended September 30, 2024.
On October 21, 2024, our Board of Directors declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on December 13, 2024 to stockholders of record at the close of business on November 29, 2024. Future declarations of dividends are subject to the final determination of our Board of Directors, and will depend on, among other things, our future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors our Board of Directors may deem relevant.
Share Repurchase Program
In June 2023, our Board of Directors approved a share repurchase program (the “2023 Share Repurchase Program”), providing authorization to repurchase up to $100 million of our common stock.
We expect to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, our 2023 Share Repurchase Program is subject to us having available cash to fund repurchases. Under the share repurchase program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
As of September 30, 2024, we have repurchased approximately 5.5 million shares of our common stock under the 2023 Share Repurchase Program at an average per-share cost of $48.86. During the three and nine months ended September 30, 2024, we repurchased approximately 594,400 and 1,111,500 shares of our common stock at an average cost of $35.33 and $37.42, respectively. During the three and nine months ended September 30, 2023, we repurchased approximately 351,000 and 431,000 shares of common stock at an average cost of $42.75 and $44.06, respectively, under the 2023 Share Repurchase Program. As of September 30, 2024, we had $30 million of remaining authorization for repurchases under the 2023 Share Repurchase Program.
Credit Facility and A&R Credit Agreement
On May 6, 2022, we entered into a five-year $100 million unsecured revolving loan facility (the “Credit Facility”) with Bank of America, N.A., as Administrative Agent and other lenders. The Credit Facility includes a letter of credit sub-facility and a swingline facility and it also permitted, subject to the satisfaction of certain conditions, up to $100 million of additional revolving loan commitments with the consent of the Administrative Agent.
On July 22, 2024, we entered into an amended and restated credit agreement (the “A&R Credit Agreement”), which was entered into among us, as borrower, certain direct and indirect subsidiaries of our as guarantors, the lenders party thereto, and Bank of America, N.A., as Administrative Agent for the lenders. The A&R Credit Agreement provides for a five-year (i) senior unsecured term loan facility (the “Term Loan”) in an aggregate principal amount $125 million and (ii) senior unsecured revolving credit facility (the “Revolver”) in an aggregate principal amount of $250 million. The A&R Credit Agreement provides for a letter of credit subfacility and a swingline facility.
At our option, loans under the A&R Credit Agreement accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.375% to 0.750%, determined based on our consolidated leverage ratio or (ii) the Term Secured Overnight Financing Rate (“SOFR”) (for interest periods of 1, 3 or 6 months) plus a margin ranging from 1.375% to 1.750%, determined based on our consolidated leverage ratio, plus a credit spread of 0.100%. We are also required to pay an unused commitment fee ranging from 0.175% to 0.250%, determined based on our consolidated leverage ratio. In connection with the execution of this agreement, we paid debt issuance costs of approximately $2.2 million.
The A&R Credit Agreement replaces our existing Credit Facility, which was fully repaid and terminated upon the effectiveness of the A&R Credit Agreement. In connection with the closing of the Credit Facility, we repaid $30 million of existing outstanding borrowings and accrued interest.
As of September 30, 2024, we had a remaining borrowing capacity of $94 million, net of standby letters of credit.
The A&R Credit Agreement contains financial covenants and requirements restricting certain of our activities, which are customary for this type of credit facility. We are also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio, in each case, determined in accordance with the terms of the A&R Credit Agreement. As of September 30, 2024, we were in compliance with these covenants.
Our outstanding debt (in thousands) is reflected in the table below. We classify the Revolver as a current liability since we could draw upon and repay the outstanding amount as needed. The maturity of the Revolver is in 2029.
Our debt consists of the following (in thousands):
| Current Debt: | As of September 30, 2024 | As of December 31, 2023 |
|---|---|---|
| Revolver - Credit Facility | — | 30,000 |
| Revolver - A&R Credit Agreement | 155,000 | — |
| Term Loan - A&R Credit Agreement | 3,834 | |
| Non-Current Debt: | ||
| Term Loan - A&R Credit Agreement | 120,392 | — |
Based on Level 2 inputs, the carrying value of our debt approximates its fair value, as borrowings are subject to variable interest rates that adjust with changes in market rates and market conditions and the current interest rate approximates that which would be available under similar financial arrangements.
For the three and nine months ended September 30, 2024, we recognized interest expense of $4.5 million and $5.6 million, respectively. As of September 30, 2024, unamortized debt issuance cost related to the Term Loan - A&R Credit Agreement is $0.8 million.
Sources and Uses of Funds
We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our longer-term liquidity is contingent upon future operating performance. Future capital expenditures will generally relate to the functionality of our current platform, the acquisition of additional storage, servers, network connectivity hardware, security apparatus and software, leasehold improvements and furniture and fixtures related to office expansion and relocation, content and general corporate infrastructure.
As of September 30, 2024, we had approximately $55 million in unconditional cash obligations, consisting primarily of purchase obligations related to contracts for cloud-based services, infrastructure and other business services as well as minimum royalty guarantees in connection with certain content licenses, of which the majority is due to be paid within the next two years. In addition, as of September 30, 2024, we had approximately $40 million in operating lease obligations with lease payments extending through 2029.
See Note 14 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding our existing capital commitments as of September 30, 2024.
Cash Flows
The following table summarizes our cash flow data for the nine months ended September 30, 2024 and 2023 (in thousands):
| Nine Months Ended September 30, 2024 | 2023 | |
|---|---|---|
| Net cash provided by operating activities | $24,680 | $106,603 |
| Net cash used in investing activities | $(156,120) | $(61,915) |
| Net cash provided by / (used in) financing activities | $162,556 | $(83,234) |
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. The majority of our revenue is generated from credit card transactions and is typically settled within one to five business days. Our primary uses of cash for operating activities are for the payment of royalties to content contributors, employee-related expenditures and the payment of other operating expenses incurred in the ordinary course of business.
Net cash provided by operating activities was $24.7 million for the nine months ended September 30, 2024, compared to Net cash provided by operating activities of $106.6 million for the nine months ended September 30, 2023. In the nine months ended September 30, 2024 and 2023, operating cash flows included a $28.7 million increase in the recurring and non-recurring payments made to the Giphy workforce, the reimbursement of which is reflected in Investing Activities on the Statement of Cash Flows. In the nine months ended September 30, 2024, operating cash flows included $45.7 million of cash outflows made for the Envato Seller Obligations.
In addition, operating cash flows for the nine months ended September 30, 2023 were favorably impacted from an increase in operating income and changes in the timing of cash collections from data deal customers and payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period. In addition, operating cash flows for the nine months ended September 30, 2023 were unfavorably impacted by the recurring and non-recurring payments made to the Giphy workforce, the reimbursement of which is reflected in Investing Activities on the Statement of Cash Flows.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2024 was $156.1 million, consisting primarily of (i) $179.1 million used in the acquisition of Envato and Backgrid, net of cash acquired; (ii) capital expenditures of $38.3 million for internal-use software and website development costs and purchases of software and equipment; and (iii) $2.5 million paid to acquire the rights to distribute certain digital content into perpetuity. These cash outflows were partially offset by $63.4 million of Giphy Retention Compensation, as reimbursed by the Giphy seller.
Cash used in investing activities in the nine months ended September 30, 2023 was $61.9 million, consisting primarily of (i) $53.7 million used in the acquisition of Giphy, net of cash acquired, (ii) capital expenditures of $34.7 million for internal-use software and website development costs and purchases of software and equipment, and (iii) $9.7 million paid to acquire the rights to distribute certain digital content in perpetuity. These cash outflows were partially offset by (i) $34.7 million of Giphy Retention Compensation, as reimbursed by the Giphy seller.
Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2024 was $162.6 million, consisting of (i) $280.0 million received from our A&R Credit Agreement; (ii) $30.0 million used for the repayment of our Credit Facility; (iii) $31.9 million, related to the payment of the quarterly cash dividend; (vi) $41.6 million paid in connection with the repurchase of common stock under our 2023 Share Repurchase Program; (v) $11.7 million paid in the settlement of tax withholding obligations related to employee stock-based compensation awards; and (vi) $2.2 million paid for debt issuance costs.
Cash used in financing activities in the nine months ended September 30, 2023 was $83.2 million, consisting of (i) $50.0 million used for the repayment of our Credit Facility; (ii) $29.0 million related to the payment of the quarterly cash dividend; (iii) $19.0 million paid in connection with the repurchase of common stock under the 2023 Share Repurchase Program; and (iv) $15.2 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by $30.0 million proceeds received from our Credit Facility.
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with the accounting principles generally accepted in the United States, or GAAP, our management considers certain financial measures that are not prepared in accordance with GAAP, collectively referred to as non-GAAP financial measures, including adjusted net income, adjusted net income per diluted common share, adjusted EBITDA, adjusted EBITDA margin, revenue growth (including by product offering) on a constant currency basis (expressed as a percentage), and adjusted free cash flow. These non-GAAP financial measures are included solely to provide investors with additional information regarding our financial results and are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies.
| Non-GAAP Financial Measures (in thousands): | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Adjusted net income | $46,351 | $45,549 | $115,369 | $131,741 |
| Adjusted EBITDA | $69,997 | $64,690 | $188,046 | $194,509 |
| Adjusted free cash flow | $45,672 | $12,651 | $93,102 | $96,870 |
| Revenue growth on a constant currency basis | 7% | 12% | 4% | 7% |
These non-GAAP financial measures have not been calculated in accordance with GAAP, should be considered only in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP measures. In addition, adjusted net income, adjusted net income per diluted common share, adjusted EBITDA, adjusted EBITDA margin, revenue growth (including by product offering) on a constant currency basis (expressed as a percentage) and adjusted free cash flow should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions; accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing the business and to, among other things: (i) monitor and evaluate the performance of our business operations, financial performance and overall liquidity; (ii) facilitate management’s internal comparisons of the historical operating performance of its business operations; (iii) facilitate management’s external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of our management team and, together with other operational objectives, as a measure in evaluating employee compensation; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
Management believes that adjusted net income, adjusted net income per diluted common share, adjusted EBITDA, adjusted EBITDA margin, revenue growth (including by product offering) on a constant currency basis (expressed as a percentage) and adjusted free cash flow are useful to investors because these measures enable investors to analyze Shutterstock’s operating results on the same basis as that used by management. Additionally, management believes that adjusted net income, adjusted net income per diluted common share, adjusted EBITDA and adjusted EBITDA margin provide useful information to investors about the performance of the Company’s overall business because such measures eliminate the effects of unusual or other infrequent charges that are not directly attributable to Shutterstock’s underlying operating performance and revenue growth (including by product offering) on a constant currency basis (expressed as a percentage), provides useful information to investors by eliminating the effect of foreign currency fluctuations that are not directly attributable to Shutterstock’s operating performance. Management also believes that providing these non-GAAP financial measures enhances the comparability for investors in assessing Shutterstock’s financial reporting. Management believes that adjusted free cash flow is useful for investors because it provides them with an important perspective on the cash available for strategic measures, after making necessary capital investments in internal-use software and website development costs to support the Company’s ongoing business operations and provides them with the same measures that management uses as the basis for making resource allocation decisions.
Our use of non-GAAP financial measures has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our methods for measuring non-GAAP financial measures may differ from other companies’ similarly titled measures. When evaluating our performance, these non-GAAP financial measures should be considered alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
Our method for calculating adjusted net income, adjusted net income per diluted common share, adjusted EBITDA, adjusted EBITDA margin, revenue growth (including by product offering) on a constant currency basis (expressed as a percentage) and adjusted free cash flow, as well as a reconciliation of the differences between each of our non-GAAP financial measures (adjusted EBITDA, adjusted net income, revenue growth (including by product offering) on a constant currency basis (expressed as a percentage) and adjusted free cash flow), and each measure’s most directly comparable financial measure calculated and presented in accordance with GAAP, is presented below.
The expense associated with the Giphy Retention Compensation related to (i) the one-time employment inducement bonuses and (ii) the vesting of the cash value of unvested Meta equity awards held by the employees prior to closing, which are reflected in operating expenses (together, the “Giphy Retention Compensation Expense - non-recurring”), are required payments in accordance with the terms of the acquisition. Meta’s sale of Giphy was directed by the CMA and accordingly, the terms of the acquisition were subject to CMA preapproval. Management considers the operating expense associated with these required payments to be unusual and non-recurring in nature. The Giphy Retention Compensation Expense - non-recurring is not considered ongoing expense necessary to operate the Company’s business. Therefore, such expenses have been included in the below adjustments for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share. For the three months ended September 30, 2024, the Company also incurred $4.5 million, of Giphy Retention Compensation expense related to recurring employee costs, which is included in operating expenses, and are not included in the below adjustments for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share.
Adjusted Net Income and Adjusted Net Income Per Diluted Common Share
We define adjusted net income as net income adjusted for the impact of non-cash equity-based compensation, the amortization of acquisition-related intangible assets, Giphy Retention Compensation Expense - non-recurring, unrealized gains and losses on investments, severance costs associated with strategic workforce optimizations, and the estimated tax impact of such adjustments. We define adjusted net income per diluted common share as adjusted net income divided by weighted average diluted shares.
The following is a reconciliation of net income to adjusted net income for each of the periods indicated (in thousands, except per share data):
(in thousands)
| Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 | |
|---|---|---|---|---|
| Net income | $17,615 | $28,419 | $37,361 | $111,275 |
| Add / (less) Non-GAAP adjustments: | ||||
| Non-cash equity-based compensation | 15,094 | 13,003 | 41,220 | 36,589 |
| Tax effect of non-cash equity-based compensation(1)(2) | (3,547) | (3,056) | (3,332) | (8,599) |
| Acquisition-related amortization expense(3) | 9,332 | 9,052 | 27,658 | 25,580 |
| Tax effect of acquisition-related amortization expense(1) | (2,193) | (2,127) | (6,499) | (6,011) |
| Bargain purchase gain | — | (9,864) | — | (51,804) |
| Giphy Retention Compensation Expense - non-recurring | 10,281 | 8,198 | 21,825 | 25,389 |
| Tax effect of Giphy Retention Compensation Expense - non-recurring(1) | (2,416) | (1,927) | (5,129) | (5,967) |
| Other(4) | 3,272 | 4,969 | 3,413 | 6,825 |
| Tax effect of other(1) | (1,087) | (1,118) | (1,148) | (1,536) |
| Adjusted net income(4) | $46,351 | $45,549 | $115,369 | $131,741 |
| Net income per diluted common share | $0.50 | $0.79 | $1.04 | $3.06 |
| Adjusted net income per diluted common share | $1.31 | $1.26 | $3.22 | $3.62 |
| Weighted average diluted shares | 35,472 | 36,081 | 35,838 | 36,352 |
(1) Statutory tax rates are used to calculate the tax effect of the adjustments.
(2) For the nine months ended September 30, 2024, the tax effect of non-cash equity-based compensation includes a $6.3 million add-back for the reduction of deferred tax assets associated with the expiration of performance-based stock options and restricted stock units granted the Company’s Founder and Executive Chairman in 2014. The performance-based metrics were not met, the awards were not exercisable, and the Company recognized a non-cash tax expense for the change in deferred taxes.
(3) Of these amounts, $7.8 million and $8.1 million are included in cost of revenue for the three months ended September 30, 2024 and 2023, respectively, and $24.1 million and $23.4 million are included in cost of revenue for the nine months ended September 30, 2024 and 2023, respectively. The remainder of acquisition-related amortization expense is included in general and administrative expense in the Statement of Operations.
(4) Other consists of unrealized gains and losses on investments and severance costs associated with strategic workforce optimizations.
Adjusted EBITDA and Adjusted EBITDA Margin
We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, bargain purchase gain related to the acquisition of Giphy, Giphy Retention Compensation Expense - non-recurring, foreign currency transaction gains and losses, severance costs associated with strategic workforce optimizations, unrealized gains and losses on investments, interest income and expense and income taxes. We define adjusted EBITDA margin as the ratio of adjusted EBITDA to revenue.
The following is a reconciliation of net income to adjusted EBITDA for each of the periods indicated (in thousands):
(in thousands)
| Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 | |
|---|---|---|---|---|
| Net income | $17,615 | $28,419 | $37,361 | $111,275 |
| Add / (less) Non-GAAP adjustments: | ||||
| Interest expense | 4,451 | 562 | 5,574 | 1,286 |
| Interest income | (1,086) | (1,894) | (3,477) | (2,727) |
| (Benefit) / Provision for income taxes | (88) | (806) | 17,116 | 9,133 |
| Depreciation and amortization | 21,643 | 21,271 | 64,339 | 59,373 |
| EBITDA | $42,535 | $47,552 | $120,913 | $178,340 |
| Non-cash equity-based compensation | 15,094 | 13,003 | 41,220 | 36,589 |
| Bargain purchase gain | — | (9,864) | — | (51,804) |
| Giphy Retention Compensation Expense - non-recurring | 10,281 | 8,198 | 21,825 | 25,389 |
| Foreign currency (gain) / loss | (1,185) | 775 | 675 | (887) |
| Unrealized gain on investment | (1,558) | — | (1,688) | — |
| Workforce optimization - severance | 4,830 | 5,026 | 5,101 | 6,882 |
| Adjusted EBITDA | $69,997 | $64,690 | $188,046 | $194,509 |
| Revenue | $250,588 | $233,248 | $684,956 | $657,368 |
| Net income margin | 7.0% | 12.2% | 5.5% | 16.9% |
| Adjusted EBITDA margin | 27.9% | 27.7% | 27.5% | 29.6% |
Revenue Growth (including by product offering) on a Constant Currency Basis
We define revenue growth (including by product offering) on a constant currency basis (expressed as a percentage) as the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for all periods in the comparison.
| Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 | |
|---|---|---|---|---|
| Reported revenue (in thousands) | $250,588 | $233,248 | $684,956 | $657,368 |
| Revenue growth | 7% | 14% | 4% | 8% |
| Revenue growth on a constant currency basis | 7% | 12% | 4% | 7% |
| Content reported revenue (in thousands) | $203,713 | $178,791 | $547,494 | $559,738 |
| Content revenue growth | 14% | (9)% | (2)% | (5)% |
| Content revenue growth on a constant currency basis | 13% | (11)% | (2)% | (6)% |
| Data, Distribution, and Services reported revenue (in thousands) | $46,875 | $54,457 | $137,462 | $97,630 |
| Data, Distribution, and Services revenue growth | (14)% | 611% | 41% | 433% |
| Data, Distribution, and Services revenue growth on a constant currency basis | (14)% | 609% | 41% | 433% |
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Adjusted Free Cash Flow
We define adjusted free cash flow as our net cash provided by operating activities, adjusted for capital expenditures, content acquisition, cash received related to Giphy Retention Compensation in connection with the acquisition of Giphy and cash paid for Envato Seller Obligations.
The following is a reconciliation of net cash provided by operating activities to adjusted free cash flow for each of the periods indicated (in thousands):
(in thousands)
| Cash flow information: | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Net cash (used in) / provided by operating activities | $(11,585) | $10,014 | $24,680 | $106,603 |
| Net cash (used in) / provided by investing activities | $(147,893) | $4,213 | $(156,120) | $(61,915) |
| Net cash provided by / (used in) financing activities | $213,334 | $(25,305) | $162,556 | $(83,234) |
| Adjusted free cash flow: | ||||
| Net cash (used in) / provided by operating activities | $(11,585) | $10,014 | $24,680 | $106,603 |
| Capital expenditures | (14,761) | (11,845) | (38,297) | (34,715) |
| Content acquisitions | (652) | (4,473) | (2,473) | (9,725) |
| Cash received related to Giphy Retention Compensation | 26,922 | 18,955 | 63,444 | 34,707 |
| Cash paid for Envato Seller Obligations(1) | 45,748 | — | 45,748 | — |
| Adjusted Free Cash Flow | $45,672 | $12,651 | $93,102 | $96,870 |
(1) Envato Seller Obligations relate to payments made on behalf of the Envato sellers’ after the closing of the acquisition. These liabilities were funded from the acquired cash on the Envato balance sheet and are not indicative of obligations and cash flows to be incurred prospectively.
Market risk
As filed, 4,140 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We are exposed to market risks in the ordinary course of our business, including risks related to foreign currency exchange rate fluctuation, interest rate fluctuation and inflation.
Foreign Currency Exchange Risk
Our sales to international customers are denominated in multiple currencies, including but not limited to the U.S. dollar, the euro, the British pound, the Australian dollar and the Japanese yen. Revenue denominated in foreign currencies as a percentage of total revenue was approximately 27% and 29% for the nine months ended September 30, 2024 and 2023, respectively. Changes in exchange rates will affect our revenue and certain operating expenses to the extent that our revenue is generated and expenses are incurred in currencies other than the U.S. dollar. Royalties earned by and paid to contributors are denominated in the U.S. dollar and will not be affected by changes in exchange rates. Based on our foreign currency denominated revenue for the nine months ended September 30, 2024, we estimate that a 10% change in the exchange rate of the U.S. dollar against all foreign currency denominated revenues would result in an approximately 3% impact on our revenue.
We have established foreign subsidiaries in various countries and have concluded that the functional currency of these entities is generally the local currency. Business transacted in currencies other than each entity’s functional currency results in transactional gains and losses. Translation adjustments resulting from converting the foreign subsidiaries’ financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive loss in stockholders’ equity. We do not currently enter into derivatives or other financial instruments in order to hedge our foreign currency exchange risk, but we may do so in the future.
Our historical revenue by currency is as follows (in thousands):
| Three Months Ended September 30, 2024 U.S. Dollars | Originating Currency | 2023 U.S. Dollars | Originating Currency | Nine Months Ended September 30, 2024 U.S. Dollars | Originating Currency | 2023 U.S. Dollars | Originating Currency | |
|---|---|---|---|---|---|---|---|---|
| Euro | $36,900 | €33,841 | $33,186 | €29,985 | $102,724 | €94,693 | $104,563 | €95,986 |
| British pounds | 14,784 | £11,424 | 14,306 | £11,321 | 43,655 | £34,343 | 42,704 | £34,061 |
| All other non-U.S. currencies(1) | 13,052 | 13,011 | 39,253 | 41,382 | ||||
| Total foreign currency | 64,736 | 60,503 | 185,632 | 188,649 | ||||
| U.S. dollar | 185,852 | 172,745 | 499,324 | 468,719 | ||||
| Total revenue | $250,588 | $233,248 | $684,956 | $657,368 |
(1) Includes no single currency which exceeded 5% of total revenue for any of the periods presented.
Interest Rate Fluctuation Risk
Our cash and cash equivalents consist of cash and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. The fair value of our cash and cash equivalents is not particularly sensitive to interest rate changes.
Amounts borrowed under the A&R Credit Agreement accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.375% to 0.750%, determined based on the Company’s consolidated net leverage ratio or (ii) the Term SOFR rate (for interest periods of 1, 3 or 6 months) plus a margin ranging from 1.375% to 1.750%, determined based on the Company’s consolidated net leverage ratio, plus a credit spread adjustment of 0.100%. A hypothetical 10% change in interest rates would not have a material impact on our interest expense as of September 30, 2024.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Controls and procedures
As filed, 2,855 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. However, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objective.
On July 22, 2024, the Company completed its acquisition of Envato Pty Ltd. (“Envato”). Management is currently integrating Envato into our operations and internal control processes and, pursuant to the SEC’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the Company is excluding the internal control over financial reporting of Envato from its evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2024.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As mentioned above, the Company completed its acquisition of Envato on July 22, 2024. The Company is in the process of reviewing the internal control structure of Envato and, if necessary, will make appropriate changes as it integrates Envato into the Company’s overall internal control over financial reporting process.
Risk factors
As filed, 614 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2023 Form 10-K, which could materially affect our business, financial condition or future results. During the three months ended September 30, 2024, there were no material changes to these risk factors as described in our 2023 Form 10-K.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-07-01 to 2024-09-30 | $250.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2024-01-01 to 2024-09-30 | $685.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2024-07-01 to 2024-09-30 | $104.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months2024-01-01 to 2024-09-30 | $283.9m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months2024-07-01 to 2024-09-30 | $28.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2024-01-01 to 2024-09-30 | $69.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months2024-07-01 to 2024-09-30 | $18.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2024-01-01 to 2024-09-30 | $55.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2024-07-01 to 2024-09-30 | $4.5m | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months2024-01-01 to 2024-09-30 | $5.6m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months2024-07-01 to 2024-09-30 | −$88.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | $17.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | $17.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | $37.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | $0.50 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2024-01-01 to 2024-09-30 | $1.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | $1.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 35,472,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2024-01-01 to 2024-09-30 | 35,838,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $24.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2024-01-01 to 2024-09-30 | $38.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months2024-01-01 to 2024-09-30 | $31.9m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months2024-01-01 to 2024-09-30 | $41.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2024-09-30 | $131.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-09-30 | $277.4m | us-gaap:AssetsCurrent |
| Total assets | At period end2024-09-30 | $1.35bn | us-gaap:Assets |
| Current liabilities | At period end2024-09-30 | $663.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2024-09-30 | $825.9m | us-gaap:Liabilities |
| Long-term debt | At period end2024-09-30 | $120.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | At period end2024-09-30 | $158.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | At period end2024-09-30 | $522.9m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001549346-24-000045. Last ingested by Listed: Nov 11, 2026, 02:57 ET. Listed shows no prices and gives no investment advice.