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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Shutterstock Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Ms. Amy Behrman, Corporate Development, Investor Relations and Strategic Finance. You may begin.
Thank you, operator. Good morning, everyone and thank you for joining us for Shutterstock's fourth quarter and full year 2018 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman; and Steven Berns, our Chief Operating and Chief Financial Officer.
During this call, management may make forward-looking statements that are subject to risk and uncertainty, including predictions, expectations, estimates and other information. These include statements relating to long-term effects of our investments in our business, the future success and financial impact of new and existing product offerings. Our future growth, margin and profitability, our long-term strategy, our growth potential, potential future results of efforts to reduce our expense footprint and implementation of large-scale business solutions, and our 2019 guidance.
Our actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance. Please refer to today's press release and the reports and documents we file from time-to-time with the U.S. Securities and Exchange Commission, including the section entitled Risk Factor in the company's annual report on Form 10-K for the year ended December 31, 2018, for discussions of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements we may make on this call.
On this call, we will refer to adjusted EBITDA, adjusted EBITDA margin, adjusted net income, revenue growth excluding Webdam, revenue growth on a constant currency basis including and excluding Webdam, revenue growth and revenue per download on a constant currency basis and free cash flow, all of which are non-GAAP financial measures. You can find a description of these items along with reconciliation to the most directly comparable GAAP financial measures in today's earnings release, which is posted on the Investor Relations section of our website.
We believe that the use of these measures in conjunction with GAAP financial measures allows investors to consider our operating results on the same basis used by management. This provides them with important additional insights about the company's overall business and operating performance and enhances comparability in assessing our financial reporting. However, these non-GAAP financial measures should not be considered as a substitute for or superior to financial information prepared in accordance with GAAP.
Lastly, as a reminder, we sold Webdam in February of 2018, and therefore, Webdam did not contribute to results in 2018 subsequent to that date. However, Webdam was included in our 2017 results and our first quarter 2018 results and therefore, some of our commentary today will specifically state that we are excluding the results of Webdam, meaning that we are excluding it from the fourth quarter of 2017 to provide a comparable basis to the fourth quarter of 2018, and from the full year 2017 and first quarter of 2018 to provide a comparable year-on-year basis.
And with that, I would like to turn the call over to Jon.
Thanks Amy. And thank you everyone for joining us today for Shutterstock's fourth quarter and full year 2018 earnings call. As a reminder, our strategy remains focused on three pillars. Platform, network and talent. Starting with platform, our goal is to make our content, tools and platform available anytime and anywhere, as well as improve our performance and stability. As it relates to network, we are focused on improving the further personalization and localization of our customer and contributor experiences through data driven and testing oriented culture.
And on talent, Shutterstock wouldn't be what are today without global power base of over 1,000 employees and their innovative thinking and commitment to our customers and contributors. Looking back across these areas, we believe we made significant progress in 2018 and are well positioned for success in 2019. I want to point out some of our key accomplishments in 2018. We streamlined the process for contributors to upload content, implemented language and localization improvements to our platform, which had helped drive customer and contributor engagement to an all time high.
Pricing and packaging changes have been enabled by our testing culture and agile environment. All of our channels have revenue growth with e-commerce in particular delivering 10% growth for the year, which was the highest annual level of growth since 2015. In addition, our focus on cost management and internal efficiencies has led to improving adjusted EBITDA margin. However, there is still lot of work to be done. And we are focused on continuing to improve the efficiency, speed and performance of our platform to evolve and personalize our customer and contributor experiences, and to motivate a talented global team to drive revenue growth and improve margin in 2019 and beyond.
Focusing on our 2018 performance, consolidated revenue growth in 2018 excluding the impact of FX and Webdam was 13.5%. Our e-commerce channel grew 8.8% in the fourth quarter and 10% for the full year driven primarily by our image products. Throughout 2018, we made several improvements to our technology platform resulting in faster load speeds. We have also improved our mobile iOS and Android apps and sped up mobile responsive web pages for devices of all sizes and shapes.
We have taken and continued to take steps to improve our customers experience through website stability and performance to better meet the needs of our global customer base. And lastly, we have expanded the UI and UX improvements made last quarter for footage to other pages across our e-commerce platform. Across the e-commerce channel, we have developed an integrated marketing strategy with a focus on activities that deliver higher ROI conversion rate and customer lifetime value.
We are also leveraging data and a culture of testing to optimize pricing and packaging options, as well as to increase personalization and localization for our global customers. We are making great strides in further establishing the Shutterstock brand with our new ad campaign, it's not stock it's Shutterstock. In addition, our recent video smooth on the fire festival shows the breadth and depth of our video and music offerings for customers to be able to build their own productions at a fraction of the cost it would take to execute a custom shoot.
The fire festival video has gone viral and now has nearly 3.5 million views. In our enterprise channel, revenue grew 12.1% in the fourth quarter as compared to the fourth quarter of 2017, driven by continued growth in images, accelerating growth in footage and strength across most products in a pack. Full year 2018 enterprise revenue grew 22.1% as compared to 2017. Fourth quarter enterprise revenue growth did not meet our expectation and we are focused on improving this performance with better execution of our go-to-market strategies and customer and product offerings.
Getting into more detail on our specific product area. In November, we launched Shutterstock Select, a premium tier royalty-free video content. This new offering is our highest video production value available filmed on cinema grade equipment including red cameras. Clips feature and commercial content categories such as cinematic aerials, millennial adventure, astronomy, action and workplace scene. Shutterstock Select is a new tier added to our current collection of over 13 million high quality videos used by filmmakers all over the world.
Our platform solutions offering which represents our API integrations continue to deliver steady growth and release product improvements to speed of integration with our partners. In the fourth quarter, we announced the exclusive integration with Apple's Final Cut Pro X to help users streamline the video creation process and increase access to Shutterstock library image, video and music assets. The team also launched an update to its developer portal to streamline the integration process for our API partners.
Our editorial offering continues to gain traction and in October, we launched our e-commerce offering. For the first time our comprehensive editorial collection is available to all customers as a self-serve ecommerce product. As a reminder, our editorial collection contains over 40 million images and we add on average more than 700,000 new editorial images every month. In addition, our team provided coverage of over 1,100 entertainment and sporting events throughout the quarter.
We continue to be excited about the opportunity for our editorial offering on both the product and content side. We also entered into a partnership with rights clearance industry leader greenlight. This exclusive partnership provides Shutterstock customers with access to services that clear editorial images and video content for licensing in a commercial way. This is the first time we have offered this service to our customers and it opens up our 40 million editorial images to be cleared for commercial use.
On the contributor side, we recently made our platform available in 21 languages and increased from the six languages previously. Our contributor base is global and the ability to interact with contributors in their local languages has helped fuel the record high levels of engagement seen in 2018. As of the end of the year, Shutterstock had more than 650,000 contributors; an increase of approximately 85% through 2018.This increase in contributor signage is due to process improvements made to the contributor signup flow and product improvements to our contributor platform.
We will continue to optimize our contributor experience with the goal of being the first place contributors go to, to monetize their content. In summary, we believe in the long term global market opportunity and I am confident in our ability to successfully execute our strategy to drive revenue growth, improve margins and increase cash flow to ultimately deliver increased shareholder value.
With that I'll turn the call over to Steven for a more detailed operational and financial review.
Thanks John and thank you everyone for joining us today. Before I discuss our performance, as always I want to let you know that we posted a brief information deck on our website that contains supporting materials for today's call. To begin with some of our key financial outcomes in 2018. In February, we sold Webdam for gross proceeds of approximately $49 million which was approximately 3x our purchase price in 2011 and in February of 2018 we recorded a gain of $38.6 million for that sale.
CapEx for 2018 totaled $34.9 million which was materially below our prior year as well as favorable to our previous guidance. In August of 2018, we paid a dividend of $105 million and consistent with our liquidity expectations communicated at that time of the dividend that we expected to end 2018 with a balance in the $200 million to $250 million range and we came in at $230 million. Reviewing some of our key metrics in the fourth quarter. Our customer base grew by 3.5% to nearly 1.9 million customers. Paid downloads grew by 6.6% to an all-time high of $46.8 million.
Revenue per download grew by 2.1% on a reported basis and 3.3% on a constant currency basis. Our image library expanded by 42% to over 240 million images and our video library increased by 44% to over 13 million clips. Revenue growth is reported in the fourth quarter was 6.7%. Two items which impacted our fourth quarter revenue growth were the sale of Webdam in February 2018 and foreign currency fluctuations. Excluding the impact of foreign currency movements, revenue growth was approximately 7.9% in the fourth quarter compared to the 2017 period.
Excluding impact of Webdam from the 2017 fourth quarter revenue growth in the fourth quarter was approximately 10.1%. And if we exclude both FX and Webdam impacts in the quarter revenue grew 11.3%. Operating income was $15.6 million in the fourth quarter, an increase of over 117% driven by our continues cost management efforts and growth in revenue. Operating income also benefited from a $2 million reduction in our indirect tax accruals. Adjusted EBITDA for the quarter grew 45.6% to $33.9 million, which compares to $23.3 million in the same period a year ago, driven by the increase in operating income which was partially offset by an increase in depreciation and amortization.
As Jon mentioned in his comments, revenue in the fourth quarter from our e-commerce channel improved 8.8% to $95.6 million as compared to the prior year fourth quarter. This growth was driven by improved marketing efficiencies and platform improvements which led to steady acquisition and retention trends throughout 2018. Our enterprise channel revenue grew 12.1% to $66.5 million and the enterprise channel represented 41% of our total revenue in the fourth quarter as compared to 39% in the prior year.
GAAP net income in the fourth quarter was $14.9 million or $0.42 per diluted share, an increase from net income of $2.1 million or $0.06 per diluted share in the fourth quarter of 2017. This represented a 625% increase year-over-year. Adjusted net income which among other items excludes the gain on the sale of Webdam was $20.9 million or $0.59 per diluted chair for the fourth quarter of 2018 as compared to $10.6 million or $0.30 per diluted share in the fourth quarter of 2017 which represented a 97% increase year-over-year.
Consistent with prior periods in the fourth quarter of 2018 approximately 66% of our revenues were from customers outside the United States. Of that 66% amount about half were derived from customers in Europe and the other half was from Asia-Pac, Latin America, Canada and the Middle East. Fourth-quarter operating expenses excluding stock-based compensation were relatively flat versus prior year driven by an increase in royalty expense which is a result of increased revenue performance and that's offset by lower product and G&A expenses.
Contributor royalty expense was approximately 26.7% of revenue which has remained relatively constant as compared to recent prior quarters. Before I go into some of our major expense categories, I'd like to reiterate that we have taken and continue to take actions to reduce the growth rate of our expenses. While we saw results in improving margin through 2018, expense management is an ongoing effort that we believe will continue to yield improvement, improved results in 2019 and beyond.
As I discussed the expense categories my comments will exclude stock based compensation expense. And I'll refer --and the variance as I refer to will be from the fourth quarter of 2018 as compared to the fourth quarter of last year. Sales and marketing expenses increased 6%. Generally this category of spend is split equally between marketing spend and the cost of our enterprise sales organization. Sales and marketing expense was flat at 26% of revenue in the fourth quarter of 2018 as compared to prior year.
Product development cost decreased 26% versus a fourth quarter last year, primarily due to lower personnel and consulting costs. As a percentage of revenue, product development costs were 6% of revenue for the quarter versus 9% of revenue in the 2017 period. General and administrative expenses decreased 11% from the fourth quarter of 2017. As a percentage of revenue, general and administrative expenses were 12% as compared with 14% in the fourth quarter of 2017. The decrease in G&A was the result of cost management efforts and a $2 million benefit from the reduction of the indirect tax accrual I mentioned earlier.
Moving up to taxes. Income tax expense was $1.8 million in the fourth quarter of 2018 versus an expense of $6.8 million in the fourth quarter of last year. For the full year, income tax expense decreased by $1.9 million as compared to the full year of 2017. The lower effective tax rate during 2018 was primarily a result of the Tax Cuts and Jobs Act which among other things lowered our US statutory federal tax rate from 35% to 21% effective January 1, 2018.
During the year ended 12/31/18, our net cash taxes paid were approximately $600,000 as compared to $5 million paid in 2017. Taking a look at the deferred revenue, as a reminder at year-end 2017, the deferred revenue balance was $137.7 million excluding deferred revenue related to Webdam and adjusted for the adoption of new revenue recognition rules which went into effect on January 1st, 2018. The deferred revenue balance as of December 31, 2018 was $139.6 million of which approximately 40% relates to our e-commerce channel and 60% to our Enterprise Channel.
Moving to cash flows and the balance sheet. We continue to maintain a strong positive working capital position. For the fourth quarter, net cash flow from operations was $33.7 million, a decrease of $2.8 million from the fourth quarter of 2017. In the quarter free cash flow is $27.3 million, an increase of $8.6 million from the fourth quarter of 2017. Free cash flow is cash flow from operations left cash payments for capital expenditures and content purchases.
The increase in free cash flow was primarily driven by lower capital expenditures, offset by a decrease in cash provided by operations, as well as a slight increase in the cash used to acquire content. And lastly, as I mentioned in the fourth quarter of 2018, capital expenditures were at $5.3 million, a decrease from the $17.4 million of CapEx in the fourth quarter of 2017. For the full year ending December 31st, 2018, net cash flow from operations was $102.2 million which is a decrease of $5.8 million from 2017.
Free cash flow was $63.5 million which is an increase of $13.5 million from 2017. And this change was primarily driven by lower capital expenditures, partially offset by a decrease in cash provided by operations. In 2018, for the full year our capital expenditures were $34.9 million, a decrease of more than $20 million from the $55.1 million of CapEx in 2017. And below our 2018 guidance of $48 million.
We are continuing to actively manage our capital expenditures and believe that the levels we are managing to as of the end of 2018 are reasonable for the business of our size and growth. And so as we talk about 2019 guidance, you'll see that this $35 million is the approximate range that we expect to be in. At the end of the quarter, we had approximately $231 million of cash and cash equivalents. As a reminder, on August 29th of 2018, we paid a special non-recurring dividend of $3 per share totaling approximately $105 million.
As a reminder, in our second quarter earnings call, I noted that we expected to end the year between $200 million and $250 million in cash. And our year-end balance was near the center of that range. Our liquidity strategy continues to be to maintain a strong cash position that enables us to fund operations, while also providing us with the considerable flexibility to pursue operational and strategic growth opportunities.
As we have done historically, we will continue to evaluate the appropriate use of cash generated in our business to maximize returns for shareholders. Overall, we continue to deliver growth across all of our business channels and we believe the work we have done managing expenses and strengthening our balance sheet will enable us to pursue further gains in revenue and profitability in 2019.
And so moving to our financial guidance for 2019. We expect revenue of between $685 million to $695 million which is growth of 10% to 12%. Adjusted EBITDA of between $118 million and $123 million representing growth of 12% to 17%. Income from operations of between approximately $37 million to $47 million. Non-cash equity based compensation expense of approximately $25 million. Capital expenditures including capitalized labor of approximately $37million. And an effective tax rate for 2019, we expect that to be in the low to mid 20% range.
Given our financial guidance for 2019, we believe that our revenue growth will continue to improve. However, at this time while we continue to drive for revenue growth of approximately 20% in the long term, we expect near-term growth rates to be below that level. As it relates to margins, we believe that we will continue to build upon the adjusted EBITDA margin of 17% that was achieved in 2018. Cost management measures combined with revenue growth are expected to generate increased margins as our guidance for 2019 implies.
We appreciate your time today and your interest in Shutterstock. And now Jon and I will be happy to answer any questions you may have. Skyler, please prompt the participants for questions.
[Operator Instructions]
Our first question comes from Youssef Squali with SunTrust. Your line is now open.
Great, thank you very much. I have two questions please. Jon, starting with a comment you made in your prepared remarks around maybe the enterprise business not having met your expectations. Can you maybe expand a little bit on that? And what's implied in your guidance for 2019 in terms of growth in that segment? And then secondarily, it looks like one of your major competitors just did a major recap a couple weeks ago.
I was wondering if any of the kind of slowdown that you're seeing in anyway particularly in the US is particularly --is potentially driven by a change in the competitive landscape. And any planned change to your marketing or advertising strategies and given kind of the recent new developments. Thank you.
Yes. I'll start with the enterprise business. There's a lot of work we have to do there. We know this business really well. We're scaling it. There's a lot of improvements we have in the works both in our product and the efficiency of our sales team. And we believe that we can get that growth back on track. As far as the competitive environment goes, no major changes, I mean we we've been competing with the same players in the space for many years.
We've had some new competitors come in. We've had a competitor yes to a recap, but I'd rather focus on our balance sheet. If you look at our performance, we've grown every single year for the past 15 years. We've been a profitable company every single one of those years. We have no debt; very clean balance sheet. A lot of dry powder to do what we think is best for the business. And as we clean up some of our platform issues and continue to grow, there's going to be a ton of opportunity for us to use that balance sheet in some interesting ways.
On some of your other questions I'll let Steven going for those details.
Yes. I think is relating to as Jon said I think the competitive environment hasn't changed. And I also think that as Jon said, we did launch a new advertising and marketing campaign, which we feel really good about. We --it's early days; it's going across all of-- all the different medium out there. And so we feel great about that, and then we were able to build upon that as Jon said with a fire festival video, which has gone viral 3.5 million views and growing. And basically showing people combined with our new ad campaign what Shutterstock enables them to do for their businesses.
And so we feel great about that. I wouldn't call it as much a recapitalization as a refinancing. And so of this competitor you're referring to, but at the same time as Jon said we couldn't be more well positioned. We feel really good about the cost management efforts we put in place about the cash flow that we are generating that enables us to do the acquisitions that we've done to drive our growth even further than it would organically, as well as maximize returns for our shareholders with the dividend that we paid last year.
So really focused on continuing to build on the foundation that is already here.
Yes. On the fire festival video, we agree, we thought it was awesome. So congrats on that, but just drilling down a little bit on the enterprise is the assumption for your 10% to 12% growth for 2019 is the implication there that the enterprise business growth for 2019 will be somewhat similar to what it did in 2018 or is the assumption that it'll slowdown a bit considering the challenges you're going through?
Yes. So we're not providing the growth by channel. We've done a number of activities in 2018 that enable us to iterate as we've talked about whether it be on our platform or other situations, where we're able to iterate faster on product. And so as we go through 2019 we believe that there's going to be opportunities for us to pursue strong growth in both e-commerce and enterprise. But we don't break down our guidance between the two channels.
Our next question comes from Brian Fitzgerald with Jefferies. Your line is now open.
Thanks guys. A quick follow-up on the competitive landscape just around particularly on pricing. Any dynamics to call out there? Do you feel pricing economic is stabilized across the industries or any situation and what you can see the economics become better and more favorable for the contributors over time. And I know you balance that dynamic very carefully on a real-time basis.
And then one follow-up. The guide implies about 11% growth. Appreciate your comments that you just gave. Do you feel the industry maybe not to you --but the industry is tapped out at low double-digit growth and you mentioned that 20% bogey longer-term. Are there are specific future levers where we should focus to see really reacceleration of growth over time? Thanks.
Yes. I'll start on --okay few questions in there. On the pricing, we're constantly evolving our prices and packaging to kind of evolve with the marketplace and the needs of our customers. There's a lot of stabilizing forces out there in the marketplace. And it seems to be that we have a good feel for what people are willing to pay and we price our package, our images, footage and music accordingly. All those segments are still very profitable for us.
One thing I would say that with the number of contributors coming into the platform, and the increase we're seeing, we spent a lot of time over the past couple years making our contributor platform as efficient as possible. So if you look from our mobile app how contributors upload images for site, how we automatically keyword using machine learning and AI. As we start to get more and more images and we start to get that kind of leverage over our competition in that our contributors know that we're the first place they should go with their images to monetize.
You can see that great growth rate 85% year-over-year, the number of contributors and the content coming in increases as well. So what we see with that is that we're able to pick and choose exactly the content. We want and we know that our customers need and that gives us some leverage in that. We're getting content that our competitors are not getting and we know that. So that goes back to the pricing and packaging question as well. On future levers, I'd say all of our segments, there's a lot of growth.
If you look at e-commerce, you can see that the growth has come back pretty strong, fastest has been then since 2015. And we see -- we see more opportunity there. On the enterprise side, while we still have to work out some more efficiency, and again manual process, it's just kind of a typical scaling challenge you would see with any business that's growing fast. We got to another plateau now we need to make that business more efficient and remove those manual processes.
If you look at our custom product, there is a huge amount of opportunity there as well. It's really what we see is one of the most innovative parts of the space and that we've productized custom photography in the way that our competitors have not. So that's a lever and then finally on the API side, our third channel, we're really just scratching the surface there as we integrating to more partners. So we see a lot of opportunity there as well.
Just to build on a couple of things that Jon said with regard to the contributor platform that we --that is now available in 21 languages. And so it actually attracts and fits right in with our strategy of localization to make sure that we're able to meet the needs of customers in the local language with content being contributed by people who may not have had had one of our six languages that existed before that as a first language. The second thing is relates to your question on guidance, where we see some of the drivers or what I would add to my prior comments is that we definitely see opportunities of being greater internationally.
The absolute level of digital communication is growing at a rate faster than expected in terms of absolute dollars. It will be the first year in 2018 that's predicted that it will be the first year in which digital spending for marketing is greater than legacy spending. And so that fits right in the wheelhouse of Shutterstock stocks offerings of obviously imagery, music, custom editorial. And so we feel that we're in a strong position as it relates to the international growth opportunities.
Once again because of the investments we've made and the foundations that we put in place for the platform.
Our next question comes from Lloyd Walmsley with Deutsche Bank. Your line is now open.
Thanks. Two if I can. First following up on Youssef's question on enterprise. You mentioned potentially changing to go to market there. Can you talk about what kind of changes you're looking at perhaps? And then I think Steven said that the personnel component of sales and marketing expense didn't grow year-over-year, a lot of that is enterprise sales force. So wondering do you plan to grow that this year?
And then just to stepping back at the industry level, do you all think that spending across --in across imagery on a dollar basis? Is that -- what kind of growth rate do you think the industry is growing at? How much of your growth is kind of industry growth versus market share at this point?
So as it relates to the enterprise sales, we talked about this going back when we started on the migration and intrusive, the implementation, basically having a higher level of productivity of our employee population and we've been able to achieve that. And so we're able to get some of the operating leverage by not having the costs associated with our -- of running our business grow at the same rate. And so I think that based on the work that we've done to date, we've gotten good returns on that, but I think we'll continue to generate even higher returns as we go forward by improving on the operating opportunities we have.
So that's one of the drivers in terms of go- to-market also making sure that with the localization comments I had before, making sure that in each market as Jon said, we have the right pricing and packaging not just on the e-commerce side of course on the enterprise side to meet the needs of customers improved workflow on our site, as it relates to all the UI and UX capabilities that we provide all key drivers. As it relates to industry growth, there isn't as we've talked about in the past, but there isn't an absolute measurement that's available for us to go and look at.
What we do look at as I mentioned before is really what's happening with digital marketing, what's happening with the use of content with the explosion of content, whether it be in television production and the use of video from Shutterstock in that. The use of music and video together to produce materials that before would be custom and sending crews out. It is just on the rise and we continue to see that. As you know, even in the --in many developing markets as Internet connectivity becomes greater, there's also greater advertising and marketing communications opportunities.
So we don't have a specific number but it is certainly I would say robust sector with significant growth. And as we see those opportunities, we have the flexibility to choose to invest accordingly to drive that growth for Shutterstock, but we don't-- I cannot have a comment as it relates to whether or not we think we're stealing share and are growing our market size as we go-to-market size as well. But we --because --it's a little challenging just because we're the only public company in the state.
So we look at it and say, we see what our customers are demanding. We see what our customers' workflows are and what they want to do. And we drive to provide the best solutions for our customers.
End of Q&A
And at this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Steven Berns for closing remarks.
Great. Appreciate everybody's participation today. And we look forward to speaking with you soon. Thanks very much.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone have a great day.