Ladies and gentlemen, thank you for joining us for the Q3 2020 Shutterstock, Inc. Earnings Conference Call. All participants are currently in a listen-only mode. After the presentation, we will have a question-and-answer session. I would now like to turn the conference over to Chris Suh, Vice President of Investor Relations and Corporate Development. Please proceed, Chris.

Thank you, James, and good morning, everyone. Thank you for joining us today for Shutterstock's third quarter 2020 earnings call. Joining me today is Stan Pavlovsky, our Chief Executive Officer, and Jarrod Yahes, our Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the impact of COVID-19 on our business, the long-term effects of our investments in our business, the future success and financial impact of new and existing product offerings, our future growth, margins, and profitability, our long-term strategy, and our performance targets. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release and the reports we file with the SEC from time to time, including the risk factors discussed in our most recently filed 10-Q and our annual 10-K for discussions of important risk factors that could cause results to differ materially from any forward-looking statements we may make on our call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, revenue growth, including by distribution channel on a constant currency basis, billings, and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with today’s press release and in our 10-Q, which are posted on the Investor Relations section of our website. Finally, please refer to the brief information that we posted on our website that contains supporting materials for today's call. And now at this time, I'll turn the call over to Stan.

Thanks, Chris. Good morning everyone. And thank you for joining Shutterstock's third quarter earnings call. This quarter, Shutterstock returned to year-on-year revenue growth, with revenue of $165 million, representing growth of 4% from Q3 of last year, or 3% on a constant currency basis. We saw year-on-year revenue growth across all regions, especially in North America, which was up 6%, representing roughly half of the total growth. Europe and the rest of the world were each up 3%. Revenue growth across these regions, particularly in North America, was driven by our smaller subscription product. To continue to grow revenue, we are very focused on innovating on our product offering. For example, in response to the success of our smaller image subscriptions, we rolled out smaller footage subscriptions with allotments as low as five licenses per month for $99 per month. Through our low-cost subscription model, we've made our professional-quality video content accessible to a broader audience, including prosumers and the DIY marketer audience. To help our audience ease into working with video content and to expedite the editing process, we include with the subscription a set of free clips that are pre-edited by our in-house creatives, so users can save time on editing and focus on their storytelling. In addition, in October, we launched our first monthly PremiumBeat music stock, also with an allotment of five licenses for $64.95 per month. On an annualized basis, we believe that these new subscription products will be accretive to our average revenue per customer. The product innovation we are driving is leading to strong results against the subscription KPIs we introduced last quarter and is attracting a whole new audience for Shutterstock. While our subscription metrics were exceptionally strong this quarter and we're pleased with the results, we do not believe this pace of growth will continue each and every quarter. Jarrod will go into more detail on our KPI metrics in a few minutes. Now turning our attention from product innovation to overall strategy. We continue to make progress against Shutterstock's three strategic focus areas that I've outlined previously: workflow innovation, fresh and relevant content, and data and insights to drive performance. Today, I'd like to spend some time, particularly on workflow innovation in the enterprise channel. On the workflow innovation front, in the third quarter, we began to establish the groundwork for a broader vision of driving inspiration and customer value. In the third quarter, we started to work with a number of beta customers to test and refine our enterprise customer experience. Our new enterprise experience introduces self-serve capabilities, including bulk actions, such as licensing and downloads, and improved access to multi-asset workflows and discoverability. We also completed the beta launch of our collaborative workspaces application. Workspaces, which is a core piece of our strategy to drive higher content utility, will allow us to improve the customer's creative workflow process by enabling on-platform collaborative discovery and ideation across teams from small and medium businesses to enterprise. In addition to innovating with workflow in the enterprise, we recently brought to market two exciting new products with the launch of Editorial Video and Shutterstock Studios. At launch, Editorial Video will have more than 250,000 user-generated live and archived video clips across news, entertainment, sports, and fashion, which is highly complimentary to our editorial image catalog containing over 50 million images. Shutterstock Studios enables us to go beyond stock content to provide custom project services to address unique customer needs. Now moving on from our strategic initiatives to discussing progress against our margin objectives. EBITDA in Q3 was $47 million, which represents a 29% adjusted EBITDA margin, up from 14% last year and up from 23% in Q2. Our strong EBITDA margins reflect our efforts at improving the efficiency of our content, technology, and marketing efforts. We are, however, going to continue to invest for growth and do anticipate some margin compression over the next several quarters while we make requisite investments in our business. More specifically, as we look towards the rest of 2020 and 2021, we have a number of areas in which we plan to invest for growth. We continue to invest aggressively to drive growth in our platform solutions offering, which includes headcount expansion in both sales and technology. We continue to see platform solutions as a highly attractive area to redeploy capital given, as laid out last quarter, the opportunity to expand to new market segments and new customers, secure higher usage and engagement, and drive higher customer and revenue retention. We also continue to invest in people, not just in expanding the platform solutions team, but also in sales, marketing, product, and technology. I was also thrilled to announce earlier in the month that Sara Birmingham joined Shutterstock as Chief Human Resources Officer. She brings a wealth of experience in building and optimizing high-performing organizations in a fast-changing environment. Before turning the call over to Jarrod to discuss our financials, I wanted to thank the Shutterstock team for impressive performance this quarter. And now, I'll turn the call over to Jarrod.

Thank you, Stan and good morning, everyone. In the third quarter, Shutterstock realized the return to revenue growth earlier than we previously expected, driven by the success of our subscription offerings and continued momentum in our enterprise revenue channel. Q3 revenues grew 4% year-on-year, or 3% on a constant currency basis. Growth was led by our e-commerce channel, which grew 7%, representing the fastest growth rate over the past year and a material uptick from last quarter. Our enterprise channel also improved materially, down 6% last quarter to down 1% this quarter, or an improvement of 5%. In our enterprise channel, it's clear that the changes we've implemented are now having a positive impact. By reinvigorating our sales organization, innovating our suite of product offerings, and making further platform investments in our API, we're starting to see improvements in both bookings and deferred revenue. We saw a $6.4 million sequential increase in deferred revenues, which is indicative of the progress we're making. We believe we are still tracking for the enterprise channel to return to recognized revenue growth in the early part of 2021. From a geographic perspective, we saw a return to year-on-year revenue growth and revenue acceleration this quarter across all regions, with particular strength in North America, which was up 6% to $59 million. Europe grew 3% to $53 million, and the rest of the world, including Asia, also grew 3% to $53 million. Gross margins were 63.5%, up approximately 350 basis points from the first quarter. While the gross margins were strong, I would note for investors that part of the gross margin improvement is short-term in nature and driven by the reduction in utilization and paid downloads of 6.2%, which is partially due to the pandemic. As utilization normalizes, we expect our gross margins to decline from these levels, and investors should not expect this level of gross margin on a go-forward basis. Sales and marketing expense was 22% of revenue as compared to 29% in the third quarter of 2019. Consistent with the second quarter, we've adhered to tight metrics around marketing ROI and become more efficient at customer acquisition. As expected, there was a sequential increase in sales and marketing from Q2 to Q3, consistent with our plan for accelerating marketing spend in the back half of the year on branding our new subscription products and targeted performance marketing. Product development costs were 6% of revenue, down from 9% in the third quarter of 2019. In product development, we're seeing reductions in software costs, employee costs, and third-party contractor costs. We expect to continue to invest in developing new products and internal tools and enhancing the functionality of our existing products and technologies, so I would expect to see increases in product development costs going forward. G&A expenses were 17% of revenue, down from 18% of revenue in the third quarter of 2019. G&A expenses in the third quarter included $3.1 million of expense associated with performance-based stock awards, where we anticipate the performance criteria now being met for those awards. Absent this expense, G&A would have approximated 15% of revenue, which is more in line with our G&A in the second quarter. We are continuing our disciplined approach with respect to vendor cost reductions and accelerating efforts towards process automation. We believe these decisions will enable us to create long-term operating leverage in G&A as our business scales. Adjusted EBITDA margins increased to 29% compared to 14% in the third quarter of 2019. This was an exceptional quarter from a margin perspective. However, please note that with the investments we are making in products and platform, and the expectation of higher utilization in the quarters to come, this will pressure margins in the quarters to come. GAAP net income was $22.6 million, or $0.62 per diluted share. Adjusted net income was $29.3 million, and adjusted diluted earnings per share was $0.80 per share as compared to $10.3 million or $0.29 per diluted share in the third quarter of 2019. On August 14, we completed a $125 million marketed offering of common stock and achieved several investor relations objectives for Shutterstock, including broadening our shareholder base, increasing our public float, and significantly expanding the universe that equity research analyst coverage. We are pleased to welcome our new institutional investors and research analysts and look forward to working with them closely as we execute on our long-term vision for creating shareholder value at Shutterstock. Turning to our balance sheet and cash flows. At the end of the quarter, we have $383 million of cash, up from $311 million at June 30, 2020. The quarterly increase in cash of $72 million includes $64 million of operating cash flows, in addition to $23 million of net proceeds from the stock offering, partially offset by $7 million of CapEx and content acquisitions and the $6 million quarterly cash dividend paid in September. Our deferred revenue balance increased to $144.7 million from $138.2 million at June 30, 2020, or an increase of $6.4 million. The change in deferred revenue is due to both our e-commerce and enterprise businesses, and this increase is a positive development as a result of getting back to bookings growth in prior periods. Turning to our key operating metrics. There were particular bright spots for Shutterstock during the quarter. Subscribers increased by 39% to 255,000 from 184,000 at the end of Q3, 2019. Subscriber revenue increased by 12% to $67.6 million from $60.1 million in the third quarter of 2019, and subscriber revenue as a percentage of total revenue increased to 41%. Average revenue per customer increased 0.3% year-over-year to $328. While we are truly pleased with these trends and are aggressively investing in the subscription product innovation pipeline as Stan discussed, we do not believe this pace of growth in subscription will continue each and every quarter. Paid downloads continue to be soft and were down 6% to $43.4 million, partially due to a reduction in activity and utilization related to the pandemic. This resulted in revenue per download increasing by $0.39 to $3.79 per download. Our image library expanded by 18% to over 350 million images, and our video library increased by 25% to over 20 million clips. In terms of capital allocation, we will payout our next quarterly dividend of $0.17 per share on December 16, 2020. As previously stated, we plan to grow the dividend in line with earnings growth and plan to revisit the quarterly dividend with our fourth-quarter earnings release. With respect to our M&A strategy, we're seeing a number of opportunities for smaller bolt-ons of key talent in technology, as well as medium-sized acquisitions, and are optimistic we'll have some announcements before the end of the year on that front. While we expect to provide full-year 2021 earnings guidance with our fourth-quarter results, we wanted to provide investors with color on what to expect through the fourth quarter. Firstly, we expect revenue growth to be consistent with the third quarter, assuming no material change in demand and utilization patterns due to the pandemic. While we are pleased with the positive momentum we experienced in the quarter and the return to growth, until our industry gets back to the previously forecasted 5% to 7% TAM growth, we'll continue to be cautious in evaluating our growth prospects for 2021. From an EBITDA margin perspective, we expect Q4 EBITDA margins to be approximately 20% as we continue reinvesting some of the year-to-date margin upside we've experienced. Expense increases for the fourth quarter will be focused on sales and marketing, and we also expect increased utilization to pressure gross margins, both in Q4 as well as 2021 compared to current levels. We are pleased with, as a management team, our Q3 results, both in terms of the return to revenue growth, combined with the exceptional margins. As stated previously, we plan to continue to reinvest some of that margin upside we've experienced to best position Shutterstock for growth in the years to come. Thank you for joining us today. We very much appreciate your time. Operator, we'd now like to open the line for any questions.

And our first question comes from Youssef Squali from Truist Securities. Please go ahead, your line is open.

Great. Thank you very much. Good morning everyone and congratulations. It's impressive to see the cost containment story. My first question is about the trends you're noticing after Q3, particularly in October, regarding the sustainability of improvements in e-commerce and enterprise alongside cost management, which was a significant surprise. Could you elaborate on the gross margin improvement? You mentioned lower utilization due to the pandemic, but there are several other strategies you're implementing regarding revenue share with distributors and contributors. Jarrod, could you help clarify the different impacts from these components? Your Q4 guidance of 20% EBITDA seems quite a bit lower than what was just reported, so it would be helpful if you could discuss the factors influencing that. Thank you.

Hi, Youssef. This is Stan. Thanks so much. I'll discuss the Q4 aspect and then let Jarrod address the gross margins. Briefly, regarding the momentum heading into Q4, we are still experiencing the positive momentum from Q3 as we move into Q4, which is reflected in the guidance we're providing for the quarter, showcasing ongoing strength in e-commerce and enhanced momentum in enterprise. I'll let Jarrod elaborate on the gross margin.

Sure. I think we feel confident about the gross margins and their positive trajectory. There are several factors contributing to this upward trend. Last quarter, we discussed our content ingestion process and noted that we're effectively utilizing AI and technology instead of relying solely on onshore and offshore personnel for content management, which is certainly yielding positive results. As you're aware, we modified our contributor royalties, introducing an annual assessment of payout profiles for contributors, which is also impacting our results at this time of year. Additionally, there's a notable effect from the changes in paid downloads. If you examine the trends, they shifted from down 1% to down 5.6% and then to down 6.2% this quarter. This affects the cost of goods sold and influences the gross margin. While we don't foresee these gross margins being sustainable at current levels, we are optimistic that paid downloads will rebound as utilization improves. We expect this recovery to start in the fourth quarter and continue into next year. Consequently, we anticipate some of the recent gains in gross margin will begin to decline. However, we are implementing various strategies to manage costs, including reducing credit card acceptance fees and lowering interchange fees, to maintain gross margins as much as possible. Nevertheless, we don't believe the margins will remain at their current levels and anticipate a return to historical figures seen over the past several quarters.

All right. That's helpful. Thank you.

Our next question comes from the line of Brad Erickson with Needham & Company. Go ahead, please. Your line is open.

Hi. Thanks. Just a couple. So, first on the subscription acceleration. I guess, beyond just broad-based recovery and demand you talked about where are you doing anything different there either on performance marketing channels, or is your messaging different in any channels for either new or existing customers? Just curious what may have driven the faster shift over to subscription that we saw in the quarter?

One of the significant changes we've implemented is the introduction of smaller subscriptions designed for smaller businesses, including options for both images and footage, and most recently with PremiumBeat. From a marketing standpoint, we approach our audiences differently depending on how we go to market. This includes the channels we use, the type of messaging we employ, the amount we invest in acquiring customers relative to their lifetime value, and how we engage with them once they subscribe to our emails or products. We adopt a segmentation strategy for acquiring these customers, which has proven to be very effective. When examining the growth in subscriber revenue alongside overall subscriber growth, you can see the positive impact that our smaller subscription offerings have on total revenue in contrast to the more rapid growth in overall subscriber numbers.

Got it. That's helpful. And then just to follow-up on the e-commerce side of the business. I know you said the rebound there was broad-based again. But just curious to get a little bit more sub-sector detail if we could. I imagine advertising and things like digital commerce came back fairly well. Just curious if you can call out any other categories that showed sort of outperformance type of improvement in the quarter. Thanks.

I believe we are experiencing ongoing momentum, especially as companies prepare for their fourth-quarter initiatives, which include back-to-school and early holiday preparations. Additionally, we've observed various shifts related to events like Amazon's Prime Day and its effects on the retail sector, along with some other spending categories that are beginning to recover. Overall, it feels like we're seeing a return for several categories, particularly regarding continued growth in the small and medium business segment within e-commerce. However, we are still noticing a decline in significant categories such as automotive and travel, which remain affected by the pandemic. That said, we did observe some acceleration in categories that showed growth last quarter.

And our next question comes from Ron Josey with JMP Securities. Please go ahead, your line is open.

Great. Thanks for taking the quarter and taking the question. And Stan, I wanted to talk a little more about subscriptions. You mentioned you're aggressively investing here and understood the lower price plans, but can you talk about the profile of those who are buying subscriptions? I think you just mentioned SMBs and whatnot. But I'm just curious about those who are buying subscriptions. We mentioned prosumers in the past. And I'm also curious if you can talk a little more about platform solutions and how that might be helping the broader growth, but then also for subscriptions. Thank you.

Today, most of our subscriptions are focused on our e-commerce sector. As we continue to invest, we will develop an increasing variety of subscription products for both enterprise and platform solutions. Currently, many of the smaller subscriptions are designed for customers who prefer self-service options without needing an account manager. These customers are typically planning to pursue specific projects throughout the year and require a straightforward method to do so. When we consider our investment in subscriptions, we recognize that our current offerings are associated with different sets of content or content allotments linked to various price points. I mentioned previously that we will keep evolving our subscriptions to include more services. For instance, as we progress with our Shutterstock Studios business in the enterprise sector, those services will integrate into our overall creative subscriptions. We plan to introduce workflow services aimed at different audience types as part of our subscription offerings. While we envision growth in subscriptions across all channels, at present, e-commerce is the primary driver. Our platform solutions have proven to be a successful channel for us, and we are beginning to roll out new products in this area, including services related to editing and utilizing our datasets and computer vision. We are actively working on developing different subscription products within this channel as well, although current contracts do not categorize most of these as subscriptions. We anticipate further developments regarding the evolution of subscriptions across our channels, closely aligned with our customers' purchasing behavior. We see significant potential to expand subscriptions through all three of our sales channels.

Our next question comes from the line of John Egbert with Stifel. Go ahead, please. Your line is open.

Great. Congrats on the results, and thanks for taking my question. So, it looks like you had a nice inflection in gross billings and a significant improvement in the enterprise revenue relative to the past few quarters. And that seems like a reasonable timeline for that segment to return to growth. I was wondering if you could talk about the evolution of your enterprise sales strategy as you've evolved the sales organization. I know you've talked about using e-commerce to fuel some enterprise sales, for example. I'm just curious the steps you've taken in the recent last few months.

I've been discussing our enterprise strategy for several quarters, emphasizing our shift from a purely transactional approach to a more strategic partnership model. This change began with realigning our team to better segment our customers and adjusting the compensation plan to prioritize larger average order values and develop stronger relationships within the enterprise sector. A significant factor in this transformation has been the addition of our new Chief Revenue Officer, Jamie Elden, who has excelled in his role, alongside a strong sales operations team. Our go-to-market strategy has adapted accordingly, and we've introduced new products and services. Today, we offer not only creative solutions but also creative services and workflow services. We are now capable of providing global solutions to meet our customers' creative needs efficiently and cost-effectively. We're seeing strong performance across all our enterprise verticals, including media and agencies, as well as growth in our small and medium business segment. This segment is focused on acquiring new customers while also retaining existing ones, and it is contributing positively to our overall enterprise growth. I believe our transition to a partnership-focused organization is proving successful, and I am proud of our team's achievements and results.

Thank you. I have a couple of follow-up questions, starting with you, Stan, regarding the last question. You've mentioned improvements to workflow and innovations in the enterprise channel for some time now, but this seems to be a renewed area of interest. Can you explain what is different this time? How are you approaching it in a new way? I recall you discussing self-serve capabilities and data launches, so any insights on that would be really helpful. Additionally, in your presentation on the micro-side, you highlighted first-party data assets as an opportunity. Could you elaborate on that in terms of potential products you see coming from that area? Are you currently offering anything in the market related to that? Thank you.

Certainly. I believe that for our company to succeed, we need a combination of content workflow and data assets. What sets us apart is our intention to integrate all three of these elements across our sales channels. Unlike many competitors, we view ourselves as an open platform. For instance, when we collaborate with our partners in platform solutions and utilize computer vision for content ingestion or for identifying content that is brand safe or possesses specific characteristics, we make these services available through our platform solutions. This is because many of our customers require these capabilities, such as image recognition and management of internal content. When considering workflow and our commitment to offering more services, our focus isn't on competing with individual tools or monetizing them. Instead, when we introduce collaboration services like workspaces, which enable customers to brainstorm, collaborate, and share content as part of their initial workflow, it becomes a vital aspect of our subscription products. This will enhance retention and engagement with our subscription offerings. As we increasingly utilize our first-party data for recommendations and performance, these components will also be integrated into our subscription products across all sales channels. Some features, like the computer vision examples I mentioned, are already in the market, while others are currently in beta with customers. As we roll out these products and make them more widely accessible, we will provide additional information regarding their performance and impact on our subscription metrics in future quarters. We want to emphasize to the community that we are deeply committed to this area, backed by customer research. The workflow services we are rolling out are entirely driven by our customers' requests.

Sounds good. Thank you. Thanks.

And there are no further questions in queue at this time. I'd like to turn the call back over to CEO, Stan Pavlovsky.

Thank you so much. I'd like to again say and express my gratitude to our employees, our customers, and our contributors for their support and encouragement. I continue to be so excited for the road ahead, as we continue to take advantage of the opportunities that we have in front of us. And with that, that ends our call for today. Thanks everyone.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.