Shutterstock, Inc. Q4 FY2022 Earnings Call

Thanks, Mitchell. Good morning, everyone and thank you for joining us for Shutterstock’s fourth quarter 2022 earnings call. Joining us today is Paul Hennessy, Shutterstock’s Chief Executive Officer; and Jarrod Yahes, Shutterstock’s Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, the long-term effects of investments in our business, the future success and financial impact of new and existing product offerings, our ability to consummate acquisitions and integrate the businesses we have acquired or may acquire into our existing operations, our future growth, margins and profitability, our long-term strategy and our performance targets including 2022 guidance. Actual results or trends could differ materially from our forecast. For more information, please refer to today’s press release on the reports we file with the SEC from time-to-time, including the risk factors discussed in our Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on this call. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, revenue growth, including by distribution channel on a constant currency basis, billings and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included in our press release and in our 10-Q. I'd now like to turn the call over to Paul Hennessy, Chief Executive Officer.

Thanks, Chris, and good morning everyone. Thank you for joining us today. Today, we'll be discussing Shutterstock's 2022 results and 2023 outlook. We'd also like to provide an update on some of the exciting developments in our end-to-end creative platform across both our E-commerce and enterprise channels. Shutterstock closed out 2022 with $828 million in revenue, and $218 million in EBITDA, well ahead of our expectations and guidance. Overall, despite growth in North America and the rest of the world, we saw weakness in Europe, where growth was negative 4% for the year. This weakness in Europe was most evident in our E-commerce channel. Overall, our E-commerce channel was up 2% in 2022, with revenue growth in North America offset by a decline in Europe and the rest of the world. Meanwhile, our enterprise channel grew 15% in 2022, a second consecutive year of double-digit growth. This growth reflects continued momentum driven by our multi-asset and multi-touchpoint relationships with large enterprises across North America, Europe and the rest of the world, as well as continued innovation in our product offerings. Looking ahead to 2023, our team is excited to capitalize on our strengths. As an end-to-end Creative Partner, Shutterstock is well positioned to ultimately offer more value to our customers and to achieve sustained growth. Since joining as CEO last year, I've been discussing our content library, our Creative Flow platform, our enterprise capabilities, and our highly engaged team as the key drivers of differentiation and value creation at Shutterstock. This quarter, we leverage these strengths to bring differentiated value to our customers. Today, I want to talk about how Shutterstock is not only embracing AI, but also commercializing it for the benefit of both our E-commerce customers within our Creative Flow suite, and our enterprise customers with our Computer Vision offering. Furthermore, I'd like to provide a few examples of how our broader end-to-end Creative platform has really resonated with our enterprise customers. In January, we formally launched our AI image generation platform to all of our customers across both our E-commerce and enterprise channels. Shutterstock AI image generator allows anyone to create high-quality visuals ready in seconds, simply by describing what they're looking for. There are three truly unique differentiators which set Shutterstock apart in terms of bringing this innovative capability to our customers, namely ease and quality, convenience, and confidence. Ease and quality. Our image generator has been designed for creative use cases to produce unique, varied and high-quality images from just a single word input or short simple phrases. We have built into the user interface an intuitive style picker, and integrated support for over 20 languages. We offer the ability to discover and license stock content and generative content in the same platform with a single plan, which is a unique capability in the market today. Convenience. We have immediately integrated this capability and put it into the hands of existing customers, making generative available in all our subscriptions, path products, and enterprise offerings. Confidence. Customers have peace of mind when it comes to licensing content that's created on our generative AI platform by virtue of being powered by properly commercially licensed training data. Also, our customers know that we're paying creators and have uniquely structured our contributor fund to compensate artists for the revenue generated by Shutterstock in connection with the licensing of generative AI content and of our training data. In short, we believe that Shutterstock's AI image generation platform is uniquely positioned at the intersection of creativity, and productivity. I now like to turn your attention to our E-commerce channels specifically. Beyond the ease of use and peace of mind I described just now, we also have integrated our generative AI platform with Creative Flow for E-commerce customers. As a result, AI image generation is a seamless part of our customer's creative journey. To illustrate, after creating a generative AI image, a customer can edit it in our Creative app, tag, store and search for them in the catalog and amplify them on various social channels using our calendar and plan. We are encouraged by the engagement we've seen in the short period of time. Our early reads show that we're seeing about 75% of the generative AI traffic come from potential new customers, and 25% from existing customers engaging with the new technology. Users have already created over 3 million generative assets in just the past two weeks since launch. While we're excited by this large scale and early engagement, we're currently focused on incremental monetization opportunities. Also on the E-commerce front, I'm very excited about the newest addition to our leadership team with John Kane joining us last week as the Global Head of E-commerce. John is a seasoned executive with a proven track record of successfully leading E-commerce businesses. He was most recently at NerdWallet in Broome and he has almost 10 years of experience at priceline.com. John will be focused on driving growth in our E-commerce channel, and as such, he'll be partnering closely with our product marketing and business operations team. With its unique combination of workflow applications and content, including now generative AI content, Shutterstock has a solid foundation upon which to continue building and evolving, and we look forward to John's contributions. I'd now like to provide an update on our enterprise channel. We continue to see sustained growth in our enterprise channel, underpinned by, one, extremely strong customer retention, which is now in the mid-90s. Two, solid growth in our subscription bookings, which were up 27% for the year, and three, an acceleration in large enterprise deals valued at more than $100,000, which grew 24% for the year. We're also investing in high-profile branding events such as Con, Sundance, and South by Southwest to drive awareness and demand for our enterprise offering. Clearly, our performance in enterprise in 2022, and in the fourth quarter was exceptionally strong, and our end-to-end creative platform is resonating with our enterprise clients. I'd like to provide a few examples of how our products and offerings are being applied in increasingly diverse use cases. Amazon Web Services wanted to showcase some of the ways in which its customers and partners are using AWS. To that end, Shutterstock Studios produced a collection of 30-second animated videos to highlight how these customers and partners use AWS to solve business challenges. Shutterstock partnered with Allergan in its initiative to promote inclusion and aesthetic medicine by producing a collection of images that includes a range of people of varying gender, color, race, age, and abilities. This diverse gallery is available for download and is a great example of how Shutterstock is embracing inclusive representation. On the editorial front, Shutterstock provides must-have content in connection with breaking news and celebrity entertainment news, often on an exclusive basis. Since our acquisition of Splash News, we're seeing increased demand for our content and coverage from global media companies like The Daily Mail, News UK in Ireland, the New York Post, and TMZ. With Pond5, we continue to see demand from large streaming platforms and TV and film production studios. Companies like Netflix, Disney, and Discovery Channel all rely on Pond5 as their source for the critical ingredient that goes into their creative endeavors. Our enterprise business has also been enhancing Computer Vision partnerships by leveraging Shutterstock AI and our massive pool of licensable metadata. Subsequent to establishing our partnership with OpenAI and LG, which I discussed last quarter, we've announced an additional partnership with Meta, in which our data content library and associated metadata is being licensed to train their generative AI models to enhance their machine learning capabilities. Today Shutterstock's AI content library that we use for model training consists of 600 million images, 45 million videos, 2 million music tracks, and over a million 3D models. It is massive, diverse, and transparently licensable. Looking ahead, we believe we can leverage our leading position as the licensing partner to commercialize our data across more use cases that go beyond generative AI applications. In closing, as this management team drives the business forward, we're striking a prudent balance between investing for growth during this time of massive innovation in AI in our industry and remaining nimble in the event of continued economic challenges. Looking ahead, I'm excited for what's in store in 2023 as we continue to deliver value to our customers with the content, tools and data in our end-to-end Creative platform, spanning generative AI, Computer Vision, and much more. I look forward to seeing many of you in person at our Investor Day here in New York at the Empire State Building in a few weeks. I'll now hand the call over to Jarrod to discuss our financial performance and our guidance.

Thank you, Paul, and good morning, everyone. We're extremely pleased to have ended the year with revenues of $828 million significantly above our previous expectations. For the full year 2022, our revenue growth was 7% or 11% on a constant currency basis, with our E-commerce channel growing 2% and our enterprise channel growing a robust 15%. In the fourth quarter, E-commerce revenue was down 5% on a reported basis, and down 2% on a constant currency basis. The growth rate in our E-commerce channel continues to be meaningfully impacted by ongoing weakness in Europe, where macro uncertainty is having a more pronounced impact with weak new customer demand exacerbated by foreign exchange pressure. To give investors a sense of the weakness in Europe, our E-commerce business in North America grew 4% in the quarter. By contrast, our E-commerce business in Europe and the rest of the world combined was down 12% or a 16% differential relative to North America. It's clear that Europe has gotten worse from the third to the fourth quarter, whereas North America has remained stable. Turning to our enterprise channel in the fourth quarter. Enterprise grew 25% on a reported basis, or 30% on a constant currency basis. Performance in our enterprise channel exceeded our expectations with revenue growing across all regions including Europe. Enterprise growth in the fourth quarter was driven by growth in our multi-asset flex product offerings, multiple Computer Vision deals, strong momentum in studios and editorial and the contributions from our acquisitions of Pond5 and Splash. These products and business lines in enterprise are gaining scale and growing in excess of 20% with some closer to 60% growth, thus powering our enterprise channel growth in a balanced manner. Our investments in enterprise are paying off. Turning to our income statement. For both the full year and the fourth quarter gross margins were flat, excluding non-cash M&A amortization. Sales and marketing expense in the fourth quarter was 22% of revenue compared to 30% in the fourth quarter of 2021, which included over $6 million of linear television ad spend. For the full year, sales and marketing expense was 25% of revenue, compared to 26% in 2021. The decrease largely related to our TV brand spend campaign in 2021. Product development was 8% of revenue, flat with the fourth quarter of 2021, reflecting continued investment in our product offerings and the integration of our acquisitions. For the full year, product development increased to 8% of revenue from 7% in 2021, G&A expenses were 18% of revenue, compared to 17% in the fourth quarter of 2021, driven by an increase in bad debt expense. However, for the full year G&A expenses decreased to 16% from 17% in 2021. We are continuing to see operating leverage in our business, per our expectations, and that's manifesting itself in the G&A line. With the difficult macroeconomic backdrop, we are sharply focused on costs and margins, and our results are showcasing that profitability focus. We are keeping a close eye on our headcount, engaging in process automation, and rightsizing our physical office footprint. As part of rightsizing our office footprint, in the fourth quarter, we recognized a non-cash impairment charge related to lease and related assets of $18.7 million associated with our decision to close or consolidate certain office spaces that have been underutilized. We expect this charge to benefit go-forward lease operating expenses by more than $2 million per year in 2023 and beyond. In the fourth quarter, adjusted EBITDA was a record of $58 million. Shutterstock grew EBITDA by 13% this year from $193 million to $218 million, and EBITDA margins meaningfully exceeded our target for margin expansion, increasing 138 basis points to 26.3% from 25% in 2021. This is the third consecutive year we've driven significant margin expansion. As a result, our EBITDA has more than doubled over the course of the past three years. Turning to our balance sheet, we had $115 million of cash at the end of the quarter and exhibited strong cash flow generation. As of December 31, we had $50 million drawn on a revolver. However, we've now fully repaid this balance and have zero debt on the balance sheet. On January 31, we announced a 13% increase in our quarterly dividend to $0.27 per share, which will be paid on March 16. This increase was attributable to the strength in our cash flows, zero debt on the balance sheet, and our confidence in the business for 2023. During 2022, we repurchased 984,000 shares for $73 million and completed the $100 million repurchase authorization. As a result, our shares outstanding decreased by 588,000 shares compared to 2021. Our deferred revenue balance was $187 million, an increase of $13 million from the third quarter of 2022, primarily due to growth in enterprise. On our key operating metrics for the quarter, subscriber count was 586,000 from 343,000 last year, driven by the inclusion of Creative Flow Plus and PicMonkey subscribers. Subscriber revenue increased by 9% to $88.8 million. Average revenue per customer decreased to $341 driven by the inclusion of smaller ARPU subscribers. Paid downloads were down 5.6% and revenue per download increased to $4.49 per download. Consistent with what we're seeing in our revenues, paid downloads were up in our enterprise channel and down in E-commerce largely due to weakness in Europe. Finally, turning to our guidance. Our expectations for the full year 2023 are as follows: Revenue of $836 million to $853 million, representing 1% to 3% annual revenue growth, adjusted EBITDA of $220 million to $228 million, with margins ranging from flat to up 50 basis points and adjusted earnings per share between $3.90 to $4.05 per share. Our revenue guidance is based on recent spot rates for the euro and pound and FX is expected to be a 1% headwind to revenue growth, while the additional month's contribution of Pond5 adds 2% to revenue growth. Our guidance is reflective of the ongoing macro challenges we're seeing in Europe and a cautious approach to overall customer demand. We expect revenue growth to be first half loaded with faster growth in the first half of 2023. We are not factoring into our guidance any upside from the rollout of generative AI, or from additional Computer Vision partnerships beyond the deals we've already signed. We are bullish on both of these opportunities and our pipeline and our prospects. But until deals are signed, or we see significant revenue incrementality, we prefer to keep them out of our forecast. From a margin perspective, we are targeting up to 50 basis points of EBITDA margin expansion in 2023, driven by operating leverage in G&A, and our ongoing focus on cost management. Other modeling assumptions include stock-based compensation of $55 million, depreciation and amortization expense of $68 million, capital expenditures of $45 million, and an effective tax rate percentage in the high teens. Before opening up for questions, I'd like to formally invite everyone on the call to our Investor Day to be held in the Empire State Building on February 28. We plan to have an immersive extended reality experience for investors, including deep dives into Generative AI and Creative Flow and multiple other business opportunities. Thank you so much for your time and attention. With that, operator, we'll now open the call for any questions.

Our first question comes from Andrew Boone with JMP Securities. Your line is open. Please go ahead.

Hi, guys. Thanks so much for taking my questions. Can we start on the enterprise side of the business? You talked about strength within multi-asset flex, Computer Vision deals, editorial, Pond5 and Splash while contributing. But there was just a significant step up from 3Q to 4Q. Can you just break that down and help us better understand the drivers there? And then, you talked about just not including the pipeline of Computer Vision assets for 2023. Can you just talk about the pipeline and what that looks like, right? You seem to have added OpenAI embedded Meta. What else is out there as you think about that? And just as kind of an extension of that. You talked about earlier licensing beyond Generative AI. Can you just flesh that out? So three questions for you. Thanks so much.

Thanks so much, Andrew. We'll try and remember all those three questions to the best of our ability, but you may have to get us back on track if we lose focus. So look, turning to our enterprise business, we turned in a spectacular year. The business grew 15%. Paul gave some of the really compelling metrics around how we grew our subscription bookings, which were up 27%, the acceleration, the large deals, which grew 24%, and the strong customer retention, which was in the mid-90s. So all of those, fundamentally, when you think of the core of the enterprise business, we're moving up into the right. There are multiple business lines in our enterprise business, which don't comprise 10% of the revenues of the business. So that would include studios, that would include editorial, that would include Computer Vision. Those businesses are growing somewhere between 20% and 60% a year. So we've got these engines of growth that are an enterprise sort of rolling the boat forward. And they're performing particularly well. We don't break out the quarterly or annual contribution of those individual business lines, but there are a number of different pockets of growth, and it resulted in fantastic growth for the year, and great growth for the quarter. I think your next question was really just pertaining to Generational AI. Andrew, are you most interested in sort of the incrementality around it? Or what was sort of the specific key area you were honing in on?

I have two points to discuss. First, how should we approach these contracts moving forward? Is the increase based on usage or will it resemble a continuous subscription revenue model that we can easily project into the future? What should we anticipate regarding the increase in the fourth quarter and its continuation into 2023? Secondly, Paul, you mentioned licensing opportunities beyond Generative AI. Could you elaborate on what you see as potential areas beyond Generative AI?

Sure. And Andrew, I'll answer the first part of that. And then pass it over to Paul. So, in terms of the Computer Vision deals that we signed, these are large partnerships. Those partnerships positively impacted the fourth quarter, they will positively impact 2023. These are long-term deals that will continue to benefit our business into 2024 and beyond. These deals do have somewhat of an upfront revenue composition, but they also entail revenue that continues on through the long life of the contract. Moreover, we believe that there's a variety of ways that we can add value to these relationships and grow these relationships over time. So we don't view these as discrete deals with companies rather partnerships that we expand into and grow off of. Internally, we've really proven our ability to use these as leverage points to develop larger and more multi-prong relationships with the clients.

Thank you. And we'll move on to our next question. Next question comes from a line of Bernie McTernan with Needham & Co. Your line is open. Please go ahead.

Great. Good morning. Thanks for the questions. Maybe just to start, the 75% of traffic from new customers that are using generative AI and Creative Flow. Are these paying customers or trials? And then also any insight you can provide in terms of if it's like a new vertical that's using generative AI or kind of what you're seeing from the composition of clients?

Ladies and gentlemen, please remain on your line your conference will resume shortly. I think we are experiencing technical difficulties. We do have Bernie McTernan with Needham & Company in the queue to ask a question. Bernie, please go ahead.

Hey, guys. Thanks. So, you mentioned in the prepared remarks, 75% of traffic from new customers are new to the platform. Any more detail you can provide on the verticals that these customers are paying or not? Just trying to get a sense of the composition of people who are using generative AI?

Yes. We tried to give you as much as we could in the few days since launch. As I mentioned, we're seeing lots of good engagement. We gave the mix of customers. We don't know if that's a sustainable mix or representative of what that will be four weeks out, eight weeks out, or six months out. So we just tried to do our best to expose exactly what's happening on the platform today. Over time, as we have insights into the monetization of that behavior, we'll be back out and discussing that.

Understood. We noticed a sequential decrease in customer count. Is there anything specific that contributed to that?

Bernie, I think the biggest piece is, you've seen some of the weakness in our E-commerce business. The customer count is really driven by the E-commerce business. Our enterprise customer count is very steady and a much smaller number as compared to the sort of aggregate customer count that we publish externally. So, it's really a function of the weakness in E-commerce, which is primarily driven by that significant differential in the performance of Europe compared to the rest of the world and the U.S.

Got it. And then, lastly for me. If I just take paid downloads and multiply by revenue per download, and look at that relative to 3Q, it seems like there was a, call it $13 million step up in ancillary. That's the right way to think about how much Computer Vision generated in the quarter?

Yes. I think Bernie, we don't consider that ancillary revenue; it's not the right way to think about it. Unfortunately, we have a number of different businesses that fall into that area. So I would call out studios as impacting that. I would call out our asset assurance business impacting that. I would call out the Computer Vision business as impacting that, and there are multiple other revenue streams that sort of encompass that.

Thank you. And one moment for our next question. And our next question comes from the line of Youssef Squali with Truist. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking my question. I have two inquiries. First, regarding your comments on E-commerce, I understand that John, your new Global Head of that Division, has recently joined. Can you provide more details on how you're planning to drive revenue growth in that area? It's clear that this is a major part of the business, and the decline year-on-year is affecting overall performance. How long do you think it will take to see positive growth there? Second, concerning your AI partnerships, can you explain how the revenue flows from deals with companies like OpenAI or Meta, beyond just the initial payment? Jarrod mentioned the ongoing annual revenue; is it tied to usage for continual AI training, or does it also include the sale of AI-generated images on third-party sites using your content, such as DALL-E 2? I’m just looking for a clearer understanding of how the revenue works in that context.

Great. Youssef, I'll start and then Jarrod can answer your second part question. Hopefully what you're seeing and it's very apparent of what we're doing with E-commerce is we're getting very, very busy. We are focused on everything from process improvement, product development, tool set delivery for our customers, additional content to lift conversion, and we're bringing in, as we mentioned, more resources to focus on a very strategic part of our business called E-commerce. And I'd say at the same time, we're laser-focused on being customer-centric, so that we're listening to exactly what our customers need, building products and services for them and bringing content to bear so that they can find what they're looking for and action their business objectives. So, we're going to continue to do that. We've had a history of doing that. It's kind of in the DNA. And we're going to continue to focus our business on that. We've also aligned our entire workforce to be very, very strategic on the work that we do. We expect to be better executors as we move forward. And you asked about the win in this market with the current backdrop that we're operating. I can tell you that by June 1 or September 1, there's going to be a magic event that suddenly E-commerce is going to magically start growing at the rates that we would be excited about. But what I can tell you is, we've gotten a lot of minds and hands working on that opportunity. We're feeling pretty good about our chances of strong execution there. And that's reflected in our guidance. As Jarrod said, we believe that there's some potential upside to that guidance because of the things we did put in and we didn't put in.

And Youssef, to the second part of your question just on the money flow pertaining to our Computer Vision partnerships. Ultimately, we have a massive pool of content and metadata. When our partners train their AI machine learning models using our metadata, as we confer that data, that's used for model training. The money would flow; we would build an invoice for those clients, and they would pay us. We also receive 30 million to 40 million new content assets each year. It is imperative to continue to train AI and machine learning models. This is an extremely valuable source of incremental metadata for our partners. Effectively, they're contracting for a long-term period to continue to ingest and pay for that metadata and content. We have typically leveraged those partnerships to also gain access to some technology, which we've done in the case of an LG or OpenAI. We think that's an intrinsic part of us working collaboratively with our strategic partners. But what we haven't done thus far is we don't have effectively a revenue share on the end products that those partners are going off and creating in their core businesses. So for example, OpenAI, we do not have a revenue share with all the deals that OpenAI is going to do in the growth of their business. We're effectively monetizing our data and our content with those customers. What we are able to do, though, is monetize on our site. We are able to monetize the core metadata. Plus, we're able to charge within our core subscription impacted products for generative AI, which we hope will have incrementality associated with the revenue growth in our business. As Paul mentioned, early engagement is quite strong, and we're really excited about what we're seeing thus far.

And Jarrod, did you quantify the organic growth that you guys had for the quarter beyond the 6% and 9% growth rate that you gave for reporting FX adjusted? What was the organic number when you adjust for Pond5?

Sure, Youssef. So for the fourth quarter of 2022, the organic growth excluding Pond5 was 3.3% on a constant currency basis, and flat on a reported basis, excluding Pond5. If you were to include Pond5 on a constant currency basis, the growth was 9.5% for the fourth quarter.

Thank you. And one moment for our next question, please. And our next question comes from the line of Lauren Schenk with Morgan Stanley. Your line is open. Please go ahead.

Great. Thanks. I wanted to ask a few more about the AI partnerships if I can. First, just wanted to confirm the upfront Meta and LG partnership revenue was booked in the fourth quarter. And then you said there were multiple Computer Vision deals in the fourth quarter. Just wanted to ask if there are any others besides those two in the quarter? And then just lastly, anything you can share around your visibility or the range of potential outcomes for those new partnerships heading into 2023? Thank you.

Sure, Lauren. So, the good news is that the LG and the Meta partnership deals did positively impact the fourth quarter. They will also positively impact the first quarter of 2023, the second, third, and fourth quarters of 2023, and into 2024 and beyond. This is something where we are seeing immediate contribution, but we're also going to be seeing a positive contribution in the quarters to come from these deals. I can also confirm that these are the deals that we put out press releases around, and we've had public permission to put up the names around. There are 20-plus other customers that we've been working with in this area, some of which are extremely large companies, the names of which we see around us each and every day, but we've not disclosed those partnerships. There's a lot of momentum in this business, and there's a sizable number of deals that we've signed, and we feel quite good about the pipeline. So, we're enthusiastic, because these can be large deals, and this is a new nascent business for us, that's sort of coming to us in real time. We're not yet at a place where we're baking large deals into our guidance and into our probability-weighted pipeline. As and when these large deals land, we'll update the investor community. There's a great pipeline, but this is all really so new and sort of happening to us in real time, so we're going to be a little bit more cautious from a guidance and forecasting perspective on this one.

Thank you. And one moment for our next question. And our next question comes from the line of Nat Schindler with Bank of America. Your line is open. Please go ahead.

Yes. Hi, everyone. There's a lot of interest in how generative AI will impact deals. Can you discuss more broadly how generative AI will change the industry and its applications in the near to long term? How do you see this evolving and what effects do you anticipate for both parties and marketplaces like yours?

Nat, I'll take that one. And I'll open with one of my standard answers. I don't know. But what I would tell you is that we are doing everything in our power to make sure that we are among the first to figure out all of the use cases for AI. You see the level of engagement that we've described in two weeks, and that tells us that we are fishing in the right pond in terms of our development, by listening to our customers and reading the tea leaves of which way this industry is going. We see, obviously, the most basic things, people are creating images for their use. We're using our underlying metadata to train models. We believe that this is just scratching the surface of use cases for AI, where our minds go in a world where we are fine-tuning search queries to generate content on behalf of our customers. Depending on the level of detail in those search queries, you start to enhance and maybe even replace some of the existing toolsets that are out there that are doing some of the basic editing and modification of images because customers can actually create the very specific thing they're looking for. It's early days on all of those things, but there are a lot of avenues that we're exploring. When you build a platform like we have, assembling the content, breadth and depth that we have, layer on the product innovation, and leverage our contributors, and by the way, our employees, many of whom are the best-in-class sales force that are sitting in the offices of our small, medium, and large scale clients, innovation happens, new products happen, and new opportunities happen. So, it's still the first pitch of the first inning for AI and its use cases. We believe that the Shutterstock platform, and the company broadly, is well-positioned to be first movers in whatever way this goes.

Great. Thank you. And I love that you used I don't know as an answer, because that's the only honest one.

Thank you. And one moment for our next question. And our next question comes from the line of Nick Deflas with Red Burn. Your line is open. Please go ahead.

Yes. Thanks very much indeed. Just a quick question, two actually. As we think about the impact Pond5 on enterprise and E-commerce, then if you can give us any stare on that? Thanks very much for the organic figure. It's one of the questions earlier. And the second question is just on the subscriber numbers being down a little bit versus Q3. You took around that and how you expect to return or what timeframe you expect to return E-commerce to growth? Thanks very much.

Sure. So just with respect to Pond5, Pond5 at the time of the acquisition would have been about 3% of the revenue of the business. So that's sort of the annual contribution. That business is a little bit more heavily tilted towards E-commerce than enterprise from a revenue distribution. A simple back of the envelope way to think about it would be a 2% contribution to the E-commerce business and a 1% contribution to the enterprise business. I'm sorry, what was the second part of your question?

The second part of the question was just on subscribers. So 586 in the fourth quarter, I think the figure in the third quarter was 607. So, what's going on there in terms of the decline? And when do you think you'll be turning that around?

Yes. I believe the subscriber decline is mainly due to the significant year-over-year growth and the quarterly sequential decline. This drop in subscriber count is largely influenced by our E-commerce business. The challenges we have faced in Europe have contributed to this decline. However, it's important to note that subscriber revenues increased by 9% year-over-year, and this figure includes our enterprise business subscribers. In fact, subscriber bookings in our enterprise business grew more than 20% year-on-year. We are seeing a unique situation where smaller subscribers were affected by Europe, while subscriber revenues remain very strong, primarily due to larger subscribers in our enterprise business. This creates an interesting contrast between the two reporting channels regarding our subscribers.

Do you think that you have a timeframe? You think that this economic impact in Europe particularly, will turn around in the second half of the year? How do you think about that?

So, we're being conservative at this point in time. As Paul mentioned, we're not baking into our guidance any kind of a return to growth in our E-commerce business this year itself. We would rather take a bit of a wait-and-see attitude on that. We want to observe multiple months of trends moving in the right direction, particularly in Europe, to make that call. Things certainly did deteriorate from the third quarter to the fourth quarter, and so, we're sort of baking that in and carrying that forward. We're going to continue to focus on doing what we can in terms of improving the value for our customers and growing our E-commerce platform. We're bringing in the right talent, the right tools, and really taking the right marketing strategies to be able to grow that business.

That's great. Thanks very much indeed.

Great. Thanks. We want to express our gratitude to our customers, contributors, and especially our employees. For those of you on the call, thanks for joining. This ends all the content for today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.