What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-02-13 · 240 added, 288 removed, 268 unchanged (66% of the section changed)

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See also the “Risk Factors” disclosure in Item 1A above for additional discussion of the risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.

For a discussion as to how COVID-19 has affected our business, see “COVID-19 Update” below.

Overview and Recent Developments

Shutterstock is a global technology company offering a creative platform, which provides high-quality content, tools and services to creative professionals.

Shutterstock is a leading global creative platform offering full-service solutions, high-quality content, and tools for brands, businesses and media companies.

Our platform brings together users and contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed.

The content licensed by our customers include:

The content licensed by our customers includes:

• Images - consisting of photographs, vectors and illustrations.

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• Music - consisting of high-quality music tracks and sound effects, which are often used to complement images and footage.

Our platform brings together users and contributors of content by providing readily-searchable content that our customers pay to license and by compensating contributors as their content is licensed.

For customers seeking specialized content that goes beyond our library of stock content, our platform also connects customers with contributors who can produce custom branded content.

• 3D Models - following our acquisition of TurboSquid, Inc.

on February 1, 2021, we now offer 3D models, used in industries such as advertising, media & video production, gaming, retail, education, design and architecture.

For customers seeking specialized solutions, we also create custom, on-brand content by matching our global contributor network to the unique needs of our customers.

This solution allows us to offer customers a fast and scalable way to produce cost-effective content that is in line with the visual footprint of their brand.

We typically offer a royalty-free non-exclusive license and the processes we maintain to properly license content and the indemnification protections we provide, allow individuals and businesses of all sizes, including media agencies, publishers, production companies and creative service providers, to confidently utilize such content for their unique commercial or editorial needs.

Over 2.0 million active, paying customers contributed to our revenue in 2020.

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This makes our collection of content one of the largest of its kind, and we delivered 180.0 million paid downloads to our customers across all of our brands during the year ended December 31, 2020.

In January 2019, we launched our award winning “It’s not stock, it’s Shutterstock” campaign message is designed to showcase the quality and depth of our creative asset library.

In addition, in December 2019, we celebrated exceeding $1 billion in cumulative royalties paid to our contributors, since we were founded in 2003.

During 2019 , in addition to the increase in content provided by our contributors, we also added to our robust product offering through the following product launches and exclusive partnerships:

In April 2019, we announced the renewal of our agreement with the Associated Press (AP) to distribute AP’s daily global photo output for license to Shutterstock customers based in the U.S., the U.K.

This distribution deal gives Shutterstock customers access to approximately 3,000 images daily as well as access to iconic news images from the vast AP archive.

In May 2019, we launched our new self-serve application program interface (API) subscription plans which enable developers and businesses to resell more than 1 million images within their products and applications.

In July 2019, we introduced Shutterstock Elements, a collection consisting of thousands of cinema-grade video effects for filmmakers, including 4K lens flares, transitions and video kits with smoke, fire and explosions.

In October 2019, we launched Smart Brief, a new product that dramatically cuts brief drafting time and enables collaboration to meet client needs faster with less upfront effort.

In November 2019, we announced an unlimited monthly subscription plan for Shutterstock Music.

This plan, geared towards content creators, provides access to a range of track lengths, as well as flexibility to license music tracks as needs arise.

In 2019 , we also invested in our customer and contributor experiences by releasing the following product enhancements:

In January 2019, we announced that our contributor-facing website and mobile applications are now available in 21 languages, aligning with the languages already available on the Shutterstock customer-facing site and its new developer portal.

In March 2019, we launched in-app contributor registration for the mobile-first generation, making it easier than ever for iOS and Android users to sign up as Shutterstock contributors.

In April 2019, we launched “View in Room,” our first Augmented Reality (AR) feature, allowing iOS app users to visualize how an image from Shutterstock’s collection would look in real life.

Through our platform, we generate revenue by licensing content to our customers.

During the year ended December 31, 2020, 62% of our revenue and the majority of our content licenses came from our E-commerce sales channel.

E-commerce customers have the flexibility of choosing content subscription plans that provide a large volume of content for their creative process.

We also offer simple, affordable, smaller subscriptions and those where customers have an option to pay for individual content licenses at the time of delivery.

The majority of our customers license content directly through our self-service web properties, including our Shutterstock.com, bigstock.com and premiumbeat.com websites.

E-commerce customers have the ability to purchase plans that are paid on either a monthly or annual basis or to license content on a transactional basis.

E-commerce customers generally license content under our standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs.

Customers in our Enterprise sales channel generally have unique content, licensing and workflow needs.

Our dedicated enterprise sales, service, client success and research teams are able to provide a number of enhancements to their creative workflows including non-standard licensing rights, multi-seat access, multi-brand licensing packages and content licensed for use-cases outside of those available for license on our e-commerce platform.

Customers in our Enterprise sales channel may also benefit from the creation of custom branded content, an offering that launched in 2017.

These customers benefit from communication with our dedicated sales, service and research teams which provide a number of personalized enhancements to their creative workflows including non-standard licensing rights, multi-seat access, ability to pay on credit terms, multi-brand licensing packages, increased indemnification protection and content licensed for use-cases outside of those available on our e-commerce platform.

Customers in our enterprise sales channel may also benefit from our API platform as well as access to Shutterstock Editorial, which includes our library of editorial images and videos and Shutterstock Studios, our offering which provides custom, high-quality content matched with production tools and services.

Our Enterprise sales channel provided approximately 38% of our revenue in 2020.

Until February 26, 2018, we also generated revenues by licensing the use of the Webdam digital asset management platform to customers on a contract basis, typically for terms of twelve months.

On February 26, 2018, we completed the Sale of Webdam for an aggregate purchase price of $49.1 million .

Each time an image, footage clip or music track is delivered to a customer for use, we record a royalty expense for the amount due to the associated contributor.

Depending on the products purchased by our customers, royalties are calculated using either a fixed dollar amount or a fixed percentage of revenue and are typically paid to contributors on a monthly basis, subject to certain payout minimums.

Royalties represent the largest component of our operating expenses, are reported within cost of revenue, tend to increase proportionately with revenue and may be impacted by the mix of products sold.

In addition to content sourced through direct submission on our web properties, we also obtain content through exclusive distribution agreements with strategic partners or through the direct acquisition of a content library or archive.

In certain cases, we will enter into arrangements with contributors whereby we guarantee a minimum royalty to a contributor or strategic partner, usually paid up-front, in exchange for exclusive rights to distribute content when we believe such exclusivity provides us with a distinct competitive advantage.

As the use cases for our creative solutions expand, we believe our customers are seeking alternative means to consume our offerings.

As a result, we have seen strong growth in customers purchasing monthly subscription products.

Our monthly subscriptions provide for a fixed number of content licenses that may be downloaded during the period.

Our subscription-based pricing model makes the creative process easier because customers can download content in our collection for use in their creative process without incremental costs, which provides greater creative freedom and helps improve work product.

In addition, customers may also purchase licenses through other contractual plans where the customer commits to buy a predetermined quantity of content licenses that may be downloaded over a period of time, generally between one month to one year.

For users who need less content, individual content licenses may also be purchased on a transactional basis, paid for at the time of download.

Contributors of content typically earn a royalty each time their work is licensed.

Contributors earn royalties based on our published earnings schedule that is based on annual licensing volume, which determines the contributor’s earnings tier and the purchase option under which the content was licensed.

Royalties represent the largest component of our operating expenses, are reported within cost of revenue, tend to fluctuate proportionately with revenue and paid downloads and may be impacted by the mix of products sold.

In addition to content sourced through direct submission to our e-commerce platform, we also obtain all types of content through exclusive distribution agreements with strategic partners or through the direct acquisition of content, content libraries or archives.

In certain cases, we enter into arrangements with contributors or strategic partners whereby we guarantee a minimum royalty, in exchange for exclusive rights to distribute content when we believe such exclusivity provides us with a distinct competitive advantage.

When we license content that has been obtained through direct acquisition, we pay no royalties.

In recent years, we have made a number of enhancements to our content libraries through the direct acquisition of content and through entering into several such agreements and partnerships.

We have also enhanced our collections and content acquisition capabilities through our acquisitions of PremiumBeat, Rex Features, The Picture Desk Limited, and Flashstock.

We have experienced revenue and operating expense growth over the past three years.

Our total revenue has grown to $650.5 million in 2019 from $623.3 million in 2018 and $557.1 million in 2017 .

Our total operating expenses have grown to $630.4 million in 2019 from $590.8 million in 2018 and $530.8 million in 2017 , principally as a result of increased royalties, marketing costs, depreciation and amortization related primarily to our technology and infrastructure and cash employee compensation expenses.

An important driver of our growth is customer acquisition, which we achieve primarily through online marketing efforts and directly through our sales force.

Online marketing includes paid search, organic search, online display advertising, brand marketing, email marketing, affiliate marketing, social media and strategic partnerships.

At the beginning of 2019, we launched our award-winning “It’s not stock, it’s Shutterstock” campaign, designed to create top-of-funnel awareness and website traffic by showing the creative marketing results that can be achieved with Shutterstock assets.

Online marketing includes paid search, online display advertising, print advertising, trade shows, email marketing, direct mail, affiliate marketing, public relations, social media and partnerships.

Over the past several years, our investments in marketing have represented a significant percentage of revenue.

We manage customer acquisition costs based on the blended average customer lifetime value across our purchase options so that we are able to manage our marketing expenses to achieve certain desired growth targets.

Since we believe the market for content is multi-faceted and continually expanding, we plan to continue to invest aggressively in customer acquisition to achieve revenue growth.

We believe that another important driver of growth is the quality of the user experience we provide on our websites, especially the efficiency and speed with which our search interfaces and algorithms help customers find and download the content that they need, the degree to which our websites have been localized for our global user base, the degree to which we make use of the large quantity of data we collect about image, footage and music and search patterns, and the security of user

information on our platform.

This spend considers, among other things, the blended average customer lifetime value across our various purchase options so we can manage customer acquisition costs and aim to achieve targeted returns.

To this end, we have invested aggressively in product development and cloud-based hosting infrastructure, and we intend to continue to invest in these areas, to the extent that we can improve the customer experience and increase the efficiency with which we deploy new products and features.

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In 2020, our net income was $71.8 million and net cash from operating activities was $165.1 million.

In the same period, adjusted EBITDA, adjusted net income, and free cash flow were $96.3 million , $43.7 million and $73.2 million , respectively.

In the same period, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and free cash flow were $154.9 million, 23.2%, $95.2 million and $144.2 million, respectively.

See Part II, Item 6 of this Annual Report on Form 10-K under the heading “Selected Financial Data—Non-GAAP Financial Measures.”

COVID-19 Update

In December 2019, a novel coronavirus disease (“COVID-19”) was initially reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.

Our operations have been impacted by office closures globally and restrictions on employee travel and in-person meetings, however, we have generally been able to deliver our services remotely.

The economic uncertainty caused by COVID-19 has had an impact on our customers and their ability to spend marketing budgets on our products, which has resulted in an unfavorable impact, to varying degrees geographically, on our revenue growth and number of paid downloads for the twelve months ended December 31, 2020.

Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Key Operating Metrics

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Year Ended December 31,

(in millions, except revenue per download)

Paid downloads (during the period)

Revenue per download (during the period) (1)

Content in our collection (end of period)

Effective January 1, 2018, we adopted ASU 2014-09 using the modified retrospective approach.

Historical revenue totals reflect those previously reported and have not been restated.

2020 2019 2018

Subscribers (end of period) 281,000 194,000 *

Subscriber revenue (in millions) $ 265.3 $ 236.5 *

Average revenue per customer (trailing twelve months) $ 333 $ 330 *

Paid downloads (in millions) 180.0 187.8 179.6

Revenue per download $ 3.68 $ 3.43 $ 3.40

Content in our collection (end of period, in millions)

Images 360 314 242

Footage clips 21 17 13

* Information not available

We define subscribers as those customers who purchase one or more of our monthly recurring products for a continuous period of at least three months, measured as of the end of the reporting period.

We believe the number of subscribers is an important metric that provides insight into our monthly recurring business and its growth.

We believe that an increase in our number of subscribers is an indicator of engagement in our platform and potential for future growth.

Subscriber Revenue

We define subscriber revenue as the revenue generated from subscribers during the period.

We believe subscriber revenue, together with our number of subscribers, provide insight into the portion of our business and growth driven by our monthly recurring products.

Average Revenue Per Customer

Average revenue per customer is calculated by dividing total revenue for the trailing twelve month period by customers.

We define customers as total active, paying customers that contributed to total revenue over the trailing twelve month period.

Changes in our average revenue per customer will be driven by changes in the mix of our subscription-based products and the pricing in our transactional business.

Paid Downloads

Measuring the number of paid downloads that our customers make in any given period is important because downloads are the primary method of delivering licensed content, which drives a significant portion of our revenue and contributor royalties.

We define paid downloads as the number of downloads that our customers make in a given period of our photographs, vectors, illustrations, footage or music tracks.

Paid downloads exclude custom content, re-downloads of content that a customer has downloaded in the past (which do not generate incremental revenue or contributor royalty expense) and downloads of content that is offered to customers for no charge, including our free image of the week.

We define paid downloads as the number of downloads that our customers make in a given period of our content.

Paid downloads exclude custom content and downloads of content that are offered to customers for no charge, including our free image of the week.

Measuring the number of paid downloads that our customers make in a given period is important because they are the primary method of delivering licensed content, which drives a significant portion of the Company’s revenue and contributor royalties.

Revenue per Download

We define revenue per download as the amount of revenue recognized in a given period divided by the number of paid downloads in that period excluding revenue from custom content and the impact of revenue that is not derived from or associated with content licenses.

This metric captures changes in our pricing, if any, as well as the mix of purchase options that our customers choose, some of which generate more revenue per download than others, and the impact that changes in foreign currency rates have on our pricing.

Increases in r evenue per download have primarily been driven by the introduction of new product offerings.

Revenue per download may be impacted by changes in product mix or competitive pressures.

We define revenue per download as the amount of revenue recognized in a given period divided by the number of paid downloads in that period excluding revenue from custom content and revenue that is not derived from or associated with content licenses.

This metric captures any changes in our pricing, including changes resulting from the impact of competitive pressures, as well as the mix of licensing options that our customers choose, some of which generate more revenue per download than others, and the impact that changes in foreign currency rates have on our pricing.

Changes in revenue per download are primarily driven by the introduction of new product offerings, changes in product mix and customer utilization of our products.

Content in our Collection

We define content in our collection as the total number of (a) images (photographs, vectors and illustrations) and (b) footage clips (in number of clips) available to customers for commercial license on shutterstock.com at the end of the period.

We define content in our collection as the total number of approved images (photographs, vectors and illustrations) and footage (in number of clips) in our library on shutterstock.com at the end of the period.

We exclude content from this collection metric that is not uploaded directly to our site but is available for license by our customers through an application program interface, custom content and certain content that may be licensed for editorial use only.

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Prior to the Sale of Webdam, we also earned revenue from licensing hosted software services through Webdam’s cloud-based tools for businesses, which were purchased as part of a subscription.

Prior to the adoption of ASU 2014-09 on January 1, 2018, and reflected in the reported revenue amounts for the year ended December 31, 2017, we recognized revenue when all of the following basic criteria were met:

there was persuasive evidence of an arrangement, performance or delivery of services had occurred, the sales price was fixed or determinable, and collectability was reasonably assured.

We considered persuasive evidence of an arrangement to be an electronic order form, or a signed contract, which contained the fixed pricing terms.

Performance or delivery for content licenses was considered to have occurred upon the download of the licensed content.

Subscription revenue was recognized upon each download using an effective per-license rate and revenue associated with any unused licenses was recognized at the subscription expiration.

Revenue attributable to the hosted software services was recognized ratably during the license subscription.

Effective January 1, 2018, subsequent to the adoption of ASU 2014-09, we recognize revenue upon the satisfaction of performance obligations, which occurs when (i) content is downloaded by a customer or (ii) hosted software services are provisioned and available to a customer.

For content licenses, we recognize revenue on both our subscription-based and transaction-based sales when content is downloaded, at which time the license is provided.

In addition, management estimates expected unused licenses for subscription-based products and recognizes the revenue associated with the unused licenses throughout the subscription period.

We recognize revenue upon the satisfaction of performance obligations, which occurs when (i) content is downloaded by a customer or (ii) hosted software services are provisioned and available to a customer.

For content licenses, we recognize revenue on both our subscription-based and transaction-based products when content is downloaded, at which time the license is provided.

In addition, management estimates expected unused licenses for subscription-based products and recognizes the estimated revenue associated with the unused licenses as digital content is downloaded and licenses are obtained for such content by the customer during the subscription period.

The estimate of unused licenses is based on historical download activity and future changes in the estimate could impact the timing of revenue recognition of our subscription products.

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Collectability is reasonably assured at the time the electronic order or contract is entered.

The majority of our customers purchase products by making an electronic payment at the time of the transaction.

The majority of our customers purchase products by making an electronic payment with a credit card at the time of the transaction.

Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue.

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Cost of revenue consists of royalties paid to contributors, credit card processing fees, content review costs, customer service expenses, infrastructure and hosting costs related to maintaining our creative platform and cloud-based software platform, depreciation and amortization of capitalized internal-use software, content and technology intangible assets, allocated facility costs and other supporting overhead costs.

Cost of revenue also consists of employee compensation, including non-cash equity-based compensation, bonuses and benefits associated with the maintenance of our creative platform and cloud-based software platform.

Cost of revenue also includes employee compensation, including non-cash equity-based compensation, bonuses and benefits, associated with the maintenance of our creative platform and cloud-based software platform.

Sales and Marketing.

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Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products.

Product development costs also include allocated facility and other supporting overhead costs.

Product development costs also includes software and other IT equipment costs, allocated facility expenses and other supporting overhead costs.

General and Administrative.

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Year Ended December 31,

2020 2019 2018

(in thousands)

Consolidated Statements of Operations:

Revenue $ 666,686 $ 650,523 $ 623,250

Operating expenses:

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Provision for income taxes 17,757 4,808 11,426

(1) Effective January 1, 2018, we adopted ASU 2014-09 using the modified retrospective approach.

Historical revenue totals reflect those previously reported and have not been restated.

Net income $ 71,766 $ 20,108 $ 54,687

The following table presents the components of our results of operations for the periods indicated as a percentage of revenue:

Year Ended December 31,

2020 2019 2018

Consolidated Statements of Operations:

Revenue 100 % 100 % 100 %

Operating expenses:

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Provision for income taxes 3 % 1 % 2 %

Net income 11 % 3 % 9 %

Comparison of the Years Ended December 31, 2020 and December 31, 2019

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Year Ended December 31,

2020 2019 $ Change % Change

(in thousands)

Consolidated Statements of Operations Data:

Revenue $ 666,686 $ 650,523 $ 16,163 2 %

Operating expenses:

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Income from operations 85,266 20,155 65,111 323

Gain on Sale of Webdam

Other income / (expense), net

Other income, net 4,257 4,761 (504) (11)

Income before income taxes 89,523 24,916 64,607 259

Provision for income taxes 17,757 4,808 12,949 269

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* Not meaningful.

See “Other income / (expense), net” and “Gain on Sale of Webdam” below

Revenue increase d by $27.3 million , or 4% , to $650.5 million in 2019 as compared to 2018 .

Excluding the impact of foreign currency fluctuations, revenue increased 6% from 2018 to 2019 .

In addition, the Company’s E-commerce and Enterprise revenues increased by approximately 7% and 1% , respectively, from 2018 to 2019 , compared to increases of 10% and 22% , respectively, from 2017 to 2018 .

On a constant currency basis, the Company’s E-commerce and Enterprise revenues increased by approximately 9% and 3% , respectively, from 2018 to 2019 , compared to increases of 9% and 21% , respectively, from 2017 to 2018 .

During 2019 , we increased sales and marketing efforts to attract more users and promote increased customer engagement across our platform.

We continue to focus on product offerings, platform improvements and other initiatives to increase customer engagement.

As a result of these initiatives, there was a 5% increase in the number of paid downloads compared to 2018 .

In 2019 and 2018 , we delivered 187.8 million and 179.6 million paid downloads, respectively, and our 2019 revenue per download increase d to $3.43 from $3.40 for 2018 .

The increase in revenue per download is partially driven by our sales of footage clips which have increased as a percentage of overall revenue.

Footage clips typically carry a higher revenue per download than other content types.

The increased revenue from our content business was partially offset by the absence of revenue from Webdam, as a result of the Sale of Webdam in February 2018.

We did not recognize revenue from Webdam during 2019 , compared to $2.7 million for the period from January 1, 2018 through February 26, 2018.

Our revenue growth by region is as follows:

revenue from outside Europe and North America increase d by $20.2 million , or 11% , to $204.9 million , revenue from Europe increase d by $9.8 million , or 5% , to $217.4 million and revenue from North America decrease d by $2.7 million , or 1% , to $228.2 million in 2019 compared to 2018 .

Net income $ 71,766 $ 20,108 $ 51,658 257 %

Revenue increased by $16.2 million, or 2%, to $666.7 million in 2020 as compared to 2019.

Foreign currency fluctuations did not have a significant impact on revenues in 2020, as compared to 2019.

Our revenue growth in 2020 is primarily driven by our subscription business.

From 2019 to 2020, subscribers grew by 45% to 281,000 and subscriber revenue grew by 12% to $265.3 million.

During 2020, the majority of our subscriber revenue growth is attributed to our E-commerce sales channel.

E-commerce revenues increased by 5%, to $412.5 million in 2020 as compared to 2019.

Foreign currency fluctuations did not have a significant impact on E-commerce revenues in 2020, as compared to 2019.

During 2020, growth in our E-commerce sales channel was primarily driven by increased subscriber revenue.

Enterprise revenues decreased by 2%, to $254.2 million in 2020 as compared to 2019.

Foreign currency fluctuations did not have a significant impact on Enterprise revenues in 2020, as compared to 2019.

During 2020, the Company identified and implemented certain changes to improve performance, updated product offerings and made further platform investments.

We believe these enhancements impacted our Enterprise sales operations at the end of 2020 and is one of the drivers of the increased deferred revenue balance as of December 31, 2020.

In addition, we believe our revenue for the year ended December 31, 2020 was unfavorably affected by the global COVID-19 pandemic and its impact on our customers and their ability to spend marketing budgets on our products.

In the years ended December 31, 2020 and 2019, we delivered 180.0 million and 187.8 million paid downloads, respectively, and our revenue per download increased to $3.68 for the year ended December 31, 2020, from $3.43 for the year ended December 31, 2019.

During the year ended December 31, 2020, the 4% decrease in the number of paid downloads compared to 2019, is due to lower customer utilization of our products.

We believe that the decline in usage during 2020, compared to 2019, is partially attributable to COVID-19.

Changes in our revenue by region were as follows:

revenue from North America increased by $8.4 million, or 4%, to $236.6 million, revenue from Europe increased by $3.3 million, or 2%, to $220.7 million and revenue from outside Europe and North America increased by $4.5 million, or 2%, to $209.4 million, in the year ended December 31, 2020 compared to 2019.

Cost and Expenses

Cost of Revenue.

Cost of revenue increase d by $10.5 million , or 4% , to $278.2 million in 2019 as compared to 2018 .

Royalty expense, which is primarily incurred as content is downloaded, increase d $3.8 million , or 2% , as compared to 2018 .

The Company’s royalty rate was approximately 26.3% and 26.8% in 2019 and 2018, respectively, and fluctuates based on customer usage and the mix of products sold.

We anticipate royalties will continue growing in absolute dollars as long as revenue grows, although royalties as a percentage of revenue may vary from period to period as a result of shifts in customer usage and product mix.

Depreciation and amortization expense increase d by $4.7 million as compared to 2018 , to $40.4 million in 2019 , driven primarily by the depreciation of our capitalized internal-use software.

We expect that our cost of revenue will increase in absolute dollars in the foreseeable future to the extent our revenue grows.

Cost of revenue decreased by $18.6 million, or 7%, to $259.6 million in 2020 as compared to 2019, due to lower royalty expense, content procurement costs and depreciation and amortization expense, partially offset by higher costs associated with website hosting, hardware and software licenses as well as increased credit card fees.

In addition, cost of revenue includes severance charges of $1.2 million for the year ended December 31, 2020.

The reduction in royalty expense was driven by the 4% decline in paid downloads as well as a modification in the way we compensate contributors.

We expect that our cost of revenue will fluctuate in line with changes in revenue and paid downloads.

Sales and Marketing.

Sales and marketing expenses increase d by $15.3 million , or 9% , to $181.7 million in 2019 as compared to 2018 .

Expenses related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $10.8 million , or 12% , in 2019 compared to 2018 , as a result of increased spending on affiliate, search advertising and other new channels.

Employee-related expenses increased by $2.3 million , as compared to the same period in the prior year, driven by an increase in sales and marketing headcount to support new initiatives.

As a percent of revenue, for 2019 , sales and marketing expenses increased slightly from the same period in 2018 , primarily driven by the increase in customer acquisition costs.

As we continue to invest in new customer acquisition, products and geographies, we expect sales and marketing expenses to increase in absolute dollars in the foreseeable future.

Sales and marketing expenses decreased by $22.5 million, or 12%, to $159.2 million in 2020 as compared to 2019.

As a percent of revenue, sales and marketing expenses decreased to 24% for the year ended December 31, 2020, from 28% for 2019.

This decrease was primarily driven by a $21.1 million decline in marketing spend as we focused resources on more efficient customer acquisition and improved marketing return on investment.

In addition, travel and related expense costs declined by $2.2 million due to travel restrictions resulting from COVID-19.

These declines were partially offset by $2.3 million in higher employee-related costs.

For the year ended December 31, 2020, sales and marketing expense includes severance charges of $1.7 million.

We expect sales and marketing expenses to fluctuate as we optimize our sales channels and invest in new customer acquisition, products and geographies.

Product Development.

Product development expenses decrease d by $1.7 million , or 3% , to $57.2 million in 2019 as compared to 2018 .

This decrease was driven by an approximately $5.5 million reduction in employee related costs, net of capitalized labor.

The decline was partially offset by an increase of $4.0 million in software and other technology used to support our product development initiatives in 2019 , as compared to 2018 .

We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhancing the functionality of our existing products and technologies.

Product development expenses decreased by $11.2 million, or 20%, to $46.0 million in 2020 as compared to 2019.

This decrease was primarily driven by a $7.6 million reduction in software and other IT-related costs for the year ended December 31, 2020, compared to the prior year.

In addition, employee and consulting related expenses decreased by $1.4 million in 2020 as compared to 2019.

For the year ended December 31, 2020, product and development expense includes severance charges of $1.1 million.

We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhance the functionality of our existing products and technologies.

General and Administrative.

General and administrative expenses increase d by $15.5 million , or 16% , to $113.2 million in 2019 as compared to 2018 .

This increase was driven by (i) higher employee-related costs of $9.9 million in 2019 as compared to 2018 , primarily driven by increased headcount associated with ensuring the stability and security of the Company’s technology infrastructure;

(ii) severance charges of approximately $2.2 million incurred in 2019 ;

(iii) higher software and other IT-related costs of $5.0 million in 2019 , as compared to 2018 , related primarily to enhancements to our corporate and technology infrastructure;

and (iv) higher professional and consulting fees of $1.4 million , as compared to 2018 .

These increases were partially offset by a $1.1 million reduction in bad debt expense in 2019 as compared to 2018 .

In addition, depreciation and amortization expense in 2019 decrease d $0.4 million , including the impact of $1.5 million of accelerated amortization expense recorded in connection with the Company’s re-branding of its Editorial product.

We expect to continue to incur general and administrative expenses to support our global operational growth and enhancements to support our reporting and planning functions.

Gain on Sale of Webdam.

On February 26, 2018, the Company completed the Sale of Webdam, for an aggregate purchase price of $49.1 million .

Total cash received, net of $4.6 million in transaction costs paid, was $44.3 million , inclusive of $2.5 million received during 2019 from the release of funds from escrow.

During 2018 , management recognized a pre-tax gain on the sale of approximately $38.6 million , which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

Other income / (expense), net.

During 2019 , approximately $4.2 million of other income consisted of interest income, in addition to $0.5 million of favorable foreign currency fluctuations.

During 2018 , we recorded a charge of $5.9 million as a result of the impairment of a long-term investment asset.

Additionally, during 2018 , we recorded an expense of approximately $1.8 million related to unfavorable foreign currency fluctuations, offset by approximately $2.7 million of interest income.

General and administrative expenses increased by $3.3 million, or 3%, to $116.6 million in 2020 as compared to 2019.

This increase was primarily driven by (i) higher non-cash compensation expense of $5.6 million, attributable to certain performance-based awards;

(ii) higher employee-related costs of $4.2 million in 2020 as compared to 2019;

and (iii) an increase in bad debt expense of $2.5 million in 2020 compared to 2019.

These increases were partially offset by (i) a reduction in expense of $3.4 million, associated with the 2019 accrual of long-term incentives, related to our 2017 acquisition of Flashstock;

(ii) lower depreciation and amortization expense of $3.2 million, driven by the recognition of $1.5 million of accelerated amortization expense in 2019 in conjunction with the Company’s re-branding of its Editorial product, in addition to lower depreciation driven by assets which became fully depreciated in prior periods;

and (iii) lower professional and consulting fees of $1.6 million in 2020 compared to 2019.

For the years ended December 31, 2020 and 2019, general and administrative expenses include severance charges of $1.4 million and $1.3 million, respectively.

Other income, net.

During 2020, $3.1 million of other income related to favorable foreign currency fluctuations, in addition to $1.2 million of interest income.

During 2019, $4.2 million of other income consisted of interest income, in addition to $0.5 million related to favorable foreign currency fluctuations.

As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate.

Income Taxes.

Income tax expense decrease d by $6.6 million to $4.8 million in 2019 as compared to 2018 .

The decrease in 2019 income tax expense was primarily driven by the absence of $11.0 million of tax expense associated with the gain on Sale of Webdam, recorded in 2018, partially offset by $3.1 million of expense related to certain provisions of the TCJA and a $1.0 million valuation allowance related to certain foreign net operating loss carryforwards.

Income tax expense increased by $12.9 million, or 269%, to $17.8 million in 2020 as compared to 2019.

The increase in 2020 income tax expense was primarily driven by the increase in pre-tax income from $24.9 million in 2019 to $89.5 million in 2020.

Our effective tax rates for the years ended December 31, 2020 and 2019 were approximately 19.8% and 19.3%, respectively.

The 2019 effective tax rate includes discrete items, the most significant of which relate to a discrete tax benefit for the release of reserves for uncertain tax positions due to a lapse in the statute of limitations, the effects of the foreign-derived intangible income deduction and the U.S.

Research and Development tax credit claimed on the Company’s 2018 tax return,

which was completed in 2019.

The net effect of these discrete items decrease d the effective tax rate for 2019 by 5.2% .

The 2020 effective tax rate includes certain discrete items and the net effect of these discrete items increased the effective tax rate for 2020 by 0.8%.

Excluding these discrete items, the effective tax rate would have been 19.0% for 2020.

The 2018 effective tax rate includes discrete items, the most significant of which relate to the gain on the Sale of Webdam, partially offset by discrete tax benefits relating to the impairment of a long-term investment asset, the release of reserves for uncertain tax positions due to a lapse in the statute of limitations and the effect of the U.S.

Research and Development tax credit claimed on our 2017 tax return, which was completed in 2018.

The net effect of these discrete items increase d our effective tax rate for 2018 by 6.2% .

Research and Development tax credit claimed on the Company’s 2018 tax return, which was completed in 2019.

The net effect of these discrete items decreased our effective tax rate for 2019 by 5.2%.

Excluding these discrete items, the 2019 effective tax rate would have been 24.5%.

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Year Ended December 31,

2019 2018 $ Change % Change

(in thousands)

Consolidated Statements of Operations Data:

Revenue $ 650,523 $ 623,250 $ 27,273 4 %

Operating expenses:

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Gain on Sale of Webdam — 38,613 (38,613) *

Other (expense) / income, net

Other income / (expense), net 4,761 (4,952) 9,713 *

Income before income taxes 24,916 66,113 (41,197) (62)

Provision for income taxes 4,808 11,426 (6,618) (58)

Net income $ 20,108 $ 54,687 $ (34,579) (63) %

_______________________________________________________________________________

(1) Effective January 1, 2018, we adopted ASU 2014-09 using the modified retrospective approach.

Historical revenue totals reflect those previously reported and have not been restated.

* Not meaningful.

See “Other (expense) / income, net” and “Gain on Sale of Webdam” below

Revenue increase d by $66.1 million , or 12% , to $623.3 million in 2018 as compared to 2017 .

Revenue increased by $27.3 million, or 4%, to $650.5 million in 2019 as compared to 2018.

Excluding the impact of foreign currency fluctuations, revenue increased 6% from 2018 to 2019.

In addition, the Company’s E-commerce revenues increased 10% and the Company’s Enterprise revenues increased 22% from 2017 to 2018 .

During 2018 , we continued to grow our customer base and continued with initiatives focused on broadening our product offerings and adding functionality to our creative platform, enhanced our workflow tools and increased sales and marketing efforts to attract more users and promote increased customer engagement across our platform.

The increase was partially offset by the absence of revenue from Webdam, which contributed $2.7 million for the period from January 1, 2018 through February 26, 2018.

The Company completed the Sale of Webdam in February 2018.

The Company’s E-commerce revenues increased by 7%, to $392.2 million in 2019 as compared to 2018.

On a constant currency basis, the Company’s E-commerce revenues increased by approximately 9% in 2019 as compared to 2018.

The Company’s Enterprise revenues increased by 1%, to $258.3 million in 2019 as compared to 2018.

On a constant currency basis, the Company’s Enterprise revenues increased by approximately 3% in 2019 as compared to 2018.

The Company faced headwinds in its Enterprise sales channel which resulted in the implementation of changes, including sales force optimization and compensation plan revisions.

During 2019, we continued to grow our customer base and continued with initiatives focused on broadening our product offerings and adding functionality to our creative platform, enhancing our workflow tools and increasing sales and marketing efforts to attract more users and promote increased customer engagement across our platform.

As a result of these initiatives, there was a 5% increase in the number of paid downloads compared to 2018.

Changes in our product mix have driven a 9% increase in revenue per download as compared to the prior year.

Changes in our product mix drove a 1% increase in revenue per download as compared to the prior year.

In 2019 and 2018, we delivered 188 million and 180 million paid downloads, respectively, and our revenue per download increased to $3.43 from $3.40, respectively.

The increased revenue from our content business was partially offset by the absence of revenue from Webdam, as a result of the Sale of Webdam in February 2018.

Webdam revenues were $2.7 million for the period from January 1, 2018 through February 26, 2018 compared to 16.0 million for the year ended December 31, 2017.

Our revenue growth by region is as follows:

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Cost of Revenue.

Cost of revenue increase d by $34.6 million , or 15% , to $267.7 million in 2018 as compared to 2017 .

Royalties expense, which varies in large part by the number of downloads and the revenue earned on each download increase d $16.3 million , or 11% , as compared to 2017 , which is in line with the increase in revenues during 2018 partially offset by changes in product mix amongst license types that incur differing royalty costs relative to the revenue earned for those license products.

We anticipate royalties will continue growing in absolute dollars as long as revenue grows, although royalties as a percentage of revenue may vary somewhat from period to period as a result of further shifts in customer usage and product mix.

Costs associated with website hosting, hardware and software licenses and depreciation and amortization expense increased by $13.0 million , to $54.2 million in 2018 as compared to 2017 , driven primarily by the depreciation and amortization of infrastructure and software assets acquired, developed and purchased in recent years and other hosting costs.

Employee-related costs also increased by $3.1 million , or 23% , driven by increased headcount to support increased customer volume and a more robust website infrastructure.

Cost of revenue increased by $10.5 million, or 4%, to $278.2 million in 2019 as compared to 2018.

Royalty expense, which is primarily incurred as content is downloaded, increased $3.8 million, or 2%, as compared to 2018.

Depreciation and amortization expense increased by $4.7 million as compared to 2018, to $40.5 million in 2019, driven primarily by the depreciation of our capitalized internal-use software.

We expect that our cost of revenue will increase in absolute dollars in the foreseeable future to the extent our revenue grows.

We expect that our cost of revenue will fluctuate in line with changes in revenue and paid downloads.

Sales and Marketing.

Sales and marketing expenses increase d by $20.0 million , or 14% , to $166.4 million in 2018 as compared to 2017 .

Expenses related to brand and performance advertising, the largest component of our sales and marketing expenses, increase d by $14.9 million , or 19% , in 2018 compared to 2017 , as a result of increased spending on affiliate, search advertising and other new channels.

Employee-related costs, increase d by $3.8 million , or 7% , as compared to 2017 , driven by an increase in sales and marketing headcount to support our expansion into new products and markets, as well as increased sales commissions as a result of growth in the amount of revenue generated by our global direct sales team.

We anticipate that our total sales and marketing spend will continue to increase in absolute dollars for the foreseeable future, as we continue to pursue growth through new customers, products, markets and geographies.

Sales and marketing expenses increased by $15.3 million, or 9%, to $181.7 million in 2019 as compared to 2018.

Expenses related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $10.8 million, or 12%, in 2019 compared to 2018, as a result of increased spending on affiliate, search advertising and other new channels.

Employee-related expenses increased by $2.3 million, as compared to the same period in the prior year, driven by an increase in sales and marketing headcount to support new initiatives.

As a percent of revenue, for 2019, sales and marketing expenses increased slightly from the same period in 2018, primarily driven by the increase in customer acquisition costs.

As we continue to invest in new customer acquisition, products and geographies, we expect sales and marketing expenses to increase in absolute dollars in the foreseeable future.

Product Development.

Product development expenses increase d by $6.4 million , or 12% , to $58.9 million in 2018 as compared to 2017 .

Employee related expenses, including stock based compensation, and consulting-related expenses, net of capitalized costs for the development of internal-use software, increased by $1.7 million, or 4%, as compared to 2017, driven by an increase in human capital requirements in product, engineering and quality assurance to support our increasing number of product development initiatives for our web properties, including ongoing efforts to improve our search capabilities and enhancing the features and functionality of the e-commerce platform.

The remaining increase in product development costs was attributable to increases in costs related to software, hardware, facilities, consulting and other resources that are not capitalized.

We anticipate this level of product development expenses to continue for the foreseeable future, of which a portion will continue to be capitalized, as we continue to invest in developing new products and internal tools and enhancing the functionality of our existing products and technology.

Product development expenses decreased by $1.7 million, or 3%, to $57.2 million in 2019 as compared to 2018.

This decrease was driven by an approximately $5.5 million reduction in employee related costs, net of capitalized labor.

The decline was partially offset by an increase of $4.0 million in software and other technology used to support our product development initiatives in 2019, as compared to 2018.

General and Administrative.

General and administrative expenses decreased by $0.9 million , or 1% , to $97.8 million in 2018 as compared to 2017 .

The decrease in general and administrative expense was driven by a $2.0 million benefit relating to a change in estimate in the Company’s indirect tax accruals, a $0.3 million decrease in consulting services and professional fees, and other various reductions resulting from the execution of expense management initiatives.

These decreases were partially offset by a $1.9 million increase in the long-term performance-based bonus arrangements entered into concurrently with the acquisition of Flashstock, expected to be paid in 2020, and a $1.8 million increase in stock-based compensation expense.

General and administrative expenses increased by $15.5 million, or 16%, to $113.2 million in 2019 as compared to 2018.

This increase was driven by (i) higher employee-related costs of $9.9 million in 2019 as compared to 2018, primarily driven by increased headcount associated with ensuring the stability and security of the Company’s technology infrastructure;

(ii) severance charges of approximately $2.2 million incurred in 2019;

(iii) higher software and other IT-related costs of $5.0 million in 2019, as compared to 2018, related primarily to enhancements to our corporate and technology infrastructure;

and (iv) higher professional and consulting fees of $1.4 million, as compared to 2018.

These increases were partially offset by a $1.1 million reduction in bad debt expense in 2019 as compared to 2018.

In addition, depreciation and amortization expense in 2019 decreased $0.4 million, including the impact of $1.5 million of accelerated amortization expense recorded in connection with the Company’s re-branding of its Editorial product.

We expect to continue to incur general and administrative expenses to support our global operational growth and enhancements to support our reporting and planning functions.

Gain on Sale of Webdam.

On February 26, 2018, we completed the Sale of Webdam, for an aggregate purchase price of $49.1 million .

Total cash received during 2018, net of $4.6 million in transaction costs paid, was $41.8 million with an additional $2.5 million receivable remaining in escrow at the balance sheet date.

The funds in escrow are included as a component of other current assets on the Consolidated Balance Sheet as of December 31, 2018 and are expected to be released to us in the first quarter of 2019.

Management recognized a pre-tax gain on the sale of approximately $38.6 million , which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

Other (expense) / income, net.

On February 26, 2018, the Company completed the Sale of Webdam, for an aggregate purchase price of $49.1 million.

Total cash received, net of $4.6 million in transaction costs paid, was $44.3 million, inclusive of $2.5 million received during 2019 from the release of escrowed funds.

During 2018, management recognized a pre-tax gain on the sale of approximately $38.6 million, which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

Other income / (expense), net.

During 2019, approximately $4.2 million of other income consisted of interest income, in addition to $0.5 million of favorable foreign currency fluctuations.

During 2018, we recorded a charge of $5.9 million as a result of the impairment of a long-term investment asset.

Additionally, during 2018 , we recorded approximately $1.8 million of expense related to unfavorable foreign currency fluctuations, offset by approximately $2.7 million of interest income.

During 2017 , we recorded income of approximately $2.8 million related to favorable foreign currency fluctuations and approximately $0.9 million of interest income.

Additionally, during 2018, we recorded an expense of approximately $1.8 million related to unfavorable foreign currency fluctuations, offset by approximately $2.7 million of interest income.

Income Taxes.

Income tax expense decrease d by $1.9 million to $11.4 million in 2018 as compared to 2017 .

Income tax expense decreased by $6.6 million to $4.8 million in 2019 as compared to 2018.

Our effective tax rates for the years ended December 31, 2019 and 2018 were approximately 19.3% and 17.3%, respectively.

The decline in the effective tax rate, excluding the discrete items, is primarily attributable to the TCJA, which lowered the U.S.

statutory federal tax rate from 35% to 21% effective January 1, 2018.

Research and Development tax credit claimed on the Company’s 2018 tax return,which was completed in 2019.

The net effect of these discrete items decreased the effective tax rate for 2019 by 5.2%.

Excluding these discrete items, the effective tax rate would have been 24.5% for 2019.

Research and Development tax credit claimed on our 2017 tax return.

The net effect of these discrete items increased the effective tax rate for 2018 by 6.2% .

Excluding these discrete items, the effective tax rate would have been 11.1% for year ended December 31, 2018 .

In 2017 , the U.S.

enacted the TCJA, which significantly changed U.S.

tax law by, among other things, lowering the U.S.

statutory federal income tax rate from 35% to 21% effective January 1, 2018 and imposing a one-time transition tax on accumulated undistributed earnings of foreign subsidiaries.

We calculated and recorded an estimate of the impact of the TCJA in the 2017 year-end income tax provision, which includes (i) an expense of $3.7 million related to the impact of remeasuring our deferred tax balances to reflect the new tax rate and (ii) an expense of $0.8 million for the one-time transition tax.

During 2018, we completed our analysis of certain income tax effects of the TCJA and did not make any significant adjustments to estimates previously recorded.

We continue to assess the impact of the TCJA on future fiscal years and continue to monitor the Internal Revenue Service guidance and proposed regulations that are intended to interpret the provisions of the TCJA.

The 2017 effective tax rate includes other discrete items partially offsetting the impact of the TCJA, the most significant of which is the tax effect of the domestic production activities deduction reflected in our 2016 and amended 2014 and 2015 federal income tax returns which increased our effective tax rate by 10.1% .

Excluding the effects of the TCJA and these other discrete tax items, our effective tax rate would have been 34.3% for the year ended December 31, 2017 .

Research and Development tax credit claimed on our 2017 tax return, which was completed in 2018.

The net effect of these discrete items increased our effective tax rate for 2018 by 6.2%.

Excluding these discrete items, the 2018 effective tax rate would have been 11.1%.

As we continue to expand our operations outside of the United States, we have been and may continue to become subject to taxation in additional non-U.S.

jurisdictions and our effective tax rate could fluctuate accordingly.

Liquidity and Capital Resources

As of December 31, 2019 , we had cash and cash equivalents totaling $303.3 million , which primarily consisted of bank balances.

As of December 31, 2020, we had cash and cash equivalents totaling $428.6 million, which primarily consisted of bank balances and money market funds.

Since inception, we have financed our operations primarily through cash flows generated from operations.

Historically, our principal uses of cash have been funding our operations, capital expenditures, content acquisition, business combinations that enhance our strategic position, a non-recurring special dividend and share purchases under our share repurchase program.

Historically, our principal uses of cash have included funding our operations, capital expenditures, content acquisition, business combinations that enhance our strategic position, cash dividend payments and share purchases under our share repurchase program.

We plan to finance our operations and capital expenses largely through cash generated by our operations.

Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources.

Investment in ZCool Technologies Limited (“ZCool”)

On January 4, 2018, we invested $15 million in convertible preferred shares issued by ZCool, which is equivalent to a 25% fully diluted equity ownership interest, to further expand our presence in fast-growing markets.

Stock Offering

On August 14, 2020, we completed an offering (the “Stock Offering”), whereby 2,580,000 shares of our common stock were sold to the public at a price to the public of $48.50 per share.

We sold 516,000 shares of common stock in the Stock Offering and our Founder and Executive Chairman of the Board sold 2,064,000 shares of common stock in the Stock Offering.

We received net proceeds from the shares sold, of approximately $23.2 million, after deducting underwriting discounts and commissions and offering expenses payable.

We did not receive any proceeds from the shares sold by the Company’s Founder and Executive Chairman of the Board.

We declared and paid cash dividends of $0.68 per share of common stock, or $24.4 million during the year ended December 31, 2020.

On January 12, 2021, our Board of Directors declared a quarterly cash dividend of $0.21 per share of outstanding common stock payable on March 18, 2021 to stockholders of record at the close of business on March 4, 2021.

The Company currently expects to continue to pay comparable cash dividends on a quarterly basis in the future.

Future declarations of dividends are subject to the final determination of our Board of Directors, and will depend on, among other things, our future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors our Board of Directors may deem relevant.

On August 1, 2018, the Board of Directors declared a Special Dividend of $3.00 per share.

The Special Dividend was paid on August 29, 2018 to stockholders of record at the close of business on August 15, 2018.

The aggregate payment made in connection with this dividend was approximately $104.9 million.

Long-Term Investments

In 2020, we invested $5.0 million in preferred shares of an entity with a creative production and analytics platform.

These preferred shares do not have a readily determinable fair value, and provide us less than a 2% fully diluted ownership interest.

In 2018, we invested $15 million in convertible preferred shares issued by ZCool Technologies Limited (“ZCool”), which is equivalent to a 25% fully diluted equity ownership interest, to further expand our presence in fast-growing markets.

ZCool’s primary business is the operation of an e-commerce platform in China whereby customers can pay to license content contributed by creative professionals.

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During 2018,we recognized a pre-tax gain on sale of approximately $38.6 million, which represents the excess of the net purchase price over the net assets transferred, less transaction costs.

On August 1, 2018, the Board of Directors declared a Special Dividend of $3.00 per share.

The Special Dividend was paid on August 29, 2018 to stockholders of record at the close of business on August 15, 2018.

The aggregate payment made in connection with this dividend was approximately $104.9 million .

On February 11, 2020 , our Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on March 19, 2020 to stockholders of record at the close of business on March 5, 2020 .

We currently expect to continue to pay comparable cash dividends on a quarterly basis in the future.

Future declaration of dividends are subject to the final determination of our Board of Directors, and will be based on our future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors our Board of Directors may deem relevant.

Share Repurchase Program

In October 2015, our board of directors approved a share repurchase program, authorizing us to repurchase up to $100 million of our common stock and in February 2017, our Board approved an increase to the share repurchase program, authorizing us to repurchase up to an additional $100 million of our outstanding common stock.

We expect to fund future repurchases through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate.

In October 2015, our board of directors approved a share repurchase program, authorizing us to repurchase up to $100 million of our common stock and in February 2017, our Board of Directors approved an increase to the share repurchase program, authorizing us to repurchase up to an additional $100 million of our outstanding common stock.

We expect to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate.

Accordingly, our share repurchase program is subject to us having available cash to fund repurchases.

Under this program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.

Under the share repurchase program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.

As of December 31, 2020, we have repurchased approximately 2,558,000 shares of our common stock under the share repurchase program at an average per-share cost of $39.09.

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In addition, as compared to the sell-to-cover approach, net share settlement has resulted in fewer shares being issued into the market as employees’ RSUs vest, thereby reducing the dilutive impact of our share-based compensation programs on stockholders.

During the year ended December 31, 2019 , s hares with an aggregate value of $7.1 million were withheld upon vesting of RSUs and paid in connection with related remittance to taxing authorities.

During the year ended December 31, 2020, shares with an aggregate value of $4.5 million were withheld upon vesting of RSUs and paid in connection with related remittance to taxing authorities.

In addition, $1.2 million of proceeds were received during 2020 from the issuance of common stock in connection with the exercise of stock options.

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We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Consistent with previous periods, we expect that future capital expenditures will primarily relate to building enhancements to the functionality of our current platform, the acquisition of additional storage, servers, network connectivity hardware, security apparatus and software, leasehold improvements and furniture and fixtures related to office expansion and relocation, content and general corporate infrastructure.

Future capital expenditures will generally relate to building enhancements to the functionality of our current platform, the acquisition of additional storage, servers, network connectivity hardware, security apparatus and software, leasehold improvements and furniture and fixtures related to office expansion and relocation, content and general corporate infrastructure.

See Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information regarding our existing capital commitments as of December 31, 2020.

Historical Trends

The following table summarizes our cash flow data for 2020, 2019 and 2018, respectively.

Year Ended December 31,

2020 2019 2018

(in thousands)

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Net cash used in financing activities $ (4,587) $ (1,696) $ (109,739)

_______________________________________________________________________________

Except for the Special Dividend in 2018, no distributions or dividends have been paid during the periods presented.

2017 includes repurchases of common stock under the share repurchase program.

Operating Activities

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Our primary uses of cash for operating activities are for the payment of royalties to content contributors, employee-related expenditures and the payment of other operating expenses incurred in the ordinary course of business.

Net cash provided by operating activities was $165.1 million for the year ended December 31, 2020, compared to $102.6 million for the year ended December 31, 2019.

In the year ended December 31, 2020, operating cash flows were favorably impacted from our increased operating income, partially offset by $7.8 million in one-time payments associated with

long-term incentives related to our 2017 acquisition of Flashstock, and changes in the timing of payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period.

Net cash provided by operating activities was $102.6 million in 2019, which remained flat compared to $102.2 million in 2018.

In 2018 , net cash provided by operating activities was $102.2 million , compared to $108.0 million in 2017 , for a decrease of $5.8 million , or 5% .

This decrease was primarily driven by changes in working capital, including collections of accounts receivable and payments of accounts payable and accrued liabilities.

The decline in operating cash flows was also impacted by fluctuations in deferred revenues, which increased by $28.7 million in 2017 and $3.7 million in 2018 excluding the effects of the adoption of ASU 2014-09 and the Sale of Webdam.

Cash paid for income taxes was $1.9 million , $0.6 million and $5.0 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Investing Activities

Our investing activities have consisted primarily of capital expenditures for internal-use software and website development costs and purchases of software and equipment related to our data centers.

Our investing activities have consisted primarily of capital expenditures for internal-use software and website development costs and purchases of software and equipment.

Our investing activities have also included content acquisitions, as well as investments, acquisitions and disposals.

Capital expenditures include internal-use software and website development costs and purchases of software equipment as well as capitalization of leasehold improvements.

Capital expenditures are primarily attributable to investments in internally developed software.

We continue to invest significantly in product development and hosting infrastructure to enhance our customer experience and increase the efficiency with which we deploy new products and features.

Cash used in investing activities totaled $35.3 million, $27.2 million and $12.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Cash used in investing activities for the year ended December 31, 2020 was $35.3 million, consisting primarily of capital expenditures of $25.6 million for internal-use software and website development costs and purchases of software and equipment, an investment of $5.0 million in a creative production and analytics platform, $3.0 million paid to acquire the rights to distribute certain digital content and $1.9 million associated with the acquisition of AI driven music technology.

Cash used in investing activities during 2019, mostly consisted of capital expenditures and content acquisitions of $26.1 million and $3.3 million, respectively, partially offset by $2.5 million net cash received from escrowed funds related to the Sale of Webdam.

Cash used in investing activities during 2018 mostly consisted of $34.9 million of capital expenditures and our $15.0 million investment in ZCool, partially offset by $41.8 million net cash received from the Sale of Webdam.

Cash used in investing activities during 2017 mostly consisted of $55.1 million related to capital expenditures and $49.6 million , net of cash acquired, related to the acquisition of Flashstock, which was partially offset by $55.3 million of cash provided from the net impact of liquidation and purchase of short-term investments.

Capital expenditures and content acquisition were $26.1 million and $3.3 million in 2019 , $34.9 million and $3.8 million in 2018 and $55.1 million and $3.0 million in 2017 , respectively.

Capital expenditures include internal-use software and website development costs and purchases of software equipment related to our data centers as well as capitalization of leasehold improvements.

The increases in capital expenditures in 2017 are primarily attributable to investments in internally developed software.

We have invested significantly in product development and hosting infrastructure to enhance our customer experience and increase the efficiency with which we deploy new products and features.

Financing Activities

Our financing activities have consisted primarily of proceeds from stock-based compensation plans and cash paid in settlement of tax withholding obligations related to employee stock-based compensation awards, in addition to cash paid related to the Special Dividend paid in 2018 and the repurchase of common stock under our share repurchase program in 2017.

Our financing activities have consisted primarily of payments associated with cash dividends and cash paid in settlement of tax withholding obligations related to employee stock-based compensation awards in addition to proceeds from our Stock Offering and proceeds received in connection with the exercise of stock options.

Cash used in financing activities totaled $4.6 million, $1.7 million and $109.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Cash used in financing activities during 2019 primarily consisted of $7.1 million , paid in settlement of tax withholding obligations related to employee stock-based compensation awards, partially offset by approximately $5.4 million of proceeds from the issuance of common stock in connection with the exercise of stock options.

Cash used in financing activities during 2018 primarily consisted of $104.9 million related to the payment of the Special Dividend and $7.3 million , paid in settlement of tax withholding obligations related to employee stock-based compensation awards, partially offset by proceeds of approximately $2.5 million from the issuance of common stock in connection with the exercise of stock options.

Cash used in financing activities during 2017 mostly consisted of cash used to repurchase common stock under our share repurchase program of $25.0 million .

In 2017 , we also used a net $5.2 million related to stock-based compensation programs, primarily related to the settlement of employee taxes.

Cash used in financing activities during 2020 primarily consisted of $24.4 million related to the payment of the quarterly cash dividends and $4.5 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards.

These amounts were partially offset by $23.2 million of proceeds from our Stock Offering, after deducting underwriting discounts, commissions and offering expenses paid and approximately $1.2 million in proceeds received in connection with the exercise of stock options.

Cash used in financing activities during 2019 primarily consisted of $7.1 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards, partially offset by approximately $5.4 million of proceeds received in connection with the exercise of stock options.

Cash used in financing activities during 2018 primarily consisted of $104.9 million related to the payment of the Special Dividend and $7.3 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards, partially offset by proceeds of approximately $2.5 million in proceeds received in connection with the exercise of stock options.

Contractual Obligations and Commitments

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We do not have any material capital lease obligations, and our property, equipment and software have been purchased primarily with cash.

We anticipate expanding our office and co-location facilities as our revenue and customer base continue to grow and diversify.

We do not anticipate any difficulties in renewing those leases and co-location agreements that expire within the next several years and that we currently plan to renew, or in leasing other space or hosting facilities, if required.

We do not anticipate any difficulties in renewing those leases that expire within the next several years or in leasing other space or hosting facilities, if required.

We enter into unconditional purchase obligations related to contracts for cloud-based services, infrastructure and other business services as well as minimum royalty guarantees in connection with certain content licenses.

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Payments Due by Period

Total Less Than

1 Year 1 - 3 Years 3 - 5 Years More Than

(in thousands)

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Purchase obligations 38,637 26,524 12,113 — —

Total $ 102,954 $ 35,858 $ 26,838 $ 14,607 $ 25,651

On March 21, 2013, we entered into an operating lease agreement to lease our headquarters in New York City, which was amended in January 2016, which we refer to as the ESB Lease.

The ESB Lease will expire in 2029, and the aggregate undiscounted future minimum lease payments, are approximately $56.3 million.

We are also party to a $2.6 million letter of credit, as a security deposit for the ESB Lease.

As of December 31, 2019 , the letter of credit is collateralized by an equivalent amount of cash, and as such is reported as restricted cash as a component of other assets on the Consolidated Balance Sheet as of December 31, 2019 .

In connection with our 2017 acquisition of Flashstock, we have performance-based bonus arrangements with certain Flashstock employees who are now employees of Shutterstock.

These employees are entitled to additional compensation if:

(i) the custom content business achieved certain financial targets for the 2019 calendar year and (ii) the individual was employed by Shutterstock as of December 31, 2019.

Approximately $7.8 million of incentives are expected to be paid in 2020 and are included as purchase obligations.

We are also party to a letter of credit as a security deposit for this leased facility, which was reduced from $2.6 million to $1.7 million in February 2020.

As of March 31, 2020, the Company is no longer required to provide cash collateral for its letter of credit, and, accordingly, these funds are no longer restricted.

We also enter into license agreements under which we agree to provide indemnification of varying scope and terms to customers with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements for damages directly attributable to a breach by us.

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Our license agreements entered into with customers limit our indemnification obligations at amounts ranging from $10,000 to $250,000, with certain exceptions for which our indemnification obligations are uncapped.

We have experienced nominal

losses to date as a result of the indemnification we offer and, as such, our reserves for indemnification-related losses are also nominal.

We have experienced nominal losses to date as a result of the indemnification we offer and, as such, our reserves for indemnification-related losses are also nominal.

We believe that we have the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary.

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The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the volume of expected unused licenses for our subscription-based products, goodwill, intangibles, equity-based compensation and income tax provisions.

We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the volume of expected unused licenses used in revenue recognition for our subscription-based products and income tax provisions.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates.

We believe that the assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts, equity-based compensation, accounting for income taxes and goodwill and intangible assets have the greatest potential impact on our financial statements.

We believe that the assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts and accounting for income taxes have the greatest potential impact on our financial statements.

Therefore, we consider these to be our critical accounting policies and estimates.

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The majority of our revenues are earned from the license of content.

Content licenses are generally purchased on a monthly or annual subscription basis, whereby a customer pays for a predetermined quantity of content that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the time of download.

Content licenses are generally purchased on a monthly or annual basis, whereby a customer pays for a predetermined quantity of content that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the time of download.

Prior to the Sale of Webdam, we also earned revenue from licensing hosted software services through Webdam’s cloud-based tools for businesses, which were purchased as part of a subscription.

there was persuasive evidence of an arrangement, performance or delivery of services had occurred, the sales price was fixed or determinable, and collectability was reasonably assured.

We considered persuasive evidence of an arrangement to be an electronic order form, or a signed contract, which contained the fixed pricing terms.

Performance or delivery for content licenses was considered to have occurred upon the download of the licensed content.

Subscription revenue was recognized upon each download using an effective per-license rate and revenue associated with any unused licenses was recognized at the subscription expiration.

Revenue attributable to the hosted software services was recognized ratably during the license subscription.

Effective January 1, 2018, subsequent to the adoption of ASU 2014-09, we recognize revenues upon the satisfaction of performance obligations, which occurs when (i) content is downloaded by a customer or (ii) hosted software services are provisioned and available to a customer.

For content licenses, we recognize revenues on both a subscription-based and transaction-based sales when content is downloaded, at which time the license is provided.

In addition, we estimate expected unused licenses for subscription-based products and recognize the revenue associated with unused licenses throughout the subscription period.

We recognize revenues upon the satisfaction of performance obligations, which generally occurs when (i) content is downloaded by a customer or (ii) hosted software services are provisioned and available to a customer.

For content licenses, we recognize revenues on both a subscription-based and transaction-based products when content is downloaded, at which time the license is provided.

In addition, we estimate expected unused licenses for subscription-based products and recognize the estimated revenue associated with unused licenses as digital content is downloaded and licenses are obtained for such content by the customer during the subscription period.

The estimate of unused licenses is based on historical download activity and future changes in the estimate could impact the timing of revenue recognition of our subscription products.

Revenue associated with hosted software services is recognized ratably over the term of the license.

ASU 2014-09 has resulted in a change in the timing of recognizing revenue on our content license subscription products.

ASU 2014-09 did not impact revenue recognition on content licenses sold on a transactional basis or license revenue associated with hosted software services.

Prior to our adoption of ASU 2014-09, we deferred certain acquisition costs that were then amortized over a period of less than one year.

Effective January 1, 2018, we expense contract acquisition costs as incurred, to the extent that the amortization period would otherwise be one year or less.

We expense contract acquisition costs as incurred, to the extent that the amortization period would otherwise be one year or less.

Collectability is reasonably assured at the time the electronic order or contract is entered.

The majority of our customers purchase products by making electronic payments at the time of the transaction with a credit card.

The majority of our customers purchase products by making electronic payments with a credit card at the time of the transaction.

Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue.

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Accordingly, we recognize revenue net of costs paid to resellers.

We adopted ASU 2014-09 on January 1, 2018 using the modified retrospective approach, and prior period amounts were not restated.

The effect of adoption of this new guidance on the Consolidated Balance Sheet as of January 1, 2018 was to reduce (i) prepaid expenses and other current assets by $3.7 million and (ii) deferred revenues by $9.9 million, with an offsetting $6.2 million increase in 2018 opening retained earnings.

Accounts Receivable and Allowance for Doubtful Accounts

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Our reserve analysis contemplates our historical loss rate on receivables, specific customer situations and the economic environments in which we operate.

Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts.

Upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, the Company shifted to a current expected credit loss model.

As of December 31, 2020 and 2019, we had an allowance for doubtful accounts of $4.9 million and $3.6 million, respectively.

The decrease in the allowance for doubtful accounts is a result of write-offs of older receivables determined not to be collectible and improvement of our aging profile resulting from better collections.

Equity-Based Compensation

We measure and recognize non-cash equity-based compensation expense for all stock-based awards granted to employees based on estimated fair values.

The value portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period.

Forfeitures are accounted for as they occur.

For awards with a change of control condition, an evaluation is made at the grant date and future periods as to the likelihood of the condition being met.

Compensation expense is adjusted in future periods for subsequent changes in the expected outcome of the change of control conditions until the vesting date.

Compensation expense related to awards with a market condition is recognized ratably over the requisite service period regardless of the achievement of the market condition.

Compensation expense related to awards with a performance condition is recognized ratably over the requisite service period based on the expected levels of achievement.

To the extent that the expected levels of achievement change, stock-based compensation expense is adjusted and recorded in the Consolidated Statements of Operations and the remaining unrecognized stock-based compensation is recognized over the remaining requisite service period.

We use the closing price of our common stock on the date of grant to determine the fair value of restricted stock units (“RSUs”), including performance-based restricted stock units (“PRSUs”).

We use the Black-Scholes option pricing model, to determine the fair value of stock options on the date of grant.

The Monte Carlo simulation model is used if the award has a market condition.

All awards are granted pursuant to the 2012 Omnibus Equity Incentive Plan (the “2012 Plan”), which are discussed further in Note 10 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

The determination of the grant date fair value using an option-pricing model and simulation model requires judgment as well as assumptions regarding a number of other complex and subjective variables.

These variables include our closing market price at the grant date, the expected stock price volatility over the expected term of the awards, awards’ exercise and cancellation behaviors, risk-free interest rates, and expected dividends, which are estimated as follows:

Fair Value of Common Stock.

The grant date fair value for stock-based awards is based on the closing price of our common stock on the NYSE on the date of grant and fair value for all other purposes related to stock-based awards is the closing price of our common stock on the NYSE on the relevant date.

Expected Term.

The expected term is estimated using the simplified method allowed under Securities and Exchange Commission (“SEC”) guidance.

In certain cases for market based awards, the Company’s expected term is based on a combination of historical data and estimates of the period of time the award will be outstanding.

The volatility is estimated based on historical price volatility of our common stock.

Risk-free Interest Rate.

The risk-free interest rate is based on the yields of U.S.

Treasury securities with maturities similar to the expected term of each award group.

Dividend Yield.

The Company determines the dividend yield based on management’s expectations of future dividends.

The Company used an expected dividend yield of zero for options granted through 2019.

If any of the assumptions used in the Black-Scholes pricing model or Monte Carlo simulation model changes significantly, the fair value for future awards may differ materially compared with the awards granted previously.

The awards granted pursuant to the 2012 Plan are subject to a time-based vesting requirement and certain award grants may also include market based or performance based vesting conditions.

Stock option awards granted under the 2012 Plan vest over three or four years while the majority of the restricted stock units granted under the 2012 Plan vest over three years.

Fluctuations in our allowance for doubtful accounts are primarily attributable to changes in the aging profile of our gross accounts receivable balances and specific customer situations arising during the year.

Our income tax expense includes U.S.

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Any reserve for uncertain tax provisions and related penalties and interest is included in the income tax provision.

We assessed the realizability of deferred tax assets and determined, based on the available evidence including a history of taxable income, estimates of future taxable income and planning strategies, that it is more likely than not that the deferred tax assets will be realized.

We will continue to evaluate our ability to realize deferred tax assets on a quarterly basis.

On a quarterly basis, we assess the realizability of deferred tax assets, based on the available evidence including a history of taxable income, estimates of future taxable income and planning strategies and a valuation allowance is recorded to the extent that it is not more likely than not that the deferred tax assets will be realized.

Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities.

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tax amount as a result of such “deemed” repatriation.

Our tax expense for the year ended December 31, 2017 included provisional amounts for such taxes.

We did not record any provision for potential deferred U.S.

We do not record provisions for potential deferred U.S.

income taxes or foreign withholding taxes that otherwise may be payable if we were to repatriate such earnings, since we do not intend to repatriate such amounts.

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In the first quarter of 2018, we elected to treat any potential GILTI inclusions as a period cost.

During 2017, we recorded provisional estimates for the accounting impacts of the TCJA, including the transition tax, deferred tax re-measurements, and other items, due to the uncertainty regarding how these provisions were to be implemented and additional anticipated forthcoming guidance.

We completed our analysis of the TCJA during 2018, and have not made any significant adjustments to estimates previously recorded.

We continue to assess the impacts of the TCJA on future fiscal years and monitor the Internal Revenue Service guidance intended to interpret the provisions of the TCJA.

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Changes to these factors could affect the measurement and allocation of fair value.

Goodwill and Intangible Assets

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually on October 1 of each fiscal year or more frequently if events occur or circumstances exist that indicate that the fair value of a reporting unit may be below its carrying value.

In 2018, our goodwill balance was allocated to four reporting units:

Bigstock, Editorial, Images and Music.

During the second quarter of 2019, due to changes in our reporting structure and the achievement of key milestones in the continued integration of our operations and technology platform, we changed the way we monitor the business and concluded that we operated with a single reporting unit.

As a result of the change in reporting units, in the second quarter of 2019, we evaluated our goodwill for impairment immediately prior and subsequent to the change in reporting units.

The evaluation utilized a qualitative assessment of our Bigstock, Images and Music reporting units to determine whether a quantitative assessment was necessary and determined there were no indicators of potential impairment.

For our Editorial reporting unit, which represented approximately $12.9 million of the goodwill balance at the assessment date, we performed a quantitative goodwill impairment assessment which included a discounted cash flow analysis and incorporated various estimates and assumptions.

The most significant of these assumptions were projected revenue growth rates, future royalty rates, a discount rate of 14.5% and a terminal growth rate of 3%.

These estimates were based on our historical experience and projections of future activity, factoring in customer demand and a cost structure necessary to achieve related revenue.

We concluded that, at the time of the change in reporting units, no adjustment to the carrying value of the goodwill balance was necessary, and the aggregate goodwill for the legacy reporting units was assigned to the single content business reporting unit.

We also performed our annual goodwill assessment as of October 1, 2019 and concluded that the fair value of our reporting unit was greater than its carrying amount, and therefore, no adjustment to the carrying value of goodwill was necessary.

We utilized a qualitative assessment to determine whether a quantitative assessment was necessary and determined there were no indicators of potential impairment.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis