Shutterstock, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this filing. In addition to historical consolidated financial information, this discussion contains forward-looking statements including statements about our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those expressed or implied in forward-looking statements. See “Forward Looking Statements” above. 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 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 includes: • Images - consisting of photographs, vectors and illustrations. Images are typically used in visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and other similar uses. • Footage - consisting of video clips, premium footage filmed by industry experts and cinema grade video effects, available in HD and 4K formats. Footage is often integrated into websites, social media, marketing campaigns and cinematic productions. • Music - consisting of high-quality music tracks and sound effects, which are often used to complement images and footage. • 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. As of December 31, 2020, more than 1.6 million approved contributors made their images, footage and music tracks available in our collection, which has grown to more than 360 million images and more than 21 million footage clips as of December 31, 2020. 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. 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. 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. 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. 46 Table of Contents 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. 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, 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. 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. 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. 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. We continue to have operating income and positive operating cash flows. 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 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. See Item 1A. Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business. 47 Table of Contents Key Operating Metrics In addition to key financial metrics, we regularly review a number of key operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe that these metrics can be useful for understanding the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the years ended December 31, 2020, 2019 and 2018: Year Ended December 31, 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 Subscribers We define subscribers as those customers who purchase one or more of our monthly recurring products for a continuous period of at least three months, measured as of the end of the reporting period. We believe the number of subscribers is an important metric that provides insight into our monthly recurring business 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 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 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. 48 Table of Contents Content in our Collection 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. We believe that our large selection of high-quality content enables us to attract and retain customers and drives our network effect. Basis of Presentation Revenue The majority of our revenue is earned from licensing content. Content licenses are generally purchased by our customers 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. 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. 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. Revenue associated with hosted software services is recognized ratably over the term of the license. 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 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. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and control the product or service before transferring it to the customer. We also license content to customers through third-party resellers. Third-party resellers sell our products directly to customers as the principal in those transactions. Accordingly, we recognize revenue net of costs paid to resellers. Costs and Expenses Cost of Revenue. Cost of revenue consists of royalties paid to contributors, credit card processing fees, content review costs, customer service expenses, infrastructure and hosting costs related to maintaining our creative platform and cloud-based software platform, depreciation and amortization of capitalized internal-use software, content and technology intangible assets, allocated facility costs and other supporting overhead costs. Cost of revenue also includes employee compensation, including non-cash equity-based compensation, bonuses and benefits, associated with the maintenance of our creative platform and cloud-based software platform. Sales and Marketing. Sales and marketing expenses include third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing expenses also include associated employee compensation, including non-cash equity-based compensation, bonuses and benefits, and commissions as well as allocated facility and other supporting overhead costs. Product Development. Product development expenses consist of employee compensation, including non-cash equity-based compensation, bonuses and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Product development costs also includes software and other IT equipment costs, allocated facility expenses and other supporting overhead costs. General and Administrative. General and administrative expenses include employee compensation, including non-cash equity-based compensation, bonuses and benefits for executive, finance, accounting, legal, human resources, internal information technology, internet security, business intelligence and other administrative personnel. In addition, general and 49 Table of Contents administrative expenses include outside legal, tax and accounting services, bad debt expense, insurance, facilities costs, other supporting overhead costs and depreciation and amortization expense. Other Income / (Expense), Net. Other income / (expense), net consists of non-operating costs such as foreign currency transaction gains and losses, interest income and expense and an impairment related to a long-term investment asset. Income Taxes. We compute income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted statutory income tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. 50 Table of Contents Results of Operations The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods. Year Ended December 31, 2020 2019 2018 (in thousands) Consolidated Statements of Operations: Revenue $ 666,686 $ 650,523 $ 623,250 Operating expenses: Cost of revenue 259,573 278,176 267,671 Sales and marketing 159,241 181,730 166,448 Product development 46,038 57,216 58,897 General and administrative 116,568 113,246 97,782 Total operating expenses 581,420 630,368 590,798 Income from operations 85,266 20,155 32,452 Gain on Sale of Webdam — — 38,613 Other income / (expense), net 4,257 4,761 (4,952) Income before income taxes 89,523 24,916 66,113 Provision for income taxes 17,757 4,808 11,426 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: Cost of revenue 39 % 43 % 43 % Sales and marketing 24 % 28 % 27 % Product development 7 % 9 % 9 % General and administrative 17 % 17 % 16 % Total operating expenses 87 % 97 % 95 % Income from operations 13 % 3 % 5 % Gain on Sale of Webdam — % — % 6 % Other income / (expense), net 1 % 1 % (1) % Income before income taxes 13 % 4 % 11 % Provision for income taxes 3 % 1 % 2 % Net income 11 % 3 % 9 % 51 Table of Contents Comparison of the Years Ended December 31, 2020 and December 31, 2019 The following table presents our results of operations for the periods indicated: 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: Cost of revenue 259,573 278,176 (18,603) (7) Sales and marketing 159,241 181,730 (22,489) (12) Product development 46,038 57,216 (11,178) (20) General and administrative 116,568 113,246 3,322 3 Total operating expenses 581,420 630,368 (48,948) (8) Income from operations 85,266 20,155 65,111 323 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 Net income $ 71,766 $ 20,108 $ 51,658 257 % Revenue 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. 52 Table of Contents Cost and Expenses Cost of Revenue. 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 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 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 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 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 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 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 decreased our effective tax rate for 2019 by 5.2%. Excluding these discrete items, the 2019 effective tax rate would have been 24.5%. 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. 53 Table of Contents Comparison of the Years Ended December 31, 2019 and December 31, 2018 The following table presents our results of operations for the periods indicated: 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: Cost of revenue 278,176 267,671 10,505 4 Sales and marketing 181,730 166,448 15,282 9 Product development 57,216 58,897 (1,681) (3) General and administrative 113,246 97,782 15,464 16 Total operating expenses 630,368 590,798 39,570 7 Income from operations 20,155 32,452 (12,297) (38) Gain on Sale of Webdam — 38,613 (38,613) * 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) % _______________________________________________________________________________ * Not meaningful. See “Other (expense) / income, net” and “Gain on Sale of Webdam” below Revenue 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. 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 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. Our revenue growth by region is as follows: revenue from outside Europe and North America increased by $20.2 million, or 11%, to $204.9 million, revenue from Europe increased by $9.8 million, or 5%, to $217.4 million and revenue from North America increased by $2.7 million, or 1%, to $228.2 million in 2019 compared to 2018. 54 Table of Contents Cost and Expenses Cost of Revenue. 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 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 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. 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. General and Administrative. 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, 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 an expense of approximately $1.8 million related to unfavorable foreign currency fluctuations, offset by approximately $2.7 million of interest income. As we increase the volume of business transacted in foreign currencies resulting from international expansion and as currency rates fluctuate, we expect foreign currency gains and losses to continue to fluctuate. Income Taxes. Income tax expense decreased 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. Our effective tax rates for the years ended December 31, 2019 and 2018 were approximately 19.3% and 17.3%, 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 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. 55 Table of Contents 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 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, 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 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. 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. Dividends 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. ZCool and its affiliates have been the exclusive distributor of Shutterstock content in China since 2014. Sale of Digital Asset Management Business On February 26, 2018, we completed the Sale of Webdam for an aggregate purchase price of $49.1 million. Total cash received, net of $4.6 million transaction costs paid, was $44.3 million, inclusive of $2.5 million received during the year ended December 31, 2019, from the release of funds from escrow. 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. 56 Table of Contents 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 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 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. As of December 31, 2020, we have $100 million of repurchase capacity remaining under this program. We did not repurchase any shares under the share repurchase program in 2020. Share-Based Compensation Effective October 1, 2016, we implemented a practice of net share settlement upon the vesting of restricted stock units (“RSUs”) to cover any required withholding taxes by retaining the number of shares with a value equal to the amount of the tax and remitting an equal amount of cash to the appropriate taxing authorities, rather than our previous approach of requiring employees to sell a portion of the shares that they receive upon vesting to fund the required withholding taxes (“sell-to-cover”). The net share settlement approach has increased our cash outflows compared to the cash outflows under the sell-to-cover approach. 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, 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. Sources and Uses of Funds We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. 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. Cash Flows The following table summarizes our cash flow data for 2020, 2019 and 2018, respectively. Year Ended December 31, 2020 2019 2018 (in thousands) Net cash provided by operating activities $ 165,072 $ 102,646 $ 102,202 Net cash used in investing activities $ (35,310) $ (27,234) $ (12,827) Net cash used in financing activities $ (4,587) $ (1,696) $ (109,739) Operating Activities Our primary source of cash from operating activities is cash collections from our customers. The majority of our revenue is generated from credit card transactions and is typically settled within one to five business days. Our primary uses of cash for operating activities are for the payment of royalties to content contributors, employee-related expenditures and the payment of other operating expenses incurred in the ordinary course of business. Net cash provided by operating activities was $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 57 Table of Contents 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. 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. 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. Financing Activities 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 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. 58 Table of Contents Contractual Obligations and Commitments We lease real estate under operating lease agreements that expire on various dates during the period from 2021 through 2029. We do not have any material capital lease obligations, and our property, equipment and software have been purchased primarily with cash. 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. Our future minimum payments under non-cancelable operating leases and purchase obligations are as follows as of December 31, 2020: Payments Due by Period Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years (in thousands) Operating lease obligations $ 64,317 $ 9,334 $ 14,725 $ 14,607 $ 25,651 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 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. We are not responsible for any damages, costs, or losses to the extent such damages or losses arise as a result of the modifications made by the customer, or the context in which content is used. 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 believe that we have the appropriate insurance coverage in place to adequately cover such indemnification obligations, if necessary. Off-Balance Sheet Arrangements As of December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the volume of expected unused licenses used in revenue recognition for our subscription-based products 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. 59 Table of Contents 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. Revenue Recognition The majority of our revenues are earned from the license of content. 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. 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. 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 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. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and we control the product or service before transferring it to the customer. We also license content to customers through third-party resellers. Third-party resellers sell our products directly to customers as the principal in those transactions. Accordingly, we recognize revenue net of costs paid to resellers. Accounts Receivable and Allowance for Doubtful Accounts Our accounts receivable consists of customer obligations due under normal trade terms, carried at their fair value less an allowance for doubtful accounts, if required. We determine our allowance for doubtful accounts based on an evaluation of the aging of our accounts receivable and on a customer-by-customer basis where appropriate. 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. 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. Income Taxes Our income tax expense includes U.S. (federal and state) and foreign income taxes. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. We record an income tax liability for the difference, if any, between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The reserves are adjusted in light of changing facts and circumstances, such as the outcomes of tax audits or lapses in statutes of limitations. Any reserve for uncertain tax provisions and related penalties and interest is included in the income tax provision. 60 Table of Contents 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. In the event that actual results differ from these estimates, we will adjust these estimates in future periods which may result in a change in the effective tax rate in a future period. Except as required under U.S. tax laws, we do not provide for U.S. taxes on the undistributed earnings of our foreign subsidiaries. With the enactment of the TCJA, we are required to treat the undistributed earnings and profits of our foreign subsidiaries accumulated through a measurement period that should not extend more than one year beyond the date of the enactment of the TCJA as if they were repatriated to the U.S., and pay a current U.S. tax amount as a result of such “deemed” repatriation. 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. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the TCJA. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In the first quarter of 2018, we elected to treat any potential GILTI inclusions as a period cost. 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. Acquisitions Business combinations are recorded at fair value and allocated to the assets acquired and liabilities assumed in the transaction. Fair values are based on the exit price (i.e., the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date). We evaluate several factors, which may include market data for similar assets and expected future cash flows discounted at risk adjusted rates and replacement cost for the assets to determine an appropriate exit price when evaluating the fair value of our assets. Other assets and liabilities acquired in a business combination are recorded based on the fair value of the assets acquired and liabilities assumed at acquisition date. Changes to these factors could affect the measurement and allocation of fair value. Recent Accounting Pronouncements See Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a full description of recent accounting pronouncements, which is incorporated herein by reference.