What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-10 compared with 2021-02-11 · 238 added, 186 removed, 322 unchanged (57% of the section changed)

7 unchanged sentences

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.

Shutterstock is a leading global creative platform offering full-service solutions, high-quality content, and creative workflow solutions 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:

Our key offerings include:

• Images - consisting of photographs, vectors and illustrations.

3 unchanged sentences

• 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.

• 3 Dimensional (“3D”) Models - consisting of 3D models, used in a variety of industries such as advertising, media and video production, gaming, retail, education, design and architecture, following our acquisition of TurboSquid, Inc.

(“TurboSquid”) on February 1, 2021.

• Creative Design Software - consisting of our online graphic design and image editing platform.

On September 3, 2021, we completed the acquisition of substantially all of the assets and assumption of certain liabilities from PicMonkey, LLC (“PicMonkey”).

For customers seeking specialized solutions, Shutterstock Studios extends our offerings by providing custom, high-quality content matched with production tools and services at scale.

Shutterstock Studios delivers end-to-end custom creative services providing data-driven content strategy and full-scale production for our customers.

Shutterstock Editorial provides imagery and video content for the latest news, sports and entertainment, and Shutterstock Editorial also offers the Newsroom, for global breaking news, exclusives and archival content.

In addition, in July 2021, through our newly formed entity Shutterstock.AI, Inc.

(“Shutterstock.AI”), we acquired Pattern89, Inc., Datasine Limited, and assets from Shotzr, Inc., three artificial intelligence entities that provide data driven insights through their artificial intelligence platforms.

Shutterstock.AI will commercialize data assets within our content library and enable companies to grow their capabilities in computer vision and content insights.

In addition, with artificial intelligence tools obtained from these acquisitions, we plan to develop predictive performance capabilities to help customers make more data-informed content decisions.

Over 2.0 million active, paying customers contributed to our revenue in 2021.

3 unchanged sentences

During the year ended December 31, 2021, 63% 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.

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

1 unchanged sentence

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.

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, which provides data-driven content strategy, brand storytelling and full scale production services.

Our Enterprise sales channel provided approximately 37% of our revenue in 2021.

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.

As a result, we have seen strong growth in customers purchasing monthly subscription products, including our suite of multi-asset subscriptions, launched during 2021.

These multi-asset products are credit-based and enable customers to license images, footage and music in a single subscription.

Our monthly subscriptions provide for either a fixed number of content licenses or credits that may be used to download content 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.

4 unchanged sentences

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

1 unchanged sentence

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.

The economic uncertainty caused by COVID-19 has had an impact on our customers and their ability to spend marketing budgets on our products, to varying degrees during 2020 and into 2021.

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

7 unchanged sentences

Subscriber revenue (in millions) $ 317.5 $ 265.3 $ 236.5

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

Average revenue per customer (last twelve months) $ 368 $ 333 $ 330

Paid downloads (in millions) 180.0 180.0 187.8

3 unchanged sentences

Footage clips 24 21 17

* 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 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 excluding customers from our acquisitions of TurboSquid and PicMonkey.

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

1 unchanged sentence

Subscriber Revenue

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

We define subscriber revenue as the revenue generated from subscribers during the period excluding revenues from our acquisitions of TurboSquid and PicMonkey.

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.

Average revenue per customer is calculated by dividing total revenue for the last twelve-month period by customers, excluding revenues from our recent acquisitions of TurboSquid and PicMonkey.

We define customers as total active, paying customers that contributed to total revenue over the last twelve-month period, excluding customers from our recent acquisitions of TurboSquid and PicMonkey.

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.

1 unchanged sentence

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.

Paid downloads exclude content related to custom content, downloads of content that are offered to customers for no charge, including our free image of the week, and downloads associated with our computer vision offering.

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.

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, revenue that is not derived from or associated with content licenses and revenue associated with our computer vision offering.

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.

7 unchanged sentences

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.

Subsequent to the acquisition of PicMonkey, we also generate revenue from the license of creative editing tools.

We recognize revenue upon the satisfaction of performance obligations, which occurs when content is downloaded by 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.

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.

For revenue associated with the license of our creative editing tools, the Company recognizes revenue on a straight-line basis over the subscription period.

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

10 unchanged sentences

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 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, purchased content and acquisition-related 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.

7 unchanged sentences

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

administrative expenses include outside legal, tax and accounting services, bad debt expense, insurance, facilities costs, other supporting overhead costs and depreciation and amortization expense.

In addition, general and 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.

Other income / (expense), net consists of non-operating costs such as foreign currency transaction gains and losses, in addition to interest income.

Income Taxes.

16 unchanged sentences

Income from operations 108,106 85,266 20,155

Gain on Sale of Webdam — — 38,613

Other income / (expense), net 4,257 4,761 (4,952)

Other (expense) / income, net (3,370) 4,257 4,761

Income before income taxes 104,736 89,523 24,916

13 unchanged sentences

Income from operations 14 % 13 % 3 %

Gain on Sale of Webdam — % — % 6 %

Other income / (expense), net 1 % 1 % (1) %

Other income, net — % 1 % 1 %

Income before income taxes 14 % 13 % 4 %

15 unchanged sentences

Income from operations 108,106 85,266 22,840 27

Other (expense) / income, net (3,370) 4,257 (7,627) (179)

Income before income taxes 104,736 89,523 15,213 17

Provision for income taxes 12,853 17,757 (4,904) (28)

Net income $ 91,883 $ 71,766 $ 20,117 28 %

Revenue increased by $106.7 million, or 16%, to $773.4 million in 2021 as compared to 2020.

On a constant currency basis, revenue increased approximately 15% in the year ended December 31, 2021, as compared to 2020.

Our revenue growth in 2021 is primarily driven by revenue generated from our 2021 acquisitions and the increase in our subscription business.

From 2020 to 2021, subscribers grew by 22% to 343,000 and subscriber revenue grew by 20% to $317.5 million.

E-commerce revenues increased by 19%, to $490.2 million in 2021, as compared to 2020.

On a constant currency basis, E-commerce revenues increased by 16% in 2021, as compared to 2020.

During 2021, growth in our E-commerce sales channel was driven by increased subscriber revenue and revenue generated by our acquisitions of TurboSquid and PicMonkey, which were completed on February 1, 2021 and September 3, 2021, respectively.

Enterprise revenues increased by 11%, to $283.2 million in 2021, as compared to 2020.

On a constant currency basis, Enterprise revenues increased by 10% in 2021, as compared to 2020.

We have continued to execute on our strategy to respond to market trends including making updates to product offerings and continuously improving our platform.

We believe these enhancements impacted our Enterprise sales operations during the period and were one of the drivers of the increased deferred revenue balance as of December 31, 2021.

In the years ended December 31, 2021 and 2020, we delivered 180.0 million paid downloads, and our revenue per download increased to $4.16 in 2021, as compared to $3.68 in 2020.

During 2021, the 13% increase in revenue per download, is primarily due to changes in product mix.

Changes in our revenue by region were as follows:

revenue from North America increased by $54.4 million, or 23%, to $291.0 million, revenue from Europe increased by $32.8 million, or 15%, to $253.5 million and revenue from outside Europe and North America increased by $19.5 million, or 9%, to $229.0 million, in the year ended December 31, 2021 compared to 2020.

Cost and Expenses

Cost of Revenue.

Cost of revenue increased by $18.1 million, or 7%, to $277.7 million in 2021 as compared to 2020.

This increase was primarily driven by:

(i) higher royalty expense, content procurement costs and credit card fees, associated with our increased revenue and (ii) increased depreciation and amortization expense driven by our recent acquisitions.

In addition, in 2020, cost of revenue included severance charges of $1.2 million.

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

Sales and Marketing.

Sales and marketing expenses increased by $45.6 million, or 29%, to $204.9 million in 2021 as compared to 2020.

As a percent of revenue, sales and marketing expenses increased to 26% for the year ended December 31, 2021, from 24% for 2020.

The increase in sales and marketing expenses was primarily driven by (i) $31.7 million in higher marketing spend which includes performance marketing, brand marketing and television ad spend, and (ii) $11.3 million in higher employee-related costs, primarily related to commissions associated with increased enterprise billings.

In addition, for the year ended December 31, 2021 and 2020, sales and marketing includes severance charges of $2.2 million and $1.7 million, respectively.

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

Product Development.

Product development expenses increased by $6.0 million, or 13%, to $52.0 million in 2021 as compared to 2020.

This increase was primarily driven by higher personnel costs and higher non-cash compensation expense.

These increases were partially offset by a reduction in software and other IT-related costs, for the year ended December 31, 2021, as compared to the prior year.

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 $14.2 million, or 12%, to $130.8 million in 2021 as compared to 2020.

This increase was primarily driven by (i) $5.9 million in higher employee-related costs in 2021 as compared to 2020, (ii) $4.7 million in higher non-cash compensation expense;

and (iii) $4.3 million in higher professional fees, which were impacted by transaction costs associated with our acquisitions of TurboSquid and PicMonkey.

These increases were partially offset by a $2.4 million decline in bad debt expense, and other reductions associated with ongoing vendor management initiatives.

For the years ended December 31, 2021 and 2020, general and administrative expenses include severance charges of $0.5 million and $1.4 million, respectively.

Other (expense) / income, net.

During 2021, other (expense) / income, net substantially consisted of $3.3 million of expense due to foreign currency fluctuations.

We expect to experience future foreign currency gains and losses as the US Dollar fluctuates relative to non-US currencies in which we transact.

During 2020, approximately $3.1 million of other (expense) / income, net related to favorable foreign currency fluctuations, in addition to $1.2 million of interest income.

Income Taxes.

Income tax expense decreased by $4.9 million, to $12.9 million in 2021 as compared to 2020.

Our effective tax rates for the years ended December 31, 2021 and 2020 were approximately 12.3% and 19.8%, respectively.

The 2021 effective tax rate includes discrete items, the most significant of which relate to windfall tax benefits associated with equity-based compensation and the impact of a capital loss transaction.

The net effect of these items decreased our effective tax rate by 8.6%.

Excluding these discrete items, our effective tax rate would have been 20.9% for 2021.

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.

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.

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)

65 unchanged sentences

jurisdictions and our effective tax rate could fluctuate accordingly.

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 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.

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.

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

1 unchanged sentence

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.

Historically, our principal uses of cash have included funding our operations, capital expenditures, content acquisitions, business combinations and asset acquisitions 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.

Stock Offering

7 unchanged sentences

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

1 unchanged sentence

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.

Share Repurchase Program

3 unchanged sentences

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”).

As of December 31, 2021, we have repurchased approximately 2.8 million shares of our common stock under the share repurchase program at an average per-share cost of $45.55.

During the year ended December 31, 2021, we repurchased approximately 233,700 shares of our common stock at an average per share cost of $116.26.

As of December 31, 2021, we had $73 million of remaining authorization for purchases under the share repurchase program.

Equity-Based Compensation

Upon the vesting of restricted stock units (“RSUs”), the Company has a practice of net share settlement, 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 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, 2021, shares with an aggregate value of $22.7 million were withheld upon vesting of RSUs and paid in connection with related remittance to taxing authorities.

2 unchanged sentences

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.

Our longer-term liquidity is contingent upon future operating performance.

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.

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 other non-lease commitments as of December 31, 2021.

The following table summarizes our cash flow data for 2021, 2020 and 2019, respectively.

10 unchanged sentences

Net cash provided by operating activities was $216.4 million for the year ended December 31, 2021, compared to $165.1 million for the year ended December 31, 2020.

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 the year ended December 31, 2021, operating cash flows were favorably impacted from our increased operating income and changes in the timing of payments pertaining to operating expenses, which can cause operating cash flow to fluctuate from period to period.

In addition, in the year ended December 31, 2020, operating cash flows were impacted by $7.8 million in one-time payments associated with long-term incentives related to our 2017 acquisition of Flashstock.

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.

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.

Our investing activities have consisted primarily of capital expenditures, business combinations, asset acquisitions, investments and content acquisitions.

Capital expenditures include internal-use software and website development costs, purchases of software equipment, and 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.

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

Cash used in investing activities totaled $250.4 million, $35.3 million and $27.2 million for the years ended December 31, 2021, 2020 and 2019, 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 for the year ended December 31, 2021 was $250.4 million, consisting primarily of (i) $181.6 million cash used in the acquisitions of TurboSquid and PicMonkey, net of cash acquired;

(ii) $31.6 million cash used in the asset acquisitions of Pattern89, Inc., Datasine Limited and assets from Shotzr, Inc.;

(iii) capital expenditures of $28.1 million for internal-use software and website development costs, and purchases of software and equipment, and (iv) $8.9 million paid to acquire the rights to distribute certain digital content in perpetuity.

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 purchase of software and equipment, an investment of $5.0 million in a creative production and analytics platform, $3.0 million to acquire the rights to distribute certain digital content in perpetuity 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 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.

Our financing activities have consisted primarily of payments associated with cash dividends, settlements of tax withholding obligations related to employee stock-based compensation awards and repurchases of common stock under our share repurchase program.

Our financing activities also includes proceeds from our Stock Offering and proceeds received in connection with the exercise of stock options.

Cash used in financing activities totaled $77.7 million, $4.6 million and $1.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Cash used in financing activities during 2021 primarily consisted of (i) $30.7 million, related to the payment of the quarterly cash dividend;

(ii) $26.5 million in connection with the repurchase of common stock under our share repurchase program, and (iii) $22.7 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards.

These amounts were partially offset by approximately $2.1 million in proceeds received in connection with the exercise of stock options.

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.

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 $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

13 unchanged sentences

The ESB Lease will expire in 2029, and the aggregate undiscounted future minimum lease payments, are approximately $50.4 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 are also party to a letter of credit as a security deposit for this leased facility in the amount of $1.7 million.

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.

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.

2 unchanged sentences

As of December 31, 2021, 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.

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with the accounting principles generally accepted in the United States, or GAAP, our management considers certain financial measures that are not prepared in accordance with GAAP, collectively referred to as non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage), and free cash flow.

These non-GAAP financial measures are included solely to provide investors with additional information regarding our financial results and are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies.

These non-GAAP financial measures have not been calculated in accordance with GAAP and should be considered only in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP measures.

In addition, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) and free cash flow should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address.

We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions;

accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.

Shutterstock’s management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing the business and to, among other things:

(i) monitor and evaluate the performance of Shutterstock’s business operations, financial performance and overall liquidity;

(ii) facilitate management’s internal comparisons of the historical operating performance of its business operations;

(iii) facilitate management’s external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels;

(iv) review and assess the operating performance of Shutterstock’s management team and, together with other operational objectives, as a measure in evaluating employee compensation and bonuses;

(v) analyze and evaluate financial and strategic planning decisions regarding future operating investments;

and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.

Management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) and free cash flow are useful to investors because these measures enable investors to analyze Shutterstock’s operating results on the same basis as that used by management.

Additionally, management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share provide useful information to investors about the performance of the Company’s overall business because such measures eliminate the effects of unusual or other infrequent charges that are not directly attributable to Shutterstock’s underlying operating performance and revenue growth (including by distribution channel) on a constant currency basis, provides useful information to investors by eliminating the effect of foreign currency fluctuations that are not directly attributable to Shutterstock’s operating performance.

Management also believes that providing these non-GAAP financial measures enhances the comparability for investors in assessing Shutterstock’s financial reporting.

Management believes that free cash flow is useful for investors because it provides them with an important perspective on the cash available for strategic measures, after making necessary capital investments in internal-use software and website development costs to support the Company’s ongoing business operations and after excluding the impact of nonrecurring payments associated with long-term incentives related to our 2017 acquisition of Flashstock, and provides them with the same measures that management uses as the basis for making resource allocation decisions.

Our use of non-GAAP financial measures has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition.

Additionally, our methods for measuring non-GAAP financial measures may differ from other companies’ similarly titled measures.

When evaluating our performance, these non-GAAP financial measures should be considered alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.

Our method for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, as well as a reconciliation of the differences between adjusted EBITDA, adjusted net income, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, and the most comparable financial measures calculated and presented in accordance with GAAP, is presented below.

Adjusted EBITDA

We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, foreign currency transaction gains and losses, expenses related to long-term incentives and contingent consideration related to acquisitions, interest income and expense and income taxes.

We define adjusted EBITDA margin as the ratio of adjusted EBITDA to revenue.

The following is a reconciliation of net income to adjusted EBITDA for each of the periods indicated:

Year Ended December 31,

2021 2020 2019

(in thousands)

Net income $ 91,883 $ 71,766 $ 20,108

Add / (less) Non-GAAP adjustments:

Depreciation and amortization 48,771 41,359 49,915

Non-cash equity-based compensation 36,179 28,309 22,815

Other adjustments, net (1)

3,370 (4,257) (1,332)

Provision for income taxes 12,853 17,757 4,808

Adjusted EBITDA $ 193,056 $ 154,934 $ 96,314

Adjusted EBITDA margin 25.0 % 23.2 % 14.8 %

_______________________________________________________________________________

(1) Included in other adjustments, net is foreign currency transaction gains and losses, expenses related to long-term incentives and contingent consideration related to acquisitions, and interest income and expense.

Adjusted Net Income

We define adjusted net income as net income adjusted for the impact of non-cash equity-based compensation, the amortization of acquisition-related intangible assets, expenses related to long-term incentives and contingent consideration related to acquisitions and the estimated tax impact of such adjustments.

We define adjusted net income per diluted common share as adjusted net income divided by weighted average diluted shares.

The following is a reconciliation of net income to adjusted net income for each of the periods indicated:

Year Ended December 31,

2021 2020 2019

(in thousands)

Net income $ 91,883 $ 71,766 $ 20,108

Add / (less) Non-GAAP adjustments:

Non-cash equity-based compensation 36,179 28,309 22,815

Tax effect of non-cash equity-based compensation (1)

(8,502) (6,653) (5,363)

Acquisition-related amortization expense 13,334 2,261 4,691

Tax effect of acquisition-related amortization expense (1)

(3,133) (531) (1,034)

Acquisition-related long-term incentives and contingent consideration (2)

Tax effect of acquisition-related long-term incentives and contingent consideration (1)

Adjusted net income $ 129,761 $ 95,152 $ 43,737

Adjusted net income per diluted common share $ 3.48 $ 2.62 $ 1.23

Weighted average diluted shares 37,324 36,369 35,581

(1) Statutory tax rates are used to calculate the tax effect of the adjustments.

(2) Represents expenses related to long-term incentives and contingent consideration related to the Flashstock acquisition.

Revenue Growth (including by distribution channel) on a Constant Currency Basis

We define revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) as the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for all periods in the comparison.

Year Ended December 31,

2021 2020 2019

Reported revenue (in thousands) $ 773,415 $ 666,686 $ 650,523

Revenue growth 16 % 2 % 4 %

Revenue growth on a constant currency basis 15 % 2 % 6 %

E-commerce reported revenue (in thousands) $ 490,212 $ 412,521 $ 392,241

E-commerce revenue growth 19 % 5 % 7 %

E-commerce revenue growth on a constant currency basis 16 % 5 % 9 %

Enterprise reported revenue (in thousands) $ 283,203 $ 254,165 $ 258,282

Enterprise revenue growth 11 % (2) % 1 %

Enterprise revenue growth on a constant currency basis 10 % (2) % 3 %

Free Cash Flow

We define free cash flow as our cash provided by operating activities, adjusted for capital expenditures and content acquisition, and, with respect to the twelve months ended December 31, 2020, a payment associated with long-term incentives related to our 2017 acquisition of Flashstock.

The following is a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated:

Year Ended December 31,

2021 2020 2019

(in thousands)

Net cash provided by operating activities $ 216,372 $ 165,072 $ 102,646

Capital expenditures (28,125) (25,630) (26,081)

Content acquisitions (8,874) (2,970) (3,344)

Payments related to long-term incentives related to acquisitions — 7,759 —

Free Cash Flow $ 179,373 $ 144,231 $ 73,221

Critical Accounting Policies and Estimates

1 unchanged sentence

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.

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.

We believe that the assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts, valuation of acquired goodwill and intangible assets, 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.

2 unchanged sentences

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.

Subsequent to the acquisition of PicMonkey, the Company also generates revenue from the license of creative editing tools.

We recognize revenues upon the satisfaction of performance obligations, which generally occurs when content is downloaded by 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.

1 unchanged sentence

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.

For revenue associated with the license of our creative editing tools, the Company recognizes revenue on a straight-line basis over the subscription period.

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

3 unchanged sentences

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.

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.

23 unchanged sentences

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.

Business combinations are recorded at fair value and allocated to the assets acquired and liabilities assumed in the transaction.

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.

We have elected to treat any potential GILTI inclusions as a period cost.

Business combinations are recorded at fair value and the purchase price is allocated to the assets acquired and liabilities assumed in the transaction.

Assets acquired may include intangible assets such as customer relationships, trade names, developed technology and contributor content.

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) and valuation methods that may be utilized include the multiple-period excess earnings method, the relief-from-royalty method and the cost-to-recreate method.

Determining the fair value requires management to use significant judgment and estimates, including estimates of future revenue growth rates from existing customers, research and development expense adjustments, sales and marketing expense adjustments, the discount rate, earnings before interest, taxes, and amortization (“EBITA”) margins and the customer attrition rate, among others.

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.

3 unchanged sentences

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