Shutterstock, Inc. 10-Q

Item 2. 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 our interim unaudited consolidated financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q and with information contained in our other filings, including the audited consolidated financial statements included in our 2021 Form 10-K. 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” disclosures contained in our 2021 Form 10-K and this Quarterly Report on Form 10-Q 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. Overview and Recent Developments Shutterstock, Inc. (referred to herein as the “Company”, “we,” “our,” and “us”) is the leading global creative platform for transformative brands 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. Our key offerings include: • 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. • 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. This offering became available upon our acquisition of TurboSquid, Inc. (“TurboSquid”) on February 1, 2021. • Creative Design Software - consisting of our online graphic design and image editing platform. This offering became available after we completed the acquisition of substantially all of the assets and assumption of certain liabilities from PicMonkey, LLC (“PicMonkey”) on September 3, 2021. On May 11, 2022, we completed our acquisition of Pond5, Inc. (“Pond5”), a video-first content marketplace which expands our content offerings across footage, image and music. On May 28, 2022, we acquired SCP 2020 Limited (“Splash News”), an entertainment news network for newsrooms and media companies, which offers image and video content across celebrity, red carpet and live events. 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 of 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. The artificial intelligence tools obtained from these acquisitions will enable us to help customers make more data-informed content decisions. Over 2.1 million active, paying customers contributed to our revenue for the twelve-month period ended June 30, 2022. As of June 30, 2022, more than 2.2 million approved contributors made their images, footage and music tracks available in our collection, which has grown to more than 415 million images and more than 26 million footage clips as of June 30, 2022. This makes our collection of content one of the largest of its kind, and we delivered 88.0 million paid downloads to our customers across all of our brands during the six months ended June 30, 2022. 24 Table of Contents Through our platform, we generate revenue as our customers make purchases of content licenses and tools. During the six months ended June 30, 2022, 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, 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. 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, which provides data-driven content strategy, brand storytelling and full scale production services. Our Enterprise sales channel provided approximately 37% of our revenue for the six months ended June 30, 2022. 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, including our suite of multi-asset subscriptions, launched in 2021. These multi-asset products are credit-based and enable customers to license images, footage and music in a single subscription. Our 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. 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. 25 Table of Contents Key Operating 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 three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Subscribers (end of period) 1 368,000 321,000 368,000 321,000 Subscriber revenue (in millions) 1 $ 84.7 $ 78.1 $ 170.1 $ 154.6 Average revenue per customer (last twelve months) 1 $ 359 $ 356 $ 359 $ 356 Paid downloads (in millions) 43.4 44.9 88.0 90.7 Revenue per download $ 4.46 $ 4.17 $ 4.34 $ 4.07 Content in our collection (end of period, in millions): Images 415 380 415 380 Footage clips 26 22 26 22 ___________________________________________________ 1 For the three and six months ended June 30, 2021, Subscribers, Subscriber Revenue and Average Revenue Per Customer exclude customers and revenue related to our acquisitions of TurboSquid, PicMonkey, Pond5 and Splash News. For the three and six months ended June 30, 2022, Subscribers, Subscriber Revenue and Average Revenue Per Download exclude customers and revenue related to PicMonkey, Pond5 and Splash News. 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. For the three and six months ended June 30, 2021, Subscribers excludes customers related to our acquisitions of TurboSquid, PicMonkey, Pond5 and Splash News. For the three and six months ended June 30, 2022, subscribers excludes customers related to PicMonkey, Pond5 and Splash News. 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. For the three and six months ended June 30, 2021, subscriber revenue excludes revenues related to our acquisitions of TurboSquid, PicMonkey, Pond5 and Splash News. For the three and six months ended June 30, 2022, subscriber revenue excludes revenues related to PicMonkey, Pond5 and Splash News. 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 last twelve-month period by customers. We define customers as total active, paying customers that contributed to total revenue over the last twelve-month period. For three and six months ended June 30, 2021, average revenue per customer excludes revenues and customers related to our acquisitions of TurboSquid, PicMonkey, Pond5 and Splash News. For the three and six months ended June 30, 2022, average revenue per customer excludes revenues and customers related to PicMonkey, Pond5 and Splash News. 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 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. 26 Table of Contents 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, 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. Changes in revenue per download are primarily driven by the introduction of new product offerings, changes in product mix and customer utilization of our products. Content in our Collection We define content in our collection as the total number of 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. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with 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, the fair value of acquired goodwill and intangible assets 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 policies, assumptions and estimates associated with our revenue recognition, allowance for doubtful accounts, 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. A description of our critical accounting policies that involve significant management judgments appears in our 2021 Form 10-K, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” See Note 1 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of the impact of the adoption of new accounting standards on our financial statements. There have been no material changes to our critical accounting policies and estimates as compared to our critical accounting policies and estimates included in our 2021 Form 10-K. 27 Table of Contents Key Components of Our Results of Operations Revenue We distribute our content offerings through two primary channels: E-commerce: The majority of our customers make purchases of content licenses and tools directly through our self-service web properties. E-commerce customers have the flexibility to purchase a subscription-based plan that is paid on a monthly or annual basis or to license content on a transactional basis. These customers generally license content under our standard or enhanced licenses, with additional licensing options available to meet customers’ individual needs. E-commerce customers typically pay the full amount of the purchase price in advance or at the time of license, generally with a credit card. Enterprise: We also have a base of customers with unique content, licensing and workflow needs. These customers benefit from communication with our dedicated sales, service and research teams which provide a number of tailored 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 the e-commerce platform. The Company’s revenues by distribution channel for the three and six months ended June 30, 2022 and 2021 are as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 E-commerce $ 127,388 $ 120,715 $ 254,458 $ 239,115 Enterprise 79,484 69,197 151,546 134,078 Total Revenues $ 206,872 $ 189,912 $ 406,004 $ 373,193 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, 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. 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 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 in addition to interest income and expense. 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. 28 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. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Consolidated Statements of Operations: Revenue $ 206,872 $ 189,912 $ 406,004 $ 373,193 Operating expenses: Cost of revenue 77,019 67,757 146,470 129,589 Sales and marketing 54,229 45,896 107,558 87,817 Product development 17,162 11,993 30,788 22,724 General and administrative 33,088 31,041 63,896 61,720 Total operating expenses 181,498 156,687 348,712 301,850 Income from operations 25,374 33,225 57,292 71,343 Other (expense) / income, net (2,661) 1,323 (1,903) (1,139) Income before income taxes 22,713 34,548 55,389 70,204 Provision for income taxes 3,268 5,094 9,372 11,236 Net income $ 19,445 $ 29,454 $ 46,017 $ 58,968 The following table presents the components of our results of operations for the periods indicated as a percentage of revenue: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Consolidated Statements of Operations: Revenue 100 % 100 % 100 % 100 % Operating expenses: Cost of revenue 37 % 36 % 36 % 35 % Sales and marketing 26 % 24 % 26 % 24 % Product development 8 % 6 % 8 % 6 % General and administrative 16 % 16 % 16 % 17 % Total operating expenses 88 % 83 % 86 % 81 % Income from operations 12 % 17 % 14 % 19 % Other (expense) / income, net (1) % 1 % — % — % Income before income taxes 11 % 18 % 14 % 19 % Provision for income taxes 2 % 3 % 2 % 3 % Net income 9 % 16 % 11 % 16 % __________________________________ Note: Due to rounding, percentages may not sum to totals. 29 Table of Contents Comparison of the Three Months Ended June 30, 2022 and 2021 The following table presents our results of operations for the periods indicated: Three Months Ended June 30, 2022 2021 $ Change % Change (in thousands) Consolidated Statements of Operations: Revenue $ 206,872 $ 189,912 $ 16,960 9 % Operating expenses: Cost of revenue 77,019 67,757 9,262 14 Sales and marketing 54,229 45,896 8,333 18 Product development 17,162 11,993 5,169 43 General and administrative 33,088 31,041 2,047 7 Total operating expenses 181,498 156,687 24,811 16 Income from operations 25,374 33,225 (7,851) (24) Other (expense) / income, net (2,661) 1,323 (3,984) (301) Income before income taxes 22,713 34,548 (11,835) (34) Provision for income taxes 3,268 5,094 (1,826) (36) Net income $ 19,445 $ 29,454 $ (10,009) (34) % Revenue Revenue increased by $17.0 million, or 9%, to $206.9 million in the three months ended June 30, 2022 compared to the same period in 2021. On a constant currency basis, revenue increased approximately 13% in the three months ended June 30, 2022, compared to the same period in 2021. The Company’s E-commerce revenues increased by 6%, to $127.4 million in the three months ended June 30, 2022, compared to the same period in 2021. On a constant currency basis, E-commerce revenues increased by 9% in the three months ended June 30, 2022, compared to the same period in 2021. During the three months ended June 30, 2022, growth in our E-commerce sales channel was primarily driven by revenue generated from our acquisitions of PicMonkey and Pond5 which were completed on September 3, 2021 and May 11, 2022, respectively. E-commerce revenue also benefited from higher subscriber revenue, which was offset by a reduction in revenue generated from our transactional products. The Company’s Enterprise revenues increased by 15%, to $79.5 million in the three months ended June 30, 2022, compared to the same period in 2021. On a constant currency basis, the Company’s Enterprise revenues increased by 19% in the three months ended June 30, 2022, compared to the same period in 2021. Enterprise revenue growth was driven by our multi-asset product offerings and continued momentum in Shutterstock Studios and Shutterstock Editorial. Enterprise revenue growth also benefited from our acquisitions of Pond5 and Splash News, which were completed on May 11, 2022 and May 28, 2022, respectively. In the three months ended June 30, 2022 and 2021, we delivered 43.4 million and 44.9 million paid downloads, respectively, and our revenue per download was $4.46 and $4.17 for the three months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022, the increase in revenue per download was primarily due to changes in product mix. Changes in our revenue by region were as follows: revenue from North America increased by $16.9 million, or 25%, to $85.9 million, revenue from Europe decreased by $1.8 million, or 3%, to $62.9 million and revenue from outside Europe and North America increased by $1.9 million, or 3%, to $58.0 million, in the three months ended June 30, 2022 compared to the same period in 2021. 30 Table of Contents Costs and Expenses Cost of Revenue . Cost of revenue increased by $9.3 million, or 14% to $77.0 million in the three months ended June 30, 2022 compared to the same period in 2021. This increase was primarily driven by: (i) increased depreciation and amortization expense driven by our recent acquisitions; (ii) increased royalty, content and reviewer costs; and (iii) higher costs associated with website hosting, hardware and software licenses. 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 $8.3 million, or 18%, to $54.2 million in the three months ended June 30, 2022 compared to the same period in 2021. As a percent of revenue, sales and marketing expenses increased to 26% for the three months ended June 30, 2022, from 24% for the same period in 2021. This was primarily driven by (i) $4.4 million in increased marketing spend, primarily related to performance marketing, and (ii) $1.3 million in higher employee-related costs. In addition, the Company has incurred additional marketing expenses associated with second quarter live events and festivals. 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 $5.2 million, or 43%, to $17.2 million in the three months ended June 30, 2022 compared to the same period in 2021. This increase was driven by $3.8 million in higher employee and third-party contractor related costs, net of capitalized labor, for the three months ended June 30, 2022, as compared to the same period in 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 $2.0 million, or 7%, to $33.1 million in the three months ended June 30, 2022 compared to the same period in 2021. During the three months ended June 30, 2022, general and administrative expenses included (i) $4.1 million in higher professional fees primarily related to our acquisitions of Pond5 and Splash News, (ii) $0.7 million related to realized foreign currency losses and (iii) $0.6 million in higher bad debt expense. This was partially offset by a $4.2 million decrease in non-cash compensation expense primarily related to the departure of certain executives of the Company. Other (Expense) / Income, Net. In the three months ended June 30, 2022, other (expense) / income, net substantially consisted of $2.5 million of unfavorable unrealized foreign currency fluctuations and $0.2 million of interest expense related to the Credit Facility. During the three months ended June 30, 2021, other (expense) / income, net substantially consisted of $1.3 million of 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 decreased by $1.8 million for the three months ended June 30, 2022, compared to the same period in 2021. Our effective tax rates were 14.4% and 14.7% for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022, the effective tax rate decreased by 4.9% related primarily to windfall tax benefits associated with equity-based compensation. Excluding discrete items, our effective tax rate would have been 19.3% for the three months ended June 30, 2022. For the three months ended June 30, 2021, the effective tax rate decreased by 5.3% related primarily to windfall tax benefits associated with equity-based compensation. Excluding these items, our effective tax rate would have been 20.0% for the three months ended June 30, 2021. 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. 31 Table of Contents Comparison of the Six Months Ended June 30, 2022 and 2021 The following table presents our results of operations for the periods indicated: Six Months Ended June 30, 2022 2021 $ Change % Change (in thousands) Consolidated Statements of Operations Data: Revenue $ 406,004 $ 373,193 $ 32,811 9 % Operating expenses: Cost of revenue 146,470 129,589 16,881 13 % Sales and marketing 107,558 87,817 19,741 22 % Product development 30,788 22,724 8,064 35 % General and administrative 63,896 61,720 2,176 4 % Total operating expenses 348,712 301,850 46,862 16 % Income from operations 57,292 71,343 (14,051) (20) % Other (expense) / income, net (1,903) (1,139) (764) * Income before income taxes 55,389 70,204 (14,815) (21) % Provision for income taxes 9,372 11,236 (1,864) (17) % Net income $ 46,017 $ 58,968 $ (12,951) (22) % ______________________________________ * Not meaningful Revenue Revenue increased by $32.8 million, or 9%, to $406.0 million in the six months ended June 30, 2022 compared to the same period in 2021. On a constant currency basis, revenue increased approximately 12% in the six months ended June 30, 2022, compared to the same period in 2021. The Company’s E-commerce revenues increased by 6%, to $254.5 million in the six months ended June 30, 2022, compared to the same period in 2021. On a constant currency basis, the Company’s E-commerce revenues increased by 9% in the six months ended June 30, 2022, compared to the same period in 2021. During the six months ended June 30, 2022, growth in our E-commerce sales channel was primarily driven by revenue generated from our acquisitions of TurboSquid, PicMonkey and Pond5, which were completed on February 1, 2021, September 3, 2021 and May 11, 2022, respectively. E-commerce revenue also benefited from higher subscriber revenue, which was offset by a reduction in revenue generated from our transactional products. The Company’s Enterprise revenues increased by 13%, to $151.5 million in the six months ended June 30, 2022, compared to the same period in 2021. On a constant currency basis, the Company’s Enterprise revenues increased by 16% in the six months ended June 30, 2022, compared to the same period in 2021. Enterprise revenue growth was driven by our multi-asset product offerings and continued momentum in Shutterstock Studios and Shutterstock Editorial. Enterprise revenue growth also benefited from our acquisitions of Pond5 and Splash News, which were completed on May 11, 2022 and May 28, 2022, respectively. In the six months ended June 30, 2022 and 2021, we delivered 88.0 million and 90.7 million paid downloads, respectively, and our revenue per download was $4.34 and $4.07 for the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022, the increase in revenue per download was primarily due to changes in product mix. Changes in our revenue by region were as follows: revenue from North America increased by $32.6 million, or 24%, to $165.8 million, revenue from Europe decreased by $1.6 million, or 1%, to $125.5 million and revenue from outside Europe and North America increased by $1.8 million, or 2%, to $114.7 million, in the six months ended June 30, 2022 compared to the same period in 2021. 32 Table of Contents Costs and Expenses Cost of Revenue. Cost of revenue increased by $16.9 million, or 13%, to $146.5 million in the six months ended June 30, 2022 compared to the same period in 2021. This increase was primarily driven by: (i) increased depreciation and amortization expense driven by our recent acquisitions; (ii) increased royalty, content and reviewer costs; and (iii) higher costs associated with website hosting, hardware and software licenses. 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 $19.7 million, or 22%, to $107.6 million in the six months ended June 30, 2022 compared to the same period in 2021. As a percent of revenue, sales and marketing expenses increased to 26% for the six months ended June 30, 2022, from 24% for the same period in 2021. The increase in sales and marketing expenses was primarily driven by (i) $10.8 million in higher marketing spend, primarily related to performance marketing, and (ii) $4.7 million in higher employee-related costs. In addition, the Company has incurred additional marketing expenses associated with second quarter live events and festivals. 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 $8.1 million, or 35%, to $30.8 million in the six months ended June 30, 2022 as compared to the same period in 2021. This increase in product development was primarily driven by $6.3 million in higher employee and third-party contractor related costs, net of capitalized labor for the six months ended June 30, 2022. 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 $2.2 million, or 4%, to $63.9 million in the six months ended June 30, 2022 compared to the same period in 2021. This increase was primarily driven by: (i) $4.3 million in higher professional fees primarily related to our acquisitions of Pond5 and Splash News, (ii) $1 million related to a donation to provide direct assistance to Shutterstock’s contributors in Ukraine, (iii) $0.9 million related to realized foreign currency losses, (iv) $0.6 million in higher employee-related costs, and (v) $0.4 million increase in bad debt expense. These increases were partially offset by a $5.6 million decrease in non-cash compensation expense related to the departure of certain executives and expense associated with certain performance based awards. Other (Expense) / Income, Net. During the six months ended June 30, 2022, other (expense) / income, net substantially consisted of $1.8 million of unfavorable foreign currency fluctuations and $0.2 million of interest expense related to the Credit Facility. During the six months ended June 30, 2021, approximately $1.2 million of other (expense) / income, net consisted unfavorable 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 decreased by $1.9 million for the six months ended June 30, 2022 as compared to the same period in 2021. Our effective tax rates for the six months ended June 30, 2022 and 2021 were 16.9% and 16.0%, respectively. For the six months ended June 30, 2022, the effective tax rate decreased by 2.2% related primarily to windfall tax benefits associated with equity-based compensation. Excluding discrete items, our effective tax rate would have been 19.1% for the six months ended June 30, 2022. For the six months ended June 30, 2021, the effective tax rate decreased by 4.0% related primarily to windfall tax benefits associated with equity-based compensation. Excluding discrete items, our effective tax rate would have been 20.0% for the six months ended June 30, 2021. 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. 33 Table of Contents Quarterly Trends Our operating results may fluctuate from quarter to quarter as a result of a variety of factors, including the effects of some seasonal trends in customer behavior. For example, we expect that certain customers’ usage may decrease at times during the third quarter of each calendar year due to the summer vacation season and may increase at times during the fourth quarter of each calendar year as demand is generally higher to support marketing campaigns in advance of the fourth quarter holiday season. While we believe seasonal trends have affected and will continue to affect our quarterly results, our growth trajectory may have overshadowed these effects to date. Additionally, because a significant portion of our revenue is derived from repeat customers who have purchased subscription plans, our revenues have historically been less volatile than if we had no subscription-based customers. In addition, expenditures on content by customers tend to be discretionary in nature, reflecting overall economic conditions, the economic prospects of specific industries, budgeting constraints, buying patterns and a variety of other factors, many of which are outside our control, including any impacts from COVID-19. As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indicators of our future operating performance. See “Risks Related to the Coronavirus (“COVID-19”) Pandemic, The effect of the COVID-19 pandemic on our operations, and the operations of our customers, partners and suppliers, could have a material adverse effect on our business, financial condition, cash flows and results of operations” in Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on our business. Liquidity and Capital Resources As of June 30, 2022, we had cash and cash equivalents totaling $84.0 million which consisted of bank balances. Since inception, we have financed our operations primarily through cash flows generated from operations. In addition, if necessary, we have the ability to draw on our credit facility, which was obtained on May 6, 2022. 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, capital expenditures and corporate actions largely through cash generated by our operations and our credit facility. Since our results of operations are sensitive to the level of competition we face, increased competition could adversely affect our liquidity and capital resources. Dividends We declared and paid cash dividends of $0.48 per share of common stock, or $17.4 million during the six months ended June 30, 2022. On July 18, 2022, our Board of Directors declared a quarterly cash dividend of $0.24 per share of outstanding common stock payable on September 15, 2022 to stockholders of record at the close of business on September 1, 2022. 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. 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 June 30, 2022, we have repurchased approximately 3.5 million shares of our common stock under the share repurchase program at an average per-share cost of $52.50. During the six months ended June 30, 2022, we repurchased approximately 708,700 shares of our common stock at an average per share cost of $79.87. As of June 30, 2022, we had $16.2 million of remaining authorization for purchases under the share repurchase program. 34 Table of Contents Equity-Based Compensation Upon the vesting of restricted stock units (“RSUs”), we have 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 equity-based compensation programs on stockholders. During the six months ended June 30, 2022, we paid $21.0 million related to employee taxes on RSU vestings. Revolving Credit Facility On May 6, 2022, we entered into a five-year $100 million unsecured revolving loan facility (the “Credit Facility”) with Bank of America, N.A., as Administrative Agent and other lenders. The Credit Facility includes a letter of credit sub-facility and a swingline facility and it also permits, subject to the satisfaction of certain conditions, up to $100 million of additional revolving loan commitments with the consent of the Administrative Agent. At our option, revolving loans accrue interest at a per annum rate based on either (i) the base rate plus a margin ranging from 0.125% to 0.500%, determined based on the Company’s consolidated leverage ratio or (ii) the Term Secured Overnight Financing Rate (“SOFR”) (for interest periods of 1, 3 or 6 months) plus a margin ranging from 1.125% to 1.5%, determined based on our consolidated leverage ratio. We are also required to pay an unused commitment fee ranging from 0.150% to 0.225%, determined based on the Company’s consolidated leverage ratio. In connection with the execution of this agreement, we paid debt issuance costs of approximately $0.6 million. On May 9, 2022, we borrowed $50 million for use in connection with the acquisition of Pond5 and for general corporate purposes. As of June 30, 2022, we had outstanding borrowings under the Credit Facility of $50 million. As of December 31, 2021, we had no outstanding debt obligations. For the three and six months ended June 30, 2022, the Company paid cash interest totaling $0.1 million. The Credit Facility contains financial covenants and requirements restricting certain of our activities, which are usual and customary for this type of loan. We are also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio, in each case, determined in accordance with the terms of the Credit Facility. As of June 30, 2022, we are in compliance with these covenants. 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 and thereafter for the foreseeable future. Future capital expenditures could 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 14 to our Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding our existing capital commitments as of June 30, 2022. Cash Flows The following table summarizes our cash flow data for the six months ended June 30, 2022 and 2021 (in thousands). Six Months Ended June 30, 2022 2021 Net cash provided by operating activities $ 59,574 $ 107,216 Net cash used in investing activities $ (240,323) $ (90,963) Net cash used in financing activities $ (45,397) $ (33,745) 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. 35 Table of Contents Net cash provided by operating activities was $59.6 million for the six months ended June 30, 2022, compared to $107.2 million for the six months ended June 30, 2021. In the six months ended June 30, 2022, operating cash flows were unfavorably impacted from a reduction in 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. Investing Activities Cash used in investing activities for the six months ended June 30, 2022 was $240.3 million, consisting primarily of (i) $212.1 million used in the acquisitions of Pond5 and Splash News, net of cash acquired, capital expenditures of $20.8 million for internal-use software and website development costs and purchases of software and equipment, and (ii) $7.0 million paid to acquire the rights to distribute certain digital content into perpetuity. Cash used in investing activities in the six months ended June 30, 2021 was $91.0 million, consisting primarily of cash used in the acquisition of TurboSquid of $72.2 million, net of cash acquired, capital expenditures of $15.3 million for internal-use software and website development costs and purchases of software and equipment and $3.4 million paid to acquire the rights to distribute certain digital content in perpetuity. Financing Activities Cash used in financing activities in the six months ended June 30, 2022 was $45.4 million, consisting of (i) $56.9 million in connection with the repurchase of common stock under our share repurchase program; (ii) $21.0 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards, and (iii) $17.4 million, related to the payment of the quarterly cash dividend. These amounts were partially offset by $50.0 million proceeds received from our Credit Facility. Cash used in financing activities in the six months ended June 30, 2021 was $33.7 million, consisting primarily of $20.2 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards and $15.3 million, related to the payment of the quarterly cash dividend. These amounts were partially offset by approximately $1.8 million received from the issuance of common stock in connection with the exercise of stock options. Contractual Obligations and Commitments We lease real estate under operating lease agreements that expire on various dates during the period from 2022 through 2029. We do not have any material finance lease obligations and our property, equipment and software have been purchased primarily with cash. We do not anticipate any difficulties in renewing those leases and co-location agreements that expire within the next several years and that we currently plan to renew, or in leasing other space or hosting facilities, if required. On March 21, 2013, we entered into an operating lease agreement to lease our headquarters in New York City, which was amended in 2016. The aggregate undiscounted future minimum lease payments under the lease, as amended, are approximately $47.6 million. We are also party to a letter of credit as a security deposit for this leased facility in the amount of $1.7 million. Additionally, as of June 30, 2022, aggregate undiscounted future minimum lease payments under other operating leases are approximately $8.3 million. 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. As of June 30, 2022, our guaranteed royalty payments and unconditional purchase obligations for the remainder of 2022 and for the fiscal years ending December 31, 2023, 2024, 2025 and 2026 were approximately $30.6 million, $37.3 million, $28.5 million, $6.3 million and $0.6 million, respectively. 36 Table of Contents 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. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Non-GAAP Financial Measures: (in thousands) Adjusted EBITDA $ 48,927 $ 53,063 $ 103,736 $ 109,482 Adjusted net income 30,272 37,935 67,456 74,571 Free cash flow $ 21,564 $ 61,692 $ 31,778 $ 88,483 Revenue growth on a constant currency basis 13 % 16 % 12 % 13 % These non-GAAP financial measures have not been calculated in accordance with GAAP, 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. Our 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 our 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 our 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 our 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 our underlying operating performance, and that 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 our operating performance. Management also believes that providing these non-GAAP financial measures enhances the comparability for investors in assessing our 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 property and equipment to support the Company’s ongoing business operations 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- 37 Table of Contents GAAP financial measures should be considered in addition to 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, are presented below. Adjusted EBITDA and Adjusted EBITDA Margin We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, foreign currency transaction gains and losses, 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: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Net income $ 19,445 $ 29,454 $ 46,017 $ 58,968 Add / (less) Non-GAAP adjustments: Depreciation and amortization 16,510 10,152 31,575 20,243 Non-cash equity-based compensation 7,043 9,686 14,869 17,896 Other adjustments, net (1) 2,661 (1,323) 1,903 1,139 Provision for income taxes 3,268 5,094 9,372 11,236 Adjusted EBITDA $ 48,927 $ 53,063 $ 103,736 $ 109,482 Adjusted EBITDA margin 23.7 % 27.9 % 25.6 % 29.3 % _______________________________________________________________________________ (1) Other adjustments, net includes unrealized foreign currency transaction gains and losses, and interest income and expense. Adjusted Net Income and Adjusted Net Income Per Diluted Common Share 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 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: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Net income $ 19,445 $ 29,454 $ 46,017 $ 58,968 Add / (less) Non-GAAP adjustments: Non-cash equity-based compensation 7,043 9,686 14,869 17,896 Tax effect of non-cash equity-based compensation (1) (1,655) (2,276) (3,493) (4,205) Acquisition-related amortization expense 7,110 1,400 13,155 2,499 Tax effect of acquisition-related amortization expense (1) (1,671) (329) (3,092) (587) Adjusted net income $ 30,272 $ 37,935 $ 67,456 $ 74,571 Adjusted net income per diluted common share $ 0.83 $ 1.02 $ 1.83 $ 2.00 (1) Statutory tax rates are used to calculate the tax effect of the adjustments. 38 Table of Contents 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. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Reported revenue (in thousands) $ 206,872 $ 189,912 $ 406,004 $ 373,193 Revenue growth 9 % 19 % 9 % 16 % Revenue growth on a constant currency basis 13 % 16 % 12 % 13 % E-commerce reported revenue (in thousands) $ 127,388 $ 120,715 $ 254,458 $ 239,115 E-commerce revenue growth 6 % 23 % 6 % 21 % E-commerce revenue growth on a constant currency basis 9 % 20 % 9 % 18 % Enterprise reported revenue (in thousands) $ 79,484 $ 69,197 $ 151,546 $ 134,078 Enterprise revenue growth 15 % 13 % 13 % 9 % Enterprise revenue growth on a constant currency basis 19 % 9 % 16 % 6 % Free Cash Flow We define free cash flow as our cash provided by operating activities, adjusted for capital expenditures and content acquisition. The following is a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) Net cash provided by operating activities $ 36,851 $ 71,388 $ 59,574 $ 107,216 Capital expenditures (9,022) (6,789) (20,797) (15,337) Content acquisitions (6,265) (2,907) (6,999) (3,396) Free Cash Flow $ 21,564 $ 61,692 $ 31,778 $ 88,483 39 Table of Contents