What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-10 · 210 added, 203 removed, 357 unchanged (54% of the section changed)

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

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

Overview and Recent Developments

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

Shutterstock is a 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:

Contributors upload their content to the Company’s web properties in exchange for royalty payments based on customer download activity.

Beyond content, customers also leverage the Company’s platform to assist with the entire creative process from ideation through creative execution.

Our key content offerings include:

• Images - consisting of photographs, vectors and illustrations.

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

• 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”).

• 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.

Our offerings are distributed to customers under the following brands:

Shutterstock;

and Splash News.

Shutterstock, our flagship brand, includes various content types such as image, footage, music and editorial.

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.

In addition, our collection of images, footage clips, music tracks and 3D models is also distributed through our Computer Vision offering which is used by large technology companies to train AI models.

Pond5 is a video-first content marketplace which expands the Company’s content offerings across footage, image and music.

PicMonkey is a leading online graphic design and image editing platform.

TurboSquid operates a marketplace that offers more than one million 3D models and a 2 dimensional (“2D”) marketplace derived from 3D objects.

Our Offset brand provides authentic and exceptional content for high-impact use cases that require extraordinary images, featuring work from top assignment photographers and illustrators from around the world.

PremiumBeat offers exclusive high-quality music tracks and provides producers, filmmakers and marketers the ability to search handpicked production music from the world’s leading composers.

Bigstock maintains a separate content library tailored for creators seeking to incorporate cost-effective imagery into their projects.

Over 2.3 million active, paying customers contributed to our revenue in 2022.

As of December 31, 2021, more than 2.0 million approved contributors made their images, footage and music tracks available in our collection, which has grown to more than 400 million images and more than 24 million footage clips as of December 31, 2021.

As of December 31, 2022, more than 2.3 million approved contributors made their images, footage and music tracks available in our collection, which has grown to 600 million images and 45 million footage clips as of December 31, 2022.

This makes our collection of content one of the largest of its kind, and we delivered 173.3 million paid downloads to our customers across all of our brands during the year ended December 31, 2022.

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

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

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

Royalties represent the largest component of our operating expenses, are

reported within cost of revenue, tend to fluctuate proportionately with revenue and paid downloads and may be impacted by the mix of products sold.

In October 2022, Shutterstock announced our strategic partnership with OpenAI, an AI research and deployment company.

In 2023, Shutterstock integrated Dall-E 2, OpenAI’s tool for AI-generated content into the Shutterstock platform to enable our customers to input keywords and generate unique images based on their specific criteria.

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

During the year ended December 31, 2022, 61% 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.

The majority of our customers license content directly through our self-service web properties which include Shutterstock.com, pond5.com, premiumbeat.com, turbosquid.com and bigstock.com.

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.

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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.

Customers in our enterprise sales channel may also benefit from access to (i) Shutterstock Editorial, which includes our library of editorial images and videos, (ii) Shutterstock Studios, our offering which provides custom, high-quality content matched with production tools and services at scale, and (iii) Computer Vision, our offering which provides metadata associated with our content collection, used to train AI models.

Our range of solutions, including the depth of our API platform integrations, appeals to a broad and diverse customer base and enables us to adapt and evolve with the needs of our more high touch clients to deliver capabilities that embed deep within their workflows.

Our Enterprise sales channel provided approximately 39% of our revenue in 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 during 2021.

As a result, we have seen continued demand for our 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.

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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.

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.

COVID-19 Update

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

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

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

Key Operating Metrics

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We believe that these metrics can be useful for understanding the underlying trends in our business.

The following table summarizes our key operating metrics, which are unaudited, for the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31,

2021 2020 2019

Subscribers (end of period) 343,000 281,000 194,000

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

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

Paid downloads (in millions) 180.0 180.0 187.8

Revenue per download $ 4.16 $ 3.68 $ 3.43

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

Images 400 360 314

Footage clips 24 21 17

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.

Subscribers, Subscriber Revenue and Average Revenue Per Customer from acquisitions are included in these metrics beginning twelve months after the closing of the respective business combination.

Accordingly, the metrics include Subscribers, Subscriber revenue, and Average revenue per customer from TurboSquid beginning February 2022 and from PicMonkey beginning September 2022.

These metrics exclude the respective customer counts and revenues from our acquisitions of Pond5 and Splash News.

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

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

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Subscriber Revenue

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

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

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

Average Revenue Per Customer

Average revenue per customer is calculated by dividing total revenue for the 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.

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.

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.

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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 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 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.

Prior to December 31, 2022, this metric only included approved images and footage clips on shutterstock.com at the end of the period.

We believe that our large selection of high-quality content enables us to attract and retain customers and drives our network effect.

The following table summarizes our key operating metrics, which are unaudited, for the years ended December 31, 2022, 2021 and 2020:

Year Ended December 31,

2022 2021 2020

Subscribers (end of period) 1

586,000 343,000 281,000

Subscriber revenue (in millions) 1

$ 346.6 $ 317.5 $ 265.3

Average revenue per customer (last twelve months) 1

$ 341 $ 368 $ 333

Paid downloads (in millions) 173.3 180.0 180.0

Revenue per download $ 4.40 $ 4.16 $ 3.68

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

Images 600 400 360

Footage clips 45 24 21

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1 Subscribers, Subscriber Revenue and Average Revenue Per Customer from acquisitions are included in these metrics beginning twelve months after the closing of the respective business combination.

Accordingly, the metrics include Subscribers, Subscriber revenue, and Average revenue per customer from TurboSquid beginning February 2022 and from PicMonkey beginning September 2022.

These metrics exclude the respective customer counts and revenues from our acquisitions of Pond5 and Splash News.

Basis of Presentation

The majority of our revenue is earned from licensing content.

The majority of our revenues are earned from licensing content.

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

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.

Subsequent to the acquisition of PicMonkey, we also generate revenue from the license of tools available through our platform.

For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price.

The standalone selling price is determined based on the price at which the performance obligation is sold separately, or if not observable through past transactions, is estimated taking into account available information including internally approved pricing guidelines and pricing information of comparable products.

We recognize revenue upon the satisfaction of performance obligations.

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

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

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

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

For revenue associated with the license of tools available through our platform, 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.

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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.

Impairment of Lease and Related Assets .

Impairment of lease and related assets includes impairment charges related to a portion of the Company’s right-of-use assets and property and equipment triggered by the decision to cease using certain office spaces.

Other (Expense) / Income, Net.

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

Income Taxes.

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General and administrative 132,644 130,758 116,568

Impairment of lease and related assets 18,664 — —

Total operating expenses 734,202 665,309 581,420

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General and administrative 16 % 17 % 17 %

Impairment of lease and related assets 2 % — % — %

Total operating expenses 89 % 86 % 87 %

Income from operations 11 % 14 % 13 %

Other income, net — % 1 % 1 %

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

Income before income taxes 11 % 14 % 13 %

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General and administrative 132,644 130,758 1,886 1

Impairment of lease and related assets 18,664 — 18,664 *

Total operating expenses 734,202 665,309 68,893 10

Income from operations 93,624 108,106 (14,482) (13)

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

Other expense, net (2,587) (3,370) 783 (23)

Income before income taxes 91,037 104,736 (13,699) (13)

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Net income $ 76,103 $ 91,883 $ (15,780) (17) %

* Not meaningful

Revenue increased by $54.4 million, or 7%, to $827.8 million in 2022 as compared to 2021.

On a constant currency basis, revenue increased approximately 11% in the year ended December 31, 2022, as compared to 2021.

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.

Approximately 18% and 7% of the Company’s revenues were denominated in Euro and Pounds Sterling, respectively.

These currencies have depreciated to historically low values compared to the U.S.

dollar during the twelve months ended December 31, 2022.

Other currencies we transact in, including the Japanese Yen and Australian Dollar also depreciated significantly during the period.

E-commerce revenues increased by 2%, to $501.4 million in 2022, as compared to 2021.

On a constant currency basis, E-commerce revenues increased by 5% in 2022, as compared to 2021.

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.

During 2022, growth in our E-commerce sales channel was 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.

Enterprise revenues increased by 15%, to $326.4 million in 2022, as compared to 2021.

On a constant currency basis, Enterprise revenues increased by 20% in 2022, as compared to 2021.

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.

The increase in Enterprise revenues was primarily driven by growth in our Computer Vision and multi-asset product offerings, in addition to revenue generated from our acquisitions of Pond5 and Splash News, which were completed on May 11, 2022 and May 28, 2022, respectively.

Enterprise revenue growth also benefited from continued momentum in Shutterstock Studios and Shutterstock Editorial.

In the years ended December 31, 2022 and 2021, we delivered 173.3 million and 180.0 million paid downloads, respectively, and our revenue per download was $4.40 in 2022 compared to $4.16 in 2021.

During 2022, the 6% increase in revenue per download, is primarily due to changes in product mix coupled with a reduction in paid download volumes.

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.

revenue from North America increased by $62.2 million, or 21%, to $353.2 million, revenue from Europe decreased by $10.5 million, or 4%, to $243.0 million and revenue from outside Europe and North America increased by $2.6 million, or 1%, to $231.6 million, in the year ended December 31, 2022 compared to 2021.

Cost and Expenses

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Cost of revenue increased by $36.6 million, or 13%, to $314.3 million in 2022 as compared to 2021.

As a percent of revenue, cost of revenues increased to 38% for the year ended December 31, 2022, from 36% for 2021.

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.

(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 $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.

Sales and marketing expenses decreased by $1.7 million, or 1%, to $203.2 million in 2022 as compared to 2021.

As a percent of revenue, sales and marketing expenses decreased to 25% for the year ended December 31, 2022, from 26% for 2021.

The decrease in sales and marketing expenses was primarily driven by $15.7 million in lower marketing spend, partially offset by $5.2 million in higher employee-related costs and $2.6 million in higher non-cash compensation expense.

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.

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Product development expenses increased by $13.4 million, or 26%, to $65.4 million in 2022 as compared to 2021.

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.

This increase was primarily driven by (i) $6.3 million in higher employee and third-party contractor related costs, net of capitalized labor for the twelve months ended December 31, 2022, (ii) $3.7 million in higher non-cash compensation expense and (iii) increased software and other IT-related costs for the twelve months ended December 31, 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.

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General and administrative expenses increased by $1.9 million, or 1%, to $132.6 million in 2022 as compared to 2021.

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.

This increase was primarily driven by (i) $4.3 million in professional fees related to our acquisitions of Pond5 and Splash News, (ii) $3.6 million increase in bad debt expense;

(iii) $1.8 million related to realized foreign currency losses, (iii) $1.6 million in severance costs associated with a strategic workforce optimization initiative;

and (iv) $1 million related to a donation to provide direct assistance to Shutterstock’s contributors in Ukraine.

These increases were partially offset by (i) $6.9 million in lower non-cash compensation expense related to the departure of certain executives and expense associated with certain performance based awards, (ii) $1.9 million in lower depreciation and amortization expense and (iii) $1.2 million in lower employee-related costs.

Impairment of Lease and Related Assets .

Impairment of lease and related assets was $18.7 million in 2022.

In the fourth quarter of 2022, the Company completed an analysis of leased-office usage and (i) ceased using certain of its office space, including two floors of its headquarters in New York City as well as (ii) abandoned certain other smaller office spaces.

This resulted in an $18.7 million impairment charge, of which $15.9 million and $2.8 million relates to right-of-use assets and property and equipment, respectively.

Other expense, net.

During 2022, other expense, net substantially consisted of $1.3 million of expense due to foreign currency fluctuations and $1.3 million of interest expense related to the Credit Facility.

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.

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

Income Taxes.

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

Income tax expense increased by $2.1 million, to $14.9 million in 2022 as compared to 2021.

Our effective tax rates for the years ended December 31, 2022 and 2021 were approximately 16.4% and 12.3%, 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.

The 2022 effective tax rate differs from the U.S.

federal statutory tax rate primarily due to the foreign-derived intangible income deduction.

The 2021 effective tax rate differs from the U.S.

federal statutory rate primarily due to the foreign-derived intangible income deduction and the impact of a capital loss transaction.

Comparison of the Years Ended December 31, 2021 and December 31, 2020

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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 primarily 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:

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Cost of Revenue.

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

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

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

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:

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

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

Sales and Marketing.

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

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

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

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

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

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

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.

This increase 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 expense includes severance charges of $2.2 million and $1.7 million, respectively.

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

Product Development.

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

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

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

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

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.

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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) higher non-cash compensation expense of $5.6 million, attributable to certain performance-based awards;

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

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

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

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

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

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 income, net.

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

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

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

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

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

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

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

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

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

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

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

jurisdictions and our effective tax rate could fluctuate accordingly.

The 2021 effective tax rate differs from the U.S.

federal statutory rate primarily due to the foreign-derived intangible income deduction and the impact of a capital loss transaction.

The 2020 effective tax rate differs from the U.S.

federal statutory rate primarily due to the foreign-derived intangible income deduction partially offset by other items.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents totaling $314.0 million, which primarily consisted of bank balances and money market funds.

As of December 31, 2022, we had cash and cash equivalents totaling $115.2 million, which primarily 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 and capital expenses largely through cash generated by our operations.

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.

Stock Offering

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

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

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

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

We declared and paid cash dividends of $0.96 per share of common stock, or $34.6 million during the year ended December 31, 2022.

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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.

Long-Term Investments

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

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

Share Repurchase Program

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During the year ended December 31, 2022, we repurchased approximately 984,000 shares of our common stock at an average per share cost of $74.02.

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 equity-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.

In addition, $2.1 million of proceeds were received during 2021 from the issuance of common stock in connection with the exercise of stock options.

As of December 31, 2022, we have fully utilized our authorization for purchases under the share repurchase program.

Stock Offering

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

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

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

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

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 December 31, 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 year ended December 31, 2022, the Company paid cash interest totaling $1.0 million and our annualized interest rate was 3.8%.

On January 27, 2023, we fully repaid our borrowings under the Credit Facility and had a remaining borrowing capacity of $98 million, net of standby letters of credit.

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 December 31, 2022, we are in compliance with these covenants.

Sources and Uses of Funds

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

As of December 31, 2022, we had approximately $93 million in unconditional cash obligations, consisting primarily of 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, of which the majority is due to be paid within the next two years.

In addition, as of December 31, 2022, we had approximately $54 million in operating lease obligations with lease payments extending through 2029.

See Notes 15 and 16 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 lease and other non-lease commitments, respectively, as of December 31, 2022.

The following table summarizes our cash flow data for 2022, 2021 and 2020, respectively.

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Net cash provided by operating activities was $158.5 million for the year ended December 31, 2022, compared to $216.4 million for the year ended December 31, 2021.

The decline in cash provided by operating activities for the year ended December 31, 2022 was impacted by the timing of payments and cash receipts in the ordinary course of business which can cause operating cash flow to fluctuate from period to period.

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, 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

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Cash used in investing activities totaled $275.6 million, $250.4 million and $35.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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;

Cash used in investing activities for the year ended December 31, 2022 was $275.6 million, consisting primarily of (i) $211.8 million cash used in the acquisitions of Pond5 and Splash News, net of cash acquired;

(ii) capital expenditures of $43.3 million for internal-use software and website development costs, and purchases of software and equipment, and (iii) $16.8 million paid to acquire the rights to distribute certain digital content in perpetuity.

Cash used in investing activities for the year ended December 31, 2021 was $250.4 million, consisting primarily (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.

(iii) capital expenditures of $28.1 million for internal-use software and website development costs, and purchase of software and equipment, and (iv) $8.9 million 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, 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.

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

Cash used in financing activities totaled $79.5 million, $77.7 million and $4.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Cash used in financing activities during 2022 primarily consisted of (i) $73.5 million in connection with the repurchase of common stock under our share repurchase program;

(ii) $34.6 million, related to the payment of the quarterly cash dividend, and (iii) $22.6 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards.

These amounts were partially offset by approximately $50.0 million in proceeds received from our Credit Facility.

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

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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 $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.

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 capital lease obligations, and our property, equipment and software have been purchased primarily with cash.

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

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

Our future minimum payments under non-cancelable operating leases and purchase obligations are as follows as of December 31, 2021:

Payments Due by Period

Total Less Than

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

(in thousands)

Operating lease obligations $ 56,187 $ 8,694 $ 14,400 $ 14,974 $ 18,119

Purchase obligations 48,100 28,600 17,100 2,400 —

Total $ 104,287 $ 37,294 $ 31,500 $ 17,374 $ 18,119

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

The ESB Lease will expire in 2029, and the aggregate undiscounted future minimum lease payments, are approximately $50.4 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.

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

We are not responsible for any damages, costs, or losses to the extent such damages or losses arise as a result of the modifications made by the customer, or the context in which content is used.

Our license agreements entered into with customers limit our indemnification obligations at amounts ranging from $10,000 to

$250,000, with certain exceptions for which our indemnification obligations are uncapped.

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

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

Off-Balance Sheet Arrangements

As of December 31, 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.

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 of proceeds received in connection with the exercise of stock options.

Non-GAAP Financial Measures

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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.

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.

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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 as net income adjusted for depreciation and amortization, non-cash equity-based compensation, impairment of lease and related assets, foreign currency transaction gains and losses, severance costs associated with strategic workforce optimizations, interest income and expense and income taxes.

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

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Non-cash equity-based compensation 35,740 36,179 28,309

Impairment of lease and related assets 18,664 — —

Other adjustments, net (1)

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_______________________________________________________________________________

(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.

(1) Included in other adjustments, net is foreign currency transaction gains and losses, severance associated with strategic workforce optimizations 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 as net income adjusted for the impact of non-cash equity-based compensation, the amortization of acquisition-related intangible assets, impairment of lease and related assets, severance costs associated with strategic workforce optimizations 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.

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Acquisition-related amortization expense (2)

29,302 13,334 2,261

Tax effect of acquisition-related amortization expense (1)

(6,886) (3,133) (531)

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

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

Impairment of lease and related assets 18,664 — —

Tax effect of impairment of lease and related assets (1)

Other $ 1,576 $ — $ —

Tax effect of other (1)

$ (355) $ — $ —

Adjusted net income $ 141,548 $ 129,761 $ 95,152

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(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.

(2) Of these amounts, $7.5 million and $5.3 million are included in cost of revenue for the three months ended December 31, 2022 and 2021, respectively, and $27.0 million and $10.2 million are included in cost of revenue for the years ended December 31, 2022 and 2021, respectively.

The remainder of acquisition-related amortization expense is included in general and administrative expense in the Statement of Operations.

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

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Free Cash Flow $ 98,334 $ 179,373 $ 144,231

Critical Accounting Policies and Estimates

Critical Accounting Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP.

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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.

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

Revenue Recognition

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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.

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.

We also generate revenue from tools available through our platform.

For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price.

We recognize revenues upon the satisfaction of performance obligations.

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

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

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

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

For revenue associated with tools available through our platform, 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.

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

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

Customer payments received

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

Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms.

Collectability for customers who pay on

credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers.

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.

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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.

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.

The global intangible low-taxed income (“GILTI”) provisions of the TCJA impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

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

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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.

Determining the fair value of the customer relationships intangible assets requires management to use significant judgment and estimates, including estimates of future revenue growth rates for existing customers, 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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis