Shutterstock, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this filing. In addition to historical consolidated financial information, this discussion contains forward-looking statements including statements about our plans, estimates and beliefs. These statements involve risks and uncertainties and our actual results could differ materially from those expressed or implied in forward-looking statements. See “Forward Looking Statements” above. See also the “Risk Factors” disclosure in Item 1A above for additional discussion of the risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Overview and Recent Developments 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. 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. 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. Our offerings are distributed to customers under the following brands: Shutterstock; Pond5; TurboSquid; Offset; PremiumBeat; Bigstock; PicMonkey; 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. 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, 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. 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 42 Table of Contents 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 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. 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 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 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. Our monthly subscriptions provide for either a fixed number of content licenses or credits that may be used to download content during the period. Our subscription-based pricing model makes the creative process easier because customers can download content in our collection for use in their creative process without incremental costs, which provides greater creative freedom and helps improve work product. 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. 43 Table of Contents Key Operating Metrics In addition to key financial metrics, we regularly review a number of key operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe that these metrics can be useful for understanding the underlying trends in our business. 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. Subscribers We define subscribers as those customers who purchase one or more of our monthly recurring products for a continuous period of at least three months, measured as of the end of the reporting period. We believe the number of subscribers is an important metric that provides insight into our monthly recurring business and its growth. We believe that an increase in our number of subscribers is an indicator of engagement in our platform and potential for future growth. Subscriber Revenue We define subscriber revenue as the revenue generated from subscribers during the period. We believe subscriber revenue, together with our number of subscribers, provide insight into the portion of our business and growth driven by our monthly recurring products. Average Revenue Per Customer Average revenue per customer is calculated by dividing total revenue for the 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. 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. 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 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. 44 Table of Contents 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 ___________________________________________________ 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 Revenue 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 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 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. Collectability is reasonably assured at the time the electronic order or contract is entered. The majority of our customers purchase products by making an electronic payment with a credit card at the time of the transaction. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and control the product or service before transferring it to the customer. We also license content to customers through third-party resellers. Third-party resellers sell our products directly to customers as the principal in those transactions. Accordingly, we recognize revenue net of costs paid to resellers. 45 Table of Contents 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. 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. 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. 46 Table of Contents Results of Operations The following table presents our results of operations for the periods indicated. The period-to-period comparisons of results are not necessarily indicative of results for future periods. Year Ended December 31, 2022 2021 2020 (in thousands) Consolidated Statements of Operations: Revenue $ 827,826 $ 773,415 $ 666,686 Operating expenses: Cost of revenue 314,306 277,659 259,573 Sales and marketing 203,154 204,878 159,241 Product development 65,434 52,014 46,038 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 Income from operations 93,624 108,106 85,266 Other (expense) / income, net (2,587) (3,370) 4,257 Income before income taxes 91,037 104,736 89,523 Provision for income taxes 14,934 12,853 17,757 Net income $ 76,103 $ 91,883 $ 71,766 The following table presents the components of our results of operations for the periods indicated as a percentage of revenue: Year Ended December 31, 2022 2021 2020 Consolidated Statements of Operations: Revenue 100 % 100 % 100 % Operating expenses: Cost of revenue 38 % 36 % 39 % Sales and marketing 25 % 26 % 24 % Product development 8 % 7 % 7 % 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 (expense) / income, net — % — % 1 % Income before income taxes 11 % 14 % 13 % Provision for income taxes 2 % 2 % 3 % Net income 9 % 12 % 11 % 47 Table of Contents Comparison of the Years Ended December 31, 2022 and December 31, 2021 The following table presents our results of operations for the periods indicated: Year Ended December 31, 2022 2021 $ Change % Change (in thousands) Consolidated Statements of Operations Data: Revenue $ 827,826 $ 773,415 $ 54,411 7 % Operating expenses: Cost of revenue 314,306 277,659 36,647 13 Sales and marketing 203,154 204,878 (1,724) (1) Product development 65,434 52,014 13,420 26 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, net (2,587) (3,370) 783 (23) Income before income taxes 91,037 104,736 (13,699) (13) Provision for income taxes 14,934 12,853 2,081 16 Net income $ 76,103 $ 91,883 $ (15,780) (17) % * Not meaningful Revenue 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. 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 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. 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 $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. 48 Table of Contents Cost and Expenses Cost of Revenue. 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) 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 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. Product Development. 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 (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. General and Administrative. 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) $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 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 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. 49 Table of Contents Comparison of the Years Ended December 31, 2021 and December 31, 2020 The following table presents our results of operations for the periods indicated: Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Consolidated Statements of Operations Data: Revenue $ 773,415 $ 666,686 $ 106,729 16 % Operating expenses: Cost of revenue 277,659 259,573 18,086 7 Sales and marketing 204,878 159,241 45,637 29 Product development 52,014 46,038 5,976 13 General and administrative 130,758 116,568 14,190 12 Total operating expenses 665,309 581,420 83,889 14 Income from operations 108,106 85,266 22,840 27 Other (expense) / income, net (3,370) 4,257 (7,627) (179) Income before income taxes 104,736 89,523 15,213 17 Provision for income taxes 12,853 17,757 (4,904) (28) Net income $ 91,883 $ 71,766 $ 20,117 28 % Revenue Revenue increased by $106.7 million, or 16%, to $773.4 million in 2021 as compared to 2020. On a constant currency basis, revenue increased approximately 15% in the year ended December 31, 2021, as compared to 2020. Our revenue growth in 2021 is primarily driven by revenue generated from our 2021 acquisitions and the increase in our subscription business. From 2020 to 2021, subscribers grew by 22% to 343,000 and subscriber revenue grew by 20% to $317.5 million. E-commerce revenues increased by 19%, to $490.2 million in 2021 as compared to 2020. On a constant currency basis, E-commerce revenues increased by 16% in 2021, as compared to 2020. During 2021, growth in our E-commerce sales channel was 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: revenue from North America increased by $54.4 million, or 23%, to $291.0 million, revenue from Europe increased by $32.8 million, or 15%, to $253.5 million and revenue from outside Europe and North America increased by $19.5 million, or 9%, to $229.0 million, in the year ended December 31, 2021 compared to 2020. Cost and Expenses Cost of Revenue. Cost of revenue increased by $18.1 million, or 7%, to $277.7 million in 2021 as compared to 2020. This increase was primarily driven by: (i) higher royalty expense, content procurement costs and credit card fees, associated with our increased revenue and (ii) increased depreciation and amortization expense driven by our recent acquisitions. In addition, in 2020, cost of revenue 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. 50 Table of Contents 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. 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 increased by $6.0 million, or 13%, to $52.0 million in 2021 as compared to 2020. This increase was primarily driven by higher personnel costs and higher non-cash compensation expense. These increases were partially offset by a reduction in software and other IT-related costs, for the year ended December 31, 2021, as compared to the prior year. We expect product development expenses, of which a portion will be capitalized, to continue in the foreseeable future, as we pursue opportunities to invest in developing new products and internal tools and enhance the functionality of our existing products and technologies. General and Administrative. General and administrative expenses increased by $14.2 million, or 12%, to $130.8 million in 2021 as compared to 2020. This increase was primarily driven by (i) $5.9 million in higher employee-related costs in 2021 as compared to 2020, (ii) $4.7 million in higher non-cash compensation expense; and (iii) $4.3 million in higher professional fees, which were impacted by transaction costs associated with our acquisitions of TurboSquid and PicMonkey. These increases were partially offset by a $2.4 million decline in bad debt expense, and other reductions associated with ongoing vendor management initiatives. For the years ended December 31, 2021 and 2020, general and administrative expenses include severance charges of $0.5 million and $1.4 million, respectively. Other (expense) / income, net. During 2021, other (expense) / income, net substantially consisted of $3.3 million of expense due to foreign currency fluctuations. We expect to experience future foreign currency gains and losses as the US Dollar fluctuates relative to non-US currencies in which we transact. During 2020, approximately $3.1 million of other (expense) / income, net related to favorable foreign currency fluctuations, in addition to $1.2 million of interest income. Income Taxes. Income tax expense decreased by $4.9 million to $12.9 million in 2021 as compared to 2020. Our effective tax rates for the years ended December 31, 2021 and 2020 were approximately 12.3% and 19.8%, respectively. The 2021 effective tax rate 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, 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, 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 $0.96 per share of common stock, or $34.6 million during the year ended December 31, 2022. On January 30, 2023, our Board of Directors declared a quarterly cash dividend of $0.27 per share of outstanding common stock payable on March 16, 2023 to stockholders of record at the close of business on March 2, 2023. The Company currently expects to continue to pay comparable cash dividends on a quarterly basis in the future. Future declarations of dividends are subject to the final determination of our Board of Directors, and will depend on, among other things, our future financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, anticipated cash needs, business prospects, provisions of applicable law and other factors our Board of Directors may deem relevant. 51 Table of Contents Share Repurchase Program In October 2015, our board of directors approved a share repurchase program, authorizing us to repurchase up to $100 million of our common stock and in February 2017, our Board of Directors approved an increase to the share repurchase program, authorizing us to repurchase up to an additional $100 million of our outstanding common stock. We expect to fund future repurchases, if any, through a combination of cash on hand, cash generated by operations and future financing transactions, if appropriate. Accordingly, our share repurchase program is subject to us having available cash to fund repurchases. Under the share repurchase program, management is authorized to purchase shares of our common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. As of December 31, 2022, we have repurchased approximately 3.8 million shares of our common stock under the share repurchase program at an average per-share cost of $52.97. 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, 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 We believe, based on our current operating plan, that our cash and cash equivalents, and cash from operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our longer-term liquidity is contingent upon future operating performance. Future capital expenditures will generally relate to building enhancements to the functionality of our current platform, the acquisition of additional storage, servers, network connectivity hardware, security apparatus and software, leasehold improvements and furniture and fixtures related to office expansion and relocation, content and general corporate infrastructure. 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 52 Table of Contents 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. Cash Flows The following table summarizes our cash flow data for 2022, 2021 and 2020, respectively. Year Ended December 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 158,451 $ 216,372 $ 165,072 Net cash used in investing activities $ (275,550) $ (250,438) $ (35,310) Net cash used in financing activities $ (79,487) $ (77,722) $ (4,587) Operating Activities Our primary source of cash from operating activities is cash collections from our customers. The majority of our revenue is generated from credit card transactions and is typically settled within one to five business days. Our primary uses of cash for operating activities are for the payment of royalties to content contributors, employee-related expenditures and the payment of other operating expenses incurred in the ordinary course of business. Net cash provided by operating activities was $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. Investing Activities Our investing activities have consisted primarily of capital expenditures, business combinations, asset acquisitions, investments and content acquisitions. Capital expenditures include internal-use software and website development costs, purchases of software equipment, and capitalization of leasehold improvements. Capital expenditures are primarily attributable to investments in internally developed software. We continue to invest significantly in product development to enhance our customer experience and increase the efficiency with which we deploy new products and features. 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, 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 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. 53 Table of Contents 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 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; (ii) $26.5 million in connection with the repurchase of common stock under our share repurchase program, and (iii) $22.7 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by approximately $2.1 million in proceeds received in connection with the exercise of stock options. Cash used in financing activities during 2020 primarily consisted of $24.4 million related to the payment of the quarterly cash dividends and $4.5 million, paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by $23.2 million of proceeds from our Stock Offering, after deducting underwriting discounts, commissions and offering expenses paid and $1.2 million of proceeds received in connection with the exercise of stock options. Non-GAAP Financial Measures To supplement our consolidated financial statements presented in accordance with the accounting principles generally accepted in the United States, or GAAP, our management considers certain financial measures that are not prepared in accordance with GAAP, collectively referred to as non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage), and free cash flow. These non-GAAP financial measures are included solely to provide investors with additional information regarding our financial results and are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies. These non-GAAP financial measures have not been calculated in accordance with GAAP and should be considered only in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP measures. In addition, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) and free cash flow should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions; accordingly, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies. Shutterstock’s management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing the business and to, among other things: (i) monitor and evaluate the performance of Shutterstock’s business operations, financial performance and overall liquidity; (ii) facilitate management’s internal comparisons of the historical operating performance of its business operations; (iii) facilitate management’s external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of Shutterstock’s management team and, together with other operational objectives, as a measure in evaluating employee compensation and bonuses; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. Management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) and free cash flow are useful to investors because these measures enable investors to analyze Shutterstock’s operating results on the same basis as that used by management. Additionally, management believes that adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share provide useful information 54 Table of Contents to investors about the performance of the Company’s overall business because such measures eliminate the effects of unusual or other infrequent charges that are not directly attributable to Shutterstock’s underlying operating performance and revenue growth (including by distribution channel) on a constant currency basis, provides useful information to investors by eliminating the effect of foreign currency fluctuations that are not directly attributable to Shutterstock’s operating performance. Management also believes that providing these non-GAAP financial measures enhances the comparability for investors in assessing Shutterstock’s financial reporting. Management believes that free cash flow is useful for investors because it provides them with an important perspective on the cash available for strategic measures, after making necessary capital investments in internal-use software and website development costs to support the Company’s ongoing business operations and after excluding the impact of nonrecurring payments associated with long-term incentives related to our 2017 acquisition of Flashstock, and provides them with the same measures that management uses as the basis for making resource allocation decisions. Our use of non-GAAP financial measures has limitations as an analytical tool, and these measures should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP, as the excluded items may have significant effects on our operating results and financial condition. Additionally, our methods for measuring non-GAAP financial measures may differ from other companies’ similarly titled measures. When evaluating our performance, these non-GAAP financial measures should be considered alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. Our method for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted common share, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, as well as a reconciliation of the differences between adjusted EBITDA, adjusted net income, revenue growth (including by distribution channel) on a constant currency basis and free cash flow, and the most comparable financial measures calculated and presented in accordance with GAAP, is presented below. Adjusted EBITDA We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, 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. The following is a reconciliation of net income to adjusted EBITDA for each of the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Net income $ 76,103 $ 91,883 $ 71,766 Add / (less) Non-GAAP adjustments: Depreciation and amortization 68,470 48,771 41,359 Non-cash equity-based compensation 35,740 36,179 28,309 Impairment of lease and related assets 18,664 — — Other adjustments, net (1) 4,163 3,370 (4,257) Provision for income taxes 14,934 12,853 17,757 Adjusted EBITDA $ 218,074 $ 193,056 $ 154,934 Adjusted EBITDA margin 26.3 % 25.0 % 23.2 % _______________________________________________________________________________ (1) Included in other adjustments, net is foreign currency transaction gains and losses, severance associated with strategic workforce optimizations and interest income and expense. 55 Table of Contents 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, 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. The following is a reconciliation of net income to adjusted net income for each of the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Net income $ 76,103 $ 91,883 $ 71,766 Add / (less) Non-GAAP adjustments: Non-cash equity-based compensation 35,740 36,179 28,309 Tax effect of non-cash equity-based compensation (1) (8,397) (8,502) (6,653) Acquisition-related amortization expense (2) 29,302 13,334 2,261 Tax effect of acquisition-related amortization expense (1) (6,886) (3,133) (531) Impairment of lease and related assets 18,664 — — Tax effect of impairment of lease and related assets (1) (4,199) — — Other $ 1,576 $ — $ — Tax effect of other (1) $ (355) $ — $ — Adjusted net income $ 141,548 $ 129,761 $ 95,152 Adjusted net income per diluted common share $ 3.87 $ 3.48 $ 2.62 Weighted average diluted shares 36,546 37,324 36,369 (1) Statutory tax rates are used to calculate the tax effect of the adjustments. (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 We define revenue growth (including by distribution channel) on a constant currency basis (expressed as a percentage) as the increase in current period revenues over prior period revenues, utilizing fixed exchange rates for translating foreign currency revenues for all periods in the comparison. Year Ended December 31, 2022 2021 2020 Reported revenue (in thousands) $ 827,826 $ 773,415 $ 666,686 Revenue growth 7 % 16 % 2 % Revenue growth on a constant currency basis 11 % 15 % 2 % E-commerce reported revenue (in thousands) $ 501,384 $ 490,212 $ 412,521 E-commerce revenue growth 2 % 19 % 5 % E-commerce revenue growth on a constant currency basis 5 % 16 % 5 % Enterprise reported revenue (in thousands) $ 326,442 $ 283,203 $ 254,165 Enterprise revenue growth 15 % 11 % (2) % Enterprise revenue growth on a constant currency basis 20 % 10 % (2) % 56 Table of Contents Free Cash Flow We define free cash flow as our cash provided by operating activities, adjusted for capital expenditures and content acquisition, and, with respect to the twelve months ended December 31, 2020, a payment associated with long-term incentives related to our 2017 acquisition of Flashstock. The following is a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated: Year Ended December 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 158,451 $ 216,372 $ 165,072 Capital expenditures (43,296) (28,125) (25,630) Content acquisitions (16,821) (8,874) (2,970) Payments related to long-term incentives related to acquisitions — — 7,759 Free Cash Flow $ 98,334 $ 179,373 $ 144,231 Critical Accounting Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure or inclusion of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to allowance for doubtful accounts, the volume of expected unused licenses used in revenue recognition for our subscription-based products, 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 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 estimates. Revenue Recognition The majority of our revenues are earned from the license of content. Content licenses are generally purchased on a monthly or annual basis, whereby a customer pays for a predetermined quantity of content that may be downloaded over a specific period of time, or, on a transactional basis, whereby a customer pays for individual content licenses at the time of download. 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. 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 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 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. Collectability is reasonably assured at the time the electronic order or contract is entered. The majority of our customers purchase products by making electronic payments with a credit card at the time of the transaction. Customer payments received 57 Table of Contents in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and we control the product or service before transferring it to the customer. We also license content to customers through third-party resellers. Third-party resellers sell our products directly to customers as the principal in those transactions. Accordingly, we recognize revenue net of costs paid to resellers. Accounts Receivable and Allowance for Doubtful Accounts Our accounts receivable consists of customer obligations due under normal trade terms, carried at their fair value less an allowance for doubtful accounts, if required. We determine our allowance for doubtful accounts based on an evaluation of the aging of our accounts receivable and on a customer-by-customer basis where appropriate. Our reserve analysis contemplates our historical loss rate on receivables, specific customer situations and the economic environments in which we operate. Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”) on January 1, 2020, the Company shifted to a current expected credit loss model. As of December 31, 2022 and 2021, we had an allowance for doubtful accounts of $5.8 million and $1.9 million, respectively. Fluctuations in our allowance for doubtful accounts are primarily attributable to changes in the aging profile of our gross accounts receivable balances and specific customer situations arising during the year. Income Taxes Our income tax expense includes U.S. (federal and state) and foreign income taxes. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes may be due. We record an income tax liability for the difference, if any, between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The reserves are adjusted in light of changing facts and circumstances, such as the outcomes of tax audits or lapses in statutes of limitations. Any reserve for uncertain tax provisions and related penalties and interest is included in the income tax provision. On a quarterly basis, we assess the realizability of deferred tax assets, based on the available evidence including a history of taxable income, estimates of future taxable income and planning strategies and a valuation allowance is recorded to the extent that it is not more likely than not that the deferred tax assets will be realized. Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities. In the event that actual results differ from these estimates, we will adjust these estimates in future periods which may result in a change in the effective tax rate in a future period. 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. 58 Table of Contents Acquisitions Business combinations are recorded at fair value and the purchase price is allocated to the assets acquired and liabilities assumed in the transaction. Assets acquired may include intangible assets such as customer relationships, trade names, developed technology and contributor content. Fair values are based on the exit price (i.e., the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date) and valuation methods that may be utilized include the multiple-period excess earnings method, the relief-from-royalty method and the cost-to-recreate method. Determining the fair value 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. Changes to these factors could affect the measurement and allocation of fair value. Recent Accounting Pronouncements See Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a full description of recent accounting pronouncements, which is incorporated herein by reference.