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 leading global creative platform connecting brands and businesses to high quality content. 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 our 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. Digital content licensed to our customers for their creative needs includes images, footage, music, and 3D models (our “Content” offering). Our Content revenues represent the majority of the Company’s business and are supported by our searchable creative platform and driven by our large contributor network. In addition, our customers have needs that are beyond traditional content license products and services. These include (i) licenses to metadata associated with our images, footage, music tracks and 3D models through our data offering, (ii) distribution and advertising services from our Giphy business, which consists of GIFs (graphics interchange format visuals) that serve as a critical ingredient in text- and message- based conversations and in contextual advertising settings, (iii) specialized solutions for high-quality content matched with production tools and services through Shutterstock Studios and (iv) other tailored white-glove services (collectively, our “Data, Distribution, and Services” offerings). The Company’s Content and Data, Distribution, and Services offering revenues are as follows (in thousands): Year Ended December 31, 2023 2022 2021 Content $ 737,264 $ 789,306 $ 757,470 Data, Distribution, and Services 137,323 38,520 15,945 Total Revenue $ 874,587 $ 827,826 $ 773,415 Our Content Offering: Our Content offering 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. • Generative AI Content - consisting of images generated from algorithms trained with high-quality, ethically sourced content. Customers can generate images by entering a description of their desired content into model prompts. Our Content is distributed to customers under the following brands: Shutterstock; Pond5; TurboSquid; PicMonkey; PremiumBeat; Splash News; Bigstock; and Offset. 43 Table of Contents 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. Pond5 is a video-first content marketplace which expands the Company’s content offerings across footage, image and music. TurboSquid operates a marketplace that offers more than one million 3D models and a 2 dimensional (“2D”) marketplace derived from 3D objects. PicMonkey is a leading online graphic design and image editing platform. 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. Splash News provides editorial image and video content across celebrity and red carpet events. Bigstock maintains a separate content library tailored for creators seeking to incorporate cost-effective imagery into their projects. 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. Signature capabilities include: • Magic Brush - Magically modify an image by brushing over the areas you'd like to change and simply describing what you want to add, replace or erase. • Variations - Generate alternate options of any stock or AI-generated image. • Expand Image - Broaden the view of any image, as easily as if zooming out through a camera lens, to see more of the scene behind the central image. • Smart Resize - Automatically change the shape of your image to match the dimensions you need. • Background Remover - Remove or replace the background with any scene when the subject of an image is perfect, but the background is not. • AI Image Generator - Allows anyone to create high-quality, ethically-sourced visuals in seconds (ready for licensing and indemnifiable for commercial use) by simply describing what they are looking for. Over 2.0 million active, paying customers contributed to our revenue in 2023. Our contributors made their images, footage and music tracks available in our collection, which has grown to 771 million images and 54 million footage clips as of December 31, 2023. This makes our collection of content one of the largest of its kind, and we delivered 153.0 million paid downloads to our customers across all of our brands during the year ended December 31, 2023. Contributors of Content typically earn a royalty each time their work is licensed. Content contributors generally 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. 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 demand for our monthly subscription products. 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. Our Data, Distribution, and Services offering address customer demand for products and services that are beyond our Content licenses. These products and services include, among other things, the use of our metadata, leveraging our Giphy, Inc. platform, and customized Shutterstock Studios offerings. We have seen increased demand for access to our metadata for machine learning and generative artificial intelligence model training. We offer ethically sourced and licenseable metadata at industry leading scales and quality. Our metadata customer base ranges from large technology and media companies to smaller start-up organizations. In 2023, we completed our acquisition of Giphy, Inc. (“Giphy”). Giphy is a content platform that allows users to personalize casual conversations with GIFs, and generates billions of monthly impressions through over 14,000 API partners. We believe customers in all industries will look to use Giphy in marketing campaigns as another advertising outlet. 44 Table of Contents Our Data, Distribution, and Services offering also includes high-quality production and custom content at scale provided by Shutterstock Studios (“Studios”). Studios is a cost-effective solution for brands and agencies looking to meet their content needs and create fresh dynamic digital assets. Customers can bring an idea, and our Studios team will provide a 360-degree content creation solution. We offer a whole spectrum of services at pre-production, production, live production and post-production stages. 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, from PicMonkey beginning September 2022, and from Pond5 and Splash News beginning May 2023. These metrics exclude the respective counts and revenues from Giphy. 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. 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 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 and transactional products as well as 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 our Studios business, downloads of content that are offered to customers for no charge (including our free trials), and downloads associated with our data offering. Measuring the number of paid downloads that our customers make in a given period is important because it is a measure of customer engagement on our platform and triggers the recognition of 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 our Studios business, revenue that is not derived from or associated with content licenses and revenue associated with our data 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 and sales channel 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, content from our Studios business and AI generated content. Prior to December 31, 2022, this metric only included approved images 45 Table of Contents and footage clips in our library 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, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 Subscribers (end of period) 1 523,000 586,000 343,000 Subscriber revenue (in millions) 1 $ 351.5 $ 346.6 $ 317.5 Average revenue per customer (last twelve months) 1 $ 412 $ 341 $ 368 Paid downloads (in millions) 153.0 173.3 180.0 Revenue per download $ 4.72 $ 4.40 $ 4.16 Content in our collection (end of period, in millions) Images 771 719 464 Footage clips 54 47 24 ___________________________________________________ 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, from PicMonkey beginning September 2022, and from Pond5 and Splash News beginning May 2023. These metrics exclude the respective counts and revenues from our acquisition of Giphy. Basis of Presentation Revenue A significant portion of our revenues are earned from licensing content. Content licenses are generally purchased 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. We also generate revenue from tools made 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 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 probable at the time the electronic order or contract is entered. A significant portion of our customers purchase products by making electronic payments with a credit card at the time of the transaction. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and 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. 46 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. Bargain Purchase Gain . A bargain purchase gain is recognized subsequent to an acquisition, if the fair value of the net assets acquired and liabilities assumed exceeds the net consideration. 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. 47 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, 2023 2022 2021 (in thousands) Consolidated Statements of Operations: Revenue $ 874,587 $ 827,826 $ 773,415 Operating expenses: Cost of revenue 352,630 314,306 277,659 Sales and marketing 214,749 203,154 204,878 Product development 96,162 65,434 52,014 General and administrative 142,646 132,644 130,758 Impairment of lease and related assets — 18,664 — Total operating expenses 806,187 734,202 665,309 Income from operations 68,400 93,624 108,106 Bargain purchase gain 50,261 — — Other income / (expense), net 3,807 (2,587) (3,370) Income before income taxes 122,468 91,037 104,736 Provision for income taxes 12,199 14,934 12,853 Net income $ 110,269 $ 76,103 $ 91,883 The following table presents the components of our results of operations for the periods indicated as a percentage of revenue: Year Ended December 31, 2023 2022 2021 Consolidated Statements of Operations: Revenue 100 % 100 % 100 % Operating expenses: Cost of revenue 40 % 38 % 36 % Sales and marketing 25 % 25 % 26 % Product development 11 % 8 % 7 % General and administrative 16 % 16 % 17 % Impairment of lease and related assets — % 2 % — % Total operating expenses 92 % 89 % 86 % Income from operations 8 % 11 % 14 % Bargain purchase gain 6 % — % — % Other income / (expense), net — % — % — % Income before income taxes 14 % 11 % 14 % Provision for income taxes 1 % 2 % 2 % Net income 13 % 9 % 12 % 48 Table of Contents Comparison of the Years Ended December 31, 2023 and December 31, 2022 The following table presents our results of operations for the periods indicated: Year Ended December 31, 2023 2022 $ Change % Change (in thousands) Consolidated Statements of Operations Data: Revenue $ 874,587 $ 827,826 $ 46,761 6 % Operating expenses: Cost of revenue 352,630 314,306 38,324 12 Sales and marketing 214,749 203,154 11,595 6 Product development 96,162 65,434 30,728 47 General and administrative 142,646 132,644 10,002 8 Impairment of lease and related assets — 18,664 (18,664) * Total operating expenses 806,187 734,202 71,985 10 Income from operations 68,400 93,624 (25,224) (27) Bargain purchase gain 50,261 — 50,261 * Other income / (expense), net 3,807 (2,587) 6,394 (247) Income before income taxes 122,468 91,037 31,431 35 Provision for income taxes 12,199 14,934 (2,735) (18) Net income $ 110,269 $ 76,103 $ 34,166 45 % * Not meaningful Revenue Revenue increased by $46.8 million, or 6%, to $874.6 million in 2023 as compared to 2022. On a constant currency basis, revenue increased approximately 5% in the year ended December 31, 2023, as compared to 2022. Content license revenues decreased by 7%, to $737.3 million in 2023, as compared to 2022. On a constant currency basis, Content license revenues decreased by 7% in 2023, as compared to 2022. The decline in our Content license revenues was driven by weakness in new customer acquisition, partially offset by increases in Pond5. Pond5 contributed to revenues for the full year in 2023 compared to seven months in 2022. Data, Distribution, and Services revenues increased by 256%, to $137.3 million in 2023, as compared to 2022, and increased by 256% in 2023 on a constant currency basis. The increase in Data, Distribution, and Services revenues was primarily driven by growth in our data offering, which accounted for $84.9 million of the growth from 2022 to 2023 and $10.5 million of revenue generated from Giphy. 2023 revenue from our E-commerce customers decreased by 12%, to $439.9 million in 2023, as compared to 2022. E-commerce revenues were not impacted on a constant currency basis in 2023. The decline in our E-commerce revenues was driven by weakness in new customer acquisition, partially offset by revenues generated from our acquisition of Pond5, which contributed to revenues for the full year in 2023. 2023 revenues from our Enterprise customers increased by 33%, to $434.6 million in 2023, as compared to 2022. Enterprise revenues were not impacted on a constant currency basis in 2023. The increase in Enterprise revenues was primarily driven by growth in our data offering, revenue generated from our acquisitions of Pond5 and Splash News, which contributed to revenues for the full year in 2023 and revenue generated from Giphy. In the years ended December 31, 2023 and 2022, we delivered 153.0 million and 173.3 million paid downloads, respectively, and our revenue per download was $4.72 in 2023 compared to $4.40 in 2022. During 2023, the decline in paid downloads is attributed to the decline in the E-commerce business. Changes in our revenue by region were as follows: revenue from North America increased by $74.5 million, or 21%, to $427.7 million, revenue from Europe decreased by $12.0 million, or 5%, to $231.0 million and revenue from outside Europe 49 Table of Contents and North America decreased by $15.8 million, or 7%, to $215.8 million, in the year ended December 31, 2023 compared to 2022. Cost and Expenses Cost of Revenue. Cost of revenue increased by $38.3 million, or 12%, to $352.6 million in 2023 as compared to 2022. As a percent of revenue, cost of revenues increased to 40% for the year ended December 31, 2023, from 38% for 2022. This increase was primarily driven by: (i) increased depreciation and amortization expense driven by our recent acquisitions; (ii) increased royalty, content and reviewer costs; (iii) higher costs associated with website hosting, hardware and software licenses; and (iv) Giphy employee-related costs comprised of $4.9 million of recurring Giphy Retention Compensation and $4.3 million of non-recurring Giphy Retention Compensation. We expect that our cost of revenue will continue to fluctuate in line with changes in revenue. Sales and Marketing. Sales and marketing expenses increased by $11.6 million, or 6%, to $214.7 million in 2023 as compared to 2022. As a percent of revenue, sales and marketing expenses was 25% for the years ended December 31, 2023 and 2022. The increase in sales and marketing expenses was primarily driven by (i) $5.1 million in higher employee-related costs; (ii) $3.1 million in higher consultant costs; and (iii) Giphy employee-related costs comprised of $1.4 million of recurring Giphy Retention Compensation and $1.0 million of non-recurring Giphy Retention Compensation not considered necessary to operate our business. 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 $30.7 million, or 47%, to $96.2 million in 2023 as compared to 2022. This increase was primarily driven by (i) Giphy employee-related costs comprised of $5.5 million of recurring Giphy Retention Compensation, net of capitalized labor and $20.9 million of non-recurring Giphy Retention Compensation not considered necessary to operate our business and (ii) $2.8 million in higher non-cash compensation expense. 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 $10.0 million, or 8%, to $142.6 million in 2023 as compared to 2022. This increase was primarily driven by (i) $7.9 million in higher non-cash equity-based compensation expense and (ii) Giphy employee-related costs comprised of $1.8 million of recurring Giphy Retention Compensation, net of capitalized labor and $5.4 million of non-recurring Giphy Retention Compensation not considered necessary to operate our business. These increases are partially offset by $1.4 million in lower occupancy costs and $1.2 million in lower professional fees. For the twelve months ended December 31, 2023 and 2022, general and administrative expenses included $3.0 million and $3.9 million in transaction costs related to the Giphy and Pond5 acquisitions, respectively. Bargain Purchase Gain . We recognized a bargain purchase gain of $50.3 million in 2023 related to the acquisition of Giphy, which represents the excess of the fair value of the net assets acquired in addition to the net negative purchase price. 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. There was no impairment of lease and related assets in 2023. Other income / (expense), net. During 2023, other income / (expense), net substantially consisted of $4.8 million of interest income and $0.9 million of favorable unrealized foreign currency fluctuations, partially offset by $1.9 million of interest expense related to our 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 2022, other income / (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. Income Taxes. Income tax expense decreased by $2.7 million, to $12.2 million in 2023 as compared to 2022. Our effective tax rates for the years ended December 31, 2023 and 2022 were approximately 10.0% and 16.4%, respectively. 50 Table of Contents The 2023 effective tax rate differs from the U.S. federal statutory tax rate primarily due to the non-taxable bargain purchase gain associated with the acquisition of Giphy, the effect of the U.S. Research and Development (“R&D”) tax credit, and the foreign-derived intangible income deduction. The 2022 effective tax rate differs from the U.S. federal statutory rate primarily due to the effect of the U.S. R&D tax credit and the foreign-derived intangible income deduction. 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 long-lived 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. Content license revenues increased by 4%, to $789.3 million in 2022 as compared to 2021. On a constant currency basis, Content revenues increased by 8% in 2022, as compared to 2021. During 2022, growth in our Content offering was driven by revenue generated from our acquisitions of PicMonkey and Pond5. Content revenue also benefited from higher subscriber revenue, which was offset by a reduction in revenue generated from our transactional products. Data, Distribution, and Services revenues increased by 142%, to $38.5 million in 2022 as compared to 2021. On a constant currency basis, Data, Distribution, and Services revenues increased by 144% in 2022, as compared to 2021. The increase in Data, Distribution, and Services revenues was primarily driven by growth in our data offering, which accounted for $15.2 million of the growth from 2021 to 2022. Data, Distribution, and Services revenue growth also benefited from continued momentum in Shutterstock Studios. 2022 revenue from our E-commerce customers 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. E-commerce revenue also benefited from higher subscriber revenue, which was offset by a reduction in revenue generated from our transactional products. 51 Table of Contents 2022 revenues from our Enterprise customers 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 data offering, in addition to revenue generated from our acquisitions of Pond5 and Splash News. 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, as 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. 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, (iv) $1.6 million in severance costs associated with a strategic workforce optimization initiative; and (v) $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. 52 Table of Contents 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 rate primarily due to the effect of the U.S. R&D tax credit and 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. Liquidity and Capital Resources As of December 31, 2023, we had cash and cash equivalents totaling $100.5 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 $1.08 per share of common stock, or $38.7 million during the year ended December 31, 2023. On January 29, 2024, our Board of Directors declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on March 14, 2024 to stockholders of record at the close of business on February 29, 2024. 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. 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 (collectively, the “2015 and 2017 Share Repurchase Programs”), authorizing us to repurchase up to an additional $100 million of our outstanding common stock. As of December 31, 2022, we have fully utilized our authorization for repurchases under the 2015 and 2017 Share Repurchase Programs. In June 2023, our Board of Directors approved a share repurchase program (the “2023 Share Repurchase Program”), providing authorization to repurchase up to $100 million of our 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, 2023, we have repurchased approximately 4.4 million shares of our common stock under the share repurchase program at an average per-share cost of $51.74. During the year ended December 31, 2023, we repurchased approximately 634,500 shares of our common stock at an average per share cost of $44.45. As of December 31, 2023, we had $71.8 million of remaining authorization for purchases under the 2023 Share Repurchase Program. 53 Table of Contents 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. As of December 31, 2023 and December 31, 2022, we had $30 million and $50 million, respectively, of outstanding borrowings under the Credit Facility. As of December 31, 2023, we had a remaining borrowing capacity of $67 million, net of standby letters of credit. For the year ended December 31, 2023, the Company paid cash interest totaling $1.7 million and our annualized interest rate was 5.8%. 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, 2023, 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, 2023, we had approximately $82 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, 2023, we had approximately $45 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, 2023. Cash Flows The following table summarizes our cash flow data for 2023, 2022 and 2021, respectively. Year Ended December 31, 2023 2022 2021 (in thousands) Net cash provided by operating activities $ 140,552 $ 158,451 $ 216,372 Net cash used in investing activities $ (54,316) $ (275,550) $ (250,438) Net cash used in financing activities $ (102,704) $ (79,487) $ (77,722) Operating Activities Our primary source of cash from operating activities is cash collections from our customers. A significant portion 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 $140.6 million for the year ended December 31, 2023, compared to $158.5 million for the year ended December 31, 2022. The decline in cash provided by operating activities for the year ended 54 Table of Contents December 31, 2023 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. In addition, operating cash flows for the year ended December 31, 2023 were unfavorably impacted by the recurring and non-recurring payments made to the Giphy workforce, the reimbursement of which is reflected in Investing Activities on the Statement of Cash Flows. Operating cash flows for the year ended December 31, 2022 were unfavorably impacted by several large accounts payables and accrued expense items from 2021 that were paid in 2022. 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. Investing Activities Our investing activities have consisted primarily of capital expenditures, business combinations, asset acquisitions, investments and content acquisitions. As of 2023, investing activities also includes amounts related to the Giphy Retention Compensation. 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 $54.3 million, $275.6 million and $250.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Cash used in investing activities for the year ended December 31, 2023 was $54.3 million, consisting primarily of (i) $53.7 million cash used in the acquisition of Giphy, net of cash acquired; (ii) capital expenditures of $44.6 million for internal-use software and website development costs, and purchases of software and equipment, and (iii) $11.1 million paid to acquire the rights to distribute certain digital content in perpetuity. These cash outflows were partially offset by $53.7 million of Giphy Retention Compensation, as reimbursed by the Giphy seller. Cash used in investing activities for the year ended December 31, 2022 was $275.6 million, consisting primarily (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 purchase 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 of (i) $181.6 million cash used in the acquisitions of Turbosquid and PicMonkey, net of cash acquired; (ii) $31.6 million cash used in the asset acquisitions of Pattern89, Inc., Datasine Limited and assets from Shotzr, Inc.; (iii) capital expenditures of $28.1 million for internal-use software and website development costs, and purchase of software and equipment, and (iv) $8.9 million to acquire the rights to distribute certain digital content in perpetuity. 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 and payments of 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 $102.7 million, $79.5 million and $77.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. Cash used in financing activities during 2023 primarily consisted of (i) $50.0 million used for the repayment of our Credit Facility; (ii) $38.7 million, related to the payment of the quarterly cash dividend; (iii) $28.2 million in connection with the repurchase of common stock under our 2023 Share Repurchase Program; and (iv) $15.8 million paid in settlement of tax withholding obligations related to employee stock-based compensation awards. These amounts were partially offset by approximately $30.0 million in proceeds received from our Credit Facility. 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 55 Table of Contents 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 $2.1 million in 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 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 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 56 Table of Contents 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. The expense associated with the Giphy Retention Compensation related to (i) the one-time employment inducement bonuses and (ii) the vesting of the cash value of unvested Meta equity awards held by the employees prior to closing, which are reflected in operating expenses (together, the “Giphy Retention Compensation Expense - non-recurring”), are required payments in accordance with the terms of the acquisition. Meta’s sale of Giphy was directed by the CMA and accordingly, the terms of the acquisition were subject to CMA preapproval. Management considers the operating expense associated with these required payments to be unusual and non-recurring in nature. The Giphy Retention Compensation Expense - non-recurring is not considered ongoing expense necessary to operate the Company’s business. Therefore, such expenses have been included in the below adjustments for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share. For the three and twelve months ended December 31, 2023, the Company also incurred $6.6 million and $13.6 million, respectively, of Giphy Retention Compensation expense related to recurring employee costs, which is included in operating expenses, and are not included in the below adjustments for calculating adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted common share. Adjusted EBITDA and Adjusted EBITDA Margin We define adjusted EBITDA as net income adjusted for depreciation and amortization, non-cash equity-based compensation, bargain purchase gain related to the acquisition of Giphy, Giphy Retention Compensation Expense - non-recurring, 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, 2023 2022 2021 (in thousands) Net income $ 110,269 $ 76,103 $ 91,883 Add / (less) Non-GAAP adjustments: Depreciation and amortization 79,729 68,470 48,771 Non-cash equity-based compensation 48,577 35,740 36,179 Bargain purchase gain (50,261) — — Giphy Retention Compensation Expense - non-recurring 31,577 — — Impairment of lease and related assets — 18,664 — Other adjustments, net (1) 8,686 4,163 3,370 Provision for income taxes 12,199 14,934 12,853 Adjusted EBITDA $ 240,776 $ 218,074 $ 193,056 Adjusted EBITDA margin 27.5 % 26.3 % 25.0 % _______________________________________________________________________________ (1) Included in other adjustments, net includes unrealized foreign currency transaction gains and losses, severance associated with strategic workforce optimizations and interest income and expense. 57 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, bargain purchase gain related to the acquisition of Giphy, Giphy Retention Compensation Expense - non-recurring, 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, 2023 2022 2021 (in thousands) Net income $ 110,269 $ 76,103 $ 91,883 Add / (less) Non-GAAP adjustments: Non-cash equity-based compensation 48,577 35,740 36,179 Tax effect of non-cash equity-based compensation (1) (11,416) (8,397) (8,502) Acquisition-related amortization expense (2) 34,737 29,302 13,334 Tax effect of acquisition-related amortization expense (1) (8,163) (6,886) (3,133) Bargain purchase gain (50,261) — — Giphy Retention Compensation Expense - non-recurring 31,577 — — Tax effect of Giphy Retention Compensation Expense - non-recurring (7,421) — — Impairment of lease and related assets — 18,664 — Tax effect of impairment of lease and related assets (1) — (4,199) — Other $ 12,493 $ 1,576 $ — Tax effect of other (1) $ (2,811) $ (355) $ — Adjusted net income $ 157,581 $ 141,548 $ 129,761 Adjusted net income per diluted common share $ 4.35 $ 3.87 $ 3.48 Weighted average diluted shares 36,242 36,546 37,324 (1) Statutory tax rates are used to calculate the tax effect of the adjustments. (2) Of these amounts, $31.6 million, $27.0 million and $10.2 million are included in cost of revenue for the years ended December 31, 2023, 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, 2023 2022 2021 Reported revenue (in thousands) $ 874,587 $ 827,826 $ 773,415 Revenue growth 6 % 7 % 16 % Revenue growth on a constant currency basis 5 % 11 % 15 % Content reported revenue (in thousands) $ 737,264 $ 789,306 $ 757,470 Content revenue growth (7) % 4 % 14 % Content revenue growth on a constant currency basis (7) % 8 % 13 % Data, Distribution, and Services reported revenue (in thousands) $ 137,323 $ 38,520 $ 15,945 Data, Distribution, and Services revenue growth 256 % 142 % 252 % Data, Distribution, and Services revenue growth on a constant currency basis 256 % 144 % 252 % 58 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, 2023, cash received related to Giphy Retention Compensation in connection with the acquisition of Giphy. The following is a presentation of cash flow information and a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated: Year Ended December 31, 2023 2022 2021 Cash flow information: (in thousands) Net cash provided by operating activities $ 140,552 $ 158,451 $ 216,372 Net cash used in investing activities $ (54,316) $ (275,550) $ (250,438) Net cash used in financing activities $ (102,704) $ (79,487) $ (77,722) Free cash flow: Net cash provided by operating activities $ 140,552 $ 158,451 $ 216,372 Capital expenditures (44,645) (43,296) (28,125) Content acquisitions (11,096) (16,821) (8,874) Cash received related to Giphy Retention Compensation 53,657 — — Free Cash Flow $ 138,468 $ 98,334 $ 179,373 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 A significant portion 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. 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, 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 59 Table of Contents through our platform, we recognize 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 probable at the time the electronic order or contract is entered. A significant portion of our customers purchase products by making electronic payments with a credit card at the time of the transaction. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. Customers that do not pay in advance are invoiced and are required to make payments under standard credit terms. Collectability for customers who pay on credit terms allowing for payment beyond the date at which service commences, is based on a credit evaluation for certain new customers and transaction history with existing customers. We recognize revenue gross of contributor royalties because we are the principal in the transaction as we are the party responsible for the performance obligation and we control the product or service before transferring it to the customer. We also license content to customers through third-party resellers. Third-party resellers sell our products directly to customers as the principal in those transactions. Accordingly, we recognize revenue net of costs paid to resellers. Accounts Receivable and Allowance for Doubtful Accounts Our accounts receivable consists of customer obligations due under normal trade terms, carried at their fair value less an allowance for doubtful accounts, if required. We determine our allowance for doubtful accounts based on an evaluation of (i) the aging of our accounts receivable considering historical receivables loss rates, (ii) on a customer-by-customer basis, where appropriate, and (iii) the economic environments in which we operate. As of December 31, 2023 and 2022, we had an allowance for doubtful accounts of $6.3 million and $5.8 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 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. 60 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 requires management to use significant judgment and estimates, including revenue growth rates, the royalty rate and the discount rate related to the trade name and revenue growth rates, the royalty rate and the economic life related to developed technology, 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.