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Here's What Made Shutterstock Lose Money

Dan Caplinger, The Motley Fool

The internet has made it essential for businesses to have a digital presence, and Shutterstock (NYSE: SSTK) has made it its business to provide a one-stop shop for clients needing quick access to an extensive library for videos, images, and other content. Given the pace at which internet technology advances, many users find that Shutterstock makes it easier to keep up than simply going it alone and trying to find relevant content year in and year out.

Coming into Wednesday's second-quarter financial report, Shutterstock investors were expecting the company to keep finding ways to be profitable and produce sales growth, preferably to a big enough extent to satisfy their desires. Revenue gains were fairly impressive, but one issue led the digital content specialist to lose money for the period, at least on an unadjusted basis.

Laptop showing screenshot of Shutterstock editor in conjunction with Google Slides.

Image source: Shutterstock.

How Shutterstock looked halfway through 2018

Shutterstock's second-quarter financials were generally solid. Revenue rose 17% to $156.6 million, which was almost exactly what most of those following the stock had expected to see. However, the company reported a surprise $300,000 loss, thwarting expectations for a substantial profit.

The main issue on the bottom line came from an impairment charge that Shutterstock took on its investment in SilverHub Media. The unit cost Shutterstock $4.8 million, or about $0.14 per share. Stock option-related issues also hurt the digital content company's bottom line. Even after adjusting for those items, though, earnings of $0.30 per share fell short of the consensus forecast among investors by about $0.02 per share.

Yet investors seemed to focus instead on more fundamental successes. Paid downloads climbed by 2.5 million to 345.2 million, and revenue per download was substantially higher, jumping almost 12% to $3.41. Shutterstock also continued expanding its library of content, jumping over the 200 million mark with 204.2 million images and 10.9 million videos.

Revenue growth was strongest in Shutterstock's enterprise segment, which enjoyed top-line gains of more than a third over the past 12 months. Yet gains of closer to 11% in the key e-commerce area were also impressive, and the fact that Shutterstock was able to generate good levels of revenue growth despite losing $3.7 million worth of sales due to the since-divested Webdam business was encouraging.

Shutterstock did a good job of bolstering its profits. Operating income jumped 71% from year-ago levels, largely because of contained increases in expenses. The company is still paying more for royalties, product development, and sales and labor costs, but the rate of that advance was less than revenue gains, and that just added to Shutterstock's bottom line.

What's next for Shutterstock?

Founder and CEO Jon Oringer celebrated Shutterstock's performance. "The investments we have made in our technology and product offerings over the past several years are yielding promising operational and financial returns," Oringer said, and "we are especially pleased to see a return to double-digit growth in our e-commerce sales channel." The CEO also noted that Shutterstock celebrated its 15th anniversary, pointing to the money it has paid to professionals in exchange for valuable content.

The company also made it clear that it values its shareholders. Shutterstock chose not to do repurchases of its shares during the quarter, but it did announce that it would pay a special cash dividend. Shareholders will get $3 per share later this month, returning $105 million to investors. That shows how Shutterstock has been able to monetize its content successfully without putting its working capital levels at risk.

Looking forward, Shutterstock didn't make any changes to guidance. Sales will still climb 15% to 17% to around $625 million to $635 million in 2018, and pre-tax operating earnings of $105 million to $110 million will translate to growth rates of between 19% and 25%.

Shutterstock investors didn't seem to care about the SilverHub impairment issue, and the stock jumped almost 6% on Wednesday following the morning announcement. With continued demand for digital content, Shutterstock is in position to take full advantage of a growing client base over time as long as it acts decisively.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.