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Edited Transcript of SSTK earnings conference call or presentation 27-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Shutterstock Inc Earnings Call

New York Feb 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Shutterstock Inc earnings conference call or presentation Monday, February 27, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rawson Daniel

Shutterstock, Inc. - VP, Strategic Finance & Analytics

* Jon Oringer

Shutterstock, Inc. - Founder, CEO & Chairman

* Steven Berns

Shutterstock, Inc. - Chief Operating & Financial Officer

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Conference Call Participants

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* Youssef Squali

Cantor Fitzgerald - Analyst

* Brian Fitzgerald

Jefferies LLC - Analyst

* Andrew Bruckner

RBC Capital Markets - Analyst

* Lloyd Walmsley

Deutsche Bank - Analyst

* Blake Harper

Loop Capital Markets - Analyst

* Ralph Schackart

William Blair - Analyst

* Aaron Kessler

Raymond James - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Shutterstock, Inc. Q4 2016 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to VP of Strategic Finance, Rawson Daniel, you may begin.

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Rawson Daniel, Shutterstock, Inc. - VP, Strategic Finance & Analytics [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us for Shutterstock's fourth-quarter and full-year 2016 earnings call. Joining me today is Jon Oringer, our Founder, Chief Executive Officer and Chairman, and Steven Berns, are Chief Operating and Financial Officer.

During this call management may make forward-looking statements that are subject to risk and uncertainty including predictions, expectations, estimates and other information. These include statements relating to the expansion of our addressable market, the growth of our customer base and success of new and existing product offerings, revenue growth and the predictability of revenue, adjusted EBITDA, equity-based compensation, foreign currency rates, taxes and capital expenditures.

Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Please refer to today's press release and the reports and documents we file from time to time with the US Securities and Exchange Commission, including the section entitled Risk Factors in the Company's annual report on Form 10-K for the year ended December 31, 2016 for discussions of important risk factors that could cause actual results to differ materially from those discussed in any forward-looking statements we may make on this call.

On this call we will refer to adjusted EBITDA, adjusted net income, revenue and adjusted EBITDA growth on a constant currency basis and free cash flow, which are non-GAAP financial measures. You can find a description of these items along with a reconciliation of the most directly comparable GAAP financial measures in today's earnings release and in our Form 10-K, which are posted on the Investor Relations section of our website.

We believe that the use of these measures in conjunction with GAAP financial measures provides important additional insights for investors about the performance of the Company's overall business and operating performance and enhances the comparability for investors in assessing our financial reporting. However, these non-GAAP financial measures should not be considered as a substitute for or superior to financial information prepared in accordance with GAAP.

And with that I will turn the call over to Jon.

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [3]

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Thanks, Rawson. And thanks, everyone, for joining us today for Shutterstock's fourth-quarter and year-end 2016 earnings call. We made significant progress on the execution of our strategy in 2016. We improved and expanded the content we offer our customers; we enhanced the technology on which our customers access this content.

We continue to diversify our product mix through video, music and editorial offerings and we continue to grow internationally. This progress manifested into 18% annual revenue growth and an 18% annual adjusted EBITDA growth on a constant currency basis. As well as strong growth across our key metrics.

During the year we expanded our image library by 63% to over 116 million images. We expanded our video library by 68% to over 6 million video clips. We grew paid downloads by 14% to 168 million and we increased revenue per download by 4% on a constant currency basis. Beyond the numbers though what I'm most excited about is how our long-term vision for the business is now beginning to come to fruition.

To date Shutterstock has been about providing users with real-time access to a library of high-quality content. Consumers and businesses of all shapes and sizes need imagery for their projects and we have been a go to option and valuable partner for them. Over time we have innovated, making our products easier to use, providing better search and workflow tools and continuously diversifying our product mix.

While this approach has brought us to where we are today, generating over five downloads per second, nearly $500 million in revenue, and approaching $100 million in adjusted EBITDA, we have designs for something much more.

Over the coming years our vision is to expand our business from a marketplace to a platform. We are confident that successfully executing our vision will mean a larger addressable market, consistent growth for us and allow our customers around the world to easily and effectively grow their businesses.

So how are we going to get there? We continue to execute against two key items; continuing to build our platform and continuing to expand our network. So let's start with our platform.

As you know, we have been dedicating considerable time and resources to migrate our tech stack to a more scalable and efficient platform. This has been the first significant migration we have undertaken since I wrote the first few lines of code for Shutterstock in 2003. And we feel confident that this migration positions us well for future growth.

We believe that it ensures our pace of innovation can be sustained far into the future so that we can continually launch more and better products and a more personalized and localized customer experience. This is a very important component for our overall growth strategy.

There is no hiding the fact that our total revenue growth has decelerated over the last several quarters due in part to the e-commerce side of our business. That said, we do believe that the technological advancements we are making our positioning us nicely for reacceleration of growth by enabling an end-to-end workflow form, as well as generating strong operational efficiencies.

In addition to our platform migration we also continue to build our capabilities around additional asset types beyond the commercial imagery. In 2016 we made significant progress in our video and music offerings, our video library grew 68% and we continue to see very strong demand for these high quality assets across both our e-commerce and enterprise customer bases.

As you know, we also now have an exclusive and entirely curated music collection across all genres. Our customer feedback gives us confidence that Shutterstock music represents a significant upgrade to the traditional music licensing experience and we are excited by its process.

As a whole our video and music products continue to represent a growing percentage of our total revenue. We also continue to be very excited about the progress we are making in editorial imagery. In 2016 we announce partnerships with the Associated Press, European Pressphoto Agency and Billy Farrell, a renowned fashion and celebrity photographer.

We also acquired the Kobal Collection Art Archives. We put together a strong offering within the editorial market including our acquisition of Rex Features and our partnership with Penske Media, which we completed in 2015. We expect our editorial business to have modest contribution to revenue in 2017 with a larger contribution in 2018.

Now let's turn to the network effects of our business model. As we attract an increasing number of customers and contributors to Shutterstock, we have accumulated more data and feedback to ensure we are tailoring our platform according to their needs. There is no doubt that the constant learning and improvement that is happening through the network effect is leading to a growing number of loyal customers and contributors, which in turn facilitates an ever improving experience.

On the supply side of our platform, our contributor base added more than 44 million images and 2 million video clips to our robust library in 2016, giving us meaningful scale compared to our competition. On the demand side we now have nearly 1.7 million customers, a 14% increase over 2015.

While we continue to see strong growth on both sides of our network, we also continue to develop our key growth levers, new asset types, enterprise and internationalization. As I mentioned earlier, we have made continued progress in the development of our video and music products and are well-positioned heading into 2017 in the editorial market.

Additionally, we now have over 36,000 enterprise customers and revenue from our enterprise business makes up roughly 30% of total revenue and has grown significantly year over year.

Finally, our business continues to benefit from a focus on internationalization. We currently offer our products in 20 languages and generate approximately two-thirds of our revenue from customers outside the United States. We believe that international growth continues to represent a large opportunity as there are key markets in Latin America, Europe and Asia which are underpenetrated.

To increase our market share in these regions we have added resources including direct sales leadership and capability. Overall, we are confident and optimistic about the opportunities ahead.

We have great momentum in our business; we are bringing in new customers and contributors. The data we are collecting from those relationships is translating into innovative and amazing products. And we have a new technological platform that is giving us an improved way to connect with our customers and is capable of handling the significant growth we have in front of us.

Today we have a business that is way ahead of our competition and we are focused on speeding up the pace of innovation. We are aggressively investing in and executing on a strategic plan that will mean stronger growth rates and ultimately shareholder value.

I will now turn the call over to Steven Berns, who has been appointed Chief Operating Officer in addition to remaining our Chief Financial Officer. Steven will provide you details on the drivers of our financial performance.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [4]

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Thanks, Jon, and thanks, everyone, for joining us today. We have posted a brief presentation deck on our website which contains supporting materials for our quarterly and annual results as well as other items discussed on today's call.

As Jon highlighted, Shutterstock delivered another year of profitable growth and operating momentum in 2016. Continued growth across both sides of our marketplace translated into full-year revenue growth on a reported basis of 16% and adjusted EBITDA growth of 13%. On a constant currency basis, 2016 revenue and adjusted EBITDA growth were both approximately 18%.

For the full year, our revenue was impacted by approximately $4.5 million due to the strengthening of the US dollar versus the British pound throughout 2016. This impact was approximately $500,000 more than was expected at the end of the third quarter of 2016.

Looking at the fourth quarter of 2016 as compared to the fourth quarter of last year, total Company revenue increased 12% on a reported basis. On a constant currency basis fourth-quarter revenue grew 14% driven by increased results from our expanding video and music offerings as well as from sustained growth at our traditional e-commerce and enterprise businesses.

We continue to see solid trends across our key metrics as we attract new customers across multiple content types and increase customer lifetime value. This past quarter our customer base expanded 14% to nearly 1.7 million customers. As compared to the prior year fourth quarter, we saw a 6% increase in paid downloads driven by new customers as well as increased activity across our existing subscriber base.

We also saw revenue per download increase 6% on a reported basis or 8% on a constant currency basis primarily driven by continued growth in our enterprise, video and music products which operate at higher price points than our traditional e-commerce images offering.

International expansion and localization continues to be a core part of our long-term growth strategy. Currently, of the approximately two-thirds of our revenues from customers outside the United States, approximately one-half is from customers in Europe with the balance from Asia-Pacific and Latin America. Excluding the impact of foreign currency movements, revenues in each of these geographies grew at double-digit rates throughout 2016.

Shifting to the cost side of the business, we continue to align our expenses against revenue opportunities in a focus on long-term profitable growth and cash flow. For the fourth quarter of 2016 operating expenses increased 16% versus the fourth quarter of 2015 driven primarily by higher contributor royalty payments associated with our growing revenue and an increase in sales and marketing spend year over year.

Contributor royalty payments were approximately 28% of revenue for the fourth quarter, which was consistent with the third quarter of 2016 and slightly lower than the fourth quarter of 2015.

Now I will discuss some of the major expense categories. For each category discussed my comments and the numbers referenced will exclude stock-based compensation expense. Our sales and marketing expense increased 28% versus the fourth quarter a year ago and was approximately 26% of revenue in the fourth quarter of 2016.

As discussed on our second- and third-quarter conference calls, while we experienced some seasonality in marketing spend throughout the year, we have been targeting a level of spend as a percentage of revenue that is consistent with 2015 on a full-year basis, which was 24% in 2015 and 24.5% in 2016.

Overall the cost of acquiring a new customer remains relatively steady and the return on our marketing investment remains consistent with historical levels as we drive new customers to our platform while keeping retention and repurchase rates high across our subscription and on-demand products.

Product and development costs increased 39% in the fourth quarter versus the fourth quarter of 2015, primarily due to higher personnel and consulting costs related to building a more expansive user experience and transitioning our tech platform, partially offset by increased capitalization of labor of approximately $6 million.

General and administrative expenses decreased by 1% for the fourth quarter versus the same period a year ago driven primarily by lower personnel costs. Overall, our revenue growth in the fourth quarter, along with our consistent focus on managing our costs, translated into adjusted EBITDA growth of 1% on a reported basis, which compares to a very strong base in 2015's fourth quarter, and a 13% increase on a constant currency basis.

GAAP net income in the quarter grew 43% to $9.9 million or $0.27 per diluted share. The increase was driven primarily by improved operating performance and lower income tax expense. As discussed on our previous two calls, we have been able to lower our effective tax rate from 43% in 2015 to 27% in 2016 due to a number of factors, including a claim of available US federal research and development tax credits related to the years 2013 through 2016.

Adjusted net income, which we had previously referred to as non-GAAP net income, and which excludes the after-tax impact of non-cash equity-based compensation expense as well as excluding the amortization of acquisition-related intangibles, and furthermore excluding changes in the fair value of contingent consideration related to acquisitions, adjusted net income as just defined -- the estimated -- and it also excludes the estimated tax impacts of these adjustments. So that number -- adjusted net income was $15.1 million for the year or $0.42 per share which represents an 11% increase versus the fourth quarter of last year.

Turning to the balance sheet, we generated $9.4 million of free cash flow in the fourth quarter and finished the year with approximately $279 million of cash, cash equivalents and short-term investments.

In February 2016 our Board of Directors approved a $100 million increase to our stock repurchase program bringing the total authorization to $200 million. As of December 31, 2016 the Company utilized a total of $77.5 million to repurchase stock under this authorization at an average price of $36.76 per share, including our fourth-quarter repurchases of approximately 370,000 shares for nearly $18 million. Therefore, including the newly authorized amount, the Company is authorized to purchase an additional $122.5 million of its common stock.

Turning to 2017, we remain encouraged by the momentum across our business and expect continued profitable growth despite additional negative impacts on our financial results from currency movements. For the full year 2017 we provided detailed guidance in our press release. Headline financial guidance includes revenue of $545 million to $560 million and adjusted EBITDA of $105 million to $110 million.

In closing, as Jon highlighted earlier, we are confident in the fundamentals of our business. We are seeing strong growth on both sides of our marketplace. We are growing our traditional e-commerce and enterprise customer bases. And we are continuing to invest in our product and technology to position us well for long-term profitable growth.

Thank you for your time today and now Jon and I would be happy to answer any questions you may have. Operator, please prompt the participants for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Youssef Squali, Cantor Fitzgerald.

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Youssef Squali, Cantor Fitzgerald - Analyst [2]

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A few questions. Jon, growth in paid downloads has been the lowest we seen in many, many quarters. Just trying to understand -- or why isn't this a trend or why isn't this trend, sorry, an indication of maybe either a maturity of the industry or a more intense competitive position that is likely here to stay?

And also can you expand on your strategy of expanding the business from a marketplace to a platform? Just give us an idea how big is this new larger addressable market you are discussing? And can you -- how quickly do you think you can get the business to reaccelerate based on these new initiatives? Thank you.

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [3]

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Sure. The growth in paid downloads follows the growth of the e-commerce business. So it tracks pretty well to that. As far as the strategy, let's go back a few years. So when we went public our strategy was at the time we were a Company that was just over $100 million of revenue and we were building what was at the time a relatively new enterprise business. We were expanding our video product and we were building the business internationally.

We took that three-pronged strategy now, almost five years later, and did a really good job with that. The business is nearly $500 million in revenue, nearly $100 million of EBITDA. And today what we are focused on is taking our transactional marketplace and turning it into an end-to-end platform.

So, what we did in 2015 and 2016 is build -- rebuild our entire tech platform in order to do that, in order to take the Company from being a transactional marketplace to having many more touch points with the customer over their entire creative lifecycle for using imagery, deploying imagery, creating imagery and measuring imagery.

We have a lot of work left to do and we are going to continue to build on top of the platform. This is not something that we do for the next quarter, for the next year -- this is a multi-year strategy and it expands our addressable market pretty significantly. If you think of stock imagery as a $5 billion to $10 billion addressable market, you take the total workflow market, and that is many tens of billions of dollars of addressable market.

So, we think we have a great platform; we have a great model. We have great starting point, which is selling over five images per second to businesses all around the world, and we are going to work off of that starting point.

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Youssef Squali, Cantor Fitzgerald - Analyst [4]

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Just as a follow-up to that. How quickly do you think we should start seeing the positive impacts or the accretive impact of that to the growth rate? And, Steven, I think in the look in at your 2017 guidance, it looks like your EBITDA margin guidance is somewhat flattish with the last couple years. Can you just speak to the leverage in the model over time over the next couple years? Thanks.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [5]

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Yes. I mean I think, Youssef, as Jon just discussed, this is not, for instance, just a 2017 event. So in terms of providing financial guidance, we are providing 2017 guidance. But on a quarterly basis what we think is that we are going to continue to build off of the platform that we are finishing up in this quarter, that we are going to drive that growth as we go forward.

And we are in the show me game. We are putting our heads down and executing. And we think that to provide here is what we are going to do is less valuable than here is what we have just done. And so, as we go forward we think that we are planning aggressively to drive growth, but we want to be realistic about what the near-term results might be.

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Youssef Squali, Cantor Fitzgerald - Analyst [6]

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Okay, thank you.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [7]

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And in terms of EBITDA margin I think that goes hand in hand with the growth that we expect. And certainly we -- as Jon talked about revenue growth acceleration, we expect that over time we will have that EBITDA growth acceleration consistent with our prior communications.

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Youssef Squali, Cantor Fitzgerald - Analyst [8]

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Great, okay, thanks.

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Operator [9]

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Brian Fitzgerald, Jefferies.

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Unidentified Participant [10]

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Hi, thank you. This is [John] on for Brian. Now that you are a few quarters into the integration with Google and Facebook, just can you provide any updates on how those partnerships are progressing? And just walk us through kind of how you guys are getting paid on that and how that affects the model going out. Thanks.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [11]

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Yes. So as it relates to those partnerships, to this point in time those are not material impacts on our overall financial results. We are working well with both of those partners, but they are not individually or even together those two material.

We continue to -- the payment models for those, we haven't described those in the public domain. We are working, as you know, with Google on the AdWords and AdSense model. And on Facebook with businesses that are looking to produce ads on the Facebook platform using Shutterstock images.

So both of those, obviously given the growth in the platforms both on Google and Facebook, are important relationships. And we continue to want to be in those environments where our customers or potential customers are going to use images to drive their businesses and consumption of their products and services.

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Brian Fitzgerald, Jefferies LLC - Analyst [12]

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Great, thank you.

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Operator [13]

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Andrew Bruckner, RBC Capital Markets.

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Andrew Bruckner, RBC Capital Markets - Analyst [14]

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Thank you. I'm wondering if you can make any comments kind of on customer trends and then sales to the same customers in terms of how much more you are getting per customer. And then secondarily, if you could talk a little bit about the higher mix of enterprise customers. Does that at all affect your gross margin? Thank you.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [15]

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So, on the latter part of your question, gross margins are really unaffected as a result of the fact that the contributor royalties are generally similar across the platform when you average all of the different types of customers on each platform. So that is not an impact.

As it relates to customer growth, it has been very stable, if you would, in the 14% to 15% annually. And the revenue per customer was essentially flat year over year. That was attributable primarily to a higher mix -- a higher mix to enterprise, but also a higher mix to some lower-priced subscriptions versus our 750 image per month product.

And what we are looking for is not just the revenue per month, but obviously the lifetime customer revenue and that lifetime value. And so, we believe that the new products have a greater stickiness. Obviously not everyone needs 750 images a month, not everyone is an enterprise customer. And so, we will continue to catch those over time. Retention is steady and it is also -- customer retention that is. And it is also in line with our past couple of years.

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Andrew Bruckner, RBC Capital Markets - Analyst [16]

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Thank you.

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Operator [17]

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Lloyd Walmsley, Deutsche Bank.

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Lloyd Walmsley, Deutsche Bank - Analyst [18]

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A couple if I can. First, as you shift more to the workflow side, are there any metrics you can share around uptake of Shutterstock Editor and kind of comment on how you plan to monetize that longer-term? Are there much higher spend rates from users who adopt the Editor or is there going to be a long-term monetization through just -- other ways through Editor?

And then a second one if I can. It looks like you are testing some lower-priced subscription tiers that we have seen in a while. If you can just give us a sense for how much of that in your test seems to be pulling people in who would ordinarily have bought a la cart versus kind of people downshifting from higher-priced tiers. Any color you can share there on those tests?

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [19]

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To start on Editor, Editor since the beginning of our workflow product and we plan to build that out further. We are not disclosing any specific metrics on Editor, but we have said that people that use Editor do buy more photos from us and it increases engagement. And we will continue to try to increase engagement.

On the lower-priced subscriptions, we are just moving to where the market is. We saw -- we see other segments of customers that are willing to buy from us on lower volume packages. And we are going to offer those lower volume packages to them when it makes sense.

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Lloyd Walmsley, Deutsche Bank - Analyst [20]

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Okay, thanks.

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Operator [21]

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Blake Harper, Loop Capital.

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Blake Harper, Loop Capital Markets - Analyst [22]

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Jon, I wanted to ask you if you could address what you think is the end market size of the micro stock market right now? Is there deflationary pressure that you see given large supply and just to follow up on what you said there about some of the pricing implications that you are seeing?

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [23]

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It is hard to just break out micro stock and, in fact, micro stock has had several definitions over the years. I can tell you that businesses of all sizes have not decreased their need for imagery. Every business needs imagery to sell their product or service and we are increasingly becoming the place that people go to get those images. We will also continuously become more of a place that people go to work on those images and we will be more in the workflow of all of these businesses.

Look, today we have 1.7 million customers, those are mostly businesses. There are tens and tens of millions of customers out there that could be buying our product and our goal is to get them.

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Blake Harper, Loop Capital Markets - Analyst [24]

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Okay, thanks. And then one more if I could. Could you just give us an update on the Adobe Photoshop plug in, the kind of uptake or usage there? Then also if you have any further plans to do something similar with some of the other Adobe creative cloud applications as well?

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [25]

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We plan to plug into every single place that a person would need an image. We will do this with our API; we will do it actively where we partner with a company and will allow other companies to integrate with our API directly. You mentioned one, Adobe, that is just one of our connectors; we plan to be everywhere a business needs an image.

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Blake Harper, Loop Capital Markets - Analyst [26]

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Okay, thanks, Jon.

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Operator [27]

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Ralph Schackart, William Blair.

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Ralph Schackart, William Blair - Analyst [28]

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Jon, I was wondering if you could give us maybe a little bit more color on the reacceleration comments. I think you called out specifically moving to an end-to-end platform. But any more color you could add just in terms of services you would offer or a product hold that the current platform has today?

And then second just for Steven, Can you give us a sense of what FX headwinds may be in the 2017 guidance? Thank you.

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [29]

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Well, I will start. If you look at -- 2016 was a year of re-platforming a lot of the Company, a lot of the way that we work on our products, a lot of the way that we develop our products and a lot of the code that our products get launched onto. 2017 is going to be the year that we build on that technological platform and we continue to innovate on behalf of the customer.

We are not going to give much detail about our products. We are the only public company in this space and we are going to continue to innovate and deliver for the customer every day like we do.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [30]

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So, as it relates to the FX impact on guidance, we are just looking at where rates finished out the year in 2016 and looking at the impact on 2017 of those rates being flat. And so effectively we are looking at a couple of points of impact. But that is already incorporated within our guidance.

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Ralph Schackart, William Blair - Analyst [31]

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Okay, thank you.

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Operator [32]

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Aaron Kessler, Raymond James.

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Aaron Kessler, Raymond James - Analyst [33]

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A couple questions. One, can you just update us maybe on the video growth in terms of number of images or rough revenue percentage and how video is tracking?

Second, just on royalty rates, I've been hearing that those may be coming down for some of the competitors. Your thoughts on what you are seeing from a royalty rate perspective?

And third, can you just remind us what the cap software was for 2016 in total? And just for 2017, if you are finishing up the tech platform in Q1, why would that be so high for the rest of the year? Is that for some of the newer products you talked about? Thank you.

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Jon Oringer, Shutterstock, Inc. - Founder, CEO & Chairman [34]

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Maybe I will start on video. Video is an important part of our offering. Video is growing faster than the Company is growing, both on the customer and on the contributor side. Video is still a complicated thing to use. And as we get better with our workflow efforts we plan to make video easier and easier to use for customers. Today it is very difficult and we have proven with Editor that we can make simple transforms of imagery a lot easier for the customer and we plan to do that with video as well.

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [35]

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In terms of the capitalization of software, for 2016 it was about -- capitalization of labor as it relates to building of our product, that was about $18 million in 2016. We expect a similar level in 2017.

And to answer the question that you had with regard to the platform being finished out and then going to customer facing functionality and features. That is what is keeping the capped labor at basically a similar rate. What we have been doing is kind of building that foundation which allows us to now build the better features and functionality to drive customer consumption of our product. So we expect that we will continue to have that rate for 2017.

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Aaron Kessler, Raymond James - Analyst [36]

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Got it. Just any quick thoughts on the royalty rates that you are seeing from some of your competitors, any changes there?

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [37]

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I think what we are trying to do is drive both the best contributors to keep them on our platform, sustain their contribution of great quality imagery to drive our customers to continue to use Shutterstock and that has been a successful model.

We see the royalty rate as fair and our contributors deem it the same. So we look at it from the outcome of the behaviors of both our customers and contributors. We see what competitors are doing, but we don't think that just cutting a single side of the marketplace is an effective mechanism for long-term profitable sustainable growth.

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Aaron Kessler, Raymond James - Analyst [38]

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Got it. Great, thank you.

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Operator [39]

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(Operator Instructions).

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Steven Berns, Shutterstock, Inc. - Chief Operating & Financial Officer [40]

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Okay, given that there is no other questions, we appreciate everyone's time today and we look forward to speaking with you soon. Thank you.

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Operator [41]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.