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Shutterstock Stock Shudders After Big Earnings Decline

Companies have discovered that they have to have a digital presence in today's world in order to maximize their potential. Shutterstock (NYSE: SSTK) has sought to make the task of developing a digital presence easier, providing images, video, and other assets and tools to give its clients access to the resources they need to modernize the way they reach out to potential customers.

Coming into Wednesday's second-quarter financial report, Shutterstock investors were expecting to see signs of further revenue growth and discipline on the bottom line. Instead, sales growth fell short of expectations, and the company saw net income drop substantially, raising further doubts about Shutterstock's long-term future. Let's take a closer look at Shutterstock and what its latest results mean for its prospects going forward.

Image source: Shutterstock.

Shutterstock falls short of the mark

Shutterstock's second-quarter financials didn't live up to what most had hoped. Revenue was up just 8%, which was slower than the 11% growth rate investors were looking to see. Adjusted net income dropped by about 35% to $8.3 million, and that translated to earnings of $0.24 per share. That was down a third from year-ago levels and missed the consensus forecast for an unchanged reading of $0.36 per share.

Looking more closely at the numbers, the clearest example of Shutterstock's slowdown came in looking at its paid download counts. Total paid downloads were down 2% to 42.7 million, and it took a nearly 9% rise in revenue per download to ensure that Shutterstock's top line would continue to grow. Lack of supply wasn't an issue, as Shutterstock raised its image count to nearly 145 million and its video library to 7.6 million.

Higher costs hit Shutterstock hard. Rising royalty costs, increased spending on marketing, and higher overhead expenses all boosted costs at a faster pace than revenue growth, leading to a net hit to the bottom line. The company noted that greater spending is necessary to build out the better technology that Shutterstock now has and to keep its long-term strategic vision intact.

CEO Jon Oringer gave his take on the results. "While the actions we are taking impact short-term financial results," Oringer said, "they also ensure that we can deliver profitable growth over time and that we bolster emerging growth businesses, [including] Motion, Editorial, Webdam, and Custom Content, which have a tremendous growth profile." The CEO went on to note that he thinks Shutterstock has a huge opportunity in an addressable market worth about $7 billion.

What's ahead for Shutterstock?

Yet on a short-term basis, Shutterstock had to rein in expectations for the remainder of the year. CFO Steven Berns attributed the revisions to "lower than expected revenue as a result of the mix shift in our e-commerce business and our continuing investment in the business at the level we expected coming into the year." Berns reiterated the intent to boost Shutterstock's long-term value as a result of these initiatives.

Specifically, Shutterstock cut its revenue guidance for the year by $10 million to $15 million, with a new range of $535 million to $545 million. Income from operations will be roughly 30% less than previously expected, with a new range of $30 million to $40 million, and adjusted EBITDA will take a 15% to 20% hit as well.

Shutterstock also put a halt to its stock buyback program. Even though the company's board authorized another $100 million back in February for further repurchases, Shutterstock still has the full amount of that authorization available for future use.

Shutterstock investors weren't happy with the news, and the stock was down a whopping 17% at midday during the trading session following the announcement. With poor trends from previous quarters becoming even more apparent, Shutterstock needs to plot out a clearer vision toward regaining its past growth if it wants to avoid further problems in the future.

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