Shutterstock’s ‘reverse Robin Hood’ sees share price soar

Shutterstock’s share price jumped by 17.65 percent following a favourable quarterly financial report, which talks about ‘margin expansion initiatives’ resulting in ‘lower operating expenses’. Shutterstock’s controversial contributor pay cut probably only played a minor role in the improved quarterly result, and when questioned by analysts, CEO Stan Pavlovsky shied away from addressing this pivotal shift in the business model.

The punishing new pay scale had only been in operation for one month of the quarter.  The real ‘savings’ (costs for contributors, as this is a classic zero sum game) will come over time, and be compounded in January next year when all contributors are demoted to the lowest rate.

Pavlovsky described the strong second quarter as ‘surpassing our expectations’, with the share price closing at US$51.06 on July 28 – the highest figure in almost two years. Shutterstock’s US$19 million net income is an impressive increase of US$15.7 million compared with the same quarter in 2019. The income increase isn’t from selling more content – revenue actually dropped by just over US$2 million – but from clawing back US$22 million in operating expenses – down to US$136 million from US$158 million.

Shutterstock’s controversial new contributor payment system only came into effect on June 1, the last month of the financial quarter. With contributors now being paid as little as US$0.10, replacing the usual $0.25-0.38, it’s safe to say the new system is here to stay, and that when the reduced contributor payments really start to bite, they will make Shutterstock’s costs look even more attractive from a shareholder point of view.

Those who have been following the Shutterstock saga may deduce that the contributor pay cut saved a few million dollars in operating expenses. It may also help to explain why Shutterstock’s average revenue per licence increased by $0.17, roughly the same amount contributors report to have lost per licence.

But Shutterstock attributes its successful quarter to other factors, hardly even addressing the new royalty system.

According to Shutterstock, the pandemic combined with its subscription-based model, where customers pay a monthly/annual fee for a number of licences, influenced the revenue per licence increase. Due to Covid, many customers with existing subscriptions didn’t acquire the number of licenses they were entitled to.

Here’s how Shutterstock chief financial officers, Jarrod Yahes, puts it during the Earnings Conference: ‘When you think about the higher revenue per download, it’s really a function of a reduction in utilisation of the business. So, as the number of paid downloads decreases, because of the subscription nature of a fair amount of our revenues, ultimately, we are able to capture those revenues without associated costs.’

This is one of the major benefits of subscription-based business model to the supplier – a customer is billed regardless of whether they use the service.

But contributors are adamant they are now paid less, and many have published monthly income sheets showing a significant overall drop in income from the pay cut. It’s beggars belief Shutterstock management spent so little time on highlighting the savings brought about by the new royalty system. Perhaps it’s a sensitive subject, and Shutterstock knows they have the microphone and disgruntled contributors are listening. In the Earnings Conference, for instance, Pavlovsky completely dodged answering a question about royalty rates:

Question by Lloyd Walmsley — Deutsche Bank Analyst (edited by Inside Imaging)
Can you talk about changes to the royalty payouts to contributors? And did you have a full quarter benefit from that in gross margin or should we expect gross margins to increase in the second half around that? And I guess related to that, are there going to be seasonal variances in gross margin to account for kind of rising payouts over the course of the year to contributors?
(Non-)Answer by Pavlovsky: On the gross margins and the contributor royalty change. One of the things that I really want to make sure is clear is that there are several things that are impacting gross margins, including hosting costs of our data centers, content ingestion costs, credit card fees, royalties. A big part of the benefit that we experienced this quarter is actually due to lower download activity as well as the automation of the content ingestion process as compared to sort of doing it manually. So, when we look at — there are several variables that are — that are impacting gross margins, some of which we expect will continue and others will vary based on what’s happening in the business, the product mix, etc.

Some may be understandably puzzled (or dazzled) by Pavlovsky’s obtuse corporatese. When referring to ‘the automation of the content ingestion process’, he’s talking about the company sacking its content reviewers – staff who assess contributors’ content – and replacing them with AI and automation.

Lastly, the image collection grew far more than expected, considering disgruntled contributors deactivated their content collection to protest Shutterstock’s pay cut. Millions of images were removed from the Shutterstock library, and contributors estimated the image collection was roughly 323 million files on last day of the financial quarter, June 30. The protest was an initiative to have the company answer to someone – shareholders, perhaps – if the  image collection or subscriber numbers dropped.

However, Shutterstock’s financial report claims the collection expanded by 21 percent, to 340 million images.

So, nothing to see here, except a bunch of happy shareholders. And Shutterstock contributors either looking for a new agency, or resigned to the pay cut.

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