Good morning. My name is Jake, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Shutterstock Q2 '20 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the call over to your first host, Chris Suh, Vice President of Corporate Development and Investor Relations. Sir, please go ahead.

Chris Suh - Vice President of Corporate Development and Investor Relations

Thank you, operator.

Good morning, everyone, and thank you for joining us for Shutterstock second quarter 2020 earnings call. Joining me today is Stan Pavlovsky, our Chief Executive Officer, and Jarrod Yahes, our Chief Financial Officer.

Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, the impact of COVID-19 on our business, the long-term effects of investments in our business, the future success and financial impact of new and existing products, our future growth margins and profitability, our long-term strategy and our performance targets. Actual results or trends could differ materially from our forecasts. For more information, please refer to today's press release and the reports we've filed with the SEC from time to time, including the risk factors discussed in our most recently filed quarterly report on Form 10-Q and our Annual Report on Form 10-K for discussions of important risk factors that could cause actual results to differ materially from any forward-looking statements we may make on our call.

We'll be discussing certain non-GAAP financial measures today, including adjusted EBITDA; adjusted EBITDA margins; adjusted net income; revenue growth, including by distribution channel and on a constant currency basis; billings; and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with today's press release and in our Form 10-Q which are posted on the Investor Relations section of our website.

Finally, please refer to the brief information deck we've posted on our website that contains supporting materials for today's call as well as the new interactive IR microsite that is available on the IR section of Shutterstock's website.

And now, at this time, I'll turn the call over to Stan.

Stan Pavlovsky - Chief Executive Officer

Thanks, Chris, and welcome to Shutterstock. We look forward to your contributions as we continually increase our outreach and communications toward the investment community.

Good morning, everyone, and thank you for joining Shutterstock's second quarter earnings call. I wanted to begin by thanking all of our Shutterstock employees who have effectively transitioned to working remotely and have been incredibly dedicated and focused during this time to offer continuity of service to our customers. As a result of their efforts, we are making progress on our strategic plan, focused on workflow innovation, content services and data and insights, which will deliver strong returns for our shareholders.

Shutterstock's revenues proved to be much more resilient in the second quarter as compared to our expectations as well as relative to how we were trending at the end of April, down high single digits. Our second quarter 2020 revenues of $159 million are down 2% from last year and down 1% on a constant currency basis. Our Rest of World region, which includes Asia, grew modestly this quarter while the North America and European regions declined 3%, consistent with last quarter.

In the back half of the year, we are making investments in the long-term growth of the Company. First, we are redeploying capital into our platform solutions offering and undertaking significant global expansion of our sales and technical integration team. We believe that this is a key growth area for Shutterstock as our customers look to consume our content services natively within enterprise applications from ad-builders to website creation tools and applications.

The major investment in our platform solutions offering is mission critical and highly strategic to Shutterstock and benefits us in several ways. First, because we are accessing our customer's customer, we expect these relationships to effectively open up new market segments for us. Second, customer volumes, revenues and engagement levels as measured by monthly and daily active users tend to go up consistently. And finally, as a result of higher engagement, platform solution relationships tend to result in enhanced customer retention and stickiness.

Among the key milestones we have recently achieved in the platform solutions offering is our new Microsoft Ads integration, which makes our content available to all Microsoft advertisers through their ad builder. With Facebook, we were a large launch partner for a new ads initiative. Our editor and content are available in the new part of Facebook ads to help more advertisers create beautiful, performing ads.

We are also driving platform relationships deep into our enterprise business to make it stickier and recurring in nature by becoming more native into enterprise workflows. For example, we just launched our platform solutions offering [Indecipherable] Weight Watchers and Business Insider in just the last two weeks. And over the past year, we have grown the number of API platforms integrations from 4,800 to over 6,500 integrations and made it easier for our enterprise customers to get access to our content and the tools they use every day.

In addition to investing in our platform solutions offering, we have planned investments in both marketing and brand building to support some of the new subscription products we are rolling out. With a range of new subscription products planned for rollout in the back half of the year in music and with multi-asset products, we aim to support these products with significant reach and mindshare within our marketing efforts.

Last quarter I discussed three tenants that I'll be focusing on as Shutterstock's CEO in order to differentiate our business and position us for long-term success. First, innovation that enhances our customer workflow, data and insights that drive performance and content that is relevant and fresh. This quarter, I want to talk about a few investments we made to ensure that our content is relevant and fresh.

First, we have enhanced our ability to cost effectively ingest content at a lower cost using AI and automation rather than offshore and onshore manual review resources. You can see the benefit of that in our gross margins this quarter. This automation makes us more scalable to ingest more content at the top of funnel, improves our ability to reduce duplicative content as we expect - that we will allow us to be more nimble with respect to tailoring the content and address the needs of the market. We have been working on this for some time, and I'm proud to see this technology begin to get implemented and drive results.

Second, as I mentioned previously, clients increasingly prefer to purchase content via subscription model. Digital advertisers face an elevated demand for freshly created content in order to capture and retain attention from their audiences. In order to drive towards higher performing and fresh content, in the beginning of June we evolved our royalty structure to better align our contributor incentives with our own, and we expect this will result in a content library enabling the growth of current and future subscription product sales.

Lastly, we are making investments to foster diversity and inclusion amongst our contributors, customers and valued employees. Seek diversity is a core principle of Shutterstock and embodies our belief that different perspectives strengthen our business. We have historically focused on the diversity of our contributor community and content in our collection. But we're committed to doing more, much more, to amplify powerful diverse voices in our network. This includes leveraging AI to surface more localized and diverse content, improving our talent acquisition and performance management programs to build a more diverse and inclusive workforce and launching a grant program dedicated to supporting photographers, artists, videographers and musicians who drive diversity, inclusion and environmental awareness initiatives. As a company and as a leadership team, we are committed to making long-lasting impact in support of diversity and inclusion at Shutterstock and in our communities.

In order to provide more insight into the evolution of our business, we are introducing three new KPIs to investors this quarter that we track internally and believe are important for our business, particularly as we transition primarily towards a subscription-based model. We expect to always have some meaningful non-subscription component of our business, including editorial and custom but expect that it will become a minority of our revenues over time. Jarrod will share the details of these new KPIs as he discusses our financial results.

Lastly, we are seeing tremendous progress in our initiatives around margin expansion, and we're starting to see the results flow through. Our adjusted EBITDA in the second quarter was $37 million, representing a margin of 23%, which is up 15% from last - which is up from 15% last year. This performance represents record quarterly EBITDA for Shutterstock and it is driven by several initiatives across content, technology and marketing to improve the efficiency of our operations.

Before handing it over to Jarrod for a detailed financial review, I want to thank the Shutterstock team for our record performance this quarter. With several of our margin enhancement initiatives now executed, we are focused on returning to growth while continuing to maintain our margin momentum. And we're in a great place to execute on M&A deals and reward shareholders with additional capital deployment on the back of our strong margin execution.

And with that, I'll turn the call over to Jarrod.

Jarrod Yahes - Chief Financial Officer

Thank you, Stan, and good morning, everyone.

Let me start by saying, we feel quite good about the second quarter and our progress against our goals. When we reported the first quarter, we saw revenue declines of high single digits year-over-year in March and April, which were predominantly attributable to the impact of the pandemic. I'm pleased to report that the improved trend we saw in the last couple of weeks of April accelerated into both May and June, resulting in the relative strength we saw in our revenues in the second quarter.

Revenue declined 2% in the second quarter compared to the prior year and was down 1% on a constant currency basis. Our e-commerce channel increased 2% to $98.2 million, while our enterprise channel revenue decreased 6% to $61.1 million. Our e-commerce channel displayed growth in North America and the rest of the world as our customers returned to work and the multiple demand tailwinds of digital marketing growth and website proliferation powered our business. As Stan mentioned, the European geography has not yet recovered to 2019 levels.

Our enterprise channel was down, largely as a result of lower bookings in prior quarters and we believe that we are poised to eventually achieve year-over-year growth in billings and deferred revenues. The key sales leadership we need for success is largely in place at this point and we have an improved product suite and the articulation of our differentiated value proposition. We do believe it will still take several quarters for the revenue growth to shine through in the enterprise channel.

In terms of our margins and profitability in the second quarter, gross margins were 60%, up approximately 200 basis points from 58% in the second quarter of 2019. This improvement is due to a number of factors, including the automation and AI we've been introducing into our content ingestion process; reductions in depreciation expense from technology platform and infrastructure costs; and the reduction in royalties due to lower utilization during the pandemic.

Sales and marketing expense was 22% of revenue as compared to 28% in the second quarter of 2019. The favorability in sales and marketing expense is driven by an increased level of scrutiny in our performance marketing spend as we adhered to tight metrics around marketing return on investment. Based on the positive demand signs we are seeing and our progress in our plans of improving margins, we are accelerating our marketing spend in the back half of the year and expect to spend significantly more on both top of funnel and performance marketing efforts to drive our subscription offerings.

Product development costs were 8% of revenue, flat with the second quarter of 2019. Our product development expenses are net of capitalized labor, which is reported within the fixed assets on our balance sheet.

G&A expenses were 16% of revenue, down from 20% of revenue in the second quarter of 2019. The G&A decrease of $7.2 million is attributable to reductions in stock compensation and amortization expense, coupled with our global efforts around vendor elimination and renegotiation; overhead cost reductions and process automation; and enterprise software platform consolidation. Our efforts in this regard since the - since the beginning of the year are beginning to shine through.

Adjusted EBITDA margins increased to 23% compared to 16% in the second quarter of 2019. Q2 adjusted EBITDA of $33 million included $2.8 million of severance expense which impacted margins by 175 basis points. We do not expect material severance expenses in the back half of the year.

GAAP net income was $19 million or $0.53 per diluted share, and adjusted net income was $22.2 million or $0.62 per diluted share as compared to $11.8 million or $0.33 per diluted share in the second quarter of 2019.

Turning to our balance sheet and cash flows. At the end of the quarter, we have $311 million of cash, up from $296 million at March 31, 2020. The quarterly increase in cash of $15 million was above and beyond the payment of our June dividend of $0.17 per share. Our free cash flow was $22.4 million as compared to $19.8 million in the second quarter of 2019. The year-over-year increase in free cash flow is due to improved profitability on consistent business volumes.

Our deferred revenue balance declined to $138.2 million from $138.9 million at March 31, 2019. The change in deferred revenue is predominantly due to our enterprise business which has not yet shown accelerated bookings in 2020. We are, this quarter, providing investors a new schedule on the Investor Relations section of our website with a reconciliation of billings to deferred revenues. As we turn around the enterprise channel, this will first result in billings and deferred revenue growth and provide a good leading indicator of our progress in getting back to growth in recognized revenues in the enterprise channel.

As Stan previously mentioned, we are providing three new operating metrics this quarter that will provide insight into the growing subscription nature of our business. We are also maintaining all of the previous metrics we've traditionally provided around download volume and revenue per download as well as the size and growth of our image and footage library.

Reviewing some of our key operating metrics and associated trends in the second quarter on a year-over-year basis. Subscribers increased 30% to 223,000. Subscriber growth is driven by video, music and image subscription products as customers increasingly prefer to consume their content with a regular monthly allotment. Subscriber revenue increased 8% to $62.6 million and represents 39% of our revenues, up from 36% of our revenues last year. Subscriber growth is well in excess of subscriber revenue growth due to changes in the product mix, with growth in our small subscription products being higher than growth in our larger subscription products.

Average revenue per customer increased 0.2% year-over-year to $326. Our long-term strategy is to increase average revenue per customer, particularly in the enterprise channel, by leveraging cross-sell of our platform solution offering as well as our editorial and custom business. Paid downloads declined by 6% to 44 million in the second quarter, mainly due to reduction in activity and utilization related to the pandemic. This resulted in revenue per download increasing by $0.17 to $3.61 per download. Our image library expanded by 21% to approximately 340 million images, and our video library increased by 27% to approximately 19 million clips.

In terms of capital allocation, Shutterstock will pay out its next quarterly dividend of $0.17 per share on September 17, 2020. As previously stated, we plan to grow the dividend in line with earnings growth and will periodically revisit the payout based on our cash flow profile and alternative uses of capital.

With respect to our M&A strategy, we are actively looking at assets and we're in a great position to execute. We'll continue to be disciplined as we evaluate M&A opportunities, so we can be confident we have the ability to integrate the acquisitions and that they present compelling industrial logic and strategic fit.

From a forward-looking perspective on the second half of the year, I'd like to provide some color on what we expect. We are working towards getting back to overall quarterly revenue growth as a company by the fourth quarter, and we're focusing our sales and marketing investments around that. Our ability to get back to growth will of course be somewhat dependent on the course that the resolution out of the pandemic takes and the impact in the various geographies in the world in which we operate.

From a margin perspective, Q2 margins were exceptional, and investors should expect those margins to come down in the back half of the year as we reinvest in platform solutions and sales and marketing spend. We also expect G&A expenses on a GAAP basis to increase in the back half of the year based on an increase in non-cash stock compensation expense. Because of the strong EBITDA performance, the stock comp expense tends to increase.

While EBITDA margins will be lower in the back half of the year than the second quarter, we are still targeting year-over-year margin expansion of at least 50 basis points in 2020 as compared to calendar year 2019, and we are highly confident of overachieving on that target, even including the severance expense that we've occurred year-to-date.

Lastly, we're proud to roll out Shutterstock's new interactive Investor Relations microsite today on the Investor Relations section of our website. We believe that this is a first of its kind fully interactive investor microsite, complete with videos of key members of our management team, dynamic charts and graphs with our TAM and go-to-market approach and audio responses to frequently asked investor questions. With investor interactions today almost entirely virtual, this type of investor engagement will allow investors to drill down into the parts of Shutterstock's story that are most compelling via self-guided navigation rather than a static PDF presentation.

We are pleased as a management team with the resiliency of our revenues in the second quarter as well as our execution in driving margin improvement and profitability. In the back half of the year, we plan to reinvest some of that margin to get back to growth while continuing to press forward with our capital allocation plans.

We appreciate your time today and thank you for joining us. Operator, we'd now like to open the line for any questions investors and analysts may have.

Question & Answers

Operator

[Operator Instructions] Now we have a question from Youssef Squali, SunTrust. Please go ahead.

Youssef Squali - SunTrust Robinson Humphrey - Analyst

Thank you very much. It's Youssef Squali. Hi guys, congrats on a - on a very strong quarter. And Jarrod, thanks for the - for the additional disclosures and the website. Awesome. I guess two questions for us. First, just around the outperformance relative to your expectations. I was hoping that maybe you can provide a little more color around maybe product type, video versus image versus music, that may have contributed. Any - what kind of surprised you in the quarter that kind of ended up causing the outperformance?

And probably even more impressive is the bottom line. I don't remember - or I should say, the last time I saw you guys doing 23% EBITDA margin, I think you have to go back to like 2013, 2014, which was eons ago. So - and I know you guys are going to be kind of doubling down on some of these investments. But as you step back and look at the business based on some of the new changes - structural changes that you're making, can you comment on the level of kind of the potential for gross margins going forward and just EBITDA, what's kind of the new long-term EBITDA margin that you think this business can support ex COVID? Clearly, there were some benefits to you guys from lower T&E, etc. related to COVID, but as you kind of normalize all of that, where do you think we could potentially shake out now relative to maybe where you guys were thinking six months ago? Thanks.

Stan Pavlovsky - Chief Executive Officer

Yeah, absolutely. So Youssef, hey, first, nice to - nice to have you on the call and hope you are staying safe and healthy. Yeah. So from a - I'll take the first question and then Jarrod will talk a little bit about the margin and EBITDA going forward. As far as revenue, as we sort of talked about on the call, we definitely have seen a lot of movement, particularly in SMB where the need for content and digital assets has increased. We've also started to bring on new products to market, new subscription products like new video subscription products, as an example, which has taken hold. We've also brought some new smaller image subs, again, to go after the prosumer and small business market. And that has been working really well, which is consistent with the trends that - that are more sort of secular in nature.

And then from a revenue perspective, some of the - we're not completely immune from some of the challenges that are happening from certain customer verticals. Obviously, travel has been hampered significantly, media, etc. So what we're doing in the meantime is really trying to help our customers with new services such as custom and editorial for commercial use products. So we've really been able to pivot, and it's really, particularly as we went into May and June, it's really helped us to offset some of the - some of the headwinds that are - that many are facing because of the pandemic. And I'll let Jarrod talk a little bit about the - the margin and EBITDA trends.

Jarrod Yahes - Chief Financial Officer

Great. Thanks. And so Youssef, I think we are - we're quite pleased with our execution year-to-date against our objectives for taking up the profitability of the business. I think there is - in the past, when we spoke last quarter and the quarter before, the leverage in the model was really in G&A. And I think we continue to believe that as you think about 2020 and beyond, there is leverage in G&A. The G&A that we experienced as a percentage of revenues in the second quarter of 20% is not the right level of G&A for the Company, and we believe that while the second quarter was quite exceptional, this level of, 16%, 17% level of G&A as a percentage of revenue is something that is going to allow us to get operating leverage in our business and expand annual EBITDA margins year-on-year for at least the next several years.

The other area that I would say from a longer-term perspective does have operating leverage is in the sales and marketing line. You'll see that we've gotten a bit shrewder on sales and marketing expense. The flip side of that is, there are long-term systemic reasons why sales and marketing should also decrease as a percentage of revenue on a go-forward basis, which is really the evolution of our business towards a subscription model. As more and more of our business becomes subscription, the need to acquire new customers via performance marketing efforts become less, and it really becomes more of a retention challenge in terms of growing your business and expanding your business. And so there really are long-term reasons why there will be some leverage in that sales and marketing line going forward.

From a gross margin perspective, however, I would say that we do not have plans to long-term systemically take up our gross margins. We believe that we have a model that allows us to have cost of goods sold that effectively matches our revenue line. We want to be competitive in the market in terms of the pricing of our subscription products. And so I don't think that while gross margins came up this quarter as a result of several of the reasons that we mentioned, but that is something that when you think from a long-term perspective should systemically go up. The gross margins you would expect to be stable over time with meaningful leverage in the G&A line and some modest leverage in the sales and marketing line as we gradually evolve the business towards more of a subscription model.

Youssef Squali - SunTrust Robinson Humphrey - Analyst

Okay. That's helpful. Thank you, guys.

Operator

Thank you.

Stan Pavlovsky - Chief Executive Officer

Absolutely.

Operator

We have a question from Brad Erickson with Needham & Company.

Brad Erickson - Needham & Company - Analyst

Hi, thanks. Just a few. So first, can we think about the mix of your content at the moment? What sort of drove the higher revenue per download in the quarter? And maybe, just if you could, just put that in context of the higher portion of subscription revenues and sort of how we should be thinking about that going forward.

Jarrod Yahes - Chief Financial Officer

Sure. So, Brad, when you think about the higher revenue per download, it's really a function of a reduction in utilization 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. And so, if you kind of look at what happened within the quarter, we experienced paid downloads approximately down 5.6%, or 6% rounded, and we experienced an increase in revenue per download of approximately 5%. So the two effectively mathematically offset each other because of the nature of our revenues.

Brad Erickson - Needham & Company - Analyst

Got it. That's great. And then, you talked about seeing signals right now that are leading you to put ad dollars back to work in the second half. And I guess the equation of balancing growth versus profitability, maybe just talk about your long-term philosophy there and how you prioritize one over the other.

Stan Pavlovsky - Chief Executive Officer

Yeah, I think - and Brad, definitely, it's - while it's a balance, I think from our perspective, there is the core categories that we're in, and we want to make sure that we're growing at least at the rate of category growth being one of the large players. And then, as we sort of continue to innovate and move into new areas for the business, adjacent areas for the business, that's where we want to focus on growth acceleration.

But as Jarrod mentioned, the decisions we're making around increasing margins - we're trying to be very surgical about that. So for example, some of the changes around content ingestion, leveraging technology, these are investments that have been kind of some time in the making and really don't impact marketing dollars or other areas of growth but continue to improve the leverage in the business. And we think that over time we will continue - that we have continued opportunities to do that while still being able to invest both in growth around the core as well as leveraging our balance sheet for augmenting our business and investing in the future of the business. So, we're very - we're very excited about the position that we're in because of the financial stability of the business.

Brad Erickson - Needham & Company - Analyst

Got it. That's great. And maybe just squeeze one last one in if I can. Beyond the macro, what needs to happen on the enterprise side to kind of return to growth? You talked about kind of looking towards the trajectory maybe towards the end of the year, early next year there. Is it just, I guess, things like more platform solutions partnerships, is it sales force productivity just picking up as those new folks get ramped? Maybe just talk about the mechanics of what can drive a return to growth on the enterprise side of the business. Thanks.

Stan Pavlovsky - Chief Executive Officer

Yeah, no, absolutely. So, the enterprise segment is made up of several parts of our business, including platform solutions as well as SMB and our sort of top-tier clients. And our strategy is, going forward for the top-tier clients, we are definitely - have several initiatives to increase the average order value or the size of those deals, and that's through a combination of providing turnkey end-to-end solutions. So you will see, as we had further into this year, that we're continuing to launch new services into the enterprise. We think we have some tailwinds when it comes to the small and medium segment, particularly because of the trends that exist around the move to digital and the acceleration of e-commerce. And so we're seeing that, both in our SMB as well as platform solutions segment.

So really I guess what I would say is, we are in the - in the high end or the top-tier clients. We have a lot of room for penetration into sort of both landing and expanding those accounts, and we're seeing signals of that as well as taking advantage of some of the more sort of industry trends around SMB. And then, from a platform solutions perspective, we're really excited about that part of our business. And as Jarrod talked about and I talked about in my opening remarks, we're going to continue to invest heavily in that part of our business because we're adding a lot of value for our partners as well as really creating a network effect in - from an audience development perspective for the Shutterstock offering. So we'll be continuing to innovate within - within our API, within platform solutions to bring new products and services to all of our partners.

Brad Erickson - Needham & Company - Analyst

Got it. That's great. Thanks.

Operator

Thank you. We have a question from Lloyd Walmsley with Deutsche Bank.

Lloyd Walmsley - Deutsche Bank - Analyst

Thanks. I have a couple. I guess firstly, 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? And then, the second one on the enterprise side. I know you guys have been doing some go to market changes on how you kind of source new customers. Can you talk about how that - how that's going and how critical is that to kind of getting the broader enterprise segment back to growth? Thanks.

Stan Pavlovsky - Chief Executive Officer

Yeah, absolutely. So first on the - 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.

I'll let Jarrod talk about kind of - I'll let Jarrod talk about sort of the longer term and the rest of the year, and then I'll take the enterprise question.

Jarrod Yahes - Chief Financial Officer

Sure. So I think - as I mentioned when I gave the talkover regarding EBITDA margins long-term, we really are focused on making sure that we're able to maintain our gross margins, that we have a strong matching between our revenues as well as our cost of goods sold, and most importantly, that we're enabling a successful expansion of the subscription offerings in our business.

As you would expect, subscription offerings tend to come with lower unit prices. They are the way that customers like to consume today in our economy. And we do want to be well positioned to be able to roll out those subscription offerings, have them be cost-effective solutions for our customers and be able to bring them to market. And we believe that the structure we have in place today enables that. That structure kicked in in June. So we would get the full three months of it in the third and the fourth quarter, but we don't expect forcibly that structure in and of itself to result in any significant increases in gross margin because, keep in mind, our pricing to the end market is the other end of that equation, and it's important that we're able to basically flex to maintain stability in our gross margins over time.

So I think that's the way we're really thinking about our business, which is stable gross margins. Leverage in G&A costs that we've talked about over the course of the last several quarters, and we do believe that over time, in addition to just being shrewd with respect to our sales and marketing expense, because of the increasing subscription nature of our business, there is less of a need to bring in net new customers from a subscriber perspective, and the challenge really becomes around retention in order to drive subscriber revenue growth. So that's I think where we are today and I think we feel quite good about the position that we're in for today as well as how the industry is going to continue to evolve towards a subscription model in the years to come.

Stan Pavlovsky - Chief Executive Officer

Thanks, Jarrod. And then your point on enterprise is a great one in terms of new customers and new logos that we bring into our - into our platform, and that's definitely a key KPI that we look at internally as well as kind of the equation of growth for enterprise is to expand and penetrate existing accounts with new services so that when we look at net retention, it is greater than prior year, and then new logos are definitely critical and is, from a pipeline perspective, something that we look at pretty much on a daily and weekly basis and is a key part of - of the growth strategy. And we're seeing a lot of great traction there.

Lloyd Walmsley - Deutsche Bank - Analyst

Okay. And if I can ask one more, just going back to some of the drivers of the subscription - subscription number of growth versus the revenue growth. How much of - how much of the growth in number of subscribers is driven by - I think you had a new video product this quarter, but just new products versus maybe - I guess, new format products versus new lower priced tier products? And what - what were some of the new, I guess, the new lower priced tiers this quarter?

Stan Pavlovsky - Chief Executive Officer

Sure. So Lloyd, while we don't give out revenue by product or we're not going to give out kind of the subscriber growth by product, the reason fundamentally why the number of subscribers is increasing significantly faster than subscriber revenue growth is because of the success and the tendency for some of this new prosumer segment to consume some of these small subscription products that we have.

So we do talk about kind of our existing TAM within the stock market industry, and we talk about some of the expansion that we believe that is going to come from some of the casual creatives that are really starting to drive our business. And those casual creatives tend to have a preference for smaller subscription products. They don't need our 750 product. They are more content to consume, say, for example, 10 assets per month at $30 per month, which is a subscription product that you can see on the homepage of our website. And so where we've seen growth is, we've seen growth in some of the smaller subscription products. The one I just mentioned is an image product.

We put out a press release last quarter about our new footage product. And while that's not as low cost of a product, it's seen meaningful traction, and we've seen a number of clients take up that footage subscription product who were erstwhile by activity or basket, buyers of Shutterstock's products. And we also have a new music product in premium beats, that's a lower cost product that we've gone to market with that we're going to be supporting with increased sales and marketing. So I think those lower cost subs, driven by the prosumer segment, are really what is forcibly driving this trend of subscriber growth in excess of subscriber revenue growth.

Lloyd Walmsley - Deutsche Bank - Analyst

All right. Thank you, guys.

Stan Pavlovsky - Chief Executive Officer

Thanks. Thanks so much, Lloyd.

Operator

Thank you. We have a question from Alex Giaimo with Jefferies. Please go ahead, sir.

Alexander Giaimo - Jefferies - Analyst

Okay. Thanks for taking the question, guys. And it's a bit of a follow-up to a couple of previous questions. But you had mentioned the goal is to get back to overall revenue growth as a company. And just looking at the addressable market analysis in the slide deck you guys put out, it looks like you're - you're looking at about 7% stock imagery growth, if I'm reading that correctly from an industry standpoint. So should we consider that maybe the North Star of where future revenue growth can get you for the Company and what needs to happen to eliminate maybe some of the competitors that are - that are taking share and have Shutterstock participate more in that upside?

And then lastly, in 2Q you were able to dramatically expand margins while also seeing revenue decline just 1%. So does that give you more confidence in the sustainability of your current revenue levels maybe as a baseline, again just given the fact that that you reined in spending and top line was still relatively steady? Thanks, guys.

Stan Pavlovsky - Chief Executive Officer

Yeah. Great question, Alex. And what I would say is, the 7% category growth expectation, similar to some of the expectations that we're - that we had going into this year around advertising, around retail, etc., a lot of those expectations are no longer true as a result of the pandemic. So you're - you're right that the 7% growth that was expected for this category would be absolutely what we would expect to grow as a key sort of player in this space. Additionally, we believe that there are several adjacent categories that we - that we are looking at that could also help us in the long term accelerate growth. And so, we're pretty actively looking at those categories.

Again, these days, growth projections are - are not very accurate and hard to - hard to get our hands around. But we definitely believe that we can get more - additional growth from being deeper in workflow and really integrating deeper with our customers, and so we'll continue to look at investing in that. As far as our margin profile and leverage in the business going forward, we stated - at the beginning of the year, we stated our goal that we were going to start to focus on increasing the margins of the business. We had talked about a 50 basis point improvement, and we're definitely confident that we can meet and exceed that going forward. But it's definitely something that we think we have room to exceed that expectation going forward.

Alexander Giaimo - Jefferies - Analyst

Great. Thanks, Stan.

Operator

[Operator Instructions] We have a follow-up question from Youssef Squali with SunTrust.

Youssef Squali - SunTrust Robinson Humphrey - Analyst

All right. Thank you. Just a follow-up to the - the M&A reference in your prepared remarks. Can you just again help us kind of frame type of either products, technology, just whatever it is that you think could help you either solidify the business as it exists today or to Stan's earlier comments about maybe going into some adjacencies to help accelerate the business? So any kind of incremental color there would be very helpful. Thanks, guys.

Jarrod Yahes - Chief Financial Officer

Sure, Youssef, I'll give some comments and then let Stan tag on. I think from our perspective, there is two types of potential opportunities we're looking at. There are a number of consolidation opportunities in the stock space. We regularly look at them, we're disciplined in our approach, we believe that these are businesses that are often additive from a content-type perspective and may give us a leg-up with this specific type of content, give us access to a new contributor community. And we typically look at those acquisitions to be accretive, either immediately or within a short period of time based on the multiple and based on our opportunity to get cost out of those businesses.

We're also looking very actively a strategic opportunities. These are companies that would typically be on a revenue multiple basis, from a transaction perspective, the margin profiles are not yet mature, but we think that with 2 million customers and over 200 people in terms of our front-end sales apparatus, there is a great channel that we can leverage in order to accelerate the growth of these businesses and take up the margins. There is a few areas that we're looking at, and we've been looking at marketing technology, specifically, in terms of creative content workflow is an area that we look at very actively. Tools and utilities with which a creative uses to manipulate content, either image, video, music or other is an area that we look at. And we also quite frankly look at AI and machine learning with respect to identification of content, looking at the performance of selected content and looking at how to create dynamism in terms of the optimization of content for deployment in marketing use cases as well as on website use cases.

So those are kind of three or four of the strategic areas we look at in addition to the consolidation plays that we regularly look at.

Youssef Squali - SunTrust Robinson Humphrey - Analyst

Sounds good. Thanks.

Operator

Thank you. And sir, it appears there are no further questions in the queue.

Stan Pavlovsky - Chief Executive Officer

Great. Well thank you, everybody. I want to take one last opportunity to thank our employees, our customers and our contributors for their support and engagement. I couldn't be more proud of the organization. I'm so excited about our future and believe that we're very well positioned to take advantage of the opportunities ahead. So please stay safe. And that ends our call for the day.

Operator

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SHUTTERSTOCK INC

Q2 2020

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