Sstk Palette Image Search
Source: Shutterstock.

Tech-savvy companies have looked for ways to improve their marketing to customers, and the use of digital images and videos for online websites has exploded in popularity. Shutterstock (NYSE:SSTK) aims to make those images and videos available to businesses of all sizes, with subscription options that allow customers to take the images they want, and use them to improve their own business prospects.

Coming into its third-quarter report, Shutterstock hoped to show investors that it could grow not only on the top line, but also in profitability. Yet, even though the company provided some evidence in support of its growth, investors weren't nearly as confident. Let's take a closer look at how Shutterstock did last quarter.

Shutterstock sits pretty
Looking at Shutterstock's headline numbers, revenue soared 41%, to $83.7 million, which was about $1.3 million better than what investors had expected to see from the image provider. Net income on a GAAP basis fell from year-ago levels to $5.3 million, or $0.15 per share. But after adjusting for stock-based compensation, adjusted earnings per share of $0.26 came in $0.02 per share better than most investors were looking to see.

A deeper examination of Shutterstock's financials shows success in several areas. In terms of paid downloads, Shutterstock saw growth of 23%, with 31.2 million for the quarter. Revenue per download also climbed substantially, with a 13% gain bringing the figure to $2.65. The size of Shutterstock's image collection grew at an even faster rate, with 13 million more images compared to 2013's third quarter, bringing Shutterstock's total library to 42.7 million images.

Gains in adjusted operating income and free cash flow also showed signs of health. Pre-tax operating earnings picked up 36% from year-ago levels, to $17.3 million, while free cash flow climbed an even more impressive 63% year over year.

Sstk Mobile
Mobile apps are an important part of Shutterstock's business. Source: Shutterstock.

Will Shutterstock keep developing?
Shutterstock also delivered guidance for the remainder of 2014, as well as for 2015. For the fourth quarter, Shutterstock expects revenue to come in between $90 million and $92 million, with adjusted operating earnings climbing to a range between $19.5 million and $21.5 million. At that rate, sequential gains in adjusted EBITDA of 12% to 24% compared to the third quarter look reasonably strong, even though investors' expectations on the revenue front fall near the middle of Shutterstock's guidance.

In 2015, Shutterstock expects revenue gains of about 32%, with sales projections of $430 million to $435 million coming in much better than the $420 million or so investors were hoping to see previously. In 2015, adjusted operating earnings of $94 million to $98 million would be roughly 40% higher than what Shutterstock sees bringing in for the full 2014 year.

Yet, one thing that could hold Shutterstock back is if its equity-based compensation keeps climbing at its current rate. Year-over-year expenses related to non-cash compensation soared more than 240%, and continued success could make it even more tempting to use stock incentives to drive employees' efforts. That might be good for morale, but it could also dilute the gains that long-term shareholders would otherwise receive themselves. In its guidance, Shutterstock said that it expects gains of just 30% or so in full-year non-cash equity-based compensation in 2015.

Shutterstock CEO Jon Oringer was pleased with the results. As he said, "We achieved strong growth due to our continued focus on providing an intuitive and efficient marketplace for businesses and creative professionals." As long as the company can maintain its intermediary role in that process, Shutterstock stands to gain from increased adoption of images and videos in the corporate world.

Shutterstock shares, however, reflected apparent concerns from investors, falling 6% in the first half-hour after the announcement. Despite short-term worries about the pace of its growth, though, the key to Shutterstock's long-term success will be whether it can keep boosting profits even as competition grows fiercer. If it can, then share-price declines could bring more favorable buy-points for optimistic investors who believe that Shutterstock's future remains bright.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.