Vimeo (NASDAQ:VMEO) had a really interesting earnings call that gives us a lot to convey and opine on with the addition of a new CFO who offered lots of colour. Overall, the story is about applying a more appropriate pricing to an already existing base of enterprise customers who were paying retail prices, so ARPU growth and growth in the enterprise segment. Moreover, a multiproduct approach will offer further scope for sales growth further on. Macro is a concern, as is tech sentiment, but the performance in the quarter was better than our expectations at least and shows that there is still a long lever to pull.
The earnings call gave a lot of colour. The best way to approach it is to present some headline figures first and then give the pros and cons that investors considering the stock today should be aware of.
The revenue grew meaningfully at 21% YoY with gross profit growing 27% showing continued margin expansion despite already strengthening 2021 comps and the growing amount of HD streaming services which grows COGS on hosting costs. The next quarter is expected to show revenue growth of around 14%, and the gross margins are not being guided to expand further (although the CFO said that they guide in order to give themselves room to operate), but this is likely more a base effect than it is a concern about their sales funnel. Sales assisted sales, which is another way of saying enterprise sales, is now 30% of the revenue. The rest the company calls self-serve sales and relies on the typical digital marketing economics of landing pages and conversions that most online businesses rely on. G&A rose 73% YoY as headcounts rise and the EBITDA loss was around $10 million. The company burned about $25 million in cash and the cash balances are around $300 million. With a 3-year runway by annualising the current quarter’s cash burn, and an uncertain macro backdrop, there is a reflexivity risk here and that has likely been the thing that decimated the stock since we last covered it.
Pros and Cons
- While 73% is a big increase in G&A, the company said pretty clearly that it aims to run sustainably and is prepared to cut costs to keep it a reasonable proportion of revenue if revenue forecasts don’t materialise. The company is not giving revenue forecasts to investors. This willingness and ability to fire people will stave off reflexivity risks as the company continues to burn cash.
- 30% of the customers belong to the sales assisted category. The model is changing from pricing on the basis of hosting burden to pricing on the basis of seats which unequivocally benefits Vimeo over its customers. They say their customers are fine with this model because it is easier for them to understand and budget for them. We are inclined to believe this line of reasoning. With scope to convert more customers from self-serve, and indeed some of them are still enterprise customers waiting to be charged enterprise rates, as well as growth these large customer figures which the company is doing much faster than growing self-serve (which is still coming down from pandemic ebullience), ARPUs should consider to rise and these large ticket sales should continue to quickly grow revenue. Subscriber growth figures are 6% this quarter YoY owing to a greater focus on this enterprise segment. We are inclined to believe this will be the majority of revenues in a couple of years. There is a long lever to pull.
- As mentioned, the seat-based pricing model is being implemented with customers. Not all customers, including some larger ones, are paying on this basis yet. That is more scope for revenue growth as of this point.
- The other thing to keep in mind is the multi-product approach. The company is developing more products to grow engagement and add tools for marketing, HR and content monetisation purposes. About 50% of sales-assisted customers are buying multiple products. Up and cross selling opportunities should remain ample on the fallow ground that are enterprise Vimeo users, yet to be fully monetised.
- HR and marketing are some of the biggest use cases for Vimeo. With the seat-based pricing model for internal communications at companies being a good model for what could happen to Vimeo revenues if unemployment ramps up, its end-markets aren’t particularly safe. Investors are going to be betting on enough offset from repricing customers to deal with spiraling unemployment that could result from rate hikes.
- Self-serve is going to be a lazy category hereafter. It is certainly not where Vimeo’s bread is buttered and it is already weaker due to pandemic effects waning and presence-based modes of doing things returning. Based on a traditional digital marketing model, it is also vulnerable to recession. Moreover, the company is moving into channels here that will reduce conversions and retention as it scrapes this barrel at the bottom. Valuable customers from this segment are being moved to sales assisted, so things are simply bound to get worse here. Indeed, these dynamics are already present in a 6% YoY subscriber growth figure vs 18% last quarter.
- Retention is currently really solid in sales assisted. As an important driver of the revenue picture, this could turn in the event of a recession especially given the use cases in addition to current contracts shrinking.
The company now trades for 2.3x P/S. That’s not too bad given the growth rates but with macro uncertainty and already guided for declines in revenue in the next quarter, the multiple isn’t very cheap either. EBITDA will be negative in 2022, and indeed, the loss guidance from last quarter will be exceeded by management admission. However, the process of converting customers paying retail prices when they’re Fortune 500 into enterprise customers is really low hanging fruit. We think some amount of revenue growth is very likely. Moreover, the subscription economics are not bad for a company like this, and we think the land and expand multiproduct approach will work well enough to keep revenues per customer growing in the longer term, even though headcount reductions are something to worry about in the nearer term. 10% net margins seem possible assuming the business stays unlevered which would put the PE based on current sales at 20x assuming Vimeo lifted their foot from the ramp-up pedal. That’s not excessive, especially with good growth still incoming for at least another quarter and likely more with still a long lever for the company to pull on multiproduct and mix. Overall, a risky tech exposure due to sentiment, but a multiple that offers a reasonably compelling case. A buy for investors with a stomach.
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