Vimeo: Changing For The Better - Seeking Alpha
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Monica Schipper/Getty Images Entertainment

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Since its IPO last year, Vimeo (NASDAQ:VMEO), a leading video company has been dropping non-stop. The stock dropped from $51 last July to $9.87 at the current moment. This is partly due to the ongoing market sell-off on small and medium growth stocks amid high inflation and the possibility of a recession happening. It is also due to the disappointing results that Vimeo posted throughout the year, the stock slashed almost 30% in a day last November as its guidance came below expectation. The management team has now decided to transform its business in order to re-accelerate growth. After going through the details of its business transformation, I am really liking the direction they are going and these changes will benefit the company in the long run. I believe the current price presents a good buying opportunity as valuation remains compressed while the company is changing for the better.

vimeo price chart
Data by YCharts

Vimeo is a Software as a Service (SaaS) video company that allows businesses and individuals to upload, store, manage, and share their videos online. The company was previously privately owned by IAC Corporation (IAC), an entertainment media company. IAC has a history of spinning out companies that are growing quickly such as Match Group (MTCH), the parent company of Tinder, and Angi Homeservices (ANGI). Vimeo experienced explosive growth in the last two years due to the rapid adoption of video amid the tailwind from the pandemic, and it decided to go public last May.
Vimeo is currently the second-largest company in the online video space with around 20% market share only behind YouTube (GOOG). Vimeo and YouTube started off as competitors with both companies focusing on creating a platform for individual creators to upload and share their videos. Vimeo, unfortunately, lost the battle to YouTube and decided to transform itself from a C2C business to a B2B/B2C business. This change successfully differentiated them from YouTube and now they are both the leader in their respective area.
Vimeo offers solutions for Video Marketing, Employee communication, and Video monetization. Their products include video creation tools, live stream hosting, video library, virtual events hosting, video analytics, and more. It comes in 6 type of plans which includes basic ((free)), plus, pro, business, premium, and enterprise (customized). The number of features increases as the tier moves up. It currently has over 1.6 million paying customers and around 7000 enterprise customers. Enterprise customers include Shopify (SHOP), Meta (FB), TikTok, WordPress, and more.
In their latest earnings report, Vimeo reported Q4 revenue of $106.1 million, a 27% growth from $83.8 million a year ago. This is driven by an 11% increase in subscribers and a 13% growth in ARPU. Adjusted EBITDA loss was $7.6 million, compared to $0.7 million a year ago. For FY21, the company’s revenue increased 38% with Enterprise revenue growing over 70% YoY. Subscriber and ARPU increased by 11% and 18% respectively. Adjusted EBITDA loss was $9.4 million, compared to $13.9 million a year ago. While full-year revenue seems strong, growth for recent quarters keeps decelerating. Management is guiding a 15%-18% growth for FY22, which represents a significant slowdown from 38%. Adjusted EBITDA loss is estimated to be between $25.0 million and $30.0 million which also widened from a loss of $9.4 million.

Vimeo outlook

Vimeo

Vimeo
This slowdown is partly due to COVID hangover with smaller customers, especially the ones in operating in sectors like Fitness. During an earnings call in 2021, Vimeo’s management team announced that they are revising their long-term targeted growth from 30% to mid-20s percentage. The downward revision causes a lot of skepticism about the company’s growth going forward and investors are fleeing due to the uncertainty.
The earnings this quarter are quite disappointing. Revenue growth rate slowing slow down is expected as it is overlapping last year’s result which is boosted heavily by the pandemic. However, I did not expect a mid-teen growth rate for FY22 with EBITDA loss widening. This is worrisome as it shows that the business struggling and is still failing to control its expense. Therefore I believe a change in business strategy is needed and I am glad that the management team acknowledged this as well. They mentioned in their investor letter that they are already starting to make progress in their business transformation. I believe the financial results for this year will remain underwhelming as the company is going through a transformation but growth will probably re-accelerate in FY23.
The company is now going through a business transformation phase. This includes shifting the focus to enterprise customers, adding new products, and changing the monetization model.
Anjali Sud, CEO, on transforming the business
We’re making needed changes to the business as we shift our go-to market, expand our product breadth and enhance our monetization model.
The company announced that they are making some management changes. They added two new seasoned executives to its team. This includes chief revenue officer, Eric Cox, and chief people officer, Crystal Boysen. Both of them have rich experience in the industry, Eric previously worked at Adobe (ADBE) for over 20 years and Crystal previously worked at Canva, a leading online design and publishing company. This is the first time that they hired a chief revenue officer and I believe this is an important hire. As I mentioned above the company has been doing a poor job at managing expenses, this addition is likely to tackle that and improve the company’s execution.
The first change is that Vimeo is now shifting its main focus from individual customers to enterprise customers. Enterprise customers remain a huge untapped market for Vimeo. It currently has approximately 1.7 million paying subscribers, yet enterprise customers only account for around 7000. This represents a percentage of 0.4%. The percentage is tiny, but this means there is a lot of room for Vimeo to grow here. From the recent earnings report, Vimeo is able to show strong growth in enterprise revenue. FY21 enterprise revenue increased over 70% YoY. What’s more impressive is that the 0.4% of enterprise customers are already contributing around 30% of their total revenue. I believe this is a much-needed shift as Enterprise customers present a much larger addressable market compared to individual users and small businesses. Right now Enterprise customer’s percentage is only 0.4% so an increase to 1% will already significantly increase its revenue. Besides, they are able to land multiple blue-chip customers like Coca-Cola (KO), VMware, and Toyota in its latest quarter.
Anjali Sud, CEO, on shifting focus to enterprise customers
Underlying our overall growth rate is an exciting mix shift towards serving larger companies, a shift that we view as ultimately higher-value stickier dollars. We set our north star internally on serving companies with greater than 100 employees. These are the customers we see as having the most urgent need for our solution with the budget to invest in best-in-class video capabilities, and who we can grow with most as our product suite expands.
Their second change is to launch more new products. It added two new products to its Vimeo enterprise offerings which are Video Library and Vimeo Events. A video library is a place that allows teams to organize, share, and find videos instantly and efficiently. Vimeo events allow teams to produce and promote virtual events easily. These new products are able to increase the attractiveness of their one in all enterprise solutions and also expand existing relationships with enterprises. This will drive up the net dollar retention rate significantly as enterprises use more and more products over time.
I believe this is also why the company decided to acquire Wirewax and Wibbitz last November. These two acquisitions are highly strategic and will bring significant value to Vimeo, yet the market seems to be discounting them.
Wirewax is an interactive video platform with over 40,000 users all over the world. It allows users to create interactive and immersive commerce videos. Users are able to add interactive touchpoints to anything or anyone in the video and link those to fully customizable overlays that appear when the audience interacts with it. These interactive videos are able to vastly increase the consumer engagement rate. Current Wirewax enterprise customers include Adidas, P&G (PG), Salesforce (CRM), and more.

Wirewax

Wirewax

Wirewax
Wibbitz is an online video creation software that allows users to create short-form videos online in minutes with no experience required. Short-form videos are getting more popular thanks to the rising popularity of TikTok. Wibbitz software allows enterprises to speed up video production time. Its current enterprise customers include HubSpot (HUBS), Verizon (VZ), Reuters, and more.
These two acquisitions are the most exciting part of Vimeo’s transformation in my opinion. They both offer unique capabilities which will vastly improve the product breadth and attractiveness of Vimeo’s platform. These new products are also likely to drive up enterprise customers’ spending on its platform which is vital for Vimeo’s growth going forward. As these two companies have a lot of enterprise customers, it will also create a cross-selling opportunity for Vimeo to onboard these large customers to its platform.
Last but not least, the company also announced that they are changing its pricing model from a storage-based model to a per-seat-based pricing model. This is able to help them better monetize large customers. The current pricing model allows enterprises to only pay a small fee of a few hundred dollars to gain access to Vimeo’s offerings. However, after the monetization method changes, they will need to pay based on how many users are using the product. I believe this will unlock a lot of potential revenue and increase ARPU as most enterprises have large teams, which means they will have to pay a lot more compared to before due to large headcounts. As Vimeo starts renewing its contract with enterprises from a storage-based model to a seat-based model, I believe we will see a big boost in its earnings.
Anjali Sud, CEO, on the opportunity in increasing ARPU
When we have successfully upgraded these companies, we see 250 times increase in ARPU.

vimeo arpu

vimeo

vimeo
The company is currently trading at an EV/sales ratio of 2.44 which is very cheap for a SaaS company growing revenue at around twenty percent. From the graph below, you can see that Vimeo is trading at a significant discount compared to other SaaS stocks with similar revenue growth rates across the board. For example, DocuSign (DOCU), which is growing at a similar pace with similar margins is trading at a 100%+ premium compared to Vimeo. Revenue guidance is soft but still represents a 15%-18% growth while going through a transitional period.

Vimeo vs peers in EV to Revenues
Data by YCharts
Vimeo vs peers in revenue
Data by YCharts

The company’s net dollar retention rate of 113% is relatively low compared to most SaaS businesses due to its current inefficient monetization model. However, I believe it will slowly increase to levels similar to its peers as they shift from the legacy storage-based model to a seat-based model. The relationship expansion with current customers by offering more products will also increase its net dollar retention rate substantially. Its leading position also allows them to have stronger pricing power compared to competitors. The company’s balance sheet is very healthy with $321 million cash in hand with only $14 million in debt. This allows the company to further invest in R&D or marketing to fuel growth. M&A may also be an option if management spots a suitable target (like Wibbitz and Wirewax). I believe as the business transformation progresses, the company will be able to achieve its long-term target of 25%+ revenue growth. Which will likely put Vimeo’s valuation back to levels similar to other SaaS stocks.
My buy thesis is heavily dependent on whether the company will succeed with its business transformation. If the company fails to deliver any meaningful changes its valuation will remain compressed or even fall further. For example, the change from a storage-based model to a per-seat-based pricing model is very accretive, however, customers may not like this change and therefore decide to leave. Also, the new products they are launching may not receive the reception they are expecting, which will affect its plan of increasing ARPU by attracting customers to use more of its products. However, the management team has proved their capability by transforming Vimeo from a C2C company into a B2B/B2C company and I believe they will successfully navigate this new transformation too. Another risk is the current unstable macro environment regarding inflation. If high inflation causes the economy slows down drastically, companies may reduce their spending which will hurt Vimeo’s revenue. I believe the impact will be relatively small as business communication is essential for all companies even during an economic downturn, but this is still something investors should keep an eye
Despite the disappointing financial results in FY21 and soft guidance for FY22, I believe the headwind will only be temporary. Their leading position in the B2B/B2C video space remains strong and the TAM for video is still huge. Most importantly, the management team is acknowledging their problems and is making solid changes to tackle them. I think they are heading in the right direction with their business transformation which should benefit the company in the long run. The shift to focusing on enterprise customers combined with the launch of new products will allow the company to grow its ARPU significantly as larger teams are going to use more Vimeo products. The change in monetization model will also unlock more revenue from existing customers. The transformation will put Vimeo in a much stronger position moving forward and I believe it can re-accelerate growth faster than most people expected. There are certainly risks regarding the transformation but management has proved itself to be capable of handling changes and I believe they can execute this time around too. The stock is currently trading at an attractive valuation and provides a bottom-fishing opportunity for long-term investors that believes in the business transformation.
Thank you for reading!! I appreciate any type of comments or feedback!!
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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