Second Look: Vimeo (VMEO)

Second Look: Vimeo (VMEO)

If TikTok, the streaming wars, and work from home orders have taught us anything, it’s the power of video. Attention-grabbing and all-consuming, video is the communication tool of today and tomorrow. Like always, most businesses are late to the game, which is why I was very excited by Vimeo’s IPO in the summer of 2021.

As a reminder, Vimeo is a software-as-a-service (SaaS) company focused on all things video. Through development and acquisition, Vimeo has built out a comprehensive platform that allows businesses and individuals to easily create, edit, collaborate, host, distribute, market, and monetize video content. This enables content production across the spectrum, helping SMBs produce dynamic Instagram posts for marketing and large enterprises host live streams for thousands of viewers.

My initial feelings about the company were captured in a First Look in June but to summarize:

  • Its financials looked pretty good. 70% gross margin, strong revenue and subscriber growth, and average revenue per user (ARPU) was up 25% year-over-year. Clearly, new customers were coming in and spending more.
     
  • Vimeo identified its main customer base as "small-to-midsize businesses (SMBs) who use video for marketing to consumers". This fits an investing theme we’ve seen emerge over the past few years: digital tools that automate and simplify tasks for small businesses. That excited me because MyWallSt has had recent success with picks that fit this category — for example, Bill.com.
     
  • That being said, Vimeo had also found success with enterprise customers. These 4,400 big names were generating 25% of Vimeo’s revenue and net revenue retention was over 110%. Most of these seemed like land-and-expand opportunities, but they cost the company more to pursue as they were supported by a sales team.
     
  • When it came to competition, it was difficult to find any other provider that could be described as a one-stop shop. Vimeo is an impressive jack of all trades and because of features like hosting, its products do have an appealing level of stickiness.
     
  • I loved Vimeo’s management team and origin story within IAC. Its CEO Anjali Sud was instrumental in the company’s transformation into a SaaS player and IAC has produced many of the market’s most iconic stocks like Match Group, Expedia, LendingTree, and Ticketmaster.
     
  • Importantly, Vimeo was aware that it was in a pandemic pull-forward. Its S1 was clear that management expected growth to continue but at a slower rate as stay-at-home orders lifted. This told me the company was prepared for longevity and would try to avoid the temptation of over-expansion.
     
  • Finally, Vimeo’s stock had a hefty price tag. I guess it made sense in light of fantastic growth figures and the market’s IPO enthusiasm but trading 21x sales is a tall order even for the best of companies, especially, when cash flow positivity looked a couple of years away.

Now, let’s jump forward to today when Vimeo has been on the public markets for six quarters and exists in a totally different macroeconomic environment.

To no one’s surprise, most KPIs have slowed to a near halt. One of my favorite things about Vimeo is its transparency. The company releases monthly metrics that allow investors to easily track revenue, subscribers, and ARPU. Unfortunately, that also means, in our present climate, we’re almost constantly disappointed. In August, Vimeo's new subscriber growth was a mere 1% year-over-year while revenue had grown just 9%. This is a long way from the 35% revenue growth of 2021.

Vimeo Monthly Metrics

Worse still, these metrics will continue to fall. While Vimeo does not provide bookings figures to investors, CFO Gillian Munson mentioned them in the company’s latest earnings call. According to her:

“Bookings growth translates to revenue growth in about three quarters. So we do have to work through some further deceleration before we reaccelerate. Currently, our line of sight would say that we reaccelerate in the second half of 2023”.

Clearly, more pain is on the way.

On top of this, the growth that Vimeo expects to experience is not in its SMB segment but instead in its enterprise segment. While I’m sad to see the business pivot away from SMBs, management has made it clear in the present environment that there is no market for SMB video tools as most have slashed their marketing spend. Sales in this segment are also self-service — they do not have a sales team focused on them and are therefore reliant upon search engine traffic. According to CEO Sud, traffic was down roughly 30% in Q2 but is approaching a plateau.

However, there is some good news about focusing on enterprise customers: the opportunity to upsell. According to Vimeo’s end-of-year presentation, Fortune 500 customers that upgrade through its sales force spent up to 250X their counterparts in the self-service channel. On average, enterprise customers are spending less than $100 a month but, as Vimeo has built out more sophisticated tools, it should be able to increase ARPU. Over the last three quarters, Vimeo has increased its sales force dramatically and it’s starting to pay off.

In Q2, sales-assisted revenue grew 45% year-over-year and bookings were up 20%. Enterprise customers within this segment have helped bolster the company’s overall ARPU and the number of users within these contracts is growing in the triple digits. Enterprise customers are most likely to use the video tools for internal communication, such as large town hall meetings or training videos, meaning usage will scale with the companies and subscriptions are unlikely to be canceled when macroeconomic conditions deteriorate. Overall, sales-assisted customers now represent 35% of revenue — a not insignificant jump from 25% in June 2021.

When it comes to retention, Vimeo can be somewhat elusive. According to management, 70% of bookings are comprised of renewals but we don’t have a firm retention figure. We were merely told Q2 retention rates were down year-over-year in the self-serve funnel and up in the sales-assisted funnel. The refusal to give clear numbers has me a bit worried.

When it comes to the overall outlook for the year, Vimeo has been forced to temper its guidance. It had hoped for double-digit revenue growth, but this has been changed to near double-digit revenue growth — for Q3 the company is expecting just 5% revenue growth year-over-year. However, despite the increased cost of enterprise customers, management is hoping for a near EBITDA breakeven in Q4 2022. Additionally, the company’s gross margin is on the rise and currently sits at 76%. 

Another bright spot: Wall Street has punished the stock mercilessly so valuation isn’t as much of a problem. Vimeo’s stock is currently down 91% since IPO and is trading at a price-to-sales of 1.92. If valuation stays this low and the company can manage to scrap together some improved financials, I wouldn’t mind giving it a third look in a few quarters.

Video is undoubtedly important and will only become more valuable, being an easy, all-in-one solution should be a massive tailwind. That being said, many of Vimeo’s features focus on creation and marketing, which I think makes it best suited to small businesses rather than stuffy enterprises. So it is possible that Vimeo won't find significant success until small businesses are back on their feet.

Anne MarieAnne Marie

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