Description

VMEO, $4.00 - Long

Vimeo is a subscription revenue video software/hosting platform that was spun out from IAC in May, 2021. It closed its first day of trading with a $7.8B market cap, and an EV/S multiple of 19x. At the time, it was a major COVID beneficiary showing 40%+ y/y revenue growth, though it was unprofitable and burning cash. In the year following spinoff, VMEO’s growth massively decelerated as the COVID tailwinds to the business faded, and it started posting negative y/y Revenue/Bookings/ARR comps during CY22 due primarily to elevated churn of COVID-era customer cohorts. It is now firmly in the “COVID winners turned post-COVID losers” category amongst investors, with the stock languishing down >90% and a valuation of <1x recurring revenue. 

What makes this interesting here is that top line trends appear to have stabilized and are showing early indications of a return to growth as COVID-era cohorts have become less of a drag, while their emphasis on strategic business use cases has resulted in the Enterprise segment becoming a bigger and rapidly growing piece of the business. Additionally, cost and pricing actions taken to optimize the business have now turned this into a profitable, significantly FCF generative company. At 0.9x ARR, I don’t believe the market is yet properly valuing the underlying improvements here.

Key points

• Top line appears to have stabilized

  • Core ARR (84% of total ARR) has flipped from negative comps in late CY22/1H23 to positive in 2H23, positing 5%+ y/y growth in Q423

  • Total ARR was +1% in Q423, its first positive comp in 5 quarters

  • The Enterprise segment, which now comprises 17% of total ARR, posted 49% subscriber growth and 64% ARR growth in Q423, each were the highest in 5 quarters

  • Declines in the non-core “Other” segment (16% of ARR) are masking the stabilization/growth in the rest of the business

• The business is now generating significant FCF:

  • $38M FCF reported in CY23

  • $55M FCF estimated in CY24

• The company has established a consistent beat and raise cadence over the last year, and just set what appears to be a very low bar in their initial CY24 guidance:

  • Throughout 2023, the company modestly beat its quarterly revenue guidance, and exceeded adjusted EBITDA each quarter by between $3M-$11M/qtr

  • During the last two years, even as the company struggled with elevated churn of COVID-era cohorts, year-end ARR has proven highly predictive of year ahead Revenue. But the company has guided CY24 Revenue 4%-8% below YE23 ARR, which appears to be overly conservative:

    • YE21 ARR $433M, CY22 Revenue $433M

    • YE22 ARR $413M, CY23 Revenue $417M

    • YE23 ARR $417M, CY24 Revenue guidance $385M-$400M

• On my CY24 estimates, which are somewhat ahead of guidance, VMEO currently trades at stunningly cheap multiples for a 78% GM subscription software business:

  • EV/S 0.9x

  • EV/EBITDA 8x

  • EV/FCFF 9x

  • P/FCFE 12x

Below I walk through the trends in each segment. Please note that ARR is not a metric that the company provides. The company publishes quarterly ending subscribers, and quarterly ARPU for each segment, from which the quarter end segment-level and total ARR can be calculated. 

Self-Serve (67% of ARR)

The Self-Serve segment is VMEO’s largest. As the name suggests, this product is sold directly to customers online without a sales force. It is a freemium model, with paid subscription pricing of $12-$65/month on an annual subscription. It currently has 1.3M+ paid subscribers. Vimeo enables creation, editing, distribution of video content, with higher priced tiers allowing more storage/bandwidth, along with added functionality targeted at business users (analytics, virtual events, etc). 

This segment has seen significant subscriber declines that began in Q122; total Self Serve subscribers have now declined by 14% from their Q421 peak. This decline is being driven by two primary factors: 1) higher churn from COVID-era cohorts, 2) VMEO actively pushing pricing here towards “a higher-level customer, a business customer” (VMEO CFO, Q223). Self Serve ARR is therefore down by somewhat less (-11% from peak) than subscriber count over the period due to pricing. As an example, the lowest tier of pricing was at $7/month as of two years ago, $9/month as of mid-2023, and is now at $12 today. Monthly ARPU has risen from ~$15 two years ago to almost $17 in Q423. Subscriber declines here are disproportionately weighted towards the lowest pricing tier. 

Past pricing:

1H22                                                  Mid-2023

Despite ongoing subscriber count declines, each of Bookings/Revenue/ARR has shown improving Y/Y trends in 2H23, with Q423 down by only -3% Y/Y. To be conservative, I model this segment’s revenues continuing to decline by -5% in CY24, which is inline with CY23’s full year bookings decline, or somewhat worse than what was seen in 2H23 bookings, and the -3% decline in YE23 ARR:

Enterprise (17% of ARR)

Higher priced Enterprise subscriptions are sold through the VMEO sales force, though most new business here (over 70%) comes in first via the free/Self Serve channel, who then upgrade. The primary use cases here are “marketers using video to acquire customers, employees using video for internal communications and collaboration, and media businesses monetizing video directly with their customers.” (VMEO CEO, Q423)

This business has been growing rapidly, and now comprises 17% of ARR, up from 7% of ARR two years ago; Enterprise was up to 21% of total Bookings in Q423. This line grew revenue 44%, bookings 53%, and year-end ARR by 64% in 2023, with both subscriber and ARR growth accelerating in the back half of 2023. I assume continued high revenue growth here in 2024 (+40% to $79M), which is slightly below the Q423 annualized bookings number, and 14% higher than YE23 ARR. 

Core (Self Serve+Enterprise, 84% of ARR)

If we combine the Self-Serve + Enterprise businesses, which I refer to as Core, we can see overall stability, and early signs of a return to growth, with Q423 ARR growth at 5% Y/Y. 

The now modestly growing Core business comprises 84% of total ARR at YE23, and 89% of Q423 Bookings. 

Other (16% of ARR)

This segment is comprised of its OTT streaming business, along with non-core products that the company is de-emphasizing, namely past acquisitions of Magisto (acquired 2019 for $200M), Wibbitz/Wirewax (acquired 2021, combined price $14M). In CY23, revenue declined -16% y/y, bookings declined by -25%, and ARR declined by -17%. I model CY24 revenue declining by -25%.

Post-COVID Churn 

Based on total subscriber counts, it appears that COVID-era excess growth has been mostly worked off at this point. Total subscribers (1449k) are now back at approximately Q320 levels, and well below the Q421 peak (1740k), suggesting the bulk of the COVID-era “excess” subscribers have already churned off:

Management had previously suggested that year end 2023/early 2024 was when the drag on the business from COVID-era cohorts would go away:

Former CEO & CFO from the Q422 call, a year ago:

Guidance Appears Conservative

In early 2023, VMEO issued initial guidance for 2023 Revenue/Adjusted EBITDA of ~$411M / $5M-$10M. They ultimately came in at $417M in revenue and $34M in adj EBITDA. Throughout 2023, VMEO beat on their quarterly revenue guidance, and exceeded their adj EBITDA guidance by anywhere between $3M-$11M per quarter. I bring this up not to suggest that past beats guarantee future beats, but to illustrate a recent history of conservative guidance by management - I believe the guidance just given for 2024 is also extremely conservative.

In each of the last two years, the prior year ending ARR has been extremely predictive of year ahead revenue. In both 2022 and 2023, revenue has come in at or slightly above prior year ending ARR. And this was despite this being a period of higher than normal churn, and subscriber count declines. Revenue has also come in ahead of prior year bookings in each year. YE23 ARR was $417M and 2023 Bookings were $403M. I believe it’s far more likely than 2024 Revenue comes in more in the range of $400M-$420M than the guided range of $385M-$400M. I model 2024 Revenue of $407M and believe I’m erring on the conservative side. 

Management (and some speculation)

VMEO’s prior CEO of 6 years departed at the end of Q223, and they’ve had an interim CEO since: board member and former Salesforce executive, Adam Gross. On the recent Q423 earnings call, they had no updates on the permanent CEO search, except to say it’s still ongoing. Interestingly, adjusted EBITDA and FCF margins have inflected meaningfully higher in 2H23 under the interim CEO, reaching 12% and 13%, respectively. 

I’d also note that, oddly, there’s been zero insider trading activity (buys or sells) since a 20k share purchase by the CFO in March 2023. 

While it is not a core part of my thesis, the fact pattern of the company seemingly not being in a hurry to find a permanent CEO, an inflection higher in profitability under interim management, and lack of insider trading activity makes me wonder if the company is currently looking to sell themselves. With top line stabilization, and FCF margins of 10%+ recently, I can’t imagine a sale, should it occur, would be done for anything less than a still low 2x-3x ARR.

Stock-Based Comp

At this point, you might be saying “This business sure does look attractively valued on FCF, but this is a software company; don’t they have huge SBC expense?”

Yes. VMEO has guided to approximately $35M of SBC expense in CY24, or about 8% of revenue. While this would put them near the low end of their subscription software peers, it would also offset a large portion of their expected 2024 FCF. 

I’m tempted to dismiss SBC entirely with some flippant statement like “Since when do software investors care about SBC?” but I owe VIC readers better than that, so instead I’ll offer the following which suggests that SBC is somewhat overstated and should continue to trend lower – SBC in 2024 of $35M will already be down by nearly half from $64M in 2022. Management has repeatedly emphasized an interest in limiting share dilution, and it shows up in the numbers:

• New gross equity (RSU & options) grants in 2023 had a fair value of $26M

  • Net of equity award share forfeitures, this number is below $5M for 2023

• Basic S/O are up by 1.8% Y/Y in Q423, which equates to $11.4M at VMEO’s current market price; adding in $6.4M in cash outlays for equity award settlement gets to an annual cost of dilution of $18M

  • In the 2.5 years since Q221, VMEO’s first quarter as a public company, basic S/O are up from 159.4M to 164.4M, or 1.3% annualized

• Language from 2022 & 2023 10-Ks suggest SBC continues to go down significantly:

  • 2023 10-K: “At December 31, 2023, there was $43.0 million of unrecognized compensation cost, net of estimated forfeitures, related to equity awards, which is expected to be recognized over a weighted-average period of 1.8 years.

    • Suggests $24M annualized expense

  • 2022 10-K: “At December 31, 2022, there was $98.0 million of unrecognized compensation cost, net of estimated forfeitures, related to equity awards of SARs and RSUs, which is expected to be recognized over a weighted-average period of 1.9 years.

I model SBC dropping to $25M in 2025 for GAAP EPS purposes, from the guided to level of $35M in 2024, and believe that further decline is supported by the above. 

Annual Model

Putting it altogether, I model a -2.5% revenue decline in 2024, followed by +1% growth in 2025. On the cost side, I have modest further declines in S&M and G&A, offset by some incremental R&D spend, consistent with the company’s guidance. Given near zero CapEx and low cash taxes (VMEO has off balance sheet deferred tax assets of >$60M), CFFO is approximately equal to adj EBITDA + interest income.

Valuation

I believe downside is well-protected here at $4/share, with $301M of cash ($1.81/share, 45% of market cap), and $0.25-$0.30+/share of annual FCF; I estimate $2.13/share in cash exiting 2024. The business is already showing 10%+ FCF margins, and a $400M+ Revenue, 78% GM recurring revenue business like this should ultimately be able to produce 20%+ FCF margins at maturity/if run for maximizing cash flows. A business with this profile should minimally get valued at 2x ARR or more – at 2x ARR, this would be worth $6.80/share for 70%+ upside. This price would equate to 21x CY24E EV/FCFF. A still relatively modest 3x ARR multiple would represent 130% upside in the stock. And should this business return to sustained top line growth, the multiple could obviously move far higher than 2x-3x ARR.

Risks

•  My primary concern here would be if they used a big chunk of their cash on acquisitions, something they’ve talked about wanting to do previously

  • M&A track record here appears poor – they spent >$200M on Magisto, Wiremax, and Wibbitz in the last few years and each are being wound down

  • I would certainly like to see the company start buying back meaningful amounts of stock at this valuation rather than doing M&A; they have a $50M buyback authorization that has sat unused for the last 2 years

  • It’s probably unlikely we see anything happen on either M&A or buyback until there is clarity around the permanent CEO

• There’s no shortage of competition here – Youtube, Wistia, KLTR, BCOV, ONTF, etc

  • It’s a competitive space and that’s a real risk

• Subscriber declines could re-accelerate

  • Being several years removed from the COVID-era cohorts, I think we probably don’t see things re-accelerate to the downside, but it’s possible; arguably the stock is already priced for this at 0.9x ARR

Catalyst

- Beating 2024 numbers

- Continued FCF generation

- VMEO could sell themselves