TMVWF - TeamViewer AG: Long-Term Growth Story Still A Concern

Summary

• 4Q22 results were driven by multi-year contracts and pricing.
• Although TMVWF is focusing on profitability, there are concerns about the sustainability of growth, particularly in acquiring new customers and the decline in new billings growth.
• FY23 guidance included revenue growth of 10-14% y/y and a target profit margin of 40%.

Thesis

TeamViewer AG ( TMVWF ) 4Q22 results were driven by both multi-year contracts and pricing (which is not a surprise, I believe). In addition, the midpoint of the growth guidance for FY23 is positive, indicating an increase in billings and revenue in the low-single-digit percentage range (ex-FX impact). In addition, the guidance supports the consensus view on TMVWF hitting 40% EBITDA margin. However, given the subdued performance of new subscription billings and the fact that growth is being driven by price increases and upsells within the existing customer base, I expect investors to become more cautious on the longer-term growth story - which is centered around acquiring new customers.

As management attempts to strike a balance between profit and growth, I believe it is prudent to lower near-term growth expectations. For me, I'd like to see more proof that the net retention rate is sustainable and that consensus/market is adjusting to the new growth/profit outlook before I invest in the stock.

Key highlights

The results of TMVWF came in better than expected. The FY23 margin guidance was also better than expected, and I think it is evident that management places a high value on remaining profitable. While I think many investors (today) like the idea of TMVWF being profitable, my concern is it reduces the upside from a growth perspective, given that a higher margin will pose difficulties for growth in the long run - especially when the shareholders have shifted from "growth-based" to "cash/value-based". As a result, I believe that attention must now be given to smooth execution on hitting margins and address the question of whether or not the underlying NRR% can sustainably rise above 100%. If successful, this would take away some investors' concerns on new billings growth (for the time-being), which has been declining and is expected to continue doing so through 2021 and 2022. That said, eventually, TMVWF has to address the concern about growth.

Billings

Fourth quarter billings of €190.6 million were in line with the pre-release and represented growth of 24%. Increasing numbers of multi-year contracts contributed to a 28% increase in EMEA billings, which totaled €109.2 million. Billings in the Americas increased by 16% to €63.7m, while billings in the Asia-Pacific region increased by 32% to €17.7m. The Enterprise segment drove overall expansion by adding €43.3 million in revenue (47% y/y) in 4Q22. The increase in billings was primarily attributed to three factors identified by management: increased conversion of leads in the sales pipeline, larger average deals, and a greater proportion of multi-year contracts. Billings from SMBs reached €147.3 million, an increase of 18% year over year, with multi-year deals totaling €20.9 million.

Net retention

Despite some mixed results, I think TMVWF has done a good job of improving net retention rates. The positive trend of improved net retention is continuing; TTM net retention was 107% on a constant currency basis. SMB ASPs rose from €773 in 3Q22 to €804 in 4Q22, reflecting in part price increases implemented via the base. Customer wise, there was a slight increase in TMVWF's SMB customer base to 622k, and the churn rate remained stable. In addition, there was a rise in the number of Enterprise clients, which reached 3,666 in 4Q22.

On the negative side, new billings ticked down to €14.3m (from €14.9m in 3Q), indicating that the weaker contribution from new customers persisted. If current trends persist, I fear that we may see a net retention rate of <100%, which would spook investors and could cause the stock price to plummet.

Guidance

Revenue for FY23 is projected to be between €620 and €645 million constant currency [cc], an increase of 10%-14% year-over-year. A range of €675-€705 million is also provided for billings cc, which works out to 6-11% growth year over year. Profitability wise, the 40% target profit margin is in line with expectations. It's worth noting that management has signaled it expects margins to improve further in the wake of Manchester United's possible early departure as a front-of-the-shirt sponsor. However, this has not yet been written into the books, and since Manchester United makes the ultimate call, TMVWF has no say in the matter.

In terms of margin, it's important to remember that additional SBC effectively props it up. Management has included an upgrade to the remote connectivity platform, investments in the TMVWF Frontline product, and infrastructure upgrades in their margin guidance for FY23. The plan to offset these investments included issuing more restricted stock units to employees to help cover these outlays. While this isn't a deal-breaker by any stretch of the imagination, it is worth noting in light of the fact that, in my opinion, investors are currently paying unusually close attention to the FCF line and the factors supporting it.

Conclusion

I think the results were good overall, and they should ease the minds of short-term profit-focused investors. Nonetheless, management still has a way to go before they can adequately address the growth story. Until such time as the aforementioned issues have been resolved, I would advise against investing in the stock.

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