TMVWF - TeamViewer: Potential Buy On Strong SMB Performance But Wait For More Clarity

2023-06-08 11:41:32 ET

Summary

• I recommend a buy rating for TeamViewer due to the continuous strong performance of the SMB segment.
• I expect the new TeamViewer Remote to drive further growth with user-friendly interface, and new features tailored to SMB needs.
• Despite concerns about the Enterprise segment, I recommend waiting for a few more quarters before making any decisions, considering the back-end loaded nature of this segment.

Thesis

I change my rating to buy for TeamViewer (TMVWF) as I see continued strength in SMB. I'm not denying that there are some mini red flags in the the Enterprise business, but I'm also noting that the Enterprise segment is typically more back-end loaded, so investors shouldn't make snap decisions. It would be more prudent to wait for the next few quarters to pass before making any decisions. With SMBs maintaining strong performance via TMV cross/upselling and stable churn, my central thesis has not changed. In addition, I anticipate that the introduction of the new product will further solidify TMV's position in the market and improve the consistency of retention rates. As growth dynamics improve, I expect to see continued valuation support and potential for re-rating in the future.

SMB strength remains strong and resilient

SMB continued its strong momentum from the previous quarters into 1Q23, offsetting Enterprise's sluggish start. A growing customer base, effective strategies for cross-selling and up-selling, and more reasonable pricing have all contributed to the success of the SMB segment. Improvements to the customer experience, including the website, channels of communication, and marketing initiatives, have also played a role in this upswing. The effect size of regular free-to-paid conversion campaigns may be smaller than in the past, but they still play a role. An important indicator of the success of cross-selling and upselling is the rise in SMB billings, which I believe was caused by an increase in ACV in higher-value brackets. Notably, TMV is seeing a stabilization in the decline in the lowest ACV bracket, which is indicative of an expanding customer base. Looking ahead, I am very confident in the SMB segment due to a few factors. First, despite the current weak business environment, customer retention has remained stable, suggesting the churn effect due to the macro environment is likely over. Second, TMV's growing subscriber base and increased ACV indicate that structural demand for TMV products persists.

New innovation to drive growth

The global release of the improved TeamViewer Remote product should serve as a major catalyst for the growth of SMB segment, in my opinion. Improved user interface, and cutting-edge web technology make possible a slew of new features in this version of TeamViewer Remote. There are many to like about this new release which addresses the need for SMB or managing SMBs. One particularly useful new feature is remote monitoring and management, which gives users the freedom to check in on and tweak their systems from wherever they may be. This works especially well for 3P IT vendors that are managing a portfolio of SMBs clients spread across the nation or globe. The product's flexibility and breadth of application are also bolstered by its compatibility with a wide range of third-party solutions and its many available add-on modules. Unlike Enterprise customers, SMBs typically use multiple point solutions to address their needs. This is possible for SMBs as their scale is typically smaller with less customization needed. As such, the decision to seamless integrate with 3P solutions is a strategic movie I concur. Not only that, but now one can easily invite others to TMV with just one click by sending them an invitation link through email or a messaging app. By removing the need for users to repeatedly enter their login credentials, this feature streamlines the authentication process and saves time. I believe this is a move that is copied from Zoom (ZM) playbook where such one-click invitation function led to viral usage. In the case of TMV, streamlining the process makes it possible for more people to try out the product for free, expanding the pool of potential customers.

Among the most astute moves made by management was the addition of a feature that lets users toggle between the old and new versions of the product, easing the upgrade process for the company's existing SMB customers. Users can gradually incorporate the new features into their routines without having to completely overhaul their current methods of working. I cannot emphasize how important this step is as this is the point where churns often happen. Even more so for SMBs, who may not have the resources to devote to fixing problems like these and for whom any "trouble" or "inconvenience" may be enough to convince them to abandon the current platform in favor of something else. This is especially true for casual users who treat these offerings as an afterthought. These changes should help TeamViewer gain traction among its free user base and open up lucrative cross- and up-selling opportunities among SMBs.

Enterprise weakness/risk

The weakness to my buy case for TMV is found in the Enterprise segment, which has seen constant deceleration in customer growth over the past few quarters and a 500bps decline in average contract size, leading to a 300bps decline in Enterprise billings. This 300bps decline is a big thing as the billings were still growing in the high 40s % just last quarter. As a result, some investors may have been prompted to sell their shares due to this minor red flag. But I think it's important to note that postponed deals are to blame for the 1Q23 slump. Macroeconomic factors and some executional difficulties largely accounted for the decline in the Americas. In Europe, on the other hand, the weakness was associated primarily with issues surrounding the actual execution.

Since the Enterprise business is typically back-end loaded, I would advise investors not to write off the Enterprise segment on the basis of a single quarter that may have been a blip. Several initiatives have been implemented by management to ensure the pipeline is continuously developed and converted throughout the remainder of the 2023 fiscal year. These include putting together a special cross-departmental task force for the higher ACV Frontline business. In addition to strengthening the regional sales organization, a new leadership team has also been appointed for the Americas region.

Conclusion

I recommend a buy rating for TMV based on the strong performance of the SMB segment. While there are some concerns regarding the Enterprise business, it is important to consider the typical back-end loaded nature of this segment and not make hasty decisions. Waiting for a few more quarters would provide a clearer picture. The SMB segment has shown resilience and momentum, with a growing customer base, effective cross-selling and up-selling strategies, and improved customer experience. I expect the introduction of the new and enhanced TeamViewer Remote product to drive further growth with its user-friendly interface, and new features tailored to SMB needs.

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