TMVWF - TeamViewer: SMB Momentum Continues And Eventual Enterprise Recovery

2023-09-07 03:01:06 ET

Summary

• TeamViewer's recent financial results showed strong revenue growth driven by cross-selling, up-selling, and new customer acquisitions.
• The company's SMB segment continues to perform well, while the Enterprise segment is showing signs of recovery.
• TeamViewer's partnerships with SAP, Siemens, Microsoft, and Google are expected to drive further growth and revenue opportunities.

Summary

TeamViewer ( OTCPK:TMVWF ) offers software solutions to remotely access and connect any computer, tablet, laptop, mobile device, and IoT endpoint such as industrial machines to allow remote control, management, and monitoring of devices, as well as interaction and collaboration. I am recommending a buy rating as TeamViewer continues to see momentum in the SMB segment, which, coupled with the eventual recovery in the enterprise segment, should drive positive EBITDA growth.

Financials/Valuation

Recent (2Q23) financial results for TeamViewer were strong. Cross-selling and up-selling, the signing of multi-year contracts, and the addition of new customers all contributed to a 12% year-over-year increase in revenue. As a result of increased spending on both R&D and marketing, the company's adjusted EBITDA margin fell from 43% to 41%. Subscriber growth was 2% y/y at 633k despite the end of service in Russia and Belarus. The net retention rate also held steady at 109%, which was up 200bps from the first quarter of this year and 800bps from the second quarter of last year. With a year-over-year increase of 13%, total net billings hit EUR151 million.

Based on my view of the business, TeamViewer should maintain its growth rate in the low teens for the foreseeable future as the momentum in SMB continues and enterprise continues to leverage success in finding deals through partnerships. As growth recovers, margins should gradually improve at a similar pace, returning to historical levels. In determining what multiple TeamViewer should trade at, I compare TeamViewer to its historical multiple, as there are no listed peers that offer similar solutions. TeamViewer is currently trading at 14x EBITDA, which I expect to increase over time as it gradually improves its EBITDA margin profile, which should aid in reducing its leverage by paying down cash. I point out that TeamViewer has a rather high debt-to-equity ratio of 5.3x, which I see as a factor that depresses multiples.

Comments

TeamViewer's 2Q23 results showed continued strength in the SMB segment and some recovery in the Enterprise segment, so I'm giving it a Buy recommendation. Starting with the latter, Enterprise's growth trend has begun to turn upwards. The Enterprise segment's billings declined by 2% in 1Q23, but rebounded by 2% in 2Q23, with the improvement attributable in part to deals from partnerships (this is a key point). Considering the challenging comparisons posed by Covid-19 deals in 2Q22, the growth's resilience is notable. Nonetheless, I do not think the risk has been eliminated for the Enterprise segment, as the company will face relatively tough comps in 2H23. Nonetheless, I am positive about the medium term performance for TeamViewer as path to winning customers here is not by pricing (competitors cannot simply undercut by pricing to win share). Management stressed that ASPs are not a major point of competition in the Enterprise segment because the solutions are tailored to each individual business. I see TeamViewer's strong relationships with its partners as a major strength in its ability to win over enterprise customers, so this is excellent news for the company. Partnering with these organizations expands TeamViewer's distribution reach and improves the company's insight into its individual customers (at the micro level).

In terms of partnerships, management elaborated on the status of their partnerships with SAP, Siemens, Microsoft, and Google. All of them are great partners, in my opinion. For instance, TeamViewer's partnership with SAP allows it to expand into new markets, such as field services and logistics, as well as manufacturing. The successful execution and capture of these potential deals would certainly drive upsides in both revenue and EBITDA line. In addition, TeamViewer's close integration with Microsoft's Teams platform sets this partnership apart from others and makes it easy for customers to buy TeamViewer products as part of Microsoft's Azure suite.

As for the SMB segment, meanwhile, have maintained their impressive performance, with even the lowest ACV segment stabilizing. Management has been very involved in initiatives that take a unified focus on the customer in this area which is bearing fruits. For example, I think a reason for the strength in the SMB segment is due to TeamViewer's efforts to continue tailoring its product to the preferences of its customers, especially as a unified platform containing all features. My view is that SMBs prefer unified platforms to point solutions for individual needs because they lack the resources to maintain multiple IT platforms. Elsewhere, the price hikes that were first implemented in 2022 will have reached their one-year anniversary by the end of 3Q23, but I still think there's room for further price hikes because they were primarily aimed at eliminating discounts previously extended to existing customer.

And the exercise as we go through now and we have been going through is segmenting, analyzing, discount, price elasticity, market pricing, usage of the product, and based on that we did, so to say, price adjustments mostly by reducing discounts. Source: 2Q23 earnings

Introducing a simplified version of Tensor to customers in the lower ACV bracket and eliminating discounts to enhance overall pricing could contribute to an upward shift in pricing. Given the present macroeconomic conditions, this approach would facilitate a smoother transition from the SMB tier to the Enterprise tier. To some degree, this shift is responsible for the decline in Enterprise ACVs. However, as the macroeconomic environment improves and customers seek more substantial, long-term agreements, I anticipate ACVs to rebound once more.

All in all, my thesis is that TeamViewer should continue to see success in winning SMB share and up-selling SMB to higher price buckets. While there's limited visibility on a recovery in the enterprise business in the near term, it should recover eventually as the economy turns for the better and TeamViewer continues to leverage its partners. The pushback from investors would likely be that the stock has already rallied by a huge mile since 4Q22, from $7.7 to $17.75. However, I believe there is still room to run as there are positive catalysts to drive the valuation further up. For instance, the continued SMB momentum and eventual improvement in enterprise Note that TeamViewer is a business that generates a lot of cash and is still growing in the low teens with potential for EBITDA margins to improve back to the 50+% range, so it screens very well in the universe of software companies too.

Risk & conclusion

Risk here is that Enterprise segment might take longer than expected to recover as the deals from partnerships typically have a longer sales cycles that might distort the growth strength as they get lumpy. In conclusion, TeamViewer is a long as it continues to show sustained momentum in the SMB segment and promising signs of recovery in the Enterprise segment. The recent financial results for 2Q23 were robust, with revenue growth fueled by cross-selling, up-selling, multi-year contracts, and new customer acquisitions. While increased spending on R&D and marketing slightly impacted the EBITDA margin, subscriber growth remained steady, and net retention rates improved.

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