VMEO - Vimeo Inc.: A Failed Bet On ARPU Growth

Summary

• Despite focusing on enterprise users, VMEO is failing to attract more enterprises to its offerings.
• VMEO has been losing subscribers for the past 4 months which is a major red flag in this industry.
• The company’s bet on ARPU growth has failed as it currently stands at only 2%.
• Mounting losses could create a liquidity crisis for Vimeo after increasing marketing expenses.

Despite its status as a leading video company, Vimeo, Inc. ( VMEO ) has dropped more than 92% since its IPO in May 2021. Although VMEO has solid profit margins, I believe VMEO is a sell due to its growing trend of losing subscribers and declining average revenues per user (ARPU). While VMEO’s management is attempting to fix these issues - mainly by changing its pricing strategy into a per-seat model, I believe the stock is a sell unless a buyout materializes.

Overview

Since 2017, VMEO has been undergoing a business transformation process after appointing Anjali Sud as CEO as it failed in competing with YouTube in the video streaming platforms scene. For this reason, VMEO has been trying to position itself as a competitor in the B2B SaaS niche by focusing on catering to enterprise customers, while developing new video tools for small businesses. Although this niche is profitable thanks to the high demand for video tools by enterprises since the pandemic, I have a sell rating on VMEO given the company’s failure to convert more users into subscribers - especially for its enterprise offering.

Business Shortcomings

VMEO operates through a SaaS business model where the company uses a freemium pricing strategy. In this way, VMEO is mainly dependent on selling subscriptions to realize revenues. With that in mind, VMEO’s most glaring shortcoming in my opinion is its failure to convert its free users to subscribed customers. Taking VMEO’s user base of nearly 290 million, the company only has 1.6 million subscribers - including only 9500 enterprise customers . Since VMEO is looking to position itself in that niche, this failure to convert more users into customers is a major red flag since the company could now see declining revenues in 2023.

With that in mind, VMEO has been working to address this failure by improving its marketing efforts. For the nine months that ended September 30, 2022, VMEO reported $129.7 million in sales and marketing expenses compared to $110.1 million over the same period in 2021. Although this increased spending could positively impact VMEO’s ability to increase its subscribers over the long term, the company could find itself in a liquidity crisis given that it is not profitable. In fact, VMEO has only had one profitable quarter since its IPO in 2021 and is expected to continue posting net losses for the foreseeable future. On that note, VMEO appears to have noticed this risk since the company cut its sales and marketing expenses by 3%.

Monetization Model

VMEO changed its monetization model from a storage-based model to a per-seat-based model. This new model allows VMEO to realize more revenues since enterprises will now pay based on how many users are using its products instead of paying a small fee to access VMEO’s products. In the meantime, not all of VMEO’s enterprise customers pay based on the new model. However, all of VMEO’s customers will pay using this model when they renew their contracts. Considering that enterprises have large teams in size, this model should have allowed ARPU to grow in the right direction. However, this was not the case since VMEO reported underwhelming growth numbers for its key metrics which I will go further into shortly.

Meanwhile, the current macro environment of high inflation and a potential recession looming on the horizon could impact VMEO negatively since enterprises’ ability to pay for such services could be impacted. Moreover, there is a growing trend of enterprises reducing their workforce to weather the current economic situation. In this way, VMEO’s ability to generate revenues would be impacted as enterprises would pay for fewer seats. For this reason, my rating for VMEO is a sell because the company could be set for a major decline in 2023 - especially with the current recessionary environment.

Decelerating Growth In Key Metrics

Another red flag is VMEO’s decelerating growth rates in revenues, subscribers, and ARPU over the past year. Recently, VMEO shared its metrics for December that included worrisome figures as decelerating growth continued. The most notable metric was subscribers which saw a 5% decline YOY in December - continuing a 4-month trend. With the company now losing subscribers, it is not surprising to see revenues declining by 1% and 2% in November and December respectively. Despite these declines, VMEO’s ARPU remained flat MOM, however, it came at a mere 2% growth. This figure is concerning since VMEO is mainly looking to ARPU growth during its transformation. As VMEO is now losing subscribers at a growing rate, I expect ARPU to turn negative in the first half of 2023.

With that in mind, a large number of VMEO’s existing users have been shifting to its new per-seat pricing model. In this way, ARPU growth was supposed to increase over the past months according to VMEO’s forecasts. Since ARPU growth has continued to decelerate despite the new model, I believe VMEO’s business transformation plan has failed since ARPU continued decelerating throughout 2022.

In its Q3 earnings call, VMEO reiterated its expectations of decelerating growth in the first half of 2023 before accelerating in the second half of the year which would be driven by the enterprise offering. However, I believe that may not be the case in light of the growing decline in subscribers, revenues, and ARPU. As I expect this trend to continue moving forward, I remain bearish on VMEO’s outlook in 2023 unless the company reports continuous growth in its key metrics which appears to be a far-fetched possibility.

Competition

The video SaaS market is highly competitive and VMEO has to compete with several well-known platforms in this niche. Out of its competitors, Zoom ( ZM ) and Microsoft Teams ( MSFT ) hold a great market share which makes competition in this niche hard for VMEO since it offers the same features as both platforms. Additionally, users would be more inclined to use Zoom and Microsoft Teams as their brand recognition is much greater than VMEO.

Additionally, VMEO faces competition from other companies in the video editing software space as other companies are entering this market like Canva and Adobe ( ADBE ) who offer tools for video editing. Despite VMEO having an impressive repertoire of video editing tools, the company suffers from its lack of recognition in this space too as consumers would usually prefer using more renowned platforms like Canva and Adobe.

Conclusion

Despite its solid products and profit margins, I am bearish on VMEO’s prospects in 2023. VMEO is losing subscribers at a growing rate MOM which has led the company to lose revenues in November and December. In light of these declines, I expect ARPU - the company’s main focus during this transformation phase - to turn negative in the first half of 2023 which would mark the failure of VMEO’s prospects of becoming profitable.

Moreover, the current recessionary environment is a major risk to VMEO since the company’s subscriptions could rapidly decline as layoffs across companies increase. Since VMEO is adopting a per-seat pricing model, revenues should witness a steep decline YoY. Considering the spike in VMEO’s sales and marketing expenses to raise awareness of its offerings, these revenue declines could substantially impact the company’s liquidity given its mounting losses.

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