VMEO - Vimeo Is Actually Executing Well Despite Appearances

2023-04-04 15:24:06 ET

Summary

• Vimeo is delivering initial promises of major upselling opportunities, with a 100x upsell multiple for large customers hunted in the self-serve grounds.
• Top of the funnel demand is where there's trouble, and we're seeing down-drift in self-serve subscriber numbers, which could mean less conversion into the enterprise segment.
• Still, the fact that Vimeo is keeping stable revenues is impressive given the circumstances, and they are controlling costs and thinning losses meaningfully.
• The valuation doesn't look high anymore, but it also doesn't look extremely compelling even upfronting the company's theoretical earnings power at a more mature stage.

Vimeo ( VMEO ) is executing quite well. Revenues are nothing special in Q4, but upselling is keeping things stable. Also the productivity of marketing dollars has improved with enterprise customers still growing, and costs coming down. Generally, costs are coming down and this has meant much thinner losses and operating cash flow positivity. We think that with the substantial retreat in price, VMEO is now probably at a new fair value even considering the macroeconomic situation and given assumptions of VMEO's earnings power at a more mature stage. But fair value means just that, so nothing really compelling at the moment.

Q4 Salient Points

Revenue is down slightly in Q4 , but total bookings are up slightly, around 4%, due to upselling effects essential to VMEO's current strategy.

The upselling promises from way back when are actually beginning to materialise. ARPU in enterprise is about 100x what it is in the self-serve segment, which approaches the 250x factor initially promised by VMEO.

Enterprise revenue growth continues, but the effects of the higher bookings even in Q4 are not being reflected fully yet. This is because it takes a while for bookings to actually translate into recognised per-seat revenue in the enterprises.

Top-of-the-funnel is where the issues are, with declines of 30% in activity according to management. This just means that in terms of converting customers, it's the initial trailers that are in recession right now. The declines in the self-serve segments in terms of customers and revenues are reflective of that, since the self-serve segment are grounds where potential enterprise customers are hunted for. Still conversions are happening from self-serve to enterprise at least, where enterprise customer figures are clearly going up.

Marketing productivity seems to be good considering this. Expenses have retreated for marketing, and the conversions continue to happen with very good increases in enterprise customer figures in Q4, in line with the average for FY 2022. Declines in R&D and other overheads are also substantially thinning losses where revenues are no longer growing.

Operating cash flow figures are now positive, so reflexivity risks are off the table.

Bottom Line

VMEO has some latent profitability once it is done with the administrative and marketing frictions involved in its strategy. R&D is pretty high as a proportion to sales, and at more normalised levels 10% could be added to the operating margin. Reduction of SG&A was impressive, possibly that can continue, but what can for sure decline at a more mature scale is the marketing expenses. Latent margins are probably at least 10% on an operating basis. While revenue is flat now, bookings will stream into revenues as those client accounts mature, so there's also some latent revenue growth contained in the recent bookings performance. Even if revenues continue to be under pressure from the macro environment with more attrition in self-serve and less conversion into enterprise, theoretical P/E is reasonable at about 15x considering the more secular trends behind VMEO, even if management exaggerates the opportunity for video use internally and for marketing by customers. That sounds about reasonable, especially since some revenue growth will return to the company eventually. But reasonable is a pass in the current market environment, where great deals can still be found.

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