BCOV - Vimeo Sees 2023 Revenue Decline As Enterprise Shows Promise

2023-06-16 13:01:01 ET

Summary

• Vimeo, Inc. reported its Q1 2023 financial results on May 6, 2023.
• The company provides video hosting services to businesses and individuals globally.
• Vimeo leadership has guided to mid-single-digit revenue decline in 2023, but continued high operating losses.
• Until Vimeo can reignite revenue growth while reducing operating losses, I'm Neutral [Hold] for the stock.

A Quick Take On Vimeo

Vimeo, Inc. ( VMEO ) reported its Q1 2023 financial results on May 6, 2023, beating both revenue and EPS consensus estimates.

The firm provides video hosting and distribution services to individuals and businesses worldwide.

While generating a small amount of operating income for Q1 2023 was positive, without significant revenue growth combined with reduced operating losses for the rest of the year, it is difficult to see a material organic catalyst to Vimeo stock in the near term.

Accordingly, I’m Neutral [Hold] on VMEO in the short term.

Vimeo Overview

New York, NY-based Vimeo, Inc. was founded in 2004 to develop a cloud-based platform for independent video creators and enterprises to publish, distribute, manage and monetize their content.

The firm is headed by Chief Executive Officer Anjali Sud, who has been with the firm since 2014 and was previously a Director at Amazon and an M&A Associate at Time Warner.

The company’s primary offerings include the following:

• Video creation and marketing

• Event marketing

• Employee communication

• Video monetization.

Vimeo acquires customers online and through direct sales and marketing efforts to enterprises.

Vimeo’s Market & Competition

According to a 2021 market research report by Grand View Research, the global online video platform market was estimated at $6.13 billion in 2020 and is expected to reach $23.7 billion by 2028.

This represents a forecast CAGR (Compound Annual Growth Rate) of 18.4% from 2021 to 2028.

The main drivers for this expected growth are an increased penetration and speed of wireless internet, the proliferation of mobile devices, and increase in demand from users for video-based content instead of or alongside text-based content.

Also, the chart below shows the market share of enterprise users in the market for online video platforms by industry:

Major competitive or other industry participants include:

• Akamai Technologies

• Brightcove Inc.

• Endavo Media

• Frame.io

• Kaltura

• Limelight Networks

• Longtail Ad Solutions

• MediaMelon

• Ooyala Inc. (Telstra)

• Panopto

• SpotX

• Wistia

Vimeo’s Recent Financial Trends

• Total revenue by quarter has plateaued or fallen recently; Operating income by quarter has improved into positive territory in the most recent quarter.

• Gross profit margin by quarter has trended higher recently; Selling, G&A expenses as a percentage of total revenue by quarter have dropped markedly in the most recent quarter.

• Earnings per share (Diluted) have reached breakeven with the most recent quarter:

(All data in the above charts is GAAP.)

In the past 12 months, VMEO’s stock price has fallen 31.95% vs. that of Brightcove Inc.’s ( BCOV ) drop of 34.12%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $268.4 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was $12.0 million, during which capital expenditures were $0.4 million. The company paid $49.0 million in stock-based compensation ("SBC") in the last four quarters.

Valuation And Other Metrics For Vimeo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

VMEO’s most recent Rule of 40 calculation was negative (5.6%) as of Q1 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Vimeo

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted accelerated bookings growth for its Enterprise segment for the third consecutive quarter.

For its self-serve segment, CEO Sud indicated she was "cautiously optimistic" and is "seeing a stabilization of macro trends post COVID" that should help the company in the quarters ahead.

Management disclosed its Enterprise segment’s net revenue retention rate [NRR] as 100% and characterized retention as "solid for the last couple of quarters."

Total revenue for Q1 2023 fell 4.4% year-over-year and gross profit margin rose 2.1%.

Selling, G&A expenses as a percentage of revenue dropped by an impressive 20.5% and operating income rose to $2.2 million after many quarters of negative results.

Looking ahead, management reiterated full-year 2023 revenue guidance of a mid-single-digit decline in topline revenue.

GAAP operating loss is expected to be $47.5 million at the midpoint of the guidance range.

The company's financial position is good, with ample liquidity, no debt and low & manageable cash burn.

VMEO’s Rule of 40 performance has been poor as of the most recent quarter.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng[es][ing]" once, "Macro" four times and "Drop" once.

The negative terms refer to the uncertain macroeconomic conditions the company faces in the aftermath of the pandemic and in the face of slowing growth.

Analysts questioned company leadership about its self-serve segment, which may experience greater challenges from the macro environment than the Enterprise segment.

Regarding valuation, the market is valuing VMEO at an EV/Sales multiple of around 1.2x.

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 7.9x on June 1, 2023, as the chart shows here:

So, by comparison, VMEO is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of June 1, 2023.

Risks to the company’s outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.

Management appears to be seeking to simplify and unify its product offerings while increasing its focus on its Enterprise segment which may have more staying power in a down economic environment.

While generating a small amount of operating income was positive, without significant revenue growth combined with reduced operating losses for the rest of 2023, it is difficult to see a material organic catalyst to the stock in the near term.

Accordingly, I’m Neutral [Hold] on Vimeo, Inc. stock in the short term.

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