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Tuesday Tech Teardown
An article by • Published Jun 16, 2021

Tuesday Tech Teardown: Vimeo $VMEO

Spun-off from $IAC on
May 24, 2021

Video strategy pivoted from content destination to solutions for content creation with focus on a B2B video SaaS product beginning in 2017
COVID-19 impact accelerated customer growth and ARPU
Freemium business model creates huge funnel and enterprise introductions
$VMEO sees $70 billion TAM by 2024

Once viewed as a poor man's YouTube: - Has Vimeo made the leap to go-to B2B video SaaS solution provider - What's the business model - Will trends continue to remain strong as the impact of COVID-19 unwinds Referenced materials Financial model

Company Description & Overview

Vimeo, Inc. was incorporated as a Delaware corporation in December 2020 in connection with the Spin-off. Vimeo operates the Vimeo business. Vimeo is the world’s leading all-in-one video software solution, providing the full breadth of video tools through a software-as-a-service model. Vimeo’s comprehensive tools empower its users to create and communicate through high-quality video on a single, integrated platform. Vimeo single turnkey solution empowers its users to create, collaborate and communicate with video. And, as businesses face significant barriers to use video today, Vimeo eliminates these barriers and solves essential video needs by offering individual and enterprise subscriptions to its cloud-based software through which users can utilize its easy-to-use video tools. Vimeo’s platform is available to users all over the world.
Vimeo is a 16-year old platform that until a few years ago was viewed as a smaller version of YouTube as a viewing destination and place to watch a video. In 2016, VMEO acquired VHX, a provider of OTT streaming and monetization services. In 2017, the company acquired Livestream, a provider of professional live streaming services; and in 2019 they acquired Magisto, a provider of AI-driven video creation and editing tools for mobile devices. SaaS and enterprise focus began only in 2017 with a holistic B2B video solution.
Vimeo uses a freemium model and has a huge funnel of 200 million free users whittling down to its ~1.6 million paying subscribers, including 4,400 enterprise customers at 1Q21. They view their TAM as comprised of 800 million small businesses and 1 million-plus larger organizations.
Free tier - anyone can have basic tools, upload videos, share links; 60% of self-serve paying users start as free users; the bigger the better is company perspective, will continue to offer new tools even to free tier to build the funnel
Self-serve paid plans - advanced features (ie livestream and social video creation tools), more storage, range from $100 to $900 per year; nobody talks to a human being, landing page and a credit card only
Enterprise paid plans - more advanced features, supports, SLAs; ARPU > $15,000; 65% of enterprise customers start as free and self-serve
Revenue targets of 30% +/- for several years assumes roughly half the growth from subscriber growth and the other half from ARPU growth. ARPU growth is partially being driven by a change in mix, with more enterprise customers. Enterprise as a percentage of total revenue went from 14% to 23% from 2018 to 2020.
Vimeo's sales efficiency and unit economics are very impressive, driven by strong demand. They have an LTV to CAC ratio over 4x for both their enterprise as well as self-serve channels. This means that amount of gross profit a customer is likely to bring in over its lifetime is over four times the cost it takes to acquire that customer. The primary drivers of gross margin are hosting and delivery costs (CDNs).
This strong sales efficiency is driven by their freemium business model - Vimeo's free and paid users add over 350,000 to their platform daily, and these videos expand Vimeo's reach by exposing the platform to potential new customers.
Vimeo's free and self-serve customers also help drive the enterprise sales process - Vimeo reported that these customers drove nearly 70% of new enterprise customers in 1Q21, up from 65% in the previous quarter.
Over the medium term, Vimeo expects:
Subscribers and ARPU to grow at about 15% CAGR, resulting in revenue growth of around 30% CAGR. CFO said on 1Q21 earnings call that business can continue to grow north of 30% for "many years to come".
Gross margins >75% (improved 12% the last 6-7 quarters, but see room for additional improvement)
>20% adjusted EBITDA margins, but does not expect to be EBITDA positive this year
To operate as a 'Rule-of-40' company
Vimeo said on the
1Q21 earnings call
that near-term growth momentum remains strong:
Sale's pipeline is the largest it's ever been
Expects to exceed plans announced on analyst day back in March to double sales staff from 75 to 150 by the end of this year
Enterprise revenue grew >100% for the third straight quarter
Average time to close an enterprise sale shortened to under 3 weeks (from about 30 days mentioned on investor day)
25% of new contracts are multi-year contracts, although duration not the goal
Intuit, Softbank, Spotify, University of Florida, Comcast, Amazon, Pottery Barn and others were highlighted as VMEO customers, while partnerships with TikTok, Mailchimp, and Hubspot $HUBS were discussed to bring native integrations
Vimeo expects revenue growth to decelerate over the rest of this year as they lap tough comps due to the Covid bump - they expect growth to fall off to 40% in 2Q and then bottom out at around 30% in 4Q before reaccelerating in 2022
Free users drove 70% of enterprise users in 1Q21
Investing in screen recording tools, a corporate video library solution and re-thinking the future of webinars and virtual events
> 50% of revenue and subscribers are outside the US, but conversion lower outside US
Self-serve ARPU +40% the last 3 years; enterprise ARPU 100x self-serve
VMEO analyzes percentage of users who engage with tools and products on a weekly basis and believe recent cohorts are showing stickiness
Some of VMEOs revenue are subject to Apple App and Google Play store fees


Financials & Valuation


Revenue growth accelerated during the pandemic
Potential growth and financial trends
Revenue built-up using self-serve and enterprise subscribers and ARPU
Operating line items scaled linearly with time
View VMEO's detailed financial model here.
Capitalization table
Using 170.9 million diluted shares (
159.4mm +11.5mm vested diluted options
) equates into a $7.2 billion market cap at $42.00
At 1Q21, $VMEO had $316 million cash and no debt
Total enterprise value is $6.9 billion (market cap less net debt)
In
January 2021
, VMEO raised $300 million of equity capital by selling 6.2 million Class A Voting shares for $200 million ($32.41), at a $5.2 billion pre-money valuation, and approximately 2.8 million additional Class A Voting shares for $100 million ($35.35), at a $5.7 billion pre-money valuation.

Liquidity & Cash Flow Analysis

Vimeo ended 1Q21 with over $300 million cash and no debt. Despite positive 1Q EBITDA margins, management has suggested they do not expect to be EBITDA positive for FY21. Capex burden has been low the last two years at 1.5% or less of revenue. With no interest expense currently, it's not hard to sketch out an inflection to free cash flow neutrality, then positivity. Management is guiding to long-term EBITDA margins of 20%-plus. Cash flow from operations gets the deferred revenue benefit EBITDA doesn't capture, but on a FCF basis using EBITDA less interest and capex as FCF, one needs to believe in low-20% EBITDA margins to convert to a 20% +/- FCF margin. Stock compensation as a percentage of revenue has been low relative to public SaaS comps, VMEO will likely expand stock comp in its cost structure, providing some room for growth and FCF margin expansion. $VMEO has a $100 million unused revolving credit facility secured by all assets and guaranteed by domestic subsidiaries. Under the covenants, VMEO must maintain $50 million of minimum liquidity through December 2022, after which a 5.5x net leverage covenant kicks in. Equity friendly actions are restricted until net leverage is below 4.0x.

Risk & MD&A Analysis

Competition
In it's S-1 filing, Vimeo
talks about
social media video hosting platforms such as Facebook and Youtube as its key competitors. Adobe $ADBE and Bamtech (owned by $DIS) also provide similar services. The company claims that their key competitive advantage over these platforms includes allowing customers to fully own their relationship with viewers by allowing for agnostic distribution and an ad-free, fully branded experience. Additionally, they believe they are more focused than others with an end-to-end solution for all user needs. Management has stated repeatedly that the biggest risk they see is not being able to build products customers want fast enough.
Vimeo
said that
pre-pandemic, they faced a largely white space opportunity where SMBs didn't use video because they thought it was too hard to make high-quality video, and large companies were skeptical about the need for video. Post pandemic, as the video use cases exploded, more competition has come to the fore:
Zoom's ($ZM) events product allows companies to host large online video, allowing for live streaming with up to 10,000 attendees. Some of the use cases for this product line up with what enterprise customers use Vimeo for
While Agora ($API) is more known for its real-time audio products and is more of an API product for developers to build customized apps, Agora also has a video product, and has
recently launched
a no-code app builder for customized video applications targeted at creators and companies that want real time engagement with large custom audiences. These use cases are right up Vimeo's alley for both enterprise customers and SMBs
Twilio ($TWLO) also has a video API product that can be used to build custom video apps for some of the enterprise use cases that Vimeo covers, although Vimeo's integrated video solution is more intuitive an easier to implement. Note that Vimeo
also has
a video API that allows external developers to build customized apps, but that is
not Vimeo's primary area of focus


In response to a question
on competing with Amazon's interactive media service, Vimeo management said that they do not consider video API providers as direct competitors because they focus on providing an intuitive, turnkey solutions to customers of all sizes.
In fact, Vimeo now counts Amazon among its customers - in 1Q21, Amazon's US support team started using Vimeo to host customer support videos, and this quarter, Vimeo has signed up Amazon UK as a customer for the same use case.
However, the risk remains that Vimeo is displaced by competition from larger players, especially on the enterprise side where large companies may have the resources to build their own apps, or may want to go with bigger brands such as Zoom. VMEO has said that their biggest competition was most companies thinking they couldn't do video by themselves. As video product and the ease of content creation proliferates, Vimeo expects more competition in the market.
Unwind of Covid Benefit
Like others in the software, collaboration tool and SaaS space, Vimeo has been a big beneficiary of Covid as the use cases for video exploded both for SMBs as well as enterprises. The benefit on the enterprise side has been much more pronounced as the pandemic forced large companies to look to video to communicate with employees - enterprise subscribers grew 87% year over year in 2020, up from 23% in 2019.
One of the risks Vimeo faces is that the momentum provided by Covid starts to fade as the pandemic recedes leading to slower growth. Most of the enterprise use cases - virtual events, town-halls, online employee training etc. - rose out of Covid, so it would be interesting to see how Vimeo performs without that tailwind.
The management appears confident that hybrid work is here to stay and claim to have the "strongest pipeline ever", so while this may not appear to be a big risk right now, it is one to watch out for the future.
ARPU Growth
A key part of Vimeo's bull thesis is consistent ARPU growth. Management has said that the overall ARPU growth will be driven by:
Improvement in self-serve ARPU - more self serve customers coming in at higher tiers, and existing customers migrating to higher tiers over time. Self-serve ARPU has increased
40% over the last three years
.
Increase in enterprise ARPU, driven by landing larger accounts, increasing the use cases from new products, and testing new packaging and pricing (
including per-seat pricing
)
Since the enterprise ARPU is 100x self-serve ARPU, a mix shift towards enterprise would drive up the overall ARPU. VMEO's CEO has said the biggest risk is execution risk and failing to deliver on the product roadmap demanded by customers. New products allow for dollar expansion with enterprise customers, they allow enterprise sales teams to stay in front of clients and relevant helping reducing churn.
Spin-Off Structure and Governance
Vimeo was created through a tax-free spin from $IAC. Typically tax-free spins include restrictions on M&A and equity issuance for a period of two years. IAC and VMEO entered into a separation agreement, which could be more beneficial to IAC or an arms length transaction.
Barry Diller and his family own all of the Class B shares. The dual-class structure will prevent inclusion in some equity indices. Further, with 41% voting power, Diller will maintain significant influence and power, impacting governance rights and powers for Class A shareholders.


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