Vimeo.com, Inc. (VMEO) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. I'm Ray McDonough, an analyst on the SaaS and applications team here at Oppenheimer. For this session, we're happy to have Narayan Menon, CFO of Vimeo. And format of today's session will be a fireside chat. If anyone has any questions, feel free to add to the chat function and I'll try to work them in as we go. With that, Narayan, thanks so much for being with us today.

Thank you, Ray. Great to be here with you today.

Right. So maybe if we just start off. Vimeo has come a long way since it was founded in 2004 and last Friday, you just reported your first quarter as an independent public company. So maybe just to level set before we get into that, can you give us a quick overview of the history of the business and how the company has transformed into what it is today?

Of course. Sure. Yes, Vimeo started 16 years ago as a destination for high-quality video content. Back in the day when video really took off, YouTube became the destination for consumer content and -- with an ad-driven model. Vimeo went the other way and was attracting the filmmakers and video professionals who didn't want to clutter their content with advertisement, and were willing to pay a subscription fees. So that was how Vimeo started many years ago. As we were on that journey, about 4 years ago, Vimeo realized that there is a big market out there for all businesses to use video and under Anjali's leadership pivoted to building software tools for businesses, small and large, to create content and distribute and monetize them. So we have been on that journey for about 4 years now. And it went from this ad-free YouTube alternative to a B2B SaaS company, from just a destination for video to building software tools for businesses. And we were able to do that because we had all the components needed to be successful in that space. We had a tried and tested platform. We had a loved brand. We had the technical expertise in the video space for more than a decade. And we had a vision that all businesses, small and large, would need video as they look forward into the future and to attract customers and engage and retain them. So that has been our journey as -- we think of ourselves as a 3- or 4-year-old enterprise start-up in many ways because of all these things that has changed in our journey. And we are investing significantly to build out the capabilities. In the last 3 or 4 years, we have really transformed the company from hosting product to live streaming, to create the entire life cycle of a video from the concept of a video, to creation, to distribution, monetization all the way to analytics, and we're continuing to invest to build out that portfolio. So exciting times at Vimeo. And as you know, we became a public company a couple of months ago. It's been an interesting journey. And to give you a kick snapshot of where we are today, Q1, we had revenue of $96 million, about 43% year-over-year growth rate. Subscribers, we have about 1.6 million subscribers and 230 million user base. And gross margins continue to improve at 73%. We are cash flow positive and continuing to invest into growth. So that's where we are. It's been an interesting 16 years of premiere history there for you.

No, that's great context. And before we get more into the numbers and the recent results, maybe just before we do that, if we think about the total opportunity and how you segment it, I think you presented at your Analyst Day about a $70 billion TAM. Maybe you can run us through how you got there and how you arrive at that based on the different segmentation versus small, medium-sized businesses and enterprise.

Sure. Yes. So we have always believed that every business that has either a website or social media presence or as an e-commerce company or has a distributed workforce, they would all need professional quality video for engaging their customers and their employees. But professional quality video is still hard. If you think about a small business owner, to create a video and publish it in social media to get new customers, it's very hard. You have to -- the alternative -- one of the alternatives is to hire a video crew and film, then edit, then create it into multiple formats for each of the platforms and then publish it. It takes thousands of dollars. And an average life of a video on a social media platform is about 2 days -- 2 to 3 days. So the economics are very hard for a small business owner to really create engaging video and use that to attract customers. Even in a large enterprise context, if you have to do all the things that companies want to do, a live stream CEO town hall or create marketing to launch a product, all of these things takes time and effort, and it's not very easy. Our -- what we are trying to do is to take the friction out of the process, to make creation and all the way to the analytics that we talked about really, really easy, and we are building the tools to make that process easy for everybody, from a small business owner to a large enterprise. With that context, if you think about the size of the small business market, there are about 350 (sic) [ 350 million ] small businesses in the world. Even if you take a slice of that, say, 100 million small businesses and assume that they would pay $250 a year, that's roughly the size of our -- the second lowest plan in our suite of products. That's a $25 billion TAM. And on the enterprise side, if you think about the number of enterprises and for the sake of ease, we kind of size them as any business with revenues north of $10 million. And there are 1 million enterprises with revenues north of $10 million. Our take on it is that every one of these businesses should be using professional quality video to better engage their customers and employees and communicate and collaborate with them. So that's roughly at, say, $40,000 TAM -- $40,000 average order value from each of those 1 million customers. That's a $40 billion TAM. So if you add these 2 together, you get to about $70 billion of TAM. But there is quite a lot of white space in between that as well. I mean there are many businesses with revenues less than $10 million annually, there are nonprofits, there are faith institutions, there are a variety of businesses size smaller than that. And all of them should be using video as well to be successful. So even without counting all of that, we can easily see this market being a $70 billion TAM. We also think that it's very early and underpenetrated. So the opportunity is huge. And we believe as the premier player in this market at this point, we have more than a fair chance of getting a big portion of that.

Yes. That's again, hopeful color. And maybe if we just shift towards recent results. You mentioned, I think in the last quarter, you grew 43%. And I think you've been pretty clear that as you count some of the pandemic-related benefits you saw last year that there might be some volatility. And I think your guidance calls for low 30% growth in 3Q and for growth to dip below 30% in 4Q. I think you mentioned consumption patterns and sales cycles being primarily responsible for the deceleration in the back half. Can you elaborate on that a bit? And how, if at all, that changes your view on the 30% plus revenue growth over the next 5 years that you initially laid out?

Sure. Yes. Let me address the second question first. There is no question in our minds that, that 30% growth rate over the medium term is achievable. We strongly believe that for all the reasons that we just talked about, the size of the TAM, how underpenetrated it is and how the video use cases are showing up in small businesses and large enterprises, new use cases showing up every day because partly driven by pandemic, partly driven by how people find video to be much more engaging, emotive and effective, there is more use cases showing up every day. So there is -- we strongly stand behind that 30% growth rate over the medium term. Short term, yes, we did -- as we are comping the COVID comps, we have some downward pressure on our revenue growth rates. Yes, the two things that I talked about on Friday, one was the demand for live streaming has come down from the peaks that we had experienced in Q2 of last year. This wasn't unexpected or surprising. We had planned and forecasted that, but the decline is a little more than what we had expected. Having said that, it is still significantly higher than where the demand was prepandemic, which shows that this isn't -- the live streaming is not something that's going to go away. It's going to continue at a higher level than it was prepandemic. But with that -- with the demand being slightly lower, we have now adjusted our forecast and factored that in, and that's the guidance that we provided with Q4 being slightly under 30%. That's one of the factors. The other factor that we also talked about is sales cycles are getting a little longer. In some ways, this is a natural and positive evolution of our sales motion. We are not selling just 1 live streaming use case anymore. We have introduced multiple other products in the last 6 months. We have Vimeo Record, which is a screen-capture asynchronous video messaging tool. We have Vimeo Library, which is a system of record for all video assets within an enterprise. All of those things are creating a little bit more complexity in the sales cycle. The sales folks need to be trained. The sales teams are talking to multiple departments within an enterprise. IT departments are getting involved, procurement teams are involved. There are much -- many more stakeholders and many more departments involved in the purchasing decision because video is not a very tactical purchasing decision anymore. It has become more of a strategic investment within an enterprise, which is also very well aligned with what we think about the future where businesses use video in every workflow. So it's a positive evolution of our business, but it does put pressure in the short term on our revenue as deals get pushed out a little bit. So overall, I think, yes, there is more pressure in the business because of COVID. And if you step back and look at this, we are in a world where things are changing. We don't know how every element of this COVID, the pandemic, the reopening post pandemic, potentially closing down again for the Delta variant, there are so many unknowns at this point. So it's really hard to predict the precision as to what each quarter would look like. But the differences that we are talking about is really small in the grand scheme of things. We had said 30% year-over-year growth rate in Q4, now we are saying maybe a few percentage points below that. That's where we are.

That makes sense. And I want to hit more on the enterprise opportunity a bit. But I think when you first talked about the 30% over the next 5 years or as your medium-term target, you talked about ARPU being about half of that expected growth over the next 5 years. And obviously, you have a free tier, which obviously opens up a massive funnel for you guys. But can you speak to a little bit about the potential pricing changes I think you've alluded to?

Yes. It's too early to go into too much detail into pricing. But if you look at where -- historically where our pricing plans were vectored on, we were going back -- it's going back to Vimeo's history as a hosting destination. Our pricing is still kind of structured around hosting and storage caps and all of that. We believe that we have a lot of run rate to improve our pricing to better align with our customers' growth and scale, and scale our pricing and packaging along with their usage models. So that's our plan and what we are looking to do is to -- we are really focused on innovating on the product space to add more and more value to our customers. As we talked about, Vimeo Record and Vimeo Library are 2 great examples of how much value we have added to our customers. We have few more really exciting products in our road map. We have talked about webinars, we have talked about virtual events. As we roll out all of these things, it gives us an opportunity to really look -- step back and look at how do we price our product, how do we align the price that we ascribe to the value our customers are getting and how do we align that with getting into an enterprise, landing in an enterprise and then expanding from there. So we are looking at all of those things. We are definitely in a place where we'll start some testing -- price testing in the next quarter or so. So we'll keep you posted, but we are very excited about the opportunity in front of us on pricing and packaging.

That makes sense. And if we kind of just think about the other side of the growth drivers in terms of sub growth, you struck a number of partnerships with companies like Shopify, GoDaddy, Wix. I think most recently, TikTok and Asana. Can you walk us through how those partnerships work? And what sort of conversion metrics you're seeing or expecting? I know it's still early.

Yes. It is still early, but we are very excited by all these great partnerships that you just talked about. When you think about this in maybe 4 categories of partnerships. The first one, where we started was some of the website builders. GoDaddy and Wix are a couple of examples there. On GoDaddy, we started with just hosting. We have since then expanded to include hosting and creation. So that's a great story there. The second one is e-commerce. Shopify is a great example where we provide Shopify customers to create videos of their products, and that helps them improve their conversion quite significantly. So that's another area that we have made great progress. The third one is some of the social media platforms, Facebook, TikTok, and here also early days in all of these things, but we are seeing great signals early on. TikTok, for example, the study that TikTok had done, customers who had created video using Facebook had a 50% better conversion rates. So more clicks, more conversion. All of that is great. And the last on that list, but some potentially bigger ones are the enterprise collaboration or enterprise partnerships. Asana is a great example that we just signed a contract with a few months ago. This is where Asana customers can embed video into their project management process. So a great example where workflow within an enterprise where video can add significant value to the overall process. To me, it's actually quite exciting because if you think about all the potential workflows within an enterprise, this really gives you a perspective that many or most of those workflows can benefit from introduction of video into the workflow. Asana is seeing that. Their customers would significantly benefit from that. And it really opens us up for more enterprise penetration. If you think about overall our strategy on partnership, there are 2 clear benefits for us. One is it really opens up new funnels into our business. So rather than just use marketing and advertisement to gain customers, these partnerships helps us bring in new customers, either on the small business side or on the enterprise side into our platform. And the second is that we add significant value to Vimeo customers because they are -- they get to use -- get more utility by integrating with other platforms that they live in. If you're a small business owner, you are in one of the website builder ecosystems or you are in social media platform. So by this native integration, it clearly adds value to them as well. So in many ways, it's a win-win-win with our partners, our customers and us all being successful in the long term.

That makes sense. And then maybe if we just take a step back, who do you view as your biggest competitors in each of these segments if you split it between small and medium-sized opportunity and the enterprise opportunity? I know you mentioned YouTube at one point, but who would you say are the biggest competitors in each of the segments?

Yes. If you think about small business, the nonusage of video continues to be the biggest competitor that we have. People are still using images and text in their advertisement, and we strongly believe and data has proven this multiple times that video is definitely more engaging and more impactful in advertisement. So that's still the biggest competitor for us. YouTube, you could have said that many years ago, YouTube was a competitor from just a hosting, but we have moved beyond that. And we don't consider them a competitor anymore. In many ways, they are a partner because many of our customers do advertise on YouTube from -- with the videos that are being created on Vimeo Create. And similarly, with social media platforms also. We don't think of them as competitors. In many ways, social media provides the audience for our customers, and we provide the tools to create the engaging videos that they can use to reach those -- reach that audience. So it's, in many ways, very -- it's more partnership than competition. So that's a small business environment in many ways. A small business owner can create videos in each of these platforms. But if you think about it, if they have to advertise in 5 platforms, they have to go into each of those platforms, create videos, which is specifically for their platform and then publish that there. They don't get to see which video is performing better across all of these platforms. But if you come to Vimeo, you can -- with a few clicks, you can create a video, which is well formatted for each platform. So it could be a long-form video for one; short form, 30-second video, for another one; short-form, 45 seconds for another one; or a vertical video for one, horizontal for another one. You could do all of that with one click within Vimeo Create and push that out to each of these platforms. And you can see the performance across all platforms in one place so that they -- for the next video that you create, you have better insights and better understanding of the performance and you can continue to tweak your marketing message as well. So that's the benefit that we provide where we are significantly ahead of the competition just because of the nature of our platform and how we do it. If you look at the enterprise side of things, again, there is definitely the nonusage. That continues to be -- not many enterprises are still fully utilizing video for all the things that they could do. Many are using video conferencing and in many ways, most of the enterprises that we are in, we have either Zoom or Microsoft or WebEx also within that enterprise. So we see them as complementary rather than competition. Over a period of time, it could become competition. We don't know. But we strongly believe that our platform strength, our focus on just video and all the capabilities that we bring, including the technological differences, being a low-latency real-time communication versus professional quality video that we provide, would continue to be a differentiator and would help us win over the long term. The other competitors that you see on the enterprise side is some of the legacy OVP, online video providers. These are more old-tech, legacy technology providers. Most of them require some kind of customer implementation. It takes longer to get things going and the average cost of implementation is significantly higher than where we are. So we win on simplicity, the breadth of our platform, price as well as seamless workflow integration. So that's kind of the broad spectrum of competition that we see both on the small business side and on the enterprise. On the enterprise side, we also have many new competitors coming up. I'm sure you have seen many well-funded start-ups. In many ways, it's a validation of the market opportunity for us. But we do see them more as point products. And we are successful against those because of our platform breadth and the end-to-end video life cycle that we bring to bear in those situations.

That's helpful. And maybe just honing in more on the enterprise opportunity. You're just starting to build out your sales force, which I think is set to double this year.

That's right.

Just run us through how the sales force is organized at this point in terms of inside reps, account managers. How is the go-to-market motion structured?

Sure. Yes, we are structured geographically. So we have a team in the U.S. And we have had that for a few years now. We started a sales team in U.K. about, I'd say, maybe 2 years ago. And now we have teams in Australia, Singapore, Ukraine, and recently in Lat Am. In terms of sales motion, primary -- almost 70% of our enterprise customers come from existing Vimeo, either free users or existing self-serve users. Most of them, they raise their hands and say, "Hey, we have used Vimeo products, and we love it. We want to get upgraded into it -- we need to get the higher capabilities and features that enterprise products provide, and we want to upgrade to that." And then it goes through a sales development rep who qualifies the lead. And an account exec who closes the transaction. And that gets passed over to an account manager who is focused on onboarding the customer and making sure they are successful and stays with them through renewals and extensions and upgrades and all of those things. So that's kind of the -- how we are structured. We are becoming more specialized. Historically, it has been more of a generalized sales force, but we are getting -- as we are getting bigger, we are becoming more specialized. Right now we are structured around large enterprises versus small and medium -- I would say, midsized businesses. So we are starting to do some of those specializations, but still early days. As we talked about our enterprise flagship product, Vimeo Enterprise is only 2 years old. So still very early days in our enterprise journey.

No. That makes sense. And as I think about the use cases for Vimeo, and broadly applicable some of the products and some of the newer products, I should say, like Vimeo Library, for instance, is across an organization. What's the initial landing point in signing an enterprise today? And how do you think that might change over time?

Yes. Historically, our primary use case was live streaming. And think of that as either a CEO town hall or a marketing team doing a product launch to a broad audience. So in these -- for example, Tesla, they do all their product launches on Vimeo. So when you have to reach thousands of millions of viewers in professional quality video around the world, you need Vimeo. Similarly, if you're a CEO, broadcasting to hundreds of thousands of employees in a secure, with SSO and all the reliability that -- and even like that requires, you need Vimeo. So that's historically been our land motion. And then once you get into a department, maybe other department wants to use that capability and then it expands from there. That used to be our primary entry point that land. Now we have Vimeo Record, Vimeo Library, many new things in our portfolio. So I'll give you an example. We landed a customer in Europe in Q2. It's a smaller financing company, about a couple of thousands of employees. They didn't have a need for live streaming at all. So all they are using is Vimeo Library, and it's a fairly good-sized transaction, and they are using Vimeo Library to be the system of record for all of their videos across the organization. So all customer videos, employee video, all of those is being managed centrally. So it's very exciting for a couple of reasons. One, it shows that the new products that we're introducing are finding customers who really like what it is helping them solve. And even for our existing customers, it adds significant value but it really opens doors for many new customers for us who we otherwise wouldn't have been able to reach. The finance one is a great example. If we had just live streaming, we wouldn't have had anything to sell them. But now with these things, we are opening many new doors for us, which is very exciting. And we have more products in the pipeline. We have publicly talked about webinars and virtual events. All of them are in the pipeline for the rest of the year. So we're very excited about the opportunity in front of us.

That makes sense. And I think this past quarter, it was clear that you're going to invest for the large opportunity that you see in front of you. Remind us where are your priorities today? How do you remain focused on the right opportunities? And how do you stay disciplined, especially as you talked about sales cycles looking to -- or starting to look to like they're being extended as you introduce more products?

Yes. Our focus is -- in the order of priority, is, one, continue to build new features and capabilities in our product. We are the market leader, and we want to be the market leader for a long period of time. So -- and on that, the good thing about right now is that we are getting so many signals from our customers asking for specific features and capabilities. What they want is they want to have 1 partner, 1 vendor who can solve all their video needs. So they are coming and telling us, "Hey, we need this. This is something that we need immediately." A great example is Vimeo Library. We have gotten so much feedback about having a product like that, that our customers were clamoring for, and we were able to build it. So similarly, all of these things, there's very clear signals coming from our existing customers and potentially new customers that helps us kind of streamline what we are focused on and what we are not focused on. So that helps us prioritize the product road map quite significantly. But we are not just focusing on what customers are asking for. We have some real -- we see the market evolving in ways that they might not have seen. So we are looking at the future and thinking about what ways can our customers solve their existing problems with video. That's also helping drive our product road map. So that's on the product. The second priority, a big investment priority for us is sales expansion. As we talked about, we -- fairly nascent sales motion for us. International locations, we have huge opportunities. Video is not a U.S.-only phenomenon. In many ways, video is used more in other parts of the world than in the U.S. So we need to be in those places. The benefit -- the big advantage we have is that the brand is very well known. Our sales teams don't have to go tell people what Vimeo is and what Vimeo does. It really takes away a lot of friction at the upfront because they know Vimeo and customers love Vimeo. But we have to be there. So we are adding sales folks in all the geographies that we talked about earlier. And we need to build out functions to support and help the sales team close more deals. We talked about investing in product marketing, sales, operations, training and onboarding. All of those things are things that we are focused on investing right now.

Yes. No, that makes sense. And we have a question coming in from the audience around LTV to CAC. And it says one of the things that stuck out during your Analyst Day was your LTV to CAC ratios, especially in the self-service market where you saw a big jump in 1Q '20 to 2Q '20. And obviously, that timing corresponds with broader shutdowns given the pandemic. How should we think about the sustainability of that metric over time given everything that we've been discussing?

Yes. We think about LTV to CAC in terms of are we getting good ROI for our investment. And yes, it has come down from where it was prepandemic, where demand was significantly high and media costs were significantly lower. We were not expecting that to stay at that point. We were expecting it to come down, and it has come down. It's also a function of how much you want to lean into investing. Our current thoughts are that we will continue to lean in and invest more to take market share. We are still significantly over any of the benchmarks that you might want to think about in terms of LTV to CAC being profitable. So we're very focused. We have the IAC genes of being very methodical and focused on the unit economics. And we continue to look at it very carefully, and we'll continue to see it's ROI positive. And so far, it has been and we will continue to invest there. So these are -- this is driving investment in sales and marketing as well as in performance marketing on the self-serve side.

And maybe if we just take a huge step back and look out 5 years and see that you weren't able to sustain your 30% growth targets. What do you think would be the 1 or 2 things that went wrong?

It's a good question. I definitely don't think we'll be in that position. But if it doesn't happen, it could be a couple of things. One, product. We are very product-led company in many ways. So we have to build the right products that solves our customers' problems. If we don't solve their problems, then we'll definitely -- whatever else we do, it's not going to help offset that. So that's our biggest focus area, as I said. And if that doesn't work out, that might be one of the reasons for being lighter on revenue. The other thing is sales expansion. There is still -- we are very early in that journey. And if we don't continue to execute, and if we don't get the productivity and efficiency of the sales team up to where we want it to be, that might be another reason.

That makes sense. And I think we're close to coming to a close, but before we wrap up, is there anything that you would want to focus investors on? Anything you want to leave us with in terms of where the opportunity is and what you're really thinking about over the near end and maybe even in the long term?

Yes. Here's what I would say. We believe this market is large, expanding and underpenetrated. We believe that we have the product vision and the operational jobs to win this market. We believe we can get to the 30% growth rate in the medium term. But as with any of these market transition, as you know, these things don't happen in a straight line. Many of these technology curves are S curves. And we want to be there when the market clearly takes off, and we believe we will be able to successfully execute to win this market. We are very confident, and that's the reason why we are investing heavily both in product and in sales and marketing, and we will continue to invest so that we can really gain a big share of this large and increasing market. So stay tuned.

All right. Well, great. With that, I think we'll wrap up. And I really appreciate you being here with us, and we look forward to talking to you soon.

Thank you, Ray. Great talking to you as well.

All right.