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

Good afternoon, and thank you for joining us this afternoon for the KeyBanc Technology Leadership Forum. I'm Justin Patterson. I lead the Internet and digital media research effort at KeyBanc. Really excited to have Narayan from Vimeo with us today. Narayan is the CFO. He was part of the spin this spring from IAC. And I'm looking forward to having a great conversation just around recent trends and the market opportunity. Narayan, thank you for joining us today.

Thank you, Justin. Great to be here with you.

Yes, of course. So to start off, maybe it would be helpful to just give a general overview of Vimeo since you are a recent spin, and there's still some market understanding going on today.

Sure. Happy to do that. Yes, Vimeo is a 16-year-old video platform with many years of technology leadership in the space. Back in the day when video really took off, YouTube went the consumer way with an ad-driven model. Vimeo went the other way and was attracting filmmakers and video professionals who wanted to host their content without the clutter of ads and were willing to pay a subscription for that. And as we were on that path 3, 4 years ago, we realized that there is a huge opportunity to build video software tools for businesses, small and large, for them to manage all their video content. And under Anjali's leadership, we kind of pivoted to a SaaS model and moved in that direction of building software tools. So we were able to do that because we had all the technology expertise of many year -- decade-long video expertise. We had a brand that was loved. We had a vision that in the future, all businesses will be video first. So -- and we have been on that path for the next 3 or 4 -- for the last 3, 4 years. And we moved -- with that, we moved from being in the Youtube to a SaaS business model, from being a hosting destination to software tools for businesses. And we have been innovating for the last 3 or 4 years. From a hosting product set, we did a couple of acquisitions, which really built out our product portfolio. We acquired Livestream, which was a leader in live streaming capability. We acquired Magisto, which was a tool for small businesses to create videos. And we continue to innovate. We recently launched our Vimeo Record product, which is screen recording and asynchronous video messaging. We launched Vimeo Library in June, which is a system of record for all video content within an enterprise. Think of it as a CMS for all video within an enterprise. So we have made significant progress from where we were, but we still think we're still a, in many ways, a 2- or 3-year-old software start-up. And we -- our focus is on helping businesses, small and large, from -- all the way from creation of a video through distribution to monetization, all the way to analytics and helping them be successful and be video first. So that's the short history of Vimeo for you.

Perfect. And before I forget, to the audience, we do have a chat feature up and running. So if you have any questions over the course of this event, please type them in, and I'll try to weave those into this conversation with Narayan. But going back to just some of the trends you talked about there, Narayan, let's perhaps start at just the addressable market level. You talked about this pivot toward a more software-centric business. You're effectively more of a start-up in there with a couple of years of experience selling to the enterprise. How do you frame that enterprise TAM today? And I guess how did that change during the pandemic when more customers are relying on video?

Yes. Great. Great question, Justin. We think about in a way, every business, if you have a website, if you have a social media presence, if you are selling an e-commerce company or any company with a distributed workforce, all of these businesses do need video, professional-quality video to better engage and communicate with their employees or their customers. So it's a very broad set. And if you break -- but still, even today, professional-quality video is hard. It's hard for small businesses. If you are a small business owner and if you want to create a video for advertising on Instagram, for example, it is hard. You have to hire a crew of photographer or videographers and do the editing. You'll have to insert music and create it in multiple different formats for each platform and publish it. And it lives in the platform for 2 days. So it's really cost prohibitive in -- to create these short-form videos for advertising. And it's harder for even large enterprises, the same kind of challenges. And most of the time, it's not the most engaging product that comes out. We -- what we do is we take out all the friction within the process. We all know video can be extremely effective. It is very emotive. It is very engaging and leads to better outcomes. But by taking away the friction on the whole process, we make it much more easier for businesses to really embrace the power of video.

Yes, go ahead.

No. I think -- so that's the opportunity in front of us broadly, right? There are 350 million small businesses in the world. Even if there is 100 million of them using video for either advertising to attract more customers or creating messages to engage their community better, it can be a huge -- it is a huge opportunity. And at about, say, $250 a customer, that's a $25 billion TAM on the -- just the small business side of the world. On the enterprise side, there are north of 1 million enterprises with revenues above $10 million. We are just using that to just size the market roughly. So even if you take that 1 million enterprises and ascribe a average revenue of about $45,000, that's a $45 billion TAM. So if you add those 2 things up, you get to about $70 billion TAM. That's the kind of rough size of the market that we are thinking about. Even between these two, the small business and the enterprise is about -- and there is a lot of other business. There's a lot of white space between those two. And there are nonprofits. There are smaller enterprises, mid-market and small and medium businesses. There is a lot in there. So it's a huge market. It's very underpenetrated. Video has really penetrated the consumer market, as we know. Everybody is using video for all kinds of communications. That hasn't really reached the enterprise or the business segment yet, but we believe it is going to happen over the next few years. And we are at the forefront of that. We have the breadth of the product, all the way from creation to communication, collaboration, monetization. And we are best positioned to solve those things for enterprises. So we are very excited to be where we are today. And we are looking at a large and expanding and underpenetrated market at this point.

Got it. And to that creation point, Anjali, your CEO recently said that she envisions that Vimeo can make every employee at an enterprise a creator over time. Can you elaborate just how Vimeo plays into that vision and what the steps to get there are?

Sure. If you think about the overall creator space, it can be anywhere from my kids creating videos on TikTok or on a Twitch, all the way to a small business user creating videos for their Shopify space or professional movie -- film professionals, putting their lives' work on Vimeo. So there -- that market is huge. I mean, if you think about broadly what about creator economy. And what we are seeing is that there is, obviously, the professional video or professionally created content. And we have been in that space for a long period of time. These are the movie, film producers, professional videographies, all of those things. And that's on one end. On the other end, you have user-generated content. We have a huge presence there also. There are a lot of consumers and people who create videos, host them on Vimeo. But what we are seeing more and more is there is an employee-generated content also showing up. The same consumerization of everything that we have talked about for many years is becoming real in the video space also. If you think about employees within an enterprise creating videos, we recently launched a product called Vimeo Record, which captures either your screen or using your webcam can capture what you're saying. And this really helps employees explain either a complex concept or product demos and many of those things where you could asynchronously do this without calling a meeting and having 50 people show up in different time zones. It -- that process is very complex, as you know, and it's not the most efficient. If you're trying to get a global company to do a meeting to explain a simple concept, video can do that much, much better. So what we are seeing is more and more employees are creating these videos to explain complex concept or to do a demo and sharing that with their colleagues and their coworkers and their collaborators in many ways so that everybody -- it's a great way to communicate an idea. So that's one example of creation within an enterprise. We see many, many more things happening. We recently did an integration with Asana, where Asana customers can actually integrate video into their project management workflows. It's a great example of video adding significant value to a workflow that has always been in an enterprise. So if somebody wants to give a project update, they could just create a video using Vimeo Record and include that in the project plan in Asana. A great example of a workflow that gets enhanced, right? So if you think about all the workflows in an enterprise and where Vimeo and video can really enhance that, there are so many opportunities, which really, if you think about that, that's the next generation of every employee becoming a creator, every employee using video to better communicate their ideas and thoughts or explain something and collaborate with them to other employees within the enterprise. And we see this as a very nascent and exciting opportunity to be part of that employee-generated content, which kind of sits in between the professionally created content and the user-generated content. And given our strength on both those -- on those areas, we believe we can be a significant player in this space as well.

Let's continue extending up on that point. You mentioned that a lot, in terms of workflows, in terms of content creation and then even some of the partnerships that Vimeo is pursuing. If you look strictly at the product side, what do you think are the next major investments you need to make to continue meeting those needs for both the small business and the enterprise customer?

Sure. Let me start with enterprise. In the last few -- last 6 months or so, we introduced 2 significant products to the market. One was Vimeo Record, that we just talked about. The other was Vimeo Library. Vimeo Library is a system of record for managing all the video assets within an enterprise. So if you're an employee within a department, say, you can -- as you log into your dashboard, you get to see all the videos that are relevant for you, maybe all the videos that's in your department or the things that are shared with your department with levels of permission and granular security levels with the ability to actually search the video and search within the video. Every video gets transcribed, and it becomes a text. And you can search, and you can really get to the point of what you want to see. So very powerful, and we are seeing significant traction on both of those things. Vimeo Record, for example, in Q2, we saw the usage go up by 80% quarter-over-quarter. And Vimeo Library, which we introduced in June of this year, already had 250 enterprise accounts using those. So we are seeing significant traction there. The 2 other things that we have publicly talked about, which are both scheduled for the second half of the year or in the next 3 to 4 months, are webinars, which we believe can be another very significant and disruptive product to the market. We have lot of the components that needs to -- that is needed to create a great webinar product, and we are bringing all of those things into the market with our product. The other one that we have is virtual events. Both of these, we believe, can significantly add to the value prop Vimeo as a platform would provide to an enterprise customer. If you think back a year ago, our primary use case for -- in enterprise was live streaming. Now we have 3 with Record and Library, and we would add 2 more. So from one use case, by the end of this year, we would be at 5 use cases. So significant acceleration there, and this is just 2021. We have a lot more exciting things planned for the next year. That's on enterprise side. On the small business side, our primary focus is on making creation very, very easy for small business owners. As you know, these are the owners of a coffee shop or a laundromat. They are not video professional. They don't want to spend too much time on video, but what they want is a product that works, that really helps them attract new customers, retain and engage existing customers. And Vimeo Create, which we launched in March of last year, is a great product that clearly helps them with that. We want to make it even more easier. We are focused on integrating it with many platforms, some of the things that we have seen in the last month, integrating with TikTok, for example, Facebook. We are -- we have partnerships growing with GoDaddy and Wix. So many exciting things on that front as well, a lot more focus on partnerships and making the product easier and integrating with the entire workflow within the product suite.

Got it. And since you mentioned partnerships there, easy one to dive into. When you strike these partnerships, how do we think through just the general benefits to the KPIs of your business?

Yes. We think of it as being -- so 2 things. One, from a -- if you think about how Vimeo has been attracting customers in the past, we get a lot of organic traffic. We have a loved and known brand around the world, and that translates into organic traffic that helps us gain customers organically. So that's a huge funnel for us. The second one for us is paid marketing, performance marketing, all the things that we do to attract customers through search ads and all of that. So those have been historically our 2 biggest channels, and it has -- both of them have worked excellently for us. Partnerships open up the other channel or channels for us. Yes, I'll give you -- a GoDaddy or Wix on the website hosting side. There are a lot of small businesses who live on those platforms. By exposing Vimeo and video to them, we help them create better websites. And with GoDaddy, for example, we started with just a hosting of the videos, and then we moved into creation. Now GoDaddy customers can create videos natively within GoDaddy. And after they create a few videos, if they want to continue doing that, they have to become Vimeo customers. And so that's a customer acquisition funnel for us. And all of the -- we have partnerships with hosting providers. We have partnerships with e-commerce, where Shopify is a great example. It's another funnel, major funnel for us. We have partnerships with Facebook, TikTok and many of the social media platforms. All of these, we see as accretive to our customer acquisition. The other part of that is that we help our customers be successful by providing them more direct linkages into all of these platforms. We provide them the reach that they otherwise couldn't, and that really helps them. For the partner, it's a big win for them as well because if you think about video, it's not a simple technology. It's a very complex implementation. If they were to build it themselves, it would take them a much longer period of time. And they will not be able to match the innovation that we have in the overall platform. So by integrating with Vimeo, they get the benefit of helping their customers get the power of video. And really, it's a win-win-win in many ways. So we are very bullish about this. It's very early for us. We didn't have a [ BD ] partnership team about a year ago. So it's still new, but we have had some excellent, excellent partnerships on the board already. We see more coming in this thing. Our plans on this is that -- the early signals and what we really want is engagement and usage of the products. Monetization would come later. So I don't expect monetization to happen at least in significant levels in 2021, but we believe '22 and beyond, you'll start seeing the benefits of this.

Got it. So if I layer all of that together, product innovation, big enterprise push and then vectors to grow users, all of that fits with that spin commentary of reacceleration come 2022. I feel like after the earnings call recently, you talked about a little bit of near-term uncertainty. So help us understand what, if anything, fundamentally changed recently? And then what bits of market variability you're seeing today?

Yes. Great question, Justin. Can you guys hear me?

Yes. I can hear you just fine.

Yes. Okay. Yes. So if you ask me what has changed fundamentally, I would say, medium term and long term, nothing has changed fundamentally. We strongly believe that we can be a 30% grower in the medium term and long term. So keep setting that aside, yes, we have -- and what gives us confidence is all the things that we just talked about, right? Significant innovation on the product, multiple -- solving multiple use cases, expansion of the sales team and investments in marketing and many partnerships that will start showing results in the future. So all of that gives us confidence that there is -- nothing has changed. And the market, as we talked about earlier, is large and underpenetrated. So really, nothing has fundamentally changed in the medium to long term. Short term, yes. I think as we're all living through this COVID era, going back to life starting to get back to normal and then going back again now, there is a lot of uncertainty in the macro space that nobody can fully predict. What we are seeing is, as I talked about 2 things that we saw in Q2. Live streaming demand has come down from where it was at the peak of pandemic. If you think back about Q2 of last year, that was the height of pandemic, and everybody wanted to do live streaming. Since then, it has come down. It is still significantly higher than where it was pre-pandemic, but the decline has been a little more than what we had anticipated. So that's one. And the second one was some of the sales cycles taking longer on the enterprise side. And part of it is because these video implementations or video deployments are becoming more strategic and critical for business success for companies who want to be video first. So there are more stakeholders involved. IT teams are involved. Procurement teams are involved. There are more departments involved. So there are more stakeholders. And along with that comes some delays. What we're also seeing is that the deal sizes are getting bigger, and that's a good sign. And it's very much aligned with our vision of where video should be. Video, we believe, should be a much broader implementation within an enterprise. And -- but it is leading to short-term pressure on revenue because deals are getting pushed out. This one, we believe, is actually a move in the right direction and would help us with both higher AOV deals as well as better stickiness as there are more stakeholders involved in a purchase. And if you think about enterprise software, we are still -- one, our AOV is still much smaller than most enterprise software companies. We are at about $20,000 to $25,000. And our deal cycles are much shorter than most enterprise software sales. We are currently at about 4 weeks. We were at 3 weeks last quarter. So that's the extension of cycles that we just talked about. But we are still, as I said, ideally, I would want to be at a much higher AOV even if the deal cycles are longer. If you think about -- I've been in an enterprise software for many, many years. I still think that deal cycles would take longer as we progress and become a bigger player in the market. But with that comes a lot of positive, other metrics. So overall, I think I view that as much more positive even though it has put pressure in the short term.

Of course. Deal cycles pushing out by 1 week for higher AOV feels like a high-class problem, all things considered.

Yes, I'm not too worried about that. Even though it does create this short-term kind of blips in the space.

So I don't believe we discussed it so far in this conversation, Narayan. But could you talk about just what that delta is as you move from SMB, self-serve channel to enterprise in terms of what that does for ARPU for your business?

Yes. So if you think about ARPU for self-serve versus enterprise, roughly, self-serve is sub-$200 per year. Enterprise ARPU is around, as I said, 20,000 to 25,000. So it's more than 100x, right, from a differential perspective. And we believe the enterprise ARPU has much more runway to grow. What we had talked about was that we believe in the next 3 to 5 years, enterprise ARPU can be about $45,000. And just think about it in terms of what the value that we offer. We talked about our previous use case -- the one use case that we solved was for live streaming. Now we have 3. By the end of the year, we will have 5. So we will be adding significantly more value to our product for an enterprise customer. The thing that we are working on, which will follow soon within the -- within this year, is improved pricing and packaging. We are -- our first order of priority on that was to innovate in the product, create more use cases. And then pricing and packaging will follow to capture that value. And we are still on target for that. You will see us doing some of those -- that work in the second half of the year. And all of these things, the increased use cases, the innovation and the pricing and packaging would all help us grow the ARPU quite significantly over the next few years.

And that ties right back nicely to your guidance, where I believe that 30% plus medium-term growth assumes roughly equal contributions from pricing and subscribers over that horizon.

Yes.

Yes, go ahead.

No, you're right. I think we believe it will be roughly half each from the growth in subs and growth in ARPU. And growth in ARPU would come from growth in both self-serve and enterprise as well as the mix change with enterprise becoming a larger portion of our revenue base.

Perfect. And as you execute on that, how should we think about the importance of international toward achieving those targets?

It's a huge opportunity for us. I'll give you 2 data points there. International, our mix of revenue on the self-serve side has been roughly 50% U.S. and 50% outside of the U.S. We believe there is a huge opportunity. There's definitely more people outside of the U.S. than inside. And in many ways, some of the other geographies are more video-first than the U.S. There is more penetration of video in some of the geographies like APAC, for example. So we believe that even in the self-serve side, the mix would -- can be much more on the international side. Our conversion ratios on the self-serve funnel is much lower in -- outside the U.S. than in the U.S. partly because we haven't really put enough effort and focus on improving those. So that's an opportunity, huge opportunity for us on the self-serve side. On the enterprise side, it's even more U.S.-based. Still about 2 years ago, we didn't have a sales team outside of the U.S. Right now, I think roughly 2/3 of our revenue still comes from the U.S. We didn't have sales teams in APAC until 3 months ago. Now we have a team both in Australia and in Singapore. We have expanded our EMEA operations with the sales team now in Ukraine. And now we are hiring sales folks in Latin America now. So all of these are really nascent geographies for us, and we believe we can significantly grow our presence. The one big advantage that we have internationally is our brand. Everybody knows Vimeo wherever you go. We always had a very distributed base. So that clearly puts us a significant advantage because our sales folks don't have to go explain what Vimeo is to a customer. They don't have to tell what Vimeo does. If you think about a new enterprise software company, the first 2 hurdles for any salesperson is to explain what the company is and second, what the product that they sell is. With Vimeo, that's not there, and you just have to sell the value prop. So makes it much easier. We believe we have a long runway in growing our international revenue base.

Perfect. And I think I have time to slip in one more question before we run out of time. You've got a product that resonates well with customers, a good brand recognition. How should we think about just long-term margin structure?

Yes. Great question. I'll break it into two. In terms of gross margins, we have said that we expect our gross margins to be 75% ratio above in the medium term. We are well on our way to that. I think that one, we are very focused on that because that helps us put money into the bottom line that we can invest in other places. Longer term on gross margin, we believe we can be the profile of any software company, and we are committed to growing gross margins there. It's not just about growing the gross margins. It's also about providing a great service and high quality, all of that. So we are not just trying to solve for cost, but to provide the optimal experience with increasing gross margins. On EBITDA, it's a slightly different answer to that. We believe the market is still continuing to grow and expand, and we want to be investing to maintain and extend our leadership position in the product. So we expect to continue to invest in our R&D, to continue to have the kind of product velocity that we have had in the last year. So you can expect us to continue to invest there. Sales and marketing is more of a question of economics. As long as we get good ROI, we measure that in terms of LTV to CAC. And we have excellent ROI right now. If we have that level of ROI, our focus is on continuing to invest and not solve for an EBITDA number in a specific quarter or a specific year. So as long as we continue to get that profitability or return on investment, we'll continue to invest there. On G&A, we believe we can get more operational leverage as we go through it. We did invest quite significantly this year to become a public company and all the associated infrastructure, but we will continue to gain some efficiencies there. What we have talked about, when we gave guidance in the next 5 years, we expect to be 20% EBITDA margin positive. That is a soft target. We know that we can be EBITDA margin -- 20% EBITDA margin positive in 5 years. But we will take it as it comes, meaning as long as we continue to see great opportunity to invest and be more successful in the long term, we'll continue to invest.

Great. With that, we're out of time. Narayan, thank you very much. It's been a pleasure talking to you this afternoon.

Thank you, Justin. Great speaking with you as well.

Take care. Bye now.