Vimeo Q4 Preview: Opex Controls At Peak, Some Dilution Incoming (NASDAQ:VMEO)

Vimeo (NASDAQ:VMEO) has been managing to re-establish some growth lately since we last covered disappointing sales deceleration at the company, and they are additionally accomplishing a lot in terms of cost control, also with the share based compensation figures starting to get under control, although some dilution should be expected on an ongoing basis. There is no longer a reflexivity risk, which is good to see because the funding environment for cash burning companies remains rather poor, despite the performance of broader markets. While we like what we’re seeing on the cost side, we aren’t betting on growth, which means current multiples probably aren’t too conducive to a value proposition here, particularly when we expect for the upcoming Q4 that EBITDA margins will not markedly improve.

A Q3 Look

Let’s start right away with revenues.

Growth is pretty limited. Remember, the current strategy of Vimeo includes converting self-serve customers, who might actually be potentially attractive enterprises, into per-seat enterprise customers that are going to generate a lot more revenue for the company. This is the sales-assisted growth strategy that the company has been up to for a while. Recently, Vimeo has also been able to generate explicit enterprise wins with major companies like BCG and other attractive logos. The issues are in small and medium sized businesses, where conversion was weak and execution resulted in limited growth, but is also consistent with the general macro environment.

Gross margins looked good this quarter, with gross profit growth despite revenues declines. This is due to some solid cost control work on hosting.

Equally impressive is the substantial declines in sales and marketing expenses and SG&A. R&D fell as well. Operating expenses came down around 25% YoY, bringing the company comfortably into operating income territory. We estimate that around $20-25 million in EBITDA is going to be possible for the next twelve months, as management indicates that these GMs and EBITDA margins are likely as good as they’ll get. We don’t think there will be much growth.

Looking Forward to Q4

There is also the matter of dilution. SBC was around $20 million per quarter last year. They’ve controlled that and now it’s down to around $10 million once some turnover in the workforce gets digested into results. Actually, it’s less than that at around $7 million or so, but it cannot last. That’s around a 6% dilution for the next four quarters, which is not insignificant, and is in line with the outstanding options for the 2021 equity compensation plan that is currently outstanding.

Other than dilution from SBC, there isn’t really any dilution risk from the need to raise capital anymore, thanks to the strong cash position, and the end of cash burn for the company as it turns into profitability. Current EV/EBITDA multiples are around 16-17x, which is not very high on NTM figures, but is definitely higher than a lot of other companies out there with better growth prospects and economics.

Moreover, management seems to be clear that GM and EBITDA margin improvements have mostly come into effect, and we don’t expect too much improvement therefore from the cost side. We also already mentioned that SBC costs are below expected run-rate averages currently as well and will rise a little. In fact, the large cash position is causing the company to consider growth investments, which they stated in the Q3 call, which really just means more expenses probably in R&D, which will come out of the bottom line.

So when I look at that number, I think 79%, 80% is probably a good range for that. I don’t think that we see a ton of upside over where we were this quarter. That was a pretty good result there. On operating expenses, as you know, we’ve been bringing down costs through the course of the year. It was down about 11% in the quarter, it’s about 5% on headcount, and the rest coming from non-comp costs. I think we will continue to show discipline on cost. And our guidance reflects that as well for Q4. But we do want to make some investments against growth and probably we were a little bit too close on cost this quarter. So I wouldn’t expect us to hold it to this EBITDA margin level as we move forward in order to make the proper trade-offs there.

Gillian Munson, CFO of VMEO

The multiple doesn’t leave too much upside on faltering growth, limited wins and limited ARPU increases. While the restructuring so far has been impressive, management has given every indication that we might have seen the end of improvements in margin. Efforts to try to boost growth, possibly by restoring the very impacted marketing and sales expenses, will probably serve to reduce margins as well going forward, where the return in new sales will not be guaranteed given the already evident deceleration. For Q4, we expect EBITDA margins to have peaked, and it’s possibly that during the Q4 they have already started to generate new expenses that may limit profit growth for a while as well, which has likely been the support to prices over the last 365 days, where net declines have been stabilised.